As filed with the Securities and Exchange Commission on November 22, 1996
Registration No. 333-
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-3
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
----------------------
HEADLANDS MORTGAGE SECURITIES, INC.
(Exact name of registrant as specified in its Charter)
Delaware Applied For
(State of Incorporation) (I.R.S. Employer Identification No.)
700 Larkspur Landing Circle
Suite 250
Larkspur, California 94939
(415) 925-5442
(Address, including zip code, and telephone number, including area code
of principal executive offices)
----------------------
Peter T. Paul
Headlands Mortgage Securities, Inc.
700 Larkspur Landing Circle
Suite 250
Larkspur, California 94939
(415) 461-6790
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
----------------------
With a copy to:
Michael P. Braun, Esq.
Brown & Wood LLP
One World Trade Center
New York, New York 10048
----------------------
Approximate date of commencement of proposed saleto the public:
From time to time on or after the effective date of the registration
statement, as determined by market conditions.
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. |_|
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, other than securities offered only in connection with
dividend or interest reinvestment plans, please check the following box. |X|
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b), under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, please 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. |_|
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
===================================================================================================================
Proposed Proposed
Amount Maximum Maximum Amount of
Title of Each Class of to be Offering Price Aggregate Registration
Securities to Be Registered Registered Per Unit* Offering Price* Fee
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Certificates .............................. $1,000,000 100% $1,000,000 $303.04
===================================================================================================================
</TABLE>
* Estimated for the purpose of calculating the registration fee.
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.
<PAGE>
(The red herring appears on left-hand side of the page, rotated at 90 degrees.
Text follows:)
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy, nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
SUBJECT TO COMPLETION DATED NOVEMBER 22, 1996
PROSPECTUS SUPPLEMENT
(To Prospectus dated ______________ ___, 1996)
HEADLANDS MORTGAGE SECURITIES, INC.
Sponsor
[HEADLANDS MORTGAGE COMPANY]
Seller and Master Servicer
Mortgage Pass-Through Certificates, Series
[199_-_] Distributions payable on the [ ] day of each
month, commencing on [ ], 1996
-----------------
The Mortgage Pass Through Certificates, Series [199_-_] (the
"Certificates") will represent the entire beneficial ownership interest in a
trust fund (the "Pool") to be created pursuant to a Pooling and Servicing
Agreement, dated as of [ ], 1996 (the "Pooling Agreement"), among Headlands
Mortgage Securities, Inc. (the "Sponsor"), [Headlands Mortgage Company], as
master servicer (the "Master Servicer"), [Headlands Mortgage Company], as seller
(the "Seller") and [ ], as trustee (the "Trustee"). The Pool will consist
primarily of a pool of conventional fixed rate mortgage loans (the "Mortgage
Loans"), substantially all of which will have original terms to maturity of not
more than [ ] months. The Mortgage Loans are secured by first liens on one- to
four-family residential properties (the "Mortgaged Properties"). Only the
Classes identified in the table below (the "Offered Certificates") are offered
hereby.
On the [ ]th day of each month or, if such [ ]th day is not a
business day, on the first business day thereafter (each, a "Distribution
Date"), commencing on [ ], 1996, from and to the extent of funds available
therefor in the Certificate Account referred to herein, a distribution will be
made on the Offered Certificates in the amounts and in the priorities set forth
herein.
<TABLE>
<CAPTION>
=================================================================================================================================
Initial Pass-
Class Certificate Principal Interest Through Price to Underwriting Proceeds to
Class Balance(1) Type Type Rate Public (4) Discount (4) Sponsor (4)
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
A-1........... $ [ %] $ $ $
[Variable
Rate (2)]
- ---------------------------------------------------------------------------------------------------------------------------------
X............. $ (3) $ S S
- ---------------------------------------------------------------------------------------------------------------------------------
M-1........... $ [ %] $ $ S
[Variable
Rate (2)]
- ---------------------------------------------------------------------------------------------------------------------------------
Total....... $ N/A $ $ S
=================================================================================================================================
</TABLE>
(1) The aggregate initial Class Certificate Balance of the Offered Certificates
is subject to a permitted variance in the aggregate of plus or minus [ ]%.
[(2) The Pass-Through Rate for any Distribution Date will equal the weighted
average of the Net Mortgage Rates then in effect for each Mortgage Loan. The
Net Mortgage Rate for each Mortgage Loan will equal the Mortgage Rate
thereon on the first day of the month preceding the month of the related
Distribution Date less the related Expense Rate. The Pass-Through Rate for
the first Distribution Date is expected to be approximately [ ]% per annum.]
(3) The Pass-Through Rate for this Class for any Distribution Date will be equal
to the excess of (a) the weighted average of the Net Mortgage Rates of the
Mortgage Loans over (b) [ ]%.
(4) Approximate.
<PAGE>
THE CERTIFICATES DO NOT REPRESENT AN INTEREST IN OR OBLIGATION OF THE SPONSOR,
THE TRUSTEE OR ANY OF THEIR RESPECTIVE AFFILIATES, EXCEPT AS SET FORTH HEREIN.
NEITHER THE CERTIFICATES NOR THE MORTGAGE LOANS ARE INSURED OR GUARANTEED BY THE
UNITED STATES GOVERNMENT, THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER
GOVERNMENTAL AGENCY OR INSTRUMENTALITY.
---------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
---------------------------
Prospective investors in the Offered Certificates should review the
information set forth under "Risk Factors" on page S-7 of this Prospectus
Supplement.
The Offered Certificates are offered by the Underwriter, subject to prior
sale, when, as and if delivered to and accepted by the Underwriter and subject
to its right to reject orders in whole or in part. It is expected that delivery
of the Offered Certificates will be made in book-entry form only through the
facilities of The Depository Trust Company on or about [date].
________________ ___, 1996
[Underwriter]
<PAGE>
Each of the Mortgage Loans was purchased or originated by the Seller, and
will be sold by the Seller to Headlands Mortgage Securities, Inc. (the
"Sponsor") for deposit to the Pool prior to the date of initial issuance of the
Certificates.
The yield to investors on each Class of Offered Certificates will be
sensitive in varying degrees to, among other things, the rate and timing of
principal payments (including prepayments) of the Mortgage Loans. The yield to
maturity of a Class of Offered Certificates purchased at a discount or premium
will be more sensitive to the rate and timing of payments thereon than a Class
purchased at par. Holders of Certificates should consider, in the case of any
such Certificates purchased at a discount, the risk that a lower than
anticipated rate of principal payments could result in an actual yield that is
lower than the anticipated yield and, in the case of any Offered Certificates
purchased at a premium, the risk that a faster than anticipated rate of
principal payments could result in an actual yield that is lower than the
anticipated yield. The yield to investors in the Offered Certificates also will
be adversely affected by Net Interest Shortfalls and by Realized Losses.
An election will be made to treat the Pool as a real estate mortgage
investment conduit (the "REMIC") for federal income tax purposes. As described
more fully herein and in the Prospectus, the Senior Certificates and the
Subordinate Certificates will constitute "regular interests" in the REMIC. See
"Certain Federal Income Tax Consequences" herein and in the Prospectus.
There is currently no secondary market for the Offered Certificates and there
can be no assurance that such a market will develop or, if it does develop, that
it will continue.
----------------------
This Prospectus Supplement does not contain complete information about the
offering of the Offered Certificates. Additional information is contained in the
Prospectus dated ____________ ___, 1996 (the "Prospectus") and purchasers are
urged to read both this Prospectus Supplement and the Prospectus in full. Sales
of the Offered Certificates may not be consummated unless the purchaser has
received both this Prospectus Supplement and the Prospectus.
Until ninety days after the date of this Prospectus Supplement, all dealers
effecting transactions in the Offered Certificates, whether or not participating
in this distribution, may be required to deliver a Prospectus Supplement and the
Prospectus. This is in addition to the obligation of dealers to deliver a
Prospectus Supplement and the Prospectus when acting as underwriters and with
respect to their unsold allotments or subscriptions.
(i)
<PAGE>
SUMMARY OF TERMS
This Summary of Terms is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus Supplement and in
the accompanying Prospectus. Certain capitalized terms used in this Summary of
Terms are defined elsewhere in this Prospectus Supplement or in the Prospectus.
<TABLE>
<CAPTION>
<S> <C>
Title of Securities............................ Mortgage Pass-Through Certificates, Series [199_-_] (the "Certificates").
Designations
Offered Certificates..................... Class A-1, Class X and Class M-1 Certificates.
</TABLE>
<TABLE>
<CAPTION>
Approximate
Initial Class Pass-Through
Class Certificate Balance Rate
----- ------------------- ----
<S> <C> <C>
Non-Offered Certificates................. B-1 $ %
B-2 $ %
R (1) (1)
-----------
(1) The Class R Certificates will
not have a Class Certificate Balance and will not bear
interest.
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
Senior Certificates...................... Class A-1 and Class X Certificates.
Mezzanine Certificates................... Class M-1 Certificates.
Subordinate Certificates................. The Mezzanine Certificates and the Class B-1 and B-2
Certificates.
Residual Certificates.................... Class R Certificates.
[Fixed Rate Certificates................. ]
[Variable Rate Certificates.............. ]
Book-Entry Certificates..................
Sponsor........................................ Headlands Mortgage Securities, Inc., a Delaware corporation
(the "Sponsor").
Seller......................................... [Headlands Mortgage Company] (the "Seller").
Master Servicer................................ [Headlands Mortgage Company] (the "Master Servicer"). See
"The Master Servicer" herein.
Trustee........................................ [ ] (the "Trustee").
Cut-off Date................................... [ ], 1996.
Distribution Date.............................. The [ ]th day of each month, or, if such day is not a Business
Day, the next succeeding Business Day, commencing in [month]
1996.
Record Date.................................... The Record Date for each Distribution Date will be the last day
of the preceding month.
Mortgage Pool.................................. The Mortgage Pool will consist of fully-amortizing, [ ] to [ ]
month, [fixed interest] [adjustable] rate, conventional first
mortgage loans (the "Mortgage Loans") having, as of the Cut-
S-1
<PAGE>
off Date, an aggregate principal balance equal to approximately
$[ ] (the "Cut-off Date Pool Principal Balance"). See "The
Mortgage Pool" herein.
Pooling and Servicing
Agreement................................ The Certificates will be issued pursuant to a Pooling and
Servicing Agreement to be dated as of [date] (the "Pooling
Agreement") among the Sponsor, the Master Servicer, the Seller
and the Trustee.
Priority of Distributions...................... As more fully described herein, distributions will be made on
the Certificates on each Distribution Date from Available Funds
in the following order of priority:
(i) to interest on each [interest bearing] Class of
Senior Certificates;
(ii) to principal on the Class A-1 Certificates, up to the
maximum amount of principal distributed on such Class on such
Distribution Date as described herein;
(iii) to interest on the Class M-1 Certificates;
(iv) to principal on the Class M-1 Certificates, up to
the maximum amount of principal to be distributed on such
Class on such Distribution Date as described herein; and
(v) to interest on and then principal of each other
Class of Subordinate Certificates in increasing order of
numerical Class designation, up to the maximum amount of
interest and principal to be distributed on each such Class on
such Distribution Date [and subject to certain limitations set
forth herein under "Description of the Certificates--
Principal"].
Class X Notional Amount........................ With respect to the first Distribution Date, the initial Class X
Notional Amount will be equal to the aggregate principal
balance of the Mortgage Loans as of the Cut-off Date. On any
Distribution Date thereafter, the Class X Notional Amount will
be equal to the aggregate of the Principal Balances of the
Mortgage Loans (the "Pool Principal Balance") as of the first
day of the month preceding the month of such Distribution
Date.
Interest....................................... On each Distribution Date, each Class of interest bearing
Offered Certificates, to the extent Available Funds are available
for the distribution of interest on such Class on such
Distribution Date, as described above under "Priority of
Distributions", generally will be entitled to receive an amount
allocable to interest equal to the sum of (i) one month's interest
at the applicable Pass-Through Rate set forth on the cover page
hereof (as to each Class, the "Pass-Through Rate") on the
related Class Certificate Balance or the Class X Notional
Amount, as applicable, immediately prior to such Distribution
Date and (ii) the sum of the amounts, if any, by which the
amount described in clause (i) above on each prior Distribution
Date exceeded the amount actually distributed as interest on
such prior Distribution Dates and not subsequently distributed
("Unpaid Interest Shortfall"). The interest entitlement for each
Class of Offered Certificates described above shall be reduced
by the allocable share of Net Interest Shortfalls for each such
S-2
<PAGE>
Class, as described herein under "Description of the Certificates
-- Interest."
Principal (including
prepayments)............................. On each Distribution Date an amount allocable to principal will
be distributed on the Class A-1 Certificates generally equal to
the lesser of (x) Available Funds reduced by the amount of
interest distributed on the Senior Certificates on such
Distribution Date and (y) the sum of (i) the Class A-1
Percentage of (a) all scheduled payments of principal due on
each Mortgage Loan on the Due Date for such Mortgage Loan
in the month in which such Distribution Date occurs,
(b) the Principal Balance of each Mortgage Loan that became a
Liquidated Mortgage Loan during the month preceding the month of
such Distribution Date, (c) the Principal Balance of each Mortgage
Loan that was repurchased by the Seller or another person as of
such Distribution Date pursuant to the Agreement, (d) certain
amounts that may be required to be paid in connection with any
substitution of Mortgage Loans on such Distribution Date pursuant
to the Pooling Agreement and (e) any net insurance or liquidation
proceeds received during the month preceding the month of such
Distribution Date allocable to recoveries of principal of Mortgage
Loans that are not yet Liquidated Mortgage Loans and (ii) the Class
A-1 Prepayment Percentage of all partial principal prepayments and
all principal prepayments in full ("Principal Prepayments")
received during such preceding month.
On each Distribution Date an amount allocable to principal will
be distributed on Class M-1 Certificates equal to the lesser of
(x) Available Funds reduced by the amount of interest and
principal distributed on the Senior Certificates and interest on
the Class M-1 Certificates, in each case on such Distribution
Date and (y) the sum of (i) the applicable Subordinate
Percentage Allocation of the sum of the amounts calculated
pursuant to clauses (a) through (e) in the preceding paragraph
for such Distribution Date and (ii) the applicable Subordinate
Prepayment Percentage Allocation of all Principal Prepayments
received during the preceding month.
See "Description of the Certificates -- Principal" herein.
[Credit Support
General.................................. Credit support for the Senior Certificates will be provided by
the Subordinate Certificates as described below. Credit support
for the Mezzanine Certificates will be provided by the Class B-1
and Class B-2 Certificates. [other credit support]
A. Subordination ........................ The rights of holders of the Subordinate Certificates to receive
distributions with respect to the Mortgage Loans in the Pool will
be subordinated to such rights of holders of the Senior
Certificates, and the rights of holders of the Class B-1 and Class
B-2 Certificates to receive such distributions will be further
subordinated to such rights of holders of the Mezzanine
Certificates, in each case only to the extent described below.
See "Description of the Certificates-- Priority of Distributions
S-3
<PAGE>
Among Certificates," "-- Allocation of Losses" and
"Credit Support -- Subordination of Subordinate Certificates"
herein.
The subordination of the Subordinate Certificates to the Senior
Certificates, and the further subordination of the Class B-1 and
Class B-2 Certificates to the Mezzanine Certificates is intended to
increase the likelihood of receipt by Senior Certificateholders and
Mezzanine Certificateholders, respectively, of the maximum amount
to which they are entitled on any Distribution Date, to provide
such holders protection against losses on the Mortgage Loans to the
extent described herein and, to a lesser extent, against losses on
[Special Hazard Mortgage Loans] [Fraud Loans] [and] [Bankruptcy
Loans.] See "Credit Support -- Subordination of Subordinated
Certificates" and "-- Allocation of Losses" herein.
[B. Description of other types
of credit support,
if any].............................
</TABLE>
<TABLE>
<CAPTION>
Weighted Average
Lives (in years)*....................... PSA
----------------------------------------------
<S> <C> <C> <C> <C> <C>
Class % % % %
----- - - - -
A-1 ............
X ............
M-1 ............
*Determined as described under "Prepayment and Yield Considerations--
Weighted Average Lives of the Offered Certificates" herein. Prepayments will
not occur at any assumed rate shown or any other constant rate, and the actual
weighted average lives of any or all of the Classes of Offered Certificates are
likely to differ from those shown, perhaps significantly.
</TABLE>
<TABLE>
<CAPTION>
Last Scheduled
Distribution Date.......................
Class Last Schedule Distribution Date
----- -------------------------------
<S> <C> <C>
A-1 ............
X ............
M-1 ............
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
Servicing Fees and Other
Expenses.............................. As compensation for their services, the servicers engaged by the
Master Servicer to perform the day-to-day servicing functions
relating to the Mortgage Loans and the Master Servicer will be
entitled to retain, from amounts received in respect of the
Mortgage Loans which are allocable to interest, an amount equal
to the Servicing Fee and Master Servicing Fee, respectively.
In addition to the Servicing Fee and the Master Servicing Fee,
there will be deducted from amounts received in respect of the
Mortgage Loans which are allocable to interest an amount
sufficient to provide for the payment of the Trustee's fee. As to
each Mortgage Loan, the sum of the Master Servicing Fee Rate,
the Servicing Fee Rate and the rate at which the Trustee's fee is
determined is referred to as the "Expense Rate."
See "Servicing of Mortgage Loans -- Servicing Compensation
and Payment of Expenses" herein.
S-4
<PAGE>
[Advances.................................. The Master Servicer, directly or through one or more servicers,
will be obligated to advance, four business days prior to each
Distribution Date an amount equal to all delinquent amounts (net
of the related Servicing Fee and Master Servicing Fee and Relief
Act Reductions) on each Mortgage Loan in the Mortgage Pool
and not previously advanced to the extent that such Advances are
determined by the Master Servicer to be recoverable.
[With respect to any Mortgage Loan requiring a balloon payment
on the maturity date of such Mortgage Loan, in the event of
default in any such payment, the Master Servicer will continue
to advance, subject to the Master Servicer's determination as to
recoverability, an amount equal to interest on the principal
balance of such Mortgage Loan deemed to be due thereon after
such default.]
Any Advance made by the Master Servicer or a servicer with
respect to a Mortgage Loan is reimbursable to it as described
herein under "Servicing of Mortgage Loans-- Advances." Under the
limited circumstances described herein, the Master Servicer will
be entitled to reimburse itself and any servicer from funds on
deposit in the Certificate Account before distributions are made
to holders of Certificates.]
[Optional Termination...................... At its option, the Master Servicer may purchase from the Pool
all remaining Mortgage Loans in the Pool and thereby effect
early retirement of the Certificates, on any Distribution Date on
which the Pool Principal Balance is less than [ ]% of the Cut-off
Date Pool Principal Balance. See "Description of the
Certificates-- Termination; Optional Termination" herein.]
If the Master Servicer exercises its right to repurchase all of
the Mortgage Loans, the Certificates outstanding at the time
of such repurchase will be retired earlier than would
otherwise be the case. See "Prepayment and Yield
Considerations" herein.
Certain Federal Income
Tax Consequences...................... [For federal income tax purposes, the Pool will be treated as a
"real estate mortgage investment conduit" ("REMIC"). The
Senior Certificates and the Subordinate Certificates will
constitute "regular interests" in the REMIC and will be treated
as debt instruments of the Pool for federal income tax purposes
with payment terms equivalent to the terms of such Certificates.
The Class R Certificates will constitute the sole class of
"residual interest" in the REMIC and will be the Class of
Residual Certificates, as described in the Prospectus.]
Holders of the Offered Certificates will be required to include in
income interest on such Certificates in accordance with the
accrual method of accounting. The Class X Certificates will,
and the other Classes of Offered Certificates may, depending on
their respective issue prices, be treated as having been issued
with original issue discount for federal income tax purposes.
For further information regarding the federal income tax
consequences of investing in the Certificates, see "Certain
Federal Income Tax Consequences" herein and in the
Prospectus.
Legal Investment........................... The Senior Certificates [and the Class M-1 Certificates] will
constitute "mortgage related securities" for purposes of the
Secondary Mortgage Market Enhancement Act of 1984
("SMMEA"), and as such, will be legal investments for certain
entities to the extent provided in SMMEA. See "Legal
Investment" in the Prospectus.
[It is anticipated that the Class M-1 Certificates will not be rated
in one of the two highest rating categories by a nationally
recognized statistical rating organization and, therefore, will not
constitute "mortgage related securities" for purposes of
SMMEA.]
Certain Classes of Certificates may be deemed "high-risk
mortgage securities" as defined in the supervisory policy
statement on securities activities approved by the Federal
Financial Institutions Examination Council on December 3, 1991
and adopted by the Comptroller of the Currency, the Federal
Deposit Insurance Corporation, the Federal Reserve Board and
the Office of Thrift Supervision. See "Legal Investment" in the
Prospectus.
S-5
<PAGE>
ERISA Considerations....................... A fiduciary of any employee benefit plan subject to the
Employee Retirement Income Security Act of 1974, as amended
("ERISA"), or the Internal Revenue Code of 1986, as amended
(the "Code"), should carefully review with its legal advisors
whether the purchase or holding of an Offered Certificate could
give rise to a transaction prohibited or not otherwise permissible
under ERISA or the Code. The Class M-1 Certificates may not
be transferred except upon satisfaction of certain conditions. See
"ERISA Considerations" herein and in the Prospectus.
Certificate Rating......................... It is a condition to the issuance of the Offered Certificates that
the Senior Certificates and the Class M-1 Certificates be rated by
[ ] and by [ ] at least as follows:
</TABLE>
<TABLE>
<CAPTION>
Class _____ _____
-----
<S> <C>
A-1........
X..........
M-1........
See "Ratings" herein.
</TABLE>
S-6
<PAGE>
RISK FACTORS
YIELD AND PREPAYMENT CONSIDERATIONS
The rate of principal payments on the Certificates, the amount of principal
and interest payments on the Certificates and the yield to maturity of the
Certificates will be directly related to the rate of payments of principal on
the Mortgage Loans. The rate of principal payments on the Mortgage Loans will in
turn be affected by the amortization schedules of the Mortgage Loans, the rate
of principal prepayments (including partial prepayments and those resulting from
refinancing) thereon by mortgagors, liquidations of defaulted Mortgage Loans,
repurchases by the Seller of Mortgage Loans as a result of defective
documentation or breaches of representations or warranties and optional purchase
by the Master Servicer of all of the Mortgage Loans in connection with the
termination of the Pool. [The Mortgagors may prepay any Mortgage Loan at any
time without penalty.]
The rate of payments (including prepayments) on mortgage loans is
influenced by a variety of economic, geographic, social and other factors. If
prevailing rates for similar mortgage loans fall below the Mortgage Rates on the
Mortgage Loans, the rate of prepayment would generally be expected to increase.
Conversely, if prevailing rates for similar mortgage loans rise above the
Mortgage Rates on the Mortgage Loans, the rate of prepayment would generally be
expected to decrease. An investor that purchases an Offered Certificate at a
discount should consider the risk that a slower than anticipated rate of
principal payments on the Mortgage Loans will result in an actual yield that is
lower than such investor's expected yield. An investor that purchases an Offered
Certificate at a premium should consider the risk that a faster than anticipated
rate of principal payments on the Mortgage Loans will result in an actual yield
that is lower than such investor's expected yield.
The timing of changes in the rate of prepayments may significantly affect
an investor's actual yield to maturity, even if the average rate of principal
prepayments is consistent with an investor's expectations. In general, the
earlier a prepayment of principal of the Mortgage Loans the greater the effect
on an investor's yield to maturity. The effect on an investor's yield as a
result of principal payments occurring at a rate higher (or lower) than the rate
anticipated by the investor during the period immediately following the issuance
of the Offered Certificates will not be offset by a subsequent like reduction
(or increase) in the rate of principal prepayments. The yield on the Class X
Certificates will be highly sensitive to the rate and timing of prepayments on
the Mortgage Loans. A rapid rate of principal prepayments on the Mortgage Loans
(as defined below) may have a material negative effect on the yield of the Class
X Certificates. Investors must make their own decisions as to the appropriate
prepayment assumptions to be used in deciding whether to purchase the Offered
Certificates. See "Prepayment and Yield Considerations---Sensitivity of the
Class X Certificates" herein.
SUBORDINATION
The rights of the holders of the Class M-1 Certificates to receive
distributions with respect to the Mortgage Loans will be subordinated to such
rights of the Senior Certificates and the rights of the holders of the Class B-1
Certificates to receive distributions with respect to the Mortgage Loans will be
subordinated to such rights of the Senior Certificates and the Class M-1
Certificates. Delinquencies that are not advanced by or on behalf of the Master
Servicer (because the amounts, if advanced, would be nonrecoverable), will
adversely affect the yield on the Certificates. Because of the priority of
distributions, shortfalls resulting from delinquencies not so advanced will be
borne first by the Class B-2 Certificates, second by the Class B-1 Certificates,
third by the Class M-1 Certificates and finally by the Senior Certificates.
The weighted average life of, and the yield to maturity on, the Subordinate
Certificates, in decreasing order of their priority of distributions, will be
progressively more sensitive to the rate and timing of Mortgagor defaults and
the severity of ensuing losses on the Mortgage Loans. If the actual rate and
severity of losses on the Mortgage Loans is higher than those assumed by a
holder of a Subordinate Certificate, the actual yield to maturity of such
Certificate may be lower than the yield expected by such holder based on such
assumption. The timing of losses on the Mortgage Loans will also affect an
investor's actual yield to maturity, even if the rate of defaults and severity
of losses over the life of the Mortgage Loans are consistent with such
investor's expectations. In general, the earlier a loss occurs the greater the
effect on an investor's yield to maturity. Realized Losses on the Mortgage Loans
will reduce the Class Certificate Balance of the Subordinate Certificates to the
extent of any losses allocated thereto without the receipt of cash attributable
to such reduction. See "Description of the Certificates--Allocation of Losses"
herein.
LIMITED OBLIGATIONS
The Mortgage Loans are be the sole source of payments on the Certificates.
The Certificates do not represent an interest in or obligation of the Seller,
the Master Servicer, the Trustee or any of their affiliates, except for limited
obligations of the
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<PAGE>
Master Servicer with respect to certain breaches of its representations and
warranties and its obligations as Master Servicer. Neither the Certificates nor
the Mortgage Loans will be guaranteed by or insured by any governmental agency
or instrumentality, the Seller, the Master Servicer, the Trustee or any of their
affiliates. Consequently, in the event that payments on the Mortgage Loans are
insufficient or otherwise unavailable to make all payments required on the
Certificates, there will be no recourse to the Seller, the Master Servicer, the
Trustee or any of their affiliates.
LIQUIDITY
The Underwriter intends to make a secondary market in the Offered
Certificates, but has no obligation to do so. There is currently no secondary
market in the Offered Certificates and there can be no assurance that such a
market will develop or, if it does develop, that it will provide
Certificateholders with liquidity of investment or that it will continue for the
life of the Certificates.
GEOGRAPHIC CONCENTRATION
[Approximately [ ]% of the Mortgage Loans (by aggregate outstanding
principal balance as of the Cut-off Date) are secured by Mortgaged Properties
located in the State of California. Property values of residential real estate
in California have declined in recent years. If the California residential real
estate market should continue to experience an overall decline in property
values after the dates of origination of the Mortgage Loans, the rates of
delinquency, foreclosure, bankruptcy and loss on the Mortgage Loans may be
expected to increase, and may increase substantially, as compared to such rates
in a stable or improving real estate market.]
[describe other geographic concentrations presenting significant risks]
BOOK-ENTRY SYSTEM
Since transactions in the [ ] Certificates (the "Book-Entry Certificates")
generally can be effected only through DTC, Participants and Indirect
Participants, the ability of a Beneficial Owner to pledge Book-Entry
Certificates to persons or entities that do not participate in the DTC system,
or to otherwise act with respect to such Book-Entry Certificates, may be limited
due to the lack of a physical certificate for such Book-Entry Certificates. in
addition, under a book-entry format, Beneficial Owners may experience delays in
their receipt of payments, since distributions will be made by the Trustee, or a
paying agent on behalf of the Trustee, to CEDE & Co., as nominee for DTC. Also,
issuance of Book-Entry Certificates in book-entry form may reduce the liquidity
thereof in any secondary trading market that may develop therefor because
investors may be unwilling to purchase securities for which they cannot obtain
delivery of physical certificates. See "Description of the
Certificates--Book-Entry Certificates" herein.
THE MORTGAGE POOL
GENERAL
Certain information with respect to the Mortgage Loans included in the
Mortgage Pool is set forth below. [A detailed description of such Mortgage Loans
on Form 8-K (the "Detailed Description") will be available to purchasers of the
Offered Certificates at or before, and will be filed with the Securities and
Exchange Commission within fifteen days of, the initial delivery of the Offered
Certificates. The Detailed Description will specify the aggregate principal
balances of the Mortgage Loans included in the Mortgage Pool as of the Cut-off
Date (the "Cutoff Date Pool Principal Balance") and will also include the
following information in tabular format regarding such Mortgage Loans: years of
origination of such Mortgage Loans, the purposes of such Mortgage Loans, the
original principal balances of such Mortgage Loans, the outstanding principal
balances of such Mortgage Loans as of the Cut-off Date, the Mortgage Rates borne
by such Mortgage Loans, the original Loan-to-Value Ratios of such Mortgage
Loans, the remaining months to stated maturity of such Mortgage Loans, the types
of properties securing such Mortgage Loans and the geographical distribution of
such Mortgage Loans by state.] Prior to the Closing Date, Mortgage Loans may be
removed from the Mortgage Pool and other Mortgage Loans may be substituted
therefor. The Sponsor believes that the information set forth herein with
respect to the Mortgage Pool as presently constituted is representative of the
characteristics of the Mortgage Pool as it will be constituted at the Closing
Date, although the range of the Mortgage Rates and the maturities and certain
other characteristics of the Mortgage Loans in the Mortgage Pool may vary.
The Mortgage Pool will consist of Mortgage Loans with a Cut-off Date
Principal Balance expected to be approximately $[ ]. The Mortgage Loans provide
for the amortization of the amount financed over a series of monthly payments.
