<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 19, 1996
REGISTRATION NO.
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- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
FORM S-11
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------
FDIC REMIC TRUST 1996-C1
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS GOVERNING INSTRUMENT)
------------------
C/O STATE STREET BANK AND TRUST C/O STATE STREET BANK AND TRUST COMANY
COMPANY CORPORATE TRUST DEPARTMENT, NOT
CORPORATE TRUST DEPARTMENT IN ITS INDIVIDUAL CAPACITY BUT SOLELY
225 FRANKLIN STREET AS TRUSTEE FOR
BOSTON, MASSACHUSETTS 02110 FDIC REMIC TRUST 1996-C1
(ADDRESS OF PRINCIPAL EXECUTIVE 225 FRANKLIN STREET
OFFICES) BOSTON, MASSACHUSETTS 02110
(NAME AND ADDRESS OF AGENT FOR
SERVICE)
------------------
COPIES TO:
RANDOLPH F. TOTTEN, ESQ. MARGARET L. JACOBS, ESQ. GEOFFREY K. HURLEY, ESQ.
HUNTON & WILLIAMS FEDERAL DEPOSIT LATHAM & WATKINS
RIVERFRONT PLAZA, EAST INSURANCE CORPORATION 885 THIRD AVENUE, SUITE
TOWER 550 17TH STREET, N.W. 1000
951 EAST BYRD STREET WASHINGTON, D.C. 20429 NEW YORK, NEW YORK
RICHMOND, VIRGINIA 10022-4802
23219-4074
------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
------------------
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
PROPOSED
PROPOSED MAXIMUM
AMOUNT MAXIMUM AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF TO BE OFFERING PRICE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED(1) REGISTERED PER UNIT(1) PRICE(1) FEE
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial Mortgage Pass-
Through Certificates....... $1,000,000 100% $1,000,000 $303.04
</TABLE>
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- -------------------------------------------------------------------------------
(1) Estimated solely for purposes of calculating the registration fee on the
basis of the proposed maximum aggregate offering price.
------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
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- -------------------------------------------------------------------------------
<PAGE>
CROSS REFERENCE SHEET
PURSUANT TO RULE 501(A) OF REGULATION S-K
<TABLE>
<CAPTION>
ITEM AND CAPTION IN FORM S-11 CAPTION IN PROSPECTUS
----------------------------- ---------------------
<S> <C>
1.Forepart of Registration
Statement and Outside Front Forepart of Registration Statement; Outside
Cover Page of Prospectus...... Front Cover Page of Prospectus
2.Inside Front and Outside Back
Cover Page of Prospectus...... Inside Front; Outside Back Cover Page of
Prospectus
3.Summary Information, Risk
Factors and Ratio of Earnings
to Fixed Charges.............. Summary of Prospectus; Risk Factors
4.Determination of Offering
Price......................... *
5.Dilution........................ *
6.Selling Security Holders........ *
7.Plan of Distribution............ Description of the Certificates;
Description of the Mortgage Pool;
Underwriting
8.Use of Proceeds................. Use of Proceeds
9.Selected Financial Data......... Financial Information
10.Management's Discussion and
Analysis of Financial
Condition and Results of The Bank Insurance Fund; Financial
Operations.................... Information
11.General Information as to Summary of Prospectus; Description of the
Registrant.................... Mortgage Pool
12.Policy with Respect to Certain Summary of Prospectus; Servicing of the
Activities.................... Mortgage Loans
13.Investment Policies of Summary of Prospectus; Risk Factors;
Registrant.................... Description of the Mortgage Pool;
Description of the Pooling and Servicing
Agreement
14.Description of Real Estate...... Description of the Mortgage Pool
15.Operating Data.................. *
16.Tax Treatment of Registrant and
Its Security Holders.......... Certain Federal Income Tax Consequences;
State and Other Tax Consequences
17.Market Price of and Dividends on
the Registrant's Common Equity
and Related Stockholder
Matters....................... Risk Factors
18.Description of Registrant's
Securities.................... Description of the Certificates
19.Legal Proceedings............... *
20.Security Ownership of Certain
Beneficial Owners and
Management.................... *
21.Directors and Executive
Officers...................... *
22.Executive Compensation.......... *
23.Certain Relationships and
Related Transactions.......... *
24.Selection, Management and
Custody of Registrant's Summary of Prospectus; Description of the
Investments................... Mortgage Pool; Servicing of the Mortgage
Loans; Description of the Certificates;
Description of the Pooling and Servicing
Agreement
25.Policies with Respect to Certain
Transactions.................. *
26.Limitations of Liability........ Summary of Prospectus; Risk Factors;
Description of the Certificates; Servicing
of the Mortgage Loans; Description of the
Pooling and Servicing Agreement
27.Financial Statements and The Bank Insurance Fund; Financial
Information................... Information
28.Interests of Named Experts and
Counsel....................... *
29.Disclosure of Commission
Position on Indemnification
for Securities Act
Liabilities................... *
</TABLE>
- --------
* Answer negative or item inapplicable
<PAGE>
Subject to Completion, dated , 1996
$[ ] (APPROXIMATE)
FDIC REMIC TRUST 1996-C1
COMMERCIAL MORTGAGE PASS-THROUGH CERTIFICATES, SERIES 1996-C1
FEDERAL DEPOSIT INSURANCE CORPORATION, MORTGAGE LOAN SELLER
BANC ONE MANAGEMENT AND CONSULTING CORPORATION, SERVICER
----------------
The Series 1996-C1 Commercial Mortgage Pass-Through Certificates (the
"Certificates") will consist of 14 classes of Certificates, consisting of the
11 classes of Certificates offered hereby (collectively, the "Offered
Certificates"), and the Class I-XS Certificates, the Class II-XS Certificates
and the Class R Certificates, which are not offered hereby. The Certificates
in the aggregate evidence the entire beneficial ownership interest in a trust
fund (the "Trust Fund") consisting primarily of a pool (the "Mortgage Pool")
of adjustable and fixed rate, amortizing and balloon payment mortgage loans
(the "Mortgage Loans") secured primarily by first liens primarily on fee
simple estates in commercial, multifamily and, to a limited extent,
residential
(cover continued on next page)
----------------
PROCEEDS OF THE ASSETS IN THE TRUST FUND, TOGETHER WITH AMOUNTS PAYABLE
UNDER THE LIMITED GUARANTY, ARE THE SOLE SOURCE OF PAYMENTS ON THE
CERTIFICATES. PAYMENTS ON THE CERTIFICATES ON ANY DISTRIBUTION DATE WILL BE
MADE ONLY TO THE EXTENT OF AVAILABLE FUNDS FOR SUCH DISTRIBUTION DATE. THE
CERTIFICATES DO NOT REPRESENT ANY OBLIGATION OF OR AN INTEREST IN THE FEDERAL
DEPOSIT INSURANCE CORPORATION OR ANY DEPOSITORY INSTITUTION FOR WHICH THE
FEDERAL DEPOSIT INSURANCE CORPORATION IS ACTING AS RECEIVER, EXCEPT AS
OTHERWISE DESCRIBED HEREIN. THE CERTIFICATES ARE NOT SAVINGS ACCOUNTS OR
DEPOSITS AND ARE NOT INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION OR BY ANY OTHER GOVERNMENTAL AGENCY OR INSTRUMENTALITY. HOWEVER, A
LIMITED GUARANTY WILL BE PROVIDED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION
THROUGH THE BANK INSURANCE FUND TO COVER, AMONG OTHER THINGS, LOSSES AND OTHER
SHORTFALLS ATTRIBUTABLE TO CREDIT DEFAULTS ON THE MORTGAGE LOANS, TO THE
EXTENT DESCRIBED HEREIN. THE LIMITED GUARANTY IS BY ITS TERMS NOT BACKED BY
THE FULL FAITH AND CREDIT OF THE UNITED STATES OF AMERICA.
----------------
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 ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED
THE MERITS OF THIS OFFERING. ANY REPRESENTATION OF THE CONTRARY IS UNLAWFUL.
INVESTMENTS IN THE OFFERED CERTIFICATES MAY INVOLVE MATERIAL RISKS.
PROSPECTIVE INVESTORS SHOULD REVIEW THE INFORMATION APPEARING UNDER THE
CAPTION "RISK FACTORS" BEGINNING ON PAGE 26 BEFORE PURCHASING ANY OFFERED
CERTIFICATE.
<TABLE>
<CAPTION>
INITIAL PERCENTAGE OF PASS- UNDERWRITING FINAL SCHEDULED
INITIAL CLASS INITIAL APPLICABLE THROUGH PRICE TO DISCOUNTS AND DISTRIBUTION EXPECTED
SUB-POOL DESIGNATION BALANCE (1) SUB-POOL BALANCE RATE PUBLIC (2) COMMISSION DATE (3) RATING (4)
- -------- ----------- ------------- --------------------- ------- ---------- ------------- --------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
I Class I-A1
I Class I-A2
I Class I-B
I Class I-C
I Class I-D
I Class I-E
I Class I-F
I Class I-G
II Class II-A
II Class II-B
II Class II-C
</TABLE>
(1) Subject to a permitted variance of plus or minus 5%.
(2) Plus accrued interest from December 1, 1996 with respect to the Sub-Pool I
Certificates.
(3) The Final Scheduled Distribution Dates have been set to a date three years
after the Distribution Date following the latest scheduled maturity date
for any Mortgage Loan in the applicable Sub-Pool.
(4) By Duff & Phelps Credit Rating Co. and Moody's Investor Services, Inc.,
respectively.
(5) The Pass-Through Rate on the Offered Certificates evidencing an interest
in Sub-Pool II will be subject to adjustment on each Distribution Date
based on changes in LIBOR. The Pass-Through Rate on such Certificates for
the first Distribution Date will be based on LIBOR as of the LIBOR
Business Day preceding the Closing Date.
The Offered Certificates are offered by the several Underwriters when, as
and if issued by the Trust Fund, delivered to and accepted by the Underwriters
and subject to their right to reject orders in whole or in part. Proceeds to
the Mortgage Loan Seller from the sale of the Offered Certificates are
anticipated to be approximately $[ ] plus accrued interest with respect to
the Sub-Pool I Certificates, but before deducting expenses payable by the
Mortgage Loan Seller, estimated to be approximately $[ ]. 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 , 1996.
Lehman Brothers [ ]
The date of this Prospectus is , 1996.
- -------
In this Prospectus, the term "Mortgage Loan Seller" will refer to the
Federal Deposit Insurance Corporation acting as mortgage loan seller in its
capacity as receiver of each of the Depository Institutions with respect to a
majority of the Mortgage Loans and in its capacity as administrator of the
Bank Insurance Fund with respect to the remaining Mortgage Loans. The term
"FDIC" will refer to the Federal Deposit Insurance Corporation acting solely
in its corporate capacity and not as Mortgage Loan Seller.
<PAGE>
(cover continued)
real properties (the "Mortgaged Properties"). For purposes of calculating
distributions on the Certificates, the Mortgage Pool is segregated into two
separate sub-pools, designated as Sub-Pool I, which consists of all of the
fixed rate Mortgage Loans (the "Fixed Rate Loans"), and Sub-Pool II, which
consists of all of the adjustable rate Mortgage Loans (the "ARM Loans"). As of
November 22, 1996 (the "Information Date"), the aggregate principal balance of
(i) the Mortgage Loans in the Mortgage Pool was approximately $[ ] (the
"Information Date Balance"), (ii) the Fixed Rate Loans in Sub-Pool I was
approximately $[ ] (the "Information Date Sub-Pool I Balance") and (iii) the
ARM Loans in Sub-Pool II was approximately $[ ] (the "Information Date Sub-
Pool II Balance"), in each case after application of all payments of principal
due on or before such date, whether or not received. The Offered Certificates
bear the class designations and have the characteristics set forth in the
table on the cover page of this Prospectus.
The Mortgage Loans will be conveyed to State Street Bank and Trust Company,
the trustee of the Trust Fund, by the Federal Deposit Insurance Corporation,
in its capacity as receiver of various Depository Institutions with respect to
a majority of the Mortgage Loans, and in its capacity as administrator of the
Bank Insurance Fund with respect to the remaining Mortgage Loans (in such
capacities, the "Mortgage Loan Seller"). Each Depository Institution for which
the Mortgage Loan Seller is still acting as receiver is insolvent and in the
process of liquidation and substantially all of the Depository Institutions
from which the Mortgage Loan Seller has acquired Mortgage Loans have been
liquidated. The files with respect to many of the Mortgage Loans are
incomplete. As a result, there can be no assurance that there are not material
inaccuracies in the information included in this Prospectus with respect to
one or more Mortgage Loans. See "Special Considerations--The Mortgage Loans--
Troubled Originators," "--Limited Information" and "--Mortgage Loan Schedule."
Distributions of interest on and principal of the Offered Certificates will
be made, to the extent of available funds, on the 25th day of each month or,
if such 25th day is not a business day, then on the next succeeding business
day, beginning in January, 1997 (each, a "Distribution Date"). As more fully
described herein, distributions allocable to interest accrued on each class of
Offered Certificates will be made on each Distribution Date based on the pass-
through rate (the "Pass-Through Rate") then applicable to such class and the
principal amount (the "Class Balance") of such class, in each case outstanding
immediately prior to such Distribution Date. Distributions allocable to
interest on the Offered Certificates evidencing an interest in Sub-Pool II are
subject to reduction to reflect unfunded interest shortfalls attributable to
Basis Risk Shortfalls (as defined herein) as described herein. See "Special
Considerations--The Certificates--Sub-Pool II Certificates--Basis Risk."
Distributions allocable to principal of each class of Offered Certificates
will be made sequentially in the amounts and in accordance with the priorities
described herein. Distributions on the Sub-Pool I Certificates will be based
on the Mortgage Loans in Sub-Pool I and distributions on the Sub-Pool II
Certificates will be based on the Mortgage Loans in Sub-Pool II. See
"Description of the Certificates--Distributions."
The Federal Deposit Insurance Corporation, in its corporate capacity (in
such capacity, the "FDIC"), will deliver to the trustee a limited guaranty
(the "Limited Guaranty"), which will cover, among other things, losses and
other shortfalls attributable to credit default on (i) the Fixed Rate Loans in
an amount initially equal to approximately [ ]% of the Information Date Sub-
Pool I Balance and (ii) the ARM Loans in an amount initially equal to
approximately [ ]% of the Information Date Sub-Pool II Balance. Claims under
the Limited Guaranty may be satisfied only through draws upon the Bank
Insurance Fund, as described herein. There can be no assurance that amounts in
the Bank Insurance Fund will be available to pay any such claim at any
particular time. THE LIMITED GUARANTY IS BY ITS TERMS NOT BACKED BY THE FULL
FAITH AND CREDIT OF THE UNITED STATES OF AMERICA. As and to the extent
described herein, in the event that the coverage available in respect of a
particular Sub-Pool under the Limited Guaranty has been exhausted, credit
losses and shortfalls on the Mortgage Loans in such Sub-Pool will be borne
first by the class of Certificates evidencing an interest therein having the
lowest alphabetical class designation, before allocation of such losses and
shortfalls to any other class of Certificates evidencing an interest therein.
The yield to maturity on each class of Offered Certificates will depend on,
among other things, its respective Pass-Through Rate and the rate and timing
of principal payments (including by reason of prepayments, defaults,
liquidations and repurchases attributable to breaches of representations and
warranties) on the Mortgage Loans that are applied in reduction of the Class
Balance of such class. See "Yield and Maturity Considerations" and "--Special
Considerations--Variability in Yield; Priority in Payments; Subordination."
The ratings assigned to the Offered Certificates will not constitute an
assessment of the likelihood that principal prepayments (including for this
purpose both voluntary prepayments as well as unscheduled collections
resulting from defaults, liquidations and repurchases attributable to breaches
of representations and warranties) of the Mortgage Loans will be made, the
degree to which the rate of such prepayments might differ from that originally
anticipated or the likelihood of early optional termination of the Trust Fund.
Furthermore, such ratings will not address the possibility that (x) prepayment
of the Mortgage Loans at a higher or lower rate than anticipated by an
investor may cause such investor to experience a lower than anticipated yield,
(y) an investor that purchases an Offered Certificate at a significant premium
might fail to recover its initial investment under certain prepayment
scenarios or (z) shortfalls attributable to basis risk may reduce the amount
available for distribution on the Sub-Pool II Certificates. See "Special
Considerations--The Certificates--Limited Nature of Ratings" and "Ratings."
As described herein, "real estate mortgage investment conduit" ("REMIC")
elections will be made with respect to specific portions of the Trust Fund for
federal income tax purposes. The Offered Certificates generally will represent
"regular interests" in a REMIC. See "Certain Federal Income Tax Consequences--
Tax Treatment of Regular Certificates--Original Issue Discount."
There currently is no secondary market for the Offered Certificates. The
Underwriters intend to make a secondary market in the Offered Certificates,
but have no obligation to do so. See "Risk Factors--The Certificates--Limited
Liquidity."
2
<PAGE>
Koch Asset Management Company and Glaves & Associates, Inc. serve as the
financial adviser to the Federal Deposit Insurance Corporation in connection
with the issuance and sale of the Certificates.
------------------
ONLY THE ASSETS OF THE TRUST FUND ARE SUBJECT TO ISSUER LIABILITY UNDER THE
FEDERAL SECURITIES LAWS FOR THE INFORMATION CONTAINED IN THIS PROSPECTUS, AND
THE TRUST FUND'S ASSETS ARE LIMITED SOLELY TO THE MORTGAGE LOANS AND THE
PROCEEDS THEREOF, AS DESCRIBED HEREIN. IN THE EVENT THAT THE TRUST FUND'S
ASSETS ARE DIMINISHED BY RECOVERIES AGAINST IT BASED UPON ITS LIABILITIES AS
ISSUER UNDER THE FEDERAL SECURITIES LAWS, THE ASSETS AVAILABLE FOR PAYMENT TO
CERTIFICATEHOLDERS WILL BE DIMINISHED. THE LIMITED GUARANTY OF THE FDIC WILL
NOT BE AVAILABLE TO COVER SUCH LIABILITIES.
------------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICES OF THE OFFERED
CERTIFICATES AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
------------------
UNTIL 90 DAYS AFTER THE DATE OF THIS PROSPECTUS, ALL DEALERS EFFECTING
TRANSACTIONS IN THE OFFERED CERTIFICATES, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO
THE OBLIGATIONS OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS
AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
------------------
AVAILABLE INFORMATION
The Trust Fund has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement (of which this Prospectus forms a part)
under the Securities Act of 1933, as amended, with respect to the Offered
Certificates. This Prospectus contains summaries of the material terms of the
documents referred to herein and therein, but does not contain all of the
information set forth in the Registration Statement pursuant to the rules and
regulations of the Commission. For further information, reference is made to
such Registration Statement and the exhibits thereto. Such Registration
Statement and exhibits as well as reports and other information filed by the
Trust Fund can be inspected without charge and copied at prescribed rates at
the public reference facilities maintained by the Commission at the Public
Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C.
20549, and at its Regional Offices located as follows: Chicago Regional
Office, Northwestern Atrium Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661-2511; and New York Regional Office, Seven World Trade
Center, Suite 1300, New York, New York 10048. The Commission maintains a Web
site that contains reports, proxy, and information statements and other
information regarding registrants that file electronically with the
Commission. The Web site is located at http://www.sec.gov.
No person has been authorized to give any information or to make any
representation not contained in this Prospectus and, if given or made, such
information or representation must not be relied upon. This Prospectus does
not constitute an offer to sell or a solicitation of an offer to buy any
securities other than the Offered Certificates, or an offer of the Offered
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.
------------------
3
<PAGE>
REPORTS TO CERTIFICATEHOLDERS
The Trustee will be required to mail to holders of the Offered Certificates,
the Mortgage Loan Seller, the Servicer, the Underwriters and each Rating
Agency periodic unaudited reports concerning the Trust Fund. Such reports will
be sent on behalf of the Trust Fund to a nominee of DTC as the registered
holder of the Offered Certificates. Conveyance of notices and other
communications by DTC to its participating organizations, and directly or
indirectly through such participating organizations to the beneficial owners
of the Offered Certificates, will be governed by arrangements among them,
subject to any statutory or regulatory requirements as may be in effect from
time to time. See "Description of the Certificates--Reports to
Certificateholders; Certain Available Information" and "--Book-Entry
Registration and Definitive Certificates." Any such reports shall also be made
available to the previously mentioned parties through electronic delivery
systems such as electronic bulletin boards or internet sites.
------------------
4
<PAGE>
SUMMARY OF PROSPECTUS
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus. Certain
capitalized terms used in this Summary may be defined elsewhere in this
Prospectus. An "Index of Principal Definitions" is included at the end of this
Prospectus. Whenever reference is made in this Prospectus to a percentage of
the Mortgage Loans the percentage is calculated based on the unpaid principal
balance of the Mortgage Loans as of November 22, 1996 (the "Information Date").
TITLE OF CERTIFICATES... Commercial Mortgage Pass-Through Certificates, Series
1996-C1 (the "Certificates"), to be issued in 14
classes.
CERTIFICATE "Sub-Pool I Certificates": The Class I-A1, Class I-
DESIGNATIONS........... A2, Class I-B, Class I-C, Class I-D, Class I-E, Class
I-F and Class I-G Certificates.
"Sub-Pool II Certificates": The Class II-A, Class II-
B, and Class II-C Certificates.
"Offered Certificates": The Sub-Pool I Certificates
and the Sub-Pool II Certificates.
"Stripped Interest Certificates": The Class I-XS
Certificates and the Class II-XS Certificates.
"Class R Certificates": The Class R Certificates.
REGISTRANT AND ISSUER... FDIC REMIC Trust 1996-C1 (the "Trust Fund"). The
address of the Registrant is FDIC REMIC Trust 1996-C1
c/o State Street Bank and Trust Company, Corporate
Trust Department, 225 Franklin Street, Boston,
Massachusetts 02110 and the telephone number of the
Registrant is (617) 664-5500. The Registrant is a New
York Trust created pursuant to the Declaration of
Trust, dated as of November 13, 1996.
SERVICER AND SPECIAL Banc One Management and Consulting Corporation, an
SERVICER............... Ohio corporation. See "Servicing of the Mortgage
Loans--The Servicer."
TRUSTEE................. State Street Bank and Trust Company, a Massachusetts
banking corporation. See "Description of the
Certificates--The Trustee."
FDIC OR MORTGAGE LOAN In this Prospectus, the term "FDIC" will refer to the
SELLER................. Federal Deposit Insurance Corporation acting solely
in its corporate capacity and not as Mortgage Loan
Seller and the term "Mortgage Loan Seller" will refer
to the Federal Deposit Insurance Corporation in its
capacity as receiver of approximately 200 state or
federally chartered depository institutions (the
"Depository Institutions") with respect to a majority
of the Mortgage Loans, and in its corporate capacity
as administrator of the Bank Insurance Fund with
respect to the remaining Mortgage Loans. No more than
[ ]% of the Mortgage Loans were acquired from any
other single Depository Institution. See "The Federal
Deposit Insurance Corporation--The Mortgage Loan
Seller" and "Description of the Certificates--The
Limited Guaranty."
CUT-OFF DATE............ December 1, 1996.
5
<PAGE>
INFORMATION DATE........ November 22, 1996.
CLOSING DATE............ December [ ], 1996.
DISTRIBUTION DATE FOR
THE
OFFERED CERTIFICATES... The 25th day of each month, or if such day is not a
business day, then the next succeeding business day,
beginning in January, 1997.
RECORD DATE FOR THE
OFFERED CERTIFICATES... With respect to any Distribution Date, the last day
of the preceding calendar month with respect to the
Sub-Pool I Certificates, and the 24th day of the
calendar month in which such Distribution Date occurs
with respect to the Sub-Pool II Certificates.
REGISTRATION OF THE
OFFERED CERTIFICATES... The Offered Certificates of each class will initially
be represented by one or more global Certificates
registered in the name of Cede & Co., as nominee of
The Depository Trust Company ("DTC"). No person
acquiring an interest in any Offered Certificate (any
such person, a "Certificate Owner") will be entitled
to receive such Certificate in fully registered,
certificated form (a "Definitive Offered
Certificate"), except under the limited circumstances
described under "Description of the Certificates--
Book Entry Registration and Definitive Certificates."
Instead, DTC will effect payments and transfers in
respect of the Offered Certificates by means of its
electronic recordkeeping services, acting through
certain participating organizations ("Participants").
This may result in certain delays in receipt of
payments by an investor and may restrict an
investor's ability to pledge its securities. Unless
and until Definitive Offered Certificates of any
class are issued, all references herein to the rights
of holders of a class of Offered Certificates are to
the rights of the Certificate Owners of the
applicable class, as they may be exercised through
DTC and its Participants, except as otherwise
specified herein. See "Description of the
Certificates--General" and "--Book-Entry Registration
and Definitive Certificates."
DENOMINATIONS........... The Offered Certificates of each class will be
issued, maintained and transferred on the book-entry
records of DTC and its Participants in denominations
of $100,000 and in integral multiples of $1,000 in
excess thereof, except that one Certificate of each
such class may evidence the remainder of the initial
Class Balance of such class.
THE MORTGAGE POOL....... The Mortgage Pool will consist of adjustable and
fixed rate, amortizing and balloon payment Mortgage
Loans (and participation interests in such Mortgage
Loans) conveyed to the Trust Fund by the Mortgage
Loan Seller on or prior to the Closing Date. The
Mortgage Loans are secured primarily by first liens
primarily on fee simple estates in commercial,
multifamily and, to a limited extent, residential
real properties (the "Mortgaged Properties"). As of
the Information Date, the Mortgage Loans had, in the
aggregate, an unpaid principal balance, after
application of all payments due on or before such
date, whether or not received, of approximately
$[ ] (the "Information Date Balance"), subject to a
variance of plus or minus 5%.
6
<PAGE>
General............... Set forth below is certain information with respect
to all of the Mortgage Loans. More detailed
information with respect to the Mortgage Loans is
included under "Description of the Mortgage Pool--
Mortgage Loan Information" and in Annex A and Annex B
to this Prospectus. The files with respect to many of
the Mortgage Loans are incomplete. As a result, there
can be no assurance that there are not material
inaccuracies in the information included in this
Prospectus with respect to one or more Mortgage
Loans. See "Special Considerations--The Mortgage
Loans--Limited Information." All percentages of the
Mortgage Loans referred to in this section "General"
are approximate percentages as of the Information
Date by Information Date Balance.
Approximately [ ]% of the Mortgage Loans are secured
by a first lien on the related Mortgaged Property and
approximately [ ]% of the Mortgage Loans are secured
by a second, third or more junior lien (any such
lien, a "Junior Lien") on the related Mortgaged
Property.
Approximately [ ]% of the Mortgage Loans are ARM
Loans and approximately [ ]% of the Mortgage Loans
are Fixed Rate Loans. The rate at which interest
accrues on any Mortgage Loan is herein referred to as
the "Mortgage Rate" for such loan. The Fixed Rate
Loans and the ARM Loans are segregated into two
separate sub-pools, designated as "Sub-Pool I" and
"Sub-Pool II," respectively.
Scheduled payments of principal of and/or interest on
the Mortgage Loans ("Scheduled Payments") are due
monthly, quarterly, semiannually, annually or, in the
case of [ ] Mortgage Loans, upon maturity only. The
date that a Scheduled Payment on any Mortgage Loan is
due is herein referred to as the "Due Date" for such
Scheduled Payment. Approximately [ ]% of the
Mortgage Loans provide for the accrual of interest on
an actuarial basis; the remainder provide for the
accrual of interest on a simple interest basis (any
such loan, a "Simple Interest Loan").
Approximately [ ]% of the Mortgage Loans provide for
Scheduled Payments of principal based on amortization
schedules significantly longer than the remaining
terms of such Mortgage Loans (each such Mortgage
Loan, a "Balloon Loan"), thereby leaving substantial
principal amounts due and payable (each such payment,
a "Balloon Payment") on their respective maturity
dates, unless prepaid prior thereto. Approximately
[ ] of the Balloon Loans which represent
approximately [ ]% of the Information Date Balance
are in default with respect to the Balloon Payment
due thereon; however, the borrowers continue to make
Assumed Scheduled Payments thereon on a timely basis
(any such loan, a "Matured Performing Mortgage
Loan"). The "Assumed Scheduled Payment" with respect
to any Matured Performing Mortgage Loan is equal to
at least the interest portion of the Scheduled
Payment due on such Mortgage Loan on the Due Date
immediately prior to the Due Date on which the
Balloon Payment was first due, adjusted, in the case
of an ARM Loan, to reflect adjustments to the
Mortgage Rate thereon.
7
<PAGE>
Certain of the Mortgage Loans contain provisions
prohibiting prepayments during certain periods, and
certain of the Mortgage Loans provide for the payment
of prepayment premiums in connection with certain
prepayments. Pursuant to the terms of the Pooling and
Servicing Agreement (as herein defined) the Servicer
is not required to enforce such prepayment
provisions, and the Servicer has indicated that it
does not intend to enforce any such prohibitions or
to collect prepayment premiums.
Approximately [ ]% of the Mortgage Loans are
primarily secured by office properties; approximately
[ ]% of the Mortgage Loans are primarily secured by
general retail properties; approximately [ ]% of the
Mortgage Loans are primarily secured by
industrial/warehouse properties; approximately [ ]%
of the Mortgage Loans are primarily secured by
multifamily properties; approximately [ ]% of the
Mortgage Loans are primarily secured by mixed use
properties; approximately [ ]% of the Mortgage Loans
are primarily secured by lodging properties;
approximately [ ]% of the Mortgage Loans are
primarily secured by other types of income producing
properties; and approximately [ ]% of the Mortgage
Loans are primarily secured by residential
properties.
Approximately [ ]% and approximately [ ]% of the
Mortgage Loans are secured by liens on Mortgaged
Properties located in California and Massachusetts,
respectively. The remaining Mortgaged Properties are
located throughout approximately [ ] other
jurisdictions, none of which include Mortgaged
Properties securing more than [ ]% of the Mortgage
Loans.
The Mortgaged Properties with respect to
approximately [ ] of the Mortgage Loans (the
"Appraised Loans") (representing approximately [ ]%
of the Information Date Balance) were the subject of
an appraisal performed from October 11, 1996 through
November 29, 1996 on behalf of the Mortgage Loan
Seller by various nationally-recognized appraisal
firms in contemplation of the issuance of the
Certificates (as described herein, the "Appraisal
Process"). The remaining Mortgage Loans were not
included in the Appraisal Process. The methodology
for including Mortgage Loans in the Appraisal Process
is described under "Description of the Mortgage
Pool--Mortgage Pool Information--The Appraisal
Process." All information with respect to Information
Date LTV Ratios is based upon (a) the Information
Date Balance of the Mortgage Loan and (b) the
appraised value of the related Mortgaged Property
determined in connection with the Appraisal Process
or, if not included in the Appraisal Process, based
on the most recent available appraised value of the
Mortgaged Property. All information with respect to
the Information Date Estimated Net Cash Flow Coverage
Ratios (calculated as described herein) in this
Prospectus is based primarily upon the information
obtained in connection with the Appraisal Process or
based upon responses to a general borrower
solicitation made immediately prior to the
commencement of the Appraisal Process. Information
received from borrowers has not been independently
verified. As described more fully
8
<PAGE>
herein under "Description of the Mortgage Pool--
Mortgage Loan Information," "Estimated Net Cash Flow"
with respect to a Mortgaged Property securing an
Appraised Loan is an estimate of annualized net
operating income. In many cases, Estimated Net Cash
Flow for a particular Mortgaged Property was derived
from an analysis of income and expense experiences of
other properties deemed comparable by the appraiser,
because an operating statement for such Mortgaged
Property was not available. THE ESTIMATED NET CASH
FLOW COVERAGE RATIO WITH RESPECT TO A PARTICULAR
MORTGAGED PROPERTY SHOULD NOT BE CONSIDERED AS
EQUIVALENT TO ANY MEASURE OF PERFORMANCE, SUCH AS A
RATIO OF EARNINGS TO FIXED CHARGES, DETERMINED IN
ACCORDANCE WITH GEN ERALLY ACCEPTED ACCOUNTING
PRINCIPLES, AS AN INDICATOR OF THE PERFORMANCE OF
SUCH PROPERTY OR TO CASH FLOWS GENERATED BY
OPERATING, INVESTING AND FINANCING ACTIVITIES, AS AN
INDICATOR OF CASH FLOWS OR AS A MEASURE OF LIQUIDITY.
See "Description of the Mortgage Pool--Mortgage Loan
Information."
Sub-Pool I............ Set forth below is certain information with respect
to the Fixed Rate Loans. More detailed information
with respect to the Fixed Rate Loans is included
under "Description of the Mortgage Pool--Mortgage
Loan Information--Sub Pool I" and, with respect to
the [ ] largest Fixed Rate Loans, in Annex A to
this Prospectus. All percentages of the Fixed Rate
Loans referred to in this section "Sub-Pool I"
without further description or except as otherwise
indicated are approximate percentages of the
Information Date Sub-Pool I Balance.
Sub-Pool I consists exclusively of [ ] Fixed Rate
Loans, which have an aggregate Information Date
Balance of approximately $[ ]. The Fixed Rate Loans
include Mortgage Loans (x) with Mortgage Rates that
are subject to increase from time to time in
accordance with a schedule set forth in the related
Mortgage Loan documents, (y) with Mortgage Rates that
were subject to adjustment from time to time prior to
the Information Date based on fluctuations in the
value of a particular index, but provide for no
scheduled Mortgage Rate adjustments based on an index
after the Information Date or (z) with Mortgage Rates
that are subject to adjustment from time to time
based on fluctuations in the value of a particular
index, but which have minimum Mortgage Rates in
excess of [ ]% and which therefore behave like Fixed
Rate Loans. As of the Information Date, the Fixed
Rate Loans in the aggregate had the following
additional characteristics:
(i) Information Date Balances ranging from $[ ] to
$[ ], and an average Information Date Balance
of $[ ];
(ii) Mortgage Rates ranging from [ ]% per annum to
[ ]% per annum, and a weighted average Mortgage
Rate of [ ]% per annum (the Information Date
Balance of any Fixed Rate Loan with a Net
Mortgage Rate that is lower than the Pass-
Through Rate on the Class I-G Certificates will
be discounted as described under "Description of
the Certificates--Distributions--Principal
Distribution Calculations.");
9
<PAGE>
(iii) seasoning (i.e., the number of months from
origination to the Information Date) of the
Fixed Rate Loans ranging from [ ] months to [ ]
months, and a weighted average seasoning of [ ]
months;
(iv) remaining terms to scheduled maturity ranging
from [ ] months to [ ] months (excluding
Matured Performing Mortgage Loans), and a
weighted average remaining term to scheduled
maturity of [ ] months (excluding Matured
Performing Mortgage Loans);
(v) approximately [ ]% of the Fixed Rate Loans are
Appraised Loans (each, an "Appraised Fixed Rate
Loan");
(vi) approximately [ ]% of the Fixed Rate Loans have
appraisal information, and the Information Date
LTV Ratios (calculated as described herein),
with respect to such Fixed Rate Loans range
from [ ]% to [ ]%with a weighted average
Information Date LTV Ratio for such Fixed Rate
Loans of [ ]%;
(vii) approximately [ ]% of the Fixed Rate Loans have
operating statement information, and the
Estimated Net Cash Flow Coverage Ratios
(calculated as described herein) with respect
to such Fixed Rate Loans range from [ ]x to
[ ]x with a weighted average Estimated Net Cash
Flow Coverage Ratio for such Fixed Rate Loans
of [ ]x;
(viii) approximately [ ]% of the Fixed Rate Loans are
up to 29 days delinquent with respect to their
Scheduled Payments, or Assumed Scheduled
Payments, as the case may be, and
approximately [ ]% of the Fixed Rate Loans are
up to 59 days delinquent with respect to their
Scheduled Payments, or Assumed Scheduled
Payments, as the case may be;
(ix) approximately [ ]% of the Fixed Rate Loans are
Matured Performing Mortgage Loans (each, a
"Matured Performing Fixed Rate Loan");
(x) approximately [ ]% of the Matured Performing
Fixed Rate Loans are up to 29 days delinquent
with respect to their Assumed Scheduled
Payments and approximately [ ]% of the Matured
Performing Fixed Rate Loans are up to 59 days
delinquent with respect to two Assumed
Scheduled Payments;
(xi) approximately [ ]% of the Fixed Rate Loans are
secured primarily by a first lien on the
related Mortgaged Property, and approximately [
]% of the Fixed Rate Loans are secured
primarily by a Junior Lien on the related
Mortgaged Property; and
(xii) approximately [ ]% of the Fixed Rate Loans were
originated by the Mortgage Loan Seller after
the commencement of the applicable receivership
(the "Loans-to-Facilitate"). See "Description
of the Mortgage Pool--Loans-to-Facilitate."
10
<PAGE>
Sub-Pool II........... Set forth below is certain information with respect
to the ARM Loans. More detailed information with
respect to the ARM Loans is included under
"Description of the Mortgage Pool--Mortgage Loan
Information--Sub Pool II" and, with respect to the
[ ] largest ARM Loans, in Annex B to this
Prospectus. All percentages of the ARM Loans referred
to in this section "Sub-Pool II" without further
description or except as otherwise indicated are
approximate percentages of the Information Date Sub-
Pool II Balance.
Sub-Pool II consists exclusively of [ ] ARM Loans,
which have an aggregate Cut-off Date Balance of
approximately $[ ]. The Mortgage Rate on each ARM
Loan is subject to adjustment on specified Due Dates
by adding or, in certain cases, subtracting, a fixed
number of basis points (a "Gross Margin") to or from,
as the case may be, the value of a base index (an
"Index") or, in certain cases, a fraction thereof,
subject, in the case of certain of the ARM Loans, to
rounding conventions and to periodic and/or lifetime
maximum and/or minimum Mortgage Rates, as described
herein. The ARM Loans include only Mortgage Loans
that provide for a scheduled Mortgage Rate adjustment
based on an Index following the Information Date.
As of the Information Date, the ARM Loans (i.e., the
Mortgage Loans in Sub-Pool II) in the aggregate had
the following additional characteristics:
(i) Information Date Balances ranging from $[ ] to
$[ ], and an average Information Date Balance
of $[ ];
(ii) Mortgage Rates ranging from approximately [ ]%
per annum to approximately [ ]% per annum, and
a weighted average Mortgage Rate of
approximately [ ]% per annum;
(iii) Gross Margins for Prime Index Loans ranging
from approximately [ ]% to approximately
[ ]%, and a weighted average Gross Margin of
approximately [ ]%; Gross Margins for other
ARM Loans ranging from approximately [ ]% to
approximately [ ]%, and a weighted average
Gross Margin of approximately [ ]%;
(iv) approximately [ ]% of the ARM Loans have
maximum lifetime Mortgage Rates, which range
from approximately [ ]% per annum to
approximately [ ]% per annum, and a weighted
average maximum lifetime Mortgage Rate of
approximately [ ]% per annum; the remainder of
the ARM Loans do not have maximum lifetime
Mortgage Rates;
(v) approximately [ ]% of the ARM Loans have
minimum lifetime Mortgage Rates, which range
from approximately [ ]% per annum to
approximately [ ]% per annum, and a weighted
average minimum lifetime Mortgage Rate of
approximately [ ]% per annum; the remainder of
the ARM Loans do not have minimum lifetime
Mortgage Rates;
11
<PAGE>
(vi) seasoning (i.e., the number of months from
origination to the Information Date) of the ARM
Loans ranging from [ ] months to [ ] months,
and a weighted average seasoning of [ ] months;
(vii) remaining terms to scheduled maturity ranging
from [ ] months to [ ] months (excluding
Matured Performing Mortgage Loans), and a
weighted average remaining term to scheduled
maturity of [ ] months (excluding Matured
Performing Mortgage Loans);
(viii) approximately [ ]% of the ARM Loans are
Appraised Loans (each, an "Appraised ARM
Loan");
(ix) approximately [ ]% of the ARM Loans have
appraisal information, and the Information Date
LTV Ratios (calculated as described herein)
with respect to such ARM Loans range from [ ]%
to [ ]% with a weighted average Information
Date LTV Ratio for such ARM Loans of [ ]%;
(x) approximately [ ]% of the ARM Loans have
operating statement information, and the
Estimated Net Cash Flow Coverage Ratios
(calculated as described herein) with respect
to such ARM Loans range from [ ]x to [ ]x with
a weighted average Estimated Net Cash Flow
Coverage Ratio for such ARM Loans of [ ]x;
(xi) approximately [ ]% of the ARM Loans permit
negative amortization, as described herein;
(xii) approximately [ ]% of the ARM Loans are up to
29 days delinquent with respect to their
Scheduled Payments, or Assumed Scheduled
Payments, as the case may be, and approximately
[ ]% of the ARM Loans are up to 59 days
delinquent with respect to their Scheduled
Payments, or Assumed Scheduled Payments, as the
case may be;
(xiii) approximately [ ]% of the ARM Loans are
Matured Performing Mortgage Loans (each, a
"Matured Performing ARM Loan");
(xiv) approximately [ ]% of the Matured Performing
ARM Loans are up to 29 days delinquent with
respect to their Assumed Scheduled Payments and
approximately [ ]% of the Matured Performing
ARM Loans are up to 59 days delinquent with
respect to their Assumed Scheduled Payments;
(xv) approximately [ ]% of the ARM Loans are secured
primarily by a first lien on the related
Mortgaged Property, and approximately [ ]% of
the ARM Loans are secured primarily by a Junior
Lien on the related Mortgaged Property; and
(xvi) approximately [ ]% of the ARM Loans were
originated by the Mortgage Loan Seller after
the commencement of the applicable receivership
(the "Loans-to-Facilitate"). See "Description
of the Mortgage PoolLoans-to-Facilitate."
12
<PAGE>
Mortgage Rate adjustments occur monthly, in the case
of approximately [ ]% of the ARM Loans; semi-
annually, in the case of approximately [ ]% of the
ARM Loans; annually, in the case of approximately
[ ]% of the ARM Loans; every three years, in the
case of approximately [ ]% of the ARM Loans; and at
other frequencies, in the case of approximately [ ]%
of the ARM Loans.
The Indices upon which Mortgage Rate adjustments on
the ARM Loans are based include, among others, (i)
the highest prime lending rate as published from time
to time in the "Money Rates" section of The Wall
Street Journal ("The Wall Street Journal Prime Rate")
or the prime lending rate of various financial
institutions in the case of approximately [ ]% of
the ARM Loans, (ii) the monthly weighted average cost
of funds of member savings institutions of the
Eleventh District Federal Home Loan Bank System, in
the case of approximately [ ]% of the ARM Loans and,
(iii) constant maturity U.S. Treasury rates of
various maturities, in the case of approximately
[ ]% of the ARM Loans. No more than [ ]% of the ARM
Loans have Mortgage Rates based on another Index. The
Mortgage Loan Seller has instructed the Servicer to,
and the Pooling and Servicing Agreement will require
the Servicer to, convert any Index that no longer
exists on an ARM Loan to The Wall Street Journal
Prime Rate, to the extent permitted by the applicable
Mortgage Loan documents. See "Description of the
Mortgage Pool--Mortgage Loan Information--Sub-Pool
II."
DESCRIPTION OF THE
CERTIFICATES........... The Certificates will be issued pursuant to a Pooling
and Servicing Agreement, to be dated as of the Cut-
off Date, by and among the Mortgage Loan Seller, the
FDIC, the Servicer and the Trustee (the "Pooling and
Servicing Agreement"), and will represent in the
aggregate the entire beneficial ownership interest in
the Trust Fund, which consists of the Mortgage Pool
and certain related assets. See "Description of the
Pooling and Servicing Agreement." In addition, on
each Distribution Date, (x) the Sub-Pool II
Certificates will have the benefit of the obligation
of the FDIC (i) to make payments in respect of the
Basis Risk Support Amount, if any, for such
Distribution Date, and (ii) to draw from the Bank
Insurance Fund amounts then payable under the Limited
Guaranty in respect of the Mortgage Loans and REO
Loans in Sub-Pool I and (y) the Sub-Pool I
Certificates will have the benefit of the obligation
of the FDIC to draw from the Bank Insurance Fund
amounts then payable under the Limited Guaranty in
respect of the Mortgage Loans and REO Loans in Sub-
Pool I. Such obligations of the FDIC are limited in
scope as described herein and are not backed by the
full faith and credit of the United States of
America. See "The Bank Insurance Fund."
Class Balances........ As of the Closing Date, the aggregate of the Class
Balances of the Certificates will be equal to or less
than the Information Date Balance; the aggregate of
the Class Balances of each Sub-Pool of Certificates
will be equal to or less than the Corresponding
Information Date Sub-Pool Balance. The initial Class
Balance of each class of Offered Certificates,
subject to a variance of plus or minus 5%, is set
forth on the cover page of this Prospectus. The Class
Balance of each class of Certificates
13
<PAGE>
evidencing an interest in a particular Sub-Pool
outstanding at any time represents the maximum amount
that the holders thereof are entitled to receive as
distributions allocable to principal from the cash
flow on the Mortgage Loans in such Sub-Pool, the
other assets in the Trust Fund, and any proceeds of
the Limited Guaranty. As more specifically described
herein, the Class Balance of each class of Offered
Certificates will be reduced on each Distribution
Date to the extent of any distributions of principal
of such class on such Distribution Date and will be
increased on each Distribution Date to the extent of
mortgage loan negative amortization, if any,
allocated to such class on such Distribution Date.
The Stripped Interest Certificates have no Class
Balances and are not entitled to receive any
distributions allocable to principal. See
"Description of the Certificates--General."
Pass-Through Rates.... Sub-Pool I. For each Distribution Date, the Pass-
Through Rates on the Sub-Pool I Certificates will be
fixed at the following rates per annum:
<TABLE>
<CAPTION>
PASS-THROUGH
CLASS RATE
----- ------------
<S> <C>
I-A1..........................
I-A2..........................
I-B...........................
I-C...........................
I-D...........................
I-E...........................
I-F...........................
I-G...........................
</TABLE>
The Pass-Through Rate on the Class I-XS Certificates
will be subject to adjustment on each Distribution
Date to equal the excess, if any, of the Weighted
Average Effective Net Mortgage Rate of Sub-Pool I for
such Distribution Date over the weighted average of
the Pass-Through Rates on the Sub-Pool I Certificates
for such Distribution Date. The Pass-Through Rate for
the Class I-XS Certificates on the first Distribution
Date will be [ ]% per annum.
See "Description of the Certificates--Distributions--
Sub-Pool I Certificates--Pass-Through Rates."
Sub-Pool II. For each Distribution Date, the Pass-
Through Rates on the Sub-Pool II Certificates will be
subject to adjustment to equal the sum of LIBOR and
the Applicable Margin, as set forth below:
<TABLE>
<CAPTION>
CLASS APPLICABLE MARGIN
----- -----------------
<S> <C>
II-A.....................
II-B.....................
II-C.....................
</TABLE>
; provided, however, that in the event that the Pass-
Through Rate on one or more classes of Sub-Pool II
Certificates exceeds the Weighted Average Effective
Net Mortgage Rate of Sub-Pool II for such
Distribution Date, payment of interest at the Pass-
Through Rate on such class or classes of Sub-Pool II
Certificates will be reduced to the extent that the
Basis Risk
14
<PAGE>
Support Amount, if any, for such Distribution Date is
insufficient to make up such shortfall. Any such
shortfall on any Distribution Date will be allocated
among such class or classes of Sub-Pool II
Certificates as described herein, and will not be
carried forward for payment in the future.
As defined more specifically herein, the "Basis Risk
Support Amount" for any Distribution Date is an
amount equal solely to the amount, if any,
distributable on such Distribution Date in respect of
interest on both classes of Stripped Interest
Certificates. See "Description of the Certificates--
Distributions--Sub-Pool II Certificates--Basis Risk."
As defined more specifically herein, the "Weighted
Average Effective Net Mortgage Rate" of a Sub-Pool on
any Distribution Date is equal to the weighted
average of the Net Mortgage Rates on the Mortgage
Loans in such Sub-Pool, adjusted to the extent
necessary to reflect the accrual of interest on a
"30/360" basis. See "Description of the
Certificates--Distributions--Interest Distribution
Calculations Applicable to the Certificates." The
"Net Mortgage Rate" on any Mortgage Loan at any time
of determination is equal to the then applicable
Mortgage Rate minus 17.65 basis points, which is the
sum of the rates at which the maximum servicing fees
and the trust administrative fees are calculated.
For purposes of determining the Pass-Through Rates on
the Sub-Pool II Certificates for any Distribution
Date, "LIBOR" shall be obtained by the Trustee by
obtaining the quoted offered rate for one-month
United States dollar deposits with leading banks in
the London interbank market that appears as of 11:00
a.m. (London time) on the display page designated as
page 3750 on the Telerate Monitor on the LIBOR
Business Day prior to the immediately preceding
Distribution Date, or, in the case of the first
Distribution Date, on the LIBOR Business Day
preceding the Closing Date. See "Description of the
Certificates--Distributions--Sub-Pool II
Certificates--Pass-Through Rates."
The Pass-Through Rate on the Class II-XS Certificates
will be subject to adjustment on each Distribution
Date to equal the excess, if any, of the Weighted
Average Effective Net Mortgage Rate of Sub-Pool II
for such Distribution Date over the weighted average
of the Component Reference Rates on the Sub-Pool II
Certificates for such Distribution Date. The
"Component Reference Rate" for a class of Sub-Pool II
Certificates on any Distribution Date is equal to the
lesser of the Weighted Average Effective Net Mortgage
Rate of Sub-Pool II on such Distribution Date and the
Pass-Through Rate for such class on such Distribution
Date.
Distributions......... Distributions on the Certificates will be made by the
Trustee, to the extent of available funds, on each
Distribution Date to the holders of record as of the
close of business on the applicable Record Date.
Distributions on each Sub-Pool of Certificates will
be based on the Mortgage Loans in the Corresponding
Sub-Pool. For purposes of calculating distributions
on the Certificates, as well as the amount of
servicing fees and trust administrative fees payable
each month, each Mortgaged Property acquired by the
Trust Fund (each, an "REO Property") will be treated
as if there exists with respect thereto an
outstanding Mortgage Loan (an
15
<PAGE>
"REO Loan") generally with the same characteristics
as its predecessor Mortgage Loan. See "Description of
the Certificates--Distributions--Certain Calculations
with Respect to Individual Mortgage Loans." For
purposes hereof, any class of Certificates or any
Certificate evidencing an interest in a particular
Sub-Pool, including the class of Stripped Interest
Certificates evidencing an interest in such Sub-Pool,
is sometimes herein referred to as a "Corresponding"
class or a "Corresponding" Certificate, respectively,
with respect to such Sub-Pool or to the other classes
of Certificates evidencing an interest in such Sub-
Pool. With respect to any Distribution Date, the
total of all (x) scheduled payments due on the
Mortgage Loans or deemed to be due on the Matured
Performing Mortgage Loans and REO Loans during the
related Due Period, to the extent received by the
related Determination Date or in respect of which the
Servicer has made a P&I Advance for such Distribution
Date, and (y) unscheduled collections received on the
Mortgage Loans and REO Loans during the related
Prepayment Period that are available for distribution
to holders of the Certificates evidencing interests
in a particular Sub-Pool on any Distribution Date,
together with any payments made under the Limited
Guaranty for such Sub-Pool and such Distribution
Date, is herein referred to as the "Available
Distribution Amount" for such Sub-Pool and such
Distribution Date. The "Prepayment Period" for each
Distribution Date commences on the sixteenth day of
the calendar month preceding the month in which such
Distribution Date occurs and ends on the fifteenth
day of the month in which such Distribution Date
occurs. The "Due Period" for each Distribution Date
commences on the second day of the calendar month
preceding the month in which such Distribution Date
occurs (or in the case of the first Distribution
Date, the period that begins on the day following the
Cut-off Date) and ends on the first day of the month
in which such Distribution Date occurs. The
"Determination Date" for each Distribution Date is
the 15th day of the month in which such Distribution
Date occurs or, if such 15th day is not a business
day, then the next preceding business day. See
"Description of the Certificates--Distributions--
Method, Timing and Amount."
On each Distribution Date, the Trustee will apply the
applicable Available Distribution Amount for such
date to make distributions in respect of interest and
principal as and to the extent described herein, in
the following order of priority, in each case to the
extent of remaining available funds:
With respect to the Sub-Pool I Certificates, from the
Available Distribution Amount for Sub-Pool I:
first, to the Class I-A1 Certificates and the Class
I-A2 Certificates (generally with
distributions in respect of principal applied
first to the Class I-A1 Certificates until
they are paid in full, as described herein);
second, to the Class I-B Certificates;
third, to the Class I-C Certificates;
fourth, to the Class I-D Certificates;
16
<PAGE>
fifth, to the Class I-E Certificates;
sixth, to the Class I-F Certificates; and
seventh, to the Class I-G Certificates.
With respect to the Sub-Pool II Certificates, from
the Available Distribution Amount for Sub-Pool II:
first, to the Class II-A Certificates;
second, to the Class II-B Certificates; and
third, to the Class II-C Certificates.
Generally, as more specifically described herein, (i)
distributions with respect to any class of
Certificates will be applied first to interest and
then to principal (the amount of interest and
principal required to be distributed to any class of
Certificates on any Distribution Date, as described
more specifically herein, "Distributable Interest"
and "Distributable Principal," respectively); (ii)
shortfalls in required distributions of interest with
respect to any class of Certificates on any
Distribution Date will be carried forward for payment
on subsequent Distribution Dates, without interest
thereon, to the extent of available funds; (iii)
Distributable Interest for any Distribution Date for
each class of Offered Certificates and Stripped
Interest Certificates is calculated over an accrual
period commencing on the immediately preceding
Distribution Date (or, in the case of the first
Distribution Date, commencing on the Closing Date)
and ending on the day immediately preceding such
Distribution Date, in each case based on a 360-day
year consisting of twelve 30-day months; (iv) no
distributions in respect of principal of any class of
Certificates evidencing an interest in a particular
Sub-Pool will be made until all Corresponding classes
of Certificates having a higher alphabetical class
designation have been paid in full (for so long as
the amount of coverage allocable to Sub-Pool I under
the Limited Guaranty and the protection afforded by
the subordination of the Corresponding classes of
Certificates have not been exhausted, no
distributions in respect of principal of the Class I-
A2 Certificates will be made until the Class I-A1
Certificates have been paid in full); and (v)
distributions in respect of interest on a class of
Stripped Interest Certificates will be made on each
Distribution Date, but only after all Corresponding
classes of Certificates have received their
respective Distributable Interest and Distributable
Principal for such Distribution Date. See
"Description of the Certificates--Distributions--Sub-
Pool I Certificates--Priority" and "--Sub-Pool II
Certificates--Priority."
SERVICING............... The FDIC has used the Servicer to service all
performing commercial mortgage loans acquired by it
since July 1993 and a substantial number of the
Mortgage Loans have been serviced by the Servicer for
at least two years. The Servicer is required to
service the Mortgage Loans with the objective of
maximization of the present value of net cash flows
generated from the Mortgage Loans, in a manner
consistent with the terms of the Mortgage Loans and
the standards set forth in the Pooling and Servicing
Agreement. The Servicer is entitled to use sub-
servicers in connection
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with its servicing responsibilities, subject to
certain conditions; the engagement of a separate
special servicer is not contemplated.
In connection with its servicing activities, the
Servicer will be required, among other things, (i) to
make reasonable efforts to collect all Scheduled
Payments due on the Mortgage Loans, and to make
advances in respect of (a) certain delinquent
Scheduled Payments on the Mortgage Loans, other than
Balloon Payments, (b) certain delinquent Assumed
Scheduled Payments and (c) certain REO Loans, in each
case subject to the limitations described herein (any
such advance, as more specifically described herein,
a "P&I Advance"), (ii) to make advances in respect of
certain delinquent tax payments, insurance premiums,
property protection expenses and senior liens (any
such advance, as more specifically described herein,
a "Servicing Advance"), (iii) to modify the Matured
Performing Mortgage Loans and certain defaulted
Mortgage Loans, (iv) to institute foreclosure or
related proceedings with respect to certain defaulted
Mortgage Loans, (v) to inspect certain of the
Mortgaged Properties from time to time and collect
certain information from the respective borrowers and
(vi) to the extent of its calculated Servicing Fee
for a particular period, as described herein, to make
payments from its own funds in the amount of the
shortfall, if any, in collection of interest
attributable to prepayments of any Mortgage Loans and
early payments of Scheduled Payments on any Simple
Interest Loans made during the applicable period. See
"Servicing of the Mortgage Loans."
As more fully described herein, the Servicer will be
entitled to reimbursement for any P&I Advances and
Servicing Advances (collectively, "Advances") made,
by it or on its behalf, from amounts collected in
respect of the applicable Sub-Pool, to the extent
described herein, together with interest thereon at
the then applicable prime rate. See "Description of
the Certificates--P&I Advances" and "Description of
the Pooling and Servicing Agreement--Collection
Account."
THE LIMITED GUARANTY.... In connection with the sale of the Mortgage Loans to
the Trust Fund, the FDIC will deliver to the Trustee
for the benefit of the Certificateholders the Limited
Guaranty. The Limited Guaranty will cover losses and
other shortfalls attributable to credit defaults on
the Mortgage Loans, and certain expenses of the Trust
Fund, up to an aggregate amount initially equal to
$[ ], which is approximately 32.5% of the
Information Date Balance. The amount of claims that
may be paid in respect of Sub-Pool I is initially
equal to approximately $[ ], which is approximately
[ ]% of the Information Date Sub-Pool I Balance, and
the amount of claims that may be paid in respect of
Sub-Pool II is initially equal to approximately
$[ ], which is approximately [ ]% of the Information
Date Sub-Pool II Balance. The aggregate amount of
such coverage, as well as the respective Available
Sub-Pool Coverage Amount, will be reduced to reflect
the payment of claims under the Limited Guaranty and
increased to reflect any amounts recovered by or on
behalf of the FDIC in respect of such claims, in each
case on a Sub-Pool by Sub-Pool basis. The aggregate
amount of such coverage available at the time of any
determination is referred to herein as the "Available
Guaranty
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Amount," and the amount of such coverage available to
a particular Sub-Pool is referred to herein as the
"Available Sub-Pool Coverage Amount" for such Sub-
Pool. Although the Limited Guaranty is issued by the
FDIC, claims thereunder may be satisfied only through
draws upon the Bank Insurance Fund. There can be no
assurance that amounts in the Bank Insurance Fund
will be available to pay any such claim at any
particular time. The Bank Insurance Fund ("BIF") was
established by Congress in 1989 pursuant to the
Financial Institutions Reform, Recovery and
Enforcement Act of 1989 ("FIRREA"). BIF insures the
deposits of all of its member institutions
(typically, commercial or savings banks). THE LIMITED
GUARANTY IS BY ITS TERMS NOT BACKED BY THE FULL FAITH
AND CREDIT OF THE UNITED STATES OF AMERICA. With
certain important exceptions, discussed herein under
"The Bank Insurance Fund," the FDIC's obligations
under the Limited Guaranty will rank pari passu
(i.e., are neither senior nor subordinate) with all
other general obligations of the FDIC. See
"Description of the Certificates--The Limited
Guaranty" and "The Bank Insurance Fund." The Limited
Guaranty does not cover shortfalls attributable to
basis risk. See "Risk Factors--The Certificates--Sub-
Pool II Certificates--Basis Risk."
Although only one Limited Guaranty will be provided
by the FDIC, the amount of claims payable thereunder
in respect of a particular Sub-Pool will be limited
to the applicable Available Sub-Pool Coverage Amount
plus the Excess Coverage Amount, if any. The "Excess
Coverage Amount" with respect to a particular Sub-
Pool is equal to the excess, if any, of the
applicable Available Sub-Pool Coverage Amount of the
other Sub-Pool over the aggregate of the Class
Balances of the Certificates evidencing an interest
in such other Sub-Pool. There can be no assurance
that an Excess Coverage Amount ever will be available
to a particular Sub-Pool; as a result, in the event
that claims paid under the Limited Guaranty in
respect of a particular Sub-Pool exceed the
applicable Available Sub-Pool Coverage Amount,
subsequent losses on the Mortgage Loans and REO Loans
in such Sub-Pool may be borne by the holders of
Corresponding Certificates, allocated as described
under "--Subordination," notwithstanding an
outstanding Available Sub-Pool Coverage Amount for
the other Sub-Pool.
SUBORDINATION........... The Limited Guaranty is intended to provide to all
classes of Offered Certificates and to the Stripped
Interest Certificates "first loss" coverage in
respect of credit defaults on the Mortgage Loans in
an aggregate amount equal to the Available Guaranty
Amount. In the event that the amount of coverage
available under the Limited Guaranty in respect of a
particular Sub-Pool (i.e., the applicable Available
Sub-Pool Coverage Amount and the Excess Coverage
Amount, if any) has been exhausted, credit losses and
shortfalls on the Mortgage Loans in such Sub-Pool
will be borne first by the Corresponding class of
Certificates having the lowest alphabetical class
designation before allocation of such losses and
shortfalls to any other Corresponding class of
Certificates (the Class I-A1 Certificates and the
Class I-A2 Certificates are pari passu). This
subordination is intended to enhance the likelihood
of timely receipt by
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<PAGE>
the holders of any class of Certificates evidencing
an interest in a particular Sub-Pool with a
relatively high alphabetical class designation of the
full amount of Distributable Interest and
Distributable Principal payable in respect of such
class on each Distribution Date, as compared with any
Corresponding class of Certificates having a
relatively low alphabetical class designation. The
protection afforded to the holders of each class of
Certificates evidencing an interest in a particular
Sub-Pool by means of the subordination of each other
Corresponding class of Certificates with a lower
alphabetical class designation will be accomplished
by the application of the Available Distribution
Amount for such Sub-Pool on each Distribution Date in
the order of priority described above in this Summary
under "Description of the Certificates--
Distributions." Further, allocation of all
Distributable Principal to the class of Certificates
evidencing an interest in a particular Sub-Pool with
the highest alphabetical class designation then
outstanding will accelerate the amortization of such
class of Certificates, relative to the actual
amortization of the Mortgage Loans in such Sub-Pool.
To the extent that any class of Certificates
evidencing an interest in a particular Sub-Pool is
amortized faster than the Mortgage Loans in such Sub-
Pool due to the distribution to such class of all
Distributable Principal with respect to such Sub-
Pool, the percentage interest evidenced by such class
of Certificates will be decreased (with a
corresponding increase in the interest in the Sub-
Pool evidenced by the other classes of Certificates),
thereby increasing, relative to their respective
Class Balances, the subordination afforded to such
class of Certificates by the other Corresponding
classes of Certificates. See "Yield and Maturity
Considerations--Weighted Average Life." The
Certificates of any class evidencing an interest in a
particular Sub-Pool are neither senior nor
subordinate to the Certificates of any class
evidencing an interest in the other Sub-Pool. See
"Description of the Certificates--Subordination" and
"Yield and Maturity Considerations."
CERTAIN INVESTMENT
CONSIDERATIONS;
MORTGAGE LOAN
PREPAYMENTS............ The yield on the Offered Certificates of any class
will depend on, among other things, the Pass-Through
Rate for such class. The yield on any Offered
Certificate purchased at a discount or premium will
also be affected by the rate and timing of
distributions in respect of principal on such
Certificate, which in turn will be affected by the
rate and timing of principal payments and prepayments
(including for this purpose both voluntary principal
prepayments as well as other unscheduled collections
resulting from defaults, liquidations and repurchases
attributable to breaches of representations and
warranties) on the Mortgage Loans and the extent to
which Distributable Principal is applied on any
Distribution Date in reduction of the Class Balance
of the class to which such Certificate belongs. See
"Description of the Certificates--Distributions--Sub-
Pool I Certificates--Priority" and "Sub-Pool II
Certificates--Priority."
Mortgage Loan Prepayments. The actual rate of
prepayment of principal on the Mortgage Loans cannot
be predicted. Certain of the Mortgage
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<PAGE>
Loans may be prepaid at any time, certain of the
Mortgage Loans may be prepaid only following a "lock-
out period" and certain of the Mortgage Loans require
the payment of a prepayment premium in connection
with certain prepayments. Pursuant to the terms of
the Pooling and Servicing Agreement the Servicer is
not required to enforce such prepayment provision,
and the Servicer has indicated that it does not
intend to enforce prepayment prohibitions or to
collect prepayment premiums. As a result, investors
should assume that the Mortgage Loans may be prepaid
at any time and without a corresponding prepayment
premium. There can be no assurance as to the amount
or timing of voluntary prepayments or any other
unscheduled collections on the Mortgage Loans. The
investment performance of the Offered Certificates
may vary materially and adversely from the investment
expectations of investors due to prepayments on the
Mortgage Loans being higher or lower than anticipated
by investors. The actual yield to the holder of an
Offered Certificate may not be equal to the yield
anticipated at the time of purchase of the
Certificate or, notwithstanding that the actual yield
is equal to the yield anticipated at that time, the
total return on investment expected by the investor
or the expected weighted average life of the
Certificate may not be realized. These effects are
summarized below. For a discussion of certain factors
affecting prepayment of the Mortgage Loans, see
"Yield and Maturity Considerations." IN DECIDING
WHETHER TO PURCHASE ANY OFFERED CERTIFICATES, AN
INVESTOR SHOULD MAKE AN INDEPENDENT DECISION AS TO
THE APPROPRIATE PREPAYMENT ASSUMPTIONS TO BE USED.
Limited Information. The files with respect to many
of the Mortgage Loans are incomplete. As a result,
there can be no assurance that there are not material
inaccuracies in the information included in this
Prospectus with respect to one or more Mortgage
Loans. In the event that any such inaccuracy in
respect of a Mortgage Loan in a particular Sub-Pool
results in a breach of a representation of the FDIC,
an applicable remedy may include repurchase by the
FDIC of such loan, which would have the same effect
to holders of the Corresponding Certificates as a
prepayment. See "Special Considerations--The Mortgage
Loans--Limited Information" and "Description of the
Mortgage Pool--Representations and Warranties;
Remedies."
Yield. If an investor purchases an Offered
Certificate at an amount equal to its unpaid
principal amount (that is, at "par"), the effective
yield to that investor (assuming that there are no
interest shortfalls and assuming the full return of
the purchaser's investment principal) will
approximate the Pass-Through Rate on that
Certificate. If an investor pays less or more than
the unpaid principal amount of the Certificate (that
is, buys the Certificate at a "discount" or
"premium," respectively), then, based on the
assumptions set forth in the preceding sentence, the
effective yield to the investor will be higher or
lower, respectively, than the Pass-Through Rate on
that Certificate, because such discount or premium
will be amortized over the life of the Certificate.
Any deviation in the actual rate of prepayments on
the Mortgage Loans in the applicable Sub-Pool from
the rate assumed by the investor will affect the
period of time over which, or the rate at which, the
discount or premium will be amortized and,
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<PAGE>
consequently, will change the investor's actual yield
from that anticipated. An investor that purchases an
Offered Certificate at a discount should carefully
consider the risk that a slower than anticipated rate
of principal payments on the Mortgage Loans in the
Sub-Pool evidenced thereby will result in an actual
yield that is lower than such investor's expected
yield. An investor that purchases any Offered
Certificate at a premium should consider the risk
that a faster than anticipated rate of principal
payments on the Mortgage Loans in the Sub-Pool
evidenced thereby will result in an actual yield that
is lower than such investor's expected yield. Insofar
as an investor's initial investment in any Offered
Certificate is returned in the form of payments of
principal thereon, there can be no assurance that
such amounts can be reinvested in a comparable
alternative investment with a comparable yield.
Reinvestment Risk. As stated above, if an Offered
Certificate is purchased at par, fluctuations in the
rate of distributions of principal will generally not
affect the yield to maturity of that Certificate.