All the
S-8
<PAGE>
Mortgage Loans provide for payments due [as of the first day of each month (each
a "Due Date")]. The Mortgage Loans to be included in the Mortgage Pool were
originated or acquired in the normal course of its [mortgage banking business]
by the Seller substantially in accordance with the underwriting criteria
specified herein. At origination, [substantially all] [specify percentage] of
the Mortgage Loans had a stated term to maturity of [ ] years. [Monthly payments
made by the Mortgagors on the Mortgage Loans either earlier or later than the
related Due Date will not affect the amortization schedule or the relative
application of such payments to principal and interest.] [The Mortgagors may
prepay any Mortgage Loan at any time without penalty.]
[Other than during the first [six] [twelve] months following origination,
during which time each such Mortgage Loan will bear interest at a Mortgage Rate
fixed at origination, each Mortgage Loan has a Mortgage Rate subject to
[semi-annual] [annual] adjustment on the first day of the month specified in the
related Mortgage Note (each such date, an "Adjustment Date") to equal the sum,
rounded to the nearest [ ]%, of (i) [the weekly average yield on United States
Treasury securities adjusted to a constant maturity of one year] [the weekly
average of secondary market interest rates on six-month negotiable certificates
of deposit] [the London interbank offered rate ("LIBOR") for [three-month]
United States dollar deposits] [other indices] (the "Index")[, as published by
the Federal Reserve Board in Statistical Release H.15(519) and most recently
available as of 45 days prior to the Adjustment Date] [which appears on the
Reuters Screen LIBO Page as of [ ], London time, on the first business day of
the month prior to the Adjustment Date] and (ii) a fixed percentage amount
specified in the related Mortgage Note (the "Gross Margin"); provided, however,
that the Mortgage Rate will not increase or decrease by more than the Periodic
Rate Cap on any Adjustment Date. All the Mortgage Loans provide that over the
life of the Mortgage Loan the Mortgage Rate will in no event be more than the
initial Mortgage Rate plus a fixed percentage (such rate, the "Maximum Rate").
[In addition, each Mortgage Loan provides that in no event will the Mortgage
Rate be less than the initial Mortgage Rate (such rate, the "Minimum Rate").]
Effective with the first payment due on a Mortgage Loan after each related
Adjustment Date, the monthly payment will be adjusted to an amount which will
fully amortize the outstanding principal balance of the Mortgage Loan over its
remaining term. [Approximately [ ]% of the Mortgage Loans were originated with a
Mortgage Rate less than the sum of the then-applicable Index and Gross Margin,
rounded as described herein.] If the Index ceases to be published or is
otherwise unavailable, the Master Servicer will select an alternative index for
mortgage loans on single-family residential properties, based upon comparable
information, over which it has no control and which is readily verifiable by
mortgagors.]
[Each Mortgage Loan was originated on or after [date], [and has an initial
Adjustment Date on or before [date]].
The latest date on which any Mortgage Loan matures is [date]. The earliest
stated maturity date of any Mortgage Loan is [date].
[As of the Cut-off Date, no Mortgage Loan was delinquent more than 30 days.]
[None] of the Mortgage Loans will be subject to any buydown agreement.
No Mortgage Loan will have a Loan-to-Value Ratio as of the Cut-off Date of
more than [ ]%. The weighted average of the Loan-to-Value Ratios as of the
Cut-off Date of the Mortgage Loans was approximately [ ]%. Each Mortgage Loan
with a Loan-to-Value Ratio as of the Cut-off Date of greater than 80% will be
covered by a primary mortgage guaranty insurance policy issued by a mortgage
insurance company approved by the Federal National Mortgage Association ("FNMA")
or the Federal Home Loan Mortgage Corporation ("FHLMC"), which policy will
provide coverage in an amount equal to the excess of the original principal
balance of the related Mortgage Loan plus accrued interest thereon and related
foreclosure expenses in excess of 75% of the value of the related Mortgaged
Property. No such primary mortgage insurance policy will be required with
respect to any such Mortgage Loan after the date on which the related
Loan-to-Value Ratio is less than 80%.
The "Loan-to-Value Ratio" of a Mortgage Loan at any given time is a
fraction, expressed as a percentage, of the principal balance of the Mortgage
Loan at origination to the original value of the Mortgaged Property (i.e., the
value at origination based upon an appraisal or the selling price, whichever is
less, or in the case of certain refinancings, the value set forth in an
appraisal). No assurance can be given that the value of any Mortgaged Property
has remained or will remain at the level that existed on the appraisal or sales
date. If residential real estate values generally or in a particular geographic
area decline, the Loan-to-Value Ratios might not be a reliable indicator of the
rates of delinquencies, foreclosures and losses that could occur with respect to
such Mortgage Loans.
[None of the Mortgage Loans is insured by any primary mortgage guaranty
insurance policy.]
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<PAGE>
[No] Mortgage Loan provides for deferred interest or negative amortization.
Approximately [ ]% and [ ]% (by Cut-off Date Pool Principal Balance) will be
secured by Mortgaged Properties located in [ ] and [ ], respectively. Except as
indicated in the preceding sentence no more than approximately [ ]% of the
Mortgage Loans will be secured by Mortgaged Properties located in any one state.
No more than approximately [ ]% of the Mortgage Loans (by principal balance as
of the Cut-off Date) will be secured by Mortgaged Properties located in any one
postal zip code area.
[The first and last date on which any Convertible Mortgage Loan is
convertible from an adjustable Mortgage Rate to a fixed Mortgage Rate is [date]
and [date], respectively.]
The following information sets forth in tabular format certain information,
as of the Cut-off Date, as to the Mortgage Loans. Percentages (approximate) are
stated by principal balance as of the Cut-off Date.
MORTGAGE LOAN STATISTICS
<TABLE>
<CAPTION>
Mortgage Pool
<S> <C>
Number of Mortgage Loans..............................................................
Cut-off Date Pool Principal Balance................................................... $
[Rate Adjustment Frequency:].........................................................
[6 months]...................................................................... %
[12 months]..................................................................... %
[24 months]..................................................................... %
[36 months]..................................................................... %
[60 months]..................................................................... %
[Payment Adjustment Frequency:].......................................................
[6 months]...................................................................... %
[12 months]..................................................................... %
[24 months]..................................................................... %
[36 months]..................................................................... %
[60 months]..................................................................... %
[Convertible Mortgage Loans........................................................... %]
Original Principal Balance:
Ranges.......................................................................... $ to $
Average......................................................................... $
Original Term to Stated Maturity:
Ranges.......................................................................... to months
Weighted Average................................................................ months
Remaining Months to Stated Maturity:
Ranges.......................................................................... to months
Weighted Average................................................................ months
Mortgage Rate:
Ranges.......................................................................... % to %
Weighted Average................................................................ %
[Net Mortgage Rate:]
Ranges.......................................................................... % to %
Weighted Average................................................................ %
[Gross Margin:]
Ranges.......................................................................... % to %
Weighted Average................................................................ %
[Weighted Average Months to Next Rate ............ Not more than
Adjustment Date]............................................................... months
[Periodic Rate Cap:]
Ranges.........................................................................
Weighted Average...............................................................
[Maximum Rate:]
Ranges......................................................................... % to %
S-10
<PAGE>
Weighted Average............................................................... %
[Minimum Rate:]
Ranges......................................................................... % to %
Weighted Average............................................................... %
Expense Fees:
Ranges......................................................................... % to %
Weighted Average............................................................... %
Primary Residences................................................................... At least %
Investment Properties................................................................ No more than %
Second Homes......................................................................... No more than %
Single-family Detached Residences.................................................... At least %
Condominiums......................................................................... No more than %
Planned Unit Developments or De Minimis
Planned Unit Developments...................................................... No more than %
Located in [ ]....................................................................... No more than %
Number of Other States*.............................................................. No more than %
Two- to Four-Family Residences....................................................... No more than %
Purchase Money Mortgage Loans........................................................ At least %
Rate/Term Refinancing Mortgage Loans................................................. No more than %
Cash Out Refinance Mortgage Loans.................................................... No more than %
Limited Documentation................................................................ No more than %
No Asset and/or Income Certificate................................................... No more than %]
</TABLE>
- ----------------
* No more than 5% of the Mortgage Loans (by aggregate principal balance as
of the Cut-off Date) are secured by Mortgaged Properties in such states.
S-11
<PAGE>
ASSIGNMENT OF THE MORTGAGE LOANS
Pursuant to the Pooling Agreement, the Sponsor on the Closing Date will
sell, transfer, assign, set over and otherwise convey without recourse to the
Trustee in trust for the benefit of Certificateholders all right, title and
interest of the Sponsor in and to each Mortgage Loan and all right, title and
interest in and to all other assets included in the Pool, including all
principal and interest received by the Master Servicer on or with respect to the
Mortgage Loans after the Cut-off Date (to the extent not applied in computing
the Cut-off Date Pool Principal Balance), exclusive of interest accruing thereon
prior to the Cut-off Date.
In connection with such transfer and assignment, the Sponsor will deliver
or cause to be delivered, with respect to each Mortgage Loan, to the Trustee, or
a custodian for the Trustee, among other things, the original loan agreement or
promissory note (the "Mortgage Note") (and any modification or amendment
thereto) endorsed without recourse to the order of the Trustee (or its nominee)
showing an unbroken chain of endorsements from the original payee thereof to the
Person endorsing it to the Trustee, the original agreement or instrument
creating a first lien on the related Mortgaged Property (the "Mortgage") with
evidence of recording indicated thereon, the assignment (which may be in the
form of a blanket assignment if permitted) to the Trustee of the Mortgage with
evidence of recording in the name of the Trustee thereon and, if applicable, any
riders or modifications to such Mortgage Note and Mortgage (collectively, the
"Mortgage File"). Where the original Mortgage or assignment has been delivered
to the recording office and has not yet been returned, the Sponsor may deliver
or cause to be delivered a true copy thereof with a certification by the Master
Servicer, or if the original Mortgage or assignment has been lost or destroyed,
the Sponsor may deliver or cause to be delivered photocopies of such documents
containing an original certification by the judicial or other governmental
authority of the jurisdiction where such documents were recorded. Assignments of
the Mortgage Loans to the Trustee (or its nominee) will be recorded in the
appropriate public office for real property records, except in states where, in
the opinion of counsel acceptable to the Trustee, such recording is not required
to protect the Trustee's interests in the Mortgage Loan against the claim of any
subsequent transferee or any successor to or creditor of the Sponsor or the
Seller.
The Trustee will review each Mortgage File within 90 days of the Closing
Date (or promptly after the Trustee's receipt of any document permitted to be
delivered after the Closing Date) and if any such document is found to be
defective in a material respect and the Seller does not cure such defect within
90 days (or 270 days where the defect relates solely to the inability of the
Master Servicer to deliver the original or certified copy of the Mortgage or
assignment) of notice thereof from the Trustee, the Seller following delivery of
the opinion referred to below, will on the Distribution Date in the month
following the expiration of such 90 days (or 270 days) either (i) repurchase the
related Mortgage Loan (or any property acquired in respect thereof) at a price
equal to 100% of the unpaid principal balance of such Mortgage Loan plus accrued
and unpaid interest on such principal balance at the related Net Mortgage Rate
less any unreimbursed Advances made with respect thereto, or (ii) during a
limited period of time after the Closing Date as specified in the Pooling
Agreement and upon satisfaction of the conditions set forth in the Pooling
Agreement, substitute an Eligible Substitute Mortgage Loan (as defined in the
Pooling Agreement) meeting the criteria specified in the Pooling Agreement. This
repurchase or substitution obligation constitutes the sole remedy available to
Certificateholders or the Trustee for a material defect in a constituent
document. The Sponsor will make no representations and warranties with respect
to the Mortgage Loans and will have no obligation to purchase or substitute for
a Mortgage Loan with deficient documentation or which is otherwise defective.
Prior to any such repurchase or substitution, the Seller shall deliver an
opinion of counsel to the Trustee to the effect that such repurchase or
substitution will not (i) give rise to a "prohibited transaction" under Section
860F(A)(2) of the Code, (ii) be deemed a contribution to the Pool after the
"start-up date" that would give rise to the tax specified under Section
860G(a)(1) of the Code or (iii) adversely affect the status of the Pool as a
REMIC. Any such substitution or purchase that otherwise would have been required
but for the inability to deliver the opinion referred to above will not be
permitted until such opinion is delivered.
SERVICING OF MORTGAGE LOANS
[Headlands Mortgage Company
Headlands Mortgage Company ("Headlands") is a closely-held California
S-corporation which was organized in 1981. Headlands is engaged in the mortgage
banking business, which consists of the origination, acquisition, sale and
servicing of residential mortgage loans secured by one- to four-unit family
residences, and the purchase and sale of mortgage servicing rights.
Headlands is headquartered in Northern California, and has production
branches in California, Washington, Oregon, Idaho, Nevada and Arizona. Loans are
originated primarily on a wholesale basis, through a network of independent
mortgage loan brokers approved by Headlands.
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<PAGE>
Headland's executive offices are located at 700 Larkspur Landing Circle,
Suite 250, Larkspur, CA 94939.
UNDERWRITING STANDARDS
All of the Mortgage Loans were originated or acquired by Headlands.
Headlands originates and purchases "conventional non-conforming mortgage loans"
(i.e., loans which are not insured by the FHA or partially guaranteed by the VA
or which do not qualify for sale to FNMA or FHLMC) secured by first liens on
one- to four-family residential properties. These loans typically differ from
those underwritten to the guidelines established by FNMA, FHLMC and the
Government National Mortgage Association ("GNMA") primarily with respect to
loan-to-value ratios, borrower income, required documentation, interest rates,
borrower occupancy of the mortgaged property and/or property types. To the
extent that these programs reflect underwriting standards different from those
of FNMA, FHLMC and GNMA, the performance of loans made thereunder may reflect
higher delinquency rates and/or credit losses.
All mortgage loans originated or acquired by Headlands must meet credit,
appraisal and underwriting standards acceptable to Headlands. Such underwriting
standards (the "Underwriting Standards") are applied to evaluate the prospective
borrower's credit standing and repayment ability and the value and adequacy of
the mortgaged property as collateral. These standards are applied in accordance
with applicable federal and state laws and regulations. Exceptions to the
Underwriting Standards are permitted where compensating factors are present.
Headlands' Underwriting Standards for purchase money or rate/term refinance
loans secured by one- to two-family primary residences generally allow
Loan-to-Value Ratios at origination of up to 95% for mortgage loans with
original principal balances of up to $400,000, up to 90% for mortgage loans
secured by one- to four-family, primary residences with original principal
balances of up to $400,000, up to 85% for mortgage loans with original principle
balances of up to $500,000 and up to 80% for mortgage loans with original
principal balances up to $650,000. Headlands may acquire mortgage loans with
principal balances up to $3,000,000 ("super jumbos") if the loan is secured by
the borrower's primary residence. The Loan-to-Value Ratio for super jumbos
generally may not exceed 60%. For cash-out refinanced loans, the maximum
Loan-to-Value Ratio generally is 80%, and the maximum "cash out" amount
permitted is based in part on the original amount of the related mortgage loan.
Headlands' Underwriting Standards for mortgage loans secured by investor
properties generally allow Loan-to-Value Ratios at origination of up to 90% for
mortgage loans with original principal balances up to $250,000. Headlands'
Underwriting Standards permit mortgage loans secured by investor properties to
have higher original principal balances if they have lower Loan-to-Value Ratios
at origination.
For each mortgage loan with a Loan-to-Value Ratio at origination exceeding
80%, Headlands generally requires a primary mortgage guaranty insurance policy
insuring a portion of the balance of the mortgage loan at least equal to the
product of the original principal balance of such mortgage loan and a fraction,
the numerator of which is the excess of the original principal balance of such
mortgage loan over 75% of the lesser of the appraised value and selling price of
the related mortgage property and the denominator of which is the original
principal balance of the related mortgage loan plus accrued interest thereon and
related foreclosure expenses. No such primary mortgage guaranty insurance policy
will be required with respect to any such mortgage loan after the date on which
the related Loan-to-Value Ratio decreases to 80% or less or, based upon a new
appraisal, the principal balance of such mortgage loan represents 80% or less of
the new appraised value. All of the insurers which have issued primary mortgage
guaranty insurance policies with respect to the Mortgage Loans meet FNMA's or
FHLMC's standards or are acceptable to the Rating Agencies. In certain
circumstances, however, Headlands does not require primary mortgage guaranty
insurance on mortgage loans with principal balances up to $500,000 that have
Loan-to-Value Ratios exceeding 80% but less than or equal to 95%. All residences
except cooperatives and certain high-rise condominium dwellings are eligible for
this program. Each qualifying mortgage loan will be made at an interest rate
that is higher than the rate would be if the Loan-to-Value Ratio was 80% or less
or if primary mortgage guaranty insurance was obtained. Under such
circumstances, the Certificateholders will not have the benefit of primary
mortgage guaranty insurance coverage.
In determining whether a prospective borrower has sufficient monthly income
available (i) to meet the borrower's monthly obligation on the proposed mortgage
loan and (ii) to meet monthly housing expenses and other financial obligations
including the borrower's monthly obligations on the proposed mortgage loan,
Headlands generally considers the ratio of such amounts to the proposed
borrower's acceptable stable monthly gross income. Such ratios vary depending on
a number of underwriting criteria, including Loan-to-Value Ratios, and are
determined on a loan-by-loan basis.
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<PAGE>
Headlands originates and acquires loans which have been underwritten under
one of five documentation programs: full documentation, alternative
documentation, limited documentation, no ratio loan documentation and no
income/no asset verification.
Under full documentation, the prospective borrower's employment, income and
assets are verified through written and telephonic communications. Alternative
documentation provides for alternative methods of employment verification
generally using W-2 forms or pay stubs.
Under the limited documentation program, more emphasis is placed on the
value and adequacy of the mortgaged property as collateral and other assets of
the borrower than on credit underwriting. Mortgage loans underwritten using the
limited documentation program are limited to borrowers with credit histories
that demonstrate an established ability to repay indebtedness in a timely
fashion. Under the limited documentation program, certain credit underwriting
documentation concerning income or income verification and/or employment
verification is waived. Loans originated and acquired with limited documentation
include cash-out refinance loans, super jumbos and mortgage loans secured by
investor-owned properties. Permitted maximum Loan-to-Value Ratios (including
secondary financing) under the limited documentation program, which range up to
80%, are more restrictive than mortgage loans originated with full documentation
or alternative documentation.
Under the no ratio loan documentation program, income ratios for the
prospective borrower are not calculated. Mortgage loans underwritten using the
no ratio loan documentation program have Loan-to-Value Ratios less than or equal
to 80% and meet the standards for the limited documentation program.
Under the no income/no asset verification program, emphasis is placed on
the value and adequacy of the mortgaged property as collateral and credit
history rather than on verified income and assets of the borrower. Mortgage
loans underwritten under no income/no asset verification are limited to
borrowers with excellent credit histories. Under the no income/no asset
verification program, credit underwriting documentation concerning income,
employment verification and asset verification is waived and income ratios are
not calculated.
Headlands generally performs a pre-funding audit on each mortgage loan.
This audit includes a review for compliance with applicable underwriting program
guidelines and accuracy of the credit report and phone verification of
employment. Headlands performs a post-funding quality control review on a
minimum of 10% of the mortgage loans originated or acquired for complete
re-verification of employment, income and liquid assets used to qualify for such
mortgage loan. Such review also includes procedures intended to detect evidence
of fraudulent documentation and/or imprudent activity during the processing,
funding, servicing or selling of the mortgage loan.
Verification of occupancy and applicable information is made by regular mail.
One- to four-family residential properties are appraised by qualified
independent appraisers who are approved by Headlands. All appraisals are
required to conform to the Uniform Standards of Professional Appraisal Practice
adopted by the Appraisal Standards Board of the Appraisal Foundation and must be
on forms acceptable to FNMA and FHLMC. As part of Headlands' pre-funding quality
control procedures, either field or desk appraisal reviews are obtained on [ ]%
of all mortgage loans.
SERVICING OVERVIEW
Headlands (in its capacity as master servicer) will act as master servicer
for the Mortgage Loans pursuant to the Agreement. [All of the Mortgage Loans are
serviced by Headlands.]
As of [ ], 1996, Headlands' mortgage loan servicing portfolio consisted of
[ ] one- to four-family residential mortgage loans with an aggregate principal
balance of [$ ] billion. Headlands' primary source of mortgage servicing rights
is from mortgage loans originated through mortgage brokers.
Headlands' Servicing Center was established in January 1994. It has a staff
of [ ] employees. Prior to January 1994, Headlands' servicing portfolio was
subserviced by First California Mortgage Company ("First California").
Mortgage loan servicing includes collecting payments from borrowers and
remitting those funds to investors, accounting for mortgage loan principal and
interest, reporting to investors, holding custodial funds for payment of
mortgage and mortgage related expenses such as taxes and insurance, advancing
funds to cover delinquent payments, inspecting foreclosures and property
disposition in the event of unremedied defaults, and otherwise administering the
mortgages.
S-14
<PAGE>
The following table summarizes the delinquency experience including pending
foreclosures on residential mortgage loans originated or acquired as part of
Headlands' mortgage banking operations and included in Headlands' servicing
portfolio at the dates indicated. As of December 31, 1993, 1994 and 1995 and
[month/day], 1996, the total principal balance of loans serviced by Headlands
was (in millions) $4,283, $4,779, $4,149 and $[ ], respectively.
<TABLE>
<CAPTION>
December 31,
1993 1994 1995 At August 31, 1996
--------------------- --------------------- --------------------- ---------------------
Percent of Percent of Percent of Percent of
Number Servicing Number Servicing Number Servicing Number Servicing
of Loans Portfolio of Loans Portfolio of Loans Portfolio of Loans Portfolio
-------- --------- -------- --------- -------- --------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Total Portfolio* 26,410 100% 29,076 100% 27,261 100% 100%
====== ==== ====== ==== ====== ==== ====== ====
Period of Delinquency:
30-59 days 265 1.0% 327 1.1% 283 1.0% %
60-89 days 49 0.2% 49 0.2% 62 0.2% %
90 days or more 40 0.2% 50 0.2% 47 0.2% %
------- ---- ------- ---- ------- ---- ------- ----
Total Delinquencies
(excluding Foreclosures) 354 1.3% 426 1.5% 392 1.4% %
======= ==== ======= ==== ======= ==== ======= ====
Foreclosures Pending 107 0.4% 102 0.3% 146 0.5% %
</TABLE>
- ------------------
* The total loans in portfolio have been reduced by the number of loans which
are pending service release or have been foreclosed.
There can be no assurance that the delinquency and foreclosure experience
of the Mortgage Loans will correspond to the delinquency and foreclosure
experience of the servicing portfolio of Headlands set forth in the foregoing
tables. The statistics shown above represent the respective delinquency and
foreclosure experiences only at the dates presented, whereas the aggregate
delinquency and foreclosure experience on the Mortgage Loans will depend on the
results obtained over the life of the Pool. The servicing portfolio includes
mortgage loans with a variety of payment and other characteristics (including
geographic location) which are not necessarily representative of the payment and
other characteristics of the Mortgage Loans. The servicing portfolio includes
mortgage loans underwritten pursuant to guidelines not necessarily
representative of those applicable to the Mortgage Loans. It should be noted
that if the residential real estate market should experience an overall decline
in property values, the actual rates of delinquencies and foreclosures could be
higher than those previously experienced by Headlands or First California. In
addition, adverse economic conditions may affect the timely payment by
mortgagors of scheduled payments of principal and interest on the Mortgage Loans
and, accordingly, the actual rates of delinquencies and foreclosures with
respect to the Mortgage Loans.]
[Servicing Compensation and Payment of Expenses
The Expense Fees with respect to the Mortgage Pool are payable out of the
interest payments on each Mortgage Loan. The Expense Rate in respect of each
Mortgage Loan will be at least [ ]% per annum and not more than [ ]% per annum
of the Principal Balance of such Mortgage Loan. The Expense Fees consist of (a)
servicing
compensation payable to the Master Servicer in respect of its master servicing
activities (the "Master Servicing Fee"), [(b) servicing and other related
compensation payable to the Master Servicer in respect of its servicing
activities (the "Servicing Fee")] and (c) certain credit support fees and fees
paid to the Trustee. The Master Servicing Fees will be [ ]% per annum of the
Principal Balance of each Mortgage Loan and the Servicing Fee will be [ ]% per
annum of the Principal Balance of each Mortgage Loan. The Master Servicer is
obligated to pay certain ongoing expenses associated with the Pool and incurred
by the Master Servicer in connection with its responsibilities under the Pooling
Agreement and such amounts will be paid by the Master Servicer out of the Master
Servicing Fee. [The amount of the Master Servicing Fee is subject to adjustment
with respect to prepaid Mortgage Loans, as described herein under "-- Adjustment
to the Master Servicing Fee in Connection with Prepaid Mortgage Loans."] [The
Master Servicer is also entitled to receive all late payment fees, assumption
fees and other similar charges and all reinvestment income earned on amounts on
deposit in the Certificate Account and Distribution Account.]
[Adjustment to Master Servicing Fee in Connection with Prepaid Mortgage Loans
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When a Mortgage Loan is prepaid between Due Dates, the borrower is required
to pay interest on the amount prepaid only to the date of prepayment and not
thereafter. Prepayments received during a calendar month will be distributed to
Certificateholders on the Distribution Date in the month following the month of
receipt. Pursuant to the Agreement, the Master Servicing Fee for any month will
be reduced by an amount with respect to each such Mortgage Loan sufficient to
pass through to the Pool on such Distribution Date an amount equal to 30 days'
interest at the Net Mortgage Rate for each such Mortgage Loan. Any such
shortfalls in interest as a result of prepayments in excess of the amount of the
Master Servicing Fee for a month will reduce the amount of interest available to
be distributed to Certificateholders from what would have been the case in the
absence of such prepayments. See "Description of the Certificates -- Interest"
herein.]
[Advances
Subject to the following limitations, the Master Servicer will be required
to advance four business days prior to each Distribution Date [occurring on or
before the Distribution Date in [ ] from its own funds or funds in the
Certificate Account that do not constitute Available Funds for such Distribution
Date, in an amount equal to the aggregate of payments of principal and interest
(adjusted to the applicable Net Mortgage Rate) which were due on the related Due
Date and which were delinquent on the related Determination Date, together with
an amount equivalent to interest on each Mortgaged Property acquired by the
Master Servicer through foreclosure or deed-in-lieu of foreclosure in connection
with a defaulted Mortgage Loan ("REO Property") (any such advance, an
"Advance").]
Advances are intended to maintain a regular flow of scheduled interest and
principal payments on the Certificates rather than to guarantee or insure
against losses. The Master Servicer is obligated to make Advances with respect
to delinquent payments of principal of or interest on each Mortgage Loan (with
such payments of interest adjusted to the related Net Mortgage Rate), other than
those resulting from a Relief Act Reduction, to the extent that the Master
Servicer determines that such Advances are recoverable from future payments and
collections or insurance payments or proceeds of liquidation of the related
Mortgage Loan. If the Master Servicer determines on any Determination Date to
make an Advance, such Advance will be included with the distribution to
Certificateholders on the related Distribution Date. Any failure by the Master
Servicer to make an Advance as required under the Agreement with respect to the
Certificates will constitute an Event of Default thereunder, in which case the
Trustee or the successor servicer will be obligated to make any such Advance, in
accordance with the terms of the Agreement.]
DESCRIPTION OF THE CERTIFICATES
GENERAL
The Certificates will be issued pursuant to a Pooling and Servicing
Agreement, dated as of [ ] (the "Pooling Agreement"), among the Sponsor, the
Seller, the Master Servicer and the Trustee. Reference is made to the Prospectus
for important additional information regarding the terms and conditions of the
Pooling Agreement and the Certificates. The following summaries do not purport
to be complete and are subject to, and are qualified in their entirety by
reference to, the provisions of the Pooling Agreement. When particular
provisions or terms used in the Pooling Agreement are referred to, the actual
provisions (including definitions of terms) are incorporated by reference.
The Mortgage Pass-Through Certificates, Series [199_-_] (the
"Certificates") will consist of the Class A-1 Certificates and the Class X
Certificates (the "Class A-1 Certificates" and the "Class X Certificates,"
respectively, and collectively, the "Senior Certificates"), three classes of
subordinated certificates (the "Class M-1 Certificates," the "Class B-1
Certificates" and the "Class B-2 Certificates," respectively and collectively,
the "Subordinate Certificates"), and the Class R Certificates (the "Residual
Certificates"). Only the Senior Certificates and the Class M-1 Certificates (the
"Offered Certificates") are offered hereby.
The Senior Certificates in the aggregate will evidence an initial
beneficial ownership interest of approximately [ ]% in the Pool, the Class M-1
Certificates in the aggregate will evidence approximately [ ]% of the undivided
interest in the principal balance of the Pool and the Class B-1 and Class B-2
Certificates evidence in the aggregate the remaining [ ]% undivided interest in
the principal balance of the assets in the Pool. The Class X Certificates will
have no principal balance, are entitled only to a portion of the interest on the
Mortgage Loans and are not entitled to any distributions of principal. The
Residual Certificates will not have a Class Certificate Balance and will not
bear interest.
The Class A-1 Certificates will be issuable in [book-entry] [fully
registered] form only. [The Class A-1 Certificates will be issued in minimum
dollar denominations of $[ ] and
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integral multiples of $[ ] in excess thereof.] The Class X [and Class M-1]
Certificates will be issued in fully registered certificated form in minimum
dollar denomination of $[ ] and integral multiples of $[ ] in excess thereof. A
single certificate of each Class may be issued in any amount in excess of the
minimum denomination.
BOOK-ENTRY CERTIFICATES
The Offered Certificates will be book-entry Certificates (the "Book-Entry
Certificates"). The Book-Entry Certificates will be issued in one or more
certificates which equal the aggregate principal balance of each such Class of
Offered Certificates which will be held by a nominee of The Depository Trust
Company (together with any successor depository selected by the Sponsor, the
"Depository"). Beneficial interests in the Book-Entry Certificates will be
indirectly held by investors through the book-entry facilities of the
Depository, as described herein. Investors may hold such beneficial interests in
the Book-Entry Certificates in minimum denominations of $1,000 and in integral
multiples in excess thereof, except that one Book-Entry Certificate of each such
Class may be issued in an amount which is not an integral multiple of $1,000.
The Sponsor has been informed by the Depository that its nominee will be CEDE &
Co. ("CEDE"). Accordingly, CEDE is expected to be the holder of record of the
Book-Entry Certificates. Except as described below, no person acquiring a
Book-Entry Certificate (each, a "beneficial owner") will be entitled to receive
a physical certificate representing such Certificate (a "Definitive
Certificate").
The beneficial owner's ownership of a Book-Entry Certificate will be
recorded on the records of the brokerage firm, bank, thrift institution or other
financial intermediary (each, a "Financial Intermediary") that maintains the
beneficial owner's account for such purpose. In turn, the Financial
Intermediary's ownership of such Book-Entry Certificate will be recorded on the
records of the Depository (or of a participating firm that acts as agent for the
Financial Intermediary, whose interests will in turn be recorded on the records
of the Depository, if the beneficial owner's Financial Intermediary is not a
Depository participant). Therefore, the beneficial owner must rely on the
foregoing procedures to evidence its beneficial ownership of a Book-Entry
Certificate. Beneficial ownership of a Book-Entry Certificate may only be
transferred by compliance with the procedures of such Financial Intermediaries
and Depository participants.
The Depository is a limited purpose trust company organized under the laws
of the State of New York, a member of the Federal Reserve System, a "Clearing
Corporation" within the meaning of the Uniform Commercial Code as in effect in
the State of New York and a "Clearing Agency" registered pursuant to Section 17A
of the Securities Exchange Act of 1934, as amended. The Depository performs
services for its participants, some of which (and/or their representatives) own
the Depository. In accordance with its normal procedures, the Depository is
expected to record the positions held by each Depository participant in the
Book-Entry Certificates, whether held for its own account or as a nominee for
another person. In general, beneficial ownership of Book-Entry Certificates will
be subject to the rules, regulations and procedures governing the Depository and
Depository participants as in effect from time to time.
Distributions on the Book-Entry Certificates will be made on each
Distribution Date by the Trustee to the Depository. The Depository will be
responsible for crediting the amount of such payments to the accounts of the
applicable Depository participants in accordance with the Depository's normal
procedures. Each Depository participant will be responsible for disbursing such
payments to the beneficial owners of the Book-Entry Certificates that it
represents and to each Financial Intermediary for which it acts as agent. Each
such Financial Intermediary will be responsible for disbursing funds to the
beneficial owners of the Book-Entry Certificates that it represents.
Under a book-entry format, beneficial owners of the Book-Entry Certificates
may experience some delay in their receipt of payments, since such payments will
be forwarded by the Trustee to CEDE. Because the Depository can only act on
behalf of Financial Intermediaries, the ability of a beneficial owner to pledge
Book-Entry Certificates to persons or entities that do not participate in the
Depository system, or otherwise take actions in respect of such Book-Entry
Certificates, may be limited due to the lack of physical certificates for such
Book-Entry Certificates. In addition, issuance of the Book-Entry Certificates in
book-entry form may reduce the liquidity of such Certificates in the secondary
market since certain potential investors may be unwilling to purchase
Certificates for which they cannot obtain physical certificates.
None of the Sponsor, the Master Servicer or the Trustee will have any
responsibility for any aspect of the records relating to or payments made on
account of beneficial ownership interests of the Book-Entry Certificates held by
CEDE, as nominee for DTC, or for maintaining, supervising or reviewing any
records relating to such beneficial ownership interests. In the event of the
insolvency of the Depository, a Depository participant or an indirect Depository
participant in whose name Book-Entry Certificates are registered, the ability of
the Beneficial Owners of such Book-Entry Certificates to obtain timely payment
may be impaired.
Unless and until Definitive Certificates are issued, it is anticipated that
the only "Certificateholder" of the Book-Entry Certificates will be CEDE, as
nominee of the Depository. Beneficial owners of the Book-Entry Certificates will
not be
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Certificateholders, as that term is used in the Pooling Agreement. Beneficial
owners are only permitted to exercise the rights of Certificateholders
indirectly through Financial Intermediaries and the Depository. Monthly and
annual reports on the Pool provided by the Master Servicer to CEDE, as nominee
of the Depository, may be made available to beneficial owners upon request, in
accordance with the rules, regulations and procedures creating and affecting the
Depository, and to the Financial Intermediaries to whose Depository accounts the
Book-Entry Certificates of such beneficial owners are credited.
The Depository has advised the Sponsor and the Trustee that, unless and
until Definitive Certificates are issued, the Depository will take any action
permitted to be taken by the holders of the Book-Entry Certificates under the
Pooling Agreement only at the direction of one or more Financial Intermediaries
to whose Depository accounts the Book-Entry Certificates are credited, to the
extent that such actions are taken on behalf of Financial Intermediaries whose
holdings include such Book-Entry Certificates.
Definitive Certificates will be issued to beneficial owners of the
Book-Entry Certificates, or their nominees, rather than to the Depository, only
if (a) the Depository or the Sponsor advises the Trustee in writing that the
Depository is no longer willing, qualified or able to discharge properly its
responsibilities as nominee and depository with respect to the Book-Entry
Certificates and the Sponsor or the Trustee is unable to locate a qualified
successor; (b) the Sponsor, at its sole option, elects to terminate a book-entry
system through the Depository; or (c) after the occurrence of an Event of
Default (as described in the accompanying Prospectus), beneficial owners having
Percentage Interests aggregating not less than 51% of all Percentage Interests
evidenced by each Class of the Book-Entry Certificates advise the Trustee and
the Depository through the Financial Intermediaries in writing that the
continuation of a book-entry system through the Depository (or a successor
thereto) is no longer in the best interests of beneficial owners.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Trustee will be required to notify all beneficial
owners of the occurrence of such event and the availability through the
Depository of Definitive Certificates. Upon surrender by the Depository of the
global certificate or certificates representing the Book-Entry Certificates and
instructions for re-registration, the Trustee will issue the Definitive
Certificates, and thereafter the Trustee will recognize the holders of such
Definitive Certificates as Certificateholders under the Pooling Agreement.
PAYMENTS ON MORTGAGE LOANS; ACCOUNTS
On or prior to the Closing Date, the Master Servicer will establish an
account (the "Certificate Account") with [ ], which shall be maintained [as a
separate trust account] by the Master Servicer in trust for the benefit of
Certificateholders. Funds credited to the Certificate Account may be invested
for the benefit and at the risk of the Master Servicer in Eligible Investments,
as defined in the Pooling Agreement, that are scheduled to mature on or prior to
the business day preceding the next Distribution Date. On or prior to the
business day immediately preceding each Distribution Date, the Master Servicer
shall withdraw from the Certificate Account the amount of Available Funds and
shall deposit such Available Funds in an account established and maintained with
the Trustee on behalf of Certificateholders (the "Distribution Account").
PRIORITY OF DISTRIBUTIONS AMONG CERTIFICATES.
As more fully described herein, distributions will be made on the
Certificates on each Distribution Date from Available Funds in the following
order of priority: (i) to interest on each Class of Senior Certificates, (ii) to
principal on the Class A-1 Certificates, up to the maximum amount of principal
to be distributed on the Class A-1 Certificates on such Distribution Date, (iii)
to interest on the Class M-1 Certificates, (iv) to principal on the Class M-1
Certificates, up the maximum amount of principal to be distributed on such Class
on such Distribution Date, and (v) to interest on and then principal of each
other Class of Subordinate Certificates, up to the maximum amount of interest
and principal to be distributed on such Class on such Distribution Date [and
subject to certain limitations set forth below under "Principal."]
DISTRIBUTIONS
Distributions of principal and interest to holders of the Offered
Certificates will be made on each Distribution Date to the extent of Available
Funds to holders of record of such Offered Certificates on [the last day of the
preceding month,] (the "Record Date") except that the final distribution in
respect of any Class of Offered Certificates will be made only upon presentation
and surrender of such Certificates at the office or agency appointed by the
Trustee for that purpose in [ ].
Distributions of interest and principal to holders of Subordinate
Certificates will be subordinate to distributions of interest on and principal
of the Senior Certificates and distributions of interest and principal to
holders of the Class B-1 and Class B-2 Certificates will be subordinate to
distributions of interest on and principal of the Class M-1 Certificates. See
"-- Allocation of Losses" and "Credit Support."
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The aggregate amount of funds available in the Certificate Account on a
Distribution Date for distribution on the Certificates is equal to "Available
Funds". Available Funds for any Distribution Date is the sum of (i) all
scheduled installments of interest (net of related Expense Fees) and principal
due on the first day of the month in which such Distribution Date occurs and
received prior to the related Determination Date together with any Advances in
respect thereof, (ii) all insurance and liquidation proceeds (net of related
expenses) received during the month preceding such Distribution Date, (iii) all
partial or full prepayments received during the month preceding such
Distribution Date and (iv) the amount required to be paid in respect of a
Mortgage Loan that became required to be repurchased or substituted during the
month preceding such Distribution Date, reduced by amounts in reimbursement for
Advances previously made and other amounts as to which the Master Servicer or a
servicer is entitled to be reimbursed from the Certificate Account pursuant to
the Pooling Agreement. See "The Mortgage Pool -- Assignment of Mortgage Loans"
herein.
The Trustee will forward with each distribution on a Distribution Date to
each Offered Certificateholder and the Master Servicer a statement or statements
setting forth, among other things, (i) the amount of such distribution allocable
to principal and (ii) the amount of such distribution allocable to interest.
Such amounts will be expressed as a dollar amount per $1,000 of Class
Certificate Balance. See "Description of the Certificates -- Reports to
Certificateholders" in the Prospectus for a detailed description of the
information to be included in such statements.
INTEREST
On each Distribution Date, each Class of Offered Certificates, to the
extent of Available Funds on such Distribution Date applied in the order
described above under "-- Priority of Distributions Among Classes of
Certificates", will be entitled to receive an amount allocable to interest equal
to the sum of (i) one month's interest at the applicable Pass-Through Rate on
the Class Certificate Balance or Class X Notional Amount, as the case may be,
and (ii) the sum of the amounts, if any, by which the amount described in clause
(i) above on each prior Distribution Date exceeded the amount actually
distributed as interest on such prior Distribution Dates and not subsequently
distributed ("Unpaid Interest Amounts"). [Interest will be calculated and
payable on the basis of a 360- day year divided into twelve 30-day months.]
The interest entitlement described above for each Class of Offered
Certificates will be reduced by (i) such Class of Certificates allocable share
of "Net Interest Shortfalls" with respect to such Distribution Date, which is
equal to the amount of interest any Class of Certificateholders would otherwise
have been entitled to receive with respect to any Mortgage Loan that was the
subject of (a) a Relief Act Reduction [or (b) after the coverage provided by the
Subordinate Certificates is exhausted for such type of loss, a Special Hazard
Loss, Fraud Loss or a Bankruptcy Loss,] and (ii) such Class' pro rata share of
Net Prepayment Interest Shortfalls. A "Relief Act Reduction" is a reduction in
the amount of monthly interest payment on a Mortgage Loan pursuant to the
Soldiers' and Sailors' Civil Relief Act of 1940. See "Certain Legal Aspects of
Mortgage Loans -- Soldiers' and Sailors' Civil Relief Act" in the Prospectus.
"Net Prepayment Interest Shortfall" is the amount by which the aggregate of
Prepayment Interest Shortfalls during the calendar month immediately preceding
the month in which the related Due Date occurs exceeds the aggregate amount of
the Master Servicing Fee for such period. A "Prepayment Interest Shortfall" is
the amount by which interest at the Net Mortgage Rate received in connection
with a prepayment of principal on a Mortgage Loan is less than one month's
interest at the Net Mortgage Rate on the Principal Balance of the related
Mortgage Loan that is prepaid. Each Class' pro rata share of such Net Prepayment
Interest Shortfalls will be based on the amount of interest such Class of
Certificates otherwise would have been entitled to receive.
In the event that, on a particular Distribution Date, Available Funds on
such Distribution Date applied in the order described above under "-- Priority
of Distributions Among Classes of Certificates," are not sufficient to make a
full distribution of interest to holders of the Offered Certificates, interest
will be distributed on such Class or Classes of Offered Certificates of equal
priority in proportion to the amount of interest each such Class or Classes
would otherwise have been entitled to receive in the absence of such shortfall.
The amount of any resulting shortfall will be carried forward and added to the
amount holders of each such Class of Offered Certificates will be entitled to
receive on the next Distribution Date. Such a shortfall could occur, for
example, if losses realized on the Mortgage Loans were exceptionally high or
were concentrated in a particular month. Any such amount so carried forward will
not bear interest.
PRINCIPAL
On each Distribution Date, the Class A-1 Certificates will be entitled to
receive a amount allocable to principal equal to the lesser of (x) Available
Funds reduced by the amount of interest distributed on the Senior Certificates
on such Distribution Date and (y) the sum of (i) the Class A-1 Percentage of (a)
all scheduled payments of principal due on each Mortgage Loan on the Due Date
for such Mortgage Loan in the month in which such Distribution Date occurs, (b)
the Principal Balance of each Mortgage Loan that became a Liquidated Mortgage
Loan during the month preceding the month of such Distribution Date, (c) the
Pooling Principal Balance of each Mortgage Loan that was repurchased by the
Seller or
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another person as of such Distribution Date pursuant to the Pooling Agreement,
(d) certain amounts that may be required to be paid in connection with any
substitution of Mortgage Loans and (e) any net insurance or liquidation proceeds
received during the month preceding the month of such Distribution Date
allocable to recoveries of principal of Mortgage Loans that are not yet
Liquidated Mortgage Loans and (ii) the Class A-1 Prepayment Percentage of all
partial principal prepayments and of all principal prepayments in full
("Principal Prepayments") received during such preceding month.
On each Distribution Date, the Class M-1 Certificates will be entitled to
receive an amount allocable to principal equal to the lesser of (x) Available
Funds reduced by the amount of interest and principal distributed on the Senior
Certificates and interest on the Class M-1 Certificates, in each case on such
Distribution Date and (y) the sum of (i) the applicable Subordinate Percentage
Allocation of the sum of the amounts calculated pursuant to clauses (a) through
(e) in the preceding paragraph for such Distribution Date and (ii) the
applicable Subordinate Prepayment Percentage Allocation of all Principal
Prepayments received during the preceding month.
"Principal Balance" of a Mortgage Loan as of any Due Date is the unpaid
principal balance of such Mortgage Loan as specified in the amortization
schedule at the time relating thereto (before any adjustment to such schedule by
reason of moratorium or similar waive or grace period) for such Due Date, after
giving effect to any previous partial payments and to the payment of principal
due on such Due Date and irrespective of any delinquency in payment by the
Mortgagor. The "Pool Principal Balance" will equal the aggregate of the
Principal Balances of all Mortgage Loans. The "Due Date" for a Mortgage Loan is
the first day of each calendar month on which the scheduled installment of
principal and interest with respect thereto is due.
The "Class A-1 Percentage" for any Distribution Date is the percentage
obtained by dividing the sum of the Class Certificate Balance of the Class A-1
Certificates immediately prior to such date by the aggregate of the Class
Certificate Balances of all Classes of Certificates immediately prior to such
date. The "Subordinate Percentage" for any Distribution Date is the percentage
calculated as the difference between 100% and the Class A-1 Percentage for such
date.
The "Subordinate Percentage Allocation" for any Distribution Date and Class
of Subordinate Certificates, is equal to a fraction, the numerator of which is
the related Class Certificate Balance immediately prior to such date and the
denominator of which is the aggregate of the Class Certificate Balances of all
Subordinate Certificates immediately prior to such date.
The "Class A-1 Prepayment Percentage" for any Distribution Date occurring
during the five years beginning on the first Distribution Date will, except as
provided below, equal 100%. Thereafter, the Class A-1 Prepayment Percentage will
be subject to gradual reduction as described in the following paragraph. This
disproportionate allocation of certain unscheduled payments in respect of
principal will have the effect of accelerating the amortization of the Class A-1
Certificates while, in the absence of Realized Losses, increasing the interest
in the principal balance of the Mortgage Loans evidenced by the Subordinate
Certificates. Increasing the respective interest of the Subordinate Certificates
relative to that of the Senior Certificates is intended to preserve the
availability of the subordination provided by the Subordinate Certificates.
The "Class A-1 Prepayment Percentage" for any Distribution Date occurring
on or after the fifth anniversary of the first Distribution Date will be as
follows: for any Distribution Date in the first year thereafter, the Class A-1
Percentage for such Distribution Date plus 70% of the Subordinate Percentage for
such Distribution Date; for any distribution Date in the second year thereafter,
the Class A-1 Percentage for such Distribution Date plus 60% of the Subordinate
Percentage for such Distribution Date; for any Distribution Date in the third
year thereafter, the Class A-1 Percentage for such Distribution Date plus 40% of
the Subordinate Percentage for such Distribution Date; for any Distribution Date
in the fourth year thereafter, the Class A-1 Percentage for such Distribution
Date plus 20% of the Subordinate Percentage for such Distribution Date; and for
any Distribution Date thereafter, the Class A-1 Percentage for such Distribution
Date (unless on any of the foregoing Distribution Dates the Class A-1 Percentage
exceeds the initial Class A-1 Percentage, in which case the Class A-1 Prepayment
Percentage for such Distribution Date will once again equal 100%).
Notwithstanding the foregoing, no reduction to the Senior Prepayment Percentage
will occur if [(i) as of the first Distribution Date as to which any such
reduction applies, the dollar amount of all monthly payments on the Mortgage
Loans due in each of the preceding six months that are delinquent 60 days or
more exceeds a monthly average of [ ]% of all monthly payments due in such month
(including for this purpose any Mortgage Loans in foreclosure and Mortgage Loans
with respect to which the related Mortgaged Property has been acquired by the
Pool), or (ii) cumulative Realized Losses with respect to the Mortgage Loans
exceed (a) with respect to the Distribution Date in [ ], [ %] of the Class
Certificate Balance of the Subordinate Certificates as of the Cut-off Date (the
"Original Subordinate Principal Balance"), (b) with respect to the Distribution
Date in [ ], [ %] of the Original Subordinate Principal Balance, (c) with
respect to the Distribution Date in [ ], [ %] of the Original Subordinate
Principal Balance, (d) with respect to the Distribution Date in [ ], [ %] of the
Original Subordinate Principal Balance, and (e) with respect to the Distribution
Date in [ ], [ %] of the Original Subordinate Principal Balance.
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The "Subordinate Prepayment Percentage" for any Distribution Date is 100%
minus the Senior Prepayment Percentage for such Distribution Date. The
"Subordinate Prepayment Percentage Allocation" for any Distribution Date and
Class of Subordinate Certificates, is equal to the product of the Subordinate
Prepayment Percentage and a fraction, the numerator of which is the related
Class Certificate Balance immediately prior to such date and the denominator of
which is the aggregate of the Class Certificate Balances of all Subordinate
Certificates immediately prior to such date.
If on any Distribution Date the allocation to the Class of Certificates
then entitled to principal of full and partial principal prepayments and other
amounts in the percentages required above would reduce the outstanding Class
Certificate Balance of such Class below zero, the distribution to such Class of
Certificates will be limited to the amount necessary to reduce the related Class
Certificate Balance to zero and any remaining portion thereof will be
distributed to the Class of Certificates next entitled to distributions of
principal.
ALLOCATION OF LOSSES
On each Distribution Date, any Realized Loss on a Mortgage Loan, other than
any Excess Loss, will be allocated first, sequentially, to the Class B-2, Class
B-1 and Class M-1 Certificates, in that order, in each case until the respective
Class Certificate Balance thereof is reduced to zero, and thereafter to the
Class A-1 Certificates.
On each Distribution Date, Excess Losses will be allocated pro rata among
the Class A-1 Certificates and the Subordinate Certificates based upon their
respective Class Certificate Balances.
In general, a "Realized Loss" means, with respect to a Liquidated Mortgage
Loan, the amount by which the remaining unpaid principal balance of the Mortgage
Loan exceeds the amount of liquidation proceeds applied to the principal balance
of the Mortgage Loan. "Excess Losses" are (i) Special Hazard Losses in excess of
the Special Hazard Loss Coverage Amount, (ii) Bankruptcy Losses in excess of the
Bankruptcy Loss Coverage Amount and (iii) Fraud Losses in excess of the Fraud
Loss Coverage Amount. "Bankruptcy Losses" are losses that are incurred as a
result of Debt Service Reductions and Deficient Valuations. "Special Hazard
Losses" are Realized Losses in respect of Special Hazard Mortgage Loans. "Fraud
Losses" are losses sustained on a Liquidated Mortgage Loan by reason of a
default arising from fraud, dishonesty or misrepresentation. See "Credit Support
- -- Subordination of Subordinate Certificates" herein.
A "Liquidated Mortgage Loan" is a defaulted Mortgage Loan as to which the
Master Servicer has determined that all recoverable liquidation and insurance
proceeds have been received. A "Special Hazard Mortgage Loan" is a Liquidated
Mortgage Loan as to which the ability to recover the full amount due thereunder
was substantially impaired by a hazard not insured against under a standard
hazard insurance policy of the type described in the Prospectus under "Credit
Support -- Special Hazard Insurance Policies." See "Credit Support --
Subordination of Subordinate Certificates" herein.
The "Class Certificate Balance" of any Class of Certificates as of any
Distribution Date is the initial Class Certificate Balance thereof, reduced by
the sum of (i) all amounts previously distributed to holders of such Class as
payments of principal and (ii) the amount of Realized Losses and Excess Losses
allocated to such Class, as described in the preceding paragraph.
TERMINATION; OPTIONAL TERMINATION
The circumstances under which the obligations created by the Pooling
Agreement will terminate in respect of the Certificates are described in
"General Provisions of Pooling Agreements -- Termination; Repurchase of Mortgage
Loans and Mortgage Certificates" in the Prospectus. [The Master Servicer will
have the option to purchase all remaining Mortgage Loans and other assets in the
Pool, thereby effecting early retirement of the Certificates [and causing the
termination of the Pool's status as a REMIC,] but such option will not be
exercisable until such time as the Pool Principal Balance as of the Distribution
Date on which the purchase proceeds are to be distributed to Certificateholders
is less than [ ]% of the Cut-off Date Pool Principal Balance. Distributions in
respect of any such optional termination will be paid to Certificateholders in
order of their priority of distribution as described under "-- Priority of
Distributions Among Classes of Certificates." The proceeds from such a
distribution may not be sufficient to distribute the full amount to which each
Class is entitled if the purchase price is based in part on the fair market
value of the property acquired upon foreclosure of a Mortgage Loan and such fair
market value is less than the Principal Balance of the related Mortgage Loan. In
no event will the trust created by the Pooling Agreement continue beyond the
later of (a) the repurchase described above, (b) the expiration of 21 years from
the death of the survivor of the person named in the Pooling Agreement and (c)
[ ]. The termination of the Pool will be effected in a manner consistent with
applicable federal income tax regulations [and the status of the Pool as a
REMIC.]
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LAST SCHEDULED DISTRIBUTION DATE
The Last Scheduled Distribution Date for each Class of Offered Certificates
is the latest date on which the Class Certificate Balance is expected to be
reduced to zero, and has been calculated on the basis of the assumptions
described above under "Prepayment and Yield Considerations -- Assumptions
Relating to Tables" except for the following additional assumptions: [describe].
Since the rate of distributions in reduction of the Class Certificate Balance on
each Class of Offered Certificates will depend on the rate of payment (including
prepayments) of the Mortgage Loans as well as the frequency and severity of
losses experienced by the Pool, the Class Certificate Balance of any such Class
could reach zero significantly earlier or later than its Last Scheduled
Distribution Date. The rate of payments on the Mortgage Loans will depend on
their particular characteristics, as well as on prevailing interest rates from
time to time and other economic factors, and no assurance can be given as to the
actual payment experience of the Mortgage Loans. See "Maturity, Prepayment and
Weighted Average Life of Certificates" in the Prospectus.
EVENTS OF DEFAULT
Events of Default will consist of: (i)(a) any failure by the Master
Servicer to make an Advance which continues unremedied for two business days or
(b) any failure by the Master Servicer to make or cause to be made any other
required payment pursuant to the Pooling Agreement which continues unremedied
for five business days (ii) any failure by the Master Servicer to observe or
perform in any material respect any other of its covenants or agreements in the
Pooling Agreement, which continues unremedied for 60 days after the giving of
written notice of such failure to the Master Servicer by the Trustee or to the
Master Servicer and the Trustee by holders of Certificates evidencing not less
than 25% of the Pool Principal Balance; (iii) certain events of insolvency,
readjustment of debt, marshalling of assets and liabilities or similar
proceedings, and certain actions by or on behalf of the Master Servicer
indicating its insolvency or inability to pay its obligations; or (iv) the
Master Servicer assigns or delegates its duties or rights under the Pooling
Agreement in contravention of the provisions therein.
RIGHTS UPON EVENT OF DEFAULT
So long as an Event of Default remains unremedied, the Trustee or holders
of Certificates evidencing not less than 51% of the Pool Principal Balance by
notice in writing to the Master Servicer may terminate all of the rights and
obligations of the Master Servicer under the Pooling Agreement and in and to the
Mortgage Loans, whereupon the Trustee will succeed to all of the
responsibilities, duties, and liabilities of the Master Servicer under the
Pooling Agreement, including the obligation to make Advances; provided, however,
that the Trustee shall have no obligation whatsoever with respect to any
liability incurred by the Master Servicer at or prior to the receipt by the
Master Servicer of such notice. Notwithstanding the foregoing, in the event of
an Event of Default arising from the Master Servicer's failure to make an
Advance as described in clause (i)(a) in the preceding paragraph, the Trustee
shall terminate all of the rights and obligations of the Master Servicer under
the Pooling Agreement and in and to the Mortgage Loans as described in the
preceding sentence.
[No Certificateholder, solely by virtue of such holder's status as a
Certificateholder, will have any right under the Pooling Agreement to institute
any proceeding with respect thereto, unless such holder previously has given to
the Trustee written notice of an Event of Default and unless the holders of
Certificates evidencing not less than 25% of the Pool Principal Balance have
made written request to the Trustee to institute such proceeding in its own name
as Trustee thereunder and have offered to the Trustee reasonable indemnity, and
the Trustee for [ ] days has neglected or refused to institute any such
proceeding.]
THE TRUSTEE
[ ] will be the Trustee under the Pooling Agreement. The Sponsor and [ ]
may maintain other banking relationships in the ordinary course of business with
the Trustee. Offered Certificates may be surrendered at the Corporate Trust
Office of the Trustee located at [ ], Attention: [ ] or at such other addresses
as the Trustee may designate from time to time.
PREPAYMENT AND YIELD CONSIDERATIONS
GENERAL
Because principal payments on the Mortgage Loans will be distributed to
Certificateholders as they are received from Mortgagors, the rate of principal
payments on the Offered Certificates, the aggregate amount of each interest
payment on the interest bearing Offered Certificates and the yield to maturity
of Offered Certificates purchased at a price other than par
S-22
<PAGE>
are directly related to the rate of payments of principal on the Mortgage Loans.
The principal payments on the Mortgage Loans may be in the form of scheduled
principal payments or principal prepayments (for this purpose, the term
"principal prepayment" includes prepayments and any other recovery of principal
in advance of its scheduled Due Date, including liquidations due to default,
casualty, condemnation and the like). Any such prepayments will result in
distributions to holders of the Offered Certificates of amounts which would
otherwise be distributed over the remaining term of the Mortgage Loans. See
"Maturity, Prepayment Considerations and Weighted Average Life of the
Certificates" in the Prospectus. The rate at which mortgage loans in general
prepay may be influenced by a number of factors, including general economic
conditions, mortgage market interest rates, availability of mortgage funds and
homeowner mobility. In general, if prevailing interest rates fall significantly
below the interest rates on the Mortgage Loans, the Mortgage Loans are likely to
prepay at higher rates than if prevailing rates remain at or above the interest
rates on the Mortgage Loans. Conversely, if interest rates rise above the
interest rates on the Mortgage Loans, the rate of prepayment would be expected
to decrease.
The timing of changes in the rate of prepayments may significantly affect
the actual yield to investors, even if the average rate of principal prepayments
is consistent with the expectations of investors. In general, the earlier the
payment of principal of the Mortgage Loans the greater the effect on an
investor's yield to maturity. As a result, the effect on an investor's yield of
principal prepayments occurring at a rate higher (or lower) than the rate
anticipated by the investor during the period immediately following the issuance
of the Certificates will not be offset by a subsequent like reduction (or
increase) in the rate of principal prepayments. The yield on the Class X
Certificates will be highly sensitive to the rate and timing of prepayments on
the Mortgage Loans. A rapid rate of principal prepayments on the Mortgage Loans
(as defined below) may have a material negative effect on the yield of the Class
X Certificates. Investors must make their own decisions as to the appropriate
prepayment assumptions to be used in deciding whether to purchase the Offered
Certificates. See "-- Sensitivity of the Class X Certificates" herein.
As described herein under "Description of the Certificates -- Principal",
the Class A-1 Prepayment Percentage of Principal Prepayments and excluding for
this purpose, liquidations due to default, casualty, condemnation and the like
will be initially distributed to the Class A-1 Certificates. This may result in
all (or a disproportionate percentage) of such principal prepayments being
distributed to holders of the Class A-1 Certificates and none (or less than
their pro rata share) of such principal prepayments being distributed to holders
of Subordinate Certificates during the periods of time described in the
definition of "Class A-1 Prepayment Percentage."
[Mortgagors are permitted to prepay the Mortgage Loans, in whole or in
part, at any time without penalty.] The rate of payment of principal may also be
affected by any repurchase of the Mortgage Loans permitted or required by the
Pooling Agreement. See "The Mortgage Pool -- Assignment of Mortgage Loans" and
"Description of the Certificates -- Termination; Optional Termination" herein.
Each monthly interest payment on a Mortgage Loan will be calculated as the
product of one-twelfth of the applicable Mortgage Rate at the time of such
calculation and the then unpaid principal balance on such Mortgage Loan. The Net
Mortgage Rate with respect to each Mortgage Loan will be similarly calculated on
a loan-by-loan basis, by subtracting from the applicable Mortgage Rate the
related Expense Rate.
The effective yield to holders of interest bearing Offered Certificates
will be reduced slightly below the yield otherwise produced by the applicable
Pass-Through Rate because, while interest will accrue from the first day of each
month, the distribution of such interest will not be made until the [ ]th day of
the month following the month of accrual.