However, the total return on any purchaser's
investment, including an investor that purchases at
par, will be reduced to the extent that principal
distributions received on its Certificate cannot be
reinvested at a rate as high as the Pass-Through Rate
of the Certificate. Investors in the Offered
Certificates should consider the risk that rapid
rates of prepayments on the Mortgage Loans in the
Sub-Pool evidenced thereby may coincide with periods
of low prevailing market interest rates. During
periods of low prevailing market interest rates,
borrowers may be expected to prepay or refinance
Mortgage Loans that carry interest rates
significantly higher than then-current interest rates
for comparable mortgage loans. Consequently, the
amount of principal distributions available to an
investor for reinvestment at such low prevailing
interest rates may be relatively large. Conversely,
slow rates of prepayments on the Mortgage Loans may
coincide with periods of high prevailing market
interest rates. During such periods, it is less
likely that borrowers will elect to prepay or
refinance Mortgage Loans and, therefore, the amount
of principal distributions available to an investor
for reinvestment at such high prevailing interest
rates may be relatively small.
Weighted Average Life Volatility. One indication of
the effect of varying prepayment rates on a security
is the change in its weighted average life. The
"weighted average life" of an Offered Certificate is
the average amount of time that will elapse between
the date of issuance of the Certificate and the date
on which each dollar in reduction of the principal
amount of the Certificate is distributed to the
investor. Low rates of prepayment may result in the
extension of the weighted average life of a
Certificate; conversely, high rates may result in the
shortening of such weighted average life. In general,
if in a high interest rate environment the weighted
average life of a Certificate purchased at par is
extended beyond that initially anticipated, such
Certificate's market value will be adversely
affected, even though the yield to maturity on the
Certificate is unaffected. Similarly, there is a cap
on the amount by which the market value of the
Certificate can increase in a low interest rate
environment because its
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<PAGE>
weighted average life will be shortened if there are
high prepayments. The weighted average lives of the
Offered Certificates, under various prepayment
scenarios, are displayed in the tables appearing
under the heading "Yield and Maturity
Considerations--Weighted Average Life."
OPTIONAL TERMINATION.... At its option, any of the Servicer, the FDIC, the
Mortgage Loan Seller or the holder of the Class R
Certificate may purchase all of the Mortgage Loans
and REO Properties, and thereby effect termination of
the Trust Fund and early retirement of the then
outstanding Certificates, on any Distribution Date on
which the remaining aggregate principal balance of
the Mortgage Loans and REO Properties is less than
10% of the Cut-off Date Balance of the Mortgage
Loans. See "Description of the Certificates--
Termination."
CERTAIN FEDERAL INCOME
TAX CONSEQUENCES....... Upon the issuance of the Certificates, Hunton &
Williams, counsel to the Federal Deposit Insurance
Corporation in connection with the issuance of the
Certificates, will deliver its opinion generally to
the effect that, assuming compliance with all
provisions of the Pooling and Servicing Agreement,
for federal income tax purposes, separate portions of
the Trust Fund each will qualify as a real estate
mortgage investment conduit (a "REMIC") under the
Internal Revenue Code of 1986 (the "Code").
For federal income tax purposes, each class of
Offered Certificates will represent ownership of
"regular interests" in a REMIC and will generally be
treated as representing ownership of debt instruments
of such REMIC. See "Certain Federal Income Tax
Consequences." The Sub-Pool II Certificates also will
represent ownership of a contractual right to receive
an amount equal to the Basis Risk Shortfall to the
extent of the Basis Risk Support Amount, as described
under "Description of the Certificates --Sub-Pool II
Certificates--Basis Risk." See "Certain Federal
Income Tax Consequences--General" and "--Tax
Treatment of Regular Certificates--Taxation of Owners
of Offered Certificates--Basis Risk Support Amount."
For federal income tax reporting purposes, Classes
[ ], [ ], [ ], [ ], and [ ] will be treated, and
Classes [ ], [ ], [ ], [ ], [ ], and [ ] will
not be treated, as having been issued with original
issue discount. The prepayment assumption that will
be used in determining the rate of accrual of
original issue discount, market discount, and
premium, if any, on each of the Sub-Pool I
Certificates and the Sub-Pool II Certificates will be
[ ]% of CPR, the level of LIBOR that will be assumed
for such determinations on the Sub-Pool II
Certificates will be [ ]%. No representation is
made, however, about the rate at which prepayments on
the Mortgage Loans actually will occur or the level
of LIBOR at any time after the date of this
Prospectus. See "Certain Federal Income Tax
Consequences--Tax Treatment of Regular Certificates
--Original Issue Discount."
Subject to the discussion under "Certain Federal
Income Tax Consequences--General" regarding the right
of the Sub-Pool II
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Certificates to receive the Basis Risk Support
Amount, the Regular Certificates will be treated as
assets described in section 7701(a)(19)(C) of the
Code, "real estate assets" under section 856(c)(5)(A)
of the Code, and "permitted assets" within the
meaning of section 860L(c)(1)(G) of the Code
generally in the same proportion that the assets of
the Trust Fund would be so treated. In addition,
interest on the Offered Certificates will be treated
as "interest on obligations secured by mortgages on
real property" under section 856(c)(3)(B) of the Code
generally to the extent that such Certificates are
treated as "real estate assets" under section
856(c)(5)(A) of the Code. While the Mortgage Loans
generally will be treated as "real estate assets"
under section 856(c)(5)(A) of the Code, no more than
an insignificant number of the Mortgage Loans will be
assets described in section 7701(a)(19)(C) of the
Code. The Offered Certificates, except the Sub-Pool
II Certificates to the extent that they represent
ownership of the right to receive the Basis Risk
Support Amount, will be "qualified mortgages" within
the meaning of section 860G(a)(3) of the Code if
transferred to another REMIC on its startup day in
exchange for a regular or residual interest therein.
For further information regarding federal income tax
consequences of investing in the Offered
Certificates, see "Certain Federal Income Tax
Consequences."
ERISA CONSIDERATIONS.... A fiduciary of any employee benefit plan or other
retirement arrangement subject to the Employee
Retirement Income Security Act of 1974, as amended
("ERISA"), or Section 4975 of the Code (a "Plan")
should review carefully with its legal advisers
whether the purchase or holding of Offered
Certificates could give rise to a transaction that is
prohibited or is not otherwise permitted either under
ERISA or Section 4975 of the Code or whether there
exists any statutory or administrative exemption
applicable to an investment therein.
The U.S. Department of Labor has issued to Lehman
Brothers an individual prohibited transaction
exemption, Prohibited Transaction Exemption 91-14
(the "Exemption"), which generally exempts from the
application of certain of the prohibited transaction
provisions of Section 406 of ERISA and the excise
taxes imposed on such prohibited transactions by
Section 4975(a) and (b) of the Code, transactions
relating to the purchase, sale and holding of pass-
through certificates underwritten by Lehman Brothers
and the servicing and operation of related asset
pools, provided that certain conditions are
satisfied.
It is expected that Prohibited Transaction Exemption
91-14 will generally apply to the Class I-A1
Certificates, the Class I-A2 Certificates and the
Class II-A Certificates, but it will not apply to the
other classes of Offered Certificates (such other
classes, collectively, the "ERISA-Restricted
Certificates"). THE ERISA-RESTRICTED CERTIFICATES
SHOULD NOT BE ACQUIRED BY A PLAN. BECAUSE THE ERISA-
RESTRICTED CERTIFICATES ARE SUBORDINATED TO THE CLASS
I-A1, CLASS I-A2 AND CLASS II-A CERTIFICATES, THE
EXEMPTION DOES NOT APPLY TO THE ERISA-RESTRICTED
CERTIFICATES, AND SUCH CERTIFICATES MAY NOT BE
PURCHASED BY OR TRANSFERRED TO A
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<PAGE>
PLAN, EXCEPT IN THE EVENT THAT THE TRUSTEE RECEIVES
REPRESENTATIONS FROM SUCH PLAN PURSUANT TO THE
POOLING AND SERVICING AGREEMENT SATISFACTORY TO THE
TRUSTEE THAT THE PURCHASE AND HOLDING OF THE ERISA-
RESTRICTED CERTIFICATES WILL NOT RESULT IN A NON-
EXEMPT PROHIBITED TRANSACTION AS DESCRIBED HEREIN.
See "ERISA Considerations."
RATINGS................. It is a condition of their issuance that the Offered
Certificates of each class receive the ratings from
Moody's Investors Service, Inc. and Duff & Phelps
Credit Rating Co. (together, the "Rating Agencies")
as set forth on the cover page of this Prospectus. A
security rating addresses the likelihood of the
receipt by Certificateholders of all distributions to
which such Certificateholders are entitled, including
the complete payment of principal by the Final
Scheduled Distribution Date. A security rating is not
a recommendation to buy, sell or hold securities and
may be subject to revision or withdrawal at any time
by the assigning rating organization. A security
rating does not address the frequency or likelihood
of prepayments (whether voluntary or involuntary) of
Mortgage Loans, or the possibility of a lower than
anticipated yield to investors. A security rating
does not address the likelihood of Basis Risk
Shortfalls, the sufficiency of any Basis Risk Support
Amount to cover such shortfall or the corresponding
effect on yield to investors. See "Ratings" and
"Special Considerations--The Certificates--Limited
Nature of Ratings."
LEGAL INVESTMENT........ The appropriate characterization of the Offered
Certificates under various legal investment
restrictions, and thus the ability of investors
subject to these restrictions to purchase the Offered
Certificates, may be subject to significant
interpretative uncertainties. The Offered
Certificates will not be "mortgage related
securities" within the meaning of the Secondary
Mortgage Market Enhancement Act of 1984. Accordingly,
investors should consult their own legal advisers to
determine whether and to what extent the Offered
Certificates constitute legal investments for them.
See "Legal Investment."
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<PAGE>
RISK FACTORS
AN INVESTMENT IN THE OFFERED CERTIFICATES INVOLVES VARIOUS RISKS.
PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE FOLLOWING INFORMATION IN
CONJUNCTION WITH THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS BEFORE
MAKING A DECISION TO PURCHASE THE OFFERED CERTIFICATES.
THE MORTGAGE LOANS
Troubled Originators. Most of the Mortgage Loans will have been originated
or purchased by approximately 200 state or federally chartered depository
institutions (each, a "Depository Institution") either (x) for which the
Mortgage Loan Seller has been appointed as receiver or (y) from which the
Mortgage Loan Seller, in its capacity as administrator of the Bank Insurance
Fund, has acquired such Mortgage Loans. The remainder of the Mortgage Loans
have been originated by the Mortgage Loan Seller, in its capacity as receiver
of one or more of the Depository Institutions subject to the guidelines
described under "Description of the Mortgage Pool--Loans-to-Facilitate." Each
Depository Institution for which the Mortgage Loan Seller is still acting as
receiver is insolvent and in the process of liquidation and many of the
Depository Institutions from which the Mortgage Loan Seller has acquired
Mortgage Loans have been liquidated. It is possible that the financial
difficulties experienced by certain of the Depository Institutions may have
adversely affected either or both of (i) the standards and procedures by which
the Mortgage Loans were originated by such Depository Institutions or, if
purchased from another originator, the standards and procedures by which the
Depository Institutions (a) selected such Mortgage Loans for purchase and (b)
reviewed them prior to purchase and (ii) the manner in which such Mortgage
Loans have been serviced prior to the acquisition thereof by the Mortgage Loan
Seller.
Limited Information. Except with respect to the Loans-to-Facilitate, the
information set forth in this Prospectus with respect to the Mortgage Loans is
derived primarily from a review of certain of the credit, servicing and legal
files relating to the Mortgage Loans. The Mortgage Loan Seller has determined
that there is not sufficient available information to permit the Mortgage Loan
Seller to determine fully the origination, credit appraisal and underwriting
practices of the Mortgage Loan originators with respect to the Mortgage Loans
or the manner in which the Mortgage Loans have been serviced prior to the
acquisition thereof by the Mortgage Loan Seller. In particular, for various
reasons, including without limitation the age of certain of the Mortgage Loans
and the number of servicing transfers with respect to certain Mortgage Loans,
the Mortgage Loan Seller did not have access to reliable information, either
from books and records or from officers of the Mortgage Loan originators, with
respect to the underwriting policies and practices followed by the Mortgage
Loan originators in originating commercial, multifamily and/or residential
mortgage loans. Even if such information were available, it is unlikely that
specific information regarding the origination and underwriting policies and
guidelines of any Mortgage Loan originator at a particular time would be
useful in evaluating the underwriting and origination of the Mortgage Loans
included in its respective portfolio because (i) the terms of a substantial
number of such Mortgage Loans may have been renegotiated or modified on one or
more occasions since the date of origination and (ii) certain of such Mortgage
Loans may have been originated or purchased by a Depository Institution using
different or inconsistent underwriting criteria. Accordingly, no assurance can
be given that the Mortgage Loans, other than the Loans-to-Facilitate, were
originated in accordance with any particular set of uniform underwriting
policies or practices or that any of the Mortgage Loans were serviced prior to
their acquisition by the FDIC in accordance with any particular set of
servicing standards.
Furthermore, it is possible that this Prospectus does not contain material
information regarding the Mortgage Loans that would have been disclosed if the
servicing procedures, books and records, payment histories, Mortgage Loan
files and personnel of the Mortgage Loan originators and the Depository
Institutions had not been affected by such institutions' having been placed in
receivership. In the absence of applicable information in the file for a
Mortgage Loan and in instances where no updated appraisal or operating
statement information was received by the Mortgage Loan Seller or the Servicer
on its behalf, it is not possible for the Mortgage Loan Seller to determine,
among other things, the appraised value of the related Mortgaged Property,
whether such Mortgaged Property is owner-occupied, whether the current net
operating income from the related Mortgaged
26
<PAGE>
Property is sufficient to cover debt service on the Mortgage Loan, whether
there have been modifications, waivers or amendments with respect to such
Mortgage Loan that are not included in such file, or whether such Mortgage
Loan otherwise has terms that are inconsistent with information used to
prepare the disclosure set forth in this Prospectus. In addition, although the
Mortgage Loan Seller has engaged various contractors to identify and review
the terms of any modification to a Mortgage Loan that may have occurred during
the period following the review of the related file through the Closing Date,
there can be no assurance that such Mortgage Loan does not have terms
materially inconsistent with the information used to prepare the disclosure
set forth in this Prospectus.
While a review of the Mortgage Loan files in contemplation of the issuance
of the Certificates has been undertaken on behalf of the Mortgage Loan Seller,
the Mortgage Loans have not been "re-underwritten" or subjected to the type of
review that would typically be made in respect of newly originated mortgage
loans. However, as described herein under "Description of the Mortgage Pool--
Mortgage Loan Information," the Mortgaged Properties with respect to
approximately [ ]% of the Mortgage Loans (the "Appraised Loans"), were
appraised primarily from October 11, 1996 through November 29, 1996 on behalf
of the Mortgage Loan Seller by various nationally-recognized appraisal firms
in contemplation of the issuance of the Certificates (the "Appraisal
Process"). The methodology for including Mortgage Loans in the Appraisal
Process is described under "Description of the Mortgage Pool--Mortgage Loan
Information." The information in this Prospectus with respect to Information
Date LTV Ratios is based upon the most recently available appraised value
(which, in the case of non-Appraised Loans, may be significantly out of date)
and information in this Prospectus with respect to Estimated Net Cash Flow
Coverage Ratios is based upon the most recently available net cash flow
(which, in the case of some Mortgage Loans, may be significantly out of date).
ESTIMATED NET CASH FLOW WAS NOT CALCULATED IN ACCORDANCE WITH GENERALLY
ACCEPTED ACCOUNTING PRINCIPLES. There can be no assurance that information
with respect to Information Date LTV Ratios and Estimated Net Cash Flow
Coverage Ratios is in any respect indicative of the actual fair market value
of any such Mortgaged Property or of the ability of the underlying borrowers
to make debt service payments on the Mortgage Loans. See "Description of the
Mortgage Pool--Mortgage Loan Information."
Notwithstanding the foregoing, the FDIC will make certain representations
and warranties regarding the Mortgage Loans, including the accuracy of the
mortgage loan schedule with respect to each Sub-Pool (together, the "Mortgage
Loan Schedule") attached to the Pooling and Servicing Agreement, which
includes information upon which is based certain of the statistical
information included in this Prospectus. The FDIC will be obligated to cure
such breach or to repurchase, substitute for or make a payment to the Trust
Fund in an amount equal to any resulting loss (in certain cases at the option
of the FDIC) with respect to Mortgage Loans as to which there is a breach of
such representations and warranties. In any case in which the FDIC may select
a remedy, it is under no obligation to consider the ramifications of such
selection to Certificateholders generally or to the holders of Certificates of
any particular class. In the unlikely event that the FDIC fails to honor its
proper obligations with respect to breaches of its representations and
warranties, such obligations may be subject to enforcement in the Federal
courts. The Federal courts have generally held that claims sounding in
contract against the Federal Deposit Insurance Corporation in its corporate
capacity, which might otherwise be barred under the doctrine of sovereign
immunity, may nonetheless be maintained by virtue of the waiver of sovereign
immunity created by the FDIC's "sue and be sued clause," 12 U.S.C.(a) 1819
(Fourth). However, there is no guaranty that any such claim will not be barred
or will succeed on its merits or otherwise. See "Description of the Mortgage
Pool--Representations and Warranties; Remedies" and "The Bank Insurance Fund--
Defenses to Payment of BIF Obligations under the Limited Guaranty."
Mortgage Loan Schedule. Although the Mortgage Loan Seller has endeavored to
create an accurate database upon which the Mortgage Loan Schedule was produced
as of the Information Date, because of the factors described above and
described more fully under "Description of the Mortgage Pool--Mortgage Loan
Information," the Mortgage Loan Seller believes that the database may contain
material inaccuracies with respect to one or more Mortgage Loans. By making
the representations described under "Description of the Mortgage Pool--
Representations and Warranties; Remedies," the risk of material inaccuracies
in the Mortgage
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Loan Schedule will be borne by the FDIC, to the extent described in such
section. For a description of the specific remedies applicable to a breach of
any such representation, see "Description of the Mortgage Pool--
Representations and Warranties; Remedies."
Nature of the Mortgaged Properties. The Mortgaged Properties consist of
income-producing and owner-occupied properties. Repayment of loans made on the
security of income-producing property is typically dependent primarily upon
the ability of the related real estate project to generate income sufficient
to pay operating expenses, to make necessary repairs, tenant improvements and
capital improvements and to pay debt service; thus, the value of an income-
producing property is typically directly related to the net operating income
derived from such property. If the net operating income of a 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. A number of the Mortgage Loans may be secured by
liens on owner-occupied Mortgaged Properties or on Mortgaged Properties leased
to a single tenant or a small number of significant tenants. Accordingly, a
decline in the financial condition of the borrower or a significant tenant, as
applicable, may have a disproportionately greater effect on the net operating
income from such Mortgaged Properties than would be the case with respect to
Mortgaged Properties with multiple tenants. Furthermore, the value of any
Mortgaged Property may be adversely affected by risks generally incident to
interests in real property, including changes in general or local economic
conditions and/or specific industry segments; declines in real estate values;
declines in rental or occupancy rates; increases in interest rates, real
estate tax rates and other operating expenses; changes in governmental rules,
regulations and fiscal policies, including environmental legislation; acts of
God; and other factors beyond the control of the Servicer.
In addition, additional risk may be presented by the type and use of a
particular Mortgaged Property. Lending on the security of office buildings,
shopping centers, lodging and industrial sites generally is perceived to
involve greater risk than lending on the security of multifamily or
residential projects, and certain types of commercial properties are exposed
to particular risks. For instance, shopping centers in general are affected by
the health of the retail industry, and a particular shopping center may be
adversely affected by a decline in the drawing power of an anchor tenant, the
bankruptcy of an anchor tenant, a shift in consumer demand due to demographic
changes (e.g., population decreases or changes in average age or income)
and/or changes in consumer preference (e.g., to discount retailers). In
addition, industrial properties may be adversely affected by reduced demand
for industrial space occasioned by a decline in a particular industry segment
(e.g., a decline in defense spending), and a particular industrial property
that suited the needs of its original tenant may be difficult to relet to
another tenant or may become functionally obsolete relative to newer
properties.
Limited Recourse. Except as otherwise set forth herein with respect to the
Limited Guaranty, the Mortgage Loans are not insured or guaranteed by any
governmental entity or private mortgage insurer. No evaluation has been
undertaken relating to the significance of the recourse provisions of any of a
number of the Mortgage Loans that provide for recourse against the related
borrower or another person in the event of a default. Accordingly, investors
should consider all of the Mortgage Loans to be nonrecourse loans as to which
recourse in the case of default will be limited to the specific property and
such other assets, if any, as were pledged to secure a Mortgage Loan. Even
with respect to those Mortgage Loans that provide for recourse against the
borrower and its assets generally, there can be no assurance that enforcement
of such recourse provisions will be practicable, or that the assets of the
borrower 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. As indicated under "Description of the Mortgage Pool--Mortgage Loan
Information," the Information Date LTV Ratio with respect to approximately
[ ]% of the ARM Loans, and approximately [ ]% of the Fixed Rate Loans is
greater than 100%. See "Certain Legal Aspects of Mortgage Loans--Foreclosure."
Delinquent Mortgage Loans; Matured Performing Mortgage Loans. As of the
Information Date, approximately [ ]% of the ARM Loans and approximately [ ]%
of the Fixed Rate Loans were up to 29 days delinquent with respect to their
Scheduled Payments; approximately [ ]% of the ARM Loans, and approximately
[ ]% of the Fixed Rate Loans were up to 59 days delinquent with respect to
their Scheduled
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Payments; and approximately [ ]% of the ARM Loans, and approximately [ ]% of
the Fixed Rate Loans were Matured Performing Mortgage Loans. Approximately
[ ]% of the Matured Performing ARM Loans were up to 29 days delinquent with
respect to their Assumed Scheduled Payments and approximately [ ]% of the
Matured Performing ARM Loans were up to 59 days delinquent with respect to
their Assumed Scheduled Payments. Approximately [ ]% of the Matured
Performing Fixed Rate Loans were up to 29 days delinquent with respect to
their Assumed Scheduled Payments and approximately [ ]% of the Matured
Performing Fixed Rate Loans were up to 59 days delinquent with respect to
their Assumed Scheduled Payments. Matured Performing Mortgage Loans are
expected to be modified to provide for, among other things, extended maturity
dates and Scheduled Payment adjustments. See "--Balloon Payments" and
"Servicing of the Mortgage Loans--Modifications, Waivers and Amendments."
Investors should consider the risk that the inclusion of delinquent Mortgage
Loans and Matured Performing Mortgage Loans in the Mortgage Pool may affect
the rate of defaults and prepayments on the Mortgage Loans and the yield on
the Offered Certificates. See "Yield and Maturity Considerations." The
Servicing Fee payable to the Servicer is based on a variable rate designed to
provide a direct incentive to the Servicer to minimize the delinquency status
of the Mortgage Loans. See "Servicing of the Mortgage Loans--Servicing and
Other Compensation and Payment of Expenses."
Borrower Default. Information concerning the Estimated Net Cash Flow
Coverage Ratios of the Mortgage Loans is set forth under "Description of the
Mortgage Pool--Mortgage Loan Information." As indicated therein, the Estimated
Net Cash Flow for the Mortgaged Properties securing approximately [ ]% of the
ARM Loans and approximately [ ]% of the Fixed Rate Loans is currently
insufficient to cover debt service payments. Even where the net operating
income generated by a Mortgaged Property is currently sufficient to cover debt
service payments on the related Mortgage Loan, there can be no assurance that
this will continue to be the case in the future. In the case of an ARM Loan,
an increase in the Mortgage Rate will increase the debt service and could
impair the related borrower's ability to repay such loan. See "--Nature of the
Mortgaged Properties" and "--Limited Recourse." ESTIMATED NET CASH FLOW WAS
NOT CALCULATED IN ACCORDANCE WITH GENERALLY ACCEPTED ACCOUNTING PRINCIPLES AND
INFORMATION PROVIDED BY BORROWERS HAS NOT BEEN INDEPENDENTLY VERIFIED. See
"Description of the Mortgage Pool--Mortgage Loan Information."
In order to produce a greater recovery on a present value basis on defaulted
Mortgage Loans, including Matured Performing Mortgage Loans, the Servicer has
considerable flexibility under the Pooling and Servicing Agreement to extend
and modify Mortgage Loans that are in default or as to which a payment default
is reasonably foreseeable, including, in particular, Balloon Payments. More
specifically, subject to the overall goal of producing a greater recovery on a
present value basis from the defaulted Mortgage Loans than would result from
foreclosure, and to certain conditions set forth in the Pooling and Servicing
Agreement, including under certain circumstances the requirement to obtain the
consent of the FDIC, the Servicer has the power, among other things, to
forgive permanently payments of principal, to lower temporarily mortgage
rates, to lower or modify payment rates, or to modify the schedule for
payments of principal. To the extent amounts remain available thereunder, the
Limited Guaranty will cover the reduction of principal and interest otherwise
due in respect of a Mortgage Loan attributable to a modification, waiver or
amendment of the terms thereof by the Servicer, as described under
"Description of the Certificates--The Limited Guaranty."
The Servicer is entitled to receive a Modification Fee in connection with
the modification of defaulted Mortgage Loans or as to which default is
reasonably foreseeable, a Resolution Fee, in addition to a Modification Fee,
in connection with the modification of a Mortgage Loan during its Resolution
Period and a Liquidation Fee in connection with the liquidation of defaulted
Mortgage Loans or properties acquired on behalf of the Trust Fund. While the
payment of such compensation to the Servicer is designed to increase the
present value of receipts from or proceeds of Mortgage Loans in default or as
to which default is reasonably foreseeable, there can be no assurance that it
will do so. See "Servicing of the Mortgage Loans--Servicing and Other
Compensation and Payment of Expenses."
Balloon Payments. Approximately [ ]% of the ARM Loans and approximately
[ ]% of the Fixed Rate Loans are Balloon Loans. Balloon Loans involve a
greater risk to the lender than self-amortizing loans
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because the ability of a borrower to make a Balloon Payment typically will
depend upon its ability either to refinance the loan or to sell the related
Mortgaged Property. The ability of a borrower 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 borrower's equity in the Mortgaged Property, the
financial condition and operating history of the borrower and the Mortgaged
Property, tax laws, prevailing general economic conditions and the
availability of credit for loans secured by multifamily or commercial, as the
case may be, real properties generally. Neither the Servicer, the Trustee nor
the Mortgage Loan Seller will be required to refinance any Balloon Loan.
In order to maximize recoveries on defaulted Mortgage Loans, the Pooling and
Servicing Agreement enables the Servicer to extend and modify Mortgage Loans
that are in material default or as to which a payment default (including the
failure to make a Balloon Payment) is reasonably foreseeable; subject,
however, to the limitations described under "Servicing of the Mortgage Loans--
Modifications, Waivers and Amendments." There can be no assurance, however,
that any such extension or modification will increase the present value of
recoveries in a given case. Any delay in collection of a Balloon Payment that
would otherwise be distributable in respect of a class of Certificates,
whether such delay is due to borrower default or to modification of the
Balloon Loan by the Servicer, will likely extend the weighted average life of
such class of Certificates. See "Yield and Maturity Considerations."
Adjustable Rate Mortgage Loans; Negative Amortization. Approximately [ ]%
of the ARM Loans provide for the deferral and capitalization of interest
payments (i.e., "negative amortization"). Increases in the required Scheduled
Payments on ARM Loans in excess of those assumed in the original underwriting
of such loans may result in a default rate higher than that on mortgage loans
with fixed mortgage rates. Moreover, increases in the principal balances of
ARM Loans due to negative amortization may result in a default rate that is
higher than that of adjustable rate mortgage loans that do not provide for
negative amortization. Certain of such ARM Loans may contain no limit as to
the amount of negative amortization that can be accredited to their respective
balances. A slower rate of amortization or negative amortization on an ARM
Loan would correspondingly be reflected in a slower rate of amortization or
negative amortization on the Corresponding Certificates. See "Description of
the Certificates--Distributions--Interest Distribution Calculations Applicable
to the Certificates."
Enforceability. Most of the Mortgage Loans contain due-on-sale clauses and
due-on-encumbrance clauses, which permit the lender to accelerate the maturity
of the Mortgage Loan if the borrower sells, transfers, conveys or encumbers
the related Mortgaged Property or its interest in such Mortgaged Property.
Such clauses generally are enforceable, subject to certain exceptions. The
Mortgage Loan Seller did not undertake any procedures to determine whether the
Mortgaged Properties securing any of the Mortgage Loans were the subject of
subordinate financing. See "Certain Legal Aspects of Mortgage Loans--Due-on-
Sale and Due-on-Encumbrance."
A significant number of the Mortgage Loans include debt-acceleration
clauses, which permit the lender to accelerate the debt upon a monetary or
non-monetary default of the borrower. The courts of all states will enforce
clauses providing for acceleration in the event of a material payment default
after the giving of appropriate notices. The equity courts of any state,
however, may refuse to permit the foreclosure of a mortgage or deed of trust
when an acceleration of the indebtedness would be inequitable or unjust or the
circumstances would render the acceleration unconscionable. See "Certain Legal
Aspects of Mortgage Loans."
Most of the Mortgage Loans are secured, in part, by an assignment of leases
and rents pursuant to which the borrower assigns to the lender its right,
title and interest as landlord under the leases of the related Mortgaged
Property, and the income derived therefrom, as further security for the
related Mortgage Loan, while retaining a license to collect rents for so long
as there is no default. If the borrower defaults, the license terminates and
the lender is entitled to collect rents. Some state laws may require that the
lender take possession of the Mortgaged Property and obtain a judicial
appointment of a receiver before becoming entitled to collect the rents. In
addition, if bankruptcy or similar proceedings are commenced by or in respect
of the borrower, the lender's ability to collect the rents may be adversely
affected. See "Certain Legal Aspects of Mortgage Loans--Leases and Rents."
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Environmental Law Considerations. The Mortgage Loan Seller generally has not
determined whether environmental assessments have been conducted with respect
to the Mortgaged Properties, and it is likely that any environmental
assessments that were conducted with respect to any of the Mortgaged
Properties were conducted at the time of the origination of the related
Mortgage Loans and not thereafter. However, the Mortgage Loan Seller will
represent and warrant that, as of the Closing Date, no Mortgaged Property is
affected by a Disqualifying Condition (as defined herein under "Description of
the Mortgage Pool--Representations and Warranties; Remedies"). In the event
that, following a default in payment that continues for 60 days, (i) the
environmental site assessment obtained by the Servicer prior to any
foreclosure (as described in the following paragraph) indicates the presence
of a Disqualifying Condition that arose prior to the Closing Date and (ii) the
Servicer certifies that it has acted in compliance with the servicing standard
set forth in the Pooling and Servicing Agreement and has not, by any action,
created, caused or contributed to a Disqualifying Condition, the Mortgage Loan
Seller, at its option, will either cure such Disqualifying Condition or
repurchase the affected Mortgage Loan for a price equal to the outstanding
principal balance thereof plus accrued and unpaid interest to the date of
repurchase, plus certain related expenses. See "Description of the Mortgage
Pool--Representations and Warranties; Remedies."
The Pooling and Servicing Agreement requires that the Servicer obtain an
environmental site assessment of a Mortgaged Property prior to acquiring title
thereto on behalf of the Trust Fund or assuming its operation. Such
prohibition may effectively preclude enforcement of the security for the
related Mortgage Note until a satisfactory environmental site assessment is
obtained (or until any required remedial action is thereafter taken). The
Servicer is not required to obtain an environmental site assessment in
connection with a modification, waiver or amendment of a particular Mortgage
Loan unless the Servicer determines in accordance with the servicing standard
imposed on it by the Pooling and Servicing Agreement that such an
environmental site assessment is necessary or appropriate under the particular
circumstances. See "Servicing of the Mortgage Loans--Realization Upon
Defaulted Mortgage Loans" and "Certain Legal Aspects of Mortgage Loans--
Environmental Site Assessments."
Under the laws of certain states where the Mortgaged Properties are located,
failure to perform the remediation of environmental conditions required or
demanded by the state may give rise to a lien on a Mortgaged Property to
ensure the reimbursement of remediation costs incurred by the state. Although
the costs of remedial action could be substantial, the state of the law in
certain of these jurisdictions presently is unclear as to whether and under
what conditions such costs (or the requirements otherwise to undertake
remedial actions) would be imposed on a secured lender such as the Trust Fund.
However, under the laws of some states and under applicable federal law, a
lender may be liable for such costs in certain circumstances as the "owner" or
"operator" of the Mortgaged Property. Shortfalls occurring as the result of
imposition of any such costs will be covered by the Limited Guaranty, to the
extent of amounts available thereunder. See "Certain Legal Aspects of the
Mortgage Loans--Environmental Risks--Environmental Site Assessments."
Concentration. Approximately [ ]% and [ ]% of the Mortgage Loans are
secured by liens on Mortgaged Properties located in California and
Massachusetts, respectively. In general, geographic concentration increases
the exposure of the Trust Fund to any adverse economic or other developments
that may occur in those states. The economies of those states may be adversely
affected to a greater degree than that of other areas in the country by
certain developments affecting industries concentrated in such states. The
Mortgage Loan Seller did not undertake any procedures to determine the state
of the economy of any particular region or locality, or the effect of any such
economy on any particular property type.
No Mortgage Loan in a particular Sub-Pool constitutes more than
approximately [ ]% of the applicable Information Date Sub-Pool Balance.
However, the Mortgage Loan Seller did not undertake any procedures to
determine whether there were affiliations between borrowers with respect to
more than one Mortgage Loan, or to determine whether the net operating income
on Mortgaged Properties securing a significant amount of Mortgage Loans was
dependent upon payments under operating leases by a particular tenant or group
of related tenants. In general, concentration of borrowers or tenants
increases the exposure of the related Sub-Pool to any adverse economic or
other development that may occur to such borrowers or tenants.
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THE CERTIFICATES
Limited Liquidity. There is currently no secondary market for the
Certificates. While the Underwriters currently intend to make a secondary
market in the Offered Certificates, they are under no obligation to do so.
There can be no assurance that a secondary market will develop or, if a
secondary market does develop, that it will provide holders of Certificates
with liquidity of investment or that it will continue while the Certificates
are outstanding. Any such secondary market may provide less liquidity to
investors than any comparable market for securities that evidence interests
solely in single-family mortgage loans. The Certificates will not be listed on
any securities exchange.
The primary source of ongoing information regarding the Certificates,
including information regarding the status of the Mortgage Loans, the other
assets of the Trust Fund and the Limited Guaranty, will be the periodic
reports (the "Periodic Reports") to be delivered pursuant to the Pooling and
Servicing Agreement as described herein under the heading "Description of the
Certificates--Reports to Certificateholders; Certain Available Information."
There can be no assurance that any additional ongoing information regarding
the Offered Certificates will be available to any person through any other
source. The limited nature of such information in respect of the Certificates
may adversely affect the liquidity thereof, even if a secondary market for the
Offered Certificates does develop. Although reports with respect to the Trust
Fund initially will be required to be filed from time to time with the
Commission pursuant to the Exchange Act, (i) it is not anticipated that such
reports will include information in addition to the information to be included
in the Periodic Reports and (ii) the Trust Fund may exercise whatever rights
it may have to terminate its obligation to file reports with the Commission
pursuant to the Exchange Act.
Insofar as a secondary market does develop with respect to any class of
Offered Certificates, the market value of such Certificates will be affected
by several factors, including the perceived liquidity thereof, the anticipated
cash flow thereon (which may vary widely depending upon the prepayment and
default assumptions applied in respect of the Mortgage Loans) and prevailing
interest rates. The price payable at any time in respect of certain classes of
Certificates (in particular, a class with a relatively long average life) may
be extremely sensitive to small fluctuations in prevailing interest rates; and
the relative change in price for a Certificate in response to an upward or
downward movement in prevailing interest rates may not necessarily equal the
relative change in price for such Certificate in response to an equal but
opposite movement in such rates. Accordingly, the sale of Offered Certificates
by a holder in any secondary market that may develop may be at a discount from
the price paid by such holder.
Certificateholders will have no redemption rights, although the Certificates
are subject to early retirement at the option of any of the Servicer, the
FDIC, the Mortgage Loan Seller or the Class R Certificateholder under certain
specified circumstances described herein. See "Description of the
Certificates--Termination."
Securities Law and Other Liabilities. Only the assets of the Trust Fund are
subject to issuer liability under the federal securities laws for the
information contained in this Prospectus, and the Trust Fund's assets are
limited solely to the Mortgage Loans and the proceeds thereof, as described
herein. Even if the Federal Deposit Insurance Corporation were deemed to be
the issuer of the Certificates for purposes of the federal securities laws,
the doctrine of sovereign immunity, as limited by the Federal Tort Claims Act
(28 U.S.C. 1346(b)), provides that claims may not be brought against the
United States or any agency or instrumentality thereof unless specifically
permitted by act of Congress. The Federal Tort Claims Act bars claims for
fraud or misrepresentation, and courts have held, in cases involving the
Federal Deposit Insurance Corporation as well as other federal agencies and
instrumentalities, that the United States may assert its sovereign immunity to
claims brought under the federal securities laws. Thus, it is probable that
any attempt to assert a claim against the Federal Deposit Insurance
Corporation for a violation of the federal securities laws resulting from a
material misstatement in or material omission from this Prospectus or the
registration statement of which this Prospectus forms a part would be barred.
The liability of the FDIC in connection with the Certificates, and in respect
of the Trust Fund's obligations under the Certificates, will consist solely of
certain obligations arising in connection with a breach by the FDIC of certain
of the representations and warranties made by it in respect of the Mortgage
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Loans and in connection with Basis Risk Shortfalls. The liability of the
Trustee and the Servicer in connection with the Certificates, and in respect
of the Trust Fund's obligations under the Certificates, is limited solely to
their respective express obligations set forth in the Pooling and Servicing
Agreement.
Accordingly, only the assets of the Trust Fund are subject to issuer
liability to investors under the federal securities laws for the information
contained in this Prospectus and the related registration statement and under
federal and state laws with respect to the sale of the Offered Certificates.
The Trust Fund's assets are limited to the Mortgage Loans, the proceeds
thereof and certain other assets associated with the Mortgage Loans, as
described herein. In the event that the Trust Fund's assets are diminished by
recoveries against it based upon its liabilities under the federal securities
laws, the assets available for payment to Certificateholders will be
diminished.
Variability in Yield; Priority of Payments; Subordination. The yield on any
Offered Certificate will depend on, among other things, the Pass-Through Rate
in effect from time to time for such Certificate. The Pass-Through Rate
applicable to the Sub-Pool II Certificates will fluctuate based on changes in
LIBOR. See "Description of the Certificates--Distributions--Sub-Pool II
Certificates--Pass-Through Rates." Accordingly, the yield on the Sub-Pool II
Certificates, in general, will be highly sensitive to changes in LIBOR. Such
yield will be adversely affected by Basis Risk Shortfalls, to the extent not
covered by Basis Risk Support Amounts. Any "Unfunded Basis Risk Shortfall" on
any Distribution Date (i.e., the excess, if any, of the Basis Risk Shortfall
for such Distribution Date over the Basis Risk Support Amount for such
Distribution Date) will be allocated among the classes of Sub-Pool II
Certificates then having Pass-Through Rates in excess of the Weighted Average
Effective Net Mortgage Rate of Sub-Pool II, as described herein under "--Sub-
Pool II Certificates--Basis Risk." The Pass-Through Rate on the Sub-Pool I
Certificates will be fixed for the life of such Certificates. See "Description
of the Certificates--Distributions."
The yield on any Offered Certificate purchased at a discount or premium will
also be affected by the rate and timing of principal payments on such
Certificate, which in turn will be affected by (i) the rate and timing of
principal payments and prepayments (including voluntary principal prepayments
as well as other unscheduled collections resulting from defaults, liquidations
and repurchases attributable to breaches of representations and warranties) on
the Mortgage Loans in the Sub-Pool evidenced thereby and (ii) the extent to
which Distributable Principal is applied on any Distribution Date in reduction
of the Class Balance of the class to which such Certificate belongs. As
further described herein, Distributable Principal in respect of a particular
Sub-Pool will be allocated to the Corresponding classes of Certificates in
descending alphabetical order (in the case of the Sub-Pool I Certificates,
first to the Class I-A1 Certificates and then to the Class I-A2 Certificates,
except as otherwise described herein), in each case until they are retired.
See "Description of the Certificates--Distributions." Because it is impossible
to predict accurately the timing and amount of principal prepayments and other
unscheduled recoveries of principal, if any, that will be received, investors
may find it difficult to analyze the effect that such items might have on the
yield and weighted average lives of the Certificates.
The yield on any Offered Certificate also will be affected by the rate and
timing of losses attributable to defaults on the Mortgage Loans in the Sub-
Pool evidenced thereby and, in the event of exhaustion of the amount of
coverage under the Limited Guaranty available to such Sub-Pool, by (x) the
severity of such losses and (y) the rate and timing of delinquencies of such
Mortgage Loans in respect of which the Servicer does not or is not required to
make a P&I Advance. As and to the extent described herein, the classes of
Certificates evidencing an interest in a particular Sub-Pool having a lower
alphabetical class designation are subordinate in right and time of payment to
the Corresponding classes of Certificates having a higher alphabetical class
designation and, in the event of exhaustion of the amount of coverage under
the Limited Guaranty in respect of such Sub-Pool, will bear shortfalls in
collections and losses incurred in respect of the Mortgage Loans in such Sub-
Pool prior to more senior Corresponding classes of such Certificates. Losses
and other shortfalls experienced with respect to the Mortgage Loans in a
particular Sub-Pool, to the extent not covered by the Limited Guaranty, will
not be applied to reduce either the Class Balance or the absolute entitlement
to interest of any Corresponding class of Certificates, even though such
losses and shortfalls may cause one or more of such classes to receive less
than the full amount of principal and interest to which it is entitled. See
"Description of the Mortgage Pool,"
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"Description of the Certificates--Distributions" and "--Subordination" and
"Yield and Maturity Considerations."
Sub-Pool II Certificates--Basis Risk. Under certain circumstances, the Pass-
Through Rates of one or more classes of Sub-Pool II Certificates as of any
Distribution Date could exceed the Weighted Average Effective Net Mortgage
Rate of Sub-Pool II. The resulting shortfall in interest collections (a "Basis
Risk Shortfall," as more specifically defined herein) could arise due to,
among other things, variations in the difference between LIBOR and the Indices
for the ARM Loans, variations in the difference between the Applicable Margins
on the Sub-Pool II Certificates and the Gross Margins on the ARM Loans,
variations in Mortgage Rate adjustment dates for the ARM Loans relative to
those for the Sub-Pool II Certificates, implementation of the maximum lifetime
Mortgage Rates for the ARM Loans and differences in the length of the accrual
periods for particular ARM Loan payments and the Accrual Periods for
corresponding Distribution Dates for the Sub-Pool II Certificates. Any such
shortfall, to the extent not offset by the Basis Risk Support Amount will be
borne only by such classes of Sub-Pool II Certificates, and will be allocated
among such classes as described herein under "Description of the
Certificates--Distributions--Sub-Pool II Certificates--Basis Risk." The Basis
Risk Support Amount with respect to any Distribution Date is limited solely to
the amount, if any, distributable on such Distribution Date in respect of
interest on the Class I-XS Certificates and the Class II-XS Certificates. Any
Unfunded Basis Risk Shortfall will not be carried forward for payment on any
future Distribution Date. As described herein, in the absence of an increasing
Weighted Average Effective Net Mortgage Rate for each Sub-Pool over time,
because, generally, the weighted average of the Pass-Through Rates on the
classes of Certificates evidencing an interest in each Sub-Pool will increase
over time, the Pass-Through Rates on the classes of Stripped Interest
Certificates would be expected to decrease over time and, as a result, the
likelihood and amount of Unfunded Basis Risk Shortfalls would be expected to
increase over time. See "Description of the Certificates--Distributions--Sub-
Pool II Certificates--Basis Risk."
Credit Support Limitations. The Certificates will represent beneficial
ownership interests solely in the assets of the Trust Fund and will not
represent an interest in or obligation of the Federal Deposit Insurance
Corporation in any capacity, any Depository Institution or any other person,
except as otherwise described herein. Distributions on any class of Offered
Certificates will depend solely on the amount and timing of payments and other
collections and advances in respect of the Mortgage Loans in the Sub-Pool
evidenced thereby, Basis Risk Support Amounts (in the case of the Sub-Pool II
Certificates) and amounts available under the Limited Guaranty. To increase
the likelihood of timely and complete distributions to the holders of the
Offered Certificates of each class, the Offered Certificates (as well as the
Stripped Interest Certificates) will have the benefit of the Limited Guaranty
to cover losses and other shortfalls attributable to credit defaults in
respect of the Mortgage Loans, as well as certain expenses of the Trust Fund.
The aggregate amount of coverage under the Limited Guaranty initially is equal
to approximately $[ ], which is equal to approximately [ ]% of the
Information Date Balance. The amount of such coverage initially available to
Sub-Pool I is limited to approximately $[ ], which is equal to approximately
[ ]% of the Information Date Sub-Pool I Balance and the amount of such
coverage initially available to Sub-Pool II is limited to approximately
$[ ], which is equal to approximately [ ]% of the Information Date Sub-Pool
II Balance. See "Description of the Certificates--The Limited Guaranty."
Although the Limited Guaranty is issued by the FDIC, claims thereunder may be
satisfied only through draws upon the Bank Insurance Fund. There can be no
assurance that amounts in the Bank Insurance Fund will be available to pay any
such claim at any particular time. THE LIMITED GUARANTY IS BY ITS TERMS NOT
BACKED BY THE FULL FAITH AND CREDIT OF THE UNITED STATES OF AMERICA. See "The
Bank Insurance Fund." Amounts available under the Limited Guaranty (as well as
the respective amounts available to each Sub-Pool) will be reduced over the
life of the Certificates by the aggregate dollar amount of claims paid
thereunder and will be increased to reflect any amounts recovered by or on
behalf of the FDIC in respect of such claims, in each case on a Sub-Pool by
Sub-Pool basis. The aggregate amount of coverage available under the Limited
Guaranty at the time of any determination is referred to herein as the
"Available Guaranty Amount," and the amount of such coverage available to a
particular Sub-Pool is referred to herein as the "Available Sub-Pool Coverage
Amount" for such Sub-Pool. In the event that the Available Sub-Pool Coverage
Amount under the Limited Guaranty in respect of a particular Sub-Pool has been
exhausted, the entire risk of shortfalls and losses on the
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<PAGE>
Mortgage Loans in such Sub-Pool in excess of the Excess Coverage Amount, if
any, will be borne by the holders of the Corresponding classes of
Certificates, notwithstanding the existence of any Available Sub-Pool Coverage
Amount for the other Sub-Pool. Such risk will be allocated to such classes of
Certificates in reverse alphabetical class designation as and to the extent
described under "Description of the Certificates--Subordination." Under no
circumstances will claims in respect of a particular Sub-Pool in excess of the
sum of the Available Sub-Pool Coverage Amount and the Excess Coverage Amount,
if any, for such Sub-Pool be paid, and in no event will aggregate claims in
respect of both Sub-Pools in excess of the Available Guaranty Amount be paid.
Limited Nature of Ratings. Any rating assigned by a Rating Agency to a class
of Certificates will reflect its assessment only of the likelihood that
holders of such class of Certificates will receive payments to which such
Certificateholders are entitled under the Pooling and Servicing Agreement. The
ratings assigned to the Certificates 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 from a particular Sub-
Pool is adequate to make payments required on the classes of Certificates
evidencing an interest therein. Such rating will not constitute an assessment
of the likelihood that principal prepayments (including for this purpose both
voluntary prepayments as well as unscheduled collections resulting from
defaults, liquidations and repurchases attributable to breaches of
representations and warranties) of the Mortgage Loans will be made, the degree
to which the rate of such prepayments might differ from that originally
anticipated or the likelihood of early optional termination of the Trust Fund.
Furthermore, such ratings will not address the possibility that (x) prepayment
of the Mortgage Loans at a higher or lower rate than anticipated by an
investor may cause such investor to experience a lower than anticipated yield,
(y) an investor that purchases an Offered Certificate at a significant premium
might fail to recover its initial investment under certain prepayment
scenarios or (z) Basis Risk Shortfalls may reduce the amount available for
distribution on the Sub-Pool I Certificates.
The amount of the Limited Guaranty was determined on the basis of criteria
established by each Rating Agency. The Mortgage Loan Seller believes that
those criteria are based in part upon an analysis of the behavior of mortgage
loans in a larger group. However, there can be no assurance that the
historical data supporting any such analysis will accurately reflect future
experience, or that the data derived from a large pool of mortgage loans will
accurately predict the delinquency, foreclosure or loss experience of the
Mortgage Loans. Such criteria also may be based upon determinations of the
values of the Mortgaged Properties that provide security for the Mortgage
Loans. However, no assurance can be given that those values will not decline
in the future. See "Ratings."
Control. Under certain circumstances, the consent or approval of the FDIC
and the holders of a specified percentage of the aggregate Class Balance or
notional amount (in the case of the Stripped Interest Certificates) of all
outstanding Certificates, in certain cases regardless of the Sub-Pool
evidenced thereby, will be required to direct, and will be sufficient to bind
all Certificateholders to, certain actions, including amending the Pooling and
Servicing Agreement in certain circumstances. See "Description of the
Certificates--Voting Rights" and "Description of the Pooling and Servicing
Agreement--Events of Default," "--Rights Upon Events of Default" and "--
Amendment." In addition, under certain circumstances, the Servicer is required
to obtain the consent of the FDIC before taking certain actions with respect
to the Mortgage Loans. See "Servicing of the Mortgage Loans--Realization Upon
Defaulted Mortgage Loans." In determining whether to consent to or to approve
any particular action, the FDIC is under no obligation to consider the
ramifications of any such determination to Certificateholders generally or to
the holders of Certificates of any particular class.
Book-Entry Registration. Each class of Offered Certificates initially will
be represented by one or more Certificates registered in the name of Cede &
Co., as nominee for DTC. As a result, unless and until corresponding
Definitive Offered Certificates are issued, the Certificate Owners with
respect to each class of Offered Certificates will be able to exercise the
rights of Certificateholders only indirectly through DTC and its Participants.
In addition, the access of Certificate Owners to information regarding the
Offered Certificates in which they hold interests may be limited. Conveyance
of notices and other communications by DTC to its Participants, and directly
and indirectly through such Participants to Certificate Owners, will be
governed by
35
<PAGE>
arrangements among them, subject to any statutory or regulatory requirements
as may be in effect from time to time. Furthermore, as described herein,
Certificate Owners may suffer delays in the receipt of payments on the related
class of Offered Certificates, and the ability of any Certificate Owner to
pledge or otherwise take actions with respect to its interest in the Offered
Certificates may be limited due to the lack of a physical certificate
evidencing such interest. See "Description of the Certificates--Book-Entry
Registration and Definitive Certificates."
DESCRIPTION OF THE MORTGAGE POOL
GENERAL
The Trust Fund will consist primarily of a pool (the "Mortgage Pool") of
adjustable and fixed rate, amortizing and balloon payment mortgage loans (the
"Mortgage Loans"), each of which is evidenced by a promissory note (a
"Mortgage Note") and secured by a mortgage, deed of trust or other similar
security instrument (a "Mortgage") that creates a first lien or a Junior Lien
on a fee simple or leasehold estate in commercial, multifamily or, in the case
of a limited number of Mortgage Loans, residential real property (each, a
"Mortgaged Property"). As of the Information Date, the mortgage loans, in the
aggregate, had an Information Date Balance of approximately $[ ].
As of the Information Date, [ ]% of the ARM Loans and [ ]% of the Fixed
Rate Loans provide for scheduled payments of principal based on amortization
schedules significantly longer than the remaining terms of such Mortgage Loans
(each such Mortgage Loan, a "Balloon Loan"), thereby leaving substantial
principal amounts due and payable (each such payment, a "Balloon Payment") on
their respective maturity dates, unless prepaid prior thereto. As of the
Information Date, [ ]% of the ARM Loans and [ ]% of the Fixed Rate Loans
were in default with respect to the Balloon Payment due on such loans prior to
the Information Date; however, the borrowers continue to make Assumed
Scheduled Payments thereon on a timely basis (any such loan, a "Matured
Performing Mortgage Loan"). The "Assumed Scheduled Payment" with respect to
any Matured Performing Mortgage Loan is equal to the Scheduled Payment (or
generally, in the case of a Matured Performing Mortgage Loan that is a Simple
Interest Loan, the interest portion of such Scheduled Payment) due on such
loan on the Due Date immediately prior to the Due Date on which the Balloon
Payment was first due, adjusted, in the case of an ARM Loan, to reflect
adjustments to the Mortgage Rate thereon.
Certain of the Mortgage Loans contain provisions entitling the holder of the
Mortgage Note to demand payment of the entire principal balance thereof prior
to its Maturity Date. The Pooling and Servicing Agreement provides that the
Servicer will not exercise any such option to call the note except in the
event of a payment default thereunder. Certain of the Mortgage Loans contain
provisions prohibiting prepayments during certain periods, and certain of the
Mortgage Loans provide for the payment of prepayment premiums in connection
with certain prepayments. The Servicer does not intend to enforce prepayment
prohibitions or to collect prepayment premiums.
MORTGAGE LOAN INFORMATION
The information contained in this Prospectus with respect to the Mortgage
Loans is based primarily upon a review of the Mortgage Loan files on behalf of
the Mortgage Loan Seller in contemplation of the issuance of the Certificates
(the "Initial Review"). The Mortgage Loans have not been "re-underwritten" or
subjected to the type of review that would typically be made in respect of
newly originated mortgage loans. However, in contemplation of the issuance of
the Certificates, the Mortgage Loan Seller arranged for (w) the solicitation
of updated operating statements from the borrowers, (x) the appraisal of the
Mortgaged Properties with respect to certain of the Mortgage Loans (the
"Appraisal Process"); (y) the verification of certain information with respect
to the ARM Loans (the "ARM Audit"); and (z) the review of the contents of the
Mortgage Loan files with respect to certain of the Mortgage Loans (the
"Mortgage File Sampling"). See "Risk Factors--The Mortgage Loans--Limited
Information."
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<PAGE>
Due Diligence Process. The Initial Review was undertaken on behalf of the
Mortgage Loan Seller during the period from October 1, 1993 to November 22,
1996. The Initial Review was limited to a review of the contents of each
Mortgage Loan file, such as the related Mortgage Note, and a comparison of
such information to the related servicing records. The statistical information
included in this Prospectus with respect to the Mortgage Loans is based
primarily upon a database generated in connection with the Initial Review (the
"Initial Database"), modified to reflect the ARM Audit and the Mortgage File
Sampling, in each case to the extent then completed, as described herein.
The Appraisal Process. The Mortgaged Properties, with respect to 528 of the
Mortgage Loans (the "Appraised Loans"), which represent approximately [ ]% of
the Information Date Balance, were the subject of an appraisal process
conducted on behalf of the Mortgage Loan Seller during the period from October
11, 1996 through November 29, 1996 in contemplation of the issuance of the
Certificates. The Mortgaged Properties were initially selected by the Mortgage
Loan Seller for the appraisal process pursuant to the table below.
"Non-lead" participation interests were excluded from the appraisal process.
The balance of all Mortgage Loans having a principal balance as of September
15, 1996 in excess of $1,000,000 for which no appraisal had been procured
subsequent to July 1, 1995 were included in the appraisal process.
Additionally, approximately 53% of Mortgage Loans having principal balances
ranging between $500,000--$1,000,000, approximately [ ]% of Mortgage Loans
ranging between $250,000--$500,000, and approximately [ ]% of Mortgage Loans
with balances below $250,000 were selected on a random basis for inclusion in
the appraisal process.
During the course of the appraisal process, certain of the Mortgage Loans
originally selected for appraisal were eliminated from the appraisal process
for various reasons, including without limitation, uncooperative borrowers.
Mortgage Loans acquired by the Mortgage Loan Seller after September 1, 1996
were not included in the appraisal process, even if they had principal
balances in excess of $1,000,000.
Each appraisal included in the appraisal process was required to comply with
the then current Uniform Standards of Professional Appraisal Practice as
published by The Appraisal Standards Board of The Appraisal Foundation, was
conducted by a state certified, designated MAI appraiser and reviewed on
behalf of the Mortgage Loan Seller by a state certified, designated SRA
appraiser for consistency and conformity to the appraisal process.
Alternative appraisal sources have provided valuations conducted subsequent
to July 1, 1995, for an additional [ ]% of the Mortgage Loans, which include
appraisals procured by Banc One Management and Consulting Corporation as a
function of the normal servicing process. Additionally, appraisal reports
prepared subsequent to July 1, 1991 and prior to July 1, 1995 exist for
approximately [ ]% of the Mortgage Loans. The remaining Mortgage Loans, which
represent in the aggregate approximately [ ]% of the ARM Loans and
approximately [ ]% of the Fixed Rate Loans, were not subject to the Appraisal
Process (the "Non-Appraised Loans").
FIXED RATE LOANS
<TABLE>
<CAPTION>
PRINCIPAL PRINCIPAL APPRAISED APPRAISED
BALANCE NUMBER OF BALANCE APPRAISED SINCE SINCE PERCENT
RANGE LOANS OF LOANS OCT.-DEC. 1996 JULY 1, 1995 OCTOBER 1, 1991 APPRAISED
--------- --------- --------- -------------- ------------ --------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Greater than
$1,000,000............. 100%
$500,000 to $1,000,000..
$250,000 to $500,000....
Less than $250,000......
</TABLE>
37
<PAGE>
ARM LOANS
<TABLE>
<CAPTION>
PRINCIPAL PRINCIPAL APPRAISED APPRAISED
BALANCE NUMBER OF BALANCE APPRAISED SINCE SINCE PERCENT
RANGE LOANS OF LOANS OCT.-DEC. 1996 JULY 1, 1995 OCTOBER 1, 1991 APPRAISED
--------- --------- --------- -------------- ------------ --------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Greater than
$1,000,000............. 100%
$500,000 to $1,000,000..
$250,000 to $500,000....
Less than $250,000......
</TABLE>
The ARM Audits. Each ARM Loan was subject to an audit on behalf of the
Mortgage Loan Seller during the period from [ ] to [ ] in an attempt
to verify that all payments previously made by the applicable borrower were
properly paid in accordance with the terms of such loan. To make such
determinations, the actual payment history of each borrower was compared
against a "reconstructed" payment history that reflected the exact terms of
the related ARM Loan during the period for which such actual payment history
was available. The correct Mortgage Rate for each Mortgage Rate adjustment
date was compared with the interest rate actually used and all payments due
were compared with all payments actually made in respect of each ARM Loan to
determine whether the borrower was overcharged or undercharged.
If it was determined that an overcharge with respect to an ARM Loan
occurred, the applicable borrower was notified by mail as to (a) the amount of
overcharge, (b) the principal balance of such ARM Loan as of the audit date
and (c) the current Mortgage Rate, Index, Gross Margin and next Mortgage Rate
adjustment date. Each letter provided that the outstanding principal balance
of such borrower's ARM Loan would be reduced by the amount of the overcharge,
unless the borrower otherwise requested cash in the amount of the overcharge.
As of the Information Date the borrowers with respect to approximately [ ]
of the ARM Loans, which represent approximately [ ]% of the Information Date
Sub-Pool II Balance, have responded to such letters and the appropriate
adjustments have been made. In the event that a borrower, after such date,
notifies the Mortgage Loan Seller or the Servicer of its election to have the
principal balance of its ARM Loan reduced by the amount of the overcharge or
if a borrower does not respond to such letter at all, the Servicer will cause
the balance of such ARM Loan to be reduced by such amount.
As a result of the ARM Audit, the Initial Database was modified to the
extent necessary to reflect ARM Loan information verified as of the
InformationDate (the Initial Database, as so modified, the "Modified
Database").
The Mortgage File Sampling. The contents of the files with respect to [ ]%
of the ARM Loans and [ ]% of the Fixed Rate Loans have been reviewed on behalf
of the Mortgage Loan Seller. Such review indicated certain material
differences between the information in such files and the corresponding
information in the Modified Database with respect to certain of the Mortgage
Loans. The Mortgage Loan Seller believes that such differences are
attributable primarily to (i) insufficient reliable information, (ii) missing
and non-retrievable documentation in the Mortgage Loan files, (iii) the
potentially disruptive effects of the transfer of servicing two or more times
for each Mortgage Loan from the related Depository Institution to the Servicer
and (iv) modifications to Mortgage Loans following the creation of the Initial
Database and, in certain cases, the Modified Database. In an attempt to
reconcile such differences, the contents of the files of any Mortgage Loan
that may have been modified (determined primarily by reference to
inconsistencies in the databases with respect to Mortgage Rate for Fixed Rate
Loans and Maturity Date) following the creation of the Initial Database were
searched for modification agreements. As a result of such procedure, the
Modified Database was revised to reflect the terms of any modification
agreement so discovered (the Modified Database, as so revised, the "Final
Database").
Although the Mortgage Loan Seller has endeavored to create an accurate Final
Database, because of the factors enumerated above, the Mortgage Loan Seller
believes that the Final Database may contain material inaccuracies with
respect to one or more Mortgage Loans. By making the representations described
under
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<PAGE>
"--Representations and Warranties; Remedies," the risk of material
inaccuracies in the Mortgage Loan Schedule (including information as to
whether the Mortgage Loans have fixed or adjustable Mortgage Rates, and
applicable information as to Mortgage Rates for Fixed Rate Loans and Indices
and Gross Margins for ARM Loans) will be borne by the FDIC, to the extent
described in such section. For a description of the remedies applicable to a
breach of any such representation, see "--Representations and Warranties;
Remedies."
Set forth below is certain information with respect to the Fixed Rate Loans
(i.e., the Mortgage Loans in Sub-Pool I), and the ARM Rate Loans (i.e., the
Mortgage Loans in Sub-Pool II). (The sum in any column may not equal the
indicated total due to rounding.) In addition, set forth in Annex A and Annex
B to this Prospectus is additional information with respect to the largest
Mortgage Loans in each Sub-Pool.
SUB-POOL I
Sub-Pool I consists exclusively of [ ] Fixed Rate Loans, which have an
aggregate Information Date Balance of $[ ] (the "Information Date Sub-Pool I
Balance").
Set forth below is certain information with respect to the Mortgage Loans in
Sub-Pool I. Annex A to this Prospectus contains additional information with
respect to the [ ] largest Mortgage Loans in Sub-Pool I.
The following table sets forth the Mortgage Rates for the Fixed Rate Loans
as of the Information Date.
SUB-POOL I--MORTGAGE RATES FOR FIXED RATE LOANS AS OF THE INFORMATION DATE
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF AGGREGATE INFORMATION
RANGE OF MORTGAGE FIXED RATE INFORMATION DATE SUB-POOL I
RATES(%) LOANS DATE BALANCE BALANCE
- ----------------- ---------- ------------ ---------------
<S> <C> <C> <C>
</TABLE>
Weighted Average Mortgage Rate: [ ]% per annum
As of the Information Date, [ ]% of the Fixed Rate Loans provide for the
accrual of interest on an actuarial basis; the remainder of the Fixed Rate
Loans are Simple Interest Loans; [ ]% of the Fixed Rate Loans provide for the
accrual of interest in arrears. Actuarial loans and Simple Interest Loans are
described under the table captioned "Sub-Pool II--Mortgage Rates for ARM Loans
as of the Information Date" under "Description of the Mortgage Pool--Mortgage
Loan Information--Sub Pool II."
The following table sets forth the range of Information Date Balances of the
Fixed Rate Loans.
SUB-POOL I-- INFORMATION DATE BALANCES FOR FIXED RATE LOANS*
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF AGGREGATE INFORMATION
RANGE OF INFORMATION FIXED RATE INFORMATION SUB-POOL I
DATE BALANCES($) LOANS DATE BALANCE BALANCE
- -------------------- ---------- ------------ -------------
<S> <C> <C> <C>
</TABLE>
Average Information Date Balance: $[ ]
- --------
* The Information Date Balance of a Fixed Rate Loan may be larger than its
original principal balance as a result of, among other things, a
modification.
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<PAGE>
The following table sets forth the respective years in which the Fixed Rate
Loans were originated.
SUB-POOL I--YEAR OF ORIGINATION OF FIXED RATE LOANS
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF AGGREGATE INFORMATION
FIXED RATE INFORMATION DATE SUB-POOL I
YEAR LOANS DATE BALANCE BALANCE
- ---- ---------- ------------ ---------------
<S> <C> <C> <C>
</TABLE>
The following table sets forth the seasoning of the Fixed Rate Loans as of
the Information Date.
SUB-POOL I--SEASONING OF FIXED RATE LOANS AS OF THE INFORMATION DATE*
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF AGGREGATE INFORMATION DATE
RANGE OF SEASONING FIXED RATE INFORMATION SUB-POOL I
(MONTHS) LOANS DATE BALANCE BALANCE
- ------------------ ---------- ------------ ----------------
<S> <C> <C> <C>
</TABLE>
Weighted Average Seasoning (not including Fixed Rate Loans for which such
information is indicated as Not Available): [ ] months
The following table sets forth the Remaining Term to Scheduled Maturity of
the Fixed Rate Loans that are Balloon Loans as of the Information Date.
SUB-POOL I--REMAINING TERM TO SCHEDULED MATURITY OF THE FIXED RATE LOANS THAT
AREBALLOON LOANS AS OF THE INFORMATION DATE
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF AGGREGATE INFORMATION DATE
RANGE OF REMAINING FIXED RATE INFORMATION SUB-POOL I
TERMS (MONTHS) LOANS DATE BALANCE BALANCE
- ------------------ ---------- ------------ ----------------
<S> <C> <C> <C>
</TABLE>
Weighted Average Remaining Term to Scheduled Maturity (not including Matured
Performing Mortgage Loans): [ ] months
40
<PAGE>
The following table sets forth the Remaining Term to Scheduled Maturity of
the Fixed Rate Loans that are fully amortizing Fixed Rate Loans as of the
Information Date.
SUB-POOL I--REMAINING TERM TO SCHEDULED MATURITY OF FIXED RATE LOANS THAT ARE
FULLY AMORTIZING FIXED RATE LOANS AS OF THE INFORMATION DATE
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF AGGREGATE INFORMATION DATE
RANGE OF REMAINING FIXED RATE INFORMATION SUB-POOL II
TERMS (MONTHS) LOANS DATE BALANCE BALANCE
- ------------------ ---------- ------------ ----------------
<S> <C> <C> <C>
</TABLE>
Weighted Average Remaining Term to Scheduled Maturity: [ ] months
The following table sets forth the range of Information Date LTV Ratios of
the Fixed Rate Loans.
SUB-POOL I--INFORMATION DATE LTV RATIOS FOR APPRAISED FIXED RATE LOANS
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF AGGREGATE INFORMATION DATE
RANGE OF INFORMATION FIXED RATE INFORMATION SUB-POOL I
DATE BALANCES($) LOANS DATE BALANCE BALANCE
- -------------------- ---------- ------------ ----------------
<S> <C> <C> <C>
</TABLE>
Weighted Average Information Date LTV Ratio*: [ ]%
The following table sets forth the range of Estimated Net Cash Flow Coverage
Ratios for the Fixed Rate Loans as of the Information Date.
SUB-POOL I--ESTIMATED NET CASH FLOW COVERAGE RATIOS FOR THE APPRAISED FIXED
RATE LOANS AS OF THE INFORMATION DATE*
<TABLE>
<CAPTION>
RANGE OF PERCENT OF AGGREGATE
ESTIMATED INFORMATION DATE
NET CASH PERCENT OF BALANCE OF
FLOW NUMBER OF AGGREGATE INFORMATION DATE APPRAISED
COVERAGE FIXED RATE INFORMATION SUB-POOL I FIXED RATE
RATIOS* LOANS DATE BALANCE BALANCE LOANS
- --------- ---------- ------------ ---------------- --------------------
<S> <C> <C> <C> <C>
</TABLE>
Weighted Average Estimated Net Cash Flow Coverage Ratio: [ ]
- --------
* Determined as described on page [ ] of this Prospectus.