[Substantially all] of the Mortgage Loans will include due-on-sale clauses
which allow the holder of the Mortgage Loan to demand payment in full of the
remaining principal balance upon sale or certain transfers of the property
securing such Mortgage Loan. The Master Servicer, or the applicable servicer,
will enforce "due-on-sale" clauses to the extent permitted by applicable law.
Each Mortgage Note which contains "due-on-sale" provisions permits the holder of
the Mortgage Note to accelerate the maturity of the Mortgage Loan upon
conveyance by the Mortgagor of the underlying Mortgaged Property. The Master
Servicer, or the applicable servicer, will enforce any "due-on-sale" clause to
the extent it has knowledge of the conveyance or proposed conveyance of the
underlying Mortgaged Property and reasonably believes that it is entitled to do
so under applicable law; provided, however, that the Master Servicer or any such
servicer will not take any action in relation to the enforcement of any
"due-on-sale" provisions which would impair or threaten to impair any recovery
under any related Primary Mortgage Insurance Policy. See "Maturity, Prepayment
Considerations and Weighted Average Life of Certificates" in the Prospectus.
Acceleration of Mortgage Loans as a result of enforcement of such "due-on-sale"
provisions in connection with transfers of the related Mortgaged Properties or
the occurrence of certain other events resulting in acceleration would affect
the level of prepayments on the Mortgage Loans, thereby affecting the weighted
average lives of the Classes of the Offered Certificates.
S-23
<PAGE>
[See "Description of the Certificates -- Termination; Optional Termination"
herein in the Prospectus for a description of the Master Servicer's option to
repurchase the Mortgage Loans when the Pool Principal Balance is less than [ ]%
of the Cut-off Date Pool Principal Balance. The Seller may be required to
repurchase Mortgage Loans because of defective documentation or material
breaches in its representations and warranties with respect to such Mortgage
Loans. Any such repurchases will shorten the weighted average lives of the
Classes of Offered Certificates.
[Although each of the Mortgage Loans bears interest at an adjustable
Mortgage Rate, the [semi-annual] [annual] adjustments of the Mortgage Rate for
any Mortgage Loan will not exceed the Periodic Rate Cap and the Mortgage Rate
will in no event exceed the Maximum Rate for such Mortgage Loan, regardless of
the level of interest rates generally or the rate otherwise produced by the
Index and the Gross Margin. [In addition, such adjustments will be subject to
rounding to the nearest one-eighth of 1%.]
ASSUMPTIONS RELATING TO TABLES
The Decrement Tables have been prepared on the basis of the following
assumptions (the "Assumptions"): [describe assumptions]. Although the
characteristics of the mortgage loans for the Decrement Tables have been
prepared on the basis of the characteristics of the Mortgage Loans which are
expected to be in the Pool, there is no assurance that the Assumptions will
reflect the actual characteristics or performance of the Mortgage Loans or that
the performance of the Offered Certificates will conform to the results set
forth in the tables.
WEIGHTED AVERAGE LIVES OF THE OFFERED CERTIFICATES
Weighted average life refers to the average amount of time that will elapse
from the date of issuance of an Offered Certificate until each dollar in
reduction of the Class Certificate Balance thereof is distributed to the
investor. The weighted average lives of such Classes of Offered Certificates
will be influenced by, among other things, the rate at which principal of the
Mortgage Loans is paid, which may be in the form of scheduled amortization or
prepayments (for this purpose, the term "prepayments" includes prepayments and
liquidations due to default, casualty, condemnation and the like), the timing of
changes in such rate of payments and the priority sequence of distributions of
principal of such Offered Certificates. The interaction of the foregoing factors
may have different effects on each Class of Offered Certificates and the effects
on any such Class may vary at different times during the life of such Class.
Accordingly, no assurance can be given as to the weighted average life of any
such Class of Offered Certificates. For an example of how the weighted average
lives of the Offered Certificates are affected by the foregoing factors at
various constant percentages of PSA, see the Decrement Tables below.
Prepayments on mortgage loans are commonly measured relative to a
prepayment standard or model. The model used in this Prospectus Supplement is
the Prepayment Standard Assumption ("PSA"), which represents an assumed rate of
prepayment each month relative to the then outstanding principal balance of a
pool of mortgage loans for the life of such mortgage loans. A prepayment
assumption of 100% PSA assumes constant prepayment rates of 0.2% per annum of
the then outstanding principal balance of such mortgage loans in the first month
of the life of the mortgage loans and an additional 0.2% per annum in each month
thereafter until the thirtieth month. Beginning in the thirtieth month and in
each month thereafter during the life of the mortgage loans, 100% PSA assumes a
constant prepayment rate of 6% per annum each month. As used in the table below,
"0% PSA" assumes prepayment rates equal to 0% of PSA, i.e., no prepayments.
Correspondingly, "125% PSA" assumes prepayment rates equal to 125% of PSA, and
so forth. PSA does not purport to be a historical description of prepayment
experience or a prediction of the anticipated rate of prepayment of any pool of
mortgage loans, including the Mortgage Loans. The Sponsor believes that no
existing statistics of which it is aware provide a reliable basis for holders of
Offered Certificates to predict the amount or the timing of receipt of
prepayments on the Mortgage Loans.
The Decrement Tables set forth below have been prepared on the basis of the
Assumptions described above under "-- Assumptions Relating to Tables." There
will likely be discrepancies between the characteristics of the actual Mortgage
Loans included in the Pool and the characteristics of the Mortgage Loans assumed
in preparing the Decrement Tables. Any such discrepancy may have an effect upon
the percentages of initial Class Certificate Balances outstanding set forth in
the Decrement Tables (and the weighted average lives of the Offered
Certificates). In addition, to the extent that the Mortgage Loans that actually
are included in the Pool have characteristics that differ from those assumed in
preparing the following Decrement Tables, the Class Certificate Balance of any
such Class of Offered Certificates will be reduced to zero earlier or later than
indicated by such Decrement Tables.
S-24
<PAGE>
Furthermore, the information contained in the Decrement Tables with respect
to the weighted average life of any Offered Certificate is not necessarily
indicative of the weighted average life of such Class of Offered Certificate
that might be calculated or projected under different or varying prepayment
assumptions.
It is not likely that (i) all of the Mortgage Loans will have the Mortgage
Rates or remaining terms to maturity assumed or (ii) the Mortgage Loans will
prepay at the indicated percentage of PSA until maturity. In addition, the
diverse remaining terms to maturity of the Mortgage Loans (which includes many
recently originated Mortgage Loans) could produce slower or faster distributions
in reduction of Class Certificate Balances than indicated in the Decrement Table
at the various percentages of PSA specified.
Based upon the foregoing assumptions, the following Decrement Tables
indicate the projected weighted average life of each Class of the Offered
Certificates and set forth the percentages of the initial Class Certificate
Balance of each such Class that would be outstanding after each of the dates
shown at various constant percentages of the PSA.
S-25
<PAGE>
Percentage of Initial Class Certificate Balance
Outstanding For the Offered Certificates at
the Respective Percentages of PSA Set Forth
Below:
<TABLE>
<CAPTION>
Class A-1 Class M-1
------------------------------------------ ---------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Distribution Date % % % % % % % % % %
----------------- -- -- -- -- -- -- -- -- -- --
Initial Class
Certificate Balance
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
Weighted Average
Life
(in years)1
Years to Maturity
- --------
</TABLE>
1 The weighted average life of an Offered Certificate is determined by (i)
multiplying the amount of each distribution in reduction of the Class
Certificate Balance thereof by the number of years from the date of the
issuance of the Offered Certificate to the related Distribution Date, (ii)
adding the results and (iii) dividing the sum by the initial Class
Certificate Balance of the Offered Certificates of such Class.
S-26
<PAGE>
YIELD ON CLASS X CERTIFICATES
The significance of the effects of prepayments on the Class X Certificates
is illustrated in the following table entitled "Sensitivity of the Class X
Certificates to Prepayments," which shows the pre-tax yield (on a corporate bond
equivalent basis) to holders of such Certificates under different constant
percentages of the Prepayment Assumption. The yields of such Certificates set
forth in the following table were calculated using the assumptions specified
above under "--Decrement Tables" and assuming that the purchase price of the
Class X Certificates is approximately [ ]% for 100% of such Class of
Certificates and such Certificates are purchased on [date].
AS INDICATED IN THE FOLLOWING TABLE, THE YIELD TO INVESTORS IN THE CLASS X
CERTIFICATES WILL BE HIGHLY SENSITIVE TO THE RATE OF PRINCIPAL PAYMENTS
(INCLUDING PREPAYMENTS) OF THE MORTGAGE LOANS (ESPECIALLY THOSE WITH HIGH NET
MORTGAGE RATES), WHICH GENERALLY CAN BE PREPAID AT ANY TIME. ON THE BASIS OF THE
ASSUMPTIONS DESCRIBED ABOVE, THE YIELD TO MATURITY ON THE CLASS X CERTIFICATES
WOULD BE 0% IF PREPAYMENTS WERE TO OCCUR AT A CONSTANT RATE OF APPROXIMATELY
[ ]% OF THE PREPAYMENT ASSUMPTION. USING SUCH ASSUMPTIONS, IF THE ACTUAL
PREPAYMENT RATE OF THE MORTGAGE LOANS WERE TO EXCEED THE FOREGOING RATE FOR AS
LITTLE AS ONE MONTH (WHILE EQUALING SUCH RATE FOR ALL OTHER MONTHS), INVESTORS
UIN THE CLASS X CERTIFICATES WOULD NOT RECOVER FULLY THEIR INITIAL INVESTMENTS.
It is not likely that the Mortgage Loans will prepay at a constant rate
until maturity or that all of the Mortgage Loans will prepay at the same rate or
that they will have the characteristics assumed. There can be no assurance that
the Mortgage Loans will prepay at any of the rates shown in the table or at any
other particular rate. The timing of changes in the rate of prepayments may
affect significantly the yield realized by a holder of a Class X Certificate and
there can be no assurance that the pre-tax yield to an investor in the Class X
Certificates will correspond to any of the pre-tax yields shown herein. Each
investor must make its own decision as to the appropriate prepayment assumptions
to be used in deciding whether or not to purchase a Class X Certificate.
<TABLE>
<CAPTION>
Sensitivity of the Class X
Certificates to Prepayments
(Pre-Tax Yields to Maturity)
% of Prepayment Assumption
------------------------------------------------------------------------
50% 75% 100% 125% 200%
--- --- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Pre-Tax Yields to Maturity............................... % % % % %
The yields set forth in the preceding table were calculated by determining
the monthly discount rates which, when applied to the assumed stream of cash
flows to be paid on the Class X Certificates, would cause the discounted present
value of such assumed stream of cash flows to equal the assumed purchase price
of the Class X Certificates indicated above and converting such monthly rates to
corporate bond equivalent rates. Such calculation does not take into account
variations that may occur in the interest rates at which investors may be able
to reinvest funds received by them as payments of interest on the Class X
Certificates and consequently does not purport to reflect the return on any
investment in the Class X Certificates when such reinvestment rates are
considered.
S-27
<PAGE>
CREDIT SUPPORT
SUBORDINATION OF SUBORDINATE CERTIFICATES
The rights of Subordinate Certificateholders to receive distributions with
respect to the Mortgage Loans will be subordinated to such rights of Senior
Certificateholders, and the rights of the holders of the Class B-1 and Class B-2
Certificates to receive such distributions will be further subordinated to such
rights of the Mezzanine Certificates, in each case only to the extent described
herein. The subordination of the Subordinate Certificates to the Senior
Certificates and the subordination of the Class B-1 and Class B-2 Certificates
to the Mezzanine Certificates is intended to increase the likelihood of receipt,
respectively, by Senior Certificateholders and Mezzanine Certificateholders,
respectively, of the maximum amount to which they are entitled on any
Distribution Date and to provide such holders protection against Realized
Losses, other than Excess Losses.
In addition, the Subordinate Certificates will provide limited protection
against Special Hazard Losses, Bankruptcy Losses and Fraud Losses up to the
Special Hazard Loss Coverage Amount, Bankruptcy Loss Coverage Amount and Fraud
Loss Coverage Amount, respectively, as described below.
The Subordinated Certificates will provide protection to the Classes of
Certificates of higher relative priority against (i) Special Hazard Losses in an
initial amount expected to be up to approximately $[ ] (the "Special Hazard Loss
Coverage Amount"), (ii) Bankruptcy Losses in an initial amount expected to be up
to approximately $[ ] (the "Bankruptcy Loss Coverage Amount") and (iii) Fraud
Losses in an initial amount expected to be up to approximately $[ ] (the "Fraud
Loss Coverage Amount").
The Special Hazard Loss Coverage Amount will be reduced, from time to time,
to be an amount equal on any Distribution Date to the lesser of [(a) the
greatest of (i) 1% of the aggregate of the principal balances of the Mortgage
Loans, (ii) twice the principal balance of the largest Mortgage Loan and (iii)
the aggregate principal balances of the Mortgage Loans secured by Mortgaged
Properties located in the single [California] postal zip code area having the
highest aggregate principal balance of any such zip code area and (b) the
Special Hazard Loss Coverage Amount as of the Closing Date less the amount, if
any, of losses attributable to Special Hazard Mortgage Loans incurred since the
Closing Date.] All principal balances for the purpose of this definition will be
calculated as of the first day of the month preceding such Distribution Date
after giving effect to scheduled installments of principal and interest on the
Mortgage Loans then due, whether or not paid.
The Fraud Loss Coverage Amount will be reduced, from time to time, by the
amount of Fraud Losses allocated to the Certificates. In addition, on each
anniversary of the Cut-off Date, the Fraud Loss Coverage Amount will be reduced
as follows: [(a) on the first and second anniversaries of the Cut-off Date, to
an amount equal to the excess of [ %] of the Cut-off Date Pool Principal Balance
over the cumulative amount of Fraud Losses allocated to the Certificates, (b) on
the third and fourth anniversaries of the Cut-off Date, to an amount equal to
the excess of [ %] of the Cut-off Date Pool Principal Balance over the
cumulative amount of Fraud Losses allocated to the Certificates and (c) on the
fifth anniversary of the Cut-off Date, to zero.]
The Bankruptcy Loss Coverage Amount will be reduced, from time to time, by
the amount of Bankruptcy Losses allocated to the Certificates.
The amount of coverage provided by the Subordinate Certificates for Special
Hazard Losses, Bankruptcy Losses and Fraud Losses may be cancelled or reduced
from time to time for each of the risks covered, provided that the then current
ratings of the Certificates assigned by the Rating Agencies are not adversely
affected thereby. [In addition, a reserve fund or other form of credit support
may be substituted for the protection provided by the Subordinated Certificates
for Special Hazard Losses, Bankruptcy Losses and Fraud Losses.]
As used herein, a "Deficient Valuation" is a bankruptcy proceeding whereby
the bankruptcy court may establish the value of the Mortgaged Property at an
amount less than the then outstanding principal balance of the Mortgage Loan
secured by such Mortgaged Property or may reduce the outstanding principal
balance of a Mortgage Loan. In the case of a reduction in the value of the
related Mortgaged Property, the amount of the secured debt could be reduced to
such value, and the holder of such Mortgage Loan thus would become an unsecured
creditor to the extent the outstanding principal balance of such Mortgage Loan
exceeds the value so assigned to the Mortgaged Property by the bankruptcy court.
In addition, certain other modifications of the terms of a Mortgage Loan can
result from a bankruptcy proceeding, including the reduction (a "Debt Service
Reduction") of the amount of the monthly payment on the related Mortgage Loan.
Notwithstanding the foregoing, no such occurrence shall be considered a Debt
Service Reduction or Deficient Valuation so long as the Master Servicer is
pursuing any other remedies that may be available with respect to the related
Mortgage Loan and (i) such Mortgage Loan
S-28
<PAGE>
is not in default with respect to payment due thereunder or (ii) scheduled
monthly payments of principal and interest are being advanced by the Master
Servicer without giving effect to any Debt Service Reduction.
USE OF PROCEEDS
The Sponsor will apply the net proceeds of the sale of the Offered
Certificates [(together with the net proceeds of the sale of the Class B-1 and
Class B-2 Certificates)] against the purchase price of the Mortgage Loans.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
[An election will be made to treat the Pool as a "real estate mortgage
investment conduit" ("REMIC") for federal income tax purposes under the Internal
Revenue Code of 1986, as amended (the "Code"). The Offered Certificates will be
designated as "regular interests" in the REMIC and the Residual Certificate will
be designated as the sole class of residual interests in the REMIC. See "Certain
Federal Income Tax Consequences -- REMIC Certificates" in the Prospectus.
Offered Certificates. The Offered Certificates generally will be treated as
debt instruments issued by the REMIC for federal income tax purposes. Income on
the Offered Certificates must be reported under an accrual method of
accounting.]
The Class X Certificates will, and the other Classes of Offered
Certificates may, depending on their respective issue prices, be treated for
federal income tax purposes as having been issued with an amount of original
issue discount equal to the difference between its principal balance and its
issue price. See "Certain Federal Income Tax Consequences" in the Prospectus.
For purposes of determining the amount and the rate of accrual of original issue
discount and market discount, the Sponsor intends to assume that there will be
prepayments on the Mortgage Loans at a rate equal to [ ]% PSA.
[The Offered Certificates will be treated as regular interests in a REMIC
under section 860G of the Code. Accordingly, the Offered Certificates will be
treated as (i) qualifying real property loans within the meaning of section
593(d)(1) of the Code, (ii) assets described in section 7701(a)(19)(C) of the
Code, and (iii) "real estate assets" within the meaning of section 856(c)(5) of
the Code, in each case to the extent described in the Prospectus. Interest on
the Offered Certificates will be treated as interest on obligations secured by
mortgages on real property within the meaning of section 856(c)(3)(B) of the
Code to the same extent that the Offered Certificates are treated as real estate
assets. See "Certain Federal Income Tax Consequences" in the Prospectus.]
ERISA CONSIDERATIONS
A fiduciary of any employee benefit plan subject to the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"), or the Code, should carefully
review with its legal advisors whether the purchase or holding of an Offered
Certificate could give rise to a transaction prohibited or not otherwise
permissible under ERISA or the Code. No Class M-1 Certificate may be transferred
unless the transferor delivers to the Trustee (i) a certificate satisfactory to
the Trustee to the effect that such transferee neither is nor is acting on
behalf of a plan subject to ERISA or (ii) an opinion of counsel satisfactory to
the Trustee to the effect that such transfer will not result in the assets of
the Pool being "plan assets." See "ERISA Considerations" in the Prospectus.
[The U.S. Department of Labor has granted to [ ], an administrative
exemption (Prohibited Transaction Exemption [ ]; Exemption Application No. [ ])
(the "Exemption") from certain of the prohibited transaction rules of ERISA and
the related excise tax provisions of Section 4975 of the Code with respect to
the initial purchase, the holding and the subsequent resale by Plans of
certificates in pass-through trusts that consist of certain receivables, loans
and other obligations that meet the conditions and requirements of the
Exemption. The Exemption applies to mortgage loans such as the Mortgage Loans in
the Pool.
For a general description of the Exemption and the conditions that must be
satisfied for the Exemption to apply, see "ERISA Considerations" in the
Prospectus.
The Underwriter believes that the Exemption will apply to the acquisition
and holding of the Class A-1 Certificates and the Class X Certificates by Plans
and that all conditions of the Exemption other than those within the control of
the investors will be met. In addition, as of the date hereof, there is no
single Mortgagor that is the obligor on 5% of the Mortgage Loans included in the
Pool by aggregate unamortized principal balance of the assets of the Pool.
S-29
<PAGE>
Prospective Plan investors should consult with their legal advisors
concerning the impact of ERISA and the Code, the applicability of PTCE 83-1
described in the Prospectus and the Exemption, and the potential consequences in
their specific circumstances, prior to making an investment in the Class A-1
Certificates or the Class X Certificates. Moreover, each Plan fiduciary should
determine whether under the general fiduciary standards of investment prudence
and diversification, an investment in the Class A-1 Certificates or the Class X
Certificates is appropriate for the Plan, taking into account the overall
investment policy of the Plan and the composition of the Plan's investment
portfolio.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in the Underwriting Agreement
between the Sponsor and [ ], (the "Underwriter"), the Sponsor has agreed to sell
to the Underwriter, and the Underwriter has agreed to purchase from the Sponsor,
the Offered Certificates. Distribution of the Offered Certificates will be made
by the Underwriter from time to time in negotiated transactions or otherwise at
varying prices to be determined at the time of sale. In connection with the sale
of the Offered Certificates, the Underwriter may be deemed to have received
compensation from the Sponsor in the form of underwriting discounts.
The Sponsor has been advised by the Underwriter that it intends to make a
market in the Offered Certificates but has no obligation to do so. There can be
no assurance that a secondary market for the Offered Certificates will develop
or, if it does develop, that it will continue.
The Sponsor has agreed to indemnify the Underwriter against, or make
contributions to the Underwriter with respect to, certain liabilities, including
liabilities under the Securities Act of 1933, as amended.
LEGAL MATTERS
The validity of the Certificates, including certain federal income tax
consequences with respect thereto, will be passed upon for the Sponsor by Brown
& Wood LLP. [ ] will pass upon certain legal matters on behalf of the
Underwriter.
CERTIFICATE RATING
It is a condition to the issuance of the Offered Certificates that the
Offered Certificates be rated [Aaa] and [AAA] by [ ] and [ ].
Ratings on mortgage pass-through certificates address the likelihood of
receipt by Certificateholders of payments required under the Pooling Agreement.
[ ]'s and [ ]'s ratings take into consideration the credit quality of
the Mortgage Pool including any credit support providers, structural and legal
aspects associated with the Offered Certificates, and the extent to which the
payment stream of the Mortgage Pool is adequate to make payments required under
the Offered Certificates. [ ]'s and [ ]'s ratings on the Offered Certificates do
not, however, constitute a statement regarding frequency of prepayments on the
Mortgage Loans or address the remote possibility that, in the event of the
insolvency of the Master Servicer, the sale of the Offered Certificates may be
recharacterized as a financing and that, as a result of such recharacterization,
the Senior Certificates may be accelerated. As a result, holders of the Offered
Certificates might suffer a lower than anticipated yield.
The Sponsor has not requested a rating of any Class of Offered
Certificates by any rating agency other than [ ] and [ ]. However, there can be
no assurance as to whether any other rating agency will rate the Offered
Certificates, or if it does, what rating would be assigned by such other rating
agency. The rating assigned by any such other rating agency to a Class of
Offered Certificates may be lower than the ratings assigned by [ ] and [ ].
The rating of 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.
S-30
<PAGE>
</TABLE>
<TABLE>
<CAPTION>
INDEX TO DEFINED TERMS
Page
<S> <C>
Adjustment Date..........................................................................................S-9
Advance..................................................................................................S-16
Assumptions..............................................................................................S-25
Available Funds..........................................................................................S-19
Bankruptcy Loss Coverage Amount..........................................................................S-29
Bankruptcy Losses........................................................................................S-22
Beneficial Owner.........................................................................................S-17
Book-Entry Certificates..................................................................................S-8,S-17
CEDE.................................................................................................... S-17
Certificate Account......................................................................................S-19
Certificateholder........................................................................................S-18
Certificates.............................................................................................Cover,S-1
Class A-1 Certificates...................................................................................S-17
Class A-1 Percentage.....................................................................................S-21
Class A-1 Prepayment Percentage..........................................................................S-21
Class B-1 Certificates...................................................................................S-17
Class B-2 Certificates...................................................................................S-17
Class Certificate Balance................................................................................S-22
Class M-1 Certificates...................................................................................S-17
Class X Certificates.....................................................................................S-17
Clearing Agency..........................................................................................S-17
Clearing Corporation.....................................................................................S-17
Code.................................................................................................... S-6,S-30
Cut-off Date Pool Principal Balance......................................................................S-2,S-8
Debt Service Reduction...................................................................................S-29
Deficient Valuation......................................................................................S-29
Definitive Certificate...................................................................................S-17
Depository...............................................................................................S-17
Detailed Description.....................................................................................S-8
Distribution Account.....................................................................................S-19
Distribution Date........................................................................................Cover
Due Date.................................................................................................S-9,S-21
ERISA....................................................................................................S-6,S-30
Excess Losses............................................................................................S-22
Exemption................................................................................................S-30
Expense Rate.............................................................................................S-4
FHLMC....................................................................................................S-9
Financial Intermediary...................................................................................S-17
First California.........................................................................................S-15
FNMA.....................................................................................................S-9
Fraud Loss Coverage Amount...............................................................................S-29
Fraud Losses.............................................................................................S-22
GNMA.....................................................................................................S-13
Gross Margin.............................................................................................S-9
Headlands................................................................................................S-12
Index....................................................................................................S-9
LIBOR....................................................................................................S-9
Liquidated Mortgage Loan.................................................................................S-22
Loan-to-Value Ratio......................................................................................S-10
Master Servicer..........................................................................................Cover,S-1
Master Servicing Fee.....................................................................................S-16
Maximum Rate.............................................................................................S-9
Minimum Rate.............................................................................................S-9
Mortgage.................................................................................................S-12
Mortgage File............................................................................................S-12
S-31
<PAGE>
Page
----
Mortgage Loans...........................................................................................Cover,S-1
Mortgage Note............................................................................................S-12
Mortgaged Properties.....................................................................................Cover
Net Interest Shortfalls..................................................................................S-20
Net Prepayment Interest Shortfall........................................................................S-20
Offered Certificates.....................................................................................Cover,S-17
Original Subordinate Principal Balance...................................................................S-21
Pass-Through Rate........................................................................................S-2
Pool.....................................................................................................Cover
Pooling Agreement........................................................................................Cover,S-2,S-16
Pool Principal Balance...................................................................................S-2,S-21
Prepayment Interest Shortfall............................................................................S-20
Principal Balance........................................................................................S-20
Principal Prepayments....................................................................................S-3,S-20
Prospectus...............................................................................................i
PSA......................................................................................................S-25
Realized Loss............................................................................................S-22
Record Date..............................................................................................S-19
Relief Act Reduction.....................................................................................S-20
REMIC....................................................................................................i,S-5,S-30
REO Property.............................................................................................S-16
Residual Certificates....................................................................................S-17
Seller...................................................................................................Cover,S-1
Senior Certificates......................................................................................S-17
Servicing Fee............................................................................................S-16
SMMEA....................................................................................................S-6
Special Hazard Losses....................................................................................S-22
Special Hazard Loss Coverage Amount......................................................................S-29
Special Hazard Mortgage Loan.............................................................................S-22
Sponsor..................................................................................................Cover,i,S-1
Subordinate Certificates.................................................................................S-17
Subordinate Percentage...................................................................................S-21
Subordinate Percentage Allocation........................................................................S-21
Subordinate Prepayment Percentage........................................................................S-21
Subordinate Prepayment Percentage Allocation.............................................................S-21
Super Jumbos.............................................................................................S-13
Trustee..................................................................................................Cover,S-1
Underwriter..............................................................................................S-31
Underwriting Standards...................................................................................S-13
Unpaid Interest Amounts..................................................................................S-20
Unpaid Interest Shortfall................................................................................S-2
</TABLE>
S-32
<PAGE>
(The red herring appears on the left-hand side of the page, rotated at 90
degrees. Text follows:)
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy, nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
SUBJECT TO COMPLETION DATED NOVEMBER 22, 1996
P R O S P E C T U S
HEADLANDS MORTGAGE SECURITIES, INC. (Sponsor)
Mortgage Pass-Through Certificates (Issuable In Series)
THESE CERTIFICATES DO NOT REPRESENT AN OBLIGATION OF OR INTEREST IN
HEADLANDS MORTGAGE SECURITIES, INC. OR ANY OF ITS AFFILIATES, EXCEPT AS SET
FORTH BELOW. THESE CERTIFICATES ARE NOT INSURED OR GUARANTEED BY ANY AGENCY OR
INSTRUMENTALITY OF THE UNITED STATES.
Each Series of Certificates to be offered from time to time hereby and by
Supplements hereto will evidence the entire ownership interest of a trust fund
(the "Trust"), the assets of which will consist primarily of Mortgage Loans
and/or Mortgage Certificates (collectively, "Mortgage Assets"), as further
described herein. The Prospectus Supplement relating to a particular Series of
Certificates (the "Supplement") will describe any forms of credit support (such
as a pool policy, letter of credit, guaranty, surety bond, insurance contract or
reserve fund) which may be applicable to a Series of Certificates and/or to the
assets included in the related Trust.
Distributions of principal of and interest on each Series of Certificates
will be made (to the extent of available funds) on each Distribution Date and
allocated to the classes of such Series at the Pass-Through Rates, in the
amounts and in the order specified in the related Supplement. Each Series will
consist of one or more classes of Certificates. Each class of Certificates of a
Series will evidence beneficial ownership of a specified percentage (which may
be 0%) or portion of future interest payments and a specified percentage (which
may be 0%) or portion of future principal payments on the Mortgage Assets in the
related Trust. A Series of Certificates may include one or more classes that are
senior in right of payment to one or more other classes of Certificates of such
Series. One or more classes of Certificates of a Series may be entitled to
receive distributions of principal, interest or any combination thereof prior to
one or more other classes of Certificates of such Series or after the occurrence
of specified events, in each case as specified in the related Supplement.
Distributions will be made pro rata among the Certificates of each class then
entitled to receive such distributions.
Mortgage Loans may be fixed- or adjustable-rate first mortgage loans
secured primarily by one- to four- family residences or shares in cooperative
corporations and the related proprietary leases, purchased by the Sponsor from
certain seller or sellers specified in the related Supplement (each, a
"Seller"). The credit support (if any) for Mortgage Loans will be subject to the
terms and conditions (including any limitations on amount) described in the
related Supplement. Mortgage Certificates may be (a) GNMA Certificates
guaranteed as to full and timely payment of principal and interest by the
Government National Mortgage Association ("GNMA"), (b) FHLMC Certificates
guaranteed as to timely payment of interest and ultimate collection (and, if so
specified in the related Supplement, timely payment) of principal by the Federal
Home Loan Mortgage Corporation ("FHLMC"), or (c) FNMA Certificates guaranteed as
to timely payment of principal and interest by the Federal National Mortgage
Association ("FNMA"). GNMA Certificates will be backed by the full faith and
credit of the United States. FNMA Certificates and FHLMC Certificates will not
be backed, directly or indirectly, by the full faith and credit of the United
States. The only obligations of the Sponsor and the Seller with respect to a
Series of Certificates will be pursuant to their respective representations and
warranties in connection with such Series. The principal obligations of the
Master Servicer named in the related Supplement will be limited to its
contractual servicing obligations and to obligations pursuant to certain
representations and warranties.