41
<PAGE>
The "Estimated Net Cash Flow Coverage Ratio" for any Mortgage Loan is the
ratio of "Estimated Net Cash Flow" of the related Mortgaged Property for a
one-year period to the amount of debt service that will be payable under such
Mortgage Loan for the one-year period following the date of determination,
assuming, in the case of an ARM Loan, no adjustments to the Mortgage Rate or
Scheduled Payments thereon following such date. "Estimated Net Cash Flow" for
each Appraised Loan generally was estimated by the applicable appraiser based
upon an analysis of the condition of the related Mortgaged Property and of
income and expense experiences of comparable properties identified in the
related region or locality. If an operating statement for the applicable
property (i.e., an income and expense statement with respect to such property)
was available to the appraiser, Estimated Net Cash Flow was determined based
upon the income and expense information included in such statement and
adjusted, to the extent deemed necessary by the appraiser, to reflect
property-specific information known to the appraiser as well as relevant real
estate market information (e.g., income and expense information with respect
to comparable properties in the same region or locality).
For example, the Estimated Net Cash Flow for a particular property may have
been subject to reduction if a significant portion of the income of the
property was attributable to above-market payments pursuant to short term
leases. If an operating statement was not available, Estimated Net Cash Flow
was based upon property-specific information known to the appraiser as well as
relevant real estate market information. In all cases, the appraisals and the
Estimated Net Cash Flows, were reviewed by an independent MAI appraiser. In
any case in which the reviewer determined that the Estimated Net Cash Flow for
a particular property was questionable, the results were returned to the
original appraiser for re-analysis. In general, "Estimated Net Cash Flow" is
an estimate of the revenue derived from the use and operation of a Mortgaged
Property (consisting primarily of rental income), less operating expenses
(such as utilities, administrative expenses, repairs and maintenance,
management fees and advertising) and less fixed expenses (such as insurance
and real estate taxes). "Estimated Net Cash Flow" does not reflect interest
expenses and non-cash items, such as depreciation and amortization, and
generally does not reflect capital expenditures.
There was not sufficient information in the Mortgage Loan files or otherwise
available from the borrowers (such as operating statements, tax returns or
financial statements) to prepare accurately an analysis of property
performance and debt service consistent with a standard measure, such as a
ratio of earnings to fixed charges, calculated in accordance with generally
accepted accounting principles. "Earnings" in the calculation of earnings to
fixed charges is defined generally as pretax income from continuing
operations, including depreciation and amortization, and "fixed charges" in
such calculation is defined generally to include interest and amortization of
debt expense and discount or premium, in each case whether expensed or
capitalized. THE ESTIMATED NET CASH FLOW COVERAGE RATIO WITH RESPECT TO A
PARTICULAR MORTGAGED PROPERTY SHOULD NOT BE CONSIDERED AS EQUIVALENT TO ANY
MEASURE OF PERFORMANCE, SUCH AS A RATIO OF EARNINGS TO FIXED CHARGES,
DETERMINED IN ACCORDANCE WITH GENERALLY ACCEPTED ACCOUNTING PRINCIPLES, AS AN
INDICATOR OF THE PERFORMANCE OF SUCH PROPERTY OR TO CASH FLOWS GENERATED BY
OPERATING, INVESTING AND FINANCING ACTIVITIES, AS AN INDICATOR OF CASH FLOWS
OR AS A MEASURE OF LIQUIDITY.
There can be no assurance that such information is in any respect indicative
of the ability of the underlying borrowers to make debt service payments on
the Appraised Loans, even with respect to such loans as to which operating
statements were available. There can be no assurance that Estimated Net Cash
Flow with respect to a particular Mortgaged Property reflects any increases in
expenses or decreases in income on such property beyond the period covered
thereby, even if expected. Further, with respect to the Appraised Loans as to
which operating statements were not available, there can be no assurance that
the Estimated Net Cash Flow Coverage Ratios provided herein are representative
of Estimated Net Cash Flow Coverage Ratios that would have been calculated
from operating statements had they been available for the related Mortgaged
Properties. Finally, although the Mortgage Loan Seller does not believe that
the Non-Appraised Loans as a group will have materially different
characteristics than the Appraised Loans (other than principal balances),
there can be no assurance that the Estimated Net Cash Flow Coverage Ratios for
the Appraised Loans are indicative of what such ratios would be for the Non-
Appraised Loans.
42
<PAGE>
The Fixed Rate Loans are secured by Mortgaged Properties located in
approximately [ ] different jurisdictions. The following table sets forth the
states in which the Mortgaged Properties relating to the Fixed Rate Loans are
located. See "Risk Factors--The Mortgage Loans--Concentration."
SUB-POOL I--GEOGRAPHIC DISTRIBUTION OF FIXED RATE LOANS
<TABLE>
<CAPTION>
PERCENT OF
NUMBER OF AGGREGATE INFORMATION DATE
FIXED RATE INFORMATION SUB-POOL I
STATE LOANS DATE BALANCE BALANCE
- ----- ---------- ------------ ----------------
<S> <C> <C> <C>
</TABLE>
- --------
* No other single state includes Mortgaged Properties securing more than [ ]%
of the Fixed Rate Loans.
The following table sets forth the property type of the Mortgaged Properties
in Sub-Pool I as of the Information Date. See "Risk Factors--The Mortgage
Loans Nature of the Mortgaged Properties."
SUB-POOL I--PROPERTY TYPE
<TABLE>
<CAPTION>
PERCENT OF
NUMBER OF AGGREGATE INFORMATION DATE
FIXED RATE INFORMATION SUB-POOL I
PROPERTY TYPE LOANS DATE BALANCE BALANCE
- ------------- ---------- ------------ ----------------
<S> <C> <C> <C>
</TABLE>
The following table sets forth the delinquency status of the Fixed Rate
Loans as of the Information Date.
SUB-POOL I--DELINQUENCY STATUS AS OF THE INFORMATION DATE*
<TABLE>
<CAPTION>
DELINQUENT
SCHEDULED PAYMENTS*
PERCENT OF AGGREGATE AMOUNT AS A PERCENT
NUMBER OF AGGREGATE INFORMATION DATE OF DELINQUENT OF INFORMATION DATE
DELINQUENCY FIXED RATE INFORMATION SUB-POOL I SCHEDULED SUB-POOL I
STATUS LOANS DATE BALANCE BALANCE PAYMENTS BALANCE
- ----------- ---------- ------------ ---------------- ------------- -------------------
<S> <C> <C> <C> <C> <C>
</TABLE>
- --------
* Delinquencies are measured from the stated due date, exclusive of any
applicable grace periods.
43
<PAGE>
The following table sets forth the lien position of the Fixed Rate Loans as
of the Information Date.
SUB-POOL I--LIEN POSITION OF THE FIXED RATE LOANS
<TABLE>
<CAPTION>
PERCENT OF
NUMBER OF AGGREGATE INFORMATION DATE
FIXED RATE INFORMATION SUB-POOL I
LIEN POSITION LOANS DATE BALANCES BALANCE
- ------------- ---------- ------------- ----------------
<S> <C> <C> <C>
</TABLE>
SUB-POOL II
Sub-Pool II consists exclusively of [ ] ARM Loans, which have an aggregate
Information Date Balance of approximately $[ ] (the "Information Date Sub-
Pool II Balance"). The Mortgage Rate on each ARM Loan is subject to adjustment
on specified Due Dates (each such date of adjustment, a "Mortgage Rate
Adjustment Date") by adding or, in certain cases, subtracting, a fixed number
of basis points (a "Gross Margin") to the value of a base index (an "Index")
or, in certain cases, a fraction thereof, subject, in certain cases, to
rounding conventions, in the case of [ ]% of the ARM Loans, to lifetime
maximum and/or minimum Mortgage Rates, and in the case of [ ]% of the ARM
Loans, to periodic maximum and/or minimum Mortgage Rates, as described herein.
The amount of Scheduled Payments on each ARM Loan is subject to adjustment
on specified Due Dates (each such date, a "Payment Adjustment Date") to an
amount that would amortize the outstanding principal balance thereof over its
remaining amortization schedule and to pay interest at the applicable Mortgage
Rate, subject with respect to certain ARM Loans to payment caps, which limit
the amount by which a Scheduled Payment may adjust on any Payment Adjustment
Date. Further, in the case of certain ARM Loans, the Payment Adjustment Date
may occur at different frequencies than the related Mortgage Rate Adjustment
Dates. As a result, and because the application of payment caps may limit the
amount by which the Scheduled Payments may adjust in respect of certain
Mortgage Loans, the amount of a Scheduled Payment may be more or less than the
amount necessary to amortize the Mortgage Loan principal balance over its then
remaining amortization schedule and to pay interest at the applicable Mortgage
Rate. Accordingly Mortgage Loans may be subject to slower amortization (if the
Scheduled Payment due on a Due Date is sufficient to pay interest accrued to
such Due Date at the applicable Mortgage Rate but is not sufficient to reduce
principal in accordance with the applicable amortization schedule), to
negative amortization (if interest accrued to a Due Date at the applicable
Mortgage Rate is greater than the entire Scheduled Payment due on such Due
Date) or to accelerated amortization (if the Scheduled Payment due on a Due
Date is greater than the amount necessary to pay interest accrued to such Due
Date at the applicable Mortgage Rate and to reduce principal in accordance
with the applicable amortization schedule).
Set forth below is certain information with respect to the Mortgage Loans in
Sub-Pool II. Annex B to this Prospectus contains additional information with
respect to the [ ] largest Mortgage Loans in Sub-Pool II.
44
<PAGE>
The following table sets forth the Mortgage Rates for the ARM Loans as of
the Information Date.
SUB-POOL II--MORTGAGE RATES FOR ARM LOANS AS OF THE INFORMATION DATE
<TABLE>
<CAPTION>
PERCENT OF
NUMBER OF AGGREGATE INFORMATION DATE
RANGE OF MORTGAGE ARM INFORMATION SUB-POOL II
RATES (%) LOANS DATE BALANCE BALANCE
- ----------------- --------- ------------ ----------------
<S> <C> <C> <C>
</TABLE>
Weighted Average Mortgage Rate: [ ]% per annum
As of the Information Date, [ ]% of the ARM Loans provide for the accrual
of interest on an actuarial basis; the remainder of the ARM Loans are Simple
Interest Loans; [ ]% of the ARM Loans provide for the accrual of interest in
arrears.
An actuarial loan provides for the amortization of the amount financed under
the Mortgage Loan over a series of Scheduled Payments (except, in the case of
a Balloon Loan, the Balloon Payment). Each Scheduled Payment consists of an
installment of interest calculated on the basis of the outstanding principal
balance of the Mortgage Loan multiplied by the Mortgage Rate and further
multiplied by one-twelfth. As payments are received under an actuarial loan,
the amount received is applied first to interest accrued to the applicable Due
Date and the balance is applied to reduce the unpaid principal balance.
Accordingly, the portion of each Scheduled Payment applicable to interest and
the portion applicable to principal is determined as if each payment is made
on each Due Date, regardless of whether it is received before or after such
Due Date.
A Simple Interest Loan provides for the amortization of the amount financed
under the Mortgage Loan over a series of Scheduled Payments (except, in the
case of a Balloon Loan, the Balloon Payment). Each Scheduled Payment consists
of an installment of interest calculated on the basis of the outstanding
principal balance of the Mortgage Loan multiplied by the Mortgage Rate and
further multiplied by a fraction, the numerator of which is the number of days
in the period elapsed since the preceding payment of interest was made and the
denominator of which is the number of days in the annual period for which
interest accrues on such Mortgage Loan. As payments are received under a
Simple Interest Loan, the amount received is applied first to interest accrued
to the date of payment and the balance is applied to reduce the unpaid
principal balance. Accordingly, if a borrower pays a Scheduled Payment on a
Simple Interest Loan before its scheduled Due Date, the portion of the payment
allocable to interest for the period since the preceding payment was made will
be less than it would have been had the payment been made as scheduled, and
the portion of the payment applied to reduce the unpaid principal balance will
be correspondingly greater. However, the next succeeding payment will result
in an allocation of a greater amount to interest if such payment is made on
its scheduled Due Date.
Conversely, if a borrower pays a Scheduled Payment after its scheduled Due
Date, the portion of the payment allocable to interest for the period since
the preceding payment was made will be greater than it would have been had the
payment been made as scheduled, and the remaining portion, if any, of the
payment applied to reduce the unpaid principal balance will be correspondingly
less. If each Scheduled Payment under a Simple Interest Loan is made on or
prior to its scheduled Due Date, the principal balance of the Mortgage Loan
will amortize in the manner described in the preceding paragraph. However, if
the borrower consistently makes scheduled payments after the scheduled Due
Date the Mortgage Loan will amortize more slowly than scheduled. If a Simple
Interest Loan is prepaid, the borrower is required to pay interest only to the
date of prepayment.
45
<PAGE>
The following table sets forth the range of Gross Margins for the ARM Loans.
SUB-POOL II--GROSS MARGINS FOR THE ARM LOANS
<TABLE>
<CAPTION>
PERCENT OF
NUMBER OF AGGREGATE INFORMATION DATE
RANGE OF GROSS ARM INFORMATION SUB-POOL II
MARGINS (%) LOANS DATE BALANCE BALANCE
- -------------- --------- ------------ ----------------
<S> <C> <C> <C>
</TABLE>
Weighted Average Gross Margin: [ ]% per annum
The following table sets forth the frequency of adjustments to the Mortgage
Rates of the ARM Loans.
SUB-POOL II--FREQUENCY OF ADJUSTMENTS TO MORTGAGE RATES FOR THE ARM LOANS
<TABLE>
<CAPTION>
MORTGAGE RATE PERCENT OF
ADJUSTMENT NUMBER OF AGGREGATE INFORMATION DATE
FREQUENCY ARM INFORMATION SUB-POOL II
(MONTHS) LOANS DATE BALANCE BALANCE
- ------------- --------- ------------ ----------------
<S> <C> <C> <C>
</TABLE>
- --------
* One Mortgage Rate adjustment per indicated number of months.
The following table sets forth the range of maximum lifetime Mortgage Rates
for the ARM Loans to which such characteristic applies.
SUB-POOL II--MAXIMUM LIFETIME MORTGAGE RATES FOR THE ARM LOANS
<TABLE>
<CAPTION>
PERCENT OF
NUMBER OF AGGREGATE INFORMATION DATE
RANGE OF MAXIMUM ARM INFORMATION SUB-POOL II
LIFETIME MORTGAGE RATES (%) LOANS DATE BALANCE BALANCE
- --------------------------- --------- ------------ ----------------
<S> <C> <C> <C>
</TABLE>
Weighted Average Maximum Lifetime Mortgage Rate*: [ ]% per annum
- --------
* This calculation does not include the [ ]% of the ARM Loans without maximum
lifetime Mortgage Rates.
46
<PAGE>
The following table sets forth the range of minimum lifetime Mortgage Rates
for the ARM Loans to which such characteristic applies.
SUB-POOL II--MINIMUM LIFETIME MORTGAGE RATES FOR THE ARM LOANS
<TABLE>
<CAPTION>
PERCENT OF
NUMBER OF AGGREGATE INFORMATION DATE
RANGE OF MINIMUM ARM INFORMATION SUB-POOL II
LIFETIME MORTGAGE RATES (%) LOANS DATE BALANCE BALANCE
- --------------------------- --------- ------------ ----------------
<S> <C> <C> <C>
</TABLE>
Weighted Average Minimum Lifetime Mortgage Rate*: [ ]% per annum
- --------
* This calculation does not include the [ ]% of the ARM Loans without minimum
lifetime Mortgage Rates.
The following table sets forth the Indices of the ARM Loans as of the
Information Date.
SUB-POOL II--INDICES FOR THE ARM LOANS
<TABLE>
<CAPTION>
PERCENT OF
NUMBER OF AGGREGATE INFORMATION DATE
ARM INFORMATION SUB-POOL II
INDEX LOANS DATE BALANCE BALANCE
- ----- --------- ------------ --- ----------------
<S> <C> <C> <C> <C>
</TABLE>
If the respective Index set forth in a particular Mortgage Notes becomes
unavailable, and such Mortgage Note provides for no alternative Index, the
Servicer will select The Wall Street Journal Prime Rate as the Index.
The following table sets forth the range of Information Date Balances of the
ARM Loans.
SUB-POOL II--INFORMATION DATE BALANCES FOR THE ARM LOANS*
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF AGGREGATE INFORMATION DATE
RANGE OF ARM INFORMATION SUB-POOL II
INFORMATION DATE BALANCES($) LOANS DATE BALANCE BALANCE
- ---------------------------- --------- ------------ ----------------
<S> <C> <C> <C>
</TABLE>
Average Information Date Balance*: $[ ]
- --------
* The Information Date Balance of a Mortgage Loan may be larger than its
original principal balance as a result of, among other things, modification
or negative amortization.
47
<PAGE>
The following table sets forth the respective years in which the ARM Loans
were originated.
SUB-POOL II--YEAR OF ORIGINATION OF ARM LOANS
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF AGGREGATE INFORMATION DATE
ARM INFORMATION SUB-POOL II
YEAR LOANS DATE BALANCE BALANCE
- ---- --------- ------------ ----------------
<S> <C> <C> <C>
</TABLE>
- ----------
The following table sets forth the seasoning of the ARM Loans as of the
Information Date.
SUB-POOL II--SEASONING OF ARM LOANS AS OF THE INFORMATION DATE
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF AGGREGATE INFORMATION DATE
RANGE OF SEASONING ARM INFORMATION SUB-POOL II
(MONTHS) LOANS DATE BALANCE BALANCE
- ------------------ --------- ------------ ----------------
<S> <C> <C> <C>
</TABLE>
Weighted Average Seasoning (not including ARM Loans for which such information
is indicated as Not Available): [ ] months
- ----------
The following table sets forth the Remaining Terms to Scheduled Maturity of
the ARM Loans that are Balloon Loans as of the Information Date.
SUB-POOL II--REMAINING TERM TO SCHEDULED MATURITY OF THE ARM LOANS THAT ARE
BALLOON LOANS AS OF THE INFORMATION DATE
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF AGGREGATE INFORMATION DATE
RANGE OF REMAINING ARM INFORMATION SUB-POOL II
TERMS (MONTHS) LOANS DATE BALANCE BALANCE
- ------------------ --------- ------------ ----------------
<S> <C> <C> <C>
</TABLE>
Weighted Average Remaining Term to Scheduled Maturity (not including Matured
Performing Mortgage Loans): [ ] months
48
<PAGE>
The following table sets forth the Remaining Terms to Scheduled Maturity of
the ARM Loans that are fully amortizing ARM Loans as of the Information Date.
SUB-POOL II--REMAINING TERM TO SCHEDULED MATURITY OF ARM LOANS THAT ARE FULLY
AMORTIZING ARM LOANS AS OF THE INFORMATION DATE
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF AGGREGATE INFORMATION DATE
RANGE OF REMAINING ARM INFORMATION SUB-POOL II
TERMS (MONTHS) LOANS DATE BALANCE BALANCE
- ------------------ --------- ------------ ----------------
<S> <C> <C> <C>
</TABLE>
Weighted Average Remaining Term to Scheduled Maturity: [ ] months
The following table sets forth the range of Information Date LTV Ratios of
the ARM Loans. The "Information Date LTV Ratio" for any Mortgage Loan is a
fraction, expressed as a percentage, the numerator of which is the Information
Date Balance thereof, and the denominator of which is the appraised value of
the related Mortgaged Property based on either (i) an appraisal of recent date
prepared in connection with the Appraisal Process or otherwise, or (ii) the
most recent appraisal value as reported on the records of the Servicer or the
Due Diligence Contractor, as the case may be.
SUB-POOL II--INFORMATION DATE LTV RATIOS FOR APPRAISED ARM LOANS
<TABLE>
<CAPTION>
PERCENT OF
AGGREGATE
PERCENT OF INFORMATION DATE
NUMBER OF AGGREGATE INFORMATION DATE BALANCE OF
RANGE OF INFORMATION ARM INFORMATION SUB-POOL II APPRAISED
DATE LTV RATIOS(%) LOANS DATE BALANCE BALANCE ARM LOANS
- -------------------- --------- ------------ ---------------- ----------------
<S> <C> <C> <C> <C>
</TABLE>
Weighted Average Information Date LTV Ratio: [ ]%
- ----------
The following table sets forth the range of Estimated Net Cash Flow Coverage
Ratios for the Appraised ARM Loans as of the Information Date.
SUB-POOL II--ESTIMATED NET CASH FLOW COVERAGE RATIOS FOR THE APPRAISED ARM
LOANS AS OF THE INFORMATION DATE*
<TABLE>
<CAPTION>
PERCENT OF
AGGREGATE
PERCENT OF INFORMATION DATE
NUMBER OF AGGREGATE INFORMATION DATE BALANCE OF
RANGE OF ESTIMATED NET CASH FLOW ARM INFORMATION SUB-POOL II APPRAISED
COVERAGE RATIOS* LOANS DATE BALANCE BALANCE ARM LOANS
- -------------------------------- --------- ------------ ---------------- ----------------
<S> <C> <C> <C> <C>
</TABLE>
Weighted Average Estimated Net Cash Flow Coverage Ratio: [ ]x
- ----------
* Determined as described below.
49
<PAGE>
There can be no assurance that the Estimated Net Cash Flow Coverage Ratios
for the Mortgage Loans are in any respect indicative of the ability of the
underlying borrowers to make debt service payments on the Appraised Loans,
even with respect to such loans as to which operating statements were
available. There can be no assurance that Estimated Net Cash Flow reflects any
increases in expenses or decreases in income beyond the period covered
thereby, even if expected. Further, with respect to the Appraised Loans as to
which operating statements were not available, there can be no assurance that
the Estimated Net Cash Flow Coverage Ratios provided herein are representative
of Estimated Net Cash Flow Coverage Ratios that would have been calculated
from operating statements had they been available for the related Mortgaged
Properties. ESTIMATED NET CASH FLOW WAS NOT CALCULATED IN ACCORDANCE WITH
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES. See the discussion under the table
captioned "Sub-Pool I--Estimated Net Cash Flow Coverage Ratios for the
Appraised Fixed Rate Loans as of the Information Date."
The ARM Loans are secured by Mortgaged Properties located in approximately
[ ] different jurisdictions. The following table sets forth the states in
which the Mortgaged Properties relating to the ARM Loans are located. See
"Risk Factors--The Mortgage Loans--Concentration."
SUB-POOL II--GEOGRAPHIC DISTRIBUTION OF ARM LOANS
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF AGGREGATE INFORMATION DATE
ARM INFORMATION SUB-POOL II
STATE LOANS DATE BALANCE BALANCE
- ----- --------- ------------ ----------------
<S> <C> <C> <C>
</TABLE>
- --------
* No other single state includes Mortgaged Properties securing more than [ ]%
of the ARM Loans.
The following table sets forth the property type of the Mortgaged Properties
in Sub-Pool II as of the Information Date. See "Risk Factors--The Mortgage
Loans--Nature of the Mortgaged Properties."
SUB-POOL II--PROPERTY TYPE
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF AGGREGATE INFORMATION DATE
ARM INFORMATION SUB-POOL II
PROPERTY TYPE LOANS DATE BALANCE BALANCE
- ------------- --------- ------------ ----------------
<S> <C> <C> <C>
</TABLE>
The following table sets forth the delinquency status of the ARM Loans as of
the Information Date.
SUB-POOL II--DELINQUENCY STATUS AS OF THE INFORMATION DATE
<TABLE>
<CAPTION>
DELINQUENT
SCHEDULED PAYMENTS
PERCENT OF AGGREGATE AMOUNT AS A PERCENT
NUMBER OF AGGREGATE INFORMATION DATE OF DELINQUENT OF INFORMATION DATE
ARM INFORMATION SUB-POOL II SCHEDULED SUB-POOL II
DELINQUENCY STATUS LOANS DATE BALANCE BALANCE PAYMENTS BALANCE
- ------------------ --------- ------------ ---------------- ---------------- -------------------
<S> <C> <C> <C> <C> <C>
</TABLE>
- --------
* Delinquencies are measured from the stated due date, exclusive of any
applicable grace periods.
50
<PAGE>
The following table sets forth the lien position of the ARM Loans as of the
Information Date.
SUB-POOL II--LIEN POSITION OF THE ARM LOANS
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF AGGREGATE INFORMATION DATE
ARM INFORMATION SUB-POOL II
LIEN POSITION LOANS DATE BALANCE BALANCE
- ------------- --------- ------------ ----------------
<S> <C> <C> <C>
</TABLE>
LOANS-TO-FACILITATE
General. Approximately [ ]% of the Fixed Rate Loans and approximately [ ]%
of the ARM Loans have been originated by the Mortgage Loan Seller, in its
capacity as receiver of one or more Depository Institutions (such Mortgage
Loans, "Loans-to-Facilitate"). The Loans-to-Facilitate program is intended to
assist the Mortgage Loan Seller in its sale of commercial properties that the
Mortgage Loan Seller deems not readily marketable due to a lack of available
commercial financing and for which the Mortgage Loan Seller believes financing
by it will result in a higher net present value to it than other alternatives,
such as a cash sale or a deferral of sale. Loans-to-Facilitate are originated
pursuant to a uniform system of procedures, policies, forms and underwriting
guidelines applicable to its origination of Loans-to-Facilitate (the
"Guidelines"). The program goals include (i) increasing the net present value
of the return to the Mortgage Loan Seller from disposition of the property,
(ii) accelerating the sale of such properties, (iii) achieving consistent
Mortgage Loan Seller financing policies, (iv) delegating to the private sector
underwriting and servicing functions and (v) establishing a clear separation
of underwriting and selling responsibilities to prevent potential conflicts of
interest. Accordingly, the Guidelines may not necessarily correspond to
underwriting standards investors might expect to be applied by traditional
mortgage loan originators.
Underwriting. The Mortgage Loan Seller retains an approved private sector
contract underwriter to evaluate offers made by prospective purchasers for
foreclosed properties who request seller financing. The underwriter makes a
written recommendation as to whether a Loan-to-Facilitate should be made to
assist in the sale of the related property. The ultimate decision, however,
whether to approve the proposed financing is made by the Mortgage Loan Seller.
The underwriter evaluates (i) the adequacy of the property's net operating
income to service the required payment schedule of the proposed mortgage loan
(including "most likely" and "worst case" estimates of projected cash flows)
and (ii) the prior experience of the purchaser with respect to owning and
managing properties similar to the subject property. The underwriting process
concludes with the submission by the underwriter to the Mortgage Loan Seller
of its written recommendation in which the underwriter summarizes the
information obtained during the underwriting process and provides a positive
or negative recommendation as to whether the proposed mortgage loan should be
approved in accordance with the Guidelines. The Mortgage Loan Seller does not
dictate to the underwriter the specific factors that such underwriter should
consider in making its recommendation on whether or not to make the proposed
loan.
The factors assigned the greatest importance by the Mortgage Loan Seller and
its underwriters in evaluating a proposed mortgage loan are discussed below.
Strict compliance with the Guidelines is not necessarily a condition to the
Mortgage Loan Seller's approval of a proposed mortgage loan. In some cases, a
loan is made even with a negative recommendation from the underwriter.
51
<PAGE>
Financing Terms--General. Interest must be paid monthly, without negative
amortization, generally at a fixed rate, determined from time to time by the
Mortgage Loan Seller depending, in part, upon the amount financed. Generally,
the mortgage rate on each mortgage loan is set at 3.00% to 4.00% over the
average yield on U.S. Treasury securities adjusted to a constant maturity of
seven years or ten years, as determined by the Federal Reserve Board and
published in its Statistical Release H.15 (519) under the heading "Treasury
Constant Maturities." Payments must be calculated on a level-payment 30-year
amortization schedule, unless otherwise requested by the borrower and
offsetting factors developed through the underwriting process justify
different terms. Each mortgage loan maturity typically has a stated maturity
of ten years. Certain of the Loans-to-Facilitate provide for payment of
premiums in connection with certain prepayments. Escrows for taxes, reserves
for replacements and hazard insurance premiums are normally funded through
borrower payments. Loans-to-Facilitate are non-recourse, non-assumable and
generally contain due-on-sale and due-on-encumbrance clauses. The Guidelines
establish a minimum cash payment of not less than 25% of the purchase price
for each property.
Supplemental Information. Financial information on the property is obtained
to facilitate an analysis of the projected cash flow of the subject property.
Such financial information is derived from current rent rolls and lease
schedules, current and, if available, historical income and expense statements
for such property, information obtained in appraisal reports and pro forma
operating statements or land development projections provided by the
purchaser. In addition, the underwriter obtains resumes of management
experience and general business of the purchasing entity, and environmental
information with respect to the property. Also, each mortgage loan requires
that the related borrower provide to the Mortgage Loan Seller, on a semi-
annual basis, unaudited financial statements, operating statements, profit and
loss statements and balance sheets with respect to the related property.
Appraisals. Appraisals are generally obtained within 6 to 12 months prior to
the sale of the related property. Information obtained from the appraisal is
considered in connection with the market analysis, net operating income
projections and expense analysis performed by the underwriters with respect to
the subject property.
ASSIGNMENT OF THE MORTGAGE LOANS
In connection with the assignment by the Mortgage Loan Seller of the
Mortgage Loans to the Trustee for the benefit of the Certificateholders, the
Mortgage Loan Seller will deliver to the Trustee the following documents with
respect to each Mortgage Loan (collectively, as to each Mortgage Loan, the
"Mortgage File"):
(i) the original Mortgage Note or a copy thereof, endorsed by the
Mortgage Loan Seller, without recourse, to the order of State Street Bank
and Trust Company, as Trustee for the registered holders of FDIC REMIC
Trust 1996-C1, Commercial Mortgage Pass-Through Certificates, Series 1996-
C1;
(ii) the original Mortgage or a certified copy thereof, with evidence of
recording indicated thereon;
(iii) originals or certified copies of the related assignment of leases,
rents and profits (the "Assignment of Leases and Rents") and any related
security agreement (if, in either case, such item is a document separate
from the Mortgage), any related UCC Financing Statements (including the
assignments of any such UCC Financing Statements to the Trustee), in each
case with evidence of recording indicated thereon;
(iv) an assignment of the Mortgage and of the related Assignment of
Leases and Rents and any related Security Agreement, to State Street Bank
and Trust Company, as Trustee for the registered holders of FDIC REMIC
Trust 1996-C1, Commercial Mortgage Pass-Through Certificates, Series 1996-
C1, in recordable form;
(v) an assignment of other documents executed in connection with the
Mortgage Loan, to State Street Bank and Trust Company, as Trustee for the
registered holders of FDIC REMIC Trust 1996-C1, Commercial Mortgage Pass-
Through Certificates, Series 1996-C1;
(vi) originals or certified copies of all assumption, modification and
substitution agreements in those instances where the terms or provisions of
the Mortgage or Mortgage Note have been modified or the Mortgage or
Mortgage Note has been assumed;
52
<PAGE>
(vii) the originals or certificates of a lender's title insurance policy
issued on the date of the origination of such Mortgage Loan together with
each endorsement thereto or, with respect to each Mortgage Loan not covered
by a lender's title insurance policy, an attorney's opinion of title issued
as of the date of origination of such Mortgage Loan given by an attorney
licensed to practice law in the jurisdiction where the related Mortgaged
Property is located; and
(viii) any additional documents required to be added to the Mortgage File
pursuant to the Pooling and Servicing Agreement.
The Trustee will be required to review or cause to be reviewed each Mortgage
File and will be required to certify pursuant to the Pooling and Servicing
Agreement (a) on the Closing Date as to the receipt by or on behalf of the
Trustee of the Mortgage Note for each Mortgage Loan, (b) within 45 days of the
Closing Date as to the receipt by or on behalf of the Trustee of the documents
described in clauses (i) through (vii) of the definition of Mortgage File (the
"Interim Certification") and (c) within one year of the Closing Date as to the
receipt by or on behalf of the Trustee of the documents described in clauses
(i) through (vii) of the definition of Mortgage File to the extent not
received as of the date of the Interim Certification. If, in the process of
reviewing the Mortgage Files, the Trustee finds any document constituting a
part of a Mortgage File to have not been properly executed, or to be missing
or to be defective on its face in any material respect (each, a "Defect" in
the related Mortgage File), the Trustee shall promptly so notify the Servicer,
the Mortgage Loan Seller and the FDIC. The remedies available to the
Certificateholders in connection with a Defect in the Mortgage File are set
forth below Under "--Representations and Warranties; Remedies."
The Pooling and Servicing Agreement will require the Mortgage Loan Seller
promptly (and in any event within 45 days of the Closing Date) to cause each
assignment of a Mortgage described above and each assignment of an Assignment
of Leases and Rents described above to be submitted for recording in the real
property records of the jurisdiction in which the related Mortgaged Property
is located except in states where, in the written opinion of local counsel
acceptable to the Mortgage Loan Seller and the Trustee, such recordation is
not required to protect the Trustee's interests in the related Mortgage Loans
against sale, further assignment, satisfaction or discharge by the Mortgage
Loan Seller, the Servicer or any sub-servicers.
REPRESENTATIONS AND WARRANTIES; REMEDIES
In the Pooling and Servicing Agreement, the FDIC will represent and warrant
to the Servicer and the Trustee for the benefit of the Certificateholders,
among other things, that: (i) the information set forth in the Mortgage Loan
Schedule (including, without limitation, with respect to each Mortgage Loan,
the Cut-off Date Balance, Maturity Date and whether such Mortgage Loan is an
ARM Loan or a Fixed Rate Loan; with respect to each ARM Loan, the Index,
Margin, Mortgage Rate Adjustment Date frequency and Payment Adjustment Date
frequency; and with respect to each Fixed Rate Loan, the Mortgage Rate)
attached to the Pooling and Servicing Agreement is correct in all material
respects; (ii) immediately prior to the sale and assignment of the Mortgage
Loans to the Trustee, the Mortgage Loan Seller was the sole owner and holder
of each Mortgage Loan, the Mortgage Loan Seller has authority to sell each
such Mortgage Loan and the Mortgage Loan Seller is transferring each such
Mortgage Loan free and clear of liens; (iii) each Mortgage Loan is covered by
a title insurance policy and each such policy is in full force and effect, or
with respect to each Mortgage Loan not covered by a title insurance policy,
there exists an attorney's opinion of title; (iv) as of the Closing Date, each
Mortgage constituted a valid first lien (or in the case of certain of the
Mortgage Loans, a Junior Lien) on the related Mortgaged Property (subject only
to (a) the lien of current real property taxes and assessments not yet due
(and, in the case of a Junior Lien, the applicable senior lien or liens), (b)
covenants, conditions, and restrictions, rights of way, easements, and other
matters of public record as of the date of the recording of such Mortgage,
such exceptions appearing of record and either being acceptable to mortgage
lending institutions generally or specifically referred to in the related
title insurance policy or title opinion and which do not materially and
adversely affect the value of the Mortgaged Property, and (c) other matters to
which like properties are commonly subject that do not materially interfere
with the benefits of the security intended to be provided by the Mortgage);
(v) all taxes and governmental assessments that became due and owing prior to
the Closing Date in respect of the related
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Mortgaged Property have been paid or an escrow of funds in an amount
sufficient to cover such payments has been established; (vi) with respect to
each Mortgage Loan as of the Cut-off Date, all Scheduled Payments due on or
before the Cut-off Date have been made, except as otherwise indicated on the
Mortgage Loan Schedule; (vii) as of the Closing Date, no Mortgaged Property is
affected by a Disqualifying Condition (as defined below); (viii) there is no
proceeding pending for the total or partial condemnation of any Mortgaged
Property; (ix) as of the Closing Date, each Mortgaged Property is insured by a
fire and extended perils insurance policy issued by a "qualified insurer" (as
defined in the Pooling and Servicing Agreement); (x) each Mortgage Note or the
related Mortgage contains customary and enforceable provisions such as to
render the rights and remedies of the holder thereof adequate for the
realization against the Mortgaged Property of the benefits of the security;
(xi) with respect to any Mortgage Loan that is secured in whole or in part by
the interest of a borrower under a ground lease of a Mortgaged Property, among
other things, such ground lease (a) permits the encumbrance of the related
Mortgage and is in full force and effect and (b) has an original term
(including any extension option) which extends not less than ten years beyond
the stated term of the related Mortgage Loan; (xii) with respect to each
Mortgage Loan, the servicing practices used by the related originator and the
related Depository Institution were legal and prudent and met customary
standards utilized by prudent institutional mortgage lenders; and (xiii) each
Mortgage Loan is a "qualified mortgage" in accordance with the REMIC
provisions of the Code. See "Certain Federal Income Tax Consequences."
A "Disqualifying Condition" is defined generally as a condition, existing as
a result of, or arising from, the presence of "Hazardous Materials" on a
Mortgaged Property, such that the Mortgage Loan secured by the affected
Mortgaged Property would be ineligible, solely by reason of such condition,
for purchase by FNMA under the relevant provisions of FNMA's Multifamily
Seller/Servicer Guide in effect as of the Closing Date, including a condition
that would constitute a material violation of applicable federal, state or
local law in effect as of the Closing Date.
Upon the discovery or notice of either (x) a breach of any of such
representations or warranties (other than the representations and warranties
described in clause (i) of the second preceding paragraph (with respect only
to the provisions of the Mortgage Loan Schedule described in the next
succeeding paragraph), clause (vii) of the second preceding paragraph (with
respect to Disqualifying Conditions), clause (xi)(b) of the second preceding
paragraph (with respect to ground lease terms) and clause (xiii) of the second
preceding paragraph (with respect to REMIC provisions)) that materially and
adversely affects the interests of the Certificateholders, or (y) a Defect in
any Mortgage File, and if, as more fully set forth in the Pooling and
Servicing Agreement, there is a connection between any loss incurred and the
breached representation or warranty or Defect, as the case may be, the FDIC
will either cure the breach, indemnify the Trust Fund against loss or, at the
FDIC's option, repurchase at a price generally equal to the outstanding
principal balance of such Mortgage Loan plus accrued interest and certain
unreimbursed fees and expenses of the Servicer (the "Purchase Price") or
substitute for the related Mortgage Loan in the circumstances described below.
For purposes of the foregoing, a breach of any such representation shall
conclusively be deemed to materially and adversely affect the interests of the
Certificateholders only if a loss or expense is incurred with respect to a
Mortgage Loan. To the extent of any such indemnification payments made by the
FDIC, the FDIC will be subrogated to the rights of the Trust Fund to any
amounts recovered on the related Mortgage Loan in excess of the principal
balance of such Mortgage Loan together with accrued and unpaid interest
thereon at the applicable Mortgage Rate, as described in the Pooling and
Servicing Agreement. In the event that any litigation is commenced in which
facts are alleged that, in the judgment of the FDIC, could constitute a breach
of any of the FDIC's representations and warranties relating to the Mortgage
Loans, the FDIC has reserved the right, under the Pooling and Servicing
Agreement, to conduct the defense of such litigation at its expense.
In the event of a breach of the representation and warranty described in
clause (vii) of the fourth preceding paragraph (with respect to Disqualifying
Conditions), the FDIC will, at the request of the Servicer, either cure such
Disqualifying Condition within 90 days of the FDIC's receipt of notice of such
request or repurchase or substitute for the affected Mortgage Loan, provided
that (i) the Mortgage Loan is at least 60 days delinquent and the Servicer has
not completed foreclosure proceedings or accepted a deed in lieu of
foreclosure, (ii) the Servicer
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has delivered to the FDIC a phase I environmental site assessment meeting the
requirements of the FNMA Multifamily Seller/Servicer Guide and indicating the
presence of a Disqualifying Condition and (iii) the Servicer shall have
provided a written certification to the FDIC to the effect that it has acted
in compliance with the Servicing Standard and has not, by any action, created,
caused or contributed to, a Disqualifying Condition. In the event of a breach
of the representation and warranty described in clause (xi)(b) of the third
preceding paragraph (with respect to ground lease terms), if such breach would
result in the related Mortgage Loan failing to meet the conditions and
requirements for inclusion in a trust set forth in the Exemption (see "ERISA
Considerations") or in the event of a breach of the representation and
warranty described in clause (xiii) of the third preceding paragraph (with
respect to REMIC provisions), the FDIC will either cure such breach or
repurchase or substitute for the Mortgage Loan within 90 days of discovery of
such breach.
The FDIC will also represent and warrant that, as of the Closing Date, it
has no intention to foreclose on the Mortgaged Property securing any Mortgage
Loan and has no knowledge that any Mortgage Loan will not be paid in full.
With respect to any Mortgage Loan as to which the FDIC has breached such
representation and warranty, on or prior to the date on which the Trust Fund
would otherwise acquire the related Mortgaged Property by foreclosure or deed
in lieu of foreclosure, the FDIC will repurchase such Mortgage Loan, unless in
the case of any such loan that is in default on the Closing Date the FDIC has
provided the Trustee with an opinion of counsel that such Mortgaged Property
would qualify as "foreclosure property" within the meaning of Section
860G(a)(8) of the Code. The obligations of the FDIC described above in
connection with representations and warranties constitute the sole remedies
available to the Certificateholders or the Trustee for any such breach
thereof. See "Risk Factors--The Mortgage Loans--Troubled Originators" and "--
Limited Information."
If the FDIC discovers or receives notice of any breach of its
representations or warranties with respect to a Mortgage Loan, the FDIC may,
at its option, rather than make an indemnification payment with respect to, or
repurchase, such Mortgage Loan as provided above, remove such Mortgage Loan
from the related Sub-Pool (each removed Mortgage Loan, a "Deleted Mortgage
Loan") and substitute in its place one or more Mortgage Loans (each
substituted Mortgage Loan, a "Substitute Mortgage Loan"), but only if such
substitution is effected within two years of the Closing Date. Any Substitute
Mortgage Loan will, on the date of substitution, among other things, (i) have
an outstanding principal balance, after deduction of all scheduled payments
due in the month of substitution, of not more than the Scheduled Principal
Balance of the Deleted Mortgage Loan as of the date of substitution (the
obligation of the FDIC in respect of a shortfall resulting from the
substitution of a Mortgage Loan with a smaller principal balance is described
below), (ii)(A) in the case of a Substitute Mortgage Loan that is an ARM Loan,
(1) have the same Index as the Index on the Deleted Mortgage Loan, a LIBOR
Index or The Wall Street Journal Prime Rate, (2) have a Gross Margin not less
than the Gross Margin on the Deleted Mortgage Loan, (3) if applicable, have a
maximum Mortgage Rate and minimum Mortgage Rate not less than the maximum
Mortgage Rate and minimum Mortgage Rate, respectively, on the Deleted Mortgage
Loan, (4) provide for Scheduled Payment adjustments to occur not less
frequently than on the Deleted Mortgage Loan, (5) provide for Mortgage Rate
adjustments to occur not less frequently than on a Deleted Mortgage Loan and
(6) not permit negative amortization unless the Deleted Mortgage Loan permits
negative amortization and (B) in the case of a Substitute Mortgage Loan that
is a Fixed Rate Loan, have a Mortgage Rate not less than the Mortgage Rate of
the Deleted Mortgage Loan, (iii) have a remaining term to maturity not later
than the earlier of the Deleted Mortgage Loan and the latest maturity
permitted if such Substitute Mortgage Loan were subject to the modification
standards described under "Servicing of the Mortgage Loans Modifications,
Waivers and Amendments," (iv) comply with all of the representations and
warranties set forth in the Pooling and Servicing Agreement as of the date of
substitution and (v) otherwise be acceptable to each Rating Agency.
In connection with any substitution, an amount equal to the excess, if any,
of the Purchase Price of the Deleted Mortgage Loan over the outstanding
principal balance of the Substitute Mortgage Loan (after deduction of all
scheduled payments due in the month of substitution), together with one
month's interest at the applicable Mortgage Rate on such balance, will be
delivered by the FDIC to the Servicer for deposit in the applicable Collection
Account and distribution to the holders of Certificates evidencing an interest
in the applicable
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Sub-Pool on the first Distribution Date following the Due Period in which the
substitution occurred. In the event that one or more mortgage loans are
substituted for one or more Deleted Mortgage Loans, then the amounts described
in clause (i) will be determined on the basis of aggregate principal balances.
In any case in which the FDIC may select a remedy for a Defect or for a
breach of representation or warranty, it is under no obligation to consider
the ramifications of such selection to Certificateholders generally or to the
holders of Certificates of any particular class.
SERVICING OF THE MORTGAGE LOANS
GENERAL
The Servicer will be required to service and administer the Mortgage Loans,
either directly or through sub-servicers, on behalf of the Trustee and in the
best interests of and for the benefit of the FDIC and the Certificateholders
(as determined by the Servicer in its good faith and reasonable judgment,
without taking into account differing payment priorities among the classes of
Certificates), in accordance with applicable law, the terms of the Pooling and
Servicing Agreement, the terms of the respective Mortgage Loans and, to the
extent consistent with the foregoing, in the same manner in which, and with
the same care, prudence and diligence with which it services and administers
commercial mortgage loans for other portfolios, giving due consideration to
the customary and usual standards of practice prudent institutional mortgage
lenders and loan servicers utilize with respect to mortgage loans comparable
to the Mortgage Loans and with respect to transactions similar to that
contemplated by the Pooling and Servicing Agreement, and with the objective of
maximization of the present value of net cash flows generated from the
Mortgage Loans and REO Properties, but without regard to: (i) any relationship
that the Servicer or any affiliate of the Servicer may have with the related
mortgagor; (ii) the ownership of any Certificate by the Servicer or any
affiliate of the Servicer; (iii) the Servicer's obligation to make P&I
Advances and Servicing Advances; (iv) the Servicer's right to receive
compensation for its services under the Pooling and Servicing Agreement or
with respect to any particular transaction; and (v) the ownership or servicing
or management by the Servicer for others of any other mortgage loans or
properties (the "Servicing Standard").
Set forth below, following the subsection captioned "The Servicer," is a
description of certain pertinent provisions of the Pooling and Servicing
Agreement relating to the servicing of the Mortgage Loans. Reference is also
made to the section captioned "Description of the Pooling and Servicing
Agreement" for important information in addition to that set forth herein
regarding the terms and conditions of the Pooling and Servicing Agreement as
they relate to the rights and obligations of the Servicer thereunder.
THE SERVICER
Banc One Management and Consulting Corporation (the "Servicer") will be
responsible for servicing the Mortgage Loans. The Servicer has been servicing
the Mortgage Loans on behalf of the Mortgage Loan Seller since October 1993.
The Servicer is a wholly-owned subsidiary of BANC ONE CORPORATION. Its
principal executive offices are located at 1717 Main Street, Dallas, Texas
75201. BANC ONE CORPORATION is a bank holding company with bank subsidiaries
in several states, as well as non-bank subsidiaries engaged in mortgage
banking, finance, leasing and other related businesses. BANC ONE CORPORATION's
bank and non-bank subsidiaries engage in lending and related activities in a
substantial part of the United States. To the extent that assets owned,
managed and/or serviced by the Servicer or its affiliates are of a type
similar to the Mortgaged Properties, such assets might, depending upon the
particular circumstances (including, for example, the location of such
assets), compete with Mortgaged Properties for tenants, purchasers, financing
and the like.
The Servicer and its affiliates are engaged in servicing, asset management,
collection, liquidation, asset valuation, consulting and related activities
with non-affiliated companies and governmental entities, including
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the FDIC. The Servicer or its affiliates have operating offices in Dallas and
Houston, Texas and Manchester, New Hampshire.
As of September 30, 1996 the Servicer or its affiliates were responsible for
managing and servicing over [ ] assets, consisting of mortgage loans, real
estate owned and other assets with a total book value in excess of $[ ]
billion. Loan concentrations within the approximate $[ ] billion loan
portfolio included office buildings, retail centers, multifamily projects and
single family residences. Real estate owned assets under management
approximated $[ ] million, with significant concentrations in land, office
buildings and retail centers.
The information set forth herein concerning the Servicer has been provided
by the Servicer, and neither the FDIC, the Mortgage Loan Seller nor the
Trustee makes any representation or warranty as to the accuracy or
completeness of such information. The information set forth above should not
be considered to reflect the credit quality of the Mortgage Loans or as a
basis for assessing the likelihood, amount or severity of losses on the
Mortgage Loans. Such information is included only as an indication of the
experience of the Servicer. There can be no assurance that the default,
delinquency and loss experience of the Servicer will be representative of the
results that may be experienced with respect to the Mortgage Loans.
COLLECTION AND OTHER SERVICING PROCEDURES
The Servicer, directly or through Sub-Servicers, will be required to make
reasonable efforts to collect all payments under the Mortgage Loans, and will
be required to follow such collection procedures as it would follow with
respect to mortgage loans if it held such mortgage loans for its own account,
provided such procedures arc consistent with the Servicing Standard.
The Pooling and Servicing Agreement will require the Servicer to establish
and maintain the Collection Account with respect to each Sub-Pool and the REO
Account, as described under "Description of the Pooling and Servicing
Agreement--Accounts." The Servicer will be required to deposit into the
Collection Account for each Sub-Pool all payments received in respect of the
Mortgage Loans in such Sub-Pool including, without limitation, all Scheduled
Payments, all Assumed Scheduled Payments, all proceeds of hazard and any other
insurance policies maintained in respect of each Mortgaged Property securing a
Mortgage Loan in such Sub-Pool (to the extent such proceeds are not applied to
the restoration of the related Mortgaged Property or released to the borrower
in accordance with the normal servicing procedures of the Servicer and the
terms and conditions of the related Mortgage) (collectively, "Insurance
Proceeds") and all other amounts received and retained in connection with the
condemnation or liquidation of defaulted Mortgage Loans in such Sub-Pool by
foreclosure or otherwise (collectively, "Liquidation Proceeds"). With respect
to any Mortgage Loans as to which the Servicer has, directly or through its
own agents or independent contractors, taken over possession and management of
the underlying Mortgaged Property on behalf of the Trust Fund, whether through
foreclosure or deed in lieu of foreclosure, upon abandonment of the Mortgaged
Property by the borrower or otherwise, all payments on or other receipts with
respect to such Mortgage Loan or the related Mortgaged Property (each, an "REO
Property") (including, among other things, rent, all Liquidation Proceeds and
Insurance Proceeds) will be deposited in the REO Account. No later than the
business day immediately preceding each Distribution Date (with respect to
each Distribution Date, the "P&I Advance Date"), the portion of the foregoing
amounts on deposit in the Collection Account and the REO Account with respect
to the applicable Sub-Pool that constitute the Available Distribution Amount
for such Sub-Pool for such Distribution Date will be remitted to the Trustee
for deposit in the Distribution Account for such Sub-Pool.
The Pooling and Servicing Agreement also will require the Servicer to
establish and maintain one or more escrow accounts (collectively, the "Escrow
Account") to which the Servicer will be required to deposit amounts received
from each borrower, if required by the terms of the related Mortgage Note, for
the payment of taxes, assessments, certain hazard and other insurance premiums
and other comparable items. Withdrawals from the Escrow Account may be made to
effect timely payment of taxes, assessments, hazard and certain other
insurance
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premiums, to refund to borrowers amounts determined to be overages, to remove
amounts deposited therein in error, to pay interest to borrowers on balances
in the Escrow Account, if required, to repair or otherwise protect the
Mortgaged Properties and to clear and terminate such account. The Servicer
will be responsible for the administration of the Escrow Account and will be
entitled to all income on the funds therein not required to be paid to
borrowers under applicable law. If amounts on deposit in the Escrow Account
are insufficient to pay any tax, insurance premium or other similar item when
due, the Servicer will advance such item only to the extent that such advance
will be, in its judgment, reasonably recoverable from the related REO Property
or Mortgage Loan proceeds or payments. The Servicer will be entitled to
reimbursement of any such Servicing Advance in the same manner as a P&I
Advance. See "Description of the Certificates--P&I Advances."
The Servicer, directly or through Sub-Servicers, will also be required to
perform as to the Mortgage Loans various other customary functions of a
servicer of comparable loans, including maintaining escrow or impound
accounts, or otherwise monitoring the timely payment of items customarily
escrowed; attempting to collect delinquent payments; supervising foreclosures;
negotiating modifications; conducting property inspections on a periodic or
other basis; managing (or overseeing the management of) REO Properties; and
maintaining servicing records relating to the Mortgage Loans.
The Servicer is also responsible for calculating adjustments in the Mortgage
Rate and the Scheduled Payment for each ARM Loan and for notifying the related
borrower of such adjustments. If the base index for any ARM Loan is not
published or is otherwise unavailable and the related Mortgage Rate provides
for no alternative Index, then the Servicer will select the highest prime
lending rate as published from time to time in the "Money Rates" section of
The Wall Street Journal ("The Wall Street Journal Prime Rate"). If the
Mortgage Rate or the Scheduled Payment with respect to any ARM Loan is not
properly adjusted following the Cut-off Date by the Servicer pursuant to the
terms of such Mortgage Loan and applicable law, the Servicer is required to
deposit (to the extent not required to be deposited by the FDIC as described
under "Description of the Mortgage Pool-Mortgage Loan Information--The ARM
Audits") from its own funds in the Collection Account for Sub-Pool II on or
prior to the Due Date of the affected Scheduled Payment, an amount equal to
the excess, if any, of (i) the amount that would have been payable by the
borrower if the Mortgage Rate or Scheduled Payment had been properly adjusted
over (ii) the amount of such improperly adjusted Scheduled Payment, subject to
reimbursement only out of such amounts as are recovered from the borrower in
respect of such excess.
SUB-SERVICERS
The Servicer may delegate its servicing obligations in respect of the
Mortgage Loans serviced thereby to one or more third-party servicers, subject
to certain conditions set forth in the Pooling and Servicing Agreement (each,
a "Sub-Servicer"); provided that the Servicer will remain obligated under the
Pooling and Servicing Agreement. A Sub-Servicer may be an affiliate of the
Servicer. Each sub-servicing agreement between the Servicer and a Sub-Servicer
(a "Sub-Servicing Agreement") will provide that, if for any reason the
Servicer is no longer acting in such capacity, the Trustee or any successor
Servicer may assume the Servicer's rights and obligations under such Sub-
Servicing Agreement. The Servicer will be required to monitor the performance
of Sub-Servicers retained by it and will have the right to remove a Sub-
Servicer retained by it at any time it considers such removal to be in the
best interests of Certificateholders and FDIC.
The Servicer will be solely liable for all fees owed by it to any Sub-
Servicer, irrespective of whether the Servicer's compensation pursuant to the
Pooling and Servicing Agreement is sufficient to pay such fees. Each Sub-
Servicer will be reimbursed by the Servicer for certain expenditures that it
makes, generally to the same extent the Servicer would be reimbursed under the
Pooling and Servicing Agreement.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
The principal compensation to be paid to the Servicer in respect of its
servicing activities will be the Servicing Fee. The "Servicing Fee" will be
payable monthly on a loan-by-loan basis from amounts received in respect of
interest on each Mortgage Loan and, in the case of an REO Loan, from revenues
generated by the
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related REO Property, will accrue in accordance with the terms of the related
Mortgage Note at a per annum rate (the "Servicing Fee Rate") and will be
computed on the basis of the same principal amount and for the same period
respecting which any related interest payment on the related Mortgage Loan, or
deemed payable on the REO Loan, is computed. The rate at which the Servicing
Fee is calculated is intended to provide a direct incentive to the Servicer to
minimize the delinquency status of the Mortgage Pool. As a result, the
Servicing Fee Rate will be subject to adjustment on each Determination Date
based upon the percentage of the Mortgage Pool by aggregate principal balance
(exclusive of REO Properties) that is 61 days or more delinquent (a
"Delinquent Mortgage Loan") in respect of Scheduled Payments as of the
Determination Date following the most recently completed Due Period. Any
Matured Performing Mortgage Loan that is not modified within 120 days of its
original maturity date (or, in the case of a Balloon Loan that is a Matured
Performing Mortgage Loan as of the Cut-off Date, within 120 days of the
Closing Date) will be deemed to be 61 or more days delinquent for purposes of
determining the Servicing Fee Rate.
The Servicing Fee Rate will be the following annual percentages of the
aggregate principal balance of the Mortgage Loans: (i) 0.17%, if the balance
of Delinquent Mortgage Loans does not equal or exceed 5% of the aggregate
principal balance of all Mortgage Loans, (ii) 0.15%, if the principal balance
of Delinquent Mortgage Loans does not exceed 7% of the aggregate principal
balance of all Mortgage Loans and (iii) 0.13%, if the principal balance of
Delinquent Mortgage Loans exceeds 7% of the aggregate principal balance of all
Mortgage Loans.
As further compensation for its servicing activities, the Servicer will also
be entitled to receive (i) a Liquidation Fee in connection with the sale to an
unaffiliated person of (or overseeing the sale of) any REO Property or any
Mortgage Loan that has been delinquent for a period specified in the Pooling
and Servicing Agreement, payable out of related sales proceeds, (ii) a
Modification Fee in connection with the modification of a defaulted Mortgage
Loan (or as to which default is reasonably foreseeable) and (iii) in addition
to a Modification Fee, a Resolution Fee in connection with the modification
during the Resolution Period of a defaulted Mortgage Loan (or as to which
default is reasonably foreseeable). The "Liquidation Fee" in respect of any
defaulted Mortgage Loan or REO Property is payable to the Servicer upon
disposition of the Mortgage Loan or REO Property and shall be calculated in
the following manner: in an amount equal to 1.10% of the net sales proceeds
received from the sale of such REO Property or defaulted Mortgage Loan, as the
case may be, if such sale is completed within 12 months from the date on which
the Trust Fund acquired the defaulted Mortgage Loan or REO Property; provided,
however, that if such sale is completed during any subsequent six month
period, then the Liquidation Fee will be decreased by 5% of the Liquidation
Fee applicable in the immediately preceding period. Any shortfall in net
liquidation proceeds, including a shortfall attributable to payment of the
Liquidation Fee, will be covered by the Limited Guaranty, to the extent of the
applicable remaining coverage available thereunder. The "Modification Fee"
earned in connection with the modification of a Mortgage Loan will be limited
to the extent of collections from the related mortgagor, but in no event will
exceed 1% of the outstanding principal balance of such Mortgage Loan. The
"Resolution Fee" payable in connection with the modification of a Mortgage
Loan during the Resolution Period, in addition to any Modification Fee then
payable by the borrower, will be equal to 1.10% of all amounts collected on
such Mortgage Loan, if such modification is completed within 12 months from
the date on which the Trust Fund acquired the Mortgage Loan; provided,
however, that if such modification is completed during any subsequent six
month period, then the Resolution Fee will be decreased by 5% of the
Resolution Fee applicable in the immediately preceding period. Any shortfall
in collections resulting from the modification of a Mortgage Loan, including a
shortfall attributable to payment of a Resolution Fee, will be covered by the
Limited Guaranty, to the extent of the applicable remaining coverage available
thereunder. The "Resolution Period" with respect to any Mortgage Loan, other
than a Matured Performing Mortgage Loan as of the Cut-off Date, commences
either on the 61st day following its maturity date or on the day the Mortgage
Loan becomes 61 days delinquent.
With respect to any Balloon Loan that is a Matured Performing Mortgage Loan
as of the Cut-off Date, no Resolution Fee is payable except with respect to
modifications occurring after the 121st day following the Closing Date.
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Additional servicing compensation in the form of assumption fees, late
payment charges, charges for beneficiary statements or demands and amounts
collected for checks returned for insufficient funds, will be retained by the
Servicer. The Servicer will also be entitled to withdraw from the Collection
Account, the Escrow Account and the REO Account, as additional servicing
compensation, interest or other income earned on deposit therein, as provided
in the Pooling and Servicing Agreement.
Subject to its right to be reimbursed for all P&I Advances and Servicing
Advances, the Servicer generally will be required to pay all other expenses
incurred by it in connection with its servicing activities under the Pooling
and Servicing Agreement (including, without limitation, the costs incurred in
connection with the maintenance of a fidelity bond and an errors and omissions
insurance policy with respect to its officers, employees and agents), and will
not be entitled to reimbursement therefor except as expressly provided in the
Pooling and Servicing Agreement. A "Servicing Advance" is any advance by the
Servicer in respect of customary, reasonable and necessary costs and expenses
incurred in connection with the protection and maintenance of the Mortgaged
Properties, including without limitation, advances in respect of property
taxes and insurance premiums, attorneys' and brokers' fees, foreclosure costs,
property maintenance expenses and senior liens. See "Description of the
Pooling and Servicing Agreement--Collection Account." Further, in the event
that the aggregate of the Prepayment Interest Shortfalls are greater than the
aggregate of the Prepayment Interest Excesses in respect of a particular Sub-
Pool for any Distribution Date, the Servicer will be required to deposit into
the Collection Account for such Sub-Pool (such deposit, a "Compensating
Interest Payment"), without any right of reimbursement therefor, an amount
equal to the allocable portion for such Sub-Pool (based upon the net
shortfalls, if any, for each Sub-Pool for such Distribution Date) of the
lesser of (i) the Servicing Fee with respect to both Sub-Pools for the
applicable period and (ii) an amount sufficient to eliminate such net
shortfall.
Compensating Interest Payments will not cover shortfalls in Mortgage Loan
interest accruals that result from any liquidation of a Mortgage Loan that
occurs during a Due Period prior to the related Due Date therein; however,
such shortfalls in respect of a Mortgage Loan in a particular Sub-Pool will be
covered by the Limited Guaranty to the extent of the applicable Available Sub-
Pool Coverage Amount and Excess Coverage Amount, if any. See "Description of
the Certificates--The Limited Guaranty."
MODIFICATIONS, WAIVERS AND AMENDMENTS
The Servicer may agree, subject to the terms and conditions set forth in the
Pooling and Servicing Agreement, INCLUDING WITHOUT LIMITATION THE CONSENT OF
THE FDIC FOR SO LONG AS THE LIMITED GUARANTY IS OUTSTANDING, to modify, waive
or amend any term of any Mortgage Loan in a manner consistent with the
Servicing Standard described herein, provided that such modification, waiver
or amendment will not (i) affect the status of any of the REMICs or cause any
tax to be imposed on the Trust Fund, (ii) affect the amount or timing of any
Scheduled Payment on such Mortgage Loan or (iii) materially impair the
security for the Mortgage Loan or reduce the likelihood of timely payment of
amounts due thereon. The Servicer also may agree, subject to the terms and
conditions set forth in the Pooling and Servicing Agreement, including without
limitation the consent of the FDIC for so long as the Limited Guaranty is
outstanding, to any modification, waiver or amendment that would so affect
payments on, or impair the security for, a Mortgage Loan if, in its reasonable
judgment, a material default on the Mortgage Loan has occurred or a payment
default is reasonably foreseeable; if the Limited Guaranty is no longer
outstanding, the right of the FDIC to consent to the foregoing action may be
exercised by the holders of majority of the outstanding principal amount of
the Offered Certificates of the class in Corresponding Sub-Pool having the
latest scheduled maturity date. In no event, however, may the Servicer extend
the maturity date of such Mortgage Loan to a date (the "Optimal Wind-Down
Date") later than the earliest of (i) one year prior to the applicable Final
Scheduled Distribution Date, (ii) if such Mortgage Loan is secured in whole or
in part by a Mortgage on a leasehold estate, the date occurring ten years
prior to the termination of such leasehold estate and (iii) five years
following the maturity date of such Mortgage Loan (or, with respect to a
Mortgage Loan that has previously been modified, the earlier of (x) five years
following the previous modification date and (y) the number of years to the
end of its original amortization term). Further, no such modification shall
result in a reduction of the Mortgage Rate on a Mortgage Loan either by more
than 2
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percentage points or for a period of more than 2 years. The right of the FDIC
(or a class of Certificates, as applicable) to withhold consent to a proposed
modification is applicable only to Mortgage Loans with Cut-off Date Balances
in excess of $400,000 and only to proposed modifications of provisions other
than maturity. Any such right must be exercised within 10 days of notice of
the proposed modification from the Servicer.
In connection with the extension of the maturity date on any Mortgage Loan,
subject to the sufficiency of net operating income of the related Mortgaged
Property, (i) in the case of a Fixed Rate Loan, the Servicer generally will
set the Mortgage Rate on the extended Fixed Rate Loan at a fixed rate of not
lower than the higher of (a) the weighted average of the Mortgage Rates of the
Mortgage Loans in Sub-Pool I as of the Cut-off Date and (b) the Mortgage Rate
for such Mortgage Loan and (ii) in the case of an ARM Loan, the Servicer
generally will (a) set the floor rate on the extended ARM Loan at not lower
than the higher of (1) the weighted average of the Mortgage Rates of the
Mortgage Loans in Sub-Pool II as of the Cut-off Date and (2) the then current
Mortgage Rate for such Mortgage Loan, (b) require the Mortgage Rate and
corresponding Scheduled Payment to adjust monthly, without negative
amortization; based either on LIBOR or The Wall Street Journal Prime Rate and
(c) require a Gross Margin equal to the Gross Margin of the ARM Loan plus the
shortfall, if any, between the Index value of the ARM Loan and the modified
Index value as of the date of the modification. To the extent that the net
operating income of the related Mortgaged Property (together with such other
sources of payment as the Servicer determines are acceptable therefor) is
sufficient to support Scheduled Payments that will amortize the Mortgage Loan
on a level payment basis to the rescheduled maturity date, the Servicer will
require that Scheduled Payments be made in such amounts. If the Servicer
determines that net operating income will not be so sufficient, the Servicer
will either agree to a schedule of Scheduled Payments that would fully
amortize the Mortgage Loan by the Optimal Wind-Down Date after providing for a
Balloon Payment at the rescheduled maturity date or reduce the Scheduled
Payments to a level that can be supported by net operating income (by reducing
the principal balance of the Mortgage Loan). Shortfalls in net collections on
Mortgage Loans attributable to modifications are covered by the Limited
Guaranty, to the extent described herein under "Description of the
Certificates--The Limited Guaranty."
The Servicer is required to undertake the prompt modification of Matured
Performing Mortgage Loans in accordance with the standards described above and
as more specifically provided in the Pooling and Servicing Agreement. Except
for certain extensions of maturity dates of Mortgage Loans that are Matured
Performing Mortgage Loans as of the Cut-off Date, the Servicer will not agree
to any modification, waiver or amendment of the payment terms of a defaulted
Mortgage Loan or a Mortgage Loan where a payment default is reasonably
foreseeable unless the Servicer has determined that such modification, waiver
or amendment is reasonably likely to produce a greater recovery on a present
value basis than liquidation of the Mortgage Loan.
The Servicer is required to notify the Trustee of any modification, waiver
or amendment of any term of any Mortgage Loan, and must deliver to the
Trustee, for deposit in the related Mortgage File, an original counterpart of
the agreement related to such modification, waiver or amendment, promptly
following the execution thereof. Copies of each agreement whereby any such
modification, waiver or amendment of any term of any Mortgage Loan is effected
are to be available for review during normal business hours at the offices of
the Servicer. See "Description of the Certificates--Reports to
Certificateholders; Certain Available Information."
REALIZATION UPON DEFAULTED MORTGAGE LOANS
If a default on a Mortgage Loan has occurred and is continuing, the
Servicer, on behalf of the Trustee, may at any time 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 Servicer may not, however,
acquire title to any Mortgaged Property, have a receiver of rents appointed
with respect to any Mortgaged Property or take any other action with respect
to any Mortgaged Property that would cause the FDIC, the Mortgage Loan Seller
or the Trustee, for the benefit of the Certificateholders, 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 the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as
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amended ("CERCLA") or any other comparable law, unless the Servicer has
previously determined, based on a report prepared by a person who regularly
conducts environmental audits, that:
(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 Risks."
The Servicer will be required to notify the FDIC and the Trustee, who will
notify the holders of the Corresponding Certificates, of the Servicer's
intended course of action to effect such compliance and/or respond to such
circumstances, and the Servicer will be permitted to take such proposed action
and acquire title to such Mortgaged Property only if (i) (A) the FDIC, in the
event that amounts remain available under the Limited Guaranty, or (B) in all
other cases, Certificateholders entitled to at least 51% of the Voting Rights
allocable to the Corresponding Certificates and (ii) the Trustee, have not
objected in writing within 30 days of such notification.
If title to any REO Property is acquired by the Trust Fund, the Servicer, on
behalf of the Trust Fund, will be required to sell the REO Property within two
years of acquisition, unless (i) the Internal 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 any of the REMICs
to fail to qualify as such under the Code at any time that any Certificate is
outstanding. Subject to the foregoing, the Servicer generally will be required
to solicit bids for any REO Property so acquired in such a manner as will be
reasonably likely to realize a fair price for such property. If the Trust Fund
acquires title to any REO Property, the Servicer, on behalf of the Trust Fund,
may retain an independent contractor to manage and operate such property. The
retention of an independent contractor, however, will not relieve the Servicer
of its obligation to manage such REO Property in a manner consistent with the
Servicing Standard.
To the extent that the amount of coverage available under the Limited
Guaranty has been exhausted, and 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 together
with the aggregate of amounts reimbursable to the Servicer and the FDIC with
respect to such Mortgage Loan, the applicable Sub-Pool will realize a loss in
the amount of such shortfall. Such shortfall will be allocated among the
various Corresponding classes of Certificates as described herein under
"Description of the Certificates--Subordination." See "Description of the
Certificates--The Limited Guaranty."
A borrower's failure to make required Scheduled 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 borrower that is unable to make Scheduled Payments also may be
unable to make timely payment of taxes and insurance premiums and to otherwise
maintain the related Mortgaged Property. In general, the Servicer will be
required to monitor any Mortgage 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 borrower 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 Servicer is able to assess the success of any such
corrective action or the need for additional initiatives.
The time within which the Servicer can make the initial determination of
appropriate action, evaluate the success of corrective action, develop
additional initiatives, institute foreclosure proceedings and actually
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foreclose (or accept a deed to a Mortgaged Property in lieu of foreclosure) on
behalf of the holders of the Corresponding Certificates may vary considerably
depending on the particular Mortgage Loan, the Mortgaged Property, the
borrower, the presence of an acceptable party to assume the Mortgage Loan and
the laws of the jurisdiction in which the Mortgaged Property is located. If a
borrower files a bankruptcy petition, the Servicer may not be permitted to
accelerate the maturity of the related Mortgage Loan or to foreclose on the
related Mortgaged Property for a considerable period of time, and such
Mortgage Loan may be restructured in the resulting bankruptcy proceedings. See
"Certain Legal Aspects of Mortgage Loans--Bankruptcy Laws."
HAZARD INSURANCE POLICIES
The Pooling and Servicing Agreement requires the Servicer to maintain or
cause each borrower to maintain, to the extent permitted by the related
Mortgage Loan, a fire and other hazard insurance policy that provides for such
coverage in an amount (less a reasonable deductible) equal to the lesser of
the principal balance owing on such Mortgage Loan and the replacement cost of
the related Mortgaged Property. All amounts collected by a Servicer under any
such policy (except for amounts to be applied to the restoration or repair of
the Mortgaged Property or released to the borrower in accordance with the
Servicer's normal servicing procedures and/or to the terms and conditions of
the related Mortgage and Mortgage Note) will be deposited in the Collection
Account for the applicable Sub-Pool. The Pooling and Servicing Agreement
provides that the Servicer may satisfy its obligation to cause each borrower
to maintain such a fire and other hazard insurance policy by maintaining a
blanket policy insuring against fire and other hazard losses on all of the
Mortgage Loans.
In general, the standard form of fire and extended coverage policy covers
physical damage to or destruction of the improvements of the property by fire,
lightning, explosion, smoke, windstorm and hail, and riot, strike and civil
commotion, subject to the conditions and exclusions specified in each policy.
Although the policies covering the Mortgaged Properties are underwritten by
different insurers under different state laws in accordance with different
applicable state forms, and therefore will not contain identical terms and
conditions, most such policies typically do not cover any physical damage
resulting from war, revolution, governmental actions, floods and other water-
related causes, earth movement (including earthquakes, landslides and
mudflows), wet or dry rot, vermin, domestic animals and certain other kinds of
risks. Accordingly, a Mortgaged Property may not be insured for losses arising
from any such cause unless the related Mortgage specifically requires, or
permits the holder thereof to require, such coverage.
Hazard insurance policies typically contain co-insurance clauses that in
effect require an 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 clauses generally provide that the insurer's liability in the event of
partial loss does not exceed the lesser of (i) the replacement cost of the
improvements less physical depreciation and (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.
In addition, to the extent required by the related Mortgage, the Servicer
may require the borrower to maintain other forms of insurance including, but
not limited to, loss of rents endorsements, business interruption insurance
and comprehensive public liability insurance, and the Pooling and Servicing
Agreement requires the Servicer to maintain public liability insurance with
respect to any REO Properties as the Servicer determines in accordance with
the Servicing Standard to be in the best interests of the Certificateholders
and the FDIC. Any cost incurred by the Servicer in maintaining any such
insurance policy will be added to the amount owing under the Mortgage Loan
where the terms of the Mortgage Loan so permit; provided, however, that the
addition of any such cost will not be taken into account for purposes of
calculating the distributions to be made to Certificateholders. Such costs may
be recovered by the Servicer as a Servicing Advance.
The Limited Guaranty will cover losses and other shortfalls attributable to
credit defaults on the Mortgage Loans in a particular Sub-Pool to the extent
of the applicable Available Sub-Pool Coverage Amount and the Excess Coverage
Amount, if any. No pool insurance policy, special hazard insurance policy,
bankruptcy bond, repurchase bond or certificate guarantee insurance will be
maintained with respect to the Mortgage Loans.
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FIDELITY BONDS AND ERRORS AND OMISSIONS INSURANCE
The Pooling and Servicing Agreement requires the Servicer to obtain and
maintain in effect a fidelity bond or similar form of insurance coverage
(which may provide blanket coverage) or any combination thereof insuring
against loss occasioned by fraud, theft, or other intentional misconduct of
the officers, employees and agents of the Servicer. The Pooling and Servicing
Agreement allows the Servicer to self-insure against loss occasioned by the
errors and omissions of the officers, employees and agents of the Servicer; so
long as certain criteria set forth in the Pooling and Servicing Agreement are
met.
DUE-ON-SALE AND DUE-ON-ENCUMBRANCE PROVISIONS
Certain of the Mortgage Loans contain a due-on-sale clause that entitles the
mortgagee to accelerate payment of the Mortgage Loan upon any sale or other
transfer of the related Mortgaged Property made without the mortgagee's
consent. Certain of the Mortgage Loans also contain a due-on-encumbrance
clause that entitles the mortgagee to accelerate the maturity of the Mortgage
Loan upon the creation of any other lien or encumbrance upon the Mortgaged
Property. The Servicer will determine whether to exercise any right the
Trustee may have under any such provision in a manner consistent with the
Servicing Standard. The 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--Due-on-Sale and Due-on-Encumbrance."
INSPECTIONS; COLLECTION OF OPERATING INFORMATION
The Servicer is required to perform a physical inspection of each Mortgaged
Property at such times and in such manner as are consistent with the Servicing
Standard, but in any event (i)(A) at least annually for each related Mortgage
Loan with an outstanding principal balance equal to at least $1,000,000 and
(B) at least bi-annually for each related Mortgage Loan with an outstanding
principal balance equal to at least $200,000 but less than $1,000,000 and (ii)
if any Scheduled Payment (other than any Balloon Payment due with respect to a
Matured Performing Mortgage Loan prior to the modification thereof) for such
Mortgage Loan becomes more than 60 days delinquent on the related Mortgage
Loan, as soon as practicable thereafter. The Servicer will be required to
prepare a written report of each such inspection describing the condition of
the Mortgaged Property and specifying the existence of any material vacancies
in the Mortgaged Property, of any sale, transfer or abandonment of the
Mortgaged Property, of any material change in the condition of the Mortgaged
Property, or of any material waste committed thereon.
The Pooling and Servicing Agreement also requires the Servicer to make
reasonable efforts to collect promptly from each borrower the annual operating
statements of the related Mortgaged Property to the extent permitted under the
terms of the related Mortgage Loan. The Pooling and Servicing Agreement
further requires the Servicer to (i) review all such items as may be
collected, (ii) prepare written reports based on such reviews identifying debt
service coverages for the Mortgage Loans and any extraordinary increases or
decreases in expenses or revenues associated with the related Mortgaged
Properties and (iii) deliver copies of such written reports to the Trustee.
However, there can be no assurance that any Mortgage Loans require the
delivery of operating statements, or that any operating statements required to
be delivered will in fact be delivered, nor is the Servicer likely to have any
practical means of compelling such delivery in the case of an otherwise
performing Mortgage Loan.
Copies of the most recent inspection reports and operating statements
referred to above are to be available for review by Certificateholders during
normal business hours at the offices of the Trustee. See "Description of the
Certificates--Reports to Certificateholders; Certain Available Information."
EVENTS OF DEFAULT
Events of Default under the Pooling and Servicing Agreement will include (i)
any failure by the Servicer to remit to the Trustee for distribution to the
holders of the Certificates any amount required to be so distributed or
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remitted under the terms of the Pooling and Servicing Agreement; (ii) any
failure by the Servicer duly to observe or perform in any material respect any
of its other covenants or obligations under the Pooling and Servicing
Agreement, which failure continues unremedied for 30 days after written notice
thereof has been given to the Servicer by the Trustee, the FDIC or the
Mortgage Loan Seller, or to the Servicer, the FDIC, the Mortgage Loan Seller
and the Trustee by the holders of the Certificates entitled to not less than
25% of the Voting Rights of any class affected thereby; (iii) any breach of a
representation or warranty made by the Servicer under the Pooling and
Servicing Agreement that materially and adversely affects the interests of the
holders of the Certificates or the FDIC and that continues unremedied for 30
days after written notice of such breach has been given to the Servicer by the
Trustee, the FDIC or the Mortgage Loan Seller, or to the Servicer, the FDIC,
the Mortgage Loan Seller and the Trustee by the holders of the Certificates
evidencing not less than 25% of the Voting Rights of any class affected
thereby; and (iv) certain events of insolvency, readjustment of debt,
marshalling of assets and liabilities, or similar proceedings in respect of or
relating to the Servicer and certain actions by or on behalf of the Servicer
indicating its insolvency or inability to pay its obligations.
RIGHTS UPON EVENT OF DEFAULT
So long as an Event of Default remains unremedied under the Pooling and
Servicing Agreement, the Trustee, the FDIC (for so long as the Limited
Guarantee remains outstanding) or holders of Certificates evidencing not less
than 25% of the aggregate outstanding principal amount of the Certificates may
terminate all of the rights and obligations of the Servicer as Servicer under
the Pooling and Servicing Agreement with respect to the Mortgage Pool and in
and to the Mortgage Loans and the proceeds thereof (other than its right to
recovery of other expenses and amounts advanced pursuant to the terms of the
Pooling and Servicing Agreement, which rights the Servicer will retain under
all circumstances). Upon such termination, the Trustee will succeed to all of
the responsibilities, duties and liabilities of the Servicer under the Pooling
and Servicing Agreement with respect to the Mortgage Pool (except that if the
Trustee is prohibited by law from obligating itself to make regarding
delinquent mortgage loans, then the Trustee will not be obligated to make such
advances) and will be entitled to similar compensation arrangements. In the
event that the Trustee is unwilling or unable so to act, it may or, at the
written request of the FDIC or the holders of Certificates entitled to at
least 51% of the Voting Rights, it shall appoint, or petition a court of
competent jurisdiction for the appointment of, an established mortgage loan
servicing institution acceptable to the Rating Agencies with a net worth at
the time of such appointment of at least $50,000,000 to act as successor to
the Servicer under the Pooling and Servicing Agreement. Pending such
appointment, the Trustee is obligated to act in such capacity. The Trustee and
any such successor may agree upon the servicing compensation to be paid, which
in no event may be greater than the compensation payable to the Servicer under
the Pooling and Servicing Agreement.
The FDIC or holders of Certificates representing at least 66% of the Voting
Rights evidenced by all classes of Certificates affected by any Event of
Default will be entitled to waive such Event of Default; provided, however,
that an Event of Default described in clause (i) under "--Events of Default"
may be waived only by all of the holders of the Certificates. Upon any such
waiver of an Event of Default, such Event of Default shall cease to exist and
shall be deemed to have been remedied for every purpose under the Pooling and
Servicing Agreement.
DESCRIPTION OF THE CERTIFICATES
GENERAL
Only the Sub-Pool I Certificates and the Sub-Pool II Certificates
(collectively, "Offered Certificates") are offered hereby. The Certificates
(including the Stripped Interest Certificates and the Class R Certificates)
will be issued pursuant to a Pooling and Servicing Agreement, to be dated as
of the Cut-off Date, by and among the Mortgage Loan Seller, the FDIC, the
Servicer and the Trustee (the "Pooling and Servicing Agreement"), and will
represent in the aggregate the entire beneficial ownership interest in a Trust
Fund consisting of: (i) the Mortgage Loans and all payments under and proceeds
of the Mortgage Loans received after the Cut-off Date
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(exclusive of payments of principal and interest due on or before the Cut-off
Date); (ii) any Mortgaged Property acquired on behalf of the Trust Fund
through foreclosure, deed in lieu of foreclosure or otherwise (upon
acquisition, an "REO Property"); (iii) such funds or assets as from time to
time are deposited in the Collection Accounts; and (iv) the rights of the
mortgagee under all insurance policies with respect to the Mortgage Loans. In
addition, on each Distribution Date, (x) the Sub-Pool II Certificates will
have the benefit of the obligation of the FDIC (i) to make payments in respect
of the Basis Risk Support Amount, if any, for such Distribution Date and (ii)
to draw from the Bank Insurance Fund amounts then payable under the Limited
Guaranty in respect of the Mortgage Loans and REO Loans in Sub-Pool II and (y)
the Sub-Pool I Certificates will have the benefit of the obligation of the
FDIC to draw from the Bank Insurance Fund amounts then payable under the
Limited Guaranty in respect of the Mortgage Loans and REO Loans in Sub-Pool I.
Such obligations of the FDIC are limited in scope as described herein and are
not backed by the full faith and credit of the United States of America. See
"--Distributions--Sub-Pool II Certificates--Basis Risk," "--The Limited
Guaranty" and "The Bank Insurance Fund."
The Certificates will consist of fourteen classes, to be designated as the
Class I-A1 Certificates, the Class I-A2 Certificates, the Class I-B
Certificates, the Class I-C Certificates, the Class I-D Certificates, the
Class I-E Certificates, the Class I-F Certificates and the Class I-G
Certificates (collectively, the "Sub-Pool I Certificates"), the Class II-A
Certificates, the Class II-B Certificates and the Class II-C Certificates
(collectively, the "Sub-Pool II Certificates"), the Class I-XS Certificates
and the Class II-XS Certificates (collectively, the "Stripped Interest
Certificates") and the Class R Certificates. The Class I-XS Certificates,
which evidence an interest solely in Sub-Pool I, the Class II-XS Certificates,
which evidence an interest solely in Sub-Pool II, and the Class R Certificates
are not offered hereby. The Class I-XS Certificates and Class II-XS
Certificates will be delivered on the Closing Date to the FDIC as partial
consideration for the Limited Guaranty. The Class R Certificates may at the
option of the Mortgage Loan Seller be issued in two classes (each
corresponding to a residual interest in a particular REMIC), and will be
delivered to one or more Depository Institutions on the Closing Date.
As and to the extent described herein, the Class I-B Certificates, the Class
I-C Certificates, the Class I-D Certificates, the Class I-E Certificates, the
Class I-F Certificates, the Class I-G Certificates and the Class I-XS
Certificates will be subordinate to the Class I-A1 and Class I-A2
Certificates; the Class I-C Certificates, the Class I-D Certificates, the
Class I-E Certificates, the Class I-F Certificates, the Class I-G Certificates
and the Class I-XS Certificates will be subordinate to the Class I-B
Certificates; the Class I-D Certificates, the Class I-E Certificates, the
Class I-F Certificates, the Class I-G Certificates and the Class I-XS
Certificates will be subordinate to the Class I-C Certificates; the Class I-E
Certificates, the Class I-F Certificates, the Class I-G Certificates and the
Class I-XS Certificates will be subordinate to the Class I-D Certificates; the
Class I-F Certificates, the Class I-G Certificates and the Class I-XS
Certificates will be subordinate to the Class I-E Certificates; the Class I-G
Certificates and the Class I-XS Certificates will be subordinate to the Class
I-F Certificates; and the Class I-XS Certificates will be subordinate to the
Class I-G Certificates. The Class I-A1 Certificates and Class I-A2
Certificates are pari passu. As and to the extent described herein, the Class
II-B Certificates, the Class II-C Certificates and the Class II-XS
Certificates will be subordinate to the Class II-A Certificates; the Class II-
C Certificates and the Class II-XS Certificates will be subordinate to the
Class II-B Certificates; and the Class II-XS Certificates will be subordinate
to the Class II-C Certificates. The Certificates of any class evidencing an
interest in a particular Sub-Pool are neither senior nor subordinate to the
Certificates of any class evidencing an interest in the other Sub-Pool.
Shortfalls in collections on the Mortgage Loans in a particular Sub-Pool will
not be offset by any portion of the collections on the Mortgage Loans in the
other Sub-Pool.
The initial Class Balance of each class of Offered Certificates is set forth
on the cover page of this Prospectus. The Class Balance of each class of
Certificates evidencing an interest in a particular Sub-Pool outstanding at
any time represents the maximum amount that the holders thereof are entitled
to receive as distributions allocable to principal from the cash flow on the
Mortgage Loans in such Sub-Pool and other assets in the Trust Fund. As more
specifically described herein, the Class Balance of each class of Offered
Certificates will be reduced on each Distribution Date to the extent of any
distributions of principal of such class on such
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Distribution Date and will be increased on each Distribution Date to the
extent of any negative amortization allocated to such class on such
Distribution Date. The Stripped Interest Certificates have no Class Balances
and are not entitled to receive any distributions allocable to principal.
The Offered Certificates will be issued in book-entry form in the authorized
denominations for each class specified in the cover page of this Prospectus.
The Trustee will make such distributions with respect to the Offered
Certificates as set forth below.
The ERISA-Restricted Certificates are subject to certain restrictions on the
transfer of such Certificates to Plans. See "ERISA Considerations."
DISTRIBUTIONS
Method, Timing and Amount. Distributions on the Certificates will be made by
the Trustee, to the extent of available funds, on the 25th day of each month
or, if such 25th day is not a business day, then on the next succeeding
business day, commencing January, 1997 (each, a "Distribution Date").
Distributions on the Sub-Pool I Certificates and on the Class I-XS
Certificates will be based solely on the Mortgage Loans in Sub-Pool I (i.e.,
the Fixed Rate Loans), and distributions on the Sub-Pool II Certificates and
on the Class II-XS Certificates will be based solely on the Mortgage Loans in
Sub-Pool II (i.e., the ARM Loans). For purposes hereof, any class of
Certificates or any Certificate evidencing an interest in a particular Sub-
Pool, including the class of Stripped Interest Certificates evidencing an
interest in such Sub-Pool, is sometimes herein referred to as a
"Corresponding" class or a "Corresponding" Certificate, respectively, with
respect to such Sub-Pool or to the other classes of Certificates evidencing an
interest in such Sub-Pool. All payments with respect to a Distribution Date
will be made to the persons in whose names the Certificates are registered at
the close of business on the Record Date, which will be the last day of the
preceding calendar month with respect to the Sub-Pool I Certificates, and the
24th day of the calendar month in which such Distribution Date occurs with
respect to the Sub-Pool II Certificates. However, if any class of Sub-Pool II
Certificates is no longer maintained on the book-entry records of DTC, the
record date with respect to such class will be the last day of the month
preceding the month in which the related Distribution Date occurs. All
distributions made with respect to a class of Certificates will be allocated
pro rata among the outstanding Certificates of such class based on their
respective Percentage Interests. The "Percentage Interest" evidenced by any
Offered Certificate is equal to the initial denomination thereof as of the
Closing Date, divided by the initial Class Balance of the class to which it
belongs.
The aggregate amount available for distribution to holders of Certificates
evidencing interests in a particular Sub-Pool on each Distribution Date (the
"Available Distribution Amount" for such Sub-Pool) will, in general, equal the
sum of the following amounts:
(a) the total amount of all cash received on the Mortgage Loans and any
REO Properties that is on deposit in the Collection Account for such Sub-
Pool as of the close of business on the related Determination Date,
exclusive of:
(i) all Scheduled Payments in respect of such Sub-Pool collected but
due on a Due Date subsequent to the related Due Period,
(ii) all principal prepayments (together with related payments of the
interest thereon and related prepayment premiums), Liquidation
Proceeds, Insurance Proceeds and other unscheduled recoveries
(including amounts paid by the FDIC in connection with the repurchase
of a Mortgage Loan resulting from a breach of a representation) in
respect of such Sub-Pool received subsequent to the related Prepayment
Period, and
(iii) all amounts in the Collection Account for such Sub-Pool that
are due or reimbursable to any person (including, without limitation,
the Servicer, the Trustee, the Mortgage Loan Seller or the FDIC) other
than the Certificateholders;
(b) all P&I Advances in respect of such Sub-Pool made by the Servicer
with respect to such Distribution Date;
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(c) any Compensating Interest Payment in respect of such Sub-Pool made by
the Servicer to cover Prepayment Interest Shortfalls for such Distribution
Date;
(d) all amounts in respect of such Sub-Pool paid pursuant to the Limited
Guaranty for such Distribution Date; and
(e) with respect to Sub-Pool II, any amount payable by the FDIC in
respect of interest overcharges on ARM Loans prior to the Cut-off Date, as
described under "Description of the Mortgage Pool--Mortgage Loan
Information--The ARM Audits."
The "Due Period" for each Distribution Date commences on the second day of
the calendar month preceding the month in which such Distribution Date occurs
(or in the case of the first Distribution Date, the period that begins on the
day following the Cut-off Date) and ends on the first day of the month in
which such Distribution Date occurs. The "Prepayment Period" for each
Distribution Date commences on the sixteenth day of the calendar month
preceding the month in which such Distribution Date occurs and ends on the
fifteenth day of the month in which such Distribution Date occurs. The
"Determination Date" for each Distribution Date is the 15th day of the month
in which such Distribution Date occurs or, if such 15th day is not a business
day, then the next preceding business day.
Sub-Pool I Certificates--Priority. On each Distribution Date, for so long as
the Sub-Pool I Certificates and the Class I-XS Certificates are outstanding,
the Trustee will apply amounts on deposit in the Collection Account for Sub-
Pool I, to the extent of the Available Distribution Amount for Sub-Pool I, in
the following order of priority:
(i) to distributions of interest on the Class I-A1 Certificates and Class
I-A2 Certificates, pro rata, in accordance with these respective
entitlements described herein, an amount equal to all Distributable
Interest in respect of the Class I-A1 Certificates and the Class I-A2
Certificates for such Distribution Date, together with any portion thereof
remaining unpaid from previous Distribution Dates;
(ii) except as otherwise provided below, to distributions of principal of
the Class I-A1 Certificates, in an amount equal to the lesser of (x) the
Class Balance of the Class I-A1 Certificates outstanding immediately prior
to such Distribution Date and (y) the Distributable Principal for such
class and such Distribution Date;
(iii) except as otherwise provided below, to distributions of principal
of the Class I-A2 Certificates, in an amount equal to the lesser of (x) the
Class Balance of the Class I-A2 Certificates outstanding immediately prior
to such Distribution Date and (y) the Distributable Principal for such
class and such Distribution Date;
(iv) to distributions of interest on the Class I-B Certificates, in an
amount equal to all Distributable Interest in respect of the Class I-B
Certificates for such Distribution Date, together with any portion thereof
remaining unpaid from previous Distribution Dates;
(v) to distributions of principal of the Class I-B Certificates, in an
amount equal to the lesser of (x) the Class Balance of the Class I-B
Certificates outstanding immediately prior to such Distribution Date and
(y) Distributable Principal for such class and such Distribution Date;
(vi) to distributions of interest on the Class I-C Certificates, in an
amount equal to all Distributable Interest in respect of the Class I-C
Certificates for such Distribution Date, together with any portion thereof
remaining unpaid from previous Distribution Dates;
(vii) to distributions of principal of the Class I-C Certificates, in an
amount equal to the lesser of (x) the Class Balance of the Class I-C
Certificates outstanding immediately prior to such Distribution Date and
(y) Distributable Principal for such class and such Distribution Date;
(viii) to distributions of interest on the Class I-D Certificates, in an
amount equal to all Distributable Interest in respect of the Class I-D
Certificates for such Distribution Date, together with any portion thereof
remaining unpaid from previous Distribution Dates;
(ix) to distributions of principal of the Class I-D Certificates, in an
amount equal to the lesser of (x) the Class Balance of the Class I-D
Certificates outstanding immediately prior to such Distribution Date and
(y) Distributable Principal for such class and such Distribution Date;
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(x) to distributions of interest on the Class I-E Certificates, in an
amount equal to all Distributable Interest in respect of the Class I-E
Certificates for such Distribution Date, together with any portion thereof
remaining unpaid from previous Distribution Dates;
(xi) to distributions of principal of the Class I-E Certificates, in an
amount equal to the lesser of (x) the Class Balance of the Class I-E
Certificates outstanding immediately prior to such Distribution Date and
(y) Distributable Principal for such class and such Distribution Date;
(xii) to distributions of interest on the Class I-F Certificates, in an
amount equal to all Distributable Interest in respect of the Class I-F
Certificates for such Distribution Date, together with any portion thereof
remaining unpaid from previous Distribution Dates;
(xiii) to distributions of principal of the Class I-F Certificates, in an
amount equal to the lesser of (x) the Class Balance of the Class I-F
Certificates outstanding immediately prior to such Distribution Date and
(y) Distributable Principal for such class and such Distribution Date;
(xiv) to distributions of interest on the Class I-G Certificates, in an
amount equal to all Distributable Interest in respect of the Class I-G
Certificates for such Distribution Date, together with any portion thereof
remaining unpaid from previous Distribution Dates;
(xv) to distributions of principal of the Class I-G Certificates, in an
amount equal to the lesser of (x) the Class Balance of the Class I-G
Certificates outstanding immediately prior to such Distribution Date and
(y) Distributable Principal for such class and such Distribution Date; and
(xvi) to distributions of interest on the Class I-XS Certificates, in an
amount equal to all Distributable Interest in respect of the Class I-XS
Certificates for such Distribution Date, together with any portion thereof
remaining unpaid from previous Distribution Dates.
With respect to any Distribution Date as to which the Excess Coverage
Amount, if any, and the protection afforded by the subordination of the
Corresponding classes of Certificates have been reduced to zero, any portion
of Distributable Principal to be distributed on such Distribution Date on the
Class I-A1 Certificates pursuant to clause (ii) above shall be distributed on
the Class I-A1 Certificates and Class I-A2 Certificates pro rata, based on the
Class Balances of each such class immediately prior to such Distribution Date.
On each Distribution Date, any portion of the Available Distribution Amount
for Sub-Pool I remaining after all distributions in respect of Distributable
Interest and Distributable Principal to the Corresponding classes of
Certificates are made and after payment of certain expenses will be
distributed to the holders of the Class R Certificates.
Sub-Pool I Certificates--Pass-Through Rates. The Pass-Through Rate for each
Distribution Date will be fixed at [ ]% per annum in the case of the Class I-
A1 Certificates, [ ]% per annum in the case of the Class I-A2 Certificates,
[ ]% per annum in the case of the Class I-B Certificates, [ ]% per annum in
the case of the Class I-C Certificates, [ ]% per annum in the case of the
Class I-D Certificates, [ ]% per annum in the case of the Class I-E
Certificates, [ ]% per annum in the case of the Class I-F Certificates and
[ ]% per annum in the case of the Class I-G Certificates. The Pass-Through
Rate on the Class I-XS Certificates will be subject to adjustment on each
Distribution Date based on the excess, if any, of the Weighted Average
Effective Net Mortgage Rate of Sub-Pool I over the weighted average of the
Pass-Through Rates on the Sub-Pool I Certificates. The Pass-Through Rate for
the Class I-XS Certificates on the first Distribution Date will be [ ]% per
annum.
Sub-Pool II Certificates--Priority. On each Distribution Date, for so long
as the Sub-Pool II Certificates and the Class II-XS Certificates are
outstanding, the Trustee will apply amounts on deposit in the Collection
Account for Sub-Pool II, to the extent of the Available Distribution Amount
for Sub-Pool II, in the following order of priority:
(i) to distributions of interest on the Class II-A Certificates, in an
amount equal to all Distributable Interest in respect of the Class II-A
Certificates for such Distribution Date, together with any portion thereof
remaining unpaid from previous Distribution Dates;
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(ii) to distributions of principal of the Class II-A Certificates, in an
amount equal to the lesser of (x) the sum of (1) the Class Balance of the
Class II-A Certificates outstanding immediately prior to such Distribution
Date and (2) any negative amortization allocable to such class for such
Distribution Date and (y) the Distributable Principal for such class and
such Distribution Date;
(iii) to distributions of interest on the Class II-B Certificates, in an
amount equal to all Distributable Interest in respect of the Class II-B
Certificates for such Distribution Date, together with any portion thereof
remaining unpaid from previous Distribution Dates;
(iv) to distributions of principal of the Class II-B Certificates, in an
amount equal to the lesser of (x) the sum of (1) the Class Balance of the
Class II-B Certificates outstanding immediately prior to such Distribution
Date and (2) any negative amortization allocable to such class for such
Distribution Date and (y) Distributable Principal for such class and such
Distribution Date;
(v) to distributions of interest on the Class II-C Certificates, in an
amount equal to all Distributable Interest in respect of the Class II-C
Certificates for such Distribution Date, together with any portion thereof
remaining unpaid from previous Distribution Dates;
(vi) to distributions of principal of the Class II-C Certificates, in an
amount equal to the lesser of (x) the sum of (1) the Class Balance of the
Class II-C Certificates outstanding immediately prior to such Distribution
Date and (2) any negative amortization allocable to such class for such
Distribution Date and (y) Distributable Principal for such class and such
Distribution Date; and
(vii) to distributions of interest on the Class II-XS Certificates, in an
amount equal to all Distributable Interest in respect of the Class II-XS
Certificates for such Distribution Date, together with any portion thereof
remaining unpaid from previous Distribution Dates.
On any Distribution Date on which there is a Basis Risk Shortfall, the
Trustee will distribute the lesser of such shortfall and the Basis Risk
Support Amount for such Distribution Date among the various classes of Sub-
Pool II Certificates that have Pass-Through Rates on such Distribution Date in
excess of the Weighted Average Effective Net Mortgage Rate of Sub-Pool II for
such Distribution Date, as described herein under "--Sub-Pool II
Certificates--Basis Risk." On each Distribution Date, any portion of the
Available Distribution Amount for Sub-Pool I remaining after all distributions
in respect of Distributable Interest and Distributable Principal to the
Corresponding classes of Certificates are made and after payment of certain
expenses will be distributed to the holders of the Class R Certificates.
Sub-Pool II Certificates--Pass-Through Rates. The Pass-Through Rate on each
class of Sub-Pool II Certificates for each Distribution Date will be subject
to adjustment to equal the sum of LIBOR and the Applicable Margin, as set
forth below:
<TABLE>
<CAPTION>
CLASS APPLICABLE MARGIN
----- -----------------
<C> <S>
II-A
II-B
II-C
</TABLE>
provided, however, that in the event that the Pass-Through Rate on one or more
classes of Sub-Pool II Certificates exceeds the Weighted Average Effective Net
Mortgage Rate of Sub-Pool II for such Distribution Date, payment of interest
at the Pass-Through Rate on such class or classes of Sub-Pool II Certificates
will be reduced to the extent that the Basis Risk Support Amount, if any, for
such Distribution Date is insufficient to make up such shortfall. Any such
shortfall on any Distribution Date will be allocated among such class or
classes of Sub-Pool II Certificates as described herein, and will not be
carried forward for payment in the future. See "--Sub-Pool II Certificates--
Basis Risk."
The Pass-Through Rate on the Class II-XS Certificates will be subject to
adjustment on each Distribution Date based on the excess, if any, of the
Weighted Average Effective Net Mortgage Rate of Sub-Pool II over the weighted
average of the Component Reference Rates on the Sub-Pool II Certificates. The
"Component
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Reference Rate" for a class of Sub-Pool II Certificates on any Distribution
Date is equal to the lesser of the Weighted Average Effective Net Mortgage
Rate of Sub-Pool II on such Distribution Date and the Pass-Through Rate for
such class on such Distribution Date.
For purposes of determining the Pass-Through Rates on the Sub-Pool II
Certificates for any Distribution Date, "LIBOR" shall be obtained by the
Trustee by obtaining the quoted offered rate for one-month United States
dollar deposits with lending banks in the London interbank market that appears
as of 11:00 a.m. (London time) on the display page designated as page 3750 on
the Telerate monitor on the LIBOR Business Day prior to the immediately
preceding Distribution Date (each such date, a "LIBOR Adjustment Date") or, in
the case of the first Distribution Date, as of the LIBOR Business Day
preceding the Closing Date. "LIBOR Business Day" means a day on which banks
are open for dealing in foreign currency and exchange in London and New York
City.
The establishment of LIBOR by the Trustee on any LIBOR Adjustment Date, and
the Trustee's calculation of the rates applicable to the Sub-Pool II
Certificates for the related Distribution Date (in the absence of manifest
error) will be final and binding. Each such rate of interest may be obtained
by telephoning the Trustee at (617) 664-5500.
Sub-Pool II Certificates--Basis Risk. Payment of interest at the Pass-
Through Rate on any class of Sub-Pool II Certificates may be dependent upon,
among other things, the Pass-Through Rate for such class being less than or
equal to the Weighted Average Effective Net Mortgage Rate of Sub-Pool II. The
Pass-Through Rate of the Sub-Pool II Certificates of each class is based upon
the value of LIBOR plus the Applicable Margin, which may be different from the
value of the Indices upon which the Mortgage Rates of the ARM Loans are based
(either as a result of the use of a different Index, Mortgage Rate
determination date, Mortgage Rate adjustment date or maximum lifetime Mortgage
Rate). In particular, the Pass-Through Rates of the Sub-Pool II Certificates
adjust monthly, while the Mortgage Rates of the ARM Loans in many cases adjust
less frequently (generally at six-month, twelve-month, three-year or five-year
intervals). In addition, LIBOR and the Indices applicable to the ARM Loans may
respond to different economic and market factors, and there is no necessary
correspondence between them. Thus, it is possible, for example, that LIBOR may
rise during periods in which one or more of the Indices are stable or are
falling or that, even if both LIBOR and the Indices rose during the same
period, LIBOR may rise much more rapidly than the Indices. Consequently, the
Weighted Average Effective Net Mortgage Rate of Sub-Pool I may not equal or
exceed the Pass-Through Rate on one or more classes of the Sub-Pool II
Certificates.
Any shortfall in accrued interest at the Weighted Average Effective Net
Mortgage Rate of Sub-Pool II in relation to accrued interest at the Pass-
Through Rate on one or more classes of Sub-Pool II Certificates on any
Distribution Date is referred to herein as a "Basis Risk Shortfall." To the
extent not offset by the Basis Risk Support Amount payable by the FDIC, Basis
Risk Shortfalls on any Distribution Date will be allocated among such classes
of Sub-Pool II Certificates having Pass-Through Rates then in excess of the
Weighted Average Effective Net Mortgage Rate of Sub-Pool II, pro rata, based
on the applicable shortfall for each such class, which for any such class on
any Distribution Date is equal to interest accrued on such class for such
Distribution Date at a rate equal to the excess of the Pass-Through Rate
thereon over the Weighted Average Effective Net Mortgage Rate of Sub-Pool II.
The Basis Risk Support Amount on any Distribution Date is limited solely to
Distributable Interest on both classes of the Stripped Interest Certificates
for such Distribution Date. The effect of this provision is to make available
to the Sub-Pool II Certificates in the event of a Basis Risk Shortfall (x) the
full amount of interest accrued at the Weighted Average Effective Net Mortgage
Rate of Sub-Pool II, including the full amount of Distributable Interest on
the Class II-XS Certificates on such Distribution Date, and (y) the full
amount of Distributable Interest on the Class I-XS Certificates on such
Distribution Date, in each case not by reducing Distributable Interest on the
Stripped Interest Certificates but by requiring the FDIC to pay a like amount,
without regard to whether it then owned the Stripped Interest Certificates of
either class. The FDIC is under no obligation
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to pay any amounts in respect of Basis Risk Shortfalls in excess of the Basis
Risk Support Amount on any Distribution Date. Any Unfunded Basis Risk
Shortfall will not be carried forward for payment in the future.
As described above, a Basis Risk Shortfall will result on any Distribution
Date with respect to any class or classes of Sub-Pool II Certificates as to
which the Pass-Through Rate then exceeds the Weighted Average Effective Net
Mortgage Rate of Sub-Pool II. Because the classes of Sub-Pool II Certificates
having lower alphabetical class designations (i.e., the more subordinate
classes) will have higher Pass-Through Rates than the classes of Sub-Pool II
Certificates having higher alphabetical class designations (i.e., the more
senior classes), it is relatively more likely that the Pass-Through Rates of
the more junior classes will exceed the Weighted Average Effective Net
Mortgage Rate of Sub-Pool II and, as a result, the more junior classes are
relatively more likely to suffer Basis Risk Shortfalls. Further, the class of
Certificates evidencing an interest in a particular Sub-Pool then outstanding
with the lowest Pass-Through Rate (i.e., the most senior class) will receive
all Distributable Principal prior to the more junior classes of Corresponding
Certificates; as a result, the weighted average of the Pass-Through Rates of
the Corresponding Certificates generally will increase over time, which in
turn will reduce over time the Distributable Interest on the class of Stripped
Interest Certificates evidencing an interest in such Sub-Pool, and therefore
will reduce the Basis Risk Support Amount at any particular time. As a result,
in the absence of an increasing Weighted Average Effective Net Mortgage Rate
of Sub-Pool II (e.g., through an increasing positive spread between the
Indices on which the Mortgage Rates are based and LIBOR or through a more
rapid rate of prepayment of the Mortgage Loans in Sub-Pool II with lower
Mortgage Rates) and/or an increasing Weighted Average Effective Net Mortgage
Rate of Sub-Pool I (e.g., through a more rapid rate of prepayment of the
Mortgage Loans in Sub-Pool I with lower Mortgage Rates), the likelihood and
amount of Basis Risk Support Amounts will decrease over time. Further, because
the weighted average lives of the more junior classes of Sub-Pool II
Certificates are longer than the weighted average lives of the more senior
classes of Sub-Pool II Certificates, the more junior classes of Sub-Pool II
Certificates will be more likely than the more senior classes of Sub-Pool II
Certificates to suffer larger Unfunded Basis Risk Shortfalls.
The ratings on the Certificates do not address the likelihood of Basis Risk
Shortfalls, the sufficiency of any Basis Risk Support Amount to cover such
shortfalls or the corresponding yield to investors. See "Ratings" and "Risk
Factors--The Certificates--Limited Nature of Ratings."
Interest Distribution Calculations. The "Distributable Interest" in respect
of any class of Certificates evidencing an interest in a particular Sub-Pool
for any Distribution Date will equal the Accrued Interest for such class,
reduced (to not less than zero) by the allocable share for such class of
Certificates (in each case, calculated as described herein) of (x) in the case
of the Sub-Pool II Certificates, any Deferred Interest for such Distribution
Date, (y) in the case of the Sub-Pool II Certificates, any unfunded Basis Risk
Shortfall for such Distribution Date and (z) for the Certificates evidencing
an interest in a particular Sub-Pool, including the Corresponding Stripped
Interest Certificates, any Net Aggregate Prepayment Interest Shortfall for
such Sub-Pool and such Distribution Date. The amount, if any, of Distributable
Interest for a class of Certificates that is not distributed to such class on
a particular Distribution Date will be carried forward for payment on
subsequent Distribution Dates, without interest thereon, to the extent of
available funds.
The "Accrued Interest" in respect of each class of Offered Certificates for
each Distribution Date is equal to interest at the applicable Pass-Through
Rate accrued during the applicable Accrual Period on the Class Balance (or, in
the case of the Stripped Interest Certificates, the Notional Amount thereof)
of such class of Certificates immediately prior to such Distribution Date. The
"Notional Amount" of the Stripped Interest Certificates evidencing an interest
in a particular Sub-Pool at the time of any determination is equal to the
aggregate of the Class Balances of the Corresponding classes of Certificates
then outstanding.
The "Accrual Period" for each Distribution Date with respect to each class
of Sub-Pool I Certificates and the Class I-XS Certificates will be the
calendar month immediately preceding such Distribution Date and with respect
to Sub-Pool II Certificates and Class II-XS. Distributable Interest will be
calculated for each class of Certificates on the basis of a 360-day year
consisting of twelve 30-day months.
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The "Deferred Interest" for any Distribution Date is equal to the aggregate
negative amortization in respect of the Mortgage Loans in Sub-Pool II for
their respective Due Dates during the related Due Period, which will be
allocated among the classes of Sub-Pool II Certificates, pro rata, based on
the Accrued Interest thereon for such Distribution Date, by (i) decreasing the
Distributable Interest payable in respect of each such class on such
Distribution Date and (ii) increasing the Class Balance of each such class by
a like amount.
The "Net Aggregate Prepayment Interest Shortfall" for any Sub-Pool and any
Distribution Date will be the amount, if any, by which (a) the aggregate of
any Prepayment Interest Shortfalls in respect of such Sub-Pool for such
Distribution Date exceeds (b) the sum of (i) the aggregate of any Prepayment
Interest Excesses in respect of such Sub-Pool collected during the related Due
Period and (ii) the allocable portion for such Sub-Pool of any Compensating
Interest Payment made by the Servicer with respect to such Distribution Date.
A "Prepayment Interest Shortfall" for any Distribution Date is the shortfall
in interest collected in connection with (x) a prepayment of a Mortgage Loan
in whole or in part prior to its Due Date in the related Due Period, to the
extent such prepayment is not accompanied by interest accrued through such Due
Date, or (y) in the case of a Simple Interest Loan the Scheduled Payment of
which was received prior to its Due Date in the related Due Period, the excess
of (a) the portion of such Scheduled Payment that would have been attributable
to interest had such payment been made on such Due Date over (b) the portion
of such Scheduled Payment actually attributable to interest. A "Prepayment
Interest Excess" for any Distribution Date is the excess in interest collected
in connection with (x) a prepayment of a Mortgage Loan in whole or in part
following its Due Date in the related Due Period, to the extent such
prepayment is accompanied by interest accrued through such date of prepayment
or (y) in the case of a Simple Interest Loan the Scheduled Payment of which
was received following its Due Date in the related Due Period (and prior to
the related Determination Date), the excess of (a) the portion of such
Scheduled Payment actually attributable to interest over (b) the portion of
such Scheduled Payment that would have been attributable to interest had such
payment been made on such Due Date. As to any Distribution Date, to the extent
Prepayment Interest Excesses for all Mortgage Loans in a particular Sub-Pool
are greater than Prepayment Interest Shortfalls in such Sub-Pool, such excess
will be a part of the Available Distribution Amount for such Sub-Pool for such
Distribution Date. The Net Aggregate Prepayment Interest Shortfall for a
particular Sub-Pool and any Distribution Date will be allocated to the
Corresponding classes of Certificates, pro rata, based on Accrued Interest
thereon for such Distribution Date.
The "Weighted Average Effective Net Mortgage Rate" of a Sub-Pool on any
Distribution Date is the weighted average of the applicable Effective Net
Mortgage Rates for the Mortgage Loans in such Sub-Pool, weighted on the basis
of their respective Stated Principal Balances immediately prior to such
Distribution Date. For purposes of calculating the Weighted Average Effective
Net Mortgage Rate for any Distribution Date, the "applicable Effective Net
Mortgage Rate" for any Distribution Date for each Mortgage Loan (other than a
Discounted Mortgage Loan) is an annualized rate equal to the Mortgage Rate in
effect for such Mortgage Loan as of the commencement of the related Due
Period, (a) reduced by [ ]%, which is the sum of the rates at which the
maximum servicing and trust administrative fees accrue (the Mortgage Rate, as
so reduced, the "Net Mortgage Rate"), and (b) if the accrual of interest on
any Mortgage Loan is computed other than on the basis of a 360-day year
consisting of twelve 30-day months (which is the basis of accrual for interest
on the Certificates), then adjusted to reflect that difference in computation.
The "applicable Effective Net Mortgage Rate" for a Discounted Mortgage Loan is
[ ]% per annum, adjusted, if applicable, as described in clause (b) of the
preceding sentence.
Principal Distribution Calculations. The "Distributable Principal" for each
Distribution Date and any class of Certificates evidencing an interest in a
particular Sub-Pool will equal the Optimal Principal Distribution Amount for
such Sub-Pool and Distribution Date, net of any portion thereof distributed on
such Distribution Date to any Corresponding class of Certificates having a
higher alphabetical class designation. No distributions in respect of
principal of any class of Certificates evidencing an interest in a particular
Sub-Pool will be made until all Corresponding classes of Certificates having a
higher alphabetical class designation have been paid in full.
The "Optimal Principal Distribution Amount" for each Sub-Pool and each
Distribution Date will equal the aggregate of the following amounts with
respect to the Mortgage Loans in such Sub-Pool: (i) the principal
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portion of all Scheduled Payments (other than Balloon Payments) due, and
Assumed Scheduled Payments deemed to be due, during the related Due Period,
whether or not received, (ii) the principal portion of all unscheduled
collections and Balloon Payments received with respect to the Mortgage Loans
during the related Due Period, other than any Mortgage Loan liquidated during
such Due Period, (iii) the decline in the Scheduled Principal Balance of each
Mortgage Loan that became a Limited Guaranty Draw Loan during the related Due
Period, (iv) the Scheduled Principal Balances of all Mortgage Loans liquidated
during the related Due Period and (v) in the case of Sub-Pool II, any payments
made by the FDIC as described under "Description of the Mortgage Pool--
Mortgage Loan Information--The ARM Audits."
As referred to herein, the "Scheduled Principal Balance" of a Mortgage Loan
(other than a Discounted Mortgage Loan) with respect to any Determination Date
is equal to the principal balance of such Mortgage Loan as of the Due Date of
such Mortgage Loan occurring in the Due Period relating to such Determination
Date, after giving effect to (a) any principal prepayments or other
unscheduled recoveries of principal and any Balloon Payments received during
or prior to such Due Period, (b) any negative amortization added to the
principal balance of such Mortgage Loan on or before such Due Date, (c) any
payment in respect of principal due on or before such Due Date (other than a
Balloon Payment, but including the principal portion of any Assumed Scheduled
Payment, if applicable), irrespective of any delinquency in payment by the
borrower, and (d) any adjustment resulting from a Deficient Valuation or in
connection with a Debt Service Reduction resulting from any bankruptcy or
similar proceeding. The Scheduled Principal Balance of any Fixed Rate Loan
that has a Net Mortgage Rate lower than the Pass-Through Rate on the Class I-G
Certificates is equal to the present value of the future Scheduled Payments
due thereon, net of servicing and trust administrative fees, discounted
monthly at [ ]% per annum (i.e., the highest Pass-Through Rate on any class
of Sub-Pool I Certificates), and the principal portion of each Scheduled
Payment due thereon will be similarly discounted, for purposes of calculating
the Optimal Principal Distribution Amount (any such Mortgage Loan, a
"Discounted Mortgage Loan").
Certain Calculations with Respect to Individual Mortgage Loans. The "Stated
Principal Balance" of each Mortgage Loan (upon which is based, among other
things, the Weighted Average Effective Net Mortgage Rate calculations)
outstanding at any time represents the principal balance of such Mortgage Loan
ultimately due and payable to the Certificateholders. The Stated Principal
Balance of each Mortgage Loan will initially equal the Cut-off Date Balance
thereof (or, in the case of a Discounted Mortgage Loan, the present value of
such balance, discounted as described above) and, on each Distribution Date,
will be increased by any negative amortization for such date and will be
reduced by the portion of the Distributable Principal for such date
attributable to such Mortgage Loan. The Stated Principal Balance of a Mortgage
Loan may also be reduced in connection with a Deficient Valuation resulting
from any bankruptcy or similar proceeding. See "Certain Legal Aspects of
Mortgage Loans--Foreclosure" and "--Bankruptcy Laws."
For purposes of calculating distributions on the Certificates, as well as
the amount of servicing fees and trust administrative fees payable each month,
each REO Property will be treated as if there exists with respect thereto an
outstanding mortgage loan (an "REO Loan"), and all references to "Mortgage
Loan," "Mortgage Loans," "Mortgage Pool" and "Sub-Pool" herein, when used in
such context, will be deemed to also be references to or to also include, as
the case may be, any "REO Loans." Each REO Loan will generally be deemed to
have the same characteristics as its actual predecessor Mortgage Loan,
including the same adjustable or fixed Mortgage Rate (and, accordingly, the
same Net Mortgage Rate and Effective Net Mortgage Rate) and the same unpaid
principal balance and Stated Principal Balance. Amounts due on such
predecessor Mortgage Loan, including any portion thereof payable or
reimbursable to the Servicer, will continue to be "due" in respect of the REO
Loan; and amounts received in respect of the related REO Property, net of
payments to be made, or reimbursement to the Servicer for payments previously
advanced, in connection with the operation and management of such property,
generally will be applied by the Servicer as if received on the predecessor
Mortgage Loan. However, notwithstanding the terms of the predecessor Mortgage
Loan, the Scheduled Payment "due" on an REO Loan will in all cases, for so
long as the related Mortgaged Property is part of the Trust Fund, equal
scheduled interest thereon at the applicable Mortgage Rate.
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EXAMPLE OF DISTRIBUTIONS
The following chart sets forth an example of distributions on the Offered
Certificates for Distribution Date occurring in January, 1997 (the pattern is
repeated for succeeding Distribution Dates):
December 2 through January 1
(A)............................. The Due Period with respect to the
Distribution Date on January 27.
Scheduled Payments (including Balloon
Payments) due during the Due Period and
any Assumed Scheduled Payments deemed
to be due during the Due Period, in
each case to the extent received by the
Determination Date on January 15 or
advanced by the P&I Advance Date on
January 24, will be available for
distribution to Certificateholders on
the Distribution Date on January 27.
(Succeeding Due Periods run from the
second day of each month through the
first day of the next month.)
December 2 through January 15
(B)............................. The Prepayment Period with respect to
the Distribution Date on January 27.
Principal prepayments made and other
unscheduled collections received during
the Prepayment Period, will be
available for distribution to
Certificateholders on the Distribution
Date on January 27 (16th through the
15th for succeeding periods).
January 15 (C)................... Determination Date. The Servicer is
required to determine on or prior to
this date, among other things, the
Available Distribution Amount with
respect to each Sub-Pool for the
Distribution Date on January 27, the
amount of P&I Advances required to be
made on the P&I Advance Date on January
24 and to report to the Trustee the
information necessary to determine the
amount of claims (x) in respect of
Basis Risk Shortfalls and (y) under the
Limited Guaranty required to be made on
the Demand Date.
January 19 (D)................... The Demand Date. The Trustee is
required to make a demand on the FDIC
as administrator of the Bank Insurance
Fund, (x) for payment of any portion of
the Basis Risk Support Amount necessary
to offset the Basis Risk Shortfall for
the Distribution Date on January 27,
and (y) for payment under the Limited
Guaranty in respect of (a) Realized
Losses incurred during the related Due
Period and (b) the occurrence of a
Mortgage Loan becoming a Limited
Guaranty Draw Loan during the related
Due Period.
January 24 (E)................... The P&I Advance Date. The Servicer is
required to deliver to the Trustee for
distribution to Certificateholders on
the Distribution Date on January 27,
among other things, the portion of the
Available Distribution Amount in
respect of each Sub-Pool for such
Distribution Date then held in the
Collection Account for such Sub-Pool,
the amount of
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Compensating Interest Payments for such
Distribution Date, and a P&I Advance in
respect of the total amount of
Scheduled Payments and Assumed
Scheduled Payments due or deemed to be
due during the Due Period described
above and not received by the
Determination Date (except to the
extent deemed by the Servicer to be
non-recoverable).
January 24 (F)................... Record Date for the Offered
Certificates.
January 27 (G)................... Distribution Date (January 25 and 26
are not Business Days).
- --------
(A) Scheduled Payments due during the Due Period and any Assumed Scheduled
Payments deemed to be due during the Due Period, to the extent received by
the Servicer by the Determination Date will be remitted to the Trustee by
the Servicer on the P&I Advance Date on January 24 for distribution to
Certificateholders on January 27, 1997.
(B) Principal prepayments and other unscheduled collections received by the
Servicer during the Prepayment Period will be remitted to the Trustee by
the Servicer on the P&I Advance Date on January 24 for distribution to
Certificateholders on January 27, 1997.
(C) As of the close of business on January 15, the Available Distribution
Amount to be passed through to Certificateholders will be determined.
Holders of Offered Certificates generally will be entitled, to the extent
of available funds, to Distributable Interest as described under "--
Distributions--Interest Distribution Calculations Applicable to the
Certificates" and to Distributable Principal as described under "--
Distributions--Principal Distribution Calculations Applicable to the
Certificates."
(D) The FDIC is required to remit to the Trustee in immediately available
funds on or prior to January 24 for deposit into the Distribution Account
any claims under the Limited Guaranty.
(E) All amounts required to be remitted by the Servicer must be remitted in
immediately available funds to the Trustee for deposit into the
Distribution Account.
(F) Distributions on the Offered Certificates will be made on the Distribution
Date to Certificateholders of record at the close of business on the 24th
day of the month in which the Distribution Date occurs.
(G) The Trustee will make distributions to Certificateholders on the 25th day
of each month or, if such day is not a Business Day, on the next
succeeding Business Day.
P&I ADVANCES
On the business day immediately preceding each Distribution Date, the
Servicer will be obligated, subject to the recoverability determination
described in the next paragraph, to make advances (each, a "P&I Advance") out
of its own funds or, subject to the replacement thereof as provided in the
Pooling and Servicing Agreement, funds held in the Collection Account with
respect to the applicable Sub-Pool that are not required to be part of the
Available Distribution Amount for such Sub-Pool for such Distribution Date, in
an amount equal to the aggregate of: (i) all Scheduled Payments (net of the
related Servicing Fee), other than Balloon Payments, that were due on the
Mortgage Loans in such Sub-Pool during the related Due Period and delinquent
as of the related Determination Date; (ii) in the case of each Balloon Loan
delinquent in respect of its Balloon Payment as of the related Determination
Date, an amount equal to the Assumed Scheduled Payment thereon (net of the
related Servicing Fee), but only to the extent that the related borrower has
not made a payment sufficient to cover such amount under any forbearance
arrangement or otherwise that has been included in the Available Distribution
Amount for such Sub-Pool for such Distribution Date; and (iii) in the case of
each REO Property, an amount equal to thirty days interest with respect
thereto at the related Mortgage Rate in effect as of the commencement of the
related Due Period (net of the related Servicing Fee), but only to the extent
that such amount is not covered by any net income from such REO Property
included in the Available Distribution Amount for such Sub-Pool for such
Distribution Date. The "Assumed Scheduled Payment" with respect to any Balloon
Loan is the amount that would be due on each applicable Due Date as if it were
a Matured Performing Mortgage Loan. The
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Servicer's obligations to make P&I Advances in respect of any Mortgage Loan or
REO Property will continue through liquidation of such Mortgage Loan or
disposition of such REO Property, as the case may be.
The Servicer will be entitled to recover any P&I Advance made out of its own
funds from any amounts collected in respect of the Mortgage Loan as to which
such P&I Advance was made, whether in the form of late payments, Insurance
Proceeds, Liquidation Proceeds or otherwise ("Related Proceeds") or, to the
extent Related Proceeds are insufficient, from the Limited Guaranty to the
extent of the applicable Available Sub-Pool Coverage Amount and any Excess
Coverage Amount, or otherwise out of general funds with respect to the related
Sub-Pool on deposit in the applicable Collection Account. The Servicer will be
entitled to be reimbursed for all P&I Advances (including interest thereon at
the prime rate), as well as other fees and expenses to which it may be
entitled, prior to the distribution to the Certificateholders of principal of
or interest on the Certificates. In the event that the Available Sub-Pool
Coverage Amount and Excess Coverage Amount in respect of a particular Sub-Pool
has become exhausted, the Servicer will be required to make a P&I Advance
generally only in the amount of a fraction thereof, the numerator of which is
equal to the excess of the aggregate of the Class Balances of the
Corresponding Certificates over the aggregate Uncovered Portion thereof and
the denominator of which is the aggregate of such Class Balances.
Notwithstanding the foregoing, the Servicer will not be obligated to make any
P&I Advance that it determines in its reasonable good faith judgment would, if
made, not be recoverable out of Related Proceeds or from the Limited Guaranty,
and the Servicer will be entitled to recover any P&I Advance previously made
that it so determines to be a Nonrecoverable P&I Advance from the Limited
Guaranty to the extent of the applicable Available Sub-Pool Coverage Amount
and any Excess Coverage Amount, or otherwise out of general funds with respect
to the related Sub-Pool on deposit in the applicable Collection Account. The
determination by the Servicer that any prior P&I Advance constitutes a
Nonrecoverable P&I Advance or that any P&I Advance, if made, would constitute
a Nonrecoverable P&I Advance, is required to be evidenced by an officer's
certificate to that effect. In the event that P&I Advances with respect to 18
months of Scheduled Payments on any Mortgage Loan remain unreimbursed, the
Servicer is required to arrange for the appraisal of the related Mortgaged
Property and, if applicable, make a claim under the Limited Guaranty, as
described under "--The Limited Guaranty."
Interest accrued on outstanding Advances in respect of a particular Sub-Pool
may result in a reduction in amounts payable on the Corresponding class of
Certificates with the lowest alphabetical class designation, to the extent not
covered by the Limited Guaranty or not offset or covered by amounts otherwise
payable on such Certificates. To the extent that any holder of a Certificate
must bear the cost of Advances, the benefits of such Advances to such holder
will be contingent on the ability of such holder to reinvest the amounts
received as a result of such Advances.
THE LIMITED GUARANTY
General. To increase the likelihood of the complete and timely payment of
Distributable Interest and Distributable Principal to the holders of Offered
Certificates (as well as the Stripped Interest Certificates) of each class,
the FDIC will deliver to the Trustee for the benefit of Certificateholders a
Limited Guaranty in an aggregate amount initially equal to approximately 32.5%
of the Information Date Balance (the "Initial Guaranty Amount"). The amount of
such coverage initially available to Sub-Pool I is limited to approximately
$[ ], which is equal to approximately [ ]% of the Information Date Sub-Pool
I Balance and the amount of such coverage initially available to Sub-Pool II
is limited to approximately $[ ], which is equal to approximately [ ]% of
the Information Date Sub-Pool II Balance. Amounts available under the Limited
Guaranty (as well as the respective amounts available to each Sub-Pool) will
be reduced over the life of the Certificates by the aggregate dollar amount of
claims paid thereunder and will be increased to reflect any amounts recovered
by or on behalf of the FDIC in respect of such claims, in each case on a Sub-
Pool by Sub-Pool basis. The aggregate amount of coverage available under the
Limited Guaranty at the time of any determination is referred to herein as the
"Available Guaranty Amount," and the amount of such coverage available to a
particular Sub-Pool is referred to herein as the "Available Sub-Pool Coverage
Amount" for such Sub-Pool. Although the Limited Guaranty is issued by the
FDIC, claims thereunder may be satisfied only through draws upon the Bank
Insurance
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Fund. There can be no assurance that amounts in the Bank Insurance Fund will
be available to pay any such claim at any particular time. THE LIMITED
GUARANTY IS BY ITS TERMS NOT BACKED BY THE FULL FAITH AND CREDIT OF THE UNITED
STATES OF AMERICA. See "The Bank Insurance Fund." The Limited Guaranty, to the
extent of the Available Guaranty Amount, will be available on each
Distribution Date to cover shortfalls in the collections on the Mortgage Loans
due to (i) Realized Losses and (ii) Mortgage Loans becoming Limited Guaranty
Draw Loans. The Limited Guaranty also will be available to cover certain
expenses of the Trust Fund. The Limited Guaranty will not cover Basis Risk
Shortfalls or Prepayment Interest Shortfalls. Further, the Limited Guaranty
will not cover the FDIC's obligations in connection with a breach by it of a
representation or warranty with respect to any Mortgage Loan or in connection
with a Defect in any Mortgage File. Although only one Limited Guaranty will be
provided by the FDIC, the amount of claims payable thereunder in respect of a
particular Sub-Pool will be limited to the applicable Available Sub-Pool
Coverage Amount plus the Excess Coverage Amount, if any. The "Excess Coverage
Amount" with respect to a particular Sub-Pool is equal to the excess, if any,
of the applicable Available Sub-Pool Coverage Amount of the other Sub-Pool
over the aggregate of the Class Balances of the Certificates evidencing an
interest in such other Sub-Pool. In the event that the Available Sub-Pool
Coverage Amount under the Limited Guaranty in respect of a particular Sub-Pool
has been exhausted, the entire risk of shortfalls and losses on the Mortgage
Loans in such Sub-Pool in excess of the Excess Coverage Amount will be borne
by the holders of the Corresponding classes of Certificates, notwithstanding
the existence of any Available Sub-Pool Coverage Amount for the other Sub-
Pool. Such risk will be allocated to such classes of Certificates in reverse
alphabetical class designation as and to the extent described under "--
Subordination." Under no circumstances will claims in respect of a particular
Sub-Pool in excess of the sum of the Available Sub-Pool Coverage Amount and
the Excess Coverage Amount be paid, and in no event will aggregate claims in
respect of both Sub-Pools in excess of the Available Guaranty Amount be paid.
Scope of Coverage. A claim may be presented under the Limited Guaranty in
respect of the Realized Loss, if any, incurred in connection with the
liquidation of a defaulted Mortgage Loan or REO Property, whether through
foreclosure sale or otherwise. A "Realized Loss" is equal to the excess, if
any, of (i) the sum of (a) the unpaid principal balance of such Mortgage Loan
or REO Loan, as the case may be, plus (b) accrued and unpaid interest at the
applicable Net Mortgage Rate on such Mortgage Loan or REO Loan from time to
time, over (ii) the excess, if any, of (x) all Liquidation Proceeds, Insurance
Proceeds and other recoveries with respect to such Mortgage Loan or REO Loan,
received and not yet distributed to the applicable Certificateholders, over
(y) amounts payable or reimbursable therefrom to the Servicer for unpaid
servicing compensation, and to the Servicer or the FDIC for unreimbursed
Servicing Advances, together with interest on unreimbursed Advances, and
certain other unreimbursed expenses.
A claim also may be presented under the Limited Guaranty in respect of (i)
any temporary modification, waiver or amendment to the terms of any Mortgage
Loan that results in the reduction of the Scheduled Payments due thereon, (ii)
a reduction by a bankruptcy court of competent jurisdiction of (A) the
principal balance of a Mortgage Loan (a "Deficient Valuation") or (B) the
Scheduled Payment or the Mortgage Rate on a Mortgage Loan (a "Debt Service
Reduction"), (iii) a determination, immediately following the period in which
an aggregate of 18 months of Scheduled Payments have been advanced and remain
unreimbursed in respect of a Mortgage Loan, that the appraised value of the
related Mortgaged Property is less than the unpaid principal balance of the
Mortgage Loan plus accrued but unpaid interest thereon, or (iv) a permanent
reduction in the principal balance of any Mortgage Loan or the reduction in
the present value of the Scheduled Payments on a Discounted Mortgage Loan
attributable to the extension of the maturity date of such loan (any such
Mortgage Loan, a "Limited Guaranty Draw Loan").
The amount payable with respect to a particular Mortgage Loan under the
Limited Guaranty in connection with shortfalls described in clause (i) of the
immediately preceding paragraph is equal to the amount of the reduction in the
portion of the Scheduled Payment thereon attributable to interest; clause
(ii)(A) of the immediately preceding paragraph is equal to the amount by which
the principal balance thereof is reduced; clause (ii)(B) of the immediately
preceding paragraph is equal either to the amount of the reduction in the
portion of the Scheduled Payment thereon attributable to interest or to the
present value of the resulting reduction in the
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Net Mortgage Rate thereon; clause (iii) of the immediately preceding paragraph
is equal to the excess, if any, of the unpaid principal balance thereof plus
accrued and unpaid interest thereon over the appraised value of the related
Mortgaged Property; and clause (iv) of the immediately preceding paragraph is
equal to the amount of the reduction of the principal balance of the Mortgage
Loan, in all cases together with related unreimbursed Advances and interest
thereon.
Claims under the Limited Guaranty. If, by the close of business no later
than the fifth business day prior to any Distribution Date, the Trustee
determines, based upon the collection report previously delivered to it by the
Servicer, the existence of a shortfall covered by the Limited Guaranty, as
described under "--Scope of Coverage" above, the Trustee will be required to
make a claim to the FDIC on behalf of the Certificateholders under the Limited
Guaranty in an amount equal to the lesser of such shortfall for such
Distribution Date and the Available Guaranty Amount. Claims under the Limited
Guaranty also may be made on a periodic basis to cover certain expenses of the
Servicer, the Trustee and the FDIC, including without limitation interest on
Advances.
If the Available Sub-Pool Coverage Amount with respect to a particular Sub-
Pool, together with the Excess Coverage Amount, if any, has been reduced to
zero, coverage under the Limited Guaranty with respect to such Sub-Pool will
be exhausted, and thereafter, the holders of the Corresponding Certificates
will bear all risks of shortfalls and losses on the Mortgage Loans in such
Sub-Pool, as and to the extent described below under "--Subordination."
SUBORDINATION
The Limited Guaranty is intended to provide to all classes of Offered
Certificates and to the Stripped Interest Certificates "first loss" coverage
in respect of credit defaults on the Mortgage Loans in an aggregate amount
equal to the Available Guaranty Amount. In the event that the amount of
coverage available under the Limited Guaranty has been exhausted, credit
losses and shortfalls on each Mortgage Loan in a particular Sub-Pool will be
borne first by the Corresponding class of Certificates having the lowest
alphabetical class designation before allocation of such losses and shortfalls
to any other Corresponding class of Certificates (the Class I-A1 Certificates
and the Class I-A2 Certificates are pari passu). This subordination is
intended to enhance the likelihood of timely receipt by the holders of any
class of Certificates evidencing an interest in a particular Sub-Pool with a
relatively high alphabetical class designation of the full amount of
Distributable Interest and Distributable Principal payable in respect of such
class on each Distribution Date, as compared with any Corresponding class of
Certificates having a relatively low alphabetical class designation. The
protection afforded to the holders of each class of Certificates evidencing an
interest in a particular Sub-Pool by means of the subordination of each other
Corresponding class of Certificates with a lower alphabetical class
designation will be accomplished by the application of the Available
Distribution Amount for such Sub-Pool on each Distribution Date in the order
of priority described above under "--Distributions--Method, Timing and
Amount," "--Sub-Pool I Certificates--Priority" and "--Sub-Pool II
Certificates--Priority."
Losses and other shortfalls experienced with respect to the Mortgage Loans
in a particular Sub-Pool, to the extent not covered by the Limited Guaranty,
will not be applied to reduce either the Class Balance or the absolute
entitlement to interest of any Corresponding class of Certificates, even
though such losses and shortfalls may cause one or more of such classes to
receive less than the full amount of principal and interest to which it is
entitled. As a result, the aggregate Stated Principal Balance of a particular
Sub-Pool at any time may be less than the aggregate of the Class Balances of
the Corresponding Certificates. Such deficit will be allocated to the
respective classes of Certificates (in each case to the extent of its Class
Balance) in reverse alphabetical order of their class designations. Such
allocation will not reduce the Class Balance of any such class and is intended
solely to identify the portion (the "Uncovered Portion") of the Class Balance
of each such class for which there is at such time no corresponding principal
amount of Mortgage Loans. See "--Voting Rights."