An election may be made to treat a Trust as a real estate mortgage
investment conduit (a "REMIC"). See "Certain Federal Income Tax Consequences".
----------
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.
----------
Prior to issuance there will have been no market for the Certificates of
any Series, and there can be no assurance that a secondary market for any
Certificates will develop or, if it does develop, that it will continue. This
Prospectus may not be used to consummate sales of a Series of Certificates
unless accompanied by a Supplement.
Offers of the Certificates may be made through one or more different
methods, as more fully described under "Plans of Distribution" herein and
"Method of Distribution" in the related Supplement.
This Prospectus may not be used to consummate sales of Certificates unless
accompanied by a Supplement.
_____________ ___, 1996
<PAGE>
PROSPECTUS SUPPLEMENT
The Supplement relating to a Series of Certificates to be offered hereunder
and thereunder will, among other things, set forth with respect to such Series:
(i) a description of the class or classes of Certificates to be offered; (ii)
the initial aggregate Certificate Balance of each class of Certificates included
in such Series and offered by such Supplement; (iii) the Pass-Through Rate (or
the method of determining such Pass-Through Rate) of each class of such
Certificates; (iv) the Last Scheduled Distribution Date of each class of such
Certificates, if applicable; (v) the method to be used to calculate the amount
to be distributed as principal on each Distribution Date; (vi) the application
of distributions of principal and interest to the classes of such Certificates
and the allocation of the amounts to be so applied; (vii) whether an election
will be made to treat the Trust as a REMIC; (viii) certain information
concerning the Mortgage Assets and any other assets included in the Trust for
such Series (including, in the case of Mortgage Loans: (a) the number of
Mortgage Loans; (b) the geographic distribution of the Mortgage Loans; (c) the
aggregate principal balance of the Mortgage Loans; (d) the types of dwelling
constituting the Mortgaged Properties; (e) the longest and shortest scheduled
terms to maturity of the Mortgage Loans; (f) the maximum principal balance of
the Mortgage Loans; (g) the maximum LTV of the Mortgage Loans at origination;
(h) the maximum and minimum Mortgage Rates borne by the Mortgage Loans; and (i)
the aggregate principal balance of non-owner-occupied properties); (ix) the
extent, nature and terms of any credit support applicable to such Series; (x)
the method of distribution of the Certificates; and (xi) other specific terms of
the offering.
ADDITIONAL INFORMATION
The Sponsor has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement under the Securities Act of 1933, as
amended (the "Securities Act"), with respect to the Certificates. This
Prospectus, which forms a part of the Registration Statement, and the Supplement
relating to each Series of Certificates contain 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, which may be inspected and copied at the facilities
maintained by the Commission at its Public Reference Section, 450 Fifth Street,
N.W, Washington, D.C. 20549, and at its Regional Offices located as follows:
Chicago Regional Office, 500 West Madison Street, Chicago, Illinois 60661; and
New York Regional Office, Seven World Trade Center, New York, New York 10048.
The Commission maintains a Web site at http://www.sec.gov. that contains
reports, proxy and information statements and other information regarding
registrants including the Sponsor, that file electronically with the Commission.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents filed by or on behalf of the Trust referred to in the
accompanying Supplement with the Commission pursuant to Section 13(a), 13(c), 14
or 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), on or after the date of such Supplement and prior to the termination of
any offering of the Certificates issued by such Trust shall be deemed to be
incorporated by reference in this Prospectus and to be a part of this Prospectus
from the date of the filing of such documents. Any statement contained in a
document incorporated or deemed to be incorporated by reference herein shall be
deemed to be modified or superseded for all purposes of this Prospectus to the
extent that a statement contained herein (or in the accompanying Supplement) or
in any other subsequently filed document which also is or is deemed to be
incorporated by reference modifies or replaces such statement. Any such
statement so modified or superseded shall not be deemed, except as modified or
superseded, to constitute a part of this Prospectus.
The Trust will provide without charge to each person to whom this
Prospectus is delivered, on the written or oral request of such person, a copy
of any or all of the documents referred to above that have been or may be
incorporated by reference in this Prospectus (not including exhibits to the
information that is incorporated by reference unless such exhibits are
specifically incorporated by reference into the information that this Prospectus
incorporates). Such requests should be directed to the Corporate Trust Office of
the Trustee specified in the accompanying Supplement.
----------
UNTIL 90 DAYS AFTER THE DATE OF EACH SUPPLEMENT, ALL DEALERS EFFECTING
TRANSACTIONS IN THE REGISTERED SECURITIES COVERED BY SUCH SUPPLEMENT, WHETHER OR
NOT PARTICIPATING IN THE DISTRIBUTION THEREOF, MAY BE REQUIRED TO DELIVER SUCH
SUPPLEMENT AND THIS PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS
TO DELIVER A SUPPLEMENT AND PROSPECTUS WHEN ACTING AS UNDERWRITERS OF THE SERIES
OF CERTIFICATES COVERED BY SUCH SUPPLEMENT AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
2
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE INFORMATION OR TO MAKE ANY
REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND ANY SUPPLEMENT
WITH RESPECT HERETO AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION
MUST NOT BE RELIED UPON. THIS PROSPECTUS AND ANY SUPPLEMENT WITH RESPECT HERETO
DO NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY
SECURITIES OTHER THAN THE CERTIFICATES OFFERED HEREBY AND THEREBY OR AN OFFER OF
THE 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 THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT
TO ITS DATE.
3
<PAGE>
SUMMARY OF THE PROSPECTUS
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus and by reference to
information with respect to each Series of Certificates contained in the
Supplement to be prepared and delivered in connection with the offering of the
Certificates of such Series. THE SUPPLEMENT FOR EACH SERIES WILL SPECIFY THE
EXTENT (IF ANY) TO WHICH THE TERMS OF SUCH SERIES OR THE RELATED TRUST VARY FROM
THE DESCRIPTION OF CERTIFICATES AND TRUSTS IN GENERAL WHICH IS CONTAINED IN THIS
PROSPECTUS.
<TABLE>
<CAPTION>
<S> <C>
Title of Security ..............................Mortgage Pass-Through Certificates (the "Certificates"), issuable in
series (each a "Series"). Each Series will be issued under a
separate pooling agreement (each a "Pooling Agreement").
Sponsor ........................................Headlands Mortgage Securities, Inc., a Delaware corporation (the
"Sponsor").
Seller..........................................The seller or sellers (each, a "Seller") for a particular Series will be
named in the Supplement relating to such Series (the
"Supplement"). A Seller may be an affiliate of the Sponsor.
Trustee.........................................The trustee (the "Trustee") for a particular Series will be named in
the related Supplement.
Master Servicer.................................The entity or entities named as Master Servicer (the "Master
Servicer") in the related Supplement, which may be an affiliate
of the Sponsor. See "The Pooling and Servicing Agreement--
Certain Matters Regarding the Sponsor, the Seller and the
Master Servicer."
Closing Date....................................The date (the "Closing Date") of the initial issuance of a Series, as
specified in the related Supplement.
The Trusts......................................Each Trust will consist of
Mortgage Loans and/or Mortgage Certificates (collectively, the "Mortgage
Assets"), any real estate acquired through foreclosure or similar proceeding,
any applicable credit support, the assets in the Certificate Account, any
minimum prepayment, reinvestment or similar agreement and any other assets
described in the related Supplement, all as described herein and therein.
A. Mortgage Loans...........................The mortgage loans included in a Trust (the "Mortgage Loans")
will be secured primarily by liens on residential properties or
shares in cooperative corporations ("Cooperatives") and the
related proprietary leases. If so specified in the related
Supplement, the Mortgage Assets of the related Trust may
include mortgage participation certificates or other beneficial
interests evidencing interests in mortgage loans. Such
mortgage loans may be conventional loans (i.e., loans that are
not insured by any governmental agency) or may be insured or
guaranteed by the Federal Housing Authority ("FHA"), or the
Veterans Administration ("VA"), as specified in the related
Supplement. All Mortgage Loans will have been purchased by
the Sponsor, either directly or through an affiliate, from one
or more Sellers.
The payment terms of the Mortgage Loans to be included in a Trust
will be described in the related Supplement and may include
any of the following features or combinations thereof or other
features described in the related Supplement:
(a) Interest may be payable at a fixed rate, a rate adjustable from time to
time in relation to an index (which will be specified in the related
Supplement), a rate that is fixed for a period of time or under certain
circumstances and is followed by an adjustable rate, a rate that otherwise
varies from time to time, or a rate that is
4
<PAGE>
convertible from an adjustable rate to a fixed rate. Changes to an adjustable
rate may be subject to periodic limitations, maximum rates, minimum rates or a
combination of such limitations. Accrued interest may be deferred and added to
the principal of a loan for such periods and under such circumstances as may be
specified in the related Supplement. The loan agreement or promissory note (the
"Mortgage Note") in respect of a Mortgage Loan may provide for the payment of
interest at a rate lower than the interest rate (the "Mortgage Rate") specified
in such Mortgage Note for a period of time or for the life of the loan, and the
amount of any difference may be contributed from funds supplied by a third
party.
(b) Principal may be payable on a level debt service basis to
fully amortize the loan over its term, may be calculated on the
basis of an assumed amortization schedule that is longer than
the original term to maturity or on an interest rate that is
different from the interest rate on the Mortgage Loan or may
not be amortized during all or a portion of the original term.
Payment of all or a substantial portion of the principal may be
due on maturity ("balloon payments"). Principal may include
interest that has been deferred and added to the principal
balance of the Mortgage Loan.
(c) Monthly payments of principal and interest may be fixed
for the life of the Mortgage Loan, may increase over a speci-
fied period of time or may change from period to period.
Mortgage Loans may include limits on periodic increases or
decreases in the amount of monthly payments and may include
maximum or minimum amounts of monthly payments.
(d) The Mortgage Loans generally may be prepaid at any time
without payment of any prepayment fee. If so specified in the
related Supplement, prepayments of principal may be
prohibited for the life of any such Mortgage Loan or for
certain periods ("lockout periods"), or may be subject to a
prepayment fee, which may be fixed for the life of any such
Mortgage Loan or may decline over time. Certain Mortgage
Loans may permit prepayments after expiration of the
applicable lockout period and may require the payment of a
prepayment fee in connection with any such subsequent
prepayment. The Mortgage Loans may include "due-on-sale"
clauses which permit the mortgagee to demand payment of the
entire Mortgage Loan in connection with the sale or certain
transfers of the related Mortgaged Property. Other Mortgage
Loans may be assumable by persons meeting the then
applicable underwriting standards of the Seller.
(e) The real property constituting security for repayment of a Mortgage Loan
may be located in any one of the fifty states, the District of Columbia, Guam,
Puerto Rico or any other territory of the United States. The Mortgage Loans may
be covered by standard hazard insurance policies insuring against losses due to
fire and various other causes. The Mortgage Loans may be covered by primary
mortgage insurance policies to the extent provided in the related Supplement.
5
<PAGE>
B. Mortgage Certificates....................The Trust may include certain assets (the "Mortgage Certificates")
which may consist of GNMA Certificates, FNMA Certificates,
FHLMC Certificates or a combination thereof. Any GNMA
Certificates included in a Trust will be guaranteed as to full
and timely payment of principal and interest by GNMA, which
guaranty is backed by the full faith and credit of the United
States. Any FHLMC Certificates included in the Trust will be
guaranteed as to the timely payment of interest and ultimate
collection (and, if so specified in the related Supplement,
timely payment) of principal by FHLMC. Any FNMA
Certificates included in a Trust will be guaranteed as to timely
payment of scheduled payments of principal and interest by
FNMA. No FNMA or FHLMC Certificates will be backed,
directly or indirectly, by the full faith and credit of the United
States.
Each Mortgage Certificate will evidence an interest in a pool of mortgage
loans and/or cooperative loans, and/or in principal distributions and interest
distributions thereon. The Supplement for each Series will specify the
aggregate approximate principal balance of GNMA, FNMA and FHLMC Certificates
included in a Trust and will describe the principal characteristics of the
underlying mortgage loans or cooperative loans and any insurance, guaranty or
other credit support applicable to such underlying loans, the Mortgage
Certificates or both. In addition, the related Supplement will describe the
terms upon which distributions will be made to the Trustee as the holder of the
Mortgage Certificates. The Mortgage Certificates included in any Trust will be
registered in the name of the Trustee or its nominee or in the case of
book-entry Mortgage Certificates in the name of a financial intermediary with a
Federal Reserve Bank or a clearing corporation and will be held by the Trustee
only for the benefit of holders of the related Series of Certificates.
C. Certificate Account......................All distributions on any Mortgage Certificates and all payments
(including prepayments, liquidation proceeds and insurance
proceeds) received from the Master Servicer on any Mortgage
Loans included in the Trust for a Series will be remitted to an
account (the "Certificate Account"), and, together with any
amounts available pursuant to the terms of any applicable
credit support and any other amounts described in the related
Supplement, will be available for distribution on the
Certificates of such Series as described in the related
Supplement. Such Certificate Account shall be an Eligible
Account or Accounts established and maintained by the Master
Servicer for the benefit of holders of a Series of Certificates.
Description of Certificates.....................Each Certificate will represent a beneficial ownership interest in a
Trust to be formed by the Sponsor pursuant to a Pooling
Agreement. Each Series of Certificates may contain one or
more classes of certificates (the "Senior Certificates") which
are senior in right of distribution to one or more classes of
certificates (the "Subordinate Certificates") and may also
contain one or more classes of the types described herein
under "Description of Certificates-- Categories of Classes of
Certificates" herein.
Distributions on
the Certificates.............................Distributions on the Certificates entitled thereto will be made
monthly, quarterly, semi-annually or at such other intervals
and on the dates
6
<PAGE>
specified in the related Supplement (each, a
"Distribution Date") out of the payments received in respect of
the assets of the related Trust. The amount allocable to
payments of principal and interest on any Distribution Date
will be determined as specified in the related Supplement.
Unless otherwise specified in the related Supplement, all
distributions will be made pro rata to Certificateholders of the
class entitled thereto. The aggregate original balance of the
Certificates (the "Certificate Balance") will equal the aggregate
distributions allocable to principal that such Certificates will be
entitled to receive.
A. Interest................................Each class of Certificates of a Series will accrue interest from the
date and at the fixed or adjustable rate set forth (or determined
as set forth) in the related Supplement (the "Pass-Through
Rate"), except for certain classes of Certificates that are only
entitled to distributions of principal ("PO Certificates").
Accrued interest will be distributed (to the extent of funds available
therefor), at the times and in the manner specified in such
Supplement. Distributions of interest on any class of Accrual
Certificates will commence at the time specified in such
Supplement; until then, interest on the Accrual Certificates will
be added to the Certificate Balance thereof.
B. Principal................................Each class of Certificates of a Series will receive distributions of
principal in the amounts, at the times and in the manner
specified in the related Supplement until its initial aggregate
Certificate Balance has been fully amortized, except for certain
classes of Certificates that are only entitled to distributions of
interest ("IO Certificates"). Allocations of distributions of
principal will be made to the Certificates of each class during
the periods and in the order specified in the related
Supplement.
Credit Enhancement..............................The assets in a Trust or the Certificates of one or more classes in
the related Series may have the benefit of one or more types
of credit support as described in the related Supplement. The
protection against losses afforded by any such credit support
may be limited. The type, characteristics and amount of credit
enhancement will be determined based on the characteristics of
the Mortgage Loans underlying or comprising the Mortgage
Assets and other factors and will be established on the basis of
requirements of each Rating Agency rating the Certificates of
such Series. See "Credit Enhancement" herein.
A. Subordination........................A Series of Certificates may consist of one or more classes of
Senior Certificates and one or more classes of Subordinate
Certificates. If so specified in the related Supplement, certain
classes of Subordinate Certificates may be senior to other Classes
of Subordinate Certificates and be rated investment grade
("Mezzanine Certificates"). The rights of holders of the
Subordinate Certificates of a Series ("Subordinate
Certificateholders") to receive distributions with respect to the
assets in the related Trust will be subordinated to such rights of
holders of the Senior Certificates of the same Series ("Senior
Certificateholders") to the extent described in the related
Supplement. This subordination is intended to enhance the
likelihood of regular receipt by Senior Certificateholders of the
full amount of their scheduled monthly payments of principal and
interest. The protection afforded to Senior Certificateholders of a
Series by means of the subordination feature will be accomplished
by (i) the preferential right of such holders to receive, prior to
any
7
<PAGE>
distribution being made in respect of the related Subordinate
Certificates, the amounts of principal and interest due them on
each Distribution Date out of the funds available for distribution
on such date and, to the extent described in the related
Supplement, by the right of such holders to receive future
distributions on the assets in the related Trust that would
otherwise have been payable to Subordinate Certificateholders; (ii)
reducing the ownership interest of the related Subordinate
Certificates; (iii) a combination of clauses (i) and (ii) above; or
(iv) as otherwise described in the related Supplement. If so
specified in the related Supplement, subordination may apply only
in the event of certain types of losses not covered by other forms
of credit enhancement, such as hazard losses not covered by
standard hazard insurance policies or losses due to the bankruptcy
or fraud of the mortgagor. The related Supplement will set forth
information concerning, among other things, the amount of
subordination of a class or classes of Subordinate Certificates in
a Series, the circumstances in which such subordination will be
applicable and the manner, if any, in which the amount of
subordination will decrease over time.
B. Reserve Fund.........................One or more reserve funds (the "Reserve Fund") may be
established and maintained for each Series. The related
Supplement will specify whether or not any such Reserve Fund
will be included in the corpus of the Trust for such Series and
will also specify the manner of funding the related Reserve
Fund and the conditions under which the amounts in any such
Reserve Fund will be used to make distributions to holders of
Certificates of a particular class or released from the related
Trust.
C. Surety Bond..........................A surety bond or bonds may be obtained and maintained for a
Series or certain classes thereof, which will, subject to certain
conditions and limitations, guaranty payments of all or limited
amounts of principal and interest due on the classes of such
Series or certain classes thereof.
D. Mortgage Pool
Insurance Policy...........A mortgage pool
insurance policy or policies (the "Mortgage Pool Insurance
Policy"), may be obtained and maintained for a Series, which shall
be limited in scope, covering defaults on
the related Mortgage Loans in an initial amount equal to a
specified percentage of the aggregate principal balance of all
Mortgage Loans included in the Trust as of the first day of the
month of issuance of the related Series or such other date as is
specified in the related Supplement (the "Cut-off Date").
E. Fraud Waiver.........................If so specified in the related Supplement, a letter may be obtained
from the issuer of a Mortgage Pool Insurance Policy (the
"Waiver Letter") waiving its right to deny a claim or rescind
coverage under the related Mortgage Pool Insurance Policy by
reason of fraud, dishonesty or misrepresentation in connection
with the origination of, or application for insurance for, the
related Mortgage Loan or the denial or adjustment of coverage
under any related Primary Mortgage Insurance Policy because
of such fraud, dishonesty or misrepresentation. In such
circumstances, the issuer of the Mortgage Pool Insurance
Policy will be indemnified by the Seller for the amount of any
loss paid by the issuer of the Mortgage Pool Insurance Policy
(each such amount, a "Fraud Loss") under the terms of the
Waiver Letter. The maximum aggregate amount of Fraud
Losses covered under the Waiver Letter and the period of
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time during which such coverage will be provided will be
specified in the related Supplement.
F. Special Hazard Insurance
Policy.................A special hazard insurance
policy or policies (the "Special Hazard Insurance Policy") may be
obtained and maintained for a Series, covering certain physical
risks that are not otherwise insured against by standard hazard
insurance policies. Each Special Hazard Insurance Policy will be
limited in scope and will cover losses pursuant to the provisions
of each such Special Hazard Insurance Policy as described in the
related Supplement.
G. Bankruptcy Bond......................A bankruptcy bond or bonds (the "Bankruptcy Bond") may be
obtained to cover certain losses resulting from action that may
be taken by a bankruptcy court in connection with a Mortgage
Loan. The level of coverage and the limitations in scope of
each Bankruptcy Bond will be specified in the related
Supplement.
H. Cross Support........................If specified in the related Supplement, the beneficial ownership of
separate groups of assets included in a Trust may be evidenced
by separate classes of the related Series of Certificates. In
such case, credit support may be provided by a cross-support
feature which requires that distributions be made with respect
to Certificates evidencing beneficial ownership of one or more
asset groups prior to distributions to Subordinate Certificates
evidencing a beneficial ownership interest in other asset groups
within the same Trust.
I. FHA Insurance and VA
Guaranty..........................All or a portion of the Mortgage Loans in a Trust may be insured
by FHA insurance ("FHA Insurance") and may be partially
guaranteed by the VA (a"VA Guaranty").
J. Other Forms of Credit
Support..............................Other forms of credit support to
provide coverage for certain risks of default or various types of
losses (such as a letter of credit, limited guaranty or insurance
contract) may be applicable to a Series of Certificates, to the
Mortgage Assets included in the related Trust and/or to the
mortgage loans underlying such Mortgage Certificates, as described
in the related Supplement.
Advances........................................If so specified in the related Supplement, the Master Servicer,
directly or through subservicers, will be obligated or have the
right at its option to make certain advances (each an
"Advance") with respect to delinquent payments on such
Mortgage Loans. Any such advances will be reimbursable to
the extent described herein and in the related Supplement.
Optional Termination.................................The Master Servicer or, if specified in the related
Supplement for a Series of REMIC Certificates, the holders of the
Residual Certificates of such Series may have the option to
repurchase the Mortgage Assets included in the related Trust and
thereby effect early retirement of a Series of Certificates. Any
such option will be exercisable at the times and upon satisfaction
of the conditions specified in the related Supplement.
Tax Status of
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REMIC Certificates..... .............................Regular Certificates of a particular Series will be
treated as "regular interests" in the REMIC and will be treated as
debt instruments for federal income tax purposes, and the Residual
Certificates of such Series will be treated as "residual interests"
in the REMIC. Holders of Residual Certificates generally will
include their pro rata shares of the net income or loss of the
REMIC in determining their federal taxable income.
Holders of Accrual Certificates
and any other classes of Regular Certificates issued with original
issue discount generally will be required to include the original
issue discount (which for federal income tax purposes includes
interest accrued on Accrual Certificates as well as current
interest paid thereon) in gross income over the life of the Regular
Certificates.
Distributions on Regular Certificates to foreign investors generally
will not be subject to U.S. withholding tax, provided
applicable certification procedures are complied with.
Subject to certain limitations that may be applicable to Buydown
Loans, REMIC Certificates will be treated as "regular or
residual interests in a REMIC" for domestic building and loan
associations and "real estate assets" for real estate investment
trusts. See "Certain Federal Income Tax
Consequences -- REMIC Certificates" herein.
Tax Status of Non-
REMIC Certificates..............................For federal income tax purposes,
the trust created to hold the Mortgage Assets for each Series
of Non-REMIC Certificates will be classified as a grantor trust
and not as an association taxable as a corporation. Holders of
Non-REMIC Certificates of such Series which are not IO
Certificates will be treated as owners of undivided interests in
the trust and as equitable owners of undivided interests in each
of the Mortgage Assets held by the trust, and such holders will
be taxed on their pro rata shares of the income from the
related Mortgage Assets and may be allowed to deduct their
pro rata shares of reasonable servicing fees, consistent with
their methods of accounting, subject to limitation in the case
of Non-REMIC Certificates held by individuals, estates, or
trusts (either directly or indirectly through certain pass-through
entities). If a Series of Non-REMIC Certificates includes IO
Certificates, holders of the Certificates of such Series will be
subject to the "Stripped Bond Rules" of Section 1286 of the
Code.
Subject to certain limitations that may be applicable to Buydown
Loans, to the extent the Mortgage Assets and the related
interests qualify for such treatment, interests in the Mortgage
Assets held by holders of applicable Non-REMIC Certificates
which are not IO Certificates will be considered to represent
"loans... secured by an interest in real property" for domestic
building and loan associations and "real estate assets" for real
estate investment trusts.
It is not clear whether IO
Certificates will be treated as representing an ownership interest
in qualifying assets and income under Sections 7701(a)(19)(C)(v),
856(c)(5)(A) and 856(c)(3)(B) of the Code, although the policy
considerations underlying those Sections suggest that such
treatment should be available. It is also not clear whether a
reasonable prepayment assumption should be applied in accruing
original issue discount on the IO Certificates.
See "Certain Federal Income Tax Consequences -- Non-REMIC
Certificates" herein.
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Legal Investment................................The Supplement for each Series
of Certificates will specify which, if any, of the classes of
Certificates offered thereby will constitute "mortgage-related
securities" for purposes of the Secondary Mortgage Market
Enhancement Act of 1984 ("SMMEA"). Classes of Certificates that
qualify as "mortgage related securities" will be legal investments
for certain types of institutional investors to the extent provided
in SMMEA, subject, in any case, to any other regulations that may
govern investments by such institutional investors. Institutions
whose investment activities are subject to review by federal or
state authorities should consult with their counsel or the
applicable authorities to determine whether an investment in a
particular class of Certificates (whether or not such class
constitutes a "mortgage related security") complies with applicable
guidelines, policy statements or restrictions.
ERISA Considerations............................A fiduciary of any employee benefit plan or other retirement plan
or arrangement subject to the Employee Retirement Income
Security Act of 1974, as amended ("ERISA") or the Code
should carefully review with its legal advisors whether the
purchase or holding of Certificates could give rise to a
transaction prohibited or not otherwise permissible under ERISA or
the Code. See "ERISA Considerations" herein. Certain classes of
Certificates may not be transferred unless the Trustee and the
Sponsor are furnished with a letter of representation or an opinion
of counsel to the effect that such transfer will not result in
violation of the prohibited transaction provisions of ERISA and the
Code and will not subject the Trustee, the Sponsor or the Master
Servicer to additional obligations. See "ERISA Considerations"
herein.
Rating..........................................The Certificates of each class
offered hereby and by a Supplement will be rated in one of the four
highest rating categories by one or more nationally recognized
statistical rating organizations, as specified in such Supplement
(with respect to each Series of Certificates, the "Rating Agency").
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THE TRUSTS*
General
The Trust for each Series will be held by the Trustee for the benefit
of the related Certificateholders. Each Trust will consist of certain
mortgage-related assets (the "Mortgage Assets") consisting of (A) a mortgage
pool (a "Mortgage Pool") comprised of Mortgage Loans or (B) Mortgage
Certificates, in each case as specified in the related Supplement, together with
payments in respect of such Mortgage Assets and certain other accounts,
obligations or agreements, in each case as specified in the related Supplement.
The Certificates will be entitled to payment from the assets of the
related Trust or other assets pledged for the benefit of the holders of such
Certificates (the "Certificateholders") as specified in the related Supplement
and will not be entitled to payments in respect of the assets of any other trust
fund established by the Sponsor.
The Mortgage Assets for each Series may be acquired by the Sponsor,
either directly or through affiliates, from originators or sellers that may be
affiliates of the Sponsor (the "Seller") and conveyed by the Sponsor to the
related Trust. Mortgage Loans acquired by the Sponsor will have been originated
in accordance with the underwriting criteria specified below under "Mortgage
Loan Program--Underwriting Standards" or as otherwise described in the related
Supplement.
The following is a brief description of the Mortgage Assets expected to
be included in the Trusts. A schedule of the Mortgage Assets relating to such
Series will be attached to the Pooling Agreement delivered to the Trustee upon
delivery of the Certificates.
The Mortgage Loans
The Mortgage Loans may be fixed- or adjustable-rate mortgage loans, or
participations or other beneficial interests in such mortgage loans, evidenced
by notes or other evidence of indebtedness (the "Mortgage Notes") secured
primarily by first liens on one- to four-family residential properties in any
one of the fifty states, the District of Columbia, Guam, Puerto Rico or any
other territory of the United States. The Mortgage Loans may be conventional
loans (i.e., loans that are not insured or guaranteed by any governmental
agency) or loans insured by the FHA or partially guaranteed by the VA, as
specified in the related Supplement.
If so specified in the related Supplement, the Mortgage Loans may
include cooperative apartment loans ("Cooperative Loans") secured by security
interests in shares issued by private, non-profit cooperative housing
corporations and in the related proprietary leases or occupancy agreements
granting exclusive rights to occupy specific dwelling units in such buildings. A
"Mortgage" is a mortgage, deed of trust or similar instrument with respect to a
Mortgaged Property. The "Mortgaged Properties" securing the Mortgage Notes will
be comprised of one- to four-family dwelling units that are either detached or
semi-detached townhouses, rowhouses, individual condominium units, individual
units in planned unit developments, manufactured homes and certain other
dwelling units. The Mortgaged Properties may include leasehold interests in
residential properties, the title to which is held by third party lessors. The
Mortgaged Properties may include vacation and second homes and investment
properties. Each Mortgage Loan will be selected by the Sponsor for inclusion in
a Trust from among those purchased, either directly or through affiliates.
Originators, servicers or sellers may be affiliated with the Sponsor. All
transactions involving affiliates will be conducted in a commercially reasonable
manner at arm's length.
Unless otherwise specified in the related Supplement, all of the
Mortgage Loans in a Mortgage Pool will have monthly payments due on the first
day of each month. The payment terms of the Mortgage Loans to be included in a
Trust will be described in the related Supplement and may include any of the
following features or combinations thereof or other features described in the
related Supplement:
- --------
* Whenever the terms "Mortgage Pool" and "Certificates" are used in this
Prospectus, such terms will be deemed to apply, unless the context
indicates otherwise, to one specific Mortgage Pool and the Certificates
representing certain undivided interests, as described below, in a
single trust fund (the "Trust") consisting primarily of the Mortgage
Assets in such Mortgage Pool. Similarly, the term "Pass-Through Rate"
will refer to the Pass-Through Rate borne by the Certificates of one
specific Series and the term "Trust" will refer to one specific Trust.