REPORTS TO CERTIFICATEHOLDERS; CERTAIN AVAILABLE INFORMATION
On each Distribution Date the Trustee will forward to the holders of each
class of Certificates, a statement (a "Distribution Date Statement") based
primarily upon information furnished to the Trustee by the Servicer that will
set forth with respect to the applicable Sub-Pool or the Mortgage Pool, as
indicated, among other things:
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(i) the amount, if any, of the distribution on such Distribution Date to
the holders of Certificates of each such class allocable to Distributable
Principal and the Optimal Principal Distribution Amount for each such class
on such Distribution Date;
(ii) the amount, if any, of the distribution on such Distribution Date to
holders of Certificates of each such class allocable to Distributable
Interest and any portion thereof remaining unpaid after giving effect to
the distributions made on such Distribution Date, separately stated and the
Accrued Interest and Deferred Interest (in the case of Sub-Pool II only) in
respect of such Sub-Pool and each Corresponding class of Certificates for
such Distribution Date;
(iii) the Pass-Through Rate for each class of Certificates for such
Distribution Date;
(iv) the aggregate amount of P&I Advances and Servicing Advances made in
respect of such Sub-Pool and such Distribution Date, and the aggregate
amount of unreimbursed P&I Advances and Servicing Advances in respect of
such Sub-Pool at the close of business on such Distribution Date;
(v) the aggregate Stated Principal Balance and Scheduled Principal
Balance of the Mortgage Loans in each Sub-Pool outstanding immediately
following such Distribution Date;
(vi) the weighted average amortization term and the weighted average
remaining months to maturity of the Mortgage Loans in each Sub-Pool as of
the commencement of the Due Period to which such Distribution Date relates
and the Weighted Average Effective Net Mortgage Rate of each Sub-Pool as of
such Distribution Date;
(vii) the number and aggregate principal balance of Mortgage Loans in
such Sub-Pool (A) delinquent one month, (B) delinquent two months, (C)
delinquent three or more months and (D) as to which foreclosure proceedings
have been commenced;
(viii) as to each Mortgage Loan in such Sub-Pool that is delinquent two
or more months, (A) the loan number thereof, (B) the unpaid principal
balance thereof, (C) whether the delinquency is in respect of its Balloon
Payment, (D) the aggregate amount of unreimbursed Servicing Advances and
unreimbursed P&I Advances in respect thereof, (E) the aggregate amount of
interest accrued and payable on such Advances, (F) whether a notice of
acceleration has been sent to the borrower and, if so, the date of such
notice, (G) whether foreclosure proceedings have been commenced and, if so,
the date so commenced and (H) if such Mortgage Loan is more than three
months delinquent and foreclosure has not been commenced, the reason
therefor;
(ix) with respect to any Mortgage Loan in such Sub-Pool liquidated during
the related Due Period (other than a payment in full), (A) the loan number
thereof, (B) the nature of the liquidation event, (C) the aggregate amount
of Liquidation Proceeds received, (D) the portion of such Liquidation
Proceeds payable or reimbursable to the Servicer in respect of such
Mortgage Loan and (E) the amount of any Realized Loss, and the portion
thereof allocated to Certificateholders;
(x) with respect to each REO Property included in such Sub-Pool as of the
end of the related Due Period, (A) the loan number of the related Mortgage
Loan, (B) the date of acquisition of such REO Property by the Trust Fund,
(C) the book value of such REO Property, (D) the Stated Principal Balance
and Scheduled Principal Balance of the related REO Loan immediately
following such Distribution Date, (E) the aggregate amount of unreimbursed
Servicing Advances and unreimbursed P&I Advances in respect thereof and (F)
the aggregate amount of interest accrued and payable on such Advances;
(xi) with respect to any REO Property in such Sub-Pool sold during the
related Due Period, (A) the loan number of the related Mortgage Loan, (B)
the aggregate amount of Liquidation Proceeds received, (C) the portion of
such Liquidation Proceeds payable or reimbursable to the Servicer in
respect of such REO Property or the related REO Loan or the related
Mortgage Loan and (D) the amount of any Realized Loss in respect of the
related REO Loan;
(xii) the Class Balance of each Corresponding class of Certificates
immediately before and immediately after such Distribution Date, and the
Uncovered Portion thereof, if any;
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(xiii) the (a) aggregate amount of Principal Prepayments for such Sub-
Pool made during the related Due Period and (b) any Net Aggregate
Prepayment Interest Shortfall for such Sub-Pool and such Distribution Date;
(xiv) the amount of the Servicing Fee paid to the Servicer, and, with
respect to each Mortgage Loan, as applicable, the Liquidation Fee,
Resolution Fee and Modification Fee paid to the Servicer, and the trust
administrative fee paid to the Trustee during the related Due Period in
respect of such Sub-Pool and any other amounts otherwise reimbursable to
the Servicer or the Trustee during the related Due Period;
(xv) with respect to any Mortgage Loan in such Sub-Pool the terms of
which were modified, waived or amended, a summary of terms thereof prepared
by the Servicer;
(xvi) the amount of claims paid under the Limited Guaranty for such
Distribution Date and the Available Guaranty Amount and the Available Sub-
Pool Coverage Amount for each Sub-Pool and the Excess Coverage Amount, if
any, for any Sub-Pool immediately following such Distribution Date;
(xvii) the Basis Risk Shortfall, the Basis Risk Support Amount, the
Unfunded Basis Risk Shortfall and the allocation thereof to the Sub-Pool II
Certificates for such Distribution Date;
(xviii) the outstanding principal balance of Mortgage Loans that have
been repurchased during the related Due Period by the FDIC as a result of a
breach of a representation or warranty;
(xix) the outstanding principal balance of Deleted Mortgage Loans and
Substitute Mortgage Loans for the related Due Period; and
(xx) the aggregate amount of payments made by the FDIC in respect of the
related Due Period in connection with adjustments to the principal balances
of the ARM Loans that were discovered pursuant to the ARM Audits to have
been subject to interest overcharges, as described under "Description of
the Mortgage Pool--Mortgage Loan Information--The ARM Audits."
In the case of information furnished pursuant to subclauses (i), (ii) and
(xiii)(a) above, the amounts will be expressed as a dollar amount in the
aggregate of the relevant class of Certificates and per single Certificate.
Within a reasonable period of time after the end of each Calendar year, the
Trustee will be required to furnish to each person who at any time during the
calendar year was a holder of a Certificate of such series a statement
containing the information set forth in subclauses (i), (ii), and (xiv) above,
aggregated for such calendar year or the applicable portion thereof during
which such person was a Certificateholder. Such obligation will be deemed to
have been satisfied to the extent that substantially comparable information is
provided pursuant to any requirements of the Code as are from time to time in
force. See, however, "--Book-Entry Registration and Definitive Certificates."
The Servicer is also required to deliver to the Trustee prior to each
Distribution Date, and the trustee is to deliver to the Mortgage Loan Seller,
the Underwriters, the Certificateholders (upon request), and each of the
Rating Agencies the following reports:
(a) A Comparative Financial Status Report substantially in the form of Annex
C-1 attached hereto, setting forth, among other things, to the extent such
information is provided by the related borrower the occupancy, revenue, net
operating income and debt service coverage ratio for each Mortgage Loan as of
the Determination Date immediately preceding the preparation of such report
for each of the following periods: (i) the most current available year-to-date
(to the extent of information received), (ii) the previous two full fiscal
years, and (iii) the "base year" (representing the original underwriting
information used as of the Cut-Off Date);
(b) A Delinquent Loan Status Report substantially in the form of Annex C-2
attached hereto, setting forth, among other things, those Mortgage Loans
which, as of the close of business on the Determination Date immediately
preceding the preparation of such report, were delinquent 30-59 days,
delinquent 60-89 days, delinquent 90 days or more, current but specially
serviced, or in foreclosure but not REO Property;
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(c) A Historical Loan Modification Report substantially in the form of Annex
C-3 attached hereto, setting forth, among other things, those Mortgage Loans
which, as of the close of business on the Determination Date immediately
preceding the preparation of such report, have been modified pursuant to the
Pooling and Servicing Agreement (i) during the related Prepayment Period and
(ii) since the Cut-Off Date, showing the original and the revised terms
thereof;
(d) A Historical Loss Estimate Report substantially in the form of Annex C-4
attached hereto, setting forth, among other things, as of the close of
business on the Determination Date immediately preceding the preparation of
such report, (i) the aggregate amount of liquidation proceeds and liquidation
expenses, both for the current period and historically, and (ii) the amount of
Realized Losses occurring during the related Prepayment Period, set forth on a
Mortgage Loan-by-Mortgage Loan basis;
(e) A REO Status Report substantially in the form of Annex C-5 attached
hereto, setting forth, among other things, with respect to each REO Property
that was included in the Trust Fund as of the close of business on the
Determination Date immediately preceding the preparation of such report, (i)
the acquisition date of such REO Property, (ii) the amount of income collected
with respect to any REO Property net of related expenses and other amounts, if
any, received on such REO Property during the related Prepayment Period, and
(iii) the value of the REO Property based on the most recent appraisal or
other valuation thereof available to the Servicer as of such date of
determination (including any prepared internally by any Sub-Servicer); and
(f) A Watch List, substantially in the form of Annex C-6 attached hereto,
which provides, among other things, a list of Mortgage Loans in jeopardy of
becoming Sub-Serviced Mortgage Loans.
The Pooling and Servicing Agreement requires that the Trustee make available
at its corporate trust office, during normal business hours, for review by any
holder of a Certificate or prospective holder of a Certificate, originals or
copies of, among other things, the following items: (a) the Pooling and
Servicing Agreement and any amendments thereto, (b) all Distribution Date
Statements delivered to the holders of the Certificates since the Closing
Date, (c) all officer's certificates delivered to the Trustee since the
Closing Date, (d) all accountants' reports delivered to the Trustee since the
Closing Date, (e) the most recent property inspection report prepared by or on
behalf of the Servicer in respect of each Mortgaged Property and delivered to
the Trustee, (f) the most recent Mortgaged Property annual operating
statements, if any, collected by or on behalf of the Servicer and delivered to
the Trustee, and (g) any and all modifications, waivers and amendments of the
terms of a Mortgage Loan entered into by the Servicer and delivered to the
Trustee. Copies of any and all of the foregoing items will be available from
the Trustee upon request; however, the Trustee will be permitted to require
payment of a sum sufficient to cover the reasonable costs and expenses of
providing such copies.
Until such time as Definitive Offered Certificates of any class are issued,
the foregoing information will be available to Certificate Owners of such
class only to the extent it is forwarded by or otherwise available through DTC
and its Participants. Conveyance of notices and other communications by DTC to
Participants, and by Participants to Certificate Owners, will be governed by
arrangements among them, subject to any statutory or regulatory requirements
as may be in effect from time to time. The Servicer, the Trustee, the FDIC,
the Mortgage Loan Seller and the Certificate Registrar are required to
recognize as Certificateholders only those persons in whose names the
Certificates are registered on the books and records of the Certificate
Registrar. The initial registered holder of the Offered Certificates will be
Cede & Co. as nominee for DTC.
VOTING RIGHTS
At all times during the term of the Pooling and Servicing Agreement, 100% of
the Voting Rights will be allocated among the respective classes of
Certificates, of which 1% will be allocated to the Stripped Interest
Certificates based on their respective Notional Amounts and 99% will be
allocated to Class I-A1, Class I-A2, Class I-B, Class I-C, Class I-D, Class I-
E, Class I-F, Class I-G, Class II-A, Class II-B and Class II-C Certificates,
in proportion to the Class Balances of their Certificates (net of any
uncovered portion of the Class Balance thereof). No Voting Rights will be
allocated to the Class R Certificates. Voting Rights allocated to a class of
Certificates will be allocated among such Certificates in proportion to the
Percentage Interests evidenced thereby.
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TERMINATION
The obligations created by the Pooling and Servicing Agreement will
terminate following the earliest to occur of (i) the final payment (or advance
in respect thereof) or other liquidation of the last Mortgage Loan or REO
Property or (ii) the purchase of all of the assets of the Trust Fund by the
FDIC, the Mortgage Loan Seller, the Servicer or the Class R
Certificateholders. Certificateholders will have no redemption rights.
Any such purchase of all the Mortgage Loans and other assets in the Trust
Fund is required to be made at a price equal to the sum of (i) the aggregate
principal balance of all the Mortgage Loans then included in the Trust Fund,
plus accrued interest and the aggregate of amounts payable or reimbursable to
the Servicer under the Pooling and Servicing Agreement, and (ii) the fair
market value of all REO Properties then included in the Trust Fund, as
determined by an appraiser selected by the Servicer. Such purchase will effect
early retirement of the then outstanding Offered Certificates, but the right
of the FDIC the Servicer or the Class R Certificateholders to effect such
termination is subject to the requirement that the then aggregate Stated
Principal Balance of the Mortgage Loans and REO Properties be less than 10% of
the Cut-off Date Pool Balance.
On the final Distribution Date, the aggregate amount paid for the Mortgage
Loans and REO Properties will constitute the Available Distribution Amount for
such date, with the portion thereof distributed on the Certificates to be
distributed in accordance with the priorities described under "--
Distributions--Sub-Pool I Certificates--Priority" and "--Sub-Pool II
Certificates--Priority" above.
BOOK-ENTRY REGISTRATION AND DEFINITIVE CERTIFICATES
The Offered Certificates of each class will be issued in book-entry format
and maintained and transferred on the book-entry records of The Depository
Trust Company ("DTC"), New York, NY. The Offered Certificates of each class
will initially be issued as fully-registered securities registered in the name
of Cede & Co. (DTC's partnership nominee). One fully-registered Offered
Certificate will be issued for each Class of Offered Certificates, each in the
aggregate principal amount of such Class, and will be deposited with DTC. If,
however, the aggregate principal amount of any Class exceeds $200 million, one
certificate will be issued with respect to each $200 million of principal
amount and an additional certificate will be issued with respect to any
remaining principal amount of such Class. No Certificate Owner will be
entitled to receive a Definitive Offered Certificate representing its interest
in any such class, except under the limited circumstances described herein.
Unless and until Definitive Offered Certificates are issued, all references to
actions by holders of the Offered Certificates of a particular class will
refer to actions taken by DTC upon instructions received from Certificate
Owners of such class through its Participants, and all references herein to
payments, notices, reports and statements to holders of the Offered
Certificates will refer to payments notices, reports and statements to DTC or
Cede & Co., as the registered holder of the Offered Certificates, for
distribution to Certificate Owners through its Participants in accordance with
DTC procedures.
Until Definitive Offered Certificates of any class are issued, interests in
the Offered Certificates of such class will be transferred on the book-entry
records of DTC and its Participants. Definitive Offered Certificates of any
class, if issued, may be transferred or exchanged at the offices of the
Trustee located at 225 Franklin Street, Boston, Massachusetts, without the
payment of any service charges, other than any tax or other governmental
charge payable in connection therewith. The Trustee will initially serve as
registrar (in such capacity, the "Certificate Registrar") for purposes of
recording and otherwise providing for the registration of the Certificates and
of transfers and exchanges of the Definitive Offered Certificates, if issued.
DTC is a limited-purpose trust company organized under the New York Banking
Law, a "banking corporation" within the meaning of the New York Banking Law, 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 the provisions of Section 17A of the Securities
Exchange Act of 1934, as amended. DTC holds securities that its Participants
deposit with DTC. DTC also facilitates the clearance and settlement of
securities transactions among Participants of securities transactions, such as
transfers and pledges,
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in deposited securities through electronic computerized book-entry changes in
their accounts, thereby eliminating the need for physical movement of
securities certificates. "Direct Participants," which maintain accounts with
DTC, include securities brokers and dealers, banks, trust companies, clearing
corporations, and certain other organizations. DTC is owned by a number of its
Direct Participants and by the New York Stock Exchange, Inc., the American
Stock Exchange, Inc., and the National Association of Securities Dealers, Inc.
Access to the DTC system also is available to others such as brokers and
dealers, banks, and trust companies that clear through or maintain a custodial
relationship with a Direct Participant, either directly or indirectly
("Indirect Participants"). The rules applicable to DTC and its Participants
are on file with the Commission.
Purchases of Book-Entry Certificates under the DTC system must be made by or
through Direct Participants, which will receive a credit for the Book-Entry
Certificates on DTC's records. The ownership interest of each actual purchaser
of a Book-Entry Certificate (a "Certificate Owner") is in turn to be recorded
on the Direct and Indirect Participants' records. Certificate Owners will not
receive written confirmation from DTC of their purchases, but Certificate
Owners are expected to receive written confirmations providing details of such
transactions, as well as periodic statements of their holdings, from the
Direct or Indirect Participant through which each Certificate Owner entered
into the transaction. Transfers of ownership interest in the Book-Entry
Certificates are to be accomplished by entries made on the books of
Participants acting on behalf of Certificate Owners. Certificate Owners will
not receive certificates representing their ownership interests in the Book-
Entry Certificates, except in the event that use of the book-entry system for
the Book-Entry Certificates of any class is discontinued.
To facilitate subsequent transfers, all Book-Entry Certificates deposited
with DTC are registered in the name of DTC's partnership nominee, Cede & Co.
The deposit of Book-Entry Certificates with DTC and their registration in the
name of Cede & Co. effect no change in beneficial ownership. DTC has no
knowledge of the actual Certificate Owners of the Book-Entry Certificates;
DTC's records reflect only the identity of the Direct Participants to whose
accounts such Book-Entry Certificates are credited, which may or may not be
the Certificate Owners. The Participants will remain responsible for keeping
account of their holdings on behalf of their customers.
Conveyance of notices and other communications by DTC to Direct
Participants, by Direct Participants to Indirect Participants, and by Direct
Participants and Indirect Participants to Certificate Owners will be governed
by arrangements among them, subject to any statutory or regulatory
requirements as may be in effect from time to time.
Redemption notices shall be sent to Cede & Co. If less than all of the Book-
Entry Certificates are being redeemed, DTC's practice is to determine by lot
the amount of the interest of each Direct Participant in such issue to be
redeemed.
Neither DTC nor Cede & Co. will consent or vote with respect to the Book-
Entry Certificates. Under its usual procedures, DTC mails an Omnibus Proxy to
Issuer as soon as possible after the record date. The Omnibus Proxy assigns
Cede & Co.'s consenting or voting rights to those Direct Participants to whose
accounts the Book-Entry Certificates are credited on the record date
(identified in a listing attached to the Omnibus Proxy).
Distributions on the Book-Entry Certificates will be made to DTC. DTC's
practice is to credit Direct Participants' accounts on the related
Distribution Date in accordance with their respective holdings shown on DTC's
records unless DTC has reason to believe that it will not receive payment on
such date. Disbursement of such distributions by Participants to Certificate
Owners will be governed by standing instructions and customary practices, as
is the case with securities held for the accounts of customers in bearer form
or registered in "street name," and will be the responsibility of each such
Participant (and not of DTC, the FDIC, the Mortgage Loan Seller, the Trustee
or the Servicer), subject to any statutory or regulatory requirements as may
be in effect from time to time. Under a book-entry system, Certificate Owners
may receive payments after the related Distribution Date. Distributions of
principal and interest to DTC is the responsibility of the Trustee,
disbursement of such payments to Direct Participants shall be the
responsibility of DTC, and disbursement of such payment to the Certificate
Owners shall be the responsibility of Direct and Indirect Participants.
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With respect to the Book-Entry Certificates, the only "Certificateholder"
(as such term is used in the Pooling and Servicing Agreement) will be the
nominee of DTC, and the Certificate Owners will not be recognized as
Certificateholders under the Pooling and Servicing Agreement. Certificate
Owners will be permitted to exercise the rights of Certificateholders under
the Pooling and Servicing Agreement only indirectly through the Participants
who in turn will exercise their rights through DTC. DTC will take action
permitted to be taken by a Certificateholder under the Pooling and Servicing
Agreement only at the direction of one or more Participants to whose account
with DTC interests in the Book-Entry Certificates are credited.
Because DTC can act only on behalf of Participants, who in turn act on
behalf of Indirect Participants and certain Certificate Owners, the ability of
a Certificate Owner to pledge its interest in Book-Entry Certificates to
persons or entities that do not participate in the DTC system, or otherwise
take actions in respect of its interest in Book-Entry Certificates, may be
limited due to the lack of a physical certificate evidencing such interest.
DTC may discontinue providing its services as securities depository with
respect to the Offered Certificates at any time by giving reasonable notice to
the Mortgage Loan Seller. Under such circumstances, in the event that a
successor securities depository is not obtained, the Offered Certificates will
be printed and delivered. The Mortgage Loan Seller may decide to discontinue
use of system of book-entry transfers through DTC (or a successor securities
depository). In that event, Offered Certificates will be printed and
delivered.
The information in this section concerning DTC and DTC's book-entry system
has been obtained from sources that the Mortgage Loan Seller believes to be
reliable, but the Mortgage Loan Seller takes no responsibility for the
accuracy thereof.
The Book-Entry Certificates initially issued in book-entry form will be
issued as Definitive Offered Certificates to Certificate Owners or their
nominees, rather than to DTC or its nominee, only if (i) the Trustee is
advised in writing that DTC is no longer willing or able to discharge properly
its responsibilities as depository with respect to such Certificates and the
Mortgage Loan Seller is unable to locate a qualified successor or (ii) the
Mortgage Loan Seller, at its option, elects to terminate the book-entry system
through DTC with respect to such Certificates. Upon the occurrence of either
of the events described in the preceding sentence, DTC will be required to
notify all Participants of the availability through DTC of Definitive Offered
Certificates. Upon surrender by DTC of the certificate or certificates
representing a class of Book-Entry Certificates, together with instructions
for registration, the Trustee, as Certificate Registrar, will be required to
issue to the Certificate Owners identified in such instructions the Definitive
Offered Certificates to which they are entitled, and thereafter the holders of
such Definitive Offered Certificates will be recognized as Certificateholders
under the Pooling and Servicing Agreement.
THE TRUSTEE
State Street Bank and Trust Company, a Massachusetts banking corporation,
will act as Trustee on behalf of the Certificateholders. The offices of the
Trustee primarily responsible for the administration of the Trust Fund are
located at 225 Franklin Street, Boston, Massachusetts. See "Description of the
Pooling and Servicing Agreement--Duties of the Trustee," "--Certain Matters
Regarding the Trustee" and "--Resignation and Removal of the Trustee."
Except with respect to the statements concerning the Trustee set forth in
the paragraph above, neither the Trustee nor any of its directors, officers or
employees have investigated or make any representation or warranty as to the
accuracy or completeness of any information set forth in this prospectus.
YIELD AND MATURITY CONSIDERATIONS
YIELD CONSIDERATIONS
General. The yield on any Offered Certificate will depend on: (i) the Pass-
Through Rate in effect from time to time for such Certificate; (ii) the price
paid for such Certificate and, if the price was other than par, the
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rate and timing of payments of principal on such Certificate; and (iii) the
aggregate amount of distributions on such Certificate.
Pass-Through Rates. The Pass-Through Rates applicable to the Sub-Pool II
Certificates will fluctuate based on changes in LIBOR. See "Description of the
Certificates--Sub-Pool II Certificates--Pass-Through Rates." Accordingly, the
yield on the Sub-Pool II Certificates, in general, will be highly sensitive to
changes in LIBOR. Such yield will be adversely affected by Basis Risk
Shortfalls, to the extent not covered by Basis Risk Support Amounts. Unfunded
Basis Risk Shortfalls will be allocated among one or more classes of Sub-Pool
II Certificates as described herein under "Description of the Certificates--
Distributions--Sub-Pool II Certificates--Basis Risk." The Pass-Through Rates
on the Sub-Pool I Certificates will be fixed for the life of such
Certificates. See "Description of the Certificates--Distributions--Sub-Pool I
Certificates--Pass-Through Rates."
Listed below are the monthly average values of LIBOR since January 1991.
LIBOR values may fluctuate significantly over time and may not increase or
decrease in a constant pattern from period to period. The following does not
purport to be representative of future values of LIBOR, and no assurance can
be given as to the value of LIBOR on any LIBOR Adjustment Date.
<TABLE>
<CAPTION>
MONTH 1991 1992 1993 1994 1995 1996
----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
January............................ 7.331% 4.247% 3.264% 3.191% 6.011% 5.662%
February........................... 6.682 4.214 3.195 3.432 6.201 5.403
March.............................. 6.662 4.395 3.232 3.674 6.210 5.451
April.............................. 6.225 4.153 3.208 3.887 6.196 5.532
May................................ 6.020 3.937 3.191 4.395 6.147 5.510
June............................... 6.167 3.993 3.256 4.442 6.144 5.547
July............................... 6.100 3.509 3.216 4.617 6.004 5.546
August............................. 5.831 3.456 3.232 4.753 5.977 5.500
September.......................... 5.679 3.315 3.210 5.000 5.939 5.550
October............................ 5.402 3.269 3.232 5.142 5.949 5.461
November........................... 4.996 3.362 3.252 5.560 5.913 5.450
December........................... 4.998 3.748 3.373 6.170 5.945
</TABLE>
Rate and Timing of Principal Payments. The yield to holders of Offered
Certificates that are purchased at a discount or premium will be affected by
the rate and timing of principal payments on such Certificates. Distributable
Principal for a particular Sub-Pool will be allocated on each Distribution
Date sequentially to the Corresponding Class A Certificates, then the
Corresponding Class B Certificates, then the Corresponding Class C
Certificates and, in the case of the Sub-Pool I Certificates, then the Class
I-D Certificates, then the Class I-E Certificates, then the Class I-F
Certificates and then the Class I-G Certificates, in each case until the
entire Class Balance thereof has been paid in full. Consequently, the rate and
timing of principal payments on such Certificates will be directly related to
the rate and timing of principal payments on or in respect of the Mortgage
Loans in the Sub-Pool evidenced thereby (including principal prepayments on
the Mortgage Loans resulting from both voluntary prepayments by the mortgagors
and involuntary liquidations). The rate and timing of principal payments on
the Mortgage Loans will in turn be affected by the amortization schedules
thereof and the rate and timing of principal prepayments and other unscheduled
collections thereon (including for this purpose, collections made in
connection with liquidations of Mortgage Loans due to defaults, casualties or
condemnations affecting the Mortgaged Properties, or repurchases of Mortgage
Loans out of the Trust Fund attributable to breaches of representations and
warranties). Prepayments and, assuming the Mortgage Loan stated maturity dates
have not occurred, liquidations and purchases of the Mortgage Loans in a
particular Sub-Pool, will result in distributions on the Corresponding
Certificates of amounts that would otherwise be distributed over the remaining
terms of the Mortgage Loans. Defaults on the Mortgage Loans, particularly at
or near their stated maturity dates, even if any resulting Realized Loss
ultimately is covered by the Limited Guaranty, may result in significant
delays in payments of principal on the Mortgage Loans in a particular Sub-Pool
(and, accordingly, on
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the Offered Certificates evidencing an interest in such Sub-Pool) while work-
outs are negotiated or foreclosures are completed. See "Servicing of the
Mortgage Loans--Modifications, Waivers and Amendments" and "--Realization Upon
Defaulted Mortgage Loans" and "Certain Legal Aspects of Mortgage Loans."
The extent to which the yield to maturity of any Offered Certificate may
vary from the anticipated yield will depend upon the degree to which it is
purchased at a discount or premium and when, and to what degree, payments of
principal on the Mortgage Loans in the Sub-Pool evidenced thereby are in turn
distributed on such Certificate. An investor should consider, in the case of
any Offered Certificate purchased at a discount, the risk that a slower than
anticipated rate of principal payments on the Mortgage Loans in the Sub-Pool
evidenced thereby could result in an actual yield to such investor that is
lower than the anticipated yield and, in the case of any such Offered
Certificate purchased at a premium, the risk that a faster than anticipated
rate of principal payments could result in an actual yield to such investor
that is lower than the anticipated yield. In general, the earlier a prepayment
of principal on the Mortgage Loans is distributed on a Certificate purchased
at a discount or premium, 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 (to the extent distributable on such investor's Certificates)
occurring at a rate higher (or lower) than the rate anticipated by the
investor during any particular period would not be fully offset by a
subsequent like reduction (or increase) in the rate of principal payments.
Because the rate of principal payments on the Mortgage Loans will depend on
future events and a variety of factors (as described more fully below), no
assurance can be given as to such rate or the rate of principal prepayments in
particular. The Mortgage Loan Seller is not aware of any relevant publicly
available or authoritative statistics with respect to the historical
prepayment experience of a large group of mortgage loans comparable to the
Mortgage Loans.
Losses and Shortfalls. The yield to holders of the Offered Certificates will
also depend on the extent to which such holders are required to bear the
effects of any losses or shortfalls (including Basis Risk Shortfalls) on the
Mortgage Loans in the Sub-Pool evidenced thereby. The amount available under
the Limited Guaranty to cover credit losses will be reduced in an amount equal
to any draws to cover Basis Risk Shortfalls.
In the event that coverage under the Limited Guaranty becomes exhausted,
losses and other shortfalls on the Mortgage Loans in a particular Sub-Pool
will generally be borne: (i) in the case of the Sub-Pool I Certificates,
first, by the holders of the Class I-G Certificates, to the extent of amounts
otherwise distributable in respect of their Certificates; second, by the
holders of the Class I-F Certificates, to the extent of amounts otherwise
distributable in respect of their Certificates; third, by the holders of the
Class I-E Certificates, to the extent of amounts otherwise distributable in
respect of their Certificates; fourth, by the holders of the Class I-D
Certificates to the extent of amounts otherwise distributable in respect of
their Certificates; fifth, by the holders of the Class I-C Certificates, to
the extent of amounts otherwise distributable in respect of their
Certificates; sixth, by the holders of the Class I-B Certificates, to the
extent of amounts otherwise distributable in respect of their Certificates;
and last, by the holders of the Class I-A1 Certificates and Class I-A2
Certificates; and (ii) in the case of the Sub-Pool II Certificates, first, by
the holders of the Class II-C Certificates, to the extent of amounts otherwise
distributable in respect of their Certificates; second, by the holders of the
Class II-B Certificates, to the extent of amounts otherwise distributable in
respect of their Certificates; and last, by the holders of the Class II-A
Certificates.
Certain Relevant Factors. The rate and timing of principal payments and
defaults and the severity of losses on the Mortgage Loans may be affected by a
number of factors, including, without limitation, prevailing interest rates,
the terms of the Mortgage Loans (for example, prepayment premiums, adjustable
Mortgage Rates and amortization terms that require Balloon Payments), the
demographics and relative economic vitality of the areas in which the
Mortgaged Properties are located and the general supply and demand for rental
units in such areas, the quality of management of the Mortgaged Properties,
the servicing of the Mortgage Loans, possible changes in tax laws and other
opportunities for investment. See "Risk Factors--The Mortgage Loans" and
"Description of the Mortgage Pool."
The rate of prepayment on the Mortgage Loans in either Sub-Pool is likely to
be affected by prevailing market interest rates for mortgage loans of a
comparable type, term and risk level. When the prevailing market
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interest rate is below a mortgage coupon, a borrower may have an increased
incentive to refinance its mortgage loan. Adjustments to the Mortgage Rates on
the ARM Loans will generally be limited by lifetime and/or periodic caps and
floors and, in each case, will be based on the related Index (which may not
rise and fall consistently with mortgage interest rates then available) plus
the related Gross Margin (which may be different from margins then offered on
adjustable rate mortgage loans). See "Description of the Mortgage Pool--
Mortgage Loan Information--Sub-Pool II." As a result, the Mortgage Rates on
the ARM Loans at any time may not be comparable to prevailing market interest
rates. In addition, as prevailing market interest rates decline, and without
regard to whether the Mortgage Rates on the ARM Loans decline in a manner
consistent therewith, related borrowers 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 a different index,
margin or rate cap or floor on another adjustable rate mortgage loan. Certain
of the Mortgage Loans may be prepaid at any time and, in certain cases,
without payment of a prepayment premium.
Depending on prevailing market interest rates, the outlook for market
interest rates and economic conditions generally, some borrowers may sell
Mortgaged Properties in order to realize their equity therein, to meet cash
flow needs or to make other investments. In addition, some borrowers may be
motivated by federal and state tax laws (which are subject to change) to sell
Mortgaged Properties prior to the exhaustion of tax depreciation benefits.
No representation can be made as to the particular factors that will affect
the rate and timing of prepayments and defaults on the Mortgage Loans, as to
the relative importance of such factors, as to the percentage of the principal
balance of the Mortgage Loans that will be prepaid or as to which a default
will have occurred as of any date or as to the overall rate of prepayment or
default on the Mortgage Loans.
Delay in Payment of Distributions. The effective yield to holders of the
Sub-Pool I Certificates will differ from the yield otherwise produced by the
applicable Pass-Through Rates and purchase prices of such Certificate because
interest distributions will not be payable to such holders until the 25th day
of the month following the month of accrual (without any additional
distribution of interest or earnings thereon in respect of such delay).
Unpaid Interest. As described under "Description of the Certificates--
Distributions--Sub-Pool I Certificates--Priority" and "--Sub-Pool II
Certificates--Priority," if the portion of the Available Distribution Amount
for a particular Sub-Pool distributable in respect of interest on any
Corresponding class of Offered Certificates on any Distribution Date is less
than the Distributable Interest then payable for such class, the shortfall
will be distributable to holders of such class of Certificates on subsequent
Distribution Dates, to the extent of available funds, without interest thereon
to compensate such holders for the late payment.
WEIGHTED AVERAGE LIFE
The weighted average life of each class of Offered Certificates refers to
the average amount of time that will elapse from the date of its issuance
until each dollar allocable to principal of such Certificate is distributed to
the investor, and is determined for purposes of the tables below by (i)
multiplying the amount of each principal distribution thereon by the number of
years from the date of issuance of such class to the related Distribution
Date, (ii) summing the results and (iii) dividing the sum by the aggregate
amount of the reductions in the Class Balance of such class. The weighted
average life of an Offered Certificate of a particular class will be
influenced by, among other things, the rate at which principal of the Mortgage
Loans in the Sub-Pool evidenced thereby is paid or otherwise collected or
advanced. As described above, Distributable Principal for a particular Sub-
Pool and each Distribution Date will be allocated solely to the Corresponding
Class A Certificates, then solely to the Corresponding Class B Certificates,
then solely to the Corresponding Class C Certificates and, in the case of the
Sub-Pool I Certificates, then solely to the Class I-D Certificates, then
solely to the Class I-E Certificates, then solely to the Class I-F
Certificates and then solely to the Class I-G Certificates, in each case until
the entire Class Balance thereof has been paid in full. Consequently, the
weighted average lives of the Corresponding Class A Certificates will be
shorter, and the weighted average lives of the Corresponding Class B
Certificates, Corresponding Class C Certificates and, in the case of the Sub-
Pool I Certificates, the Class I-D Certificates,
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Class I-E Certificates, Class I-F Certificates and Class I-G Certificates may
be longer, than would otherwise be the case if such payments or other
collections of principal (or advances in respect thereof) were distributable
on a pro rata basis among all classes of Corresponding Certificates.
Prepayments on mortgage loans may be measured by a prepayment standard or
model. The model used in this Prospectus is the "Constant Prepayment Rate" or
"CPR" model. The CPR model represents an assumed constant annual rate of
prepayment each month, expressed as a per annum percentage of the then
scheduled principal balance of the pool of mortgage loans. As used in each of
the following tables, the column headed "0%" assumes that none of the Mortgage
Loans in the applicable Sub-Pool is prepaid before maturity. The columns
headed "3%," "6%," "9%" and "12%" assume that prepayments on the Mortgage
Loans in the applicable Sub-Pool are made at those CPRs. There is no
assurance, however, that prepayments of the Mortgage Loans will conform to any
level of CPR, and no representation is made that the Mortgage Loans will
prepay at the CPRs shown or at any other prepayment rate.
MODELLING ASSUMPTIONS
The following tables indicate the percentage of the initial Class Balance of
each class of Offered Certificates that would be outstanding after each of the
dates shown at various CPRs and the corresponding weighted average life of
each such class of Offered Certificates. The tables have been prepared on the
basis of the following assumptions, among others:
(i) the Mortgage Loans prepay at the indicated percentage of the CPR;
(ii) that distributions on the Certificates are received, in cash, on the
25th day of each month, commencing on January 27, 1997;
(iii) with respect to Mortgage Loans that are Matured Performing Mortgage
Loans as of the Information Date, or with respect to Balloon Loans that
have a maturity date on or prior [ ], the maturity date of each such
Mortgage Loan is extended to the earlier of the end of its respective
amortization term and five years following the Information Date;
(iv) with respect to the information in the tables under the column
labelled "No Extensions," no defaults or delinquencies in, or
modifications, waivers or amendments respecting, the payment by the
borrowers of Scheduled Payments on the Mortgage Loans occur;
(v) with respect to the information in the tables under the column
labelled "3-Year Balloon Extensions," with respect to the Balloon Loans
(other than the Mortgage Loans described in clause (iii) hereof), (a) the
maturity date of each such Balloon Loan is extended on its original
maturity date to a date three years after the earlier of its respective
original maturity date and the end of its respective amortization term as
of the Information Date, (b)(1) in the case of a Balloon Loan in Sub-Pool
II, any such extension does not result in such Mortgage Loan becoming a
Discounted Mortgage Loan and does not require a reduction in the Scheduled
Principal Balance thereof and (2) in the case of a Balloon Loan in Sub-Pool
I that is a Discounted Mortgage Loan as of the Information Date, any such
extension may result in a further discounting of such Mortgage Loan (i.e.,
the present value of the future Scheduled Payments thereon is lower than
the discounted principal balance thereof), with an immediate corresponding
draw upon the Limited Guaranty as described under "Description of the
CertificatesThe Limited Guaranty," in an amount equal to the reduction in
the Scheduled Principal Balance thereof (calculated for purposes of
determining the present value of Scheduled Payments without regard to the
Optimal Wind-Down Date), (c) 25% of the principal balance of each such
Balloon Loan is paid at its original maturity date and the amount of the
Scheduled Payments due on such Balloon Loan after the extension thereof is
75% of such amount prior to extension and (d) apart from the assumed
extensions, there are no defaults or delinquencies in, or modifications,
waivers or amendments respecting, the payment by the borrowers of principal
and interest on such Balloon Loans;
(vi) with respect to the information in the tables under the column
labelled "5-Year Balloon Extensions," with respect to the Balloon Loans
(other than the Mortgage Loans described in clause (iii)
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hereof), the maturity date of each such Balloon Loan is extended on its
original maturity date to a date five years after the earlier of its
respective original maturity date and the end of its respective
amortization term as of the Information Date, and all of the other
assumptions described in clause (v)(b) through (d) above are applicable;
(vii) in the case of an ARM Loan, (a) the Mortgage Rate stays constant
until its first Mortgage Rate adjustment date, and then adjusts to a
Mortgage Rate equal to the applicable Index for such Mortgage Loan as set
forth below plus the applicable Gross Margin for such Mortgage Loan,
subject to all of the characteristics of the Mortgage Loan, and (b) LIBOR
will remain constant at [ ]% through the Final Scheduled Distribution Date;
(viii) Scheduled Payments are due monthly;
(ix) prepayments represent payment in full of individual Mortgage Loans,
are received on their respective Due Dates and include 30 days' interest
thereon;
(x) there are no repurchases or substitutions of Mortgage Loans, and no
amounts are required to be paid by the FDIC in respect of shortfalls in the
Information Date Balances of the Mortgage Loans;
(xi) the Certificates are purchased on December [ ], 1996;
(xii) no right of optional termination is exercised; and
(xiii) the Index for each ARM Loan will adjust immediately to [ ]% per
annum for The Wall Street Journal Prime Rate, [ ]% per annum for the one-
year Treasury Index, [ ]% per annum for the two-year Treasury Index, [ ]%
per annum for the three-year Treasury Index, [ ]% per annum for the five-
year Treasury Index, [ ]% per annum for the 3-year Federal Home Loan Bank
Index, [ ]% per annum for the five-year Federal Home Loan Bank Index, [ ]%
per annum for the other miscellaneous Indices and [ ]% for the Cost-of-
Funds Index.
The Mortgage Loan assumptions described above that have been made in
preparing the following tables are expected to vary from the actual
performance of the Mortgage Loans. In particular, actual prepayments are not
likely to occur at constant rates or at the assumed rates and the terms of
extensions are not likely to be uniform, and variations in prepayment speeds
and extension terms, even if averaging to the same constant prepayment rate
over time and to the same weighted average extension term, may have different
effects on the payment rates of the Certificates. Further, not all Balloon
Loans are expected to be extended or to be extended for the suggested terms,
and prepayments and extensions may apply disproportionately to Mortgage Loans
with different Mortgage Rates. There can be no assurance as to the actual
rates of prepayment or extension of the Mortgage Loans or as to variations in
applicable interest rates.
In addition, the assumptions made in preparing the following tables vary to
some degree from the actual terms of the Certificates and the Pooling and
Servicing Agreement in that: (i) any extension of a Mortgage Loan is permitted
under the Pooling and Servicing Agreement only if a Mortgage Loan is a Matured
Performing Mortgage Loan or is a Balloon Loan in default or as to which
default is reasonably foreseeable; (ii) upon extension, and in contrast to the
assumptions, some of the Discounted Mortgage Loans in Sub-Pool I might not
require further discounting, depending upon the modified terms thereof, and
the actual reduction of the Scheduled Principal Balance of the Discounted
Mortgage Loans will depend on the modified terms thereof; (iii) under the
terms of the Pooling and Servicing Agreement, Balloon Loans may not be
extended beyond their respective Optimal Wind-Down Dates; and (iv) the terms
of any extension permitted under the Pooling and Servicing Agreement may
require an increase in the Mortgage Rate or the Scheduled Payment, rather than
providing for continuation of the same terms.
PRINCIPAL PAYMENT TABLES
Based on the foregoing assumptions, the tables indicate the weighted average
life of each class of Offered Certificates and set forth the percentage of the
initial Class Balance of each such class that would be outstanding after the
Distribution Date in July of each of the years indicated, under various
prepayment and years-of-extension scenarios.
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<PAGE>
None of the indicated percentages of CPR purports to be an historical
description of prepayment experience or a prediction of the anticipated rate
of prepayment of the Mortgage Loans included in the Mortgage Pool. Variations
in the actual prepayment experience and extension experience and the balance
of the Mortgage Loans that prepay or are extended may increase or decrease the
percentage of initial Class Balance (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 CPR and the average extension experience of all such Mortgage Loans
equals any of the specified years of extension. In addition, as described
above under "Description of the Mortgage Pool," the Mortgage Loans may be
subject to periods of slower amortization or to negative amortization, in
which case the weighted average lives of the Offered Certificates will be
increased, and to periods of accelerated amortization, in which case the
weighted average lives of the Offered Certificates will be decreased.
Investors are urged to conduct their own analyses of the rates at which the
Mortgage Loans may be expected to prepay.
Based on the foregoing assumptions, the following table indicates the
resulting weighted average lives of the Class I-A1 Certificates and sets forth
the percentage of the initial Class Balance of the Class I-A1 Certificates
that would be outstanding after each of the dates shown at the indicated CPRs
and Balloon Extension Assumptions.
PERCENT OF THE INITIAL CLASS BALANCE OF THE
CLASS I-A1 CERTIFICATES AT THE RESPECTIVE CPRS AND BALLOON EXTENSION
ASSUMPTIONS
SET FORTH BELOW:
<TABLE>
<CAPTION>
3- 5-
NO EXTENSIONS YEAR BALLOON EXTENSIONS YEAR BALLOON EXTENSIONS
------------------- --------------------------------------------------
DATE 0% 3% 6% 9% 12% 0% 3% 6% 9% 12% 0% 3% 6% 9% 12%
- ---- --- --- --- --- --- ---- ---- ---- ---- --------- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
</TABLE>
Based on the foregoing assumptions, the following table indicates the
resulting weighted average lives of the Class I-A2 Certificates and sets forth
the percentage of the initial Class Balance of the Class I-A2 Certificates
that would be outstanding after each of the dates shown at the indicated CPRs
and Balloon Extension Assumptions.
PERCENT OF THE INITIAL CLASS BALANCE OF THE
CLASS I-A2 CERTIFICATES AT THE RESPECTIVE CPRS AND BALLOON EXTENSION
ASSUMPTIONS
SET FORTH BELOW:
<TABLE>
<CAPTION>
3- 5-
NO EXTENSIONS YEAR BALLOON EXTENSIONS YEAR BALLOON EXTENSIONS
------------------- --------------------------------------------------
DATE 0% 3% 6% 9% 12% 0% 3% 6% 9% 12% 0% 3% 6% 9% 12%
- ---- --- --- --- --- --- ---- ---- ---- ---- --------- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
</TABLE>
Based on the foregoing assumptions, the following table indicates the
resulting weighted average lives of the Class I-B Certificates and sets forth
the percentage of the initial Class Balance of the Class I-B Certificates that
would be outstanding after each of the dates shown at the indicated CPRs and
Balloon Extension Assumptions.
91
<PAGE>
PERCENT OF THE INITIAL CLASS BALANCE OF THE
CLASS I-B CERTIFICATES AT THE RESPECTIVE CPRS AND BALLOON EXTENSION
ASSUMPTIONS
SET FORTH BELOW:
<TABLE>
<CAPTION>
3- 5-
NO EXTENSIONS YEAR BALLOON EXTENSIONS YEAR BALLOON EXTENSIONS
------------------- --------------------------------------------------
DATE 0% 3% 6% 9% 12% 0% 3% 6% 9% 12% 0% 3% 6% 9% 12%
- ---- --- --- --- --- --- ---- ---- ---- ---- --------- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
</TABLE>
Based on the foregoing assumptions, the following table indicates the
resulting weighted average lives of the Class I-C Certificates and sets forth
the percentage of the initial Class Balance of the Class I-C Certificates that
would be outstanding after each of the dates shown at the indicated CPRs and
Balloon Extension Assumptions.
PERCENT OF THE INITIAL CLASS BALANCE OF THE
CLASS I-C CERTIFICATES AT THE RESPECTIVE CPRS AND BALLOON EXTENSION
ASSUMPTIONS
SET FORTH BELOW:
<TABLE>
<CAPTION>
3- 5-
NO EXTENSIONS YEAR BALLOON EXTENSIONS YEAR BALLOON EXTENSIONS
------------------- --------------------------------------------------
DATE 0% 3% 6% 9% 12% 0% 3% 6% 9% 12% 0% 3% 6% 9% 12%
- ---- --- --- --- --- --- ---- ---- ---- ---- --------- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
</TABLE>
Based on the foregoing assumptions, the following table indicates the
resulting weighted average lives of the Class I-D Certificates and sets forth
the percentage of the initial Class Balance of the Class I-D Certificates that
would be outstanding after each of the dates shown at the indicated CPRs and
Balloon Extension Assumptions.
PERCENT OF THE INITIAL CLASS BALANCE OF THE
CLASS I-D CERTIFICATES AT THE RESPECTIVE CPRS AND BALLOON EXTENSION
ASSUMPTIONS
SET FORTH BELOW:
<TABLE>
<CAPTION>
3- 5-
NO EXTENSIONS YEAR BALLOON EXTENSIONS YEAR BALLOON EXTENSIONS
------------------- --------------------------------------------------
DATE 0% 3% 6% 9% 12% 0% 3% 6% 9% 12% 0% 3% 6% 9% 12%
- ---- --- --- --- --- --- ---- ---- ---- ---- --------- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
</TABLE>
Based on the foregoing assumptions, the following table indicates the
resulting weighted average lives of the Class I-E Certificates and sets forth
the percentage of the initial Class Balance of the Class I-E Certificates that
would be outstanding after each of the dates shown at the indicated CPRs and
Balloon Extension Assumptions.
92
<PAGE>
PERCENT OF THE INITIAL CLASS BALANCE OF THE
CLASS I-E CERTIFICATES AT THE RESPECTIVE CPRS AND BALLOON EXTENSION
ASSUMPTIONS
SET FORTH BELOW:
<TABLE>
<CAPTION>
3- 5-
NO EXTENSIONS YEAR BALLOON EXTENSIONS YEAR BALLOON EXTENSIONS
------------------- --------------------------------------------------
DATE 0% 3% 6% 9% 12% 0% 3% 6% 9% 12% 0% 3% 6% 9% 12%
- ---- --- --- --- --- --- ---- ---- ---- ---- --------- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
</TABLE>
Based on the foregoing assumptions, the following table indicates the
resulting weighted average lives of the Class I-F Certificates and sets forth
the percentage of the initial Class Balance of the Class I-F Certificates that
would be outstanding after each of the dates shown at the indicated CPRs and
Balloon Extension Assumptions.
PERCENT OF THE INITIAL CLASS BALANCE OF THE
CLASS I-F CERTIFICATES AT THE RESPECTIVE CPRS AND BALLOON EXTENSION
ASSUMPTIONS
SET FORTH BELOW:
<TABLE>
<CAPTION>
3- 5-
NO EXTENSIONS YEAR BALLOON EXTENSIONS YEAR BALLOON EXTENSIONS
------------------- --------------------------------------------------
DATE 0% 3% 6% 9% 12% 0% 3% 6% 9% 12% 0% 3% 6% 9% 12%
- ---- --- --- --- --- --- ---- ---- ---- ---- --------- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
</TABLE>
Based on the foregoing assumptions, the following table indicates the
resulting weighted average lives of the Class I-G Certificates and sets forth
the percentage of the initial Class Balance of the Class I-G Certificates that
would be outstanding after each of the dates shown at the indicated CPRs and
Balloon Extension Assumptions.
PERCENT OF THE INITIAL CLASS BALANCE OF THE
CLASS I-G CERTIFICATES AT THE RESPECTIVE CPRS AND BALLOON EXTENSION
ASSUMPTIONS
SET FORTH BELOW:
<TABLE>
<CAPTION>
3- 5-
NO EXTENSIONS YEAR BALLOON EXTENSIONS YEAR BALLOON EXTENSIONS
------------------- --------------------------------------------------
DATE 0% 3% 6% 9% 12% 0% 3% 6% 9% 12% 0% 3% 6% 9% 12%
- ---- --- --- --- --- --- ---- ---- ---- ---- --------- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
</TABLE>
Based on the foregoing assumptions, the following table indicates the
resulting weighted average lives of the Class II-A Certificates and sets forth
the percentage of the initial Class Balance of the Class II-A Certificates
that would be outstanding after each of the dates shown at the indicated CPRs
and Balloon Extension Assumptions.
93
<PAGE>
PERCENT OF THE INITIAL CLASS BALANCE OF THE
CLASS II-A CERTIFICATES AT THE RESPECTIVE CPRS AND BALLOON EXTENSION
ASSUMPTIONS
SET FORTH BELOW:
<TABLE>
<CAPTION>
3- 5-
NO EXTENSIONS YEAR BALLOON EXTENSIONS YEAR BALLOON EXTENSIONS
------------------- --------------------------------------------------
DATE 0% 3% 6% 9% 12% 0% 3% 6% 9% 12% 0% 3% 6% 9% 12%
- ---- --- --- --- --- --- ---- ---- ---- ---- --------- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
</TABLE>
Based on the foregoing assumptions, the following table indicates the
resulting weighted average lives of the Class II-B Certificates and sets forth
the percentage of the initial Class Balance of the Class II-B Certificates
that would be outstanding after each of the dates shown at the indicated CPRs
and Balloon Extension Assumptions.
PERCENT OF THE INITIAL CLASS BALANCE OF THE
CLASS II-B CERTIFICATES AT THE RESPECTIVE CPRS AND BALLOON EXTENSION
ASSUMPTIONS
SET FORTH BELOW:
<TABLE>
<CAPTION>
3- 5-
NO EXTENSIONS YEAR BALLOON EXTENSIONS YEAR BALLOON EXTENSIONS
------------------- --------------------------------------------------
DATE 0% 3% 6% 9% 12% 0% 3% 6% 9% 12% 0% 3% 6% 9% 12%
- ---- --- --- --- --- --- ---- ---- ---- ---- --------- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
</TABLE>
Based on the foregoing assumptions, the following table indicates the
resulting weighted average lives of the Class II-C Certificates and sets forth
the percentage of the initial Class Balance of the Class II-C Certificates
that would be outstanding after each of the dates shown at the indicated CPRs
and Balloon Extension Assumptions.
PERCENT OF THE INITIAL CLASS BALANCE OF THE
CLASS II-C CERTIFICATES AT THE RESPECTIVE CPRS AND BALLOON EXTENSION
ASSUMPTIONS
SET FORTH BELOW:
<TABLE>
<CAPTION>
3- 5-
NO EXTENSIONS YEAR BALLOON EXTENSIONS YEAR BALLOON EXTENSIONS
------------------- --------------------------------------------------
DATE 0% 3% 6% 9% 12% 0% 3% 6% 9% 12% 0% 3% 6% 9% 12%
- ---- --- --- --- --- --- ---- ---- ---- ---- --------- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
</TABLE>
The characteristics of the Mortgage Loans in either Sub-Pool may differ from
those assumed in preparing the tables above. There can be no assurance that
the Mortgage Loans in either Sub-Pool will prepay at any of the rates shown in
the tables or at any other particular rate. In addition, it is unlikely that
any Mortgage Loan in either Sub-Pool will prepay at the specified percentages
of CPR until maturity or that all of the Mortgage Loans in such Sub-Pool will
prepay at the same rate. The timing of changes in the rate of prepayments may
significantly affect the actual yield to maturity to investors, even if the
average rate of principal prepayments is consistent with the expectations of
investors.
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<PAGE>
OTHER FACTORS AFFECTING YIELD, WEIGHTED AVERAGE LIFE AND MATURITY
Balloon Payments; Extensions of Maturity. Because the ability of a borrower
to make a Balloon Payment typically will depend upon its ability either to
refinance the loan or to sell the related Mortgaged Property, there is a risk
that the Balloon Loans may default at maturity, or that the maturity of such a
Balloon Loan may be extended in connection with a workout. In the case of
defaults, recovery of proceeds may be delayed by, among other things,
bankruptcy of the borrower or adverse conditions in the market where the
property is located. In order to minimize losses on defaulted Balloon Loans,
the Servicer, with the consent of FDIC and to the extent and under the
circumstances set forth herein, is authorized to modify Balloon Loans that are
in default or as to which a payment default is reasonably foreseeable. See
"Servicing of the Mortgage Loans--Modifications, Waivers and Amendments." Any
defaulted Balloon Payment or modification that extends the maturity of a
Balloon Loan in a particular Sub-Pool may delay distributions of principal on
a Corresponding class of Offered Certificates and thereby extend the weighted
average life of such Certificates and, if such Certificates were purchased at
a discount, reduce the yield thereon.
Negative Amortization. The weighted average life of the Sub-Pool II
Certificates will be affected by any ARM Loan that contains provisions that
limit the amount by which its Scheduled Payment may adjust in response to a
change in its Mortgage Rate, that provide that its Scheduled Payment will
adjust less frequently than its Mortgage Rate or that provide for constant
Scheduled Payments notwithstanding adjustments to its Mortgage Rate. During a
period of increasing interest rates, such an ARM Loan would be expected to
amortize at a slower rate (and perhaps not at all) than if interest rates were
declining or were remaining constant. A slower rate of amortization or
negative amortization on an ARM Loan would correspondingly be reflected in a
slower rate of amortization or negative amortization on the Sub-Pool II
Certificates. Accordingly, the weighted average lives of ARM Loans that permit
negative amortization (and that of the classes of Sub-Pool II Certificates to
which any such negative amortization would be allocated or that would bear the
effects of a slower rate of amortization on such ARM Loans) will increase as a
result of such feature. During a period of declining interest rates, such an
ARM Loan would be expected to amortize at a faster rate than if interest rates
were increasing or were remaining constant. A faster rate of amortization on
an ARM Loan would correspondingly be reflected in a faster rate of
amortization on the Sub-Pool II Certificates. Any such acceleration in
amortization of its principal balance will shorten the weighted average life
of such ARM Loan and, correspondingly, the weighted average lives of those
classes of Sub-Pool II Certificates then entitled to receive Distributable
Principal.
The extent to which the yield on any Sub-Pool II Certificate will be
affected by ARM Loans that permit negative amortization will depend upon (i)
whether such Sub-Pool II Certificate was purchased at a premium or a discount
and (ii) the extent to which the payment characteristics of such ARM Loans
delay or accelerate the distributions of principal on such Certificate. See
"--Yield Considerations" and "Description of the Certificates--Distributions--
Interest Distribution Calculations Applicable to the Certificates."
Foreclosures and Payment Plans. The number of foreclosures and the principal
amount of the Mortgage Loans in a particular Sub-Pool that are foreclosed in
relation to the number and principal amount of such Mortgage Loans that are
repaid in accordance with their terms will affect the weighted average lives
of those Mortgage Loans and, accordingly, the weighted average lives of and
yields on the Offered Certificates evidencing an interest in such Sub-Pool.
Servicing decisions made with respect to the Mortgage Loans in a particular
Sub-Pool, including the use of payment plans prior to a demand for
acceleration and the restructuring of such Mortgage Loans in bankruptcy
proceedings, may also have an effect upon the payment patterns of such
Mortgage Loans and thus the weighted average lives of and yields on the
Certificates evidencing an interest in such Sub-Pool.
Representations and Warranties; Remedies. The number of purchases and the
principal amount of Mortgage Loans in a particular Sub-Pool that are
repurchased as a result of a breach of a representation or warranty in
relation to the number and principal amount of such Mortgage Loans that are
repaid in accordance with their terms will affect the weighted average lives
of those Mortgage Loans and, accordingly, the weighted average lives of and
yields on the Offered Certificates evidencing an interest in such Sub-Pool.
See "Description of the Mortgage Pool--Representations and Warranties;
Remedies."
95
<PAGE>
THE FEDERAL DEPOSIT INSURANCE CORPORATION
GENERAL
The Federal Deposit Insurance Corporation is a federally-chartered
corporation organized under the laws of the United States. Congress
established the FDIC in 1933 to provide protection for bank depositors and to
foster sound banking practices. The principal office of the FDIC is located at
550 17th Street, N.W., Washington, D.C. 20429.
The FDIC acts as a corporation for the purposes of administering the Funds
(as defined below) and regulating the activities of insured depository
institutions, and as a receiver or conservator for troubled or failed
institutions. In its corporate capacity, the FDIC has, among others, the
following powers: to make contracts; to sue and be sued; to have succession
until dissolved by an Act of Congress; to prescribe rules and regulations
necessary to carry out the provisions of any law that it has the
responsibility of administering or enforcing; to make examinations of and to
require information and reports from depository institutions; and to exercise
all powers specifically granted to it by law and such incidental powers as are
necessary to carry out the powers so granted.
As receiver of a depository institution, the FDIC succeeds to all rights,
titles, powers and privileges of the institution, its shareholders, members,
account holders, depositors, creditors, officers or directors with respect to
the institution and its assets. The FDIC may perform all functions of the
institution, collect all obligations due to the institution and preserve and
conserve the assets and property of the institution. Additionally, in its
capacity as receiver, the FDIC may organize a new federal savings association
to take over the assets and liabilities of a defaulted savings association;
organize a new national bank or bridge bank with respect to any insured bank;
or liquidate the institution having due regard to the conditions of credit in
the locality.
THE MORTGAGE LOAN SELLER
On the Closing Date, the FDIC, as receiver for approximately 200 Depository
Institutions and as administrator of the Bank Insurance Fund (in such
capacities, the "Mortgage Loan Seller"), will assign its interest in the
Mortgage Loans, without recourse, to the Trustee for the benefit of the
Certificateholders pursuant to the Pooling and Servicing Agreement. The
Mortgage Loan Seller has been appointed as receiver with respect to a number
of depository institutions, including each of the Depository Institutions.
THE BANK INSURANCE FUND
GENERAL
The Bank Insurance Fund (the "BIF") was established by Congress in 1989
pursuant to the Financial Institutions Reform, Recovery, and Enforcement Act
of 1989 ("FIRREA") as the successor to the Deposit Insurance Fund. In response
to the insolvency of the Federal Savings and Loan Insurance Corporation (the
"FSLIC"), the source of deposit insurance for savings and loans prior to the
enactment of FIRREA, Congress enacted FIRREA to reform, recapitalize and
consolidate the federal deposit insurance system. The BIF insures the deposits
of all of its member institutions (typically, commercial or savings banks)
(collectively, the "Member Institutions"). In addition to the BIF, FIRREA
established the Savings Association Insurance Fund (the "SAIF") to insure the
deposits of all of its member institutions (typically, thrifts), and the FSLIC
Resolution Fund (the "FRF") to wind up the affairs of the FSLIC, which was
abolished by FIRREA. All three funds (collectively, the "Funds") are
administered by the FDIC and are separately maintained to carry out their
respective mandates, and the FDIC is prohibited from commingling the assets of
the Funds. In addition, the FDIC, acting on behalf of the BIF, examines state
chartered banks that are not member institutions of the Federal Reserve System
and provides and monitors assistance to failing banks.
96
<PAGE>
SOURCES OF FUNDS
Assessments. The primary source of funding for the BIF are investment income
and deposit insurance premiums assessed against Member Institutions. Under
Section 7 of the Federal Deposit Insurance Act (the "FDI Act"), the FDIC has
the ability to set assessment rates for the Member Institutions. Premium
assessment rates are determined by the FDIC in its sole discretion, and are
paid to the BIF semi-annually.
For further information about the BIF, see the financial statements of the
BIF beginning on page F-1 of the Prospectus.
In addition to the deposit insurance assessments imposed on Member
Institutions, the FDIC may impose special assessments for any purpose that the
FDIC deems necessary, including without limitation, to repay borrowings from
the U.S. Treasury or Member Institutions or to satisfy its obligations under
the Limited Guaranty.
Borrowings. Under the FDI Act, the FDIC is authorized to borrow on behalf of
the BIF or the SAIF from the U.S. Treasury and Member Institutions (and to
provide security to Member Institutions for such loans), to be used by the
FDIC in carrying out its insurance obligations, including its obligations
under the Limited Guaranty. The FDIC's authority to borrow from the U.S.
Treasury is subject to the approval of the Secretary of the Treasury and to an
aggregate limit of $30 billion. Currently, the FDIC has no indebtedness
outstanding to the U.S. Treasury or to any Member Institution.
The FDIC is also authorized to borrow funds from the Federal Financing Bank
("FFB"), subject to the Maximum Obligation Limitation (as defined below).
Currently, the FDIC has no indebtedness outstanding to the FFB. See "--
Limitations on Indebtedness."
LIMITATIONS ON INDEBTEDNESS
The FDI Act limits the amount of obligations that the FDIC may incur on
behalf of the BIF or the SAIF (the "Maximum Obligation Limitation"). Such
obligations cannot exceed the sum of:
(A) the amount of cash and cash equivalents held by the BIF;
(B) 90% of the FDIC's estimate of the fair market value of assets held
other than amounts referred to in (A) above; and
(C) the total amounts authorized to be borrowed from the Secretary of the
Treasury pursuant to Section 14(a) of the FDI Act, which presently is up to
$30 billion.
For the purposes of Maximum Obligation Limitation, obligations include:
(A) any guarantee issued by the FDIC, other than deposit guarantees;
(B) any amounts borrowed pursuant to Section 14 of the FDI Act; and
(C) any other obligation for which the FDIC has a direct or contingent
liability to pay any amount.
Contingent liabilities, such as the Limited Guaranty, are measured, for
purposes of calculating the Maximum Obligation Limitation, based on their
expected cost to the FDIC, rather than their face amount. As noted, deposit
guarantees are excluded, and are represented on the BIF statement of financial
position as estimated liabilities for unresolved cases.
As of September 30, 1996, December 31, 1995 and December 31, 1994, the
maximum obligation authority available to the FDIC on behalf of the BIF was
approximately $48.0 billion, $47.0 billion and $51.6 billion, respectively.
PRIORITY OF CLAIMS AGAINST THE BIF
Generally. With certain important exceptions, discussed below, the FDIC's
obligations under the Limited Guaranty will rank pari passu with all other
general obligations of the FDIC. The obligations of the FDIC under
97
<PAGE>
the Limited Guaranty are not by its terms supported by the full faith and
credit of the United States. Rather, the obligations of the FDIC under the
Limited Guaranty are supported solely by the BIF. In the event of the
insolvency of the BIF, the ability of the FDIC to perform under the Limited
Guaranty will be dependent upon the ability of the FDIC to replenish the BIF
through deposit insurance assessments imposed on Member Institutions, the U.S.
Treasury and its other sources of funds, as described above under "--Sources
of Funds."
Treasury Borrowings. In the event of the insolvency of the FDIC, any
indebtedness outstanding to the U.S. Treasury may have to be paid before other
indebtedness of the FDIC, including any amounts outstanding under the Limited
Guaranty. Under the Federal Insolvency Act, Title 31 United States Code,
Section 3713, a claim of the United States may be required to be paid first
when a person (other than a person subject to Chapter 11 of the United States
Bankruptcy Code) indebted to the United States Government is insolvent.
Secured Borrowings. As stated above, the FDIC presently has no indebtedness
outstanding to any Member Institution; however, to the extent that the FDIC
borrows funds from Member Institutions, and provides security for such
borrowings, the FDIC's secured creditors would have priority with respect to
the specific property securing any such loan.
FFB Borrowings. As stated above, the FDIC presently has no indebtedness
outstanding to the FFB, and the priority of the claim created by any future
FFB borrowings is uncertain. It is possible that any such claim would
constitute a claim of the United States Government which under the Federal
Insolvency Act might be required to be paid prior to any payments of general
obligations, including any amounts owed under the Limited Guaranty.
DEFENSES TO PAYMENT OF BIF OBLIGATIONS UNDER THE LIMITED GUARANTY
The obligations of the FDIC under the Limited Guaranty constitute unsecured
contract obligations for which the Trustee, on behalf of the
Certificateholders, may seek judicial enforcement. The FDIC is not aware of
any available statutory or common law defenses that would permit it to avoid
its obligations under the Limited Guaranty. In connection with its delivery of
the Limited Guaranty, the FDIC will deliver at closing an opinion of the
General Counsel to the effect that the Limited Guaranty constitutes a duly
authorized, valid and enforceable obligation of the FDIC and that the FDIC is
authorized to enter into and perform its obligations under the Limited
Guaranty.
DESCRIPTION OF THE POOLING AND SERVICING AGREEMENT
GENERAL
A form of the Pooling and Servicing Agreement has been filed as an exhibit
to the Registration Statement of which this Prospectus is a part. The
following summaries describe certain provisions that appear in the Pooling and
Servicing Agreement. 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 Pooling and Servicing Agreement. A copy of the Pooling
and Servicing Agreement (including the Mortgage Loan Schedule attached
thereto) will be provided by the Trustee upon written request of a
Certificateholder. The Trustee may impose a reasonable charge for providing
such copies.
ACCOUNTS
General. The Servicer will be required to establish and maintain or cause to
be established and maintained one or more separate accounts or sub-accounts
for the collection of payments on or in respect of the Mortgage Loans in a
particular Sub-Pool (collectively, the "Collection Account"). Each account or
sub-account constituting the Collection Account will be either (i) an account
maintained with either a federal or state chartered depository institution or
trust company, the long term and short term deposit or debt obligations of
which (or of such institution's parent holding company) are rated in the
highest rating category of Moody's Investors Service ("Moody's") and Duff &
Phelps Credit Rating Co. ("Duff & Phelps"), at the time of any
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deposit therein, or (ii) a trust account or accounts maintained with a federal
or state chartered depository institution or trust company acting in its
fiduciary capacity.
The Servicer will also establish and maintain one or more separate custodial
accounts (collectively, the "REO Account") to be used in connection with REO
Properties in a particular Sub-Pool acquired on behalf of the holders of
Certificates evidencing an interest therein. Pursuant to the Pooling and
Servicing Agreement, the Servicer will deposit into the applicable REO Account
upon receipt all revenues received by it in respect of any REO Property. As
set forth in the Pooling and Servicing Agreement, the Servicer will be
entitled to make certain withdrawals from the REO Account for a particular
Sub-Pool to, among other things, (i) make remittances to the Trustee for
deposit into the Distribution Account as required by the Pooling and Servicing
Agreement, as described under "Servicing of the Mortgage Loans--Collections
and Other Servicing Procedures," (ii) pay taxes, assessments, insurance
premiums, other amounts necessary for the proper operation, management and
maintenance of the REO Properties in such Sub-Pool and certain third-party
expenses in accordance with the Pooling and Servicing Agreement and (iii) to
pay or reimburse the Servicer or the FDIC for certain advances, fees and
expenses made or incurred in respect of such Sub-Pool.
Permitted Investments. Amounts on deposit in the Collection Account and the
REO Account may be invested pending each succeeding Distribution Date in
United States government securities and other high quality investments
specified in the Pooling and Servicing Agreement ("Permitted Investments").
Permitted Investments will consist of one or more of the following:
(i) direct obligations of, or guaranteed as to timely payment of
principal and interest by, the United States or any agency or
instrumentality thereof, provided that such obligations are backed by the
full faith and credit of the United States of America;
(ii) direct obligations of, or guaranteed as to timely payment of
principal and interest by, the Federal Home Loan Mortgage Corporation
("FHLMC"), the Federal National Mortgage Association ("FNMA") or the
Federal Farm Credit System, provided that any such obligation, at the time
of purchase or contractual commitment providing for the purchase thereof,
is qualified by each Rating Agency as an investment of funds backing
securities rated in the highest category by each Rating Agency or is backed
by the full faith and credit of the United States of America;
(iii) demand and time deposits in or certificates of deposit of, or
bankers' acceptances issued by, any bank or trust company, savings and loan
association or savings bank, provided that, in the case of obligations that
are not fully FDIC-insured deposits, the commercial paper and/or long-term
unsecured debt obligations of such depository institution or trust company
(or in the case of the principal depository institution in a holding
company system, the commercial paper or long-term unsecured debt
obligations of such holding company) have the highest rating available for
such securities by each Rating Agency (in the case of commercial paper) or
have received the highest rating available for such securities by each
Rating Agency (in the case of long-term unsecured debt obligations), or
such lower rating as will not result in the downgrading or withdrawal of
the rating or ratings then assigned to the Offered Certificates by either
Rating Agency;
(iv) general obligations of or obligations guaranteed by any state of the
United States or the District of Columbia receiving the highest long-term
debt rating available for such securities by each Rating Agency, or such
lower rating as will not result in the downgrading or withdrawal of the
rating or ratings then assigned to the Offered Certificates by either
Rating Agency;
(v) commercial or finance company paper (including both non-interest-
bearing discount obligations and interest-bearing obligations payable on
demand or on a specified date not more than one year after the date of
issuance thereof) that is rated by each Rating Agency in its highest short-
term unsecured rating category at the time of such investment or
contractual commitment providing for such investment, and is issued by a
corporation the outstanding senior long-term debt obligations of which are
then rated by each Rating Agency in its highest long-term unsecured rating
category, or such lower rating as will not result in the downgrading or
withdrawal of the rating or ratings then assigned to the Offered
Certificates by either Rating Agency;
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(vi) guaranteed reinvestment agreements issued by any bank, insurance
company or other corporation as will not result in the downgrading or
withdrawal of the rating or ratings then assigned to the Offered
Certificates by either Rating Agency;
(vii) repurchase obligations with respect to any security described in
clause (i) or (ii) above entered into with a depository institution or
trust company (acting as principal) meeting the rating standards described
in clause (iii) above;
(viii) securities bearing interest or sold at a discount that are issued
by any corporation incorporated under the laws of the United States of
America or any state thereof or the District of Columbia and rated by each
Rating Agency in its highest long-term unsecured rating category at the
time of such investment or contractual commitment providing for such
investment; provided, however, that securities issued by any such
corporation will not be Permitted Investments to the extent that investment
therein would cause the then outstanding principal amount of securities
issued by such corporation that are then held as part of the Collection
Account or the Distribution Account to exceed 20% of the aggregate
principal amount of all Permitted Investments then held in the Collection
Account and the Distribution Account;
(ix) units of taxable money market funds, which funds are regulated
investment companies, seek to maintain a constant net asset value per share
and invest solely in obligations backed by the full faith and credit of the
United States, and have been designated in writing by each Rating Agency as
Permitted Investments with respect to this definition;
(x) if previously confirmed in writing to the Trustee any other demand,
money market or time deposit, or any other obligation, security or
investment, as may be acceptable to each Rating Agency as a permitted
investment of funds backing securities rated in the highest category by
each Rating Agency; and
(xi) such other obligations as are acceptable as Permitted Investments to
each Rating Agency;
provided, however, that (A) such obligation or security continues to qualify
as a "cash flow investment" pursuant to Section 860G(a)(6) of the Code; (B) no
obligation or security shall be a Permitted Investment if (i) such obligation
or security evidences a right to receive only interest payments or (ii) the
stated interest rate on such obligation or security is in excess of 120% of
the yield to maturity produced by the price at which such obligation or
security was purchased; and (c) if such obligation or security is, at the time
of such investment, not rated by Duff & Phelps, such obligation or security
need only be rated by Moody's.
Any interest or other income earned on funds in such accounts will be paid
to the Servicer as additional servicing compensation and the risk of loss of
funds in the such accounts resulting from such investments will be borne by
the Servicer. The amount of such loss will be required to be deposited by the
Servicer in the Collection Account or the REO Account, as the ease may be,
immediately as realized.
COLLECTION ACCOUNT
Deposits. The Servicer will be required to deposit or cause to be deposited
in the Collection Account for a particular Sub-Pool the following payments and
collections received or made by the Servicer in respect of such Sub-Pool
subsequent to the Cut-off Date (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 in such Sub-Pool;
(ii) all payments on account of interest on the Mortgage Loans in such
Sub-Pool (net of any portion thereof retained by the Servicer as Servicing
Fees) and all prepayment premiums;
(iii) all Insurance Proceeds;
(iv) all payments required to be deposited in the Collection Account with
respect to any deductible clause in any blanket insurance policy;
(v) all Liquidation Proceeds;
(vi) any amount required to be deposited by the Servicer in connection
with losses realized on investments for the benefit of the Servicer of
funds held in the Collection Account;
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(vii) all amounts payable by the FDIC in connection with breaches of its
representations and warranties, as described under "Description of the
Mortgage Pool--Representations and Warranties; Remedies";
(viii) all amounts payable by the FDIC in respect of interest
overcharges, as described under "Description of the Mortgage Pool--Mortgage
Loan Information--The ARM audits"; and
(ix) any other amounts required to be deposited in the Collection Account
as provided in the Pooling and Servicing Agreement.
Withdrawals. The Servicer may, from time to time, make withdrawals in
respect of a particular Sub-Pool from the Collection Account for such Sub-Pool
for any of the following purposes:
(i) to remit to the Trustee for deposit in the Distribution Account the
amounts required to make distributions to the holders of the Certificates
evidencing an interest in such Sub-Pool on each Distribution Date;
(ii) to reimburse itself for unreimbursed P&I Advances, such
reimbursement to be made out of amounts received that were identified and
applied by the Servicer as late collections of interest (net of the
Servicing Fee) on and principal of the Mortgage Loans in such Sub-Pool with
respect to which such P&I Advances were made;
(iii) to reimburse itself for unpaid Servicing Fees, and unreimbursed
Servicing Advances, such reimbursement to be made out of amounts that
represent Liquidation Proceeds and Insurance Proceeds with respect to which
such fees were earned or such expenses were incurred;
(iv) to pay itself any unpaid Liquidation Fee, Resolution Fee or
Modification Fee to which it is entitled in connection with a
rehabilitation of a defaulted Mortgage Loan or a liquidation of a defaulted
Mortgage Loan in such Sub-Pool, a Mortgaged Property securing a defaulted
Mortgage Loan in such Sub-Pool or an REO Property in such Sub-Pool, such
amount or amounts to be made out of funds that represent Liquidation
Proceeds or Insurance Proceeds and, in the case of a Resolution Fee, from
other collections on the related Mortgage Loan;
(v) to pay for costs and expenses incurred by the Trust Fund for
environmental site assessments performed with respect to Mortgaged
Properties in such Sub-Pool, and for any containment, clean-up or
remediation of hazardous wastes and materials present on such Mortgaged
Properties;
(vi) to reimburse itself, the FDIC, the Mortgage Loan Seller, 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 "--Certain Matters Regarding the Servicer, the
FDIC and the Mortgage Loan Seller";
(vii) to pay itself, as additional servicing compensation, interest and
investment income earned in respect of amounts held in the Collection
Account for such Sub-Pool;
(viii) to reimburse itself for unreimbursed P&I Advances and Servicing
Advances described in clause (ii) above and clause (iii) above incurred by
it that, in the good faith judgment of the Servicer, will not be
recoverable from the amounts described in clauses (ii) and (iii),
respectively, or from the Limited Guaranty;
(ix) at the direction of the Trustee, to pay any federal, state or local
taxes imposed on the Trust Fund or its assets or transactions that are
allocable to such Sub-Pool, as and to the extent described under "Certain
Federal Income Tax Consequences--REMIC-Level Taxes";
(x) to pay for the cost of an independent MAI-appraiser retained to
determine a fair sale price for a defaulted Mortgage Loan in such Sub-Pool
or a property acquired in respect thereof in connection with the
liquidation of such Mortgage Loan or property;
(xi) to pay for the cost of various opinions of counsel obtained pursuant
to the Pooling and Servicing Agreement for the benefit of
Certificateholders that are allocable to such Sub-Pool;
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(xii) to reimburse the FDIC for Advances for which the FDIC has
reimbursed the Servicer, together with interest thereon as and to the
extent described under "Description of the Certificates--P&I Advances";
(xiii) to reimburse itself or the Trustee for unreimbursed expenses
reasonably incurred in connection with a Defect or a breach of any
representation or warranty by the FDIC that gives rise to a repurchase
obligation of the FDIC with regard to a Mortgage Loan in such Sub-Pool,
including, without limitation, enforcement of such obligation;
(xiv) to pay to the Trustee any unpaid fees and expenses; and
(xv) to clear and terminate the Collection Account upon the termination
of the Trust Fund.
DISTRIBUTION ACCOUNT
The Trustee will be required to establish and maintain one or more accounts
or sub-accounts (collectively, the "Distribution Account") into which the
Servicer will deposit an amount equal to all amounts held in the Collection
Account and REO Account for a particular Sub-Pool that are part of the
Available Distribution Amount for such Sub-Pool and from which distributions
will be made on the Corresponding Certificates on each Distribution Date. In
addition, the Servicer is required to deliver to the Trustee for deposit into
the Distribution Account with respect to a particular Sub-Pool, P&I Advances
and Compensating Interest Payments for such Sub-Pool on each P&I Advance Date,
and the FDIC is required to deliver to the Trustee for deposit directly into
the Distribution Account with respect to a particular Sub-Pool amounts payable
under the Limited Guaranty and, in the case of Sub-Pool I, any Basis Risk
Support Amounts.
CERTAIN MATTERS REGARDING THE SERVICER, THE FDIC AND THE MORTGAGE LOAN SELLER
The Pooling and Servicing Agreement provides that the Servicer may not
resign from its obligations thereunder except (i) upon a determination that
such obligations are no longer permissible under applicable law or are in
material conflict by reason of applicable law with any other activities
carried on by it or (ii) under the circumstances set forth below under "--
Resignation of the Servicer; Transfer of Servicing." No such resignation will
become effective until the Trustee or a successor servicer has assumed the
Servicer's obligations and duties under the Pooling and Servicing Agreement.
The Pooling and Servicing Agreement also provides that none of the Servicer,
the FDIC, the Mortgage Loan Seller or any director, officer, employee or agent
of either of them will be under any liability to the Trust Fund or
Certificateholders for any action taken, or not taken, in good faith pursuant
to the Pooling and Servicing Agreement or for errors in judgment; provided,
however, that none of the Servicer, the FDIC, the Mortgage Loan Seller or any
such person will be protected against any breach of a representation, warranty
or covenant made therein, or against any expense or liability that such person
is specifically required to bear pursuant to the terms of the Pooling and
Servicing Agreement, or against any liability that would otherwise be imposed
by reason of willful misfeasance, bad faith or negligence in the performance
of obligations or duties thereunder. The Pooling and Servicing Agreement
further provides that the Servicer, the FDIC, the Mortgage Loan Seller and any
director, officer, employee or agent of any of them will be entitled to
indemnification by the Trust Fund against any loss, liability or expense
incurred in connection with any legal action or claim that relates to the
Pooling and Servicing Agreement or the Certificates; provided, however, that
such indemnification will not extend to any loss, liability or expense (i)
related to any specific Mortgage Loan or Mortgage Loans (except as any such
loss, liability or expense shall otherwise be reimbursable pursuant to the
Pooling and Servicing Agreement); (ii) incurred by reason of such party's
misfeasance, bad faith or negligence in the performance of obligations or
duties under the Pooling and Servicing Agreement, or by reason of such party's
reckless disregard of such obligations or duties; (iii) incurred in connection
with any violation by such party of any state or federal securities law; or
(iv) imposed by any taxing authority if such loss, liability or expense is not
specifically reimbursable pursuant to the terms of the Pooling and Servicing
Agreement. In addition, the Pooling and Servicing Agreement provides that
neither the Servicer, the FDIC nor the Mortgage Loan Seller will be under any
obligation to appear in, prosecute or defend any legal action that is not
incidental to its respective
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responsibilities under the Pooling and Servicing Agreement and that in its
opinion may involve it in any expense or liability. However, each of the
Servicer, the FDIC and the Mortgage Loan Seller will be permitted, in the
exercise of its discretion, to undertake any such action that it may deem
necessary or desirable with respect to the enforcement and/or protection of
the rights and duties of the parties to the Pooling and Servicing Agreement
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
Servicer, the FDIC or the Mortgage Loan Seller, as the case may be, will be
entitled to charge the applicable Collection Account therefor.
Any person into which the Servicer, the FDIC or the Mortgage Loan Seller may
be merged or consolidated, or any person resulting from any merger or
consolidation to which the Servicer, the FDIC or the Mortgage Loan Seller is a
party, or any person succeeding to the business of the Servicer, the FDIC or
the Mortgage Loan Seller, will be the successor of the Servicer, the FDIC or
the Mortgage Loan Seller, as the case may be, under the Pooling and Servicing
Agreement.
AMENDMENT
The Pooling and Servicing Agreement may be amended, from time to time, by
the Mortgage Loan Seller, the FDIC, the Servicer and the Trustee without the
consent of any of the holders of the Certificateholders, (i) to cure any
ambiguity, (ii) to correct or supplement any provision therein that may be
inconsistent with any other provision therein, (iii) to make any other
provisions with respect to matters or questions arising under the Pooling and
Servicing Agreement that are not inconsistent with the provisions thereof, or
(iv) to comply with any requirements imposed by the Code; provided that such
amendment (other than an amendment for the specific purpose referred to in
clause (iv) above) may not (as evidenced by an opinion of counsel to such
effect satisfactory to the Trustee) adversely affect in any material respect
the interests of any Certificateholders. The Pooling and Servicing Agreement
may also be amended, from time to time, by the Mortgage Loan Seller, the FDIC,
the Servicer and the Trustee, with the consent of the holders of the
Certificates entitled to not less than 51% of the Voting Rights for any
purpose; provided that no such amendment may (i) reduce in any manner the
amount of, or delay the timing of, payments received or advanced on Mortgage
Loans in a particular Sub-Pool that are required to be distributed in respect
of any Certificate evidencing an interest in such Sub-Pool without the consent
of the holder of such Certificate, (ii) alter the obligations of the Servicer
to make P&I Advances without the consent of all of the Certificateholders,
(iii) adversely affect in any material respect the interests of the holders of
any class of Certificates, in a manner other than as described in clauses (i)
and (ii), without the consent of the holders of all Certificates of such
class, (iv) reduce the aforesaid percentages of Certificates the holders of
which are required to consent to any such amendment without the consent of the
holders of all the Certificates then outstanding or (v) alter the Servicing
Standard. However, the Trustee and the Servicer will be prohibited from
consenting to any amendment of the Pooling and Servicing Agreement unless the
Trustee and the Servicer shall first have received an opinion of counsel to
the effect that such amendment will not result in the imposition of a tax on
the Trust Fund or cause the Trust Fund (or designated portion thereof) to fail
to qualify as a REMIC at any time that the Certificates are outstanding.
LIST OF CERTIFICATEHOLDERS
Upon written request of three or more Certificateholders of record made for
purposes of communicating with other holders of Certificates with respect to
their rights under the Pooling and Servicing Agreement, the Trustee will
afford such Certificateholders access during normal business hours to the most
recent list of Certificateholders.
DUTIES OF THE TRUSTEE
The Trustee will make no representation as to the validity or sufficiency of
the Pooling and Servicing Agreement (other than as to the due authorization,
execution and delivery thereof by it), the Certificates or any underlying
Mortgage Loan or related document and will not be accountable for the use or
application by or on
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behalf of the Servicer of any funds paid to the Servicer in respect of the
Certificates or the underlying Mortgage Loans, or any funds deposited into or
withdrawn from the Collection Account or any other account by or on behalf of
the Servicer. If no Event of Default has occurred and is continuing, the
Trustee will be required to perform only those duties specifically required
under the Pooling and Servicing Agreement. However, upon receipt of any of the
various certificates, reports or other instruments required to be furnished to
it pursuant to the Pooling and Servicing Agreement, the Trustee will be
required to examine such documents and to determine whether they conform to
the requirements of the Pooling and Servicing Agreement.
CERTAIN MATTERS REGARDING THE TRUSTEE
The Trustee is entitled to withdraw from the Distribution Account on each
Distribution Date the Trustee Fee. As to each Mortgage Loan and REO Loan, the
Trustee Fee will accrue at the Trustee Fee Rate and will be computed on the
basis of the same principal amount and for the same period respecting which
any related interest payment due on the Certificates is computed. In addition,
from time to time, the Trustee may request the Servicer to withdraw, and the
Servicer will pay from the Collection Account the Trustee Fee, to the extent
not paid from the Distribution Account and amounts necessary to reimburse the
Trustee for all reasonable expenses, disbursements and advances incurred by
the Trustee in the normal course of performing its duties in accordance with
any of the provisions of the Pooling and Servicing Agreement (including the
reasonable compensation and the expenses and disbursements of its outside
counsel and all persons not regularly in its employ, but excluding allocable
overhead), except any such expense or disbursement (i) specifically required
to be borne by the Trustee, (ii) incurred by reason of willful misfeasance,
bad faith or negligence in the performance of the Trustee's duties and
obligations, (iii) as may arise from a breach of any representation, warranty
or covenant of the Trustee made in the Pooling and Servicing Agreement or (iv)
incurred in connection with the use of any custodian, except as otherwise
provided in the Pooling and Servicing Agreement.
The Trustee and any director, officer, employee or agent of the Trustee will
be entitled to indemnification, to the extent of amounts held in the
Collection Account, for any loss, liability or expense (including, without
limitation, costs and expenses of litigation, and of investigation, counsel
fees, damages, judgments and amounts paid in settlement) incurred by the
Trustee in connection with the Trustee's acceptance or administration of the
Trust Fund under the Pooling and Servicing Agreement; provided, however, that
such indemnification will not extend to any loss, liability or expense that
constitutes a specific liability imposed on the Trustee pursuant to the
Pooling and Servicing Agreement, or to any loss, liability or expense incurred
by reason of willful misfeasance, bad faith or 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, or as may
arise from a breach of any representation, warranty or covenant of the Trustee
made therein.
RESIGNATION AND REMOVAL OF THE TRUSTEE
The Trustee may resign from its obligations and duties under the Pooling and
Servicing Agreement by giving written notice thereof to the FDIC, the Mortgage
Loan Seller, the Servicer and the Certificateholders. Upon receiving such
notice of resignation, the Mortgage Loan Seller will be required to use its
best efforts to promptly appoint a successor trustee. If no successor trustee
shall have accepted an appointment within thirty days after the giving of such
notice of resignation, the resigning Trustee may petition any court of
competent jurisdiction to appoint a successor trustee.
If at any time the Trustee ceases to be eligible to continue as such under
the Pooling and Servicing Agreement, or if at any time the Trustee becomes
incapable of acting, or if certain events of (or proceedings in respect of)
bankruptcy or insolvency occur with respect to the Trustee, the Mortgage Loan
Seller may remove the Trustee and appoint a successor trustee acceptable to
the Mortgage Loan Seller. In addition, holders of the Certificates entitled to
at least 51% of the Voting Rights may at any time (with or without cause)
remove the Trustee under the Pooling and Servicing Agreement and appoint a
successor trustee acceptable to the Mortgage Loan Seller.
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Any resignation or removal of a Trustee and appointment of a successor
trustee will not become effective until acceptance of appointment by the
successor trustee.
RESIGNATION OF THE SERVICER; TRANSFER OF SERVICING
The Pooling and Servicing Agreement permits the Servicer to resign from the
obligations and duties imposed on it thereby at any time after November 30,
1997 upon notice to the Trustee; provided that (i) a successor servicer is
acceptable to the FDIC, the Mortgage Loan Seller and the Trustee based upon
its financial and commercial loan servicing abilities and is available and
willing to service the Mortgage Loans under the terms and conditions set forth
in the Pooling and Servicing Agreement, (ii) the Servicer bears all costs
associated with its resignation and the transfer of servicing to the successor
servicer and (iii) each Rating Agency shall have confirmed that the rating on
each class of Certificates immediately prior to such transfer of servicing
will not be qualified, downgraded or withdrawn as a result of such transfer,
as evidenced by a letter by each Rating Agency delivered to the Trustee.
In addition, the Pooling and Servicing Agreement permits the Servicer to
assign its rights and delegate its duties and obligations under the Pooling
and Servicing Agreement in connection with the sale or transfer of a
substantial portion of its mortgage servicing portfolio; provided that (i) the
purchaser or transferee is reasonably satisfactory to the FDIC, the Mortgage
Loan Seller, the Trustee, based upon its financial and commercial mortgage
loan servicing capabilities, and reasonably satisfactory to each Rating Agency
and (ii) the requirements set forth in the immediately preceding paragraph
(other than clause (ii) thereof) are satisfied.
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS
The following discussion contains general summaries of certain legal aspects
of loans secured by commercial and multifamily residential properties. Because
such legal aspects are governed by applicable state law (which laws may differ
substantially), the summaries do not purport to be complete, to reflect the
laws of any particular state, except as set forth therein, or to encompass the
laws of all states in which the security for the Mortgage Loans is situated.
Accordingly, the summaries are qualified in their entirety by reference to the
applicable laws of those states.
GENERAL
Each Mortgage 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 is located. Mortgages, deeds 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 grantor (the
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borrower) conveys title to the real property to the grantee (the 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 property 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.
In most states, hotel and motel room rates are considered accounts
receivable under the Uniform Commercial Code ("UCC"); in cases where hotels or
motels constitute loan security, the rates are generally pledged by the
borrower as additional security for the loan. In general, the lender must file
financing statements in order to perfect its security interest in the rates
and must file continuation statements, generally every five years, to maintain
perfection of such security interest. Even if the lender's security interest
in room rates is perfected under the UCC, it will generally be required to
commence a foreclosure action or otherwise take possession of the property in
order to collect the room rates following a default. See "--Bankruptcy Laws."
Even after a foreclosure, the potential payments from a Mortgaged Property
may be less than the periodic payments due under the mortgage. For example,
the net income that would otherwise be generated from the Mortgaged Property
may be less than the amount that would be needed to service the debt if the
leases on the Mortgaged Property are at below-market rents, the market rents
have fallen since the original financing, vacancies have increased, or as a
result of excessive or increased maintenance, repair or other obligations
which a lender succeeds to as landlord.
PERSONALTY
In the case of certain types of Mortgaged Properties, such as hotels, motels
and nursing homes, personal property (to the extent owned by the borrower and
not previously pledged) may constitute a significant portion of the property's
value as security. The creation and enforcement of liens on personal property
are governed by the UCC. Accordingly, if a borrower pledges personal property
as security for a Mortgage Loan, the lender generally must file UCC financing
statements in order to perfect its security interest therein, and must file
continuation statements, generally every five years, to maintain that
perfection.
JUNIOR MORTGAGES LOANS; RIGHTS OF SENIOR MORTGAGES
Some of the Mortgage Loans are secured by junior mortgages or deeds of trust
which are subordinate to senior mortgages or deeds of trust held by other
lenders or institutional investors. The rights under a junior deed of trust or
junior mortgage, are subordinate to those of the mortgagee or beneficiary
under the senior mortgage or deed of trust, including the prior rights of the
senior mortgagee or beneficiary to receive rents, hazard insurance and
condemnation proceeds and to cause the property securing the Mortgage Loan to
be sold upon default of the mortgagor or trustor, thereby extinguishing the
junior mortgagee's or junior beneficiary's lien unless the junior lender
asserts its subordinate interest in a property in foreclosure litigation or
satisfies the defaulted senior loan. As discussed more fully below, in many
states a junior mortgagee or beneficiary may
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satisfy a defaulted senior loan in full, adding the amounts expended to the
balance due on the junior loan. Absent a provision in the senior mortgage, no
notice of default is required to be given to the junior mortgagee.
The form of the mortgage or deed of trust used by many institutional lenders
confers on the mortgagee or beneficiary the right both to receive all proceeds
collected under any hazard insurance policy and all awards made in connection
with any condemnation proceedings, and to apply such proceeds and awards to
any indebtedness secured by the mortgage or deed of trust, in such order as
the mortgage or beneficiary may determine. Thus, in the event improvements on
the property are damaged or destroyed by fire or other casualty, or in the
event the property is taken by condemnation, the mortgagee or beneficiary
under the senior mortgage or deed of trust will have the prior right to
collect any insurance proceeds payable under a hazard insurance policy and any
award of damages in connection with the condemnation and to apply the same to
the indebtedness secured by the senior mortgage or deed of trust. Proceeds in
excess of the amount of senior mortgage indebtedness will, in most cases, be
applied to the indebtedness of a junior mortgage or trust deed to the extent
the junior mortgage or deed of trust so provides. The laws of certain states
may limit the ability of mortgagees or beneficiaries to apply the proceeds of
hazard insurance and partial condemnation awards to the secured indebtedness.
In such states, the mortgagor or trustor must be allowed to use the proceeds
of hazard insurance to repair the damage unless the security of the mortgagee
or beneficiary has been impaired. Similarly, in certain states, the mortgagee
or beneficiary is entitled to the award for a partial condemnation of the real
property security only to the extent that its security is impaired.
The form of mortgage or deed of trust used by many institutional lenders
typically contains a "future advance" clause, which provides, in essence, that
additional amounts advanced to or on behalf of the mortgagor or trustor by the
mortgagee or beneficiary are to be secured by the mortgage or deed of trust.
While such a clause is valid under the laws of most states, the priority of
any advance made under the clause depends, in some states, on whether the
advance was an "obligatory" or "optional" advance. If the mortgagee or
beneficiary is obligated to advance the additional amounts, the advance may be
entitled to receive the same priority as amounts initially made under the
mortgage or deed of trust, notwithstanding that there may be intervening
junior mortgages or deeds of trust and other liens between the date of
recording of the mortgage or deed of trust and the date of the future advance,
and notwithstanding that the mortgagee or beneficiary had actual knowledge of
such intervening junior mortgages or deeds of trust and other liens at the
time of the advance. Where the mortgagee or beneficiary is not obligated to
advance the additional amounts and has actual knowledge of the intervening
junior mortgages or deeds of trust and other liens, the advance may be
subordinate to such intervening junior mortgages or deeds of trust and other
liens. Priority of advances under a "future advance" clause rests, in many
other states, on state law giving priority to all advances made under the loan
agreement up to a "credit limit" amount stated in the recorded mortgage.
Another provision typically found in the form of the mortgage or deed of
trust used by many institutional lenders obligates the mortgagor or trustor to
pay before delinquency all taxes and assessments on the property and, when
due, all encumbrances, charges and liens on the property which appear prior to
the mortgage or deed of trust, to provide and maintain fire insurance on the
property, to maintain and repair the property and not to commit or permit any
waste thereof, and to appear in and defend any action or proceeding purporting
to affect the property or the rights of the mortgagee or beneficiary under the
mortgage or deed of trust. Upon a failure of the mortgagor or trustor to
perform any of these obligations, the mortgagee or beneficiary is given the
right under the mortgage or deed of trust to perform the obligation itself, at
its election, with the mortgagor or trustor agreeing to reimburse the
mortgagee or beneficiary for any sums expended by the mortgagee or beneficiary
on behalf of the trustor. All sums so expended by the mortgagee or beneficiary
become part of the indebtedness secured by the mortgage or deed of trust.
The form of mortgage or deed of trust used by many institutional lenders
typically requires the mortgagor or trustor to obtain the consent of the
mortgagee or beneficiary in respect to actions affecting the mortgaged
property, including, without limitation, leasing activities (including new
leases and termination or modification of existing leases), alterations and
improvements to buildings forming a part of the mortgaged property and
management and leasing agreements for the mortgaged property. Tenants will
often refuse to execute leases
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unless the mortgagee or beneficiary executes a written agreement with the
tenant not to disturb the tenant's possession of its premises in the event of
a foreclosure. A senior mortgagee or beneficiary may refuse to consent to
matters approved by a junior mortgagee or beneficiary with the result that the
value of the security for the junior mortgage or deed of trust is diminished.
For example, a senior mortgagee or beneficiary may decide not to approve a
lease or to refuse to grant to a tenant a non-disturbance agreement. If, as a
result, the lease is not executed, the value of the mortgaged property may be
diminished.
FORECLOSURE
General. Foreclosure is a legal procedure that allows the lender to recover
its mortgage debt by enforcing its rights and available legal remedies under
the mortgage. If the borrower defaults in payment or performance of its
obligations under the note or mortgage, the lender has the right to institute
foreclosure proceedings to sell the real property at public auction to satisfy
the indebtedness.
Foreclosure procedures vary from state to state. Two primary methods of
foreclosing a mortgage are judicial foreclosure, involving court proceedings,
and non-judicial foreclosure pursuant to a power of sale granted in the
mortgage instrument. Other foreclosure procedures are available in some
states, such as strict foreclosure, but they are either infrequently used or
available only in limited circumstances.
Judicial Foreclosure. A judicial foreclosure proceeding is conducted in a
court having jurisdiction over the mortgaged property. Generally, the action
is initiated by the service of legal pleadings upon all parties having a
subordinate interest of record in the real property and all parties in
possession of the property, under leases or otherwise, whose interests are
subordinate to the mortgage. Delays in completion of the foreclosure may
occasionally result from difficulties in locating defendants. A foreclosure
action is subject to most of the delays and expenses of other lawsuits if
defenses are raised or counterclaims are interposed, and sometimes requires
several years to complete. When the lender's right to foreclose is contested,
the legal proceedings can be time-consuming. Upon successful completion of a
judicial foreclosure proceeding, the court generally issues a judgment of
foreclosure and appoints a referee or other officer to conduct a public sale
of the mortgaged property, the proceeds of which are used to satisfy the
judgment. Such sales are made in accordance with procedures that vary from
state to state.
Non-Judicial Foreclosure/Power of Sale. Foreclosure of a deed of trust is
generally accomplished by a non-judicial trustee's sale pursuant to a power of
sale typically granted in the deed of trust. A power of sale may also be
contained in any other type of mortgage instrument if applicable law so
permits. A power of sale under a deed of trust allows a non-judicial public
sale to be conducted generally following a request from the beneficiary/lender
to the trustee to sell the property upon default by the borrower and after
notice of sale is given in accordance with the terms of the mortgage and
applicable state law. In some states, prior to such sale, the trustee under
the deed of trust must record a notice of default and notice of sale and send
a copy to the borrower and to any other party who has recorded a request for a
copy of a notice of default and notice of sale. In addition, in some states
the trustee must provide notice to any other party having an interest of
record in the real property, including junior lienholders. A notice of sale
must be posted in a public place and, in most states, published for a
specified period of time in one or more newspapers. The borrower or junior
lienholder may then have the right, during a reinstatement period required in
some states, to cure the default by paying the entire actual amount in arrears
(without regard to the acceleration of the indebtedness), plus the lender's
expenses incurred in enforcing the obligation. In other states, the borrower
or the junior lienholder is not provided a period to reinstate the loan, but
has only the right to pay off the entire debt to prevent the foreclosure sale.
Generally, state law governs the procedure for public sale, the parties
entitled to notice, the method of giving notice and the applicable time
periods.
Equitable Limitations on Enforceability of Certain Provisions. United States
courts have traditionally imposed general equitable principles to limit the
remedies available to lenders in foreclosure actions. These principles are
generally designed to relieve borrowers from the effects of mortgage defaults
perceived as harsh or unfair. Relying on such principles, a court may alter
the specific terms of a loan to the extent it considers
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necessary to prevent or remedy an injustice, undue oppression or overreaching,
or may require the lender to undertake affirmative actions to determine the
cause of 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 and have required that lenders reinstate loans or
recast payment schedules in order to accommodate borrowers who are suffering
from a temporary financial disability. In other cases, courts have limited the
right of the lender to foreclose in the case of a non-monetary default, such
as a failure to adequately maintain the mortgaged property or an impermissible
further encumbrance of the mortgaged property. Finally, some courts have
addressed the issue of whether federal or state constitutional provisions
reflecting due process concerns for adequate notice require that a borrower
receive notice in addition to statutorily-prescribed minimum notice. For the
most part, these cases have upheld the reasonableness of the notice provisions
or have found that a public sale under a mortgage providing for a power of
sale does not involve sufficient state action to trigger constitutional
protections.
A junior mortgagee may not foreclose on the property securing a senior
mortgage unless it forecloses subject to the senior mortgages, in which case
it must either pay the entire amount due on the senior mortgages prior to or
at the time of the foreclosure sale or 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 by a junior mortgagee triggers the enforcement of a "due-
on-sale" clause in a senior mortgage, the junior mortgagee may be required to
pay the full amount of the senior mortgages to the senior mortgagees.
Accordingly, with respect to those Mortgage 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.
Also, a third party may be unwilling to purchase a mortgaged property at a
public sale because of the difficulty in determining the exact status of title
to the property (due to, among other things, redemption rights that may exist)
and because of the possibility that physical deterioration of the property may
have occurred during the foreclosure proceedings. Until 1994, potential buyers
were confronted with the 1980 decision of the United States Court of Appeals
for the Fifth Circuit, Durrett v. Washington National Insurance Co., 621 F.2d
201 (5th Cir. 1980). The court in Durrett held that a non-collusive, regularly
conducted foreclosure sale was a fraudulent transfer under Section 67d of the
former Bankruptcy Act (Section 548 of the current Bankruptcy Code) and,
therefore, could be rescinded in favor of the bankrupt's estate, if (i) the
foreclosure sale was held while the debtor was insolvent and not more than one
year prior to the filing of the bankruptcy petition and (ii) the price paid
for the foreclosed property did not represent "fair consideration"
("reasonably equivalent value" under the Bankruptcy Code). However, on May 23,
1994, Durrett was effectively overruled by the United States Supreme Court in
BFP v. Resolution Trust Corp., as Receiver for Imperial Federal Savings
Association, 511 U.S. 531 (1994), in which the Court held that "reasonably
equivalent value', for foreclosed property, is the price in fact received at
the foreclosure sale, so long as all the requirements of the State's
foreclosure law have been complied with." Although the reasoning and result of
Durrett with respect to the Bankruptcy Code was rejected by the United States
Supreme Court, the case could still be persuasive to a court applying a state
fraudulent conveyance law which has provisions similar to those construed in
Durrett.
Even if the lender is successful in the foreclosure action and is able to
take possession of the property, the costs of operating and maintaining a
commercial or multifamily property may be significant and may be greater than
the income derived from that property. The costs of management and operation
of those mortgaged properties which are hotels, motels, restaurants, nursing
homes, convalescent homes or hospitals may be particularly significant because
of the expertise, knowledge and with respect to nursing or convalescent homes,
regulatory compliance, required to run such operations and the effect which
foreclosure and a change in ownership may have with respect to consent
requirements and on the public's and the industry's (including franchisors')
perception of the quality of such operations. The lender also will commonly
obtain the services of a real estate broker and pay the broker's commission in
connection with the sale or lease 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. Moreover, because of the expenses
associated with acquiring, owning and selling a
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mortgaged property, a lender could realize an overall loss on a mortgage loan
even if the mortgaged property is sold at foreclosure, or resold after it is
acquired through foreclosure, for an amount equal to the full outstanding
principal amount of the loan plus accrued interest.
The holder of a junior mortgage that forecloses on a mortgaged property does
so subject to senior mortgages and any other prior liens, and may be obliged
to keep senior mortgage loans current in order to avoid foreclosure of its
interest in the property. In addition, if the foreclosure of a junior mortgage
triggers the enforcement of a "due-on-sale" clause contained in a senior
mortgage, the junior mortgagee could be required to pay the full amount of the
senior mortgage indebtedness or face foreclosure.
Rights of Redemption. The purposes of a foreclosure action 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 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 a majority
of states, after sale pursuant to a deed of trust or foreclosure of a
mortgage, the borrower and foreclosed junior lienors are given a statutory
period in which to redeem the property. 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. In some states, the borrower retains possession of the property
during the statutory redemption period. 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 purchaser 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.
Anti-Deficiency Legislation. Some or all of the Mortgage Loans may be
nonrecourse loans, as to which recourse in the case of default will be limited
to the Mortgaged Property and such other assets, if any, that were pledged to
secure the Mortgage Loan. However, even if a Mortgage Loan by its terms
provides for recourse to the borrower's other assets, a lender's ability to
realize upon those assets may be limited by state law. For example, in some
states a lender cannot obtain a deficiency judgment against the borrower
following foreclosure or sale under a deed of trust or by non-judicial means.
A deficiency judgment is a personal judgment against the former borrower equal
to the difference between the net amount realized upon the public sale of the
real property and the amount due to the lender. Other statutes may require the
lender to exhaust the security afforded under a mortgage 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 those states, the
lender, following judgment on such personal action, may be deemed to have
elected a remedy and thus may be precluded from foreclosing upon the security.
Consequently, lenders in those states where such an election of remedy
provision exists may choose to proceed first against the security. Finally,
other statutory provisions, designed to protect borrowers from exposure to
large deficiency judgments that might result from bidding at below-market
values at the foreclosure sale, limit any deficiency judgment to the excess of
the outstanding debt over the fair market value of the property at the time of
the sale.
Leasehold Risks. Certain of the Mortgage Loans are secured by a mortgage on
the borrower's interest in a ground lease. Leasehold mortgage loans are
subject to certain risks not associated with mortgage loans secured by a lien
on the fee estate of the borrower. The most significant of these risks is that
if the borrower's leasehold were to be terminated upon a lease default, the
leasehold mortgagee would lose its security. This risk may be lessened if the
ground lease requires the lessor to give the leasehold mortgagee notices of
lessee (borrower)
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defaults and an opportunity to cure them, permits the leasehold estate to be
assigned to and by the leasehold mortgagee or the purchaser at a foreclosure
sale, and contains certain other protective provisions typically included in a
"mortgageable" ground lease.
Under the Bankruptcy Code, a landlord in bankruptcy may "reject" an
unexpired lease. If it does, the Bankruptcy Code permits the lessee either to
treat the lease as terminated (an election that "mortgageable" ground leases
would prohibit) or "remain in possession of the leasehold." 11 U.S.C.
(S)365(h)). The legislative history of this provision indicates that Congress
intended that lessees that elected to remain in "possession of the leasehold"
were entitled to retain all of their leasehold rights under the rejected
lease, and there is case law that construes the Bankruptcy Code consistent
with that intent. See, e.g., Chestnut Ridge Plaza Associates, L.P. v. Fox
Grocery Co., 156 B.R. 477 (Bankr. W.D. Pa. 1993). However, some bankruptcy
court decisions have held that a lessee's rights under a lease rejected by a
landlord in bankruptcy are limited to the lessee's own physical possession of
the leased premises under the terms of the lease, and that the rejected lease
does not otherwise continue. Thus, in In re Carlton Restaurant, Inc., 151 B.R.
353 (Bankr. E.D. Pa. 1993), the court held that a landlord's rejection of a
lease in bankruptcy "excuses [it] from accepting performance by a party other
than a lessee who remains in possession."
Although none of the cases that have taken a restrictive view of the rights
of a lessee under a rejected lease involved a leasehold mortgagee, whose
security might have been impaired as a result of the court's holding, the
holding that a landlord that rejects a lease in bankruptcy need not honor the
right to assign that lease or to recognize a sublease casts doubt upon the
ability of a leasehold mortgagee to realize upon its security in the case of
the bankruptcy of the ground lessor. Representatives of the real estate
lending industry, which has lent billions of dollars on the security of ground
leases, have strongly criticized these cases. As a result, Congress is
considering legislation that would, if passed, clarify the Bankruptcy Code
effectively to overrule such cases. However, unless and until such legislation
is passed or the cases are overruled, some uncertainty will remain and ground
lessee/borrowers may find it difficult to refinance their mortgages.
Cooperatives. Certain of the Mortgage Loans are secured by a security
interest on the borrower's ownership interest in shares, and the proprietary
leases appurtenant thereto (or cooperative contract rights), allocable to
cooperative dwelling units that may be vacant or occupied by non-owner
tenants. Such loans are subject to certain risks not associated with mortgage
loans secured by a lien on the fee estate of a borrower in real property. Such
a loan typically is subordinate to the mortgage, if any, on the cooperative's
building which, if foreclosed, could extinguish the equity in the building and
the proprietary leases of the dwelling units derived from ownership of the
shares of the cooperative. Further, transfer of shares in a cooperative are
subject to various regulations as well as to restrictions (including transfer
restrictions) under the governing documents of the cooperative, and the shares
may be cancelled in the event that associated maintenance charges due under
the related proprietary leases are not paid. Typically, a recognition
agreement between the lender and the cooperative provides, among other things,
the lender with an opportunity to cure a default under a proprietary lease but
such recognition agreements may not have been obtained in the case of all the
Mortgage Loans secured by cooperative shares (or contract rights).
Under the laws applicable in many states, "foreclosure" on cooperative
shares is accomplished by a sale in accordance with the provisions of Article
9 of the UCC and the security agreement relating to the shares. Article 9 of
the UCC requires that a sale be conducted in a "commercially reasonable"
manner, which may be dependent upon, among other things, the notice given to
the debtor and the method, manner, time, place and terms of the sale. Article
9 of the UCC provides that the proceeds of the sale will be applied first to
pay the costs and expenses of the sale and then to satisfy the indebtedness
secured by the lender's security interest. A recognition agreement, however,
generally provides that the lender's right to reimbursement is subject to the
right of the cooperative to receive sums due under the proprietary leases.
BANKRUPTCY LAWS
Operation of the Bankruptcy Code and related state laws may interfere with
or affect the ability of a lender to realize upon collateral and/or to enforce
a deficiency judgment. For example, under the Bankruptcy Code,
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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 bankruptcy by or on behalf of a
junior lien or may stay the senior lender from taking action to foreclose out
such junior lien.
Under the Bankruptcy Code, provided certain substantive and procedural
safeguards protective of the lender are met, the amount and terms of a
mortgage loan secured by a lien on property of the debtor may be modified
under certain circumstances. For example, the outstanding amount of the loan
may be reduced to the then-current value of the property (with a corresponding
partial reduction of the amount of lender's security interest) pursuant to a
confirmed plan or lien avoidance proceeding, thus leaving the lender a general
unsecured creditor for the difference between such value and the outstanding
balance of the loan. Other modifications may include the reduction in the
amount of each scheduled payment, by means of a reduction in the rate of
interest and/or an alteration of the repayment schedule (with or without
affecting the unpaid principal balance of the loan), and/or by an extension
(or shortening) of the term to maturity. Some bankruptcy courts have approved
plans, based on the particular facts of the reorganization case, that effected
the cure of a mortgage loan default by paying arrearages over a number of
years. Also, a bankruptcy court may permit a debtor, through its
rehabilitative plan, to reinstate a mortgage loan payment schedule even if the
lender has obtained a final judgment of foreclosure prior to the filing of the
debtor's petition.
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.
In addition, the Bankruptcy Code has been amended to provide that a lender's
perfected pre-petition security interest in leases, rents and hotel revenues
continues in the post-petition leases, rents and hotel revenues, unless a
bankruptcy court orders to the contrary "based on the equities of the case."
Thus, unless a court orders otherwise, revenues from a Mortgaged Property
generated after the date the bankruptcy petition is filed will constitute
"cash collateral" under the Bankruptcy Code. Debtors may only use cash
collateral upon obtaining the lender's consent or a prior court order finding
that the lender's interest in the Mortgaged Properties and the cash collateral
is "adequately protected" as such term is defined and interpreted under the
Bankruptcy Code. It should be noted, however, that the court may find that the
lender has no security interest in either pre-petition or post-petition
revenues if the court finds that the loan documents do not contain language
covering accounts, room rents, or other forms of personally necessary for a
security interest to attach to hotel revenues.
In a bankruptcy or similar proceeding, action may be taken seeking the
recovery as a preferential transfer of any payments made by the mortgagor
under the related Mortgage Loan to the Trust Fund. Payments on long-term debt
may be protected from recovery as preferences if they are payments in the
ordinary course of business made on debts incurred in the ordinary course of
business. Whether any particular payment would be protected depends upon the
facts specific to a particular transaction.
A trustee in bankruptcy, in some cases, may be entitled to collect its costs
and expenses in preserving or selling the mortgaged property ahead of payment
to the lender. In certain circumstances, a debtor in bankruptcy may have the
power to grant liens senior to the lien of a mortgage, and analogous state
statutes and general principles of equity may also provide a mortgagor with
means to halt a foreclosure proceeding or sale and to force a restructuring of
a mortgage loan on terms a lender would not otherwise accept. Moreover, the
laws of certain states also give priority to certain tax liens over the lien
of a mortgage or deed of trust. Under the Bankruptcy Code, if the court finds
that actions of the mortgagee have been unreasonable, the lien of the related
mortgage may be subordinated to the claims of unsecured creditors.
Pursuant to the federal doctrine of "substantive consolidation" or to the
(predominantly state law) doctrine of "piercing the corporate veil," a
bankruptcy court, in the exercise of its equitable powers, also has the
authority to order that the assets and liabilities of a related entity be
consolidated with those of an entity before it. Thus,
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property ostensibly the property of one entity may be determined to be the
property of a different entity in bankruptcy, the automatic stay applicable to
the second entity extended to the first and the rights of the creditors of the
first entity impaired in the fashion set forth above in the discussion of
ordinary bankruptcy principles. Depending on facts and circumstances not
wholly in existence at the time a loan is originated or transferred to the
Trust Fund, the application of any of these doctrines to one or more of the
mortgagors in the context of the bankruptcy of one or more of their affiliates
could result in material impairment of the rights of the Certificateholders.
If a borrower's ability to make payment on a mortgage loan is dependent on
its receipt of rent payments under a lease of the related property, that
ability may be impaired by the commencement of a bankruptcy proceeding
relating to a lessee under such lease. Under the Bankruptcy Code, the filing
of a petition in bankruptcy by or on behalf of a lessee results in a stay in
bankruptcy against the commencement or continuation of any state court
proceeding for past due rent, for accelerated rent, for damages or for a
summary eviction order with respect to a default under the lease that occurred
prior to the filing of the lessee's petition. In addition, the Bankruptcy Code
generally provides that a trustee or debtor-in-possession may, subject to
approval of the court, (i) assume the lease and retain it or assign it to a
third party or (ii) reject the lease. If the lease is assumed, the trustee or
debtor-in-possession (or assignee, if applicable) must cure any defaults under
the lease, compensate the lessor for its losses and provide the lessor with
"adequate assurance" of future performance. Such remedies may be insufficient,
and any assurances provided to the lessor may, in fact, be inadequate. If the
lease is rejected, the lessor will be treated as an unsecured creditor with
respect to its claim for damages for termination of the lease. The Bankruptcy
Code also limits a lessor's damages for lease rejection to the rent reserved
by the lease (without regard to acceleration) for the greater of one year, or
15%, not to exceed three years, of the remaining term of the lease.
ENVIRONMENTAL RISKS
General. A lender may be subject to environmental risks when taking a
security interest in real property. Of particular concern may be properties
that are or have been used for industrial, manufacturing, military or disposal
activity. Such environmental risks include the risk of the diminution of the
value of a contaminated property or, as discussed below, liability for the
costs of compliance with environmental regulatory requirements or the costs of
clean-up or other remedial actions. These compliance or clean-up costs could
exceed the value of the property or the amount of the lender's loan. In
certain circumstances, a lender could determine to abandon a contaminated
mortgaged property as collateral for its loan rather than foreclose and risk
liability for compliance or clean-up costs.
CERCLA. The federal Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended ("CERCLA"), imposes strict liability on
present and past "owners" and "operators" of contaminated real property for
the costs of clean-up. A secured lender may be liable as an "owner" or
"operator" of a contaminated mortgaged property if agents or employees of the
lender have become sufficiently involved in the management of such mortgaged
property or the operations of the borrower. Such liability may exist even if
the lender did not cause or contribute to the contamination and regardless of
whether the lender has actually taken possession of a mortgaged property
through foreclosure, deed in lieu of foreclosure or otherwise. The magnitude
of the CERCLA liability at any given contaminated site is a function of the
actions required to address adequately the risks to human health and the
environment posed by the particular conditions at the site. As a result, such
liability is not constrained by the value of the property or the amount of the
original or unamortized principal balance of any loans secured by the
property. Moreover, under certain circumstances, liability under CERCLA may be
joint and several--i.e., any liable party may be obligated to pay the entire
cleanup costs regardless of its relative contribution to the contamination. If
a lender is found to be liable, it is entitled to bring an action for
contribution against other liable parties, such as the present or past owners
and operators of the property. The lender nonetheless may have to bear a
disproportionate share of the liability if such other parties are defunct or
without substantial assets.
Until recent legislation was adopted, it was uncertain what actions could be
taken by a second lender in the event of a loan default without it incurring
exposure under CERCLA in the event the property was
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environmentally contaminated. The Asset Conservation, Lender Liability and
Deposit Insurance Act of 1996 (the "1996 Lender Liability Act") provides for a
safe harbor for secured lenders from CERCLA liability even though the lender
forcloses and sells the real estate securing the loan, provided the secured
lender sells "at the earliest practicable, commercially reasonable time, at
commercially reasonable terms, taking into account market conditions and legal
and regulatory requirements." Although the 1996 Lender Liability Act provides
significant protection to secured lenders, it has not been construed by the
courts and there are circumstances in which actions taken could expose a
secured lender to CERCLA liability. And, the transferee from the secured
lender is not entitled to the protections enjoyed by a secured lender. Hence,
the marketability of any contaminated real estate continues to be suspect.
Certain Other Federal and State Laws. Many states have environmental clean-
up statutes similar to CERCLA, and not all those statutes provide for a
secured creditor exemption. In addition, underground storage tanks are
commonly found on a wide variety of commercial and industrial properties.
Federal and state laws impose liability on the owners and operators of
underground storage tanks for any cleanup that may be required as a result of
releases from such tanks. These laws also impose certain compliance
obligations on the tank owners and operators, such as regular monitoring for
leaks and upgrading of older tanks. A lender may become a tank owner or
operator, and subject to compliance obligations and potential cleanup
liabilities, either as a result of becoming involved in the management of a
site at which a tank is located or, more commonly, by taking title to such a
property. Federal and state laws also obligate property owners and operators
to maintain and, under some circumstances, to remove asbestos-containing
building materials and lead based paint. As a result, the presence of these
materials can increase the cost of operating a property and thus diminish its
value. In a few states, transfers of some types of properties are conditioned
upon cleanup of contamination prior to transfer. In these cases, a lender that
becomes the owner of a property through foreclosure, deed in lieu of
foreclosure or otherwise, may be required to clean up the contamination before
selling or otherwise transferring the property.
Beyond statute-based environmental liability, there exist common law causes
of action (for example, actions based on nuisance or on toxic tort resulting
in death, personal injury or damage to property) related to hazardous
environmental conditions on a property. While it may be more difficult to hold
a lender liable in such cases, unanticipated or uninsured liabilities of the
borrower may jeopardize the borrower's ability to meet its loan obligations.
Superlien Laws. Under the laws of many states, contamination on a property
may give rise to a lien on the property for clean-up costs. In several states,
such a lien has priority over all existing liens, including those of existing
mortgages. In these states, the lien of a mortgage may lose its priority to
such a "superlien."
Additional Considerations. The cost of remediating environmental
contamination at a property can be substantial, and it is possible, under the
circumstances described above, that such costs could become a liability of the
Trust Fund and on occasion a loss to the Certificateholders. To reduce the
likelihood of such a loss, the Pooling and Servicing Agreement will provide
that the Servicer, acting on behalf of the Trustee, may not acquire title to a
Mortgaged Property or take over its operation unless the Servicer, based on an
environmental site assessment prepared by a qualified environmental
consultant, has made the determination that it is appropriate to do so, as
described under "Servicing of the Mortgage Loans--Realization Upon Defaulted
Mortgage Loans."
If a lender forecloses on a mortgage secured by a property, the operations
on which are subject to environmental laws and regulations, the lender will be
required to operate the property in accordance with those laws and
regulations. Compliance may well entail expense, although multifamily
properties generally are subject to less compliance cost than industrial or
manufacturing properties.
In addition, a lender may be obligated to disclose environmental conditions
on a property to government entities and/or to prospective buyers (including
prospective buyers at a foreclosure sale or following foreclosure). Such
disclosure may decrease the amount that prospective buyers are willing to pay
for the affected property, sometimes substantially, and thereby decrease the
ability of the lender to recoup its investment in a loan upon foreclosure.
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Environmental Site Assessments. In addition to possibly allowing a lender to
qualify for the innocent landowner defense (see discussion under "--
Environmental Risks--CERCLA" above), environmental site assessments can be a
valuable tool in anticipating, managing and minimizing environmental risk.
They are commonly performed in many commercial real estate transactions.
Environmental site assessments vary considerably in their content and
quality. Even when adhering to good professional practices, environmental
consultants will sometimes not detect significant environmental problems
because an exhaustive environmental assessment would be far too costly and
time-consuming to be practical. Nevertheless, it is generally helpful in
assessing and addressing environmental risks in connection with commercial
real estate (including multifamily properties) to have an environmental site
assessment of a property because it enables anticipation of environmental
problems and, if agreements are structured appropriately, can allow a party to
decline to go forward with a transaction.
DUE-ON-SALE AND DUE-ON-ENCUMBRANCE
Certain of the Mortgage Loans may contain "due-on-sale" and "due-on-
encumbrance" clauses that purport to permit the lender to accelerate the
maturity of the loan if the borrower transfers or encumbers the related
Mortgaged Property. In recent years, court decisions and legislative actions
placed substantial restrictions on the right of lenders to enforce such
clauses in many states. By virtue, however, of the Garn-St Germain Depository
Institutions Act of 1982 (the "Garn Act"), effective October 15, 1982 (which
purports to preempt state laws that prohibit the enforcement of due-on-sale
clauses by providing among other matters, that "due-on-sale" clauses in
certain loans made after the effective date of the Garn Act are enforceable,
within certain limitations as set forth in the Garn Act and the regulations
promulgated thereunder), the Servicer may nevertheless have the right to
accelerate the maturity of a Mortgage Loan that contains a "due-on-sale"
provision upon transfer of an interest in the property, regardless of the
Servicer's ability to demonstrate that a sale threatens its legitimate
security interest.
SUBORDINATE FINANCING
Certain of the Mortgage Loans may not restrict the ability of the borrower
to use the Mortgaged Property as security for one or more additional loans.
Where a borrower encumbers a mortgaged property with one or more junior liens,
the senior lender is subjected to additional risk. First, the borrower may
have difficulty servicing and repaying multiple loans. Moreover, if the
subordinate financing permits recourse to the borrower (as is frequently the
case) and the senior loan does not, a borrower may have more incentive to
repay sums due on the subordinate 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 borrower
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 any existing junior lender is harmed or the borrower is
additionally burdened. Third, if the borrower 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 proceedings by the senior lender.
DEFAULT INTEREST AND LIMITATIONS ON PREPAYMENTS
Notes and mortgages 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 that 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.
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APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary Control Act
of 1980 ("Title V") provides that state usury limitations shall not apply to
certain types of residential (including multifamily) first mortgage loans
originated by certain lenders after March 31, 1980. Title V authorized any
state to reimpose interest rate limits by adopting, before April 1, 1983, a
law or constitutional provision that 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 and/or to limit discount points or other
charges.
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 borrower who enters military service after the
origination of such borrower's mortgage loan (including a borrower 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 borrower'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
individuals 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 with individuals as borrowers 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
Servicer to collect full amounts of interest on certain of the Mortgage Loans.
Any shortfalls in interest collections resulting from the application of the
Relief Act would result in a reduction of the amounts distributable to the
holders of the Certificates and would not be covered by advances or any form
of credit support provided in connection with the Certificates. In addition,
the Relief Act imposes limitations that would impair the ability of the
Servicer to foreclose on an affected Mortgage Loan during the borrower's
period of active duty status, and, under certain circumstances, during an
additional three month period thereafter.
FORFEITURES IN DRUG AND RICO PROCEEDINGS
Federal law provides that property owned by persons convicted of drug-
related crimes or of criminal violations of the Racketeer Influenced and
Corrupt Organizations ("RICO") statute can be seized by the government if the
property was used in, or purchased with the proceeds of, such crimes. Under
procedures contained in the Comprehensive Crime Control Act of 1984 (the
"Crime Control Act"), the government may seize the property even before
conviction. The government must publish notice of the forfeiture proceeding
and may give notice to all parties "known to have an alleged interest in the
property," including the holders of mortgage loans.
A lender may avoid forfeiture of its interest in the property if it
establishes that: (i) its mortgage was executed and recorded before commission
of the crime upon which the forfeiture is based, or (ii) the lender was, at
the time of execution of the mortgage, "reasonably without cause to believe"
that the property was used in, or purchased with the proceeds of, illegal drug
or RICO activities.
AMERICANS WITH DISABILITIES ACT
Under Title III of the Americans with Disabilities Act of 1990 and rules
promulgated thereunder (collectively, the "ADA"), in order to protect
individuals with disabilities, public accommodations (such as hotels,
restaurants, shopping centers, hospitals, schools and social service center
establishments) must remove architectural and communication barriers that are
structural in nature from existing places of public accommodation to the
extent "readily achievable." In addition, under the ADA, alterations to a
place of public accommodation or a commercial facility are to be made so that,
to the maximum extent feasible, such altered
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portions are readily accessible to and usable by disabled individuals. The
"readily achievable" standard takes into account, among other factors, the
financial resources of the affected site, owner, landlord or other applicable
person. In addition to imposing a possible financial burden on the borrower in
its capacity as owner or landlord, the ADA may also impose such requirements
on a foreclosing lender who succeeds to the interest of the borrower as owner
or landlord. Furthermore, since the "readily achievable" standard may vary
depending on the financial condition of the owner or landlord, a foreclosing
lender who is financially more capable than the borrower of complying with the
requirements of the ADA may be subject to more stringent requirements than
those to which the borrower is subject.
CERTAIN LAWS AND REGULATIONS
The Mortgaged Properties will be subject to compliance with various federal,
state and local statutes and regulations. Failure to comply (together with an
inability to remedy any such failure) could result in material diminution in
the value of a Mortgaged Property which could, together with the possibility
of limited alternative uses for a particular Mortgaged Property (i.e., a
nursing or convalescent home or hospital), result in a failure to realize the
full principal amount of the related Mortgage Loan.
TYPE OF MORTGAGED PROPERTY
The lender may be subject to additional risk depending upon the type and use
of the Mortgaged Property in question. For instance, Mortgaged Properties
which are hospitals, nursing homes or convalescent homes may present special
risks to lenders in large part due to significant governmental regulation of
the operation, maintenance, control and financing of health care institutions.
Mortgages on Mortgaged Properties which are owned by the borrower under a
condominium form of ownership are subject to the declaration, by-laws and
other rules and regulations of the condominium association. Mortgaged
Properties which are hotels or motels may present additional risk to the
lender in that: (i) hotels and motels are typically operated pursuant to
franchise, management and operating agreements which may be terminable by the
operator; and (ii) the transferability of the hotel's operating, liquor and
other licenses to the entity acquiring the hotel either through purchase or
foreclosure is subject to the vagaries of local law requirements. In addition,
Mortgaged Properties which are multifamily residential properties or
cooperatively owned multifamily properties may be subject to rent control
laws, which could impact the future cash flows of such properties.
ACCELERATION ON DEFAULT
Some of the Mortgage Loans included in a Trust Fund will include a "debt-
acceleration" clause, which permits the lender to accelerate the full debt
upon a monetary or nonmonetary default of the borrower. The courts of all
states will enforce clauses providing for acceleration in the event of a
material payment default after giving effect to any appropriate notices. The
equity courts of any state, however, may refuse to foreclose a mortgage or
deed of trust when an acceleration of the indebtedness would be inequitable or
unjust or the circumstances would render the acceleration unconscionable.
Furthermore, in some states, the borrower may avoid foreclosure and reinstate
an accelerated loan by paying only the defaulted amounts and the costs and
attorneys' fees incurred by the lender in collecting such defaulted payments.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion is a summary of the anticipated material federal
income tax consequences of the purchase, ownership, and disposition of the
Offered Certificates. The summary is based upon laws, regulations, rulings,
and decisions now in effect, all of which are subject to change. The
discussion does not purport to deal with the federal income tax consequences
to all categories of investors, some of which may be subject to special rules.
The discussion focuses primarily on investors who will hold the Offered
Certificates as "capital assets" (generally, property held for investment)
within the meaning of section 1221 of the Code, although much of the
discussion is applicable to other investors as well. Investors should note
that, although final regulations under
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the REMIC Provisions of the Code (the "REMIC Regulations") have been issued by
the Treasury, no currently effective regulations or other administrative
guidance have been issued with respect to certain provisions of the Code that
are or may be applicable to Certificateholders, particularly the provisions
dealing with market discount. Although the Treasury has issued final
regulations dealing with original issue discount ("OID") and premium (the "OID
Regulations"), the OID Regulations do not address directly the treatment of
"Regular Certificates" (as defined below). Furthermore, the REMIC Regulations
do not address all of the issues that arise in connection with the formation
and operation of a REMIC. Hence, definitive guidance cannot be provided with
respect to many aspects of the tax treatment of Certificateholders. Moreover,
there can be no assurance that the Internal Revenue Service (the "Service")
will not take positions that would be materially adverse to investors.
Finally, the summary does not purport to address the anticipated state income
tax consequences to investors of owning and disposing of the Offered
Certificates. Consequently, investors should consult their own tax advisors in
determining the federal, state, local, foreign, and any other tax consequences
to them of the purchase, ownership, and disposition of the Offered
Certificates.
GENERAL
A separate REMIC election will be made with respect to each of two specified
pools of Trust Fund assets (each, an "Asset Pool") for federal income tax
purposes. The Asset Pool of the "Lower-Tier REMIC" generally will consist of
the Mortgage Loans. The Asset Pool of the "Upper-Tier REMIC" generally will
consist of non-certificated "regular interests" in the Lower-Tier REMIC. Upon
the issuance of the Certificates, Hunton & Williams, counsel to the Federal
Deposit Insurance Corporation in connection with the issuance of the
Certificates, will deliver its opinion generally to the effect that, assuming
timely filing of REMIC elections and compliance with all provisions of the
Pooling and Servicing Agreement and the other issuance and closing documents,
each Asset Pool will qualify as a REMIC (each, a "Trust REMIC") for federal
income tax purposes. Hunton & Williams also will deliver its opinion that the
discussion set forth in this Prospectus under "Certain Federal Income Tax
Consequences" is correct and complete in all material respects. The foregoing
opinions will be based on existing law, but there can be no assurance that the
law will not change or that contrary positions will not be taken by the
Service.
The Certificates other than the Class R Certificates will be designated as
REMIC "regular interests" ("Regular Certificates"), which generally are
treated as debt for federal income tax purposes. The Class R Certificates (the
"Residual Certificates") will be designated as representing REMIC "residual
interests, which generally are not treated as debt for such purposes, but
rather as representing rights and responsibilities with respect to the taxable
income or loss of the related Trust REMIC.
In general, Certificates held by a "mutual savings bank" or "domestic
building and loan association" (a "Thrift Institution") taxed as a "domestic
building and loan association" will constitute assets described in section
7701(a)(19)(C)(xi) of the Code; Certificates held by a real estate investment
trust (a "REIT") will constitute "real estate assets" within the meaning of
section 856(c)(5)(A) of the Code; and interest on such Certificates will be
considered "interest on obligations secured by mortgages on real property"
within the meaning of section 856(c)(3)(B), all in the same proportion that
the related Trust REMIC's assets would so qualify. If 95% or more of the
assets of a given Trust REMIC constitute qualifying assets for Thrift
Institutions and REITs, the related Certificates and the income thereon will
be treated entirely as qualifying assets and income for such purposes. Both
Trust REMICs will be treated as a single REMIC for purposes of determining the
extent to which the related Certificates and the income thereon will be
treated as qualifying assets and income for such purposes. Regular and
Residual Certificates held by a financial institution to which section 585 or
586 of the Code applies will be treated as evidences of indebtedness for
purposes of section 582(c)(1) of the Code. Regular Certificates also will be
"qualified mortgages" within the meaning of section 860G(a)(3) of the Code
with respect to other REMICs. Effective September 1, 1997, Regular
Certificates held by a financial asset securitization investment trust (a
"FASIT") will qualify for treatment as "permitted assets" within the meaning
of section 860L(c)(1)(G) of the Code.
In addition to representing ownership of regular interests in the Upper-Tier
REMIC, the Sub-Pool II Certificates also will represent for federal income tax
purposes ownership of a contract right to receive an amount
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equal to any Basis Risk Shortfall to the extent of the Basis Risk Support
Amount (a "Contract Right"). To the extent that the Sub-Pool II Certificates
represent ownership of a Contract Right, the Sub-Pool II Certificates will not
represent assets described in the foregoing sections of the Code. Therefore,
the Sub-Pool II Certificates will not entirely constitute permitted
investments or qualified mortgages if held by another REMIC and thus will be
unsuitable for inclusion in another REMIC. Moreover, a Contract Right will not
constitute an obligation that is principally secured by an interest in real
property within the meaning of section 856(c)(5)(A) of the Code, and payments
made to a REIT with respect to such Contract Right will not constitute gross
income as described in section 856(c) of the Code.
TAX TREATMENT OF REGULAR CERTIFICATES
General
Except as described below for Regular Certificates issued with OID or
acquired with market discount or premium, interest paid or accrued on a
Regular Certificate will be treated as ordinary income to the
Certificateholder and a principal payment on such Certificate will be treated
as a return of capital to the extent that the Certificateholder's basis in the
Certificate is allocable to that payment. Regular Certificateholders must
report income from such Certificates under an accrual method of accounting,
even if they otherwise would have used the cash receipts and disbursements
method.
Original Issue Discount
Overview. Based in part on anticipated prices (including accrued interest)
and the prepayment assumptions described below, Classes , , , ,
and will be issued, and Classes , , , , , and will not
be issued, with OID within the meaning of section 1273(a) of the Code.
Certificateholders of Regular Certificates as to which there is OID should be
aware that they generally must include OID in income for federal income tax
purposes on an annual basis under a constant yield accrual method that
reflects compounding. In general, OID is treated as ordinary interest income
and must be included in income in advance of the receipt of the cash to which
it relates.