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(a) Interest may be payable at a fixed rate, a rate adjustable from
time to time in relation to an index (which will be specified in the
related Supplement, the "Index"), a rate that is fixed for a period of
time or under certain circumstances and is followed by an adjustable
rate, a rate that otherwise varies from time to time, or a rate that is
convertible from an adjustable rate to a fixed rate. Changes to an
adjustable rate may be subject to periodic limitations, maximum rates,
minimum rates or a combination of such limitations. Accrued interest
may be deferred and added to the principal of a Mortgage Loan for such
periods and under such circumstances as may be specified in the related
Supplement. A Mortgage Note may provide for the payment of interest at
a rate lower than the Mortgage Rate specified in such Mortgage Note for
a period of time or for the life of the loan, and the amount of any
difference may be contributed from funds supplied by the seller of the
Mortgaged Property or another source.
(b) Principal may be payable on a level debt service basis to fully
amortize the Mortgage Loan over its term, may be calculated on the
basis of an assumed amortization schedule that is significantly longer
than the original term to maturity or at an interest rate that is
different from the Mortgage Rate or may not be amortized during all or
a portion of the original term. Payment of all or a substantial portion
of the principal may be due on maturity ("balloon payments"). Principal
may include interest that has been deferred and added to the principal
balance of the Mortgage Loan.
(c) Monthly payments of principal and interest may be fixed for the
life of the Mortgage Loan, may increase over a specified period of time
or may change from period to period. The terms of a Mortgage Loan may
include limits on periodic increases or decreases in the amount of
monthly payments and may include maximum or minimum amounts of monthly
payments.
(d) The Mortgage Loans generally may be prepaid at any time without
the payment of any prepayment fee. If so specified in the related
Supplement, some prepayments of principal may be subject to a
prepayment fee, which may be fixed for the life of any such Mortgage
Loan or may decline over time, and may be prohibited for the life of
such Mortgage Loan or for certain periods ("lockout periods"). Certain
Mortgage Loans may permit prepayments after expiration of the
applicable lockout period and may require the payment of a prepayment
fee in connection with any such subsequent prepayment. Other Mortgage
Loans may permit prepayments without payment of a fee unless the
prepayment occurs during specified time periods. The Mortgage Loans may
include "due-on-sale" clauses that permit the mortgagee to demand
payment of the entire Mortgage Loan in connection with the sale or
certain transfers of the related Mortgaged Property. Other Mortgage
Loans may be assumable by persons meeting the then applicable
underwriting standards of the Seller.
A Trust may contain certain Mortgage Loans ("Buydown Loans"), which
include provisions whereby a third party partially subsidizes the monthly
payments of the Mortgagor during the early years of the Mortgage Loan, the
difference to be made up from a fund (a "Buydown Fund") contributed by such
third party at the time of origination of the Mortgage Loan. A Buydown Fund will
be in an amount equal either to the discounted value or full aggregate amount of
future payment subsidies. The underlying assumption of buydown plans is that the
income of the Mortgagor will increase during the buydown period as a result of
normal increases in compensation and of inflation, so that the Mortgagor will be
able to meet the full mortgage payments at the end of the buydown period. To the
extent that this assumption as to increased income is not fulfilled, the
possibility of defaults on Buydown Loans is increased. The related Supplement
will contain information with respect to any Buydown Loan concerning limitations
on the interest rate paid by the Mortgagor initially, on annual increases in the
interest rate and on the length of the buydown period.
Mortgage Loans with certain LTVs and/or certain principal balances may
be covered wholly or partially by primary mortgage guaranty insurance policies
(each, a "Primary Mortgage Insurance Policy"). The existence, extent and
duration of any such coverage will be described in the related Supplement. The
loan-to-value ratio ("LTV") of a Mortgage Loan at any given time is the ratio,
expressed as a percentage, of the then-outstanding principal balance of the
Mortgage Loan to the Appraised Value of the related Mortgaged Property. If so
specified in the related Supplement, the "Appraised Value" is either (x) the
lesser of (a) the appraised value determined in an appraisal obtained by the
originator at origination of such Mortgage Loan and (b) the sales price for such
property, except that, in the case of Mortgage Loans the proceeds of which were
used to refinance an existing mortgage loan, the Appraised Value of the related
Mortgaged Property is the appraised value thereof determined in an appraisal
obtained at the time of refinancing or (y) the appraised value determined in an
appraisal made at the request of a Mortgagor subsequent to origination in order
to eliminate the Mortgagor's obligation to keep a Primary Mortgage Insurance
Policy in force.
Each Supplement for a Series will contain information, as of the
Cut-off Date and to the extent known to the Sponsor, with respect to the
Mortgage Loans contained in such Trust, including: (i) the number of Mortgage
Loans, (ii) the geographic distribution of the Mortgage Loans; (iii) the
aggregate outstanding principal balance and the average outstanding
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principal balance of the Mortgage Loans as of the applicable Cut-off Date; (iv)
the types of dwelling constituting the Mortgaged Properties; (v) the original
terms to maturity of the Mortgage Loans; (vi) the largest principal balance and
the smallest principal balance of the Mortgage Loans; (vii) the maximum LTV of
the Mortgage Loans at origination; (viii) the maximum and minimum Mortgage
Rates; (ix) the aggregate principal balance of nonowner-occupied Mortgaged
Properties; (x) the earliest origination date and latest maturity date of any of
the Mortgage Loans; and (xi) the aggregate principal balance of Mortgage Loans
having LTVs at origination exceeding 80%.
No assurance can be given that values of the Mortgaged Properties have
remained or will remain at their levels on the dates of origination of the
related Mortgage Loans. If the residential real estate market should experience
an overall decline in property values such that the outstanding principal
balances of the Mortgage Loans, and any secondary financing on the Mortgaged
Properties, in a particular Mortgage Pool become equal to or greater than the
value of the Mortgaged Properties, the actual rates of delinquencies,
foreclosures and losses could be higher than those now generally experienced in
the mortgage lending industry. In addition, adverse economic conditions (which
may or may not affect real property values) may affect the timely payment by
Mortgagors of scheduled payments of principal and interest on the Mortgage Loans
and, accordingly, the actual rates of delinquencies, foreclosures and losses
with respect to any Mortgage Pool. If losses on defaulted Mortgage Loans exceed
the coverage of any Primary Mortgage Insurance Policy or the amount of any
credit support arrangement described in the related Supplement, such losses will
be borne by holders of Certificates ("Certificateholders").
Mortgage Certificates
All of the Mortgage Certificates will be registered in the name of the
Trustee or its nominee or, in the case of Mortgage Certificates issued only in
book-entry form, a financial intermediary (which may be the Trustee) that is a
member of the Federal Reserve System or of a clearing corporation on the books
of which the security is held. Each Mortgage Certificate will evidence an
interest in a pool of mortgage loans and/or cooperative loans and/or in
principal distributions and interest distributions thereon.
The descriptions of GNMA, FHLMC and FNMA Certificates that are set
forth below are descriptions of certificates representing proportionate
interests in a pool of mortgage loans and in the payments of principal and
interest thereon. GNMA, FHLMC or FNMA may also issue mortgage-backed securities
representing a right to receive distributions of interest only or principal only
or disproportionate distributions of principal or interest or to receive
distributions of principal and/or interest prior or subsequent to distributions
on other certificates representing interests in the same pool of mortgage loans.
In addition, any of such issuers may issue certificates representing interests
in mortgage loans having characteristics that are different from the types of
mortgage loans described below. The terms of any such certificates to be
included in a Trust (and of the underlying mortgage loans) will be described in
the related Supplement, and the descriptions that follow are subject to
modification as appropriate to reflect the terms of any such certificates that
are actually included in a Trust.
GNMA. GNMA is a wholly owned corporate instrumentality of the United
States within the Department of Housing and Urban Development ("HUD"). Section
306(g) of Title III of the National Housing Act of 1934, as amended (the
"Housing Act"), authorizes GNMA to guarantee the timely payment of the principal
of and interest on certificates that are based on and backed by a pool of loans
("FHA Loans") insured or guaranteed by the United States Federal Housing
Administration (the "FHA") under the Housing Act or Title V of the Housing Act
of 1949, or by the United States Department of Veteran Affairs (the "VA") under
the Servicemen's Readjustment Act of 1944, as amended, or Chapter 37 of Title
38, United States Code or by pools of other eligible mortgage loans.
Section 306(g) of the Housing Act provides that "the full faith and
credit of the United States is pledged to the payment of all amounts which may
be required to be paid under any guaranty under this subsection". To meet its
obligations under its guaranties, GNMA is authorized, under Section 306(d) of
the Housing Act, to borrow from the United States Treasury with no limitations
as to amount.
GNMA Certificates. All of the GNMA Certificates (the "GNMA
Certificates") will be mortgage-backed certificates issued and serviced by GNMA-
or FNMA-approved mortgage servicers. The mortgage loans underlying GNMA
Certificates may consist of FHA Loans secured by mortgages on one- to
four-family residential properties or multifamily residential properties, loans
secured by mortgages on one- to four-family residential properties or
multifamily residential properties, mortgage loans which are partially
guaranteed by the VA and other mortgage loans eligible for inclusion in mortgage
pools underlying GNMA Certificates. Unless otherwise specified in the related
Supplement, at least 90 percent by original principal amount of the mortgage
loans underlying a GNMA Certificate will be mortgage loans having maturities of
20 years or more.
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Each GNMA Certificate provides for the payment by or on behalf of the
issuer of the GNMA Certificate to the registered holder of such GNMA Certificate
of monthly payments of principal and interest equal to the registered holder's
proportionate interest in the aggregate amount of the monthly scheduled
principal and interest payments on each underlying eligible mortgage loan, less
servicing and guaranty fees aggregating the excess of the interest on each such
mortgage loan over the GNMA Certificate pass-through rate. In addition, each
payment to a GNMA Certificateholder will include proportionate pass-through
payments to such holder of any prepayments of principal of the mortgage loan
underlying the GNMA Certificate, and the holder's proportionate interest in the
remaining principal balance in the event of a foreclosure or other disposition
of any such mortgage loan.
The GNMA Certificates included in a Trust may be issued under either or
both of the GNMA I program ("GNMA I Certificates") and the GNMA II program
("GNMA II Certificates"). All mortgages underlying a particular GNMA I
Certificate must have the same annual interest rate (except for pools of
mortgages secured by mobile homes). The annual interest rate on each GNMA I
Certificate is one-half percentage point less than the annual interest rate on
the mortgage loans included in the pool of mortgages backing such GNMA I
Certificate. Mortgage Loans underlying a particular GNMA II Certificate may have
annual interest rates that vary from each other by up to one percentage point.
The annual interest rate on each GNMA II Certificate will be between one-half
percentage point and one and one-half percentage points less than the highest
annual interest rate on the mortgage loans included in the pool of mortgages
backing such GNMA II Certificate.
GNMA will have approved the issuance of each of the GNMA Certificates
in accordance with a guaranty agreement between GNMA and the servicer of the
mortgage loans underlying such GNMA Certificate. Pursuant to such agreement, the
servicer is required to advance its own funds in order to make timely payments
of all amounts due on the GNMA Certificate, even if the payments received by
such servicer on the mortgage loans backing the GNMA Certificate are less than
the amounts due on such GNMA Certificate. If a servicer is unable to make
payments on a GNMA Certificate as it becomes due, it must promptly notify GNMA
and request GNMA to make such payment. Upon such notification and request, GNMA
will make such payments directly to the registered holder of the GNMA
Certificate. In the event no payment is made by such servicer and such servicer
fails to notify and request GNMA to make such payment, the registered holder of
the GNMA Certificate has recourse only against GNMA to obtain such payment. The
registered holder of the GNMA Certificates included in a Trust is entitled to
proceed directly against GNMA under the terms of each GNMA Certificate or the
guaranty agreement or contract relating to such GNMA Certificate for any amounts
that are not paid when due under each GNMA Certificate.
As described above, the GNMA Certificates included in a Trust, and the
related underlying mortgage loans, may have characteristics and terms different
from those described above. Any such different characteristics and terms will be
described in the related Supplement.
FHLMC. FHLMC is a corporate instrumentality of the United States
created pursuant to Title III of the Emergency Home Finance Act of 1970, as
amended (the "FHLMC Act"). FHLMC's common stock is owned by the Federal Home
Loan Banks, and its preferred stock is owned by the stockholders of such Federal
Home Loan Banks. FHLMC was established primarily for the purpose of increasing
the availability of mortgage credit for the financing of urgently needed
housing. It seeks to provide an enhanced degree of liquidity for residential
mortgage investments primarily by assisting in the development of secondary
markets for conventional mortgages. The principal activity of FHLMC currently
consists of the purchase of first lien conventional residential mortgage loans
or participation interests in such mortgage loans and the resale of the mortgage
loans so purchased in the form of mortgage securities. FHLMC is confined to
purchasing, so far as practicable, conventional mortgage loans and participation
interests therein which it deems to be of such quality, type and class as to
meet generally the purchase standards imposed by private institutional mortgage
investors.
FHLMC Certificates. Each FHLMC Certificate represents an undivided
interest in a pool of mortgage loans that may consist of first lien conventional
loans, FHA Loans or VA Loans (a "FHLMC Certificate group"). FHLMC Certificates
are sold under the terms of a Mortgage Participation Certificate Agreement. A
FHLMC Certificate may be issued under either FHLMC's Cash Program or Guarantor
Program.
Mortgage loans underlying the FHLMC Certificates held by a Trust will
consist of mortgage loans with original terms to maturity of between 10 and 40
years. Each such mortgage loan must meet the applicable standards set forth in
the FHLMC Act. A FHLMC Certificate group may include whole loans, participation
interests in whole loans and undivided interests in whole loans and/or
participations comprising another FHLMC Certificate group. Under the Guarantor
Program, any such FHLMC Certificate group may include only whole loans or
participation interests in whole loans.
FHLMC guarantees to each registered holder of a FHLMC Certificate the
timely payment of interest on the underlying mortgage loans to the extent of the
applicable certificate interest rate on the registered holder's pro rata share
of
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the unpaid principal balance outstanding on the underlying mortgage loans in
the FHLMC Certificate group represented by such FHLMC Certificate, whether or
not received. FHLMC also guarantees to each registered holder of a FHLMC
Certificate collection by such holder of all principal on the underlying
mortgage loans, without any offset or deduction, to the extent of such holder's
pro rata share thereof, but does not, except if and to the extent specified in
the related Supplement for a Series of Certificates, guarantee the timely
payment of scheduled principal. Under FHLMC's Gold PC Program, FHLMC guarantees
the timely payment of principal based on the difference between the pool factor
published in the month preceding the month of distribution and the pool factor
published in such month of distribution. Pursuant to its guaranties, FHLMC
indemnifies holders of FHLMC Certificates against any diminution in principal by
reason of charges for property repairs, maintenance and foreclosure. FHLMC may
remit the amount due on account of its guaranty of collection of principal at
any time after default on an underlying mortgage loan, but not later than (i) 30
days following foreclosure sale, (ii) 30 days following payment of the claim by
any mortgage insurer or (iii) 30 days following the expiration of any right of
redemption, whichever occurs later, but in any event no later than one year
after demand has been made upon the mortgagor for accelerated payment of
principal. In taking actions regarding the collection of principal after default
on the mortgage loans underlying FHLMC Certificates, including the timing of
demand for acceleration, FHLMC reserves the right to exercise its judgment with
respect to the mortgage loans in the same manner as for mortgage loans that it
has purchased but not sold. The length of time necessary for FHLMC to determine
that a mortgage loan should be accelerated varies with the particular
circumstances of each mortgagor, and FHLMC has not adopted standards which
require that the demand be made within any specified period.
FHLMC Certificates are not guaranteed by the United States or by any
Federal Home Loan Bank and do not constitute debts or obligations of the United
States or any Federal Home Loan Bank. The obligations of FHLMC under its
guaranty are obligations solely of FHLMC and are not backed by, or entitled to,
the full faith and credit of the United States. If FHLMC were unable to satisfy
such obligations, distributions to holders of FHLMC Certificates would consist
solely of payments and other recoveries on the underlying mortgage loans and,
accordingly, monthly distributions to holders of FHLMC Certificates would be
affected by delinquent payments and defaults on such mortgage loans.
Registered holders of FHLMC Certificates are entitled to receive their
monthly pro rata share of all principal payments on the underlying mortgage
loans received by FHLMC, including any scheduled principal payments, full and
partial prepayments of principal and principal received by FHLMC by virtue of
condemnation, insurance, liquidation or foreclosure, and repurchases of the
mortgage loans by FHLMC or the seller thereof. FHLMC is required to remit each
registered FHLMC certificateholder's pro rata share of principal payments on the
underlying mortgage loans, interest at the FHLMC pass-through rate and any other
sums such as prepayment fees, within 60 days of the date on which such payments
are deemed to have been received by FHLMC.
Under FHLMC's Cash Program, there is no limitation on the amount by
which interest rates on the mortgage loans underlying a FHLMC Certificate may
exceed the pass-through rate on the FHLMC Certificate. Under such program, FHLMC
purchases groups of whole mortgage loans from sellers at specified percentages
of their unpaid principal balances, adjusted for accrued or prepaid interest,
which when applied to the interest rate of the mortgage loans and participations
purchased results in the yield (expressed as a percentage) required by FHLMC.
The required yield, which includes a minimum servicing fee retained by the
servicer, is calculated using the outstanding principal balance. The range of
interest rates on the mortgage loans and participations in a FHLMC Certificate
group under the Cash Program will vary since mortgage loans and participations
are purchased and assigned to a FHLMC Certificate group based upon their yield
to FHLMC rather than on the interest rate on the underlying mortgage loans.
Under FHLMC's Guarantor Program, the pass-through rate on a FHLMC Certificate is
established based upon the lowest interest rate on the underlying mortgage
loans, minus a minimum servicing fee and the amount of FHLMC's management and
guaranty income as agreed upon between the seller and FHLMC.
FHLMC Certificates duly presented for registration of ownership on or
before the last business day of a month are registered effective as of the first
day of the month. The first remittance to a registered holder of a FHLMC
Certificate will be distributed so as to be received normally by the 15th day of
the second month following the month in which the purchaser became a registered
holder of such FHLMC Certificate. Thereafter, such remittance will be
distributed monthly to the registered holder so as to be received normally by
the 15th day of each month. The Federal Reserve Bank of New York maintains
book-entry accounts with respect to FHLMC Certificates sold by FHLMC on or after
January 2, 1985, and makes payments of principal and interest each month to the
registered holders thereof in accordance with such holders' instructions.
Federal National Mortgage Association. FNMA is a federally chartered
and privately owned corporation organized and existing under the Federal
National Mortgage Association Charter Act, as amended. FNMA was originally
established in 1938 as a United States government agency to provide supplemental
liquidity to the mortgage market and was transformed into a stockholder-owned
and privately-managed corporation by legislation enacted in 1968.
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FNMA provides funds to the mortgage market primarily by purchasing
mortgage loans from lenders, thereby replenishing their funds for additional
lending. FNMA acquires funds to purchase mortgage loans from many capital market
investors that may not ordinarily invest in mortgages, thereby expanding the
total amount of funds available for housing. Operating nationwide, FNMA helps to
redistribute mortgage funds from capital-surplus to capital-short areas.
FNMA Certificates. FNMA Certificates are Guaranteed Mortgage
Pass-Through Certificates representing fractional undivided interests in a pool
of mortgage loans formed by FNMA ("FNMA Certificates"). Each mortgage loan must
meet the applicable standards of the FNMA purchase program. Mortgage loans
comprising a pool are either provided by FNMA from its own portfolio or
purchased pursuant to the criteria of the FNMA purchase program.
Mortgage loans underlying FNMA Certificates held by a Trust will
consist of conventional mortgage loans, FHA Loans or VA Loans. Original
maturities of substantially all of the conventional, level payment mortgage
loans underlying a FNMA Certificate are expected to be between either 8 to 15
years or 20 to 40 years. The original maturities of substantially all of the
fixed rate, level payment FHA Loans or VA Loans are expected to be 30 years.
Mortgage loans underlying a FNMA Certificate may have annual interest
rates that vary by as much as two percentage points from each other. The rate of
interest payable on a FNMA Certificate is equal to the lowest interest rate of
any mortgage loan in the related pool, less a specified minimum annual
percentage representing servicing compensation and FNMA's guaranty fee. Under a
regular servicing option (pursuant to which the mortgagee or each other servicer
assumes the entire risk of foreclosure losses), the annual interest rates on the
mortgage loans underlying a FNMA Certificate will be between 50 basis points and
250 basis points greater than is its annual pass-through rate and under a
special servicing option (pursuant to which FNMA assumes the entire risk for
foreclosure losses), the annual interest rates on the mortgage loans underlying
a FNMA Certificate will generally be between 55 basis points and 255 basis
points greater than the annual FNMA Certificate pass-through rate. If specified
in the related Supplement, FNMA Certificates may be backed by adjustable rate
mortgages.
FNMA guarantees to each registered holder of a FNMA Certificate that it
will distribute amounts representing scheduled principal and interest at the
applicable pass-through rate on the underlying mortgage loans, whether or not
received, and such holder's proportionate share of the full principal amount of
any foreclosed or other finally liquidated mortgage loan, whether or not such
principal amount is actually recovered. If FNMA were unable to perform such
obligations, distributions on FNMA Certificates would consist solely of payments
and other recoveries on the underlying mortgage loans and, accordingly,
delinquencies and defaults would affect monthly distributions to holders of FNMA
Certificates. The obligations of FNMA under its guarantees are obligations
solely of FNMA and are not backed by, nor entitled to, the full faith and credit
of the United States.
As described above, the FNMA Certificates included in a Trust, and the
related underlying mortgage loans, may have characteristics and terms different
from those described above. Any such different characteristics and terms will be
described in the related Supplement.
FNMA Certificates evidencing interests in pools of mortgage loans
formed on or after May 1, 1985 (other than FNMA Certificates backed by pools
containing graduated payment mortgage loans or mortgage loans secured by
multifamily projects) are available in book-entry form only. Distributions of
principal and interest on each FNMA Certificate will be made by FNMA on the 25th
day of each month to the persons in whose name the FNMA Certificate is entered
in the books of the Federal Reserve Banks (or registered on the FNMA Certificate
register in the case of fully registered FNMA Certificates) as of the close of
business on the last day of the preceding month. With respect to FNMA
Certificates issued in book-entry form, distributions thereon will be made by
wire, and with respect to fully registered FNMA Certificates, distributions
thereon will be made by check.
Stripped Mortgage-Backed Securities. Mortgage Certificates may consist
of one or more stripped mortgage-backed securities, each as described herein and
in the related Supplement. Each such Mortgage Certificate will represent an
undivided interest in all or part of either the principal distributions (but not
the interest distributions) or the interest distributions (but not the principal
distributions), or in some specified portion of the principal and interest
distributions (but not all of such distributions) on certain FHLMC, FNMA or GNMA
Certificates. The underlying securities will be held under a trust agreement by
FHLMC, FNMA or GNMA, each as trustee, or by another trustee named in the related
Supplement. FHLMC, FNMA or GNMA will guarantee each stripped Mortgage
Certificate to the same extent as such entity guarantees the underlying
securities backing such stripped Mortgage Certificate, unless otherwise
specified in the related Supplement.
Certificate Account
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The Master Servicer or other entity identified in the related
Supplement will, as to each Series of Certificates, establish and maintain a
Certificate Account for the benefit of the Trustee and holders of the
Certificates of such Series for receipt of (i) each distribution or monthly
payment, as the case may be, made to the Trustee with respect to the Mortgage
Assets, (ii) the amount of cash, if any, specified in the related Pooling
Agreement to be initially deposited therein, (iii) the amount of cash, if any,
withdrawn from any related Reserve Fund or other fund, and (iv) the reinvestment
income thereon, if any. The Pooling Agreement for a Series may authorize the
Trustee to invest the funds in the Certificate Account in certain investments
("Eligible Investments") that will qualify as "permitted investments" under
Section 860G(a)(5) of the Code in the case of REMIC Certificates. The Eligible
Investments will generally mature not later than the business day immediately
preceding the next Distribution Date for such Series (or, in certain cases, on
such Distribution Date). Eligible Investments include, among other investments,
obligations of the United States and certain agencies thereof, federal funds,
certificates of deposit, commercial paper carrying the ratings specified in the
related Pooling Agreement of each Rating Agency rating the Certificates of such
Series that has rated such commercial paper, demand and time deposits and
banker's acceptances sold by eligible commercial and certain repurchase
agreements of United States government securities. Reinvestment earnings, if
any, on funds in the Certificate Account generally will belong to the Master
Servicer.
Substitution of Mortgage Assets
Substitution of Mortgage Assets will be permitted in the event of
breaches of representations and warranties with respect to any original Mortgage
Asset or in the event the documentation with respect to any Mortgage Asset is
determined by the Trustee to be incomplete. The period during which such
substitution will be permitted generally will be indicated in the related
Supplement. The related Supplement will describe any other conditions upon which
Mortgage Assets may be substituted for Mortgage Assets initially included in the
Trust. See "The Pooling and Servicing Agreement--Representations and
Warranties".
DESCRIPTION OF CERTIFICATES
General
Each Series of Certificates will be issued pursuant to a separate
Pooling Agreement among the Sponsor, the Seller, the Trustee and the Master
Servicer, if such Series relates to Mortgage Loans. A form of Pooling Agreement
is filed as an exhibit to the Registration Statement of which this Prospectus is
a part. The following summaries describe certain provisions that may appear in
each Pooling Agreement. The Supplement for a Series of Certificates will
describe any provision of the Agreement relating to such Series that materially
differs from the description thereof contained in this Prospectus. The summaries
do not purport to be complete and are subject to, and are qualified in their
entirety by reference to, all of the provisions of the Pooling Agreement and the
Supplement related to a particular Series of Certificates. References herein to
a Trustee or the Master Servicer include, unless otherwise specified, any agents
acting on behalf of such Trustee or any subcontractor of the Master Servicer,
any of which agents or subcontractors may be one of their affiliates.
The Certificates are issuable in Series, each evidencing the entire
ownership interest in a Trust of assets consisting primarily of Mortgage Assets.
The Certificates of each Series will be issued in fully registered form or
book-entry form and will be issued in the authorized denominations for each
class specified in the related Supplement, will evidence specified beneficial
ownership interests in the related Trust created pursuant to the related Pooling
Agreement and will not be entitled to payments in respect of the assets included
in any other Trust established by the Sponsor. The transfer of the Certificates
may be registered, and the Certificates may be exchanged, at the office or
agency of the Trustee specified in the related Supplement without the payment of
any service charge other than any tax or governmental charge payable in
connection with such registration of transfer or exchange. The transfer of any
class of a Series of Certificates may be subject to the satisfaction of certain
conditions set forth in the related Supplement. Any qualifications on direct or
indirect ownership of Residual Certificates, as well as restrictions on the
transfer of such Residual Certificates, will be set forth in the related
Supplement. The Certificates will not represent obligations of the Sponsor or
any affiliate of the Sponsor. The Mortgage Assets will not be insured or
guaranteed by any governmental entity or other person, unless otherwise
specified in the related Supplement.
Each Series of Certificates will be issued in one or more classes. Each
class of Certificates of a Series will evidence beneficial ownership of a
specified percentage (which may be 0%) or portion of future interest payments
and a specified percentage (which may be 0%) or portion of future principal
payments on the Mortgage Assets in the related Trust. A Series of Certificates
may include one or more classes that are senior in right to payment to one or
more other classes of Certificates of such Series. Certain Series or classes of
Certificates may be covered by insurance policies, surety bonds or other forms
of credit enhancement, in each case as described herein and in the related
Supplement. One or more classes of Certificates
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of a Series may be entitled to receive distributions of principal, interest or
any combination thereof. Distributions on one or more classes of a Series of
Certificates may be made prior to one or more other classes, after the
occurrence of specified events, in accordance with a schedule or formula, on the
basis of collections from designated portions of the Mortgage Assets in the
related Trust, or on a different basis, in each case as specified in the related
Supplement. The timing and amounts of such distributions may vary among classes
or over time as specified in the related Supplement.
Distributions
Distributions of principal and interest (or, where applicable, of
principal only or interest only) on the related Certificates will be made by the
Trustee on each Distribution Date (i.e., monthly, quarterly, semi-annually or at
such other intervals and on the dates as are specified in the Supplement) in
proportion to the percentages specified in the related Supplement. Distributions
will be made by wire transfer (in the case of Certificates which are of a
certain minimum denomination, as specified in the related Supplement) or by
check mailed to record holders of such Certificates as of the date or dates
specified in the related Supplement (each, a "Record Date") at their addresses
appearing in the register maintained for holders of Certificates (the
"Certificate Register"), except that the final distribution of principal will be
made only upon presentation and surrender of such Certificate at the office or
agency of the Paying Agent for such Certificate specified in the related
Supplement. Notice will be mailed before the Distribution Date on which the
final distribution is expected to be made to the holder of such Certificate. In
the event the Certificates of a Series are issued in book-entry form,
distributions on such Certificates, including the final distribution in
retirement of such Certificates, will be made through the facilities of a
depository in accordance with its usual procedures in the manner described in
the related Supplement.
Distributions of principal of and interest on the Certificates will be
made by the Trustee out of the Certificate Account established under the Pooling
Agreement. All distributions on the Mortgage Certificates, if any, included in
the Trust for a Series, remittances on the Mortgage Loans by the Master Servicer
pursuant to the Pooling Agreement, together with any reinvestment income (if so
specified in the related Supplement) thereon and amounts withdrawn from any
Reserve Fund or other fund or payments in respect of other credit enhancement
and required to be so deposited, will be deposited directly into the Certificate
Account and thereafter will be available (except for funds held for future
distribution and for funds payable to the Master Servicer) to make distributions
on Certificates of such Series on the next succeeding Distribution Date. See
"The Trusts -- Certificate Account" and "The Pooling and Servicing Agreement --
Payments on Mortgage Loans" herein.