The amount of OID required to be included in a Regular Certificateholder's
income in any taxable year will be computed in accordance with section
1272(a)(6) of the Code, which provides for the accrual of OID under a constant
yield method on regular interests in a REMIC. Under section 1272(a)(6), as
elaborated by the related legislative history, the amount and the rate of
accrual of OID generally is to be calculated based on the prepayment rate for
the Mortgage Loans and the reinvestment rate on amounts held pending
distribution that were assumed in pricing the Regular Certificates (the
"Pricing Prepayment Assumptions"). The OID Regulations do not address directly
the treatment of instruments that are subject to section 1272(a)(6). However,
until the Treasury issues guidance to the contrary, the Trustee, in its
capacity as party responsible for computing the amount of OID to be reported
to a Regular Certificateholder each taxable year, will base its computations
on Code section 1272(a)(6) and the OID Regulations as described below.
Prospective investors should be aware that because no regulatory guidance
currently exists under Code section 1272(a)(6), there can be no complete
assurance that the methodology described below represents the correct manner
of calculating OID on the Regular Certificates.
The Pricing Prepayment Assumptions include an assumption of . No
representation is made, however, about the rate at which prepayments on the
Mortgage Loans actually will occur.
Amount of Original Issue Discount. The amount of OID on a Regular
Certificate equals the excess, if any, of the Certificate's "stated redemption
price at maturity" over its "issue price." Under the OID Regulations, a debt
instrument's stated redemption price at maturity is the sum of all payments
provided by the instrument other than "qualified stated interest" ("Deemed
Principal Payments"). Qualified stated interest, in general, is stated
interest that is payable unconditionally in cash or property (other than debt
instruments of the issuer) at least annually at (i) a single fixed rate or
(ii) a variable rate that meets certain requirements set out in the OID
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Regulations. See "--Variable Rate Certificates" below. Thus, in the case of
any Regular Certificate, the stated redemption price at maturity will include
all Deemed Principal Payments payable on that Certificate. The issue price of
a Regular Certificate generally will equal the initial price at which a
substantial amount of Certificates of the same class is sold to the public
(including any amounts paid for interest accrued as of the Closing Date under
the terms of the Certificate).
Under a de minimis rule, a Regular Certificate will be considered to have no
OID if the amount of OID is less than 0.25% of the Certificate's stated
redemption price at maturity multiplied by its weighted average maturity
("WAM"). For that purpose, the WAM of a Regular Certificate is the sum of the
amounts obtained by multiplying the amount of each Deemed Principal Payment by
a fraction, the numerator of which is the number of complete years from the
Certificate's issue date until the payment is made, and the denominator of
which is the Certificate's stated redemption price at maturity. Although no
guidance has been issued regarding the application of the de minimis rule to
REMIC regular interests, the WAM of a Regular Certificate has been computed
using the Pricing Prepayment Assumptions. A Regular Certificateholder will
include de minimis OID in income on a pro rata basis as stated principal
payments on the Certificate are received or, if earlier, upon disposition of
the Certificate, unless the Certificateholder makes the "Constant Yield
Election" (as defined below).
Accrual of Original Issue Discount. A Regular Certificateholder of a
Certificate that has OID generally must include in gross income the sum, for
all days during his taxable year on which he holds the Regular Certificate, of
the "daily portions" of the OID on such Certificate. In the case of an
original Regular Certificateholder, the daily portions of OID with respect to
such Certificate generally will be determined by allocating to each day in any
accrual period the Certificate's ratable portion of the excess, if any, of (i)
the sum of (a) the present value of all projected payments under the
Certificate yet to be received as of the close of such period plus (b) the
amount of payments received on the Certificate during such period over (ii)
the Certificate's "adjusted issue price" at the beginning of such period. The
accrual period that will be used by the Trustee for purposes of computing the
daily portions on a Regular Certificate will be the one month (or shorter
period) ending on each Distribution Date. The present value of projected
payments yet to be received on a Regular Certificate is to be computed using
the Pricing Prepayment Assumptions and the Certificate's original yield to
maturity (adjusted to take into account the length of the particular accrual
period), and taking into account payments actually received on the Certificate
prior to the close of the accrual period. The adjusted issue price of a
Regular Certificate at the beginning of the first accrual period is its issue
price. The adjusted issue price at the beginning of each subsequent period is
the adjusted issue price of the Certificate at the beginning of the preceding
period increased by the amount of OID allocable to that period and reduced by
the amount of any Deemed Principal Payments received during that period. Thus,
an increased (or decreased) rate of prepayments received with respect to a
Regular Certificate will be accompanied by a correspondingly increased (or
decreased) rate of recognition of OID by the Certificateholder.
The yield to maturity of a Regular Certificate is calculated based on the
Pricing Prepayment Assumptions. Contingencies, such as the exercise of
"mandatory redemptions," that are taken into account by the parties in pricing
the Regular Certificates typically will be subsumed in the Pricing Prepayment
Assumptions and thus will be reflected in the Certificate's yield to maturity.
If the subsequent Certificateholder's adjusted basis in the Regular
Certificate immediately after the acquisition exceeds the adjusted issue price
of the Certificate, but is less than or equal to the sum of the payments to be
received under the Certificate after the acquisition date, the amount of OID
on the Certificate will be reduced by a fraction, the numerator of which is
the excess of the Certificate's adjusted basis immediately after its
acquisition over the adjusted issue price of the Certificate and the
denominator of which is the excess of the sum of all payments to be received
on the Certificate after the acquisition date over the adjusted issue price of
the Certificate. If a subsequent Certificateholder's adjusted basis in a
Regular Certificate, immediately after its acquisition, exceeds the sum of all
payments to be received on the Certificate after the acquisition date, the
Certificateholder will no longer be required to accrue OID on the Certificate,
and the Certificateholder can elect to reduce the amount of interest income
recognized on the Certificate by the amount of amortizable premium. See "--
Amortizable Premium" below.
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Special Rules and Considerations. The OID Regulations provide that a
Certificateholder generally may make an election (a "Constant Yield Election")
to include in gross income all current income on the Regular Certificate,
including market discount (as described below under "--Market Discount") (as
reduced by any acquisition premium, as described below) under the constant
yield method used to account for OID. To make the Constant Yield Election, the
Certificateholder of the Regular Certificate must attach a statement to its
timely filed federal income tax return for the taxable year in which the
Certificateholder acquired the Regular Certificate. The statement must
identify the instruments to which the election applies. A Constant Yield
Election is irrevocable unless the Certificateholder obtains the consent of
the Service. In general, the Constant Yield Election may be made on an
obligation-by-obligation basis. If, however a Constant Yield Election is made
for a debt instrument with market discount, the Certificateholder is deemed to
have made an election to include in income currently the market discount on
all of the Certificateholder's other debt instruments with market discount, as
described in "--Market Discount" below. In addition, if a Constant Yield
Election is made for a debt instrument with amortizable premium, the
Certificateholder is deemed to have made an election to amortize the premium
on all of the Certificateholder's other debt instruments with amortizable
premium under the constant yield method. See "--Amortizable Premium" below.
To prevent taxpayers from structuring debt instruments or transactions, or
applying the bright-line or mechanical rules of the OID Regulations, in ways
that produce unreasonable tax results, the Treasury issued proposed and
temporary regulations containing an anti-abuse rule on the same date as the
issuance of the OID Regulations. The proposed and temporary regulations
provide that if a principal purpose in structuring a debt instrument, engaging
in a transaction, or applying the OID Regulations is to achieve a result that
is unreasonable in light of the purposes of the applicable statutes, the
Service can apply or depart from the OID Regulations as necessary or
appropriate to achieve a reasonable result. A result is not considered
unreasonable under the proposed and temporary regulations, however, in the
absence of a substantial effect on the present value of a taxpayer's tax
liability.
In view of the complexities and current uncertainties as to the manner of
inclusion in income of OID on Regular Certificates, each investor should
consult his own tax advisor to determine the appropriate amount and method of
inclusion in income of OID on such Certificates for federal income tax
purposes.
Variable Rate Certificates
The Sub-Pool II Certificates will pay interest at a variable rate (a
"Variable Rate Certificate"). The rules applicable to variable rate debt
instruments, as defined in the OID Regulations ("VRDIs"), apply to a Variable
Rate Certificate only if: (i) such Certificate is not issued at a premium to
its noncontingent principal amount in excess of the lesser of (a) .015
multiplied by the product of such noncontingent principal amount and the WAM
(as that term is defined above in the discussion of the de minimis rule) of
the Certificate or (b) 15 percent of such noncontingent principal amount; (ii)
stated interest on the Certificate compounds or is payable unconditionally at
least annually at specified rates, including (a) one or more "qualified
floating rates," (b) a single fixed rate and one or more qualified floating
rates, or (c) a single "objective rate;" and (iii) the qualified floating rate
or the objective rate in effect during an accrual period is set at a current
value of that rate (i.e., the value of the rate on any day occurring during
the interval that begins three months prior to the first day on which that
value is in effect under the Certificate and ends one year following that
day).
A rate is a qualified floating rate if variations in the rate reasonably can
be expected to measure contemporaneous variations in the cost of newly
borrowed funds in the currency in which the debt instrument is denominated. A
qualified floating rate may measure contemporaneous variations in borrowing
costs for the issuer of the debt instrument or for issuers in general. A
multiple of a qualified floating rate is considered a qualified floating rate
only if the rate is equal to either (a) the product of a qualified floating
rate and a fixed multiple that is greater than zero but not more than 1.35 or
(b) the product of a qualified floating rate and a fixed multiple that is
greater than zero but not more than 1.35, increased or decreased by a fixed
rate. If a Regular Certificate provides for two or more qualified floating
rates that reasonably can be expected to have approximately the same values
throughout the term of the Certificate, the qualified floating rates together
will constitute a single qualified
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floating rate. Two or more qualified floating rates conclusively will be
presumed to have approximately the same values throughout the term of a
Certificate if the values of all such rates on the issue date of the
Certificate are within 25 basis points of each other.
A variable rate will be considered a qualified floating rate if it is
subject to a restriction or restrictions on the maximum stated interest rate
(a "Cap"), a restriction or restrictions on the minimum stated interest rate
(a "Floor"), a restriction or restrictions on the amount of increase or
decrease in the stated interest rate (a "Governor"), or other similar
restriction only if: (a) the Cap, Floor, or Governor is fixed throughout the
term of the related Certificate or (b) the Cap, Floor, or Governor, or similar
restriction is not reasonably expected, as of the issue date, to cause the
yield on the Certificate to be significantly less or significantly more than
the expected yield on the Regular Certificate determined without such Cap,
Floor, Governor, or similar restriction, as the case may be. Although the OID
Regulations are unclear, it appears that a VRDI, the primary rate on which is
subject to a Cap, Floor, or Governor that itself is a qualified floating rate,
bears interest at an objective rate and not at a qualified floating rate.
Under final Treasury regulations issued on June 12, 1996, an objective rate
is a rate (other than a qualified floating rate) that (i) is determined using
a single fixed formula, (ii) is based on objective financial or economic
information, and (iii) is not based on information that is within the control
of the issuer (or a related party) or that is unique to the circumstances of
the issuer (or a related party), such as the level of the issuer's dividends,
profits, or stock value. The definition of an objective rate is broader than
the former definition in the OID Regulations and would include, for example, a
rate that is based on changes in a general inflation index.
If interest on a Variable Rate Certificate is stated at a fixed rate for an
initial period of less than one year followed by a variable rate that is
either a qualified floating rate or an objective rate for a subsequent period,
and the value of the variable rate on the issue date approximates the fixed
rate, the fixed rate and the variable rate together constitute a single
qualified floating rate or objective rate. A variable rate conclusively will
be presumed to approximate an initial fixed rate if the value of the variable
rate on the issue date does not differ from the value of the fixed rate by
more than 25 basis points.
Under the OID Regulations, all interest payable on a Variable Rate
Certificate that qualifies as a VRDI and provides for stated interest
unconditionally payable in cash or property at least annually at a single
qualified floating rate or a single objective rate (a "Single Rate VRDI
Certificate") is treated as qualified stated interest. The amount and accrual
of OID on a Single Rate VRDI Certificate is determined, in general, by
converting such Certificate into a hypothetical fixed rate security and
applying the rules applicable to fixed rate securities described under
"Original Issue Discount" above to the hypothetical fixed rate security.
Qualified stated interest or OID allocable to an accrual period with respect
to a Single Rate VRDI Certificate must be increased (or decreased) if the
interest actually accrued or paid during such accrual periods exceeds (or is
less than) the interest assumed to be accrued or paid during such accrual
period under the related hypothetical fixed rate security.
MARKET DISCOUNT
A subsequent purchaser of a Regular Certificate at a discount from its
adjusted issue price will acquire such Certificate with "market discount." The
purchaser generally will be required to recognize the market discount (in
addition to any OID remaining with respect to the Regular Certificate) as
ordinary income. A person who purchases a Regular Certificate at a price lower
than the total of the remaining projected payments on the Certificate but
higher than its adjusted issue price does not acquire the Certificate with
market discount, but will be required to report OID, appropriately adjusted to
reflect the excess of the price paid over the adjusted issue price. See "--Tax
Treatment of Regular Certificates--Original Issue Discount." A Regular
Certificate will not be considered to have market discount if the amount of
such market discount is de minimis, i.e., less than the product of (i) 0.25%
of the adjusted issue price of such Certificate, multiplied by (ii) its
weighted average maturity ("WAM"). For that purpose, the WAM of a Regular
Certificate is the sum of the amounts obtained by multiplying the amount of
each payment by a fraction, the numerator of which is the number of complete
years from the Certificate's issue date until the payment is made, and the
denominator of which is the Certificate's
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stated redemption price at maturity. Regardless of whether the subsequent
purchaser of a Regular Certificate with more than a de minimis amount of
market discount is a cash-basis or an accrual-basis taxpayer, market discount
generally will be taken into income as payments are received, in an amount
equal to the lesser of (i) the amount of the payment received or (ii) the
amount of market discount that has "accrued" (as described below), but that
has not yet been included in income. The purchaser may make an election, which
generally applies to all market discount instruments acquired by the purchaser
in the taxable year of election or thereafter, to recognize market discount
currently on an uncapped accrual basis (the "Current Recognition Election").
In addition, the purchaser may make a Constant Yield Election with respect to
a Regular Certificate purchased with market discount. See "--Tax Treatment of
Regular Certificates--Original Issue Discount."
The relevant legislative history indicates that, until the Treasury
promulgates applicable regulations, the purchaser of a Regular Certificate
with market discount generally may elect to accrue the market discount either:
(i) on the basis of a constant interest rate or (ii) in the ratio of OID
accrued for the relevant period to the total remaining OID at the beginning of
such period. Regardless of which computation method is elected, the Pricing
Prepayment Assumptions must be used to calculate the accrual of market
discount.
A Certificateholder who has acquired a Regular Certificate with market
discount generally will be required to treat a portion of any gain on a sale
or exchange of the 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 as partial principal payments were received. Moreover, such Regular
Certificateholder generally must defer interest deductions attributable to any
indebtedness incurred or continued to purchase or carry the Certificate to the
extent they exceed income on the Certificate. Any such deferred interest
expense, in general, is allowed as a deduction not later than the year in
which the related market discount income is recognized. If a Regular
Certificateholder makes a Current Recognition Election or a Constant Yield
Election, the interest deferral rule will not apply.
Treasury regulations implementing the market discount rules have not yet
been issued, and uncertainty exists with respect to many aspects of those
rules. For example, the treatment of a Regular Certificate subject to
redemption at the option of the Trustee that is acquired at a market discount
is unclear. It appears likely, however, that the market discount rules
applicable in such a case would be similar to the rules pertaining to OID. Due
to the substantial lack of regulatory guidance with respect to the market
discount rules, it is unclear how those rules will affect any secondary market
that develops for a given Class of Regular Certificates. Prospective investors
in Regular Certificates should consult their own tax advisors as to the
application of the market discount rules to those Certificates.
Amortizable Premium
A purchaser of a Regular Certificate who purchases the Certificate at a
premium over the total of its Deemed Principal Payments may elect to amortize
such premium under a constant yield method that reflects compounding based on
the interval between payments on the Certificate. The relevant legislative
history indicates that premium is to be accrued in the same manner as market
discount. Accordingly, it appears that the accrual of premium on a Regular
Certificate will be calculated using the Pricing Prepayment Assumptions. Under
the Code, except as otherwise provided in Treasury regulations to be issued,
amortized premium would be treated as an offset to interest income on a
Regular Certificate and not as a separate deduction item. If a
Certificateholder makes an election to amortize premium on a Regular
Certificate, such election will apply to all taxable debt instruments
(including all REMIC regular interests) held by the Certificateholder at the
beginning of the taxable year in which the election is made, and to all
taxable debt instruments acquired thereafter by such Certificateholder, and
will be irrevocable without the consent of the Service. Purchasers who pay a
premium for the Regular Certificates should consult their tax advisors
regarding the election to amortize premium and the method to be employed.
Basis Risk Support Amount
The treatment of amounts received by a Sub-Pool II Certificateholder under
such Certificateholder's Contract Right to receive certain payments from the
FDIC ("Basis Risk Support Payments") in the event of a
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Basis Risk Shortfall will depend in part on the portion, if any, of the
Certificateholder's purchase price allocable thereto. For federal income tax
reporting purposes, the Trustee intends to treat the issue price of a Sub-Pool
II Certificate as allocable entirely to the regular interest represented by
such Certificate, based on the position that the fair market value of the
right to receive Basis Risk Support Payments is nominal at the time of
acquisition of a Sub-Pool II Certificate because of the remoteness of a Basis
Risk Shortfall occurring. Accordingly, no portion of the issue price of a Sub-
Pool II Certificate will be treated for federal income tax reporting purposes
as allocable to the Contract Right to receive Basis Risk Support Payments.
Assuming that the Certificateholder of a Sub-Pool II Certificate would not be
required to allocate any portion of its purchase price to such Contract Right,
all Basis Risk Support Payments received by such Certificateholder would be
treated as ordinary income and taxed as they accrued regardless of when they
actually were received and regardless of the method of accounting otherwise
used by a Sub-Pool II Certificateholder. Basis Risk Support Payments most
likely would accrue, and would be taken into income, at substantially the same
time as they would if such payments represented additional interest on the
Sub-Pool II Certificates.
Gain or Loss on Disposition
If a Regular Certificate is sold, the Certificateholder will recognize gain
or loss equal to the difference between the amount realized on the sale and
his adjusted basis in the Regular Certificate. The adjusted basis of a Regular
Certificate generally will equal the cost of the Certificate to the
Certificateholder, increased by any OID or market discount previously
includible in the Certificateholder's gross income with respect to the
Certificate, and reduced by the portion of the basis of the Certificate
allocable to payments on the Certificate previously received by the
Certificateholder. Except to the extent that the market discount rules apply
and except as provided below, any gain or loss on the sale or other
disposition of a Regular Certificate generally will be capital gain or loss.
Such gain or loss will be long-term gain or loss if the Certificate is held as
a capital asset for more than 12 months.
If the Certificateholder of a Regular Certificate is a bank, Thrift
Institution, or similar institution described in section 582 of the Code, any
gain or loss on the sale or exchange of the Regular Certificate will be
treated as ordinary income or loss. In the case of other types of
Certificateholders, gain from the disposition of a Regular Certificate that
otherwise would be capital gain will be treated as ordinary income to the
extent that the amount actually includible in income with respect to the
Regular Certificate by the Certificateholder during his holding period is less
than the amount that would have been includible in income if the yield on that
Certificate during the holding period had been 110% of a specified U.S.
Treasury borrowing rate as of the date that the Certificateholder acquired the
Regular Certificate. Although the relevant legislative history indicates that
the portion of the gain from disposition of a Regular Certificate that will be
recharacterized as ordinary income is limited to the amount of OID (if any) on
the Certificate that was not previously includible in income, the applicable
Code provision contains no such limitation.
Realized Losses
Under section 166 of the Code, both corporate holders of the Offered
Certificates and noncorporate holders of the Offered 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 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 Certificateholder 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 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 Certificate could exceed the
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amount of economic income actually realized by the holder in such period.
Although the holder of a 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.
REMIC QUALIFICATION
Each Asset Pool will qualify under the Code as a REMIC, so long as a REMIC
election is in effect and certain tests concerning (i) the composition of the
Trust REMIC's assets and (ii) the nature of the Certificateholders' interests
in the Trust REMIC are met on a continuing basis. A loss of REMIC status could
have a number of consequences for Certificateholders. If, as the result of
REMIC disqualification, the Trust Fund were treated as an association taxable
as a corporation, distributions on the Regular Certificates could be
recharacterized in part as dividends from a non-includible corporation and in
part as returns of capital. Alternatively, distributions on a Regular
Certificate could continue to be treated as comprised of interest and
principal notwithstanding REMIC disqualification, in which case a cash-basis
Certificateholder might not be required to continue to recognize interest and
market discount with respect to the Certificate on the accrual basis. Under
the first alternative, a loss of REMIC status would, and under the second
alternative, a loss of REMIC status could cause the Certificates and the
associated distributions not to be qualified assets and income for the various
purposes of Thrift Institutions, domestic building and loan associations, and
REITs described in the last paragraph under "Certain Federal Income Tax
Consequence--General" above, although such a loss would not affect the status
of the Certificates as "government securities" for REITs. The Certificates
should continue to qualify as "government securities" for RICs regardless of
whether REMIC status is lost.
REMIC-LEVEL TAXES
General
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 Certificates.
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"). The Pooling and Servicing Agreement includes provisions
designed to prevent the acceptance of any contributions to the Trust Fund 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.
It is not anticipated that any material state or local income or franchise
tax will be imposed on the Trust Fund.
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 Trust Fund will be
borne by the Servicer or Trustee in either case out of its own funds, provided
that the Servicer or the Trustee, as the case may be, has sufficient assets to
do so, and provided further that such tax arises out of a breach of the
Servicer's or the Trustee's obligations, as the case may be, under the
Agreement and in respect
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of compliance with applicable laws and regulations. Any such tax not borne by
the Servicer or the Trustee will be charged against the Trust Fund resulting
in a reduction in amounts payable to holders of the Certificates.
Possible Taxes on Income From Foreclosure Property
Under the terms of the Pooling and Servicing Agreement, the Servicer is
obligated to operate and manage any Mortgaged Property acquired as REO
Property in accordance with the Servicing Standard. After the Servicer reviews
the operation of such property and consults with the Trustee to determine the
Trustee's federal income tax reporting position with respect to income it is
anticipated that the Trust Fund would derive from such property, the Servicer
could determine that it would not be commercially feasible to manage and
operate such property in a manner that would avoid the imposition of a tax on
"net income from foreclosure property" within the meaning of the REMIC
Provisions or a tax on prohibited transactions (either such tax referred to
herein as an "REO Tax"). To the extent that income the Trust Fund receives
from an REO Property is subject to a tax on (i) "net income from foreclosure
property," such income would be subject to federal tax at the highest marginal
corporate tax rate (currently 35%) and (ii) "prohibited transactions," such
income would be subject to federal tax at a 100% rate. The determination as to
whether income from an REO Property would be subject to an REO Tax will depend
on the specific facts and circumstances relating to the management and
operation of each REO Property. Generally, income from an REO Property that is
directly operated by the Servicer would be apportioned and classified as
"service" or "non-service" income. The "service" portion of such income could
be subject to federal tax either at the highest marginal corporate tax rate or
at the 100% rate on "prohibited transactions," and the "non-service" portion
of such income could be subject to federal tax at the highest marginal
corporate tax rate or, although it appears unlikely, at the 100% rate
applicable to "prohibited transactions." See, in particular, "Servicing of the
Mortgage Loans--Realization Upon Defaulted Mortgage Loans." Any REO Tax
imposed on the Trust Fund's income from an REO Property would reduce the
amount available for distribution to Certificateholders. Certificateholders
are advised to consult their own tax advisers regarding the possible
imposition of REO Taxes in connection with the operation of commercial REO
Properties by REMICs.
TAXATION OF FOREIGN CERTIFICATEHOLDERS OF REMIC REGULAR CERTIFICATES
Interest, including OID, paid on a Regular Certificate to a nonresident
alien individual, foreign corporation, or other non-United States person
("Foreign Person") generally will be treated as "portfolio interest" and,
therefore, will not be subject to any United States withholding tax, provided
that (i) such interest is not effectively connected with a trade or business
in the United States of the Certificateholder, and (ii) the Trustee (or other
person who would otherwise be required to withhold tax) is provided with
appropriate certification that the beneficial owner of the Regular Certificate
is a Foreign Person ("Foreign Person Certification"). If Foreign Person
Certification is not provided, interest (including OID) paid on such an
Certificate may be subject to either a 30% withholding tax or 31% backup
withholding. See "Backup Withholding."
REPORTING AND TAX ADMINISTRATION OF REGULAR CERTIFICATES
To the extent required by statute, regulation, or administrative ruling, the
Trustee will make reports at least annually to Regular Certificateholders of
record and to the Service with respect to (i) interest paid or accrued on the
Certificates, (ii) OID, if any, accrued on the Certificates, and (iii)
information necessary to compute the accrual of any market discount or the
amortization of any premium on the Certificates.
BACKUP WITHHOLDING
Under federal income tax law, a Certificateholder may be subject to "backup
withholding" under certain circumstances. Backup withholding may apply to a
Certificateholder who is a United States person if the Certificateholder,
among other things, (i) fails to furnish his social security number or other
taxpayer identification number ("TIN") to the Trustee, (ii) furnishes the
Trustee an incorrect TIN, (iii) fails to report properly interest and
dividends, or (iv) under certain circumstances, fails to provide the Trustee
or the
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Certificateholder's securities broker with a certified statement, signed under
penalties of perjury, that the TIN provided to the Trustee is correct and that
the Certificateholder is not subject to backup withholding. Backup withholding
may apply, under certain circumstances, to a Certificateholder who is a
Foreign Person if the Certificateholder fails to provide the Trustee or the
Certificateholder's securities broker with a Foreign Person Certification.
Backup withholding applies to "reportable payments," which include interest
payments and principal payments to the extent of accrued OID, as well as
distributions of proceeds from the sale of Regular Certificates or Residual
Certificates. The backup withholding rate is 31%. Backup withholding, however,
does not apply to payments on an Certificate made to certain exempt
recipients, such as tax-exempt organizations, and to certain Foreign Persons.
Certificateholders should consult their tax advisors for additional
information concerning the potential application of backup withholding to
payments received by them with respect to a Regular Certificate.
DUE TO THE COMPLEXITY OF THE FEDERAL INCOME TAX RULES APPLICABLE TO
CERTIFICATEHOLDERS AND THE CONSIDERABLE UNCERTAINTY THAT EXISTS WITH RESPECT
TO MANY ASPECTS OF THOSE RULES, POTENTIAL INVESTORS SHOULD CONSULT THEIR OWN
TAX ADVISORS REGARDING THE TAX TREATMENT OF THE ACQUISITION, OWNERSHIP, AND
DISPOSITION OF THE CERTIFICATES.
STATE TAX CONSIDERATIONS
In addition to the federal income tax consequences described in "Certain
Federal Income Tax Consequences," potential investors should consider the
state income tax consequences of the acquisition, ownership, and disposition
of the Regular Certificates. State income tax law may differ substantially
from the corresponding federal law, and this discussion does not purport to
describe any aspect of the income tax laws of any state. Therefore, potential
investors should consult their own tax advisors with respect to the various
state tax consequences of an investment in the Regular Certificates.
ERISA CONSIDERATIONS
GENERAL
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 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 (all of which are hereinafter referred to as
"Plans"), and on persons who are fiduciaries with respect to 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 that 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 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, ERISA and 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, 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.
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PLAN ASSET REGULATIONS
A Plan's investment in the Certificates of a particular class may cause the
Mortgage Loans included in the Sub-Pool evidenced by such Certificates to be
deemed Plan assets. Section 2510.3-101 of the regulations of the United States
Department of Labor ("DOL") provides 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 to this discussion apply, or unless the
equity participation in the entity by "benefit plan investors" (that is, Plans
and certain employee benefit plans not subject to ERISA) is not "significant."
For this purpose, in general, equity participation in the Trust Fund by
benefit plan investors will be "significant" on any date if, immediately after
the most recent acquisition of any Offered Certificate, 25% or more of any
class of equity interests 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 constitute Plan assets, then any party
exercising management or discretionary control regarding those assets, such as
the Trustee, the Servicer, or any Sub-Servicer, may be deemed to be a Plan
"fiduciary" with respect to the investing Plan, and thus subject to the
fiduciary responsibility provisions and prohibited transaction provisions of
ERISA and the Code. In addition, if the Mortgage Loans 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 to Lehman Brothers an individual prohibited transaction
exemption, Prohibited Transaction Exemption 91-14 et al. (Exemption
Application No. D-7958 et al., 56 Fed. Reg. 7413 (1991)) (the "Exemption"),
which 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 Sections 4975(a) and (b) of the Code,
certain transactions, among others, relating to the servicing and operation of
mortgage pools, such as the Mortgage Pool, and the purchase, sale and holding
of mortgage pass-through certificates, such as the Class I-A1, the Class I-A2,
and Class II-A Certificates (collectively, the "Senior 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)
Lehman Brothers, (b) any person directly or indirectly, through one or more
intermediaries, controlling, controlled by or under common control with Lehman
Brothers, 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 the Senior Certificates.
The Exemption sets forth six general conditions which must be satisfied for
a transaction involving the purchase, sale and holding of any of the Senior
Certificates to be eligible for exemptive relief thereunder. First, the
acquisition of the Senior Certificates by a Plan 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 rights and interests evidenced by the
Senior Certificates must not be subordinated to the rights and interests
evidenced by the other certificates of the same trust. Third, the Senior
Certificates at the time of acquisition by the Plan must be rated in one of
the three highest generic rating categories by Standard & Poor's Ratings Group
("Standard & Poor's"), Moody's, Duff & Phelps or Fitch Investors Service, L.P.
("Fitch"). Fourth, the Trustee cannot be an affiliate of any other member of
the "Restricted Group," which consists of any Underwriter, the FDIC, the
Servicer, the Trustee, any sub-servicer, and any mortgagor with respect to
Mortgage Loans constituting more than 5% of the aggregate unamortized
principal balance of the Mortgage Loans as of the date of initial issuance of
the Senior Certificates. Fifth, the sum of all payments made to and retained
by the Underwriter must represent not more than reasonable compensation for
underwriting the Senior Certificates; the sum of all payments made to and
retained by the FDIC pursuant to the assignment of the Mortgage Loans to the
Trust Fund must represent not more than the fair market value of such
obligations; and the sum of all payments made to and retained by the Servicer
and any sub-servicer must represent not more than reasonable compensation for
such person's services under the Pooling and Servicing Agreement and
reimbursement of such person's reasonable expenses in connection therewith.
Sixth, the investing Plan must be an accredited investor as defined in Rule
501(a)(1) of Regulation D of the Securities and Exchange Commission under the
Securities Act of 1933, as amended.
128
<PAGE>
Because the Senior Certificates are not subordinated to any other class of
Certificates, the second general condition set forth above is satisfied with
respect to such Certificates. It is a condition of the issuance of the Senior
Certificates that they be rated not lower than "Aaa" by Moody's and "AAA" by
Duff & Phelps. As of the Closing Date, the fourth general condition set forth
above will be satisfied with respect to the Senior Certificates. A fiduciary
of a Plan contemplating purchasing a Senior Certificate in the secondary
market must make its own determination that, at the time of such purchase,
such Certificate continues to satisfy the third and fourth general conditions
set forth above. A fiduciary of a Plan contemplating purchasing a Senior
Certificate, whether in the initial issuance of such Certificates or in the
secondary market, must make its own determination that the first, fifth and
sixth general conditions set forth above will be satisfied with respect to
such Senior Certificate.
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 have been included in other investment pools; (ii) certificates in such
other investment pools must have been rated in one of the three highest
categories of Standard & Poor's, Moody's, Duff & Phelps or Fitch for at least
one year prior to the Plan's acquisition of Senior Certificates; and (iii)
certificates in such other investment pools must have been purchased by
investors other than Plans for at least one year prior to any Plan's
acquisition of Senior Certificates.
If the general conditions of the Exemption are satisfied, the Exemption may
provide an exemption from the restrictions imposed by Sections 406(a) and
407(a) of ERISA (as well as 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 (i) the direct or indirect sale, exchange or transfer of
Senior Certificates in the initial issuance of Certificates between the FDIC
or the Underwriter and a Plan when the FDIC, the Underwriter, the Trustee, the
Servicer, a sub-servicer or a mortgagor is a Party in Interest with respect to
the investing Plan, (ii) the direct or indirect acquisition or disposition in
the secondary market of any Senior Certificates by a Plan and (iii) the
holding of Senior Certificates by a Plan. 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 Senior 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 hereof,
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 Sections
406(b)(1) and (b)(2) of ERISA and the taxes imposed by Section 4975(c)(1)(E)
of the Code in connection with (i) the direct or indirect sale, exchange or
transfer of Senior Certificates in the initial issuance of Certificates
between the FDIC or the Underwriter and a Plan when the person who has
discretionary authority or renders investment advice with respect to the
investment of Plan assets in such Certificates is (a) a mortgagor with respect
to 5 % or less of the fair market value of the Mortgage Loans or (b) an
affiliate of such a person, (ii) the direct or indirect acquisition or
disposition in the secondary market of Senior Certificates by a Plan and (iii)
the holding of Senior Certificates by a Plan.
Further, if certain specific conditions of the Exemption are satisfied, the
Exemption may provide an exemption from the restrictions imposed by Sections
406(a), 406(b) and 407(a) of ERISA, and the taxes imposed by Sections 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 Mortgage
Pool. It is expected that the specific conditions of the Exemption required
for this purpose will be satisfied with respect to the Senior Certificates.
The Exemption also may provide an exemption from the restrictions imposed by
Sections 406(a) and 407(a) of ERISA, and the taxes imposed by Sections 4975(a)
and (b) of the Code by reason of Sections 4975(c)(1)(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 Certificates.
129
<PAGE>
Before purchasing a Senior Certificate, a fiduciary of a Plan should itself
confirm that (i) such Senior Certificates constitute "certificates" for
purposes of the Exemption and (ii) the specific and general conditions and the
other requirements set forth in the Exemption would be satisfied. In addition
to making its own determination as to the availability of the exemptive relief
provided in the Exemption, the Plan fiduciary should consider the availability
of any other prohibited transaction exemptions, including, without limitation,
Prohibited Transaction Exemption ("PTE") 90-1, regarding investments by
insurance company pooled separate accounts; PTE 91-38, regarding investments
by bank collective investment funds; or PTE 84-14, regarding transactions
effected by a "qualified professional asset manager." A purchaser of a Senior
Certificate should be aware, however, that even if the conditions specified in
one or more exemptions are satisfied, the scope of relief provided by an
exemption may not cover all acts that might be construed as prohibited
transactions.
THE CHARACTERISTICS OF THE CLASS I-B, CLASS I-C, CLASS I-D, CLASS I-E, CLASS
I-F, CLASS I-G, CLASS II-B AND CLASS II-C CERTIFICATES WILL NOT MEET THE
REQUIREMENTS OF THE EXEMPTION. ACCORDINGLY, THE CLASS I-B, CLASS I-C, CLASS I-
B, CLASS I-C, CLASS I-D, CLASS I-E, CLASS I-F AND CLASS I-G, CLASS II-B AND
CLASS II-C CERTIFICATES SHOULD NOT BE ACQUIRED BY A PLAN.
Any Plan fiduciary considering whether to purchase an Offered Certificate on
behalf of a Plan should consult with its counsel regarding the applicability
of the fiduciary responsibility and prohibited transaction provisions of ERISA
and the Code to such investment.
LEGAL INVESTMENT
The appropriate characterization of the Offered Certificates under various
legal investment restrictions, and thus the ability of investors subject to
these restrictions to purchase Offered Certificates, is subject to significant
interpretive uncertainties. Accordingly, all institutions the investment
activities of which are subject to legal investment laws and regulations or to
review by regulatory authorities should consult with their own legal advisers
in determining whether and to what extent the Offered Certificates constitute
legal investments or are subject to restrictions on investment. All investors
the investment authority of which is subject to legal restrictions, including
federally chartered thrift institutions, should consult their own legal
advisers to determine whether and to what extent the Offered Certificates will
constitute legal investments for them. The Offered Certificates will not be
"mortgage related securities" for purposes of the Secondary Mortgage Market
Enhancement Act of 1984.
No representation is made hereby as to the proper characterization of the
Offered Certificates for legal investment purposes, or as to the ability of
particular investors to purchase the Offered Certificates under applicable
legal investment restrictions. The uncertainties described above (and any
unfavorable future determinations concerning legal investment characteristics
of the Offered Certificates) may adversely affect the liquidity of the Offered
Certificates.
All depository institutions considering an investment in the Offered
Certificates should review the Federal Financial Institutions Examination
Council's Supervisory Policy Statement on the Selection of Securities Dealers
and Unsuitable Investment Practices (to the extent adopted by their respective
regulators), setting forth, in relevant part, certain investment practices
deemed to be unsuitable for an institution's investment portfolio, as well as
guidelines for investing in certain types of mortgage securities.
The foregoing does not take into consideration the applicability of
statutes, rules, regulations, orders, guidelines or agreements generally
governing investments made by a particular investor, including, but not
limited to, "prudent investor" provisions, percentage-of-assets limits and
provisions that may restrict or prohibit investment in securities which are
not "interest bearing" or "income paying."
There may be other restrictions on the ability of certain investors,
including depository institutions, either to purchase Offered Certificates or
to purchase Offered Certificates representing more than a specified percentage
130
<PAGE>
of the investor's assets. Investors should consult their own legal advisers in
determining whether and to what extent the Offered Certificates constitute
legal investments for such investors.
UNDERWRITING
Subject to the terms and conditions set forth in an underwriting agreement
(the "Underwriting Agreement") between the Mortgage Loan Seller, FDIC and the
Trustee on behalf of the Trust Fund and the Underwriters named below, dated
December [ ], 1996, the Trust Fund has agreed to sell to the Underwriters, and
the Underwriters have severally agreed to purchase, the respective Class
Balances of each class of the Offered Certificates that are set forth below:
CLASS BALANCES
TO BE PURCHASED BY THE UNDERWRITERS (1)
<TABLE>
<CAPTION>
LEHMAN
BROTHERS
-------- ----- ----- ---- ----
<S> <C> <C> <C> <C> <C>
Class I-A1.......................................
Class I-A2.......................................
Class I-B........................................
Class I-C........................................
Class I-D........................................
Class I-E........................................
Class I-F........................................
Class I-G........................................
Class II-A.......................................
Class II-B.......................................
Class II-C.......................................
</TABLE>
- --------
(1) Subject to a variance of plus or minus 5%.
In the Underwriting Agreement, the several Underwriters have agreed, subject
to the terms and conditions set forth therein, to purchase all of the Offered
Certificates if any are purchased. In the event of default by any Underwriter,
the Underwriting Agreement provides that, in certain circumstances, the
purchase commitments of non-defaulting Underwriters may be increased or the
Underwriting Agreement may be terminated.
There is currently no secondary market for the Offered Certificates. The
Underwriters, either directly or through their affiliates, intend to make a
secondary market in the Offered Certificates, but none of the Underwriters has
any obligation to do so. There can be no assurance that an active secondary
market for any of the Offered Certificates will develop or that any such
market, if established, will continue.
131
<PAGE>
The Underwriters propose to offer each class of the Offered Certificates in
part directly to purchasers at the initial public offering prices set forth on
the cover page of this Prospectus, and in part to certain securities dealers
at such prices less the concessions set forth below for each such class. The
Underwriters may allow, and such dealers may reallow, concessions not in
excess of the amount set forth below for each such class. After the Offered
Certificates are released for sale to the public, the public offering prices
and other selling terms may be changed by the Underwriters.
<TABLE>
<CAPTION>
SELLING
CONCESSIONS REALLOWANCES
----------- ------------
<S> <C> <C>
Class I-A1.............................................
Class I-A2.............................................
Class I-B..............................................
Class I-C..............................................
Class I-D..............................................
Class I-E..............................................
Class I-F..............................................
Class I-G..............................................
Class II-A.............................................
Class II-B.............................................
Class II-C.............................................
</TABLE>
The FDIC will indemnify the Underwriters against certain civil liabilities,
including liabilities under the Securities Act of 1933, as amended, or will
contribute to payments the Underwriters may be required to make in respect
thereof.
USE OF PROCEEDS
The net proceeds from the sale of the Offered Certificates will be used
towards the simultaneous purchase by the Trust Fund of the Mortgage Loans from
the Mortgage Loan Seller.
LEGAL MATTERS
Certain legal matters will be passed upon for the Trust Fund, the Mortgage
Loan Seller and the FDIC by the General Counsel of the FDIC and by Hunton &
Williams, Richmond, Virginia, and certain legal matters will be passed upon
for the Underwriters by Latham & Watkins, New York, New York.
132
<PAGE>
RATINGS
It is a condition to issuance that the Certificates be rated not lower than
the following:
<TABLE>
<CAPTION>
MOODY'S DUFF & PHELPS
------- -------------
<S> <C> <C>
Class I-A1.............................................
Class I-A2.............................................
Class I-B..............................................
Class I-C..............................................
Class I-D..............................................
Class I-E..............................................
Class I-F..............................................
Class I-G..............................................
Class II-A.............................................
Class II-B.............................................
Class II-C.............................................
</TABLE>
A securities rating on mortgage pass-through certificates addresses the
likelihood of the receipt by holders thereof of payments to which they are
entitled. The rating takes 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 from a particular Sub-Pool is
adequate to make payments required under the Corresponding Certificates. The
ratings on the Offered Certificates do not, however, constitute a statement
regarding the likelihood or frequency of prepayments (whether voluntary or
involuntary) on the Mortgage Loans, or the corresponding effect on yield to
investors. The ratings do not address the likelihood of Basis Risk Shortfalls,
the sufficiency of any Basis Risk Shortfall Amount to cover such shortfall or
the corresponding effect on yield to investors.
There can be no assurance as to whether any rating agency not requested to
rate the Offered Certificates will nonetheless issue a rating to any class
and, if so, what such rating or ratings would be. A rating assigned to any
class of Offered Certificates by a rating agency that has not been requested
to do so may be lower than the rating assigned thereto by Moody's or Duff &
Phelps.
The ratings on the Offered Certificates should be evaluated independently
from similar ratings on other types of securities. A security rating is not a
recommendation to buy, sell or hold securities and may be subject to revision
or withdrawal at any time by the assigning rating agency.
133
<PAGE>
INDEX OF PRINCIPAL DEFINITIONS
<TABLE>
<S> <C>
1996 Lender Liability Act............................................. 114
Accrual Period........................................................ 72
Accrued Interest...................................................... 72
ADA................................................................... 116
Advance............................................................... 18
Appraisal Process..................................................... 8, 27, 36
Appraised ARM Loans................................................... 12
Appraised Fixed Rate Loans............................................ 10
Appraised Loans....................................................... 8, 27, 37
ARM Audit............................................................. 36
ARM Loans............................................................. 1
Asset Pool............................................................ 118
Assignment of Leases and Rents........................................ 52
Assumed Scheduled Payment............................................. 7, 36, 76
Available Distribution Amount......................................... 16, 67
Available Sub-Pool Coverage Amount.................................... 19, 77
Available Guaranty Amount............................................. 18, 77
Balloon Loan.......................................................... 7, 36
Balloon Payment....................................................... 7, 36
Basis Risk Shortfall.................................................. 34, 71
Basis Risk Support Amount............................................. 15, 71
Basis Risk Support Payments........................................... 71, 123
BIF................................................................... 19, 96
Book-Entry Certificates............................................... 84
Cap................................................................... 122
CERCLA................................................................ 62, 113
Certificate Owner..................................................... 6, 84
Certificate Registrar................................................. 83
Certificates.......................................................... 1, 5
Class Balance......................................................... 2
Closing Date.......................................................... 6
Code.................................................................. 23
Collection Account.................................................... 98
Compensating Interest Payment......................................... 60
Component Reference Rate.............................................. 15, 70
Constant Prepayment Rate.............................................. 89
Contract Right........................................................ 119
Constant Yield Election............................................... 121
Contributions Tax..................................................... 125
Corresponding......................................................... 16, 67
CPR................................................................... 89
Crime Control Act..................................................... 116
Current Recognition Election.......................................... 123
Cut-off Date.......................................................... 5
Debt Service Reduction................................................ 78
Defect................................................................ 53
Deferred Interest..................................................... 73
Deficient Valuation................................................... 78
Definitive Offered Certificate........................................ 6
Deleted Mortgage Loan................................................. 55
</TABLE>
<TABLE>
<S> <C>
Delinquent Mortgage Loan................................................ 59
Deemed Principal Payments............................................... 119
Depository Institution.................................................. 5, 26
Determination Date...................................................... 16, 68
Direct Participants..................................................... 84
Discounted Mortgage Loan................................................ 74
Disqualifying Condition................................................. 54
Distributable Interest.................................................. 17, 72
Distributable Principal................................................. 17, 73
Distribution Account.................................................... 102
Distribution Date....................................................... 2, 67
Distribution Date Statement............................................. 79
DOL..................................................................... 128
DTC..................................................................... 6, 83
Due Date................................................................ 7
Due Period.............................................................. 16, 68
Duff & Phelps........................................................... 98
Earnings................................................................ 42
ERISA................................................................... 24, 127
ERISA-Restricted Certificates........................................... 24
Escrow Account.......................................................... 57
Estimated Net Cash Flow................................................. 42
Estimated Net Cash Flow Coverage
Ratio.................................................................. 42
Exchange Act............................................................ 83
Exemption............................................................... 24
Excess Coverage Amount.................................................. 19, 78
FASIT................................................................... 118
FDI Act................................................................. 97
FDIC.................................................................... 2, 96
FFB..................................................................... 97
FHLMC................................................................... 99
Final Database.......................................................... 38
Final Scheduled Distribution Date....................................... 1
FIRREA.................................................................. 19, 96
Fitch................................................................... 128
Fixed Charges........................................................... 42
Fixed Rate Loans........................................................ 1
Floor................................................................... 122
FNMA.................................................................... 99
Foreign Person.......................................................... 126
Foreign Person Certification............................................ 126
FRF..................................................................... 96
FSLIC................................................................... 96
Funds................................................................... 96
Governor................................................................ 122
Gross Margin............................................................ 11, 44
Guidelines.............................................................. 51
Hazardous Materials..................................................... 54
Index................................................................... 11, 44
</TABLE>
134
<PAGE>
INDEX OF PRINCIPAL DEFINITIONS--(CONTINUED)
<TABLE>
<S> <C>
Indirect Participants.................................................. 84
Information Date....................................................... 2, 5
Information Date Balance............................................... 2, 6
Information Date LTV Ratio............................................. 49
Information Date Sub-Pool I Balance.................................... 2, 39
Information Date Sub-Pool II Balance................................... 2, 44
Initial Database....................................................... 37
Initial Guaranty Amount................................................ 77
Initial Review......................................................... 36
Insurance Proceeds..................................................... 57
Interim Certification.................................................. 53
Junior Lien............................................................ 7
LIBOR.................................................................. 15, 71
LIBOR Adjustment Date.................................................. 71
LIBOR Business Day..................................................... 71
Limited Guaranty....................................................... 2
Limited Guaranty Draw Loan............................................. 78
Liquidation Fee........................................................ 59
Liquidation Proceeds................................................... 57
Loans-to-Facilitate.................................................... 10, 51
Lower-Tier REMIC....................................................... 118
Matured Performing ARM Loan............................................ 12
Matured Performing Fixed Rate Loan..................................... 10
Matured Performing Mortgage Loan....................................... 7, 36
Maximum Obligation Limitation.......................................... 97
Member Institutions.................................................... 96
Modification Fee....................................................... 59
Modified Database...................................................... 38
Moody's................................................................ 98
Mortgage............................................................... 36
Mortgage File.......................................................... 52
Mortgage File Sampling................................................. 36
Mortgage Loan Seller................................................... 1, 2, 96
Mortgage Loans......................................................... 1, 36
Mortgage Loan Schedule................................................. 27
Mortgage Note.......................................................... 36
Mortgage Pool.......................................................... 1, 36
Mortgage Rate.......................................................... 7
Mortgage Rate Adjustment Date.......................................... 44
Mortgage Properties.................................................... 1
Mortgaged Property..................................................... 36
Negative Amortization.................................................. 95
Net Aggregate Prepayment Interest
Shortfall............................................................. 73
Net Mortgage Rate...................................................... 73
Non-Appraised Loans.................................................... 37
Nonrecoverable P&I Advance............................................. 77
Notional Amount........................................................ 72
Offered Certificates................................................... 1, 5, 65
OID.................................................................... 118
</TABLE>
<TABLE>
<S> <C>
OID Regulations...................................................... 118
Optimal Principal Distribution Amount................................ 73
Optimal Wind-Down Date............................................... 60
P&I Advance.......................................................... 18, 76
P&I Advance Date..................................................... 57
Participants......................................................... 6
Parties in Interest.................................................. 127
Pass-Through Rate.................................................... 2, 86
Payment Adjustment Date.............................................. 44
Percentage Interest.................................................. 67
Periodic Reports..................................................... 32
Permitted Investments................................................ 99
Plan................................................................. 24
Plans................................................................ 127
Pooling and Servicing Agreement...................................... 13, 65
Prepayment Interest Excess........................................... 73
Prepayment Interest Shortfall........................................ 73
Prepayment Period.................................................... 16, 68
Pricing Prepayment Assumptions....................................... 119
Prohibited Transactions Tax.......................................... 125
PTE.................................................................. 130
Purchase Price....................................................... 54
Rating Agencies...................................................... 25
Realized Loss........................................................ 78
Regular Certificates................................................. 118
Related Proceeds..................................................... 77
Relief Act........................................................... 116
REIT................................................................. 118
REMIC................................................................ 2, 23
REMIC Regulations.................................................... 118
REO Account.......................................................... 99
REO Loan............................................................. 16
REO Property......................................................... 15, 57, 66
REO Tax.............................................................. 128
Residual Certificates................................................ 118
Resolution Fee....................................................... 59
Resolution Period.................................................... 59
RICO................................................................. 116
SAIF................................................................. 96
Scheduled Payments................................................... 7
Scheduled Principal Balance.......................................... 74
Senior Certificates.................................................. 128
Service.............................................................. 118
Servicer............................................................. 5, 56
Servicing Advance.................................................... 18, 60
Servicing Fee........................................................ 58
Servicing Fee Rate................................................... 59
Servicing Standard................................................... 59
Simple Interest Loans................................................ 7
</TABLE>
135
<PAGE>
INDEX OF PRINCIPAL DEFINITIONS--(CONTINUED)
<TABLE>
<S> <C>
Single Rate VRD1 Certificates............................................ 122
Special Servicer......................................................... 5
Standard & Poor's........................................................ 128
Stated Principal Balance................................................. 74
Stripped Interest Certificates........................................... 5, 66
Sub Pool I............................................................... 1, 7
Sub Pool II.............................................................. 2, 7
Sub-Pool I Certificates.................................................. 5, 66
Sub-Pool II Certificates................................................. 5, 66
Sub-Servicer............................................................. 58
Sub-Servicing Agreement.................................................. 58
Substitute Mortgage Loan................................................. 55
The Wall Street Journal Prime Rate....................................... 13, 58
Thrift Institution....................................................... 118
TIN...................................................................... 126
Trustee.................................................................. 5
Trust Fund............................................................... 1, 5
Trust REMIC.............................................................. 118
UCC...................................................................... 106
Uncovered Portion........................................................ 79
Underwriting Agreement................................................... 131
Unfunded Basis Risk Shortfall............................................ 33
Upper-Tier REMIC......................................................... 118
Variable Rate Certificate................................................ 121
VRDIs.................................................................... 121
WAM...................................................................... 120
Weighted Average Effective Net Mortgage Rate............................. 15, 73
Weighted Average Life.................................................... 22
</TABLE>
136
<PAGE>
FEDERAL DEPOSIT INSURANCE CORPORATION
BANK INSURANCE FUND
INDEX
AUDITED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Reports of Independent Public Accountants..................... F-2, F-3
Statements of Income and the Fund Balance (Deficit) for the
years ended December 31, 1995, 1994 and 1993................. F-4
Statements of Financial Position as of December 31, 1995 and
1994......................................................... F-5
Statements of Cash Flows for the years ended December 31,
1995, 1994 and 1993.......................................... F-6
Notes to Financial Statements................................. F-7 through F-23
INTERIM UNAUDITED FINANCIAL STATEMENTS
Statements of Financial Position as of September 30, 1996
(unaudited), December 31, 1995 and September 30, 1995
(unaudited).................................................. F-24
Statements of Income and Fund Balance for the nine months
ended September 30, 1996 (unaudited), for the year ended
December 31, 1995 and for the nine months ended September 30,
1995 (unaudited)............................................. F-25
Statements of Cash Flows for the nine months ended September
30, 1996 (unaudited), for the year ended December 31, 1995
and for the nine months ended September 30, 1995
(unaudited).................................................. F-26
Notes to Financial Statements (unaudited)..................... F-27
</TABLE>
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of the
Federal Deposit Insurance
Corporation
In our opinion, the statements of income and fund balance (deficit) and cash
flows of the Bank Insurance Fund of the Federal Deposit Insurance Corporation
(FDIC) appearing on pages F-4 through F-23 present fairly, in all material
respects, the results of operations and cash flows for the period ended
December 31, 1993, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of FDIC's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for the
opinion expressed above. We have not audited the financial statements of the
Bank Insurance Fund of the Federal Deposit Insurance Corporation for any period
subsequent to December 31, 1993.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
Washington, D.C.
June 30, 1994
F-2
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Federal Deposit Insurance
Corporation
We have audited the accompanying statements of financial position of the
Federal Deposit Insurance Corporation's Bank Insurance Fund (the "Fund") as of
December 31, 1995 and 1994, and the related statements of income and the fund
balance and cash flows for the years then ended. These financial statements
are the responsibility of the Fund's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Fund as of December
31, 1995 and 1994, and the results of its operations and its cash flows for
the years then ended, in conformity with generally accepted accounting
principles.
/s/ Arthur Andersen LLP
Washington, D.C.
May 2, 1996
F-3
<PAGE>
FEDERAL DEPOSIT INSURANCE CORPORATION
BANK INSURANCE FUND STATEMENTS OF INCOME AND THE FUND BALANCE
DOLLARS IN THOUSANDS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31
-------------------------------------
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
REVENUE
Assessments (Note 11).................. $ 2,906,943 $ 5,590,644 $ 5,784,277
Interest on U.S. Treasury investments.. 1,068,395 521,473 165,130
Revenue from corporate owned assets.... 58,585 140,821 258,858
Other revenue.......................... 55,176 214,086 222,536
----------- ----------- -----------
Total Revenue........................ 4,089,099 6,467,024 6,430,801
----------- ----------- -----------
EXPENSES AND LOSSES
Operating expenses..................... 470,625 423,196 388,464
Provision for insurance losses (Note
10)................................... (33,167) (2,873,419) (7,677,400)
Corporate owned asset expenses......... 73,599 137,632 190,641
Interest and other insurance expenses
(Note 18)............................. (27,874) 53,493 306,861
----------- ----------- -----------
Total Expenses and Losses............ 483,183 (2,259,098) (6,791,434)
----------- ----------- -----------
Net Income............................. 3,605,916 8,726,122 13,222,235
----------- ----------- -----------
Fund Balance--Beginning................ 21,847,782 13,121,660 (100,575)
----------- ----------- -----------
Fund Balance--Ending................... $25,453,698 $21,847,782 $13,121,660
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
FEDERAL DEPOSIT INSURANCE CORPORATION
BANK INSURANCE FUND STATEMENTS OF FINANCIAL POSITION
DOLLARS IN THOUSANDS
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------
1995 1994
----------- -----------
<S> <C> <C>
ASSETS
Cash and cash equivalents (Note 3)..................... $ 531,308 $ 1,621,456
Investment in U.S. Treasury obligations, net (Note 4)
(market value of investments at 12-31-95 and 12-31-94
was $20.9 billion and $12.5 billion, respectively.)... 20,762,046 12,896,856
Interest receivable on investments and other assets,
net................................................... 406,804 260,702
Receivables from bank resolutions, net (Note 5)........ 4,143,040 8,190,492
Investment in corporate owned assets, net (Note 6)..... 180,293 242,628
Property and buildings, net (Note 7)................... 151,740 155,079
----------- -----------
Total Assets....................................... $26,175,231 $23,367,213
=========== ===========
LIABILITIES AND THE FUND BALANCE
Accounts payable and other liabilities................. $ 192,744 $ 256,197
Liabilities incurred from bank resolutions (Note 8).... 31,882 81,945
Estimated Liabilities for: (Notes 9 and 10)
Anticipated failure of insured institutions.......... 279,000 875,000
Assistance agreements................................ 55,941 163,164
Asset securitization guarantee....................... 126,151 128,417
Litigation losses.................................... 35,815 14,708
----------- -----------
Total Liabilities.................................. 721,533 1,519,431
----------- -----------
Commitments and contingencies (Notes 14 and 15)
Fund Balance........................................... 25,453,698 21,847,782
----------- -----------
Total Liabilities and the Fund Balance............. $26,175,231 $23,367,213
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
FEDERAL DEPOSIT INSURANCE CORPORATION
BANK INSURANCE FUND STATEMENTS OF CASH FLOWS
DOLLARS IN THOUSANDS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31
---------------------------------------
1995 1994 1993
------------ ----------- ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Cash provided from:
Assessments........................ $ 2,796,114 $ 5,709,912 $ 5,789,779
Interest on U.S. Treasury invest-
ments............................. 875,226 458,606 160,697
Recoveries from bank resolutions... 5,059,751 5,336,125 8,739,202
Recoveries from corporate owned as-
sets.............................. 211,691 694,401 1,241,305
Miscellaneous receipts............. 36,084 22,337 32,927
Cash used for:
Operating expenses................. (442,101) (485,963) (538,081)
Interest paid on liabilities from
bank resolutions.................. 0 0 (169,872)
Disbursements for bank resolu-
tions............................. (1,596,391) (2,791,417) (4,198,035)
Disbursements for corporate owned
assets............................ (159,299) (173,601) (368,564)
Miscellaneous disbursements........ (23,929) (658) (15,779)
------------ ----------- ------------
Net Cash Provided by Operating Activ-
ities (Note 17)..................... 6,757,146 8,769,742 10,673,579
------------ ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash provided from:
Maturity of U.S. Treasury obliga-
tions............................. 3,830,000 800,000 1,700,000
Cash used for:
Purchase of U.S. Treasury obliga-
tions............................. (11,675,925) (8,431,525) (5,322,969)
------------ ----------- ------------
Net Cash Used by Investing Activi-
ties................................ (7,845,925) (7,631,525) (3,622,969)
------------ ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Cash used for:
Repayments of indebtedness from
bank resolutions.................. (1,369) 0 (10,160,000)
------------ ----------- ------------
Net Cash Used by Financing Activi-
ties................................ (1,369) 0 (10,160,000)
------------ ----------- ------------
Net (Decrease) Increase in Cash and
Cash Equivalents.................... (1,090,148) 1,138,217 (3,109,390)
------------ ----------- ------------
Cash and Cash Equivalents--Begin-
ning................................ 1,621,456 483,239 3,592,629
------------ ----------- ------------
Cash and Cash Equivalents--Ending.... $ 531,308 $ 1,621,456 $ 483,239
============ =========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
BANK INSURANCE FUND
NOTES TO FINANCIAL STATEMENTS
1. LEGISLATIVE HISTORY AND OPERATIONS OF THE BANK INSURANCE FUND
Legislative History
The U.S. Congress created the Federal Deposit Insurance Corporation (FDIC)
through enactment of the Banking Act of 1933. The FDIC was created to restore
and maintain public confidence in the nation's banking system.
More recently, the Financial Institutions Reform, Recovery, and Enforcement
Act of 1989 (FIRREA) was enacted to reform, recapitalize and consolidate the
federal deposit insurance system. The FIRREA created the Bank Insurance Fund
(BIF), the Savings Association Insurance Fund (SAIF) and the FSLIC Resolution
Fund (FRF). It also designated the FDIC as the administrator of these three
funds. All three funds are maintained separately to carry out their respective
mandates.
Pursuant to FIRREA, an active institution's insurance fund membership and
primary federal supervisor are generally determined by the institution's
charter type. Deposits of BIF-member institutions are mostly insured by the
BIF; BIF members are predominantly commercial and savings banks supervised by
the FDIC, the Office of the Comptroller of the Currency, or the Federal
Reserve. Deposits of SAIF-member institutions are mostly insured by the SAIF;
SAIF members are predominantly thrifts supervised by the Office of Thrift
Supervision (OTS). The Oakar amendment to the Federal Deposit Insurance Act
(FDI Act) allows BIF and SAIF members to acquire deposits insured by the other
insurance fund without changing insurance fund coverage for the acquired
deposits.
The FRF is responsible for winding up the affairs of the former Federal
Savings and Loan Insurance Corporation (FSLIC).
Other significant legislation includes the Omnibus Budget Reconciliation Act
of 1990 (1990 OBR Act) and the Federal Deposit Insurance Corporation
Improvement Act of 1991 (FDICIA). These acts made changes to the FDIC's
assessment authority (see Note 11) and borrowing authority (see "Operations of
the BIF" in a following section). The FDICIA also requires the FDIC to: 1)
resolve troubled institutions in a manner that will result in the least
possible cost to the deposit insurance funds; 2) provide a schedule for
bringing the reserves in the insurance funds to 1.25 percent of insured
deposits; and 3) upon recapitalization, maintain the insurance funds at 1.25
percent of insured deposits or a higher percentage as circumstances warrant.
Recent Legislative Proposals
Recent proposed legislation would, if signed into law, affect the BIF in the
following ways: 1) BIF-members would be required to share the interest costs
of Financing Corporation (FICO) debt on a proportional basis with SAIF-
members; 2) if the BIF's capitalization level exceeds the designated reserve
ratio (currently 1.25 percent), FDIC would be required to refund such excess
up to the amount of the BIF-members' most recent semi-annual assessment; and
3) if the thrift charter is eliminated by January 1, 1998, the BIF and the
SAIF would be merged on that date. There would be a separate assessment to
fund the BIF-members' share of the FICO interest costs, and therefore such
interest costs would not affect regular assessments or the fund balance.
Legislative proposals are subject to change as part of the normal legislative
process; therefore, it is uncertain what provisions the proposed law, if
enacted, will ultimately include.
See also Note 19 which addresses subsequent events.
The FICO, established under the Competitive Equality Banking Act of 1987, is
a mixed-ownership government corporation whose sole purpose was to function as
a financing vehicle for the FSLIC.
F-7
<PAGE>
BANK INSURANCE FUND
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Operations of the BIF
The primary purpose of the BIF is to: 1) insure the deposits and protect the
depositors of BIF-insured banks and 2) finance the resolution of failed banks,
including managing and liquidating their assets. In addition, the FDIC, acting
on behalf of the BIF, examines state-chartered banks that are not members of
the Federal Reserve System and provides and monitors assistance to troubled
banks.
The BIF is primarily funded from the following sources: 1) BIF assessment
premiums; 2) interest earned on investments in U.S. Treasury obligations; 3)
income earned on and funds received from the management and disposition of
assets acquired from failed banks; and 4) U.S. Treasury and Federal Financing
Bank (FFB) borrowings, if necessary.
The 1990 OBR Act established the FDIC's authority to borrow working capital
from the FFB on behalf of the BIF and the SAIF. The FDICIA increased the
FDIC's authority to borrow for insurance losses from the U.S. Treasury, on
behalf of the BIF and the SAIF, from $5 billion to $30 billion.
The FDICIA also established a limitation on obligations that can be incurred
by the BIF known as the maximum obligation limitation (MOL). Under the MOL,
the BIF cannot incur any additional obligation if its total obligations exceed
the sum of: 1) the BIF's cash and cash equivalents; 2) 90 percent of the fair
market value of the BIF's other assets; and 3) the total amount authorized to
be borrowed from the U.S. Treasury, excluding FFB borrowings. For purposes of
calculating the MOL, the FDIC's total U.S. Treasury borrowing authority was
allocated between the BIF and the SAIF based on the ratio of each fund's
insured deposits to total insured deposits. At December 31, 1995, the MOL for
the BIF was $47 billion.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General
These financial statements pertain to the financial position, results of
operations and cash flows of the BIF and are presented in accordance with
generally accepted accounting principles (GAAP). These statements do not
include reporting for assets and liabilities of closed banks for which the BIF
acts as receiver or liquidating agent. Periodic and final accountability
reports of the BIF's activities as receiver or liquidating agent are furnished
to courts, supervisory authorities and others as required.
Use of Estimates
The preparation of the BIF's financial statements in conformity with
generally accepted accounting principles requires FDIC management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from these
estimates. Where it is reasonably possible that changes in estimates will
cause a material change in the financial statements in the near term, the
nature and extent of such changes in estimates have been disclosed in the
financial statements.
U.S. Treasury Obligations
Securities are intended to be held to maturity and are shown at book value.
Book value is the face value of securities plus the unamortized premium or
less the unamortized discount. Amortizations are computed on a daily basis
from the date of acquisition to the date of maturity. Interest is calculated
on a daily basis and recorded monthly using the effective interest method.
Allowance for Losses on Receivables from Bank Resolutions and Investment in
Corporate Owned Assets
The BIF records as a receivable the amounts advanced and/or obligations
incurred for assisting and closing banks. The BIF also records as an asset the
amounts advanced for investment in corporate owned assets. Any
F-8
<PAGE>
BANK INSURANCE FUND
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
related allowance for loss represents the difference between the funds
advanced and/or obligations incurred and the expected repayment. The latter is
based on the estimated cash recoveries from the assets of assisted or failed
banks, net of all estimated liquidation costs. Estimated cash recoveries also
include dividends and gains on sales from equity instruments acquired in
resolution transactions.
Escrowed Funds from Resolution Transactions
In various resolution transactions, the BIF paid the acquirer the difference
between failed bank liabilities assumed and assets purchased, plus or minus
any premium or discount. The BIF considered the amount of the deduction for
assets purchased to be funds held on behalf of the receivership (an
obligation). The funds remained in escrow and accrued interest until such time
as the receivership used the funds to: 1) repurchase assets under asset
putback options; 2) pay preferred and secured claims; 3) pay receivership
expenses; or 4) pay dividends.
The FDIC policy of holding escrowed funds was terminated during 1994. The
BIF continues to pay the acquirer of the failed bank the difference between
liabilities assumed and assets purchased, plus or minus any premium or
discount. The BIF then pays the receivership for the assets purchased by the
assuming institution, plus or minus the premium or discount paid.
Litigation Losses
The BIF accrues, as a charge to current period operations, an estimate of
probable losses from litigation against the BIF in both its corporate and
receivership capacities. The FDIC's Legal Division recommends these estimates
on a case-by-case basis. The litigation loss estimates related to
receiverships are included in the allowance for losses for receivables from
bank resolutions.
Receivership Administration
The FDIC is responsible for controlling and disposing of the assets of
failed institutions in an orderly and efficient manner. The assets, and the
claims against them, are accounted for separately to ensure that liquidation
proceeds are distributed in accordance with applicable laws and regulations.
Also, the income and expenses attributable to receiverships are accounted for
as transactions of those receiverships. Liquidation expenses incurred by the
BIF on behalf of the receiverships are recovered from those receiverships.
Cost Allocations Among Funds
Certain operating expenses (including personnel, administrative and other
indirect expenses) not directly charged to each fund under the FDIC's
management are allocated on the basis of the relative degree to which the
operating expenses were incurred by the funds. The cost of furniture, fixtures
and equipment purchased by the FDIC on behalf of the three funds under its
administration is allocated among these funds on a pro rata basis. The BIF
expenses its share of these allocated costs at the time of acquisition because
of their immaterial amounts.