Interest. Interest will accrue on the aggregate Certificate Balance
(or, in the case of IO Certificates, the aggregate notional amount) of each
class of Certificates (the "Class Certificate Balance") entitled to interest at
the Pass-Through Rate (which may be a fixed rate or a rate adjustable as
specified in such Supplement) during each Interest Accrual Period specified in
such Supplement. The "Interest Accrual Period" with respect to any Distribution
Date shall be the period from (and including) the first day of the month
preceding the month of such Distribution Date (or, in the case of the first
Distribution Date, from the Closing Date) through the last day of such preceding
month, or such other period as may be specified in the related Supplement. To
the extent funds are available therefor, interest accrued during each such
Interest Accrual Period on each class of Certificates entitled to interest
(other than a class of Certificates that provides for interest that accrues, but
is not currently payable, referred to hereafter as "Accrual Certificates") will
be distributable on the Distribution Dates specified in the related Supplement
until the Class Certificate Balance of such class is reduced to zero or, in the
case of Certificates entitled only to distributions allocable to interest, until
the aggregate notional amount of such Certificates is reduced to zero or for the
period of time designated in the related Supplement. Unless otherwise specified
in the related Supplement, distributions allocable to interest on each
Certificate that is not entitled to distributions allocable to principal will be
calculated based on the notional amount of such Certificate. The notional amount
of a Certificate will not evidence an interest in or entitlement to
distributions allocable to principal but will be used solely for convenience in
expressing the calculation of interest and for certain other purposes. Unless
otherwise specified in the related Supplement, interest on the Certificates of
each class will be calculated on the basis of a 360-day year consisting of
twelve 30-day months.
Distributions of interest on each class of Accrual Certificates will
commence only after the occurrence of the events specified in the related
Supplement and, prior to such time, such interest will be added to the Class
Certificate Balance of such class of Accrual Certificates. Any such class of
Accrual Certificates will thereafter accrue interest on its outstanding Class
Certificate Balance as so adjusted.
Principal. Unless otherwise specified in the related Supplement, the
Class Certificate Balance of any class of Certificates entitled to distributions
of principal will be the original Class Certificate Balance of such class of
Certificates specified in such Supplement, reduced by all distributions reported
to holders of such Certificates as allocable to principal and adjustments, if
any, in respect of losses and (i) in the case of Accrual Certificates, increased
by all interest accrued but not then distributable on such Accrual Certificates
and (ii) in the case of adjustable rate Certificates, subject to the effect of
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negative amortization. The related Supplement will specify the method by which
the amount of principal to be distributed on the Certificates on each
Distribution Date will be calculated and the manner in which such amount will be
allocated among the classes of Certificates entitled to distributions of
principal.
Each class of Certificates of a Series (except for IO Certificates)
will (to the extent of funds available therefor) receive distributions of
principal in the amounts, at the times and in the manner specified in the
related Supplement until its initial aggregate Class Certificate Balance has
been fully amortized. Allocations of distributions of principal will be made to
the Certificates of each class, during the periods and in the order specified in
the related Supplement. Unless otherwise specified in the related Supplement,
distributions will be made pro rata among the Certificates of each class then
entitled to receive such distributions.
If so provided in the related Supplement, one or more classes of Senior
Certificates will be entitled to receive all or a disproportionate percentage of
the payments of principal that are received from borrowers in advance of their
scheduled due dates and are not accompanied by amounts representing scheduled
interest due after the month of such payments ("Principal Prepayments") in the
percentages and under the circumstances or for the periods specified in such
Supplement. Any such allocation of Principal Prepayments to such class or
classes of Certificates will have the effect of accelerating the amortization of
such Senior Certificates while increasing the interests evidenced by the
Subordinate Certificates in the Trust. Increasing the interests of the
Subordinate Certificates relative to that of the Senior Certificates is intended
to preserve the availability of the subordination provided by the Subordinate
Certificates. See "Credit Enhancement--Subordination" herein and "Credit
Enhancement --Subordination of the Subordinated Certificates" in the related
Supplement.
Unscheduled Distributions. If specified in the related Supplement, the
Certificates will be subject to receipt of distributions before the next
scheduled Distribution Date under the circumstances and in the manner described
below and in such Supplement. If applicable, the Trustee will be required to
make such unscheduled distributions on the day and in the amount specified in
the related Supplement if, due to substantial payments of principal (including
Principal Prepayments) on the Mortgage Assets, the Trustee or the Master
Servicer determines that the funds available or anticipated to be available from
the Certificate Account and, if applicable, any Reserve Fund, may be
insufficient to make required distributions on the Certificates on such
Distribution Date. Unless otherwise specified in the related Supplement, the
amount of any such unscheduled distribution that is allocable to principal will
not exceed the amount that would otherwise have been required to be distributed
as principal on the Certificates on the next Distribution Date. Unless otherwise
specified in the related Supplement, all unscheduled distributions will include
interest at the applicable Pass-Through Rate (if any) on the amount of the
unscheduled distribution allocable to principal for the period and to the date
specified in such Supplement.
Unless otherwise specified in the related Supplement, all distributions
allocable to principal in any unscheduled distribution will be made in the same
priority and manner as distributions of principal on the Certificates would have
been made on the next Distribution Date, and with respect to Certificates of the
same class, unscheduled distributions of principal will be made on a pro rata
basis. Notice of any unscheduled distribution will be given by the Trustee prior
to the date of such distribution.
The "Last Scheduled Distribution Date" for a class of Certificates is
the latest date as of which the Class Certificate Balance of the Certificates of
such class is expected to be fully amortized, either based on the assumptions
that all scheduled payments (with no prepayments) on the Mortgage Assets in the
related Trust are timely received and, if applicable, that all such scheduled
payments are reinvested on receipt at the rate or rates specified in the related
Supplement at which amounts in the Certificate Account are assumed to earn
interest (the "Assumed Reinvestment Rate"). (If an Assumed Reinvestment Rate is
specified for a Series of Certificates, reinvestment earnings on funds in the
Certificate Account will not belong to the Master Servicer as additional
servicing compensation. Such amounts will be part of the Trust and will be
available to make distributions on the related Certificates.) The "Last
Scheduled Distribution Date" for each class of Certificates will be specified in
the related Supplement.
Categories of Classes of Certificates
In general, the classes of certificates of each Series fall into
different categories. The following chart identifies and generally defines
certain of the more typical categories. The Supplement for a Series of
Certificates may identify the classes which comprise such Series by reference to
the following categories.
</TABLE>
<TABLE>
<CAPTION>
Categories of Classes Definition
PRINCIPAL TYPES
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Categories of Classes Definition
<S> <C>
Accretion Directed................ A class that receives principal payments from the accreted interest from
specified Accrual Classes. An Accretion Directed Class also may receive
principal payments from principal paid on the Mortgage Assets or other assets
of the Trust for the related Series.
Component Certificates............ A class consisting of "Components." The Components of a class of
Component Certificates may have different principal and/or interest payment
characteristics but together constitute a single class. Each Component of a
class of Component Certificates may be identified as falling into one or more
of the categories in this chart.
Notional Amount
Certificates.................... A class having no principal balance and bearing interest on the related
notional amount. The notional amount is used for purposes of the determination
of interest distributions.
Planned Principal Class
(also sometimes
referred to as "PACs").......... A class that is designed to receive principal payments using a predetermined
principal balance schedule derived by assuming two constant prepayment rates
for the underlying Mortgage Assets. These two rates are the endpoints for the
"structuring range" for the Planned Principal Class. The Planned Principal
Classes in any Series of Certificates may be subdivided into different
categories (e.g., Primary Planned Principal Classes, Secondary Planned
Principal Classes and so forth) having different effective structuring ranges
and different principal payment priorities. The structuring range for the
Secondary Planned Principal Class of a Series of Certificates will be narrower
than that for the Primary Planned Principal Class of such Series.
Scheduled Principal Class......... A class that is designed to receive principal payments using a predetermined
principal balance schedule but is not designated as a Planned Principal Class
or Targeted Principal Class. In many cases, the schedule is derived by assuming
two constant prepayment rates for the Mortgage Assets. These two rates are the
endpoints for the "structuring range" for the Scheduled Principal
Class.
Sequential Pay.................... Classes that receive principal payments in a prescribed sequence, that do not
have predetermined principal balance schedules and that under all circumstances
receive payments of principal continuously from the first Distribution Date on
which they receive principal until they are retired. A single class that
receives principal payments before or after all other classes in the same
Series of Certificates may be identified as a Sequential Pay Class.
Strip............................. A class that receives a constant proportion, or "strip," of the principal
payments on the Mortgage Assets. The constant proportion of such principal
payments may or may not vary for each Mortgage Asset included in the Trust and
will be calculated in the manner described in the related Supplement. Such
Classes may also receive payments of interest.
Support Class (also
sometimes referred to
as "companion classes")......... A class that receives principal payments on any Distribution Date only if
scheduled payments have been made on specified Planned Principal Classes,
Targeted Principal Classes and/or Scheduled Principal Classes.
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Categories of Classes Definition
Targeted Principal Class
(also sometimes
referred to as "TACs").......... A class that is designed to receive principal payments using a predetermined
principal balance schedule derived by assuming a single constant prepayment
rate for the Mortgage Assets.
INTEREST TYPES
Accrual........................... A class that accretes the amount of accrued interest otherwise distributable on
such class, which amount will be added as principal to the principal balance of
such class on each applicable Distribution Date. Such accretion may continue
until some specified event has occurred or until such class of Accrual
Certificates is retired.
Fixed Rate........................ A class with a Pass-Through Rate that is fixed throughout the life of the class.
Floating Rate..................... A class with a Pass-Through Rate that resets periodically based upon a
designated Index and that varies directly with changes in such Index.
Inverse Floating Rate............. A class with a Pass-Through Rate that resets periodically based upon a
designated Index and that varies inversely with changes in such Index.
IO................................ Certificates that receive some or all of the interest payments made on the
Mortgage Assets and little or no principal. IO Certificates have either a
nominal principal balance or a notional amount. A nominal principal balance
represents actual principal that will be paid on such Certificates. It is
referred to as nominal since it is extremely small compared to other classes. A
notional amount is the amount used as a reference to calculate the amount of
interest due on an IO Certificate that is not entitled to any distributions in
respect of principal.
Partial Accrual................... A class that accretes a portion of the amount of accrued interest thereon,
which amount will be added to the principal balance of such class on each
applicable Distribution Date, with the remainder of such accrued interest to be
distributed currently as interest on such class. Such accretion may continue
until a specified event retired.
PO................................ A class that does not bear interest and is entitled to receive only distributions
in respect of principal.
Variable Rate..................... A class with a Pass-Through Rate that resets periodically and is calculated by
reference to the rate or rates of interest applicable to specified assets or
instruments (e.g., the Mortgage Rates borne by the Mortgage Loans in the
related Trust).
Residual Certificates
A Series of REMIC Certificates will include a class of Residual
Certificates representing the right to receive on each Distribution Date, in
addition to any other distributions to which they are entitled in accordance
with their terms and as described in the related Supplement, the excess of the
sum of distributions, payments and other amounts received over the sum of (i)
the amount required to be distributed to Certificateholders on such Distribution
Date and (ii) certain expenses, all as more specifically described in the
related Supplement. In addition, after the aggregate Class Certificate Balances
of all classes of Regular Certificates has been fully amortized, holders of the
Residual Certificates will be the sole owners of the related Trust and will have
sole rights with respect to the Mortgage Assets and other assets remaining in
such Trust. Some or all of the Residual Certificates of a Series may be offered
by this Prospectus and the related Supplement; if so, the terms of such Residual
Certificates will be described in such Supplement. Any qualifications on direct
or indirect ownership of Residual Certificates offered hereby and by the related
Supplement, as well as restrictions on the transfer of such Residual
Certificates, will be set forth in the related Supplement. If such Residual
Certificates are not so offered, the Sponsor may (but need not) sell some or all
of such Residual Certificates on or after the date of original issuance of such
Series in
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transactions exempt from registration under the Securities Act and otherwise
under circumstances that will not adversely affect the REMIC status of the
Trust.
Advances
The Master Servicer may be obligated or have the right at its option
under the Pooling Agreement for a Series of Certificates backed in whole or in
part by Mortgage Loans to advance, on or prior to any Distribution Date, from
its own funds and/or funds being held in the Certificate Account for future
distribution to Certificateholders in an amount up to the aggregate of interest
and principal installments on the Mortgage Loans that are delinquent on the
related Determination Date. If specified in the related Supplement, in the case
of Cooperative Loans, the Master Servicer will be required to advance any unpaid
maintenance fees and other charges under the related proprietary leases. The
Master Servicer may be obligated to make such Advances only to the extent any
such Advance, in the judgment of the Master Servicer made on the Determination
Date, will be reimbursable from late payments made by Mortgagors, payments under
any Primary Mortgage Insurance Policy or other form of credit support or
proceeds of liquidation. Any Master Servicer funds thus advanced are
reimbursable to the Master Servicer from cash in the Certificate Account to the
extent that the Master Servicer shall determine that any such Advances
previously made are not ultimately recoverable from the sources described above.
In making Advances, the Master Servicer will endeavor to maintain a
regular flow of scheduled interest and principal payments to holders of the
related classes of Certificates, rather than to guarantee or insure against
losses. If Advances are made by the Master Servicer from funds being held for
future distribution to Certificateholders, the Master Servicer will replace such
funds on or before any future Distribution Date to the extent that funds in the
Certificate Account on such Distribution Date would be less than the amount
required to be available for distributions to Certificateholders on such date.
The Master Servicer may also be obligated to make advances, to the
extent recoverable out of insurance proceeds, liquidation proceeds or otherwise,
in respect of certain taxes and insurance premiums not paid by Mortgagors on a
timely basis. Funds so advanced are reimbursable to the Master Servicer to the
extent permitted by the Pooling Agreement. If specified in the related
Supplement, the obligations of the Master Servicer to make Advances may be
supported by a cash advance reserve fund, a surety bond or other arrangement, in
each case as described in such Supplement.
Reports to Certificateholders
Prior to or concurrently with each distribution on a Distribution Date
and except as otherwise set forth in the related Supplement, the Master Servicer
or the Trustee will furnish to each Certificateholder of record of the related
Series a statement setting forth, to the extent applicable to such Series of
Certificates, among other things:
(i) the amount of such distribution allocable to principal,
separately identifying the aggregate amount of any Principal
Prepayments and, if so specified in the related Supplement, prepayment
penalties included therein;
(ii) the amount of such distribution allocable to interest;
(iii) the amount of any Advance;
(iv) the aggregate amount withdrawn from the Reserve Fund,
if any, that is included in the amounts distributed to
Certificateholders;
(v) the Class Certificate Balance or notional amount of each
class of the related Series after giving effect to the distribution of
principal on such Distribution Date;
(vi) the percentage of principal payments on the Mortgage
Assets (excluding prepayments), if any, which each such class will be
entitled to receive on the following Distribution Date;
(vii) the percentage of Principal Prepayments with respect to
the Mortgage Assets, if any, which each such class will be entitled to
receive on the following Distribution Date;
(viii) the related amount of the servicing compensation
retained or withdrawn from the Certificate Account by the Master
Servicer, and the amount of additional servicing compensation received
by the Master Servicer attributable to penalties, fees, excess
Liquidation Proceeds and other similar charges and items;
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(ix) the number and aggregate principal balances of Mortgage
Loans (A) delinquent (exclusive of Mortgage Loans in foreclosure) (1) 1
to 30 days, (2) 31 to 60 days, (3) 61 to 90 days and (4) 91 or more
days and (B) in foreclosure and delinquent, as of the close of business
on the last day of the calendar month preceding such Distribution Date;
(x) the book value of any real estate acquired through
foreclosure or grant of a deed in lieu of foreclosure ("REO Property");
(xi) the Pass-Through Rate, if adjusted from the date of the
last statement, of any such class expected to be applicable to the next
distribution to such class;
(xii) if applicable, the amount remaining in the Reserve
Fund at the close of business on the Distribution Date;
(xiii) the Pass-Through Rate as of the day prior to the
immediately preceding Distribution Date; and
(xiv) any amounts remaining under letters of credit, pool
policies or other forms of credit support.
Where applicable, any amount set forth above may be expressed as a
dollar amount per single Certificate of the relevant class specified in the
related Supplement. The report to Certificateholders for any Series of
Certificates may include additional or other information of a similar nature to
that specified above.
In addition, within a reasonable period of time after the end of each
calendar year, the Master Servicer or the Trustee will mail to each
Certificateholder of record at any time during such calendar year a report (a)
as to the aggregate of amounts reported pursuant to (i) and (ii) for such
calendar year or, in the event such person was a Certificateholder of record
during a portion of such calendar year, for the applicable portion of such year
and (b) such other customary information as may be deemed necessary or desirable
for Certificateholders to prepare their tax returns.
CREDIT ENHANCEMENT
General
Credit enhancement may be provided with respect to one or more classes
of a Series of Certificates or with respect to the Mortgage Assets in the
related Trust. Credit enhancement may be in the form of a limited financial
guaranty policy issued by an entity named in the related Supplement, the
subordination of one or more classes of the Certificates of such Series, the
establishment of one or more reserve funds, the use of a cross-support feature,
the use of a mortgage pool insurance policy, bankruptcy bond, special hazard
insurance policy, surety bond, letter of credit, guaranteed investment contract
or other method of credit enhancement described in the related Supplement, or
any combination of the foregoing. Unless otherwise specified in the related
Supplement, no credit support will provide protection against all risks of loss
or guarantee repayment of the entire principal balance of the Certificates and
interest thereon. If losses occur which exceed the amount covered by credit
enhancement or which are not covered by the credit enhancement,
Certificateholders will bear their allocable share of any deficiencies.
If specified in the related Supplement, the coverage provided by one or
more forms of credit enhancement may apply concurrently to two or more related
Trusts. If applicable, the related Supplement will identify the Trusts to which
such credit enhancement relates and the manner of determining the amount of the
coverage provided thereby and of the application of such coverage to the
identified Trusts.
Subordination
If so specified in the related Supplement, the rights of holders of one
or more classes of Subordinate Certificates will be subordinate to the rights of
holders of one or more classes of Senior Certificates of such Series to
distributions in respect of scheduled principal, Principal Prepayments, interest
or any combination thereof that otherwise would have been payable to holders of
Subordinate Certificates under the circumstances and to the extent specified in
the related Supplement. If so specified in the related Supplement, certain
classes of Subordinate Certificates may be senior to other classes of
Subordinate Certificates and be rated investment grade ("Mezzanine
Certificates"). If specified in the related Supplement, delays in receipt of
scheduled payments on the Mortgage Assets and certain losses with respect to the
Mortgage Assets will be borne first by the various classes of Subordinate
Certificates and thereafter by the various classes of Senior Certificates, in
each case under the circumstances and subject to the limitations specified in
such related Supplement. The aggregate
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distributions in respect of delinquent payments on the Mortgage Assets over the
lives of the Certificates or at any time, the aggregate losses in respect of
Mortgage Assets which must be borne by the Subordinate Certificates by virtue of
subordination and the amount of distributions otherwise distributable to
Subordinate Certificateholders that will be distributable to Senior
Certificateholders on any Distribution Date may be limited as specified in the
related Supplement. If aggregate distributions in respect of delinquent payments
on the Mortgage Assets or aggregate losses in respect of such Mortgage Assets
were to exceed the amount specified in the related Supplement, Senior
Certificateholders would experience losses on their Certificates.
If specified in the related Supplement, various classes of Senior
Certificates and Subordinate Certificates may themselves be subordinate in their
right to receive certain distributions to other classes of Senior Certificates
and Subordinate Certificates, respectively, through a cross support mechanism or
otherwise.
As between classes of Senior Certificates and as between classes of
Subordinate Certificates, distributions may be allocated among such classes (i)
in the order of their scheduled final distribution dates, (ii) in accordance
with a schedule or formula, (iii) in relation to the occurrence of events or
(iv) otherwise, in each case as specified in the related Supplement.
Surety Bonds
A surety bond or bonds may be obtained and maintained for a Series or
certain classes thereof which will, subject to certain conditions and
limitations, guaranty payments of all or limited amounts of principal and
interest due on all or certain of the classes of such Series.
Mortgage Pool Insurance Policies
If specified in the related Supplement, a separate mortgage pool
insurance policy ("Mortgage Pool Insurance Policy") will be obtained for the
Trust and issued by the insurer (the "Pool Insurer") named in such Supplement.
Each Mortgage Pool Insurance Policy will, subject to the limitations described
below, cover loss by reason of default in payment on Mortgage Loans in the Trust
in an amount equal to a percentage specified in such Supplement of the aggregate
principal balance of such Mortgage Loans on the Cut-off Date. As more fully
described below, the Master Servicer will present claims thereunder to the Pool
Insurer on behalf of itself, the Trustee and Certificateholders. The Mortgage
Pool Insurance Policies, however, are not blanket policies against loss, since
claims thereunder may be made only respecting particular defaulted Mortgage
Loans and only upon satisfaction of certain conditions precedent described
below. Unless otherwise specified in the related Supplement, the Mortgage Pool
Insurance Policies will not cover losses due to a failure to pay or denial of a
claim under a Primary Mortgage Insurance Policy.
Unless otherwise specified in the related Supplement, each Mortgage
Pool Insurance Policy will provide that no claims may be validly presented
unless (i) any required Primary Mortgage Insurance Policy is in effect for the
defaulted Mortgage Loan and a claim thereunder has been submitted and settled;
(ii) hazard insurance on the related Mortgaged Property has been kept in force
and real estate taxes and other protection and preservation expenses have been
paid; (iii) if there has been physical loss or damage to the Mortgaged Property,
it has been restored to its physical condition (reasonable wear and tear
excepted) at the time of issuance of the policy; and (iv) the insured has
acquired good and merchantable title to the Mortgaged Property free and clear of
liens except certain permitted encumbrances. Upon satisfaction of these
conditions, the Pool Insurer will have the option either (a) to purchase the
Mortgaged Property at a price equal to the principal balance of the related
Mortgage Loan plus accrued and unpaid interest at the Mortgage Rate to the date
of such purchase and certain expenses incurred by the Master
Servicer on behalf of the Trustee and Certificateholders or (b) to pay the
amount by which the sum of the principal balance of the defaulted Mortgage Loan
plus accrued and unpaid interest at the Mortgage Rate to the date of payment of
the claim and the aforementioned expenses exceeds the proceeds received from an
approved sale of the Mortgaged Property, in either case net of certain amounts
paid or assumed to have been paid under the related Primary Mortgage Insurance
Policy. If any Mortgaged Property is damaged, and proceeds, if any, from the
related hazard insurance policy or the applicable Special Hazard Insurance
Policy are insufficient to restore the damaged property to a condition
sufficient to permit recovery under the Mortgage Pool Insurance Policy, the
Master Servicer will not be required to expend its own funds to restore the
damaged property unless it determines that (i) such restoration will increase
the proceeds to Certificateholders on liquidation of the Mortgage Loan after
reimbursement of the Master Servicer for its expenses and (ii) such expenses
will be recoverable by it through proceeds of the sale of the Mortgaged Property
or proceeds of the related Mortgage Pool Insurance Policy or any related Primary
Mortgage Insurance Policy.
No Mortgage Pool Insurance Policy will insure (and many Primary
Mortgage Insurance Policies do not insure) against loss sustained by reason of a
default arising from, among other things, (i) fraud or negligence in the
origination or servicing of a Mortgage Loan, including misrepresentation by the
Mortgagor, the originator or persons involved in the
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origination thereof, or (ii) failure to construct a Mortgaged Property in
accordance with plans and specifications. A failure of coverage attributable to
one of the foregoing events might result in a breach of the related Seller's
representations described herein and, in such event, might give rise to an
obligation on the part of such Seller to repurchase the defaulted Mortgage Loan
if the breach cannot be cured by such Seller. No Mortgage Pool Insurance Policy
will cover (and many Primary Mortgage Insurance Policies do not cover) a claim
in respect of a defaulted Mortgage Loan occurring when the servicer of such
Mortgage Loan, at the time of default or thereafter, was not approved by the
applicable insurer.
The original amount of coverage under each Mortgage Pool Insurance
Policy will be reduced over the life of the related Certificates by the
aggregate dollar amount of claims paid less the aggregate of the net amounts
realized by the Pool Insurer upon disposition of all foreclosed properties. The
amount of claims paid will include certain expenses incurred by the Master
Servicer as well as accrued interest on delinquent Mortgage Loans to the date of
payment of the claim, unless otherwise specified in the related Supplement.
Accordingly, if aggregate net claims paid under any Mortgage Pool Insurance
Policy reach the original policy limit, coverage under that Mortgage Pool
Insurance Policy will be exhausted and any further losses will be borne by
Certificateholders.
Fraud Waiver
If so specified in the related Supplement, a letter may be obtained
from the issuer of a Mortgage Pool Insurance Policy (the "Waiver Letter")
waiving its right to deny a claim or rescind coverage under the related Mortgage
Pool Insurance Policy by reason of fraud, dishonesty or misrepresentation in
connection with the origination of, or application for insurance for, the
related Mortgage Loan or the denial or adjustment of coverage under any related
Primary Mortgage Insurance Policy because of such fraud, dishonesty or
misrepresentation. In such circumstances, the issuer of the Mortgage Pool
Insurance Policy will be indemnified by the Seller for the amount of any loss
paid by the issuer of the Mortgage Pool Insurance Policy (each such amount, a
"Fraud Loss") under the terms of the Waiver Letter. The maximum aggregate amount
of Fraud Losses covered under the Waiver Letter and the period of time during
which such coverage will be provided will be specified in the related
Supplement.
Special Hazard Insurance Policies
If specified in the related Supplement, a separate Special Hazard
Insurance Policy will be obtained for the Trust and will be issued by the
insurer (the "Special Hazard Insurer") named in such Supplement. Each Special
Hazard Insurance Policy will, subject to limitations described below, protect
holders of the related Certificates from (i) loss by reason of damage to
Mortgaged Properties caused by certain hazards (including earthquakes and, to a
limited extent, tidal waves and related water damage and such other hazards as
are specified in the related Supplement) not insured against under the standard
form of hazard insurance policy for the respective states in which the Mortgaged
Properties are located or under a flood insurance policy if the Mortgaged
Property is located in a federally designated flood area and (ii) loss caused by
reason of the application of the coinsurance clause contained in hazard
insurance policies. See "Servicing of Mortgage Loans -- Hazard Insurance"
herein. No Special Hazard Insurance Policy will cover losses occasioned by fraud
or conversion by the Trustee or Master Servicer, war, insurrection, civil war,
certain governmental action, errors in design, faulty workmanship or materials
(except under certain circumstances), nuclear or chemical reaction, flood (if
the Mortgaged Property is located in a federally designated flood area), nuclear
or chemical contamination and certain other risks. The amount of coverage under
any Special Hazard Insurance Policy will be specified in the related Supplement.
Each Special Hazard Insurance Policy will provide that no claim may be paid
unless hazard and, if applicable, flood insurance on the property securing the
Mortgage Loan have been kept in force and other protection and preservation
expenses have been paid.
Subject to the foregoing limitations and unless otherwise specified in
the related Supplement, each Special Hazard Insurance Policy will provide that
where there has been damage to property securing a foreclosed Mortgage Loan
(title to which has been acquired by the insured) and to the extent such damage
is not covered by the hazard insurance policy or flood insurance policy, if any,
maintained by the Mortgagor or the Master Servicer, the Special Hazard Insurer
will pay the lesser of (i) the cost of repair or replacement of such property or
(ii) upon transfer of the property to the Special Hazard Insurer, the unpaid
principal balance of such Mortgage Loan at the time of acquisition of such
property by foreclosure or deed in lieu of foreclosure, plus accrued interest to
the date of claim settlement and certain expenses incurred by the Master
Servicer with respect to such property. If the unpaid principal balance of a
Mortgage Loan plus accrued interest and certain expenses is paid by the Special
Hazard Insurer, the amount of further coverage under the related Special Hazard
Insurance Policy will be reduced by such amount less any net proceeds from the
sale of the property. Any amount paid as the cost of repair of such property
will also reduce coverage by such amount. So long as a Mortgage Pool Insurance
Policy remains in effect, the payment by the Special Hazard Insurer of the cost
of repair or of the unpaid principal balance of the related Mortgage Loan plus
accrued interest and certain expenses will not affect the total insurance
proceeds paid to Certificateholders, but will
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affect the relative amounts of coverage remaining under the related Special
Hazard Insurance Policy and Mortgage Pool Insurance Policy.
To the extent specified in the Supplement, the Master Servicer may
deposit cash, an irrevocable letter of credit or any other instrument acceptable
to each nationally recognized rating agency rating the Certificates of the
related Series in a special trust account to provide protection in lieu of or in
addition to that provided by a Special Hazard Insurance Policy. The amount of
any Special Hazard Insurance Policy or of the deposit to the special trust
account in lieu thereof relating to such Certificates may be reduced so long as
any such reduction will not result in a downgrading of the rating of such
Certificates by any such rating agency.
Bankruptcy Bonds
If specified in the related Supplement, a bankruptcy bond (the
"Bankruptcy Bond") to cover losses resulting from proceedings under the
Bankruptcy Code with respect to a Mortgage Loan will be issued by an insurer
named in such Supplement. Each Bankruptcy Bond will cover, to the extent
specified in the related Supplement, certain losses resulting from a reduction
by a bankruptcy court of scheduled payments of principal and interest on a
Mortgage Loan or a reduction by such court of the principal amount of a Mortgage
Loan and will cover certain unpaid interest on the amount of such a principal
reduction from the date of the filing of a bankruptcy petition. The required
amount of coverage under each Bankruptcy Bond will be set forth in the related
Supplement. Coverage under a Bankruptcy Bond may be cancelled or reduced by the
Master Servicer if such cancellation or reduction would not adversely affect the
then current rating or ratings of the related Certificates. See "Certain Legal
Aspects of the Mortgage Loans -- Anti-Deficiency Legislation and Other
Limitations on Sellers" herein.
To the extent specified in the Supplement, the Master Servicer may
deposit cash, an irrevocable letter of credit or any other instrument acceptable
to each nationally recognized rating agency rating the Certificates of the
related Series in a special trust account to provide protection in lieu of or in
addition to that provided by a Bankruptcy Bond. The amount of any Bankruptcy
Bond or of the deposit to the special trust account in lieu thereof relating to
such Certificates may be reduced so long as any such reduction will not result
in a downgrading of the rating of such Certificates by any such rating agency.
Reserve Fund
If so specified in the related Supplement, credit support with respect
to a Series of Certificates may be provided by the establishment and maintenance
with the Trustee for such Series of Certificates, in trust, of one or more
reserve funds (the "Reserve Fund") for such Series. The related Supplement will
specify whether or not a Reserve Fund will be included in the Trust for such
Series.