Postretirement Benefits Other Than Pensions
The FDIC established an entity to provide the accounting and administration
of postretirement benefits on behalf of the BIF, the SAIF, the FRF and the
Resolution Trust Corporation (RTC). The BIF funds its liabilities for these
benefits directly to the entity.
Disclosure about Recent Financial Accounting Standards Board Pronouncements
In May 1993, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 114, "Accounting by
Creditors for Impairment of a Loan," to be adopted for fiscal years beginning
after December 15, 1994. While FDIC adopted SFAS No. 114, most of the BIF
assets are specifically outside the scope of this pronouncement. These assets
do not meet the definition of a loan within the meaning of
F-9
<PAGE>
BANK INSURANCE FUND
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
the statement or are valued through alternative methods. Any assets subject to
SFAS No. 114 are immaterial either because of insignificant book value or
because any potential adjustment to the carrying value as a result of applying
Statement No. 114 would be immaterial.
The FASB issued SFAS No. 118, "Accounting by Creditors for Impairment of a
Loan--Income Recognition and Disclosures," in October 1994, to be adopted for
fiscal years beginning after December 15, 1994. This statement is an amendment
to SFAS No. 114 and was adopted by the FDIC this year.
Other recent pronouncements issued by the FASB have been adopted or are
either not applicable or not material to the financial statements.
Depreciation
The FDIC has designated the BIF administrator of facilities owned and used
in its operations. Consequently, the BIF includes the cost of these facilities
in its financial statements and provides the necessary funding for them. The
BIF charges other funds sharing the facilities a rental fee representing an
allocated share of its annual depreciation expense.
The Washington, D.C., office buildings and the L. William Seidman Center in
Arlington, Virginia, are depreciated on a straight-line basis over a 50-year
estimated life. The San Francisco condominium offices are depreciated on a
straight-line basis over a 35-year estimated life.
Related Parties
The nature of related parties and a description of related party
transactions are disclosed throughout the financial statements and footnotes.
Reclassifications
Reclassifications have been made in the 1994 and 1993 financial statements
to conform to the presentation used in 1995.
3. CASH AND CASH EQUIVALENTS
The BIF considers cash equivalents to be short-term, highly liquid
investments with original maturities of three months or less. In 1995, cash
restrictions included $10 million for health insurance payable and $274
thousand for funds held in trust. In 1994, cash restrictions included $7.4
million for health insurance payable and $737 thousand for funds held in
trust.
F-10
<PAGE>
BANK INSURANCE FUND
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
4. INVESTMENT IN U.S. TREASURY OBLIGATIONS, NET
All cash received by the BIF is invested in U.S. Treasury obligations unless
the cash is: 1) used to defray operating expenses; 2) used for outlays related
to assistance to banks and liquidation activities; or 3) invested in cash
equivalents.
U.S. TREASURY OBLIGATIONS AT DECEMBER 31, 1995
<TABLE>
<CAPTION>
YIELD UNREALIZED UNREALIZED
AT BOOK HOLDING HOLDING MARKET FACE
MATURITY PURCHASE VALUE GAINS LOSSES VALUE VALUE
-------- -------- ----------- ---------- ---------- ----------- -----------
DOLLARS IN THOUSANDS
<S> <C> <C> <C> <C> <C> <C>
Less than one year (a).. 5.53% $ 6,750,414 $ 19,934 $ (5,262) $ 6,765,086 $ 6,750,000
1-3 years............... 5.88% 12,318,436 147,762 (24,776) 12,441,422 12,350,000
3-5 years............... 5.59% 1,693,196 15,613 0 1,708,809 1,690,000
----------- -------- -------- ----------- -----------
Total................. $20,762,046 $183,309 $(30,038) $20,915,317 $20,790,000
=========== ======== ======== =========== ===========
</TABLE>
- --------
(a) Includes a $400 million Treasury note which matured on Sunday, December
31, 1995. Settlement occurred on the next business day, January 2, 1996.
U.S. TREASURY OBLIGATIONS AT DECEMBER 31, 1994
<TABLE>
<CAPTION>
YIELD UNREALIZED UNREALIZED
AT BOOK HOLDING HOLDING MARKET FACE
MATURITY PURCHASE VALUE GAINS LOSSES VALUE VALUE
-------- -------- ----------- ---------- ---------- ----------- -----------
DOLLARS IN THOUSANDS
<S> <C> <C> <C> <C> <C> <C>
Less than one year...... 4.83% $ 3,821,758 $ 0 $ (46,627) $ 3,775,131 $ 3,830,000
1-3 years............... 5.37% 8,034,591 0 (271,169) 7,763,422 8,000,000
3-5 years............... 4.72% 1,040,507 0 (94,945) 945,562 1,000,000
----------- --- --------- ----------- -----------
Total................. $12,896,856 $ 0 $(412,741) $12,484,115 $12,830,000
=========== === ========= =========== ===========
</TABLE>
In 1995, the unamortized discount, net of unamoritized premium, was $28
million. In 1994, the unamortized premium, net of unamortized discount, was
$66.9 million.
5. RECEIVABLES FROM BANK RESOLUTIONS, NET
The FDIC resolution process results in different types of transactions
depending on the unique facts and circumstances surrounding each failing or
failed institution. Payments to prevent a failure are made to operating
institutions when cost and other criteria are met. Such payments may
facilitate a merger or allow a troubled institution to continue operations.
Payments for institutions that fail are made to cover insured depositors'
claims and represent a claim against the receiverships' assets.
The FDIC, as receiver for failed banks, engages in a variety of strategies
at the time of failure to maximize the return from the sale or disposition of
assets and to minimize realized losses. A failed bank acquirer can purchase
selected assets at the time of resolution and assume full ownership, benefit
and risk related to such assets. In certain cases, the receiver offers a
period of time when an acquirer can sell assets back to the receivership at a
specified value (i.e., an asset "putback" option). The receiver can also enter
into a loss-sharing arrangement with an acquirer whereby, for specified assets
and in accordance with individual contract terms, the two parties share in
credit losses and certain qualifying expenses. These arrangements typically
direct that the receiver pay to the acquirer a specified percentage of the
losses triggered by the charge-off of assets covered by
F-11
<PAGE>
BANK INSURANCE FUND
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
the terms of the loss-sharing agreement. The receiver absorbs the majority of
the losses incurred and shares in the acquirer's future recoveries of
previously charged-off assets. Failed bank assets also can be retained by the
receiver to either be managed and disposed of by FDIC liquidation staff or by
contracted private-sector servicers with oversight from the FDIC.
As stated in Note 2, the allowance for losses on receivables from bank
resolutions represents the difference between amounts advanced and/or
obligations incurred and the expected repayment. This is based upon the
estimated cash recoveries from the management and disposition of the assets of
the assisted or failed bank, net of all estimated liquidation costs.
As of December 31, 1995 and 1994, the BIF, in its receivership capacity,
held assets with a book value of $10 billion and $18.3 billion, respectively.
The estimated cash recoveries from the sale of these assets (excluding cash
and miscellaneous receivables of $2.1 billion at December 31, 1995 and $4.2
billion at December 31, 1994) are regularly evaluated, but remain subject to
uncertainties because of changing economic conditions. These factors could
affect the claimants' (including the BIF's) actual recoveries from the level
currently estimated.
RECEIVABLES FROM BANK RESOLUTIONS, NET
<TABLE>
<CAPTION>
DECEMBER 31
--------------------------
1995 1994
------------ ------------
DOLLARS IN THOUSANDS
<S> <C> <C>
ASSETS FROM OPEN BANK ASSISTANCE:
Redeemable preferred stock/warrants.............. $ 23,500 $ 993,500
Subordinated debt instruments.................... 100,000 119,500
Notes receivable................................. 3,222 22,037
Other open bank assistance....................... 29,761 29,773
Deferred settlement.............................. 0 229,525
Interest receivable.............................. 1,517 1,921
Allowance for losses (Note 10)................... (57,405) (1,155,680)
------------ ------------
100,595 240,576
------------ ------------
RECEIVABLES FROM CLOSED BANKS:
Loans and related assets......................... 1,525,295 1,528,443
Resolution transactions.......................... 23,512,531 28,736,839
Capital instruments.............................. 25,000 25,000
Depositors' claims unpaid........................ 10,339 13,561
Allowance for losses (Note 10)................... (21,030,720) (22,353,927)
------------ ------------
4,042,445 7,949,916
------------ ------------
Total.......................................... $ 4,143,040 $ 8,190,492
============ ============
</TABLE>
F-12
<PAGE>
BANK INSURANCE FUND
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
6. INVESTMENT IN CORPORATE OWNED ASSETS, NET
The BIF acquires assets in certain troubled and failed bank cases by either
purchasing an institution's assets outright or purchasing the assets under the
terms specified in each resolution agreement. In addition, the BIF can
purchase assets remaining in a receivership to facilitate termination. The
majority of corporate owned assets are real estate and mortgage loans. The BIF
recognizes income and expenses on these assets. Income consists primarily of
the portion of collections on performing mortgages related to interest earned.
Expenses are recognized for administering the management and liquidation of
these assets.
INVESTMENT IN CORPORATE OWNED ASSETS, NET
<TABLE>
<CAPTION>
DECEMBER 31
----------------------
1995 1994
---------- ----------
DOLLARS IN THOUSANDS
<S> <C> <C>
Investment in corporate owned assets................. $ 939,756 $ 902,304
Allowance for losses (Note 10)....................... (759,463) (659,676)
---------- ----------
Total.............................................. $ 180,293 $ 242,628
========== ==========
</TABLE>
7. PROPERTY AND BUILDINGS, NET
<TABLE>
<CAPTION>
DECEMBER 31
----------------------
1995 1994
---------- ----------
DOLLARS IN THOUSANDS
<S> <C> <C>
Land................................................ $ 29,631 $ 29,631
Office buildings.................................... 151,442 151,442
Accumulated depreciation............................ (29,333) (25,994)
---------- ----------
Total............................................. $ 151,740 $ 155,079
========== ==========
</TABLE>
8. LIABILITIES INCURRED FROM BANK RESOLUTIONS
The FDIC can enter into different types of resolution transactions depending
on the unique facts and circumstances surrounding each failing or failed
institution. The BIF can assume certain liabilities that require future
payments over a specified period of time.
LIABILITIES INCURRED FROM BANK RESOLUTIONS
<TABLE>
<CAPTION>
DECEMBER 31
---------------------
1995 1994
---------- ----------
DOLLARS IN THOUSANDS
<S> <C> <C>
Escrowed funds from resolution transactions (Note
2)................................................. $ 0 $ 54,410
Funds held in trust................................. 274 737
Depositors' claims unpaid........................... 10,339 13,561
Note indebtedness................................... 0 1,389
Interest payable/other liabilities.................. 21,269 11,848
---------- ----------
Total............................................. $ 31,882 $ 81,945
========== ==========
</TABLE>
The BIF's liabilities incurred from bank resolutions of $32 million are
considered current liabilities.
F-13
<PAGE>
BANK INSURANCE FUND
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
9. ESTIMATED LIABILITIES FOR:
Anticipated Failure of Insured Institutions
The BIF records an estimated loss for banks that have not yet failed but
have been identified by the regulatory process as likely (probable) to fail
within the foreseeable future as a result of regulatory insolvency (equity
less than two percent of assets). This includes banks that were solvent at
year-end, but that have adverse financial trends and, absent some favorable
event (such as obtaining additional capital or merging), are likely to fail in
the future. The FDIC relies on this finding regarding regulatory insolvency as
the determining factor in defining the existence of the "accountable event"
that triggers loss recognition under GAAP.
The FDIC cannot predict the precise timing and cost of bank failures. An
estimated liability and a corresponding reduction in the fund balance are
recorded in the period when the liability is deemed probable and reasonably
estimable. It should be noted, however, that future assessment revenues will
be available to the BIF to recover some or all of these losses and that their
amounts have not been reflected as a reduction in the losses.
The estimated liabilities for anticipated failure of insured institutions as
of December 31, 1995 and 1994, were $279 million and $875 million,
respectively. The estimated liability is derived in part from estimates of
recoveries from the sale of the assets of these probable bank failures. As
such, they are subject to the same uncertainties as those affecting the BIF's
receivables from bank resolutions (see Note 5). This could affect the ultimate
costs to the BIF from probable bank failures.
The FDIC estimates that banks with combined assets of approximately $2
billion may fail in 1996 and 1997, and the BIF has recognized a loss of $279
million for those failures considered probable. The level of bank failures
during 1996 and 1997 may vary from this estimate with additional losses
reasonably possible ranging up to $70 million. The further into the future
projections of bank failures are made, the greater the uncertainty of banks
failing and the magnitude of the loss associated with those failures. The
accuracy of these estimates will largely depend on future economic conditions.
Assistance Agreements
The estimated liabilities for assistance agreements resulted from several
large transactions where problem assets were purchased by an acquiring
institution under an agreement that calls for the FDIC to absorb credit losses
and to pay related costs for funding and asset administration plus an
incentive fee.
Asset Securitization Guarantee
As part of the FDIC's efforts to maximize the return from the failed bank
assets and minimize losses from bank resolutions, the FDIC entered into its
first securitization transaction in August 1994. The securitization
transaction was accomplished through the creation of a real estate mortgage
investment conduit (REMIC), a trust, that purchases the loans to be
securitized from one or more institutions for which the FDIC acts as a
receiver or purchases loans owned by the Corporation. The loans in the trust
are pooled and stratified and the resulting cash flow is directed into a
number of different classes of pass-through certificates. The regular pass-
through certificates are sold to the public through licensed brokerage houses.
The largest contributing receivership retains residual pass-through
certificates, which are entitled to any remaining cash flows from the trust
after obligations to regular pass-through holders have been met.
To increase the likelihood of full and timely distributions of interest and
principal to the holders of the regular pass-through certificates, and thus
the marketability of such certificates, the BIF agreed to provide a credit
enhancement through a limited guarantee to cover future credit losses with
respect to the loans underlying the certificates. The FDIC securitization
involved the following structure: 1) approximately 1,800 performing commercial
mortgages from nearly 200 failed banks were sold to a REMIC (FDIC REMIC Trust
1994 C-1);
F-14
<PAGE>
BANK INSURANCE FUND
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
2) the REMIC in turn sold approximately $759 million in 11 classes of
securities backed by the commercial mortgages; and 3) the investors received a
limited guarantee backed by the BIF covering credit losses and other
shortfalls due to credit defaults up to a maximum of $248 million.
In exchange for backing the limited guarantee, the BIF received REMIC
securities and a portion of the proceeds from the sale of the commercial
mortgages. The net present value (NPV) of the assets received was priced to
equal the NPV of the expected exposure under the guarantee so that the BIF
neither profits nor suffers a loss as a result of the limited guarantee.
At December 31, 1995, the BIF has a liability of $126 million under the
guarantee and assets of $126 million representing the REMIC securities and the
portion of the mortgage sales proceeds received. At December 31, 1994, the BIF
liability for the guarantee was $128 million and assets were $128 million.
Cash receipts from the REMIC securities and mortgages sales proceeds
received are $12.9 million and $5.3 million during 1995 and 1994,
respectively, and are reflected in the Statement of Cash Flows as
"Miscellaneous receipts." Cash payments of guarantee claims are $2.4 million
inception-to-date and are reflected in the Statement of Cash Flows as
"Miscellaneous disbursements." Income related to the REMIC securities was $183
thousand and $28 thousand at December 31, 1995 and 1994, respectively, and is
presented as "Other revenue." The following chart summarizes the BIF's
remaining obligation under the guarantee.
ASSET SECURITIZATION GUARANTEE
<TABLE>
<CAPTION>
GUARANTEE MAXIMUM
CLAIMS PAID REMAINING
MAXIMUM THROUGH OBLIGATION
OBLIGATION DECEMBER 31 AT DECEMBER 31
---------- ----------- --------------
DOLLARS IN THOUSANDS
<S> <C> <C> <C>
1995................................... $247,748 $2,429 $245,319
1994................................... $247,748 $ 0 $247,748
</TABLE>
Litigation Losses
The BIF records an estimated loss for unresolved legal cases to the extent
those losses are considered to be probable in occurrence and reasonably
estimable in amount. In addition, the FDIC's Legal Division has determined
that losses from unresolved legal cases totaling $406 million are reasonably
possible. This includes $12 million in losses for the BIF in its corporate
capacity and $394 million in losses for the BIF in its receivership capacity
(see Note 2).
10. ANALYSIS OF CHANGES IN ALLOWANCE FOR LOSSES AND ESTIMATED LIABILITIES
Provision for insurance losses includes the estimated losses for bank
resolutions that occurred during the year for which an estimated loss was not
established and loss adjustments for bank resolutions that occurred in prior
years. It also includes an estimated loss for banks that have not yet failed
but have been identified by the regulatory process as likely to fail (see Note
9). These are referred to as estimated liabilities for anticipated failure of
insured institutions.
In the following charts, transfers include reclassifications from "Estimated
Liabilities for: Anticipated failure of insured institutions" to "Closed
banks." Terminations represent final adjustments to the estimated cost figures
for those bank resolutions that were completed and the operations of the
receivership ended.
F-15
<PAGE>
BANK INSURANCE FUND
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
ANALYSIS OF CHANGES IN ALLOWANCE FOR LOSSES AND ESTIMATED LIABILITIES--1995
<TABLE>
<CAPTION>
PROVISION FOR
INSURANCE LOSSES
BEGINNING -------------------- ADJUSTMENTS/ ENDING
BALANCE CURRENT PRIOR NET CASH TRANSFERS/ BALANCE
01/01/95 YEAR YEARS TOTAL PAYMENTS TERMINATIONS 12/31/95
--------- ------- ----- ----- -------- ------------ --------
DOLLARS IN MILLIONS
<S> <C> <C> <C> <C> <C> <C> <C>
ALLOWANCE FOR LOSSES:
Open bank assistance.... $ 1,156 $ 0 $(140) $(140) $ 0 $ (959) $ 57
Corporate owned assets.. 660 0 99 99 0 0 759
Closed banks............ 22,354 (52) 464 412 0 (1,735) 21,031
------- ---- ----- ----- ----- ------- -------
Total Allowance for
Losses............... 24,170 (52) 423 371 0 (2,694) 21,847
======= ==== ===== ===== ===== ======= =======
ESTIMATED LIABILITIES
FOR:
Anticipated failure of
insured institutions... 875 131 (570) (439) 0 (157) 279
Assistance agreements... 163 0 14 14 (101) (20) 56
Asset securitization
guarantee.............. 128 0 0 0 (2) 0 126
Litigation losses....... 15 0 21 21 0 0 36
------- ---- ----- ----- ----- ------- -------
Total Estimated
Liabilities.......... 1,181 131 (535) (404) (103) (177) 497
======= ==== ===== ===== ===== ======= =======
Provision for Insurance
Losses................. $ 79 $(112) $ (33)
==== ===== =====
</TABLE>
ANALYSIS OF CHANGES IN ALLOWANCE FOR LOSSES AND ESTIMATED LIABILITIES--1994
<TABLE>
<CAPTION>
PROVISION FOR
INSURANCE LOSSES
BEGINNING ------------------------ ADJUSTMENTS/ ENDING
BALANCE CURRENT PRIOR NET CASH TRANSFERS/ BALANCE
01/01/94 YEAR YEARS TOTAL PAYMENTS TERMINATIONS 12/31/94
--------- ------- ------- ------- -------- ------------ --------
DOLLARS IN MILLIONS
<S> <C> <C> <C> <C> <C> <C> <C>
ALLOWANCE FOR LOSSES:
Open bank assistance.... $ 215 $ 0 $ (421) $ (421) $ 3 $1,359 $ 1,156
Corporate owned assets.. 742 0 (82) (82) 0 0 660
Closed banks............ 23,191 (236) (229) (465) 0 (372) 22,354
------- ----- ------- ------- ---- ------ -------
Total Allowance for
Losses............... 24,148 (236) (732) (968) 3 987 24,170
======= ===== ======= ======= ==== ====== =======
ESTIMATED LIABILITIES
FOR:
Anticipated failure of
insured institutions... 2,972 406 (2,128) (1,722) 0 (375) 875
Assistance agreements... 326 0 (177) (177) (37) 51 163
Asset securitization
guarantee.............. 0 0 0 0 0 128 128
Litigation losses....... 21 0 (6) (6) 0 0 15
------- ----- ------- ------- ---- ------ -------
Total Estimated Lia-
bilities............. 3,319 406 (2,311) (1,905) (37) (196) 1,181
======= ===== ======= ======= ==== ====== =======
Provision for Insurance
Losses................. $ 170 $(3,043) $(2,873)
===== ======= =======
</TABLE>
F-16
<PAGE>
BANK INSURANCE FUND
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
ANALYSIS OF CHANGES IN ALLOWANCE FOR LOSSES AND ESTIMATED LIABILITIES--1993
<TABLE>
<CAPTION>
PROVISION FOR
INSURANCE LOSSES
BEGINNING ------------------------ NET ADJUSTMENTS/ ENDING
BALANCE CURRENT PRIOR CASH TRANSFERS/ BALANCE
01/01/93 YEAR YEARS TOTAL PAYMENTS TERMINATIONS 12/31/93
--------- ------- ------- ------- -------- ------------ --------
DOLLARS IN MILLIONS
<S> <C> <C> <C> <C> <C> <C> <C>
ALLOWANCE FOR LOSSES:
Open bank assistance.... $ 2,203 $ 40 $ (890) $ (850) $ 19 $(1,157) $ 215
Corporate owned assets.. 425 0 317 317 0 0 742
Closed banks............ 23,397 (224) 99 (125) 0 (81) 23,191
------- ----- ------- ------- ---- ------- -------
Total Allowance for
Losses............... 26,025 (184) (474) (658) 19 (1,238) 24,148
======= ===== ======= ======= ==== ======= =======
ESTIMATED LIABILITIES
FOR:
Anticipated failure of
insured institutions... 10,782 818 (7,873) (7,055) 0 (755) 2,972
Assistance agreements... 388 0 34 34 (97) 1 326
Asset securitization
guarantee.............. 0 0 0 0 0 0 0
Litigation losses....... 19 0 2 2 0 0 21
------- ----- ------- ------- ---- ------- -------
Total Estimated Lia-
bilities............. 11,189 818 (7,837) (7,019) (97) (754) 3,319
======= ===== ======= ======= ==== ======= =======
Provision for Insurance
Losses................. $ 634 $(8,311) $(7,677)
===== ======= =======
</TABLE>
11. ASSESSMENTS
The 1990 OBR Act removed caps on assessment rate increases and authorized
the FDIC to set assessment rates for BIF members semiannually, to be applied
against a member's average assessment base. The FDICIA: 1) required the FDIC
to implement a risk-based assessment system; 2) authorized the FDIC to
increase assessment rates for BIF-member institutions as needed to ensure that
funds are available to satisfy the BIF's obligations; and 3) authorized the
FDIC to increase assessment rates more frequently than semiannually and impose
emergency special assessments as necessary to ensure that funds are available
to repay U.S. Treasury borrowings.
The FDIC uses a risk-based assessment system that charges higher rates to
those institutions that pose greater risks to the BIF. To arrive at a risk-
based assessment for a particular institution, the FDIC places each
institution in one of nine risk categories using a two-step process based
first on capital ratios and then on other relevant information. The FDIC's
Board of Directors (Board) reviews premium rates semiannually.
The BIF reached its capitalization level of 1.25 percent of insured
deposits, as mandated by FDICIA, at the end of May 1995 (see Note 1). Based on
the recapitalization, the Board approved a reduction in assessment rates for
BIF members from a range of 23 cents to 31 cents per $100 of domestic deposits
to a range of 4 cents to 31 cents per $100 of domestic deposits. The Board's
BIF rate decrease was approved retroactively to June 1, 1995, therefore the
BIF refunded $1.5 billion in assessment overpayments in September 1995 which
is included in the assessment line item in the accompanying financial
statements.
In November 1995, the Board approved a new assessment rate structure for the
BIF. Effective January 1996, the highest-rated institutions (approximately 92
percent of the nearly 11,000 BIF-insured banks) will pay the statutory annual
minimum of $2,000 for deposit insurance. Rates for all other institutions will
be reduced to a range of 3 cents to 27 cents per $100 of insured deposits.
The average assessment rate is expected to decline to approximately 0.43
cents per $100 of domestic deposits, versus the average assessment rate of 4.4
cents per $100 during the latter half of 1995. The projected average
assessment rate would be the lowest in the more than 60-year history of
federal deposit insurance for banks. The lowest average assessment rates for
banks previously was 3.13 cents per $100 in both 1962 and 1963.
F-17
<PAGE>
BANK INSURANCE FUND
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
12. PENSION BENEFITS, SAVINGS PLANS, POSTEMPLOYMENT BENEFITS AND ACCRUED
ANNUAL LEAVE
Eligible FDIC employees (i.e., all permanent and temporary employees with
appointments exceeding one year) are covered by either the Civil Service
Retirement System (CSRS) or the Federal Employee Retirement System (FERS). The
CSRS is a defined benefit plan offset with the Social Security System in
certain cases. Plan benefits are determined on the basis of years of
creditable service and compensation levels. The CSRS-covered employees also
can contribute to the tax-deferred Federal Thrift Savings Plan (TSP).
The FERS is a three-part plan consisting of a basic defined benefit plan
that provides benefits based on years of creditable service and compensation
levels, Social Security benefits and the TSP. Automatic and matching employer
contributions to the TSP are provided up to specified amounts under the FERS.
Eligible FDIC employees also may participate in an FDIC-sponsored tax-
deferred savings plan with matching contributions. The BIF pays its share of
the employer's portion of all related costs.
Although the BIF contributes a portion of pension benefits for eligible
employees, it does not account for the assets of either retirement system. The
BIF also does not have actuarial data for accumulated plan benefits or the
unfunded liability relative to eligible employees. These amounts are reported
and accounted for by the U.S. Office of Personnel Management.
Due to a substantial decline in the FDIC's workload, the Corporation
developed a staffing reduction program, a component of which is a voluntary
separation incentive plan, or buyout. Employees eligible to participate in the
buyout program were placed into two categories, depending on the immediacy of
the need for staffing reduction. Participating Category I employees agreed to
retirement or resignation by December 31, 1995. There are 328 Category I FDIC
employees participating at an estimated cost to the BIF of $8.3 million. The
cost for Category I employees is presented as "Operating expenses" in 1995.
Participating Category II employees must have applied by February 7, 1996, and
resign or retire no later than September 30, 1997. Consideration of all
Category II applications is not complete; however, the Corporation estimates
the possible cost of the buyout program for Category II employees to be about
$15.8 million. The cost for Category II employees will be expensed in 1996.
The buyout affects other liabilities (postretirement and accrued annual
leave); however, that effect is not estimable at this time. Management
believes that the buyout will not have a material effect on the BIF. The
liability to employees for accrued annual leave is approximately $43.4 million
and $40.3 million at December 31, 1995 and 1994, respectively.
PENSION BENEFITS AND SAVINGS PLANS EXPENSES
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31
-----------------------
1995 1994 1993
------- ------- -------
DOLLARS IN THOUSANDS
<S> <C> <C> <C>
Civil Service Retirement System.................... $ 9,411 $ 9,988 $ 8,890
Federal Employee Retirement System (Basic Bene-
fit).............................................. 36,741 32,410 29,254
FDIC Savings Plan.................................. 20,545 21,603 16,267
Federal Thrift Savings Plan........................ 10,264 10,513 8,742
------- ------- -------
Total............................................ $76,961 $74,514 $63,153
======= ======= =======
</TABLE>
F-18
<PAGE>
BANK INSURANCE FUND
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
13. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The FDIC provides certain health, dental and life insurance coverage for its
eligible retirees, the retirees' beneficiaries and covered dependents.
Retirees eligible for health and/or life insurance coverage are those who have
qualified due to: 1) immediate enrollment upon appointment or five years of
participation in the plan and 2) eligibility for an immediate annuity. Dental
coverage is provided to all retirees eligible for an immediate annuity.
The FDIC is self-insured for hospital/medical, prescription drug, mental
health and chemical dependency coverage. Additional risk protection was
purchased from Aetna Life Insurance Company through stop-loss and fiduciary
liability insurance. All claims are administered on an administrative services
only basis with the hospital/medical claims administered by Aetna Life
Insurance Company, the mental health and chemical dependency claims
administered by OHS Foundation Health Psychcare Inc., and the prescription
drug claims administered by Caremark.
The life insurance program, underwritten by Metropolitan Life Insurance
Company, provides basic coverage at no cost to retirees and allows converting
optional coverages to direct-pay plans. Dental care is underwritten by
Connecticut General Life Insurance Company and provides coverage at no cost to
retirees.
The BIF expensed $18.8 million, $23 million, and $49 million for net
periodic postretirement benefit costs for the years ended December 31, 1995,
1994, and 1993, respectively. For measurement purposes, the FDIC assumed the
following: 1) a discount rate of 6 percent; 2) an average long-term rate of
return on plan assets of 5 percent; 3) an increase in health costs in 1995 of
12 percent, decreasing down to an ultimate rate in 1999 of 8 percent; and 4)
an increase in dental costs for 1995 and thereafter of 8 percent. Both the
assumed discount rate and health care cost rate have a significant effect on
the amount of the obligation and periodic cost reported.
If the health care cost rate were increased one percent, the accumulated
postretirement benefit obligation as of December 31, 1995, would have
increased by 22.9 percent. The effect of this change on the aggregate of
service and interest cost for 1995 would be an increase of 25.6 percent.
NET PERIODIC POSTRETIREMENT BENEFIT COST
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31
---------------------------
1995 1994 1993
-------- -------- -------
DOLLARS IN THOUSANDS
<S> <C> <C> <C>
Service cost (benefits attributed to employee
service during the year)..................... $ 22,574 $ 25,206 $30,274
Interest cost on accumulated postretirement
benefit obligation........................... 14,706 14,323 15,549
Net total of other components................. (3,567) (4,881) 3,117
Return on plan assets......................... (14,907) (11,651) 39
-------- -------- -------
Total....................................... $ 18,806 $ 22,997 $48,979
======== ======== =======
</TABLE>
F-19
<PAGE>
BANK INSURANCE FUND
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
As stated in Note 2, the FDIC established an entity to provide accounting
and administration on behalf of the BIF, the SAIF, the FRF and the RTC. The
BIF funds its liability and these funds are being managed as "plan assets."
ACCUMULATED POSTRETIREMENT BENEFIT OBLIGATION AND FUNDED STATUS
<TABLE>
<CAPTION>
DECEMBER 31
------------------
1995 1994
-------- --------
DOLLARS IN
THOUSANDS
<S> <C> <C>
Retirees................................................ $ 79,370 $ 70,944
Fully eligible active plan participants................. 22,401 16,831
Other active participants............................... 182,408 234,852
-------- --------
Total Obligation...................................... 284,179 322,627
Less: Plan assets at fair value (a)..................... 317,037 302,130
-------- --------
(Over) Under Funded Status............................ (32,858) 20,497
Unrecognized prior service cost......................... 57,242 0
Unrecognized net gain................................... 11,954 0
-------- --------
Postretirement Benefit Liability Recognized in the
Statements of Financial Position....................... $ 36,338 $ 20,497
======== ========
</TABLE>
- --------
(a) Consists of U.S. Treasury investments
14. COMMITMENTS
Leases
The BIF's allocated share of FDIC's lease commitments totals $132.9 million
for future years. The lease agreements contain escalation clauses resulting in
adjustments, usually on an annual basis. The BIF recognized leased space
expense of $42.7 million and $50.9 million for the years ended December 31,
1995 and 1994, respectively.
LEASED SPACE FEES
<TABLE>
<CAPTION>
1996 1997 1998 1999 2000 2001
------- ------- ------- ------- ------- -------
DOLLARS IN THOUSANDS
<S> <C> <C> <C> <C> <C>
$34,869 $30,604 $21,004 $17,603 $14,318 $14,516
</TABLE>
Asset Putbacks
Upon resolution of a failed bank, the assets are placed into receivership
and may be sold to an acquirer under an agreement that certain assets may be
resold, or "putback," to the receivership. The values and time limits for
these assets to be putback are defined within each agreement. It is possible
that the BIF could be called upon to fund the purchase of any or all of the
"unexpired putbacks" at any time prior to expiration. As of December 31, 1995
there are no assets that are eligible for putback.
F-20
<PAGE>
BANK INSURANCE FUND
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
15. CONCENTRATION OF CREDIT RISK
The BIF is counterparty to a group of financial instruments with entities
located throughout regions of the United States experiencing problems in both
loans and real estate. The BIF's maximum exposure to possible accounting loss,
should each counterparty to these instruments fail to perform and any
underlying assets prove to be of no value, is shown as follows:
CONCENTRATION OF CREDIT RISK AT DECEMBER 31, 1995
<TABLE>
<CAPTION>
SOUTHEAST SOUTHWEST NORTHEAST MIDWEST CENTRAL WEST TOTAL
--------- --------- --------- ------- ------- ---- ------
DOLLARS IN MILLIONS
<S> <C> <C> <C> <C> <C> <C> <C>
Receivables from bank
resolutions, net....... $ 97 $267 $2,958 $150 $13 $652 $4,137(a)
Corporate owned
assets, net............ 24 53 51 0 20 32 180
---- ---- ------ ---- --- ---- ------
Total................. $121 $320 $3,009 $150 $33 $684 $4,317
==== ==== ====== ==== === ==== ======
</TABLE>
- --------
(a) The net receivable excludes $3.9 million and $2.5 million, respectively,
of the SAIF's allocated share of maximum credit loss exposure from the
resolutions of Southeast Bank, N.A., Miami, FL, and Olympic National Bank,
Los Angeles, CA. There is no risk that the SAIF will not meet these
obligations.
Insured Deposits
As of December 31, 1995, the total deposits insured by the BIF is
approximately $2 trillion. This would be the accounting loss recognized if all
depository institutions failed and if the assets acquired as a result of the
resolution process provide no recovery.
16. DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash equivalents are short-term, highly liquid investments and are shown at
current value. The fair market value of the investment in U.S. Treasury
obligations is disclosed in Note 4 and is based on current market prices. The
carrying amount of interest receivable on investments, accounts payable and
liabilities incurred from bank resolutions approximates their fair market
value. This is due to their short maturities or comparisons with current
interest rates.
It is not practicable to estimate the fair market value of net receivables
from bank resolutions. These assets are unique, not intended for sale to the
private sector, and have no established market. The FDIC believes that a sale
to the private sector would require indeterminate, but substantial discounts
for an interested party to profit from these assets because of credit and
other risks. A discount of this proportion would significantly increase the
cost of bank resolutions to the BIF. Comparisons with other financial
instruments do not provide a reliable measure of their fair market value. Due
to these and other factors, the FDIC cannot determine an appropriate market
discount rate and, thus, is unable to estimate fair market value on a
discounted cash flow basis. As shown in Note 5, the carrying amount is the
estimated cash recovery value which is the original amount advanced (and/or
obligations incurred) net of the estimated allowance for loss. The majority of
the net investment in corporate owned assets (except real estate) is comprised
of various types of financial instruments (investments, loans, accounts
receivable, etc.) acquired from failed banks. As with net receivables from
bank resolutions, it is not practicable to estimate fair market values. Cash
recoveries are primarily from the sale of poor quality assets. They are
dependent on market conditions that vary over time and can occur unpredictably
over many years following resolution. Since the FDIC cannot reasonably predict
the timing of these cash recoveries, it is unable to estimate fair market
value on a discounted cash flow basis. As shown in Note 6, the carrying amount
is the estimated cash recovery value, which is the original amount advanced
(and/or obligations incurred) net of the estimated allowance for loss.
F-21
<PAGE>
BANK INSURANCE FUND
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
As stated in Note 9, the carrying amount of the estimated liability for
anticipated failure of insured institutions is the total of estimated losses
for banks that have not failed, but the regulatory process has identified as
likely to fail within the foreseeable future. It does not consider discounted
future cash flows. This is because the FDIC cannot predict the timing of
events with reasonable accuracy. For this reason, the FDIC considers the total
estimate of these losses to be the best measure of their fair market value.
17. SUPPLEMENTARY INFORMATION RELATING TO THE STATEMENTS OF CASH FLOWS
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31
------------------------------------
1995 1994 1993
---------- ----------- -----------
DOLLARS IN THOUSANDS
<S> <C> <C> <C>
Net Income........................... $3,605,916 $ 8,726,122 $13,222,235
---------- ----------- -----------
ADJUSTMENTS TO RECONCILE NET INCOME
TO NET CASH PROVIDED BY OPERATING
ACTIVITIES
INCOME STATEMENT ITEMS:
Provision for insurance losses....... (33,167) (2,873,419) (7,677,400)
Amortization of U.S. Treasury
securities.......................... (19,266) 43,145 6,715
Interest on Federal Financing Bank
borrowings.......................... 0 0 (72,977)
Depreciation on buildings............ 3,339 3,339 3,339
CHANGE IN ASSETS AND LIABILITIES:
(Increase) in interest receivable on
investments and other assets........ (146,102) (179,994) 24,915
Decrease in receivables from bank
resolutions......................... 3,659,128 5,916,593 14,384,722
(Increase) decrease in corporate
owned assets........................ (37,452) 566,472 418,322
(Decrease) increase in accounts
payable and other liabilities....... (63,454) 64,366 (216,563)
(Decrease) in liabilities incurred
from bank resolutions............... (48,694) (3,263,790) (9,419,779)
(Decrease) in estimated liability for
anticipated failure of
insured institutions................ (157,000) (375,000) 0
(Decrease) increase in estimated
liabilities for
assistance agreements............... (4,048) 13,479 0
(Decrease) increase in estimated
liability for asset
securitization guarantee............ (2,054) 128,429 0
---------- ----------- -----------
Net Cash Provided by Operating
Activities.......................... $6,757,146 $ 8,769,742 $10,673,579
========== =========== ===========
</TABLE>
F-22
<PAGE>
BANK INSURANCE FUND
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
18. INTEREST AND OTHER INSURANCE EXPENSES
The BIF incurs interest expense on funds borrowed to finance its resolution
activity. In 1995 or 1994, the BIF did not incur interest expense on funds
borrowed from FFB because all borrowings were repaid on August 6, 1993. Other
insurance expenses are incurred by the BIF as a result of payments to insured
depositors in closed bank payoff activity and the administration of assistance
transactions.
INTEREST AND OTHER INSURANCE EXPENSES
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31
---------------------------
1995 1994 1993
-------- ------- --------
DOLLARS IN THOUSANDS
<S> <C> <C> <C>
INTEREST EXPENSE FOR:
Escrowed funds from resolution transactions
(Note 2)...................................... $(43,635) $54,033 $204,969
FFB borrowings................................. 0 0 96,895
-------- ------- --------
(43,635) 54,033 301,864
======== ======= ========
INSURANCE EXPENSE FOR:
Resolution transactions........................ 15,753 507 1,570
Assistance transactions........................ 8 (1,047) 3,427
-------- ------- --------
15,761 (540) 4,997
-------- ------- --------
Total........................................ $(27,874) $53,493 $306,861
======== ======= ========
</TABLE>
19. EVENTS SUBSEQUENT TO DATE OF AUDITORS' REPORT (UNAUDITED)
On September 30, 1996 the President signed the Deposit Insurance Funds Act
of 1996 (DIFA 1996). DIFA 1996 provides for the capitalization of the Savings
Association Insurance Fund (SAIF) to its designated reserve ratio of 1.25
percent by means of a one-time special assessment on SAIF-insured deposits.
In addition, DIFA 1996 provides that, effective January 1, 1997, the
assessment base for payments on the interest on obligations issued by the
Financing Corporation (FICO) is to be expanded to include all FDIC-insured
institutions, i.e., banks and thrifts. The Act separates the FICO assessment
from the SAIF assessment as of January 1, 1997, as a result of the repeal of
section 7(b)(2)(D) of the FDI Act (which provides that the amount of the FICO
assessment is to be subtracted from the amount of the SAIF assessment).
Beginning January 1, 1997, and ending the earlier of December 31, 1999 or the
date on which the last savings association ceases to exist, BIF-assessable
deposits shall be assessed for FICO purposes at a rate equal to one-fifth of
the rate of the assessment imposed on SAIF-assessable deposits. Thereafter,
all insured depository institutions will share the FICO assessment on a pro
rata basis.
The FICO assessment will have no financial effect on the BIF since the FICO
claim will be assessed separately from the regular assessment, and the FICO
assessment is imposed on banks and not on the BIF. The FDIC as administrator
of the BIF is acting solely as an agent for the FICO to collect and remit the
FICO assessment to the FICO.
F-23
<PAGE>
BANK INSURANCE FUND
STATEMENTS OF FINANCIAL POSITION
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
1995 1995 1996
------------- ------------ -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents............ $ 446 $ 531 $ 347(a)
Investment in U.S. Treasury obliga-
tions, net.......................... 20,174 20,762 21,539
Interest receivable on investments
and other assets.................... 415 407 348
Receivables from bank resolutions,
net................................. 4,749 4,143 4,260
Investment in corporate owned assets,
net................................. 167 180 7
Property and buildings, net.......... 153 152 149
------- ------- -------
Total Assets..................... $26,104 $26,175 $26,650
======= ======= =======
LIABILITIES AND THE FUND BALANCE
Accounts payable and other liabili-
ties................................ $ 407 $ 193 $ 172
Liabilities incurred from bank reso-
lutions............................. 21 32 30
Estimated Liabilities for:
Anticipated failure of insured
institutions...................... 352 279 157
Assistance agreements.............. 103 56 50
Asset securitization guarantee..... 127 126 122
Litigation losses.................. 19 36 13
------- ------- -------
Total Liabilities................ 1,029 722 544
Fund Balance..................... 25,075 25,453 26,106
------- ------- -------
Total Liabilities and the Fund
Balance......................... $26,104 $26,175 $26,650
======= ======= =======
</TABLE>
- --------
(a) Includes $285 million in one-day U.S. Treasury certificates.
F-24
<PAGE>
BANK INSURANCE FUND
STATEMENTS OF INCOME AND FUND BALANCE
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
YEAR FOR THE YEAR YEAR
TO DATE ENDED TO DATE
SEPTEMBER 30 DECEMBER 31 SEPTEMBER 30
1995 1995 1996
------------ ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
REVENUE
Assessments............................. $ 2,646 $ 2,907 $ 54
Interest on U.S. Treasury investments... 766 1,068 938
Revenue from corporate owned assets..... 44 59 56
Other revenue........................... 30 55 30
------- ------- -------
Total Revenue......................... 3,486 4,089 1,078
------- ------- -------
EXPENSES AND LOSSES
Operating expenses...................... 325 471 341
Provision for insurance losses.......... (93) (33) 24
Corporate owned asset expenses.......... 55 74 59
Interest and other insurance expenses... (28) (28) 1
------- ------- -------
Total Expenses and Losses............. 259 484 425
------- ------- -------
Net Income.............................. 3,227 3,605 653
Fund Balance--Beginning................. 21,848 21,848 25,453
------- ------- -------
Fund Balance--Ending.................... $25,075 $25,453 $26,106
======= ======= =======
</TABLE>
F-25
<PAGE>
BANK INSURANCE FUND
STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
(UNAUDITED) FOR THE YEAR (UNAUDITED)
YEAR TO DATE ENDED YEAR TO DATE
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
1995 1995 1996
------------- ------------ -------------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Cash provided from:
Assessments......................... $2,790 $ 2,796 $ 64
Interest on U.S. Treasury
invesments......................... 549 875 977
Recoveries from bank resolutions.... 4,442 5,060 272
Recoveries from corporate owned as-
sets............................... 211 212 226
Miscellaneous receipts.............. 20 36 24
------ ------- ------
Total cash provided from operating
activities....................... 8,012 8,979 1,563
Cash used for:
Operating Expenses.................. (331) (442) (359)
Disbursements for bank resolutions.. (1,452) (1,597) (538)
Disbursements for corporate owned
assets............................. (133) (159) (71)
Miscellaneous disbursements......... (7) (24) (5)
------ ------- ------
Total cash used for operating ac-
tivities......................... (1,923) (2,222) (973)
Net Cash Provided by Operating Activi-
ties................................. 6,089 6,757 590
Cash Flows from Investing Activities
Cash provided from:
Maturity ot U.S. Treasury obliga-
tions.............................. 1,530 3,830 7,050
Cash used for:
Purchase of U.S.Treasury obliga-
tions.............................. (8,793) (11,676) (7,824)
------ ------- ------
Net Cash Used by Investing Activi-
ties................................. (7,263) (7,846) (774)
Cash Flows from Financing Activities
Cash Used for:
Payments of indebtedness incurred
from bank resolutions.............. (1) (1) 0
------ ------- ------
Net Cash Used by Financing Activi-
ties................................. (1) (1) 0
Net Decrease in Cash and Cash Equiva-
lents................................ (1,175) (1,090) (184)
Cash and Cash Equivalents--Beginning.. 1,621 1,621 531
------ ------- ------
Cash and Cash Equivalents--Ending..... $ 446 $ 531 $ 347
====== ======= ======
</TABLE>
F-26
<PAGE>
BANK INSURANCE FUND
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 1996
1. BASIS OF PRESENTATION..... The accompanying financial statements are
unaudited and include the accounts of the Bank
Insurance Fund (BIF). The statements do not
include all of the information and disclosures
required by generally accepted accounting
principles. These statements should be read in
conjunction with the financial statements and
notes thereto for the year ended December 31,
1995, for the BIF. The accompanying financial
statements have not been audited by independent
accountants in accordance with generally
accepted auditing standards but in the opinion
of management such financial statements include
all adjustments, consisting only of normal
recurring adjustments, necessary to summarize
fairly the BIF's financial position and results
of operations. The results of operations for
the nine months ended September 30, 1996, may
not be indicative of the results that may be
expected for the year ending December 31, 1996.
The December 31, 1995, condensed balance sheet
data was derived from audited financial
statements, but does not include all
disclosures required by generally accepted
accounting principles.
2. DISCLOSURE ABOUT RECENT
FINANCIAL ACCOUNTING
STANDARDS BOARD
PRONOUNCEMENTS............. In May 1993, the Financial Accounting Standards
Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) No. 114,
"Accounting by Creditors for Impairment of a
Loan," to be adopted for fiscal years beginning
after December 15, 1994. While FDIC adopted
SFAS No. 114, most of the BIF assets are
specifically outside the scope of this
pronouncement. These assets do not meet the
definition of a loan within the meaning of the
statement or are valued through alternative
methods. Any assets subject to SFAS No. 114 are
immaterial either because of insignificant book
value or because any potential adjustment to
the carrying value as a result of applying
Statement No. 114 would be immaterial. The FASB
issued SFAS No. 118, "Accounting by Creditors
for Impairment of a Loan--Income Recognition
and Disclosures," in October 1994, to be
adopted for fiscal years beginning after
December 15, 1994. This statement is an
amendment to SFAS No. 114 and was adopted by
the FDIC this year. Other recent pronouncements
issued by the FASB have been adopted or are
either not applicable or not material to the
financial statements.
F-27
<PAGE>
ANNEX A
CERTAIN CHARACTERISTICS OF THE [ ]
LARGEST SUB-POOL I MORTGAGE LOANS
(BY INFORMATION DATE SUB-POOL I BALANCE)
A-1
<PAGE>
ANNEX B
CERTAIN CHARACTERISTICS OF THE [ ]
LARGEST SUB-POOL II MORTGAGE LOANS
(BY INFORMATION DATE SUB-POOL II BALANCE)
B-1
<PAGE>
ANNEX C-1
FDIC REMIC TRUST 1996-C1
COMPARATIVE FINANCIAL STATUS REPORT
AS OF
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
CURR. PAID ANNUAL
LOAN SCHED. THRU DEBT
NUMBER CITY STATE BAL. DATE SERVICE
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------
List all loans currently in deal with or without information
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
Total: $ $
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
<CAPTION>
- ----------------------------------------------------------------------------------------------------
Financial Information:
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------
Current Full Year:
- ----------------------------------------------------------------------------------------------------
Current Full Yr. received with DSC less than 1:
- ----------------------------------------------------------------------------------------------------
Prior Full Year:
- ----------------------------------------------------------------------------------------------------
Prior Full Yr. received with DSC less than 1:
- ----------------------------------------------------------------------------------------------------
Quarterly Financial:
- ----------------------------------------------------------------------------------------------------
</TABLE>
(1) DSC calculated using NOI/Debt Service
- --------------------------------------------------------------------------------
(2) Net change should compare the latest year to the
underwriting year
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
ORIGINAL UNDERWRITING INFORMATION
- ---------------------------------------------------------------------------------------------
BASE YEAR
- ---------------------------------------------------------------------------------------------
LAST
PROP. FINAN.
INSP. INFO AS % TOTAL $ (1)
DATE OF DATE OCC REVENUE NOI DSC
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------
largest to smallest loan
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
WA $ $ WA
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
<CAPTION>
Received
- ---------------------------------------------------------------------------------------------
Loans Balance
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
# % $ %
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
PRIOR FULL YEAR OPERATING INFORMATION
- ----------------------------------------------------------------------------------------------
AS OF NORMALIZED
- ----------------------------------------------------------------------------------------------
LAST
PROP. FINAN.
INSP. INFO AS % TOTAL $ (1)
DATE OF DATE OCC REVENUE NOI DSCX
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
WA $ $ WA
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
<CAPTION>
Required
- ----------------------------------------------------------------------------------------------
Loans Balance
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
# % $ %
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
</TABLE>
C-1
<PAGE>
ANNEX C-1 (CONTINUED)
FDIC REMIC TRUST 1996-C1
COMPARATIVE FINANCIAL STATUS REPORT
AS OF
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
CURRENT ANNUAL OPERATING INFORMATION
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
LAST
PROP. FINAN.
INSP. INFO AS % TOTAL $ (1)
DATE OF DATE OCC REVENUE NOI DSC
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------
<CAPTION>
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
WA $ $ WA
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
<CAPTION>
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
"ACTUAL"
- ----------------------------------------------------------------------------------------------------------
YTD FINANCIAL INFORMATION
- ----------------------------------------------------------------------------------------------------------
MONTH REPORTED
- ----------------------------------------------------------------------------------------------------------
FINAN.
INFO AS % TOTAL $ %
OF DATE OCC REVENUE NOI DSC
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
WA $ $ WA
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
(2)
- ------------------------------------------------------------------------------------------------------------------------------------
NET CHANGE
- ------------------------------------------------------------------------------------------------------------------------------------
CURRENT & BASIS
- ------------------------------------------------------------------------------------------------------------------------------------
%
% TOTAL (1)
OCC REV DSC
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
WA $ WA
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
C-2
<PAGE>
ANNEX C-2
FDIC REMIC TRUST 1996-C1
DELINQUENT LOAN STATUS REPORT
AS OF
</TABLE>
<TABLE>
<CAPTION>
(A) (B) (C) (D) (E)=A+B+C+D
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL
SQ FT OR OUTSTANDING TOTAL OTHER
UNITS/ SCHEDULED P&I OUTSTANDING ADVANCES CURRENT
LOAN NO. PROPERTY OCC %/ PAID TO LOAN ADVANCES TO EXPENSES (TAXES & TOTAL MONTHLY
CITY & STATE TYPE DATE DATE BALANCE DATE TO DATE ESCROW) EXPOSURE P&I
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
FCL = Foreclosure
- ------------------------------------------------------------------------------------------------------------------------------------
LTM = Latest 12 Months
- ------------------------------------------------------------------------------------------------------------------------------------
* Status should contain a code indicating the current direction of each loan such as (FCL--In foreclosure, MOD--Modification, DPO--
Direct Payoff, NS--Note Sale, BK--Bankruptcy, PP--Payment Plan, Curr--Current, TBD--To Be Determined, etc.)
- ------------------------------------------------------------------------------------------------------------------------------------
** It is possible to combine the status codes if the loan is going in more than one direction (i.e. FCL/Mod, BK/Mod., BK/FCL/DPO)
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
C-3
<PAGE>
ANNEX C-2
FDIC REMIC TRUST 1996-C1 (CONTINUED)
DELINQUENT LOAN STATUS REPORT
AS OF
<TABLE>
<CAPTION>
(F) (G)=(92+F)-C
- ---------------------------------------------------------------------------------------------------------------
MOST APPRAISAL TRANSFER LOSS USING DATE NOI
CURRENT LTM ACCURATE BPO OR DATE/ 92% FILED/
INTEREST MATURITY NOI LTM APPRAISAL PROPERTY INTERNAL CLOSING APPRAISAL OR FCL SALE
RATE DATE DATE NOI/ DSCR DATE VALUE VALUE** DATE BPO (F) DATE STATUS* COMMENTS
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
90+ DAYS DELINQUENT
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
60 DAYS DELINQUENT
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
30 DAYS DELINQUENT
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
Current & at Special
Servicer
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
C-4
<PAGE>
ANNEX C-3
FDIC REMIC TRUST 1996-C1
HISTORICAL LOAN MODIFICATION REPORT
AS OF
<TABLE>
<CAPTION>
BALANCE
WHEN SENT TO BALANCE AT THE NO.
MOD/ EFFECT SPECIAL EFFECTIVE DATE OF MOS./NEW
LOAN ID CITY/STATE EXTENSION DATE SERVICE REHABILITATION OLD RATE RATE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
THIS REPORT IS HISTORICAL
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
====================================================================================================================================
Total For All Loans:
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Total For Loans in Current Month:
- ------------------------------------------------------------------------------------------------------------------------------------
# of Loans $ Balance
- ------------------------------------------------------------------------------------------------------------------------------------
Modification:
- ------------------------------------------------------------------------------------------------------------------------------------
Maturity Date Extension:
- ------------------------------------------------------------------------------------------------------------------------------------
Total:
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
(1) Actual principal loss taken by bonds
- ------------------------------------------------------------------------------------------------------------------------------------
(2) Expected future loss due to a rate reduction. This is just an estimate calculated at the time of the modification.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
C-5
<PAGE>
ANNEX C-3 (CONTINUED)
FDIC REMIC TRUST 1996-C1
HISTORICAL LOAN MODIFICATION REPORT
AS OF
<TABLE>
<CAPTION>
TOTAL NO. (2) EST. FUTURE
MOS. FOR (1) REALIZED INTEREST LOSS TO
OLD CHANGE OF LOSS TO TRUST TRUST $ (RATE
OLD P&I NEW P&I MATURITY NEW MATURITY MOD $ REDUCTIONS) COMMENT
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
C-6
<PAGE>
ANNEX C-4
FDIC REMIC TRUST 1996-C1
HISTORICAL LOSS ESTIMATE REPORT (REO-SOLD OR DISCOUNTED PAYOFF)
AS OF
<TABLE>
<CAPTION>
(C)=B2 (A) (B) (D) (E) (F)
- --------------------------------------------------------------------------------------------------------------------
LATEST NET AMT
SERVICER % RECEIVED APPRAISAL OR EFFECT DATE RECEIVED SCHEDULED TOTAL P&I
LOAN ID PROPERTY NAME CITY/STATE FROM SALE BROKERS OPINION OF SALE SALES PRICE FROM SALE BALANCE ADVANCED
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------
THIS REPORT IS HISTORICAL
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
Total of Loans:
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
Current Month Only:
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
C-7
<PAGE>
ANNEX C-4 (CONTINUED)
FDIC REMIC TRUST 1996-C1
HISTORICAL LOSS ESTIMATE REPORT (REO-SOLD OR DISCOUNTED PAYOFF)
AS OF
<TABLE>
<CAPTION>
(G) (H) (I)=D(F+G+H) (K)=I-E (M) (N)=K+M (O)-O-E
- -------------------------------------------------------------------------------------------------------------
DATE TOTAL LOSS LOSS % OF
TOTAL ACTUAL LOSSES DATE LOSSES MINOR ADJ TO MINOR ADJ WITH SCHEDULED
EXPENSES SERVICING FEES NET PROCEEDS PASSED THRU PASSED THRU TRUST PASSED THRU ADJUSTMENT BALANCE
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
</TABLE>
C-8
<PAGE>
ANNEX C-5
FDIC REMIC TRUST 1996-C1
REO STATUS REPORT
AS OF
<TABLE>
<CAPTION>
(A) (B) (C) (D) (C)=A+B+C+D
- ----------------------------------------------------------------------------------------------------
OTHER
SQ FT OR SCHEDULED TOTAL P&I ADVANCES TOTAL CURRENT
LOAN NO. PROPERTY UNITS/ PAID TO LOAN ADVANCES TO (TAXES & EXPENSES TOTAL MONTHLY
CITY & STATE TYPE OCC % DATE BALANCE DATE ESCROW) TO DATE EXPOSURE P&I
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
</TABLE>
C-9
<PAGE>
ANNEX C-5 (CONTINUED)
FDIC REMIC TRUST 1996-C1
REO STATUS REPORT
AS OF
<TABLE>
<CAPTION>
(F) (G)=(92*F)-C
- ------------------------------------------------------------------------------------------------------------------------
(YTD) MOST (1) APPRAISAL TRANSFER LOSS USING
CURRENT MOST ACCURATE BPO DATE/ 92% REO
INTEREST MATURITY NOI AS RECENT APPRAISAL PROPERTY INTERNAL CLOSING APPRAISAL OR ACQUISITION PENDING
RATE DATE OF DATE NOI/ DSCR DATE VALUE VALUE DATE BPO (F) DATE OFFERS COMMENTS
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate
Owned
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
C-10
<PAGE>
ANNEX C-6
FDIC REMIC TRUST 1996-C1
SERVICER WATCH LIST
AS OF
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
CURRENT PAID
LOAN SCHED THRU MATURITY %
NUMBER PROPERTY TYPE CITY STATE BALANCE DATE DATE CURRENT DSC COMMENT/REASON ON WATCH LIST
- -----------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C> <C> <C> <S>
- -----------------------------------------------------------------------------------------------
List all loans on watch list and reason
sorted in descending balance order.
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
Total: $
</TABLE>
C-11
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE TRUST FUND OR ANY OF THE UNDERWRITERS.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN
THOSE TO WHICH IT RELATES OR AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER
TO BUY, TO ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR SOLICITATION
WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THE IN-
FORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF.
-----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Available Information...................................................... 3
Reports to Certificateholders.............................................. 4
Summary of Prospectus...................................................... 5
Risk Factors............................................................... 26
Description of the Mortgage Pool........................................... 36
Servicing of the Mortgage Loans............................................ 56
Descripton of the Certificates............................................. 65
Yield and Maturity Considerations.......................................... 85
The Federal Deposit Insurance Corporation.................................. 96
The Bank Insurance Fund.................................................... 96
Description of the Pooling and Servicing Agreement......................... 98
Certain Legal Aspects of Mortgage Loans.................................... 105
Certain Federal Income Tax Consequences.................................... 117
State Tax Considerations................................................... 127
ERISA Considerations....................................................... 127
Legal Investment........................................................... 130
Underwriting............................................................... 131
Use of Proceeds............................................................ 132
Legal Matters.............................................................. 132
Ratings.................................................................... 133
Index of Principal Definitions............................................. 134
Financial Statements of the Bank Insurance Fund............................ F-1
Annex A.................................................................... A-1
Annex B.................................................................... B-1
Annex C.................................................................... C-1
</TABLE>
-----------------
UNTIL MARCH , 1997, ALL DEALERS EFFECTING TRANSACTIONS IN THE OFFERED CER-
TIFICATES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED
TO DELIVER A PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLI-
GATION OF THE DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND
WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
THE FEDERAL DEPOSIT INSURANCE CORPORATION,
ACTING IN ITS CORPORATE CAPACITY, AS ADMINISTRATOR OF THE BANK INSURANCE FUND
AND AS RECEIVER OF EACH OF CERTAIN
DEPOSITORY INSTITUTIONS
-----------------
$
(APPROXIMATE)
FDIC REMIC TRUST 1996-C1
COMMERCIAL MORTGAGE
PASS-THROUGH CERTIFICATES,
SERIES 1996-C1
-----------------
P R O S P E C T U S
December , 1996
-----------------
LEHMAN BROTHERS
[ ]
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 30. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The expenses expected to be incurred in connection with the issuance and
distribution of the Certificates being registered, other than underwriting
compensation, are as set forth below:
<TABLE>
<S> <C>
SEC Registration Fee................................................ $303.04
Blue Sky Fees and Expenses.......................................... *
Printing and Engraving Fees......................................... *
Legal Fees and Expenses............................................. *
Accounting Fees and Expenses........................................ *
Trustee Fees and Expenses........................................... *
Rating Agency Fees.................................................. *
Miscellaneous....................................................... *
-------
Total............................................................. $ *
=======
</TABLE>
ITEM 31. SALES TO SPECIAL PARTIES.
Not applicable.
ITEM 32. RECENT SALES OF UNREGISTERED SECURITIES.
Not applicable.
ITEM 33. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Not applicable.
ITEM 34. TREATMENT OF PROCEEDS FROM STOCK BEING REGISTERED.
Not applicable.
ITEM 35. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Index to Financial Statements [Detailed List].
(b) Exhibits.
<TABLE>
<C> <S>
1.1 Form of Underwriting Agreement.*
3.1 Declaration of Trust.
4.1 Form of Pooling and Servicing Agreement.*
4.2 Form of Limited Guaranty.*
5.1 Opinion of Hunton & Williams as to legality of the Certificates.*
8.1 Opinion of Hunton & Williams as to certain tax matters*
23.1 Consent of Price Waterhouse L.L.P.
23.2 Consent of Arthur Andersen LLP
23.3 Consent of Hunton & Williams (included in Exhibit 5.1).*
</TABLE>
- --------
* To be filed by Amendment.
II-1
<PAGE>
ITEM 36. UNDERTAKINGS.
A. Undertaking for equity offerings of nonreporting registrants.
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
B. Undertaking required for acceleration of effectiveness.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "Act") may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer
or controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted against the Registrant by such
director, officer or controlling person in connection with the securities
being registered, the Registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the
final adjudication of such issues.
C. Undertaking permitted by Rule 430A of the Securities Act
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus field by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-2
<PAGE>
SIGNATURE
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED,
STATE STREET BANK AND TRUST COMPANY, NOT IN ITS INDIVIDUAL CAPACITY BUT AS
TRUSTEE OF THE REGISTRANT TRUST FUND, CERTIFIES THAT IT HAS REASONABLE GROUNDS
TO BELIEVE THAT THE REGISTRANT TRUST FUND MEETS ALL OF THE REQUIREMENTS FOR
FILING ON FORM S-11 AND HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE
SIGNED FOR THE REGISTRANT TRUST FUND, BY A DULY AUTHORIZED SIGNATORY, IN THE
CITY OF BOSTON, COMMONWEALTH OF MASSACHUSETTS, ON THE 19TH DAY OF NOVEMBER,
1996.
FDIC REMIC TRUST 1996-C1
(the "Trust Fund")
By State Street Bank and Trust Company
-----------------------------------
Not in its individual capacity but
solely as trustee of the Trust
Fund.
By /s/ David Duclos
-----------------------------------
Authorized Signatory
II-3
<PAGE>
EXHIBIT 3.1
DECLARATION OF TRUST
OF
FDIC REMIC TRUST 1996-C1
DECLARATION OF TRUST, effective as of November 13, 1996 and made by State
Street Bank and Trust Company, a Massachusetts banking corporation, as settlor
of the Trust Fund (the "Settlor") and State Street Bank and Trust Company, as
trustee of the Trust Fund (the "Trustee") for the benefit of Lehman Brothers,
as initial beneficiary of the Trust Fund (the "Initial Beneficiary").
ARTICLE I
CREATION, NAME AND OFFICE
The Settlor has established a trust, which is named "FDIC REMIC Trust 1996-
C1" (the "Trust Fund"), and designated the Trustee, under its fiduciary powers
as a Massachusetts banking corporation, as trustee of the Trust Fund. The
Trustee hereby acknowledges that it is holding all right, title and interest
in and to the sum of One Hundred Dollars ($100.00), constituting the initial
trust estate (the "Initial Trust Estate"), in trust for the Initial
Beneficiary. This Declaration of Trust shall be construed in accordance with
the internal laws of the State of New York and the obligations, rights and
remedies of the parties hereunder shall be determined in accordance with such
laws. The principal office of the Trust Fund is in Boston, Massachusetts and
the address of the Trust Fund is 225 Franklin Street, Boston, Massachusetts
02110.
ARTICLE II
PURPOSE
The Trust Fund is created for the purposes of (a) providing for the
administration by the Trustee of the Initial Trust Estate for the use and
benefit for the Initial Beneficiary until this Declaration of Trust is amended
and restated in its entirety pursuant to a certain Pooling and Servicing
Agreement (the "Pooling and Servicing Agreement"), to be dated on or about as
of December 1, 1996, by and among the Federal Deposit Insurance Corporation in
its corporate capacity, as administrator of the Bank Insurance Fund and in its
capacity as receiver of various depository institutions, Banc One Management
and Consulting Corporation, as servicer, and the Trustee, as trustee, (b)
authorizing the execution and delivery by the Trustee, as Trustee hereunder
and not in its individual capacity, of a certain underwriting agreement by and
among the Trust Fund, the Federal Deposit Insurance Corporation and Lehman
Brothers, as representative of the underwriters (the "Underwriting Agreement")
and a Registration Statement on Form S-11 and other documents related to the
sale of the Certificates hereinafter referred to and (c) thereafter providing
for the issuance and sale by the Trustee of FDIC REMIC Trust 1996-C1
Commercial Mortgage Pass-Through Certificates, Series 1996-C1 (the
"Certificates") pursuant to the Underwriting Agreement and making
distributions and reporting to holders of Certificates, as will be provided in
the Pooling and Servicing Agreement. To the extent expressly permitted or
required under the Pooling and Servicing Agreement, the Trust Fund is created
for the additional purposes of disposing of any of the Mortgage Loans
(including Mortgaged Property and REO Property (as defined in the Pooling and
Servicing Agreement)), and in furtherance of the purposes set forth in this
sentence, the Trustee on behalf of the Trust Fund may hold and dispose of
Mortgaged Property and REO Property acquired in connection with the Mortgage
Loans.
<PAGE>
ARTICLE III
AUTHORIZATION
The Trustee is hereby authorized to take all actions that, in its sole
discretion, it deems necessary or advisable to carry out the foregoing
purposes, and said Trustee, its directors, officers and employees shall not be
liable individually for any action or omissions in the premises.
ARTICLE IV
RESTATEMENT PURSUANT TO POOLING AND SERVICING AGREEMENT
This Declaration of Trust shall be amended and restated in its entirety
pursuant to the Pooling and Servicing Agreement and no consent of the Initial
Beneficiary shall be required therefor.
If the Pooling and Servicing Agreement is not executed and delivered within
one year of the date hereof, the Trust Fund shall be terminated upon the
expiration of such one year period.
IN WITNESS WHEREOF, State Street Bank and Trust Company has caused this
Declaration of Trust to be duly executed as of the date first above written.
State Street Bank and Trust Company,
not in its individual capacity
but solely as Settlor for FDIC
REMIC Trust 1996-C1
By: /s/ David Duclos
---------------------------------
Name: David Duclos
-------------------------------
Title: Assistant Vice President
------------------------------
The undersigned hereby accepts its appointment as Trustee under the terms
and conditions of this Declaration of Trust.
State Street Bank and Trust Company,
not in its individual capacity
but solely as Settlor for FDIC
REMIC Trust 1996-C1
By: /s/ David Duclos
---------------------------------
Name: David Duclos
-------------------------------
Title: Assistant Vice President
------------------------------
2
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-11 of our report dated June 30, 1994,
relating to the financial statements of the Bank Insurance Fund of the Federal
Deposit Insurance Corporation, which appears in such Registration Statement on
Form S-11.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
Washington, D.C.
November 18, 1996
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in this Registration Statement of our report dated May 2, 1996
included with the Federal Deposit Insurance Corporation's Bank Insurance Fund
financial statements as of and for the years ended December 31, 1995 and 1994.
/s/ Arthur Andersen LLP
Washington, D.C.
November 15, 1996