The Reserve Fund for a Series will be funded (i) by the deposit therein
of cash, U.S. Treasury securities or instruments evidencing ownership of
principal or interest payments thereon, letters of credit, demand notes,
certificates of deposit or a combination thereof in the aggregate amount
specified in the related Supplement, (ii) by the deposit therein from time to
time of certain amounts, as specified in the related Supplement, to which
Subordinate Certificateholders, if any, would otherwise be entitled or (iii) in
such other manner as may be specified in the related Supplement.
Any amounts on deposit in the Reserve Fund and the proceeds of any
other instrument deposited therein upon maturity will be held in cash or will be
invested in Eligible Investments. Any instrument deposited therein will name the
Trustee, in its capacity as trustee for Certificateholders, or such other entity
as is specified in the related Supplement, as beneficiary and will be issued by
an entity acceptable to each rating agency that rates the Certificates.
Additional information with respect to such instruments deposited in the Reserve
Funds will be set forth in the related Supplement.
Any amounts so deposited and payments on instruments so deposited will
be available for withdrawal from the Reserve Fund for distribution to
Certificateholders for the purposes, in the manner and at the times specified in
the related Supplement.
Cross Support
If specified in the related Supplement, the beneficial ownership of
separate groups of assets included in a Trust may be evidenced by separate
classes of the related Series of Certificates. In such case, credit support may
be provided by a cross support feature which requires that distributions be made
with respect to Certificates evidencing a beneficial ownership
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interest in other asset groups within the same Trust. The related Supplement for
a Series that includes a cross support feature will describe the manner and
conditions for applying such cross support feature.
Other Insurance, Guaranties, Letters of Credit and Similar Instruments or
Agreements
If specified in the related Supplement, a Trust may also include
insurance, guaranties, letters of credit or similar arrangements for the purpose
of (i) maintaining timely payments or providing additional protection against
losses on the assets included in such Trust, (ii) paying administrative expenses
or (iii) establishing a minimum reinvestment rate on the payments made in
respect of such assets or principal payment rate on such assets. Such
arrangements may include agreements under which Certificateholders are entitled
to receive amounts deposited in various accounts held by the Trustee upon the
terms specified in such Supplement.
YIELD AND PREPAYMENT CONSIDERATIONS
The weighted average life of a Series of Certificates and the yield to
investors depend in part on the rate and timing of principal payments received
on or in respect of the Mortgage Assets included in the related Trust.
Prepayments on mortgage loans are commonly measured relative to a prepayment
standard or model. The prepayment model, if any, used with respect to a
particular Series will be identified and described in the related Supplement.
The Supplement for a Series of Certificates may contain a table setting
forth percentages of the initial Certificate Balance of each class expected to
be outstanding after each of the dates shown in such table. Any such table will
be based upon a number of assumptions stated in such Supplement, including
assumptions that prepayments on the mortgage loans underlying the related
Mortgage Certificates or on the Mortgage Loans are made at rates corresponding
to various percentages of the prepayment model specified in the related
Supplement. It is unlikely, however, that the prepayment of the mortgage loans
underlying the Mortgage Certificates, or of the Mortgage Loans, underlying any
Series will conform to any of the percentages of the prepayment model described
in the table set forth in such Supplement.
The rate of principal prepayments on pools of mortgage loans underlying
the Mortgage Certificates and Mortgage Loans is influenced by a variety of
economic, geographic, social and other factors. In general, however, if
prevailing interest rates fall significantly below the interest rates on such
mortgage loans or on the Mortgage Loans included in a Trust, such mortgage loans
or Mortgage Loans are likely to be the subject of higher principal prepayments
than if prevailing rates remain at or above the rates borne by such mortgage
loans or Mortgage Loans. Conversely, if prevailing interest rates rise
appreciably above the interest rates on such mortgage loans or on the Mortgage
Rates borne by the Mortgage Loans included in a Trust, such mortgage loans or
Mortgage Loans are likely to experience a lower prepayment rate than if
prevailing rates remain at or below the rates borne by such mortgage loans or
Mortgage Rates. Other factors affecting prepayment of mortgage loans include
changes in mortgagors' housing needs, job transfers, unemployment, mortgagors'
net equity in the properties securing the mortgage loans and the availability of
mortgage funds.
Prepayments may also result from the enforcement of any "due-on-sale"
provisions contained in a Mortgage Note permitting the holder of the Mortgage
Note to demand immediate repayment of the outstanding balance of the Mortgage
Loan upon conveyance by the Mortgagor of the underlying Mortgaged Property. The
Master Servicer will agree that it will enforce any "due-on-sale" clause to the
extent it has knowledge of the conveyance or proposed conveyance of the
underlying Mortgaged Property and reasonably believes that it is entitled to do
so under applicable law; provided, however, that the Master Servicer will not
take any action in relation to the enforcement of any "due-on-sale" provision
which would impair or threaten to impair any recovery under any related Primary
Mortgage Insurance Policy. Under current law, such exercise is permitted for
substantially all the mortgage loans which contain such clauses. Acceleration is
not permitted, however, for certain types of transfers, including transfers upon
the death of a joint tenant or tenant by the entirety and the granting of a
leasehold interest of three years or less not containing an option to purchase.
Mortgage Loans insured by the FHA and Mortgage Loans partially
guaranteed by the VA are assumable with the consent of the FHA and the VA,
respectively. Thus, the rate of prepayments on such Mortgage Loans may be lower
than that on conventional Mortgage Loans bearing comparable interest rates.
When a full prepayment is made on a Mortgage Loan, the Mortgagor is
charged interest on the principal amount of the Mortgage Loan so prepaid only
for the number of days in the month actually elapsed up to the date of the
prepayment rather than for a full month. Unless otherwise specified in the
related Supplement, the effect of prepayments in full will be to reduce the
amount of interest passed through in the following month to Certificateholders
because interest on the principal
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amount of any Mortgage Loan so prepaid will be paid only to the date of
prepayment. Partial prepayments in a given month may be applied to the
outstanding principal balances of the Mortgage Loans so prepaid on the first day
of the month of receipt or the month following receipt. In the latter case,
partial prepayments will not reduce the amount of interest passed through in
such month. Unless otherwise specified in the related Supplement, both full and
partial prepayments will not be passed through until the month following
receipt.
The effective yield to Certificateholders will be slightly lower than
the yield otherwise produced by the applicable Pass-Through Rate and purchase
price because while interest will accrue on each Mortgage Loan from the first
day of the month (unless otherwise provided in the related Supplement), the
distribution of such interest will not be made earlier than the month following
the month of accrual.
Under certain circumstances, the Master Servicer or, if specified in
the related Supplement for a Series of REMIC Certificates, the holders of the
Residual Certificates of such Series may have the option to purchase the assets
of a Trust thereby effecting early retirement of the related Series of
Certificates. See "The Pooling and Servicing Agreement--Termination; Optional
Termination" herein.
Factors other than those identified herein and in the related
Supplement could significantly affect principal prepayments at any time and over
the lives of the Certificates. The relative contribution of the various factors
affecting prepayment may also vary from time to time. There can be no assurance
as to the rate of payment of principal of the Mortgage Assets at any time or
over the lives of the Certificates.
The Supplement relating to a Series of Certificates will discuss in
greater detail the effect of the rate and timing of principal payments
(including Principal Prepayments), delinquencies and losses on the yield,
weighted average lives and maturities of such Certificates.
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THE SPONSOR
Headlands Mortgage Securities, Inc., a Delaware corporation (the
"Sponsor"), was organized on November 18, 1996 for the limited purpose of
acquiring, owning and transferring Mortgage Assets and selling interests therein
or bonds secured thereby. As of January 1, 1997, the Sponsor will be a
subsidiary of Headlands Mortgage Company, a closely-held California
S-corporation. The Sponsor maintains its principal office at 700 Larkspur
Landing Circle, Suite 250, Larkspur, California 94939. Its telephone number is
(415) 925-5442.
Neither the Sponsor nor any of the Sponsor's affiliates will ensure or
guarantee distributions on the Certificates of any Series.
USE OF PROCEEDS
The net proceeds to be received from the sale of each Series of
Certificates will be used by the Sponsor to either purchase the Mortgage Assets
related to that Series or to return to the Sponsor the amounts previously used
to effect such a purchase, the costs of carrying the Mortgage Assets until sale
of the Certificates and other expenses connected with pooling the Mortgage
Assets and issuing the Certificates.
MORTGAGE LOAN PROGRAM
Set forth below is a description of aspects of the Sponsor's purchase
program for Mortgage Loans eligible for inclusion in a Trust. The related
Supplement will contain additional information regarding the origination of the
Mortgage Loans.
The Sponsor will purchase Mortgage Loans, either directly or through
affiliates, from Sellers. The Mortgage Loans so acquired by the Sponsor will
have been originated in accordance with the underwriting criteria specified
below under "--Underwriting Standards".
Underwriting Standards
Each Seller will represent and warrant that all Mortgage Loans
originated and/or sold by it to the Sponsor or one of its affiliates will have
been underwritten in accordance with standards consistent with those utilized by
mortgage lenders generally during the period of origination for similar types of
loans. As to any Mortgage Loan insured by the FHA or partially guaranteed by the
VA, the Seller will represent that it has complied with underwriting policies of
the FHA or the VA, as the case may be.
Underwriting standards are applied by or on behalf of a lender to
evaluate the borrower's credit standing and repayment ability, and the value and
adequacy of the mortgaged property as collateral. In general, a prospective
borrower applying for a mortgage loan is required to fill out a detailed
application designed to provide to the underwriting officer pertinent credit
information. As part of the description of the borrower's financial condition,
the borrower generally is required to provide a current list of assets and
liabilities and a statement of income and expenses, as well as an authorization
to apply for a credit report which summarizes the borrower's credit history with
local merchants and lenders and any record of bankruptcy. In most cases, an
employment verification is obtained from an independent source (typically the
borrower's employer), which verification reports the length of employment with
that organization, the borrower's current salary and whether it is expected that
the borrower will continue such employment in the future. If a prospective
borrower is self-employed, the borrower may be required to submit copies of
signed tax returns. The borrower may also be required to authorize verification
of deposits at financial institutions where the borrower has demand or savings
accounts.
In determining the adequacy of the mortgaged property as collateral, an
appraisal is made of each property considered for financing. The appraiser is
required to inspect the property and verify that it is in good repair and that
construction, if new, has been completed. The appraisal is based on the market
value of comparable homes, the estimated rental income (if considered applicable
by the appraiser) and the cost of replacing the home.
Once all applicable employment, credit and property information is
received, a determination generally is made as to whether the prospective
borrower has sufficient monthly income available (i) to meet the borrower's
monthly obligations on the proposed mortgage loan (generally determined on the
basis of the monthly payments due in the year of
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origination) and other expenses related to the mortgaged property (such as
property taxes and hazard insurance) and (ii) to meet monthly housing expenses
and other financial obligations and monthly living expenses. The underwriting
standards applied by a Seller, particularly with respect to the level of loan
documentation and the mortgagor's income and credit history, may be varied in
appropriate cases where factors such as low LTVs or other favorable credit
exist.
If specified in the related Supplement, a portion of the Mortgage Loans
in a Mortgage Pool may have been originated under a limited documentation
program. Under a limited documentation program, more emphasis is placed on the
value and adequacy on the mortgaged property as collateral and other assets of
the borrower than on credit underwriting. Under a limited documentation program,
certain credit underwriting documentation concerning income or income
verification and/or employment verification is waived.
In the case of a Mortgage Loan secured by a leasehold interest in real
property, the title to which is held by a third party lessor, the Seller will
represent and warrant, among other things, that the remaining term of the lease
and any sublease is at least five years longer than the remaining term on the
Mortgage Note.
Certain of the types of Mortgage Loans that may be included in a Trust
may involve additional uncertainties not present in traditional types of loans.
For example, certain of such Mortgage Loans may provide for escalating or
variable payments by the Mortgagor. These types of Mortgage Loans are
underwritten on the basis of a judgment that the Mortgagors have the ability to
make the monthly payments required initially. In some instances, however, a
Mortgagor's income may not be sufficient to permit continued loan payments as
such payments increase. These types of Mortgage Loans may also be underwritten
primarily upon the basis of LTVs or other favorable credit factors.
Qualifications of Sellers
Each Seller must be an institution experienced in originating and
servicing mortgage loans of the type contained in the related Mortgage Pool in
accordance with accepted practices and prudent guidelines, and must maintain
satisfactory facilities to originate and service those mortgage loans. Each
Seller must be a seller/servicer approved by either FNMA or FHLMC. Each Seller
must be a mortgagee approved by the FHA or an institution the deposit accounts
in which are insured by the Federal Deposit Insurance Corporation.
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THE POOLING AND SERVICING AGREEMENT
Set forth below is a summary of certain provisions of the Pooling
Agreement which are not described elsewhere in this Prospectus.
Assignment of Mortgage Loans
Assignment of Mortgage Loans. At the time of issuance of each Series of
Certificates, the Sponsor will cause the Mortgage Loans comprising the related
Trust to be assigned to the Trustee together with all principal and interest on
the Mortgage Loans, except for principal and interest due on or before the
Cut-off Date. The Trustee will, concurrently with such assignment, authenticate
and deliver the Certificates to the Sponsor or its designated agent in exchange
for the Mortgage Loans and other assets, if any. Each Mortgage Loan will be
identified in a schedule appearing as an exhibit to the Pooling Agreement. Such
schedule will include information as to the outstanding principal balance of
each Mortgage Loan after application of payments due on the Cut-off Date, as
well as information regarding the Mortgage Rate, the current scheduled monthly
payment of principal and interest, the maturity of each Mortgage Note, the LTV
and certain other information.
In addition, the Sponsor will, as to each Mortgage Loan, deliver to the
Trustee (or a custodian) the Mortgage Note endorsed without recourse in blank or
to the order of the Trustee, an assignment to the Trustee of the Mortgage in
form for recording or filing as may be appropriate in the state of the Mortgaged
Property, the original recorded Mortgage with evidence of recording or filing
indicated thereon, or a copy of such Mortgage certified by the recording office
in those jurisdictions where the original is retained by the recording office, a
copy of the title insurance policy or other evidence of title, and evidence of
any Primary Mortgage Insurance Policy for such Mortgage Loan, if applicable. In
certain instances where documents respecting a Mortgage Loan may not be
available prior to execution of the Pooling Agreement, the Sponsor may deliver
copies thereof and deliver such documents to the Trustee promptly upon receipt.
With respect to any Mortgage Loans that are Cooperative Loans, the
Sponsor will cause to be delivered to the Trustee the related original
cooperative note endorsed without recourse in blank or to the order of the
Trustee, the original security agreement, the proprietary lease or occupancy
agreement, the recognition agreement, an executed financing agreement and the
relevant stock certificate, related blank stock powers and any other document
specified in the related Supplement. The Sponsor will cause to be filed in the
appropriate office an assignment and a financing statement evidencing the
Trustee's security interest in each Cooperative Loan.
The Trustee (or a custodian) will review the Mortgage Loan documents
within a specified number of days of receipt thereof in original form to
ascertain that all required documents have been properly executed and received.
The Trustee will hold such documents for each Series in trust for the benefit of
holders of the Certificates of such Series. Unless otherwise specified in the
related Supplement, if any document is found by the Trustee not to have been
properly executed or received or to be unrelated to the Mortgage Loans
identified in the Pooling Agreement, and such defect cannot be cured within the
permitted time period, the Seller will replace such Mortgage Loan with an
eligible substitute mortgage loan (as described in the related Supplement) or
repurchase the related Mortgage Loan from the Trustee within a specified number
of days of receipt of notice of the defect at a price generally equal to the
outstanding principal balance thereof, plus accrued and unpaid interest thereon
at the applicable Mortgage Rate to the first day of the month following the
month of repurchase (less any unreimbursed Advances or amounts payable as
related servicing compensation if the Seller is the Master Servicer with respect
to such Mortgage Loan). Upon receipt of the repurchase price, in the case of a
repurchase, the Trustee will reimburse any unreimbursed Advances of principal
and interest by the Master Servicer with respect to such Mortgage Loan or
unreimbursed payments under any form of credit enhancement. The remaining
portion of such repurchase price will then be passed through to holders of the
Certificates as liquidation proceeds in accordance with the procedures specified
under "Description of Certificates -- Distributions" herein. This
substitution/repurchase obligation constitutes the sole remedy available to
Certificateholders or the Trustee for such a defect in a constituent document.
Any restrictions on such substitution or repurchase with respect to a
Series of Certificates will be set forth in the related Supplement.
The Trustee will be authorized to appoint a custodian pursuant to a
custodial agreement to maintain possession of and, if applicable, to review the
documents relating to the Mortgage Loans as agent of the Trustee.
Unless otherwise specified in the related Supplement, assignments of
the Mortgage Loans to the Trustee will be recorded or filed in the appropriate
jurisdictions except in jurisdictions where, in the written opinion of local
counsel
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acceptable to the Sponsor, such filing or recording is not required to protect
the Trustee's interest in the Mortgage Loans against the claim of any subsequent
transferee or any successor to or creditor of the Sponsor or the Seller.
Assignment of Mortgage Certificates. The Sponsor will cause the
Mortgage Certificates to be registered in the name of the Trustee or its
nominee, and the Trustee concurrently will authenticate and deliver the
Certificates. The Trustee (or the custodian) will hold the Mortgage Certificates
in the manner described in the related Supplement. Each Mortgage Certificate
will be identified in a schedule appearing as an exhibit to the Pooling
Agreement, which will specify as to each Mortgage Certificate the original
principal amount and outstanding principal balance as of the Cut-off Date, the
annual pass-through rate (if any) and the maturity date.
Representations and Warranties
Unless otherwise specified in the related Supplement, the Sponsor will
not make any representations and warranties regarding the Mortgage Loans, and
its assignment of the Mortgage Loans to the Trustee will be without recourse. As
further described below, the Seller will make certain representations and
warranties concerning the Mortgage Loans in the related Pooling Agreement and
under certain circumstances may be required to repurchase or substitute a
Mortgage Loan as a result of a breach of any such representation or warranty.
In the Pooling Agreement for each Series of Certificates backed in
whole or in part by Mortgage Loans, the Seller will represent and warrant to the
Trustee, unless otherwise specified in the related Supplement, among other
things, that: (i) the information set forth in the schedule of Mortgage Loans is
true and correct in all material respects; (ii) at the time of transfer the
Seller had good title to the Mortgage Loans and the Mortgage Notes were subject
to no offsets, defenses or counterclaims, except to the extent that the buydown
agreement for a Buydown Loan forgives certain indebtedness of a Mortgagor; (iii)
as of the Cut-off Date, no Mortgage Loan was more than 30 days delinquent; (iv)
a title policy (or other satisfactory evidence of title) was issued on the date
of the origination of each Mortgage Loan and each such policy or other evidence
of title is valid and remains in full force and effect; (v) if a Primary
Mortgage Insurance Policy is required with respect to such Mortgage Loan, such
policy is valid and remains in full force and effect as of the Closing Date;
(vi) as of the Closing Date, each Mortgage is a valid first lien on the related
Mortgaged Property (subject only to (a) liens for current real property taxes
and special assessments, (b) covenants, conditions and restrictions, rights of
way, easements and other matters of public record as of the date of recording of
such Mortgage, such exceptions appearing of record being acceptable to mortgage
lending institutions generally or specifically reflected in the mortgage
originator's appraisal, and (c) other matters to which like properties are
commonly subject which do not materially interfere with the benefits of the
security intended to be provided by the Mortgage); (vii) as of the Closing Date,
each Mortgaged Property is free of damage and is in good repair; (viii) as of
the time each Mortgage Loan was originated, the Mortgage Loan complied with all
applicable state and federal laws, including usury, equal credit opportunity,
disclosure and recording laws; and (ix) as of the Closing Date, there are no
delinquent tax or assessment liens against any Mortgaged Property.
In the event of the discovery by the Seller of a breach of any of its
representations or warranties which materially and adversely affects the
interest of Certificateholders in the related Mortgage Loan, or the receipt of
notice thereof from the Trustee, the Seller will, with respect to a breach of
its representations or warranties, cure the breach within the time permitted by
the related Pooling Agreement or substitute a substantially similar substitute
mortgage loan for such Mortgage Loan or repurchase the related Mortgage Loan, or
any Mortgaged Property acquired in respect thereof, on the terms set forth above
under "--Assignment of Mortgage Loans" and in the related Supplement. The
proceeds of any such repurchase will be passed through to Certificateholders as
liquidation proceeds. This substitution/repurchase obligation constitutes the
sole remedy available to Certificateholders and the Trustee for any such breach.
Neither the Sponsor nor the Master Servicer (unless the Master Servicer is the
Seller) will be obligated to purchase a Mortgage Loan if a Seller defaults on
its obligation to do so, and no assurance can be given that the Seller will
carry out their respective repurchase obligations with respect to the Mortgage
Loans.
Since the representations and warranties of a Seller do not address
events that may occur following the sale of a Mortgage Loan by such Seller, its
repurchase obligation described below will not arise if the relevant event that
would otherwise have given rise to such an obligation with respect to a Mortgage
Loan occurs after the date of sale of such Mortgage Loan by such Seller to the
Sponsor or its affiliates.
Servicing
The Master Servicer will be responsible for servicing and administering
the Mortgage Loans and will agree to perform diligently all services and duties
customary to the servicing by prudent mortgage lending institutions or mortgages
of the same type as the Mortgage Loans in those jurisdictions where the related
Mortgage Properties are located. The Master
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Servicer may enter into a subservicing agreement with a subservicer to perform,
as an independent contractor, certain servicing functions for the Master
Servicer subject to its supervision. A subservicing agreement will not contain
any terms or conditions that are inconsistent with the related Pooling
Agreement. The subservicer will receive a fee for such services which will be
paid by the Master Servicer out of the Master Servicing Fee. The Master Servicer
will have the right to remove the subservicer of any Mortgage Loan at any time
for cause and at any other time upon the giving of the required notice. In such
event, the Master Servicer would continue to be responsible for servicing such
Mortgage Loan and may designate a replacement subservicer (which may include an
affiliate of the Sponsor or the Master Servicer).
The Master Servicer is required to maintain a fidelity bond and errors
and omissions policy or their equivalent with respect to officers and employees
which provide coverage against losses which may be sustained as a result of an
officer's or employee's misappropriation of funds or errors and omissions in
failing to maintain insurance, subject to certain limitations as to amount of
coverage, deductible amounts, conditions, exclusions and exceptions in the form
and amount specified in the Pooling Agreement.
Payments on Mortgage Loans
The Master Servicer will establish and maintain or cause to be
established and maintained with respect to the related Trust one or more
accounts for the collection of payments on the related Mortgage Assets (the
"Certificate Account") which must be an Eligible Account. An "Eligible Account"
is an account or accounts which is either (i) maintained with a depository
institution the short-term debt obligations of which (or, in the case of a
depository institution that is the principal subsidiary of a holding company,
the short-term debt obligations of such holding company) are rated in one of the
two highest short-term rating categories by the Rating Agency that rated one or
more classes of the related Series of Certificates, (ii) an account or accounts
the deposits in which are fully insured by the FDIC, (iii) an account or
accounts the deposits in which are insured by the FDIC to the limits established
by the FDIC and the uninsured deposits in which are otherwise secured such that,
as evidenced by an opinion of counsel, Certificateholders have a claim with
respect to the funds in such account or accounts, or a perfected first-priority
security interest against any collateral securing such funds, that is superior
to the claims of any other depositors or general creditors of the depository
institution with which such account or accounts are maintained or (iv) an
account or accounts otherwise acceptable to such Rating Agency. The collateral
eligible to secure amounts in the Certificate Account is limited to investments
consisting of United States government securities and other high-quality
investments ("Eligible Investments"). A Certificate Account may be maintained as
an interest-bearing account, or the funds held therein may be invested pending
each succeeding Distribution Date in Eligible Investments. The Master Servicer
or its designee will generally be entitled to receive any such interest or other
income earned on funds in the Certificate Account as additional compensation and
will be obligated to deposit in the Certificate Account the amount of any loss
immediately as realized. The Certificate Account may be maintained with the
Master Servicer or the Seller or with a depository institution that is an
affiliate of the Master Servicer or the Sponsor, provided it is an Eligible
Account.
Unless otherwise specified in the related Supplement, the Master
Servicer will deposit in the Certificate Account for each Trust on a daily
basis, to the extent applicable, the following payments and collections received
by or on behalf of it subsequent to the Cut-off Date (other than payments due on
or before the Cut-off Date):
(i) All payments on account of principal and interest (which, at its
option, may be net of the applicable servicing compensation),
including Principal Prepayments;
(ii) All amounts received by foreclosure or otherwise in connection
with the liquidation of defaulted Mortgage Loans, net of expenses
incurred in connection with such liquidation;
(iii) All proceeds received under any Primary Mortgage Insurance Policy
or title, hazard or other insurance policy covering any Mortgage Loan,
other than proceeds to be applied to the restoration or repair of the
related Mortgaged Property;
(iv) All advances as described herein under "Advances";
(v) All proceeds of any Mortgage Loans or property acquired in respect
thereof repurchased as described herein under "-- Assignment of
Mortgage Loans" and "-- Representations and Warranties";
(vi) Any Buydown Funds and, if applicable, investment earnings
thereon) required to be deposited in the Certificate Account as
described below;
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(vii) All payments required to be deposited in the Certificate Account
with respect to any deductible clause in any blanket insurance policy
described under "-- Hazard Insurance" herein;
(viii) Any amount required to be deposited by the Master Servicer in
connection with losses realized on investments for the benefit of the
Master Servicer of funds held in the Certificate Account; and
(ix) All other amounts required to be deposited in the Certificate
Account.
Under the Pooling Agreement for each Series, the Master Servicer will
be authorized to make the following withdrawals from the Certificate Account:
(i) To clear and terminate the Certificate Account upon liquidation of
all Mortgage Loans or other termination of the Trust;
(ii) To reimburse any provider of credit support for payments under
such credit support from amounts received as late payments on related
Mortgage Loans or from related insurance or liquidation proceeds;
(iii) To reimburse the Master Servicer for Advances from amounts
received as late payments on related Mortgage Loans, from related
insurance or liquidation proceeds or from other amounts received with
respect to such Mortgage Loans;
(iv) To reimburse the Master Servicer from related insurance or
liquidation proceeds for amounts expended by the Master Servicer in
connection with the restoration of property damaged by an uninsured
cause or the liquidation of a Mortgage Loan;
(v) To pay to the Master Servicer its Master Servicing Fee (and other
servicing compensation, if applicable) and to the Trustee its fee;
(vi) To reimburse the Master Servicer for Advances which the Master
Servicer has determined to be otherwise nonrecoverable;
(vii) To withdraw any amount deposited to the Certificate Account in
error; and
(viii) To pay any expenses which were incurred and are reimbursable
pursuant to the Pooling Agreement.
Collection and Other Servicing Procedures
The Master Servicer will agree to proceed diligently to collect all
payments called for under the Mortgage Loans. Consistent with the above, the
Master Servicer may, in its discretion, (i) waive any prepayment charge,
assumption fee, late payment charge or any other charge in connection with the
prepayment of a Mortgage Loan and (ii) to the extent not inconsistent with the
coverage of such Mortgage Loan by a Mortgage Pool Insurance Policy, Primary
Mortgage Insurance Policy, FHA Insurance, VA Guaranty or Bankruptcy Bond or
alternative arrangements, if applicable, suspend or reduce regular monthly
payments for a period of up to six months, or arrange with a Mortgagor a
schedule for the liquidation of delinquencies. In the event of any such
arrangement, but only to the extent of the amount of any credit support, the
provider of such credit support will honor requests for payment or otherwise
distribute funds with respect to such Mortgage Loan during the scheduled period
in accordance with the amortization schedule thereof and without regard to the
temporary modification thereof. In addition, in the event of any such
arrangement, the Master Servicer's obligation to make Advances on the related
Mortgage Loan shall continue during the scheduled period.
Under the Pooling Agreement, the Master Servicer will be required to
enforce "due-on-sale" clauses with respect to the Mortgage Loans to the extent
contemplated by the terms of the Mortgage Loans and permitted by applicable law.
Where an assumption of, or substitution of liability with respect to, a Mortgage
Loan is required by law, upon receipt of assurance that the Primary Mortgage
Insurance Policy covering such Mortgage Loan will not be affected, the Master
Servicer may permit the assumption of a Mortgage Loan, pursuant to which the
Mortgagor would remain liable on the Mortgage Note, or a substitution of
liability with respect to such Mortgage Loan, pursuant to which the new
Mortgagor would be substituted for the original Mortgagor as being liable on the
Mortgage Note. Any fees collected for entering into an assumption or
substitution of liability agreement may be retained by the Master Servicer as
additional servicing compensation. In connection with any assumption or
substitution, the Mortgage Rate borne by the related Mortgage Note may not be
changed.
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The Pooling Agreement may require the Master Servicer to establish and
maintain one or more escrow accounts into which Mortgagors deposit amounts
sufficient to pay taxes, assessments, hazard insurance premiums or comparable
items. Withdrawals from the escrow accounts maintained for Mortgagors may be
made to effect timely payment of taxes, assessments and hazard insurance
premiums or comparable items, to reimburse the Master Servicer out of related
assessments for maintaining hazard insurance, to refund to Mortgagors amounts
determined to be overages, to remit to Mortgagors, if required, interest earned,
if any, on balances in any of the escrow accounts, to repair or otherwise
protect the Mortgaged Property and to clear and terminate any of the escrow
accounts. The Master Servicer will be solely responsible for administration of
the escrow accounts and will be expected to make advances to such account when a
deficiency exists therein.
Hazard Insurance
Unless otherwise specified in the related Supplement, under the Pooling
Agreement, the Master Servicer will be required to maintain for each Mortgage
Loan a hazard insurance policy providing coverage against loss by fire and other
hazards which are covered under the standard extended coverage endorsement
customary in the state in which the property is located. Such coverage will be
in an amount at least equal to the lesser of (i) the maximum insurable value of
the improvements securing such Mortgage Loan or (ii) the greater of (y) the
outstanding principal balance of the Mortgage Loan and (z) an amount such that
the proceeds of such policy shall be sufficient to prevent the Mortgagor and/or
the mortgagee from becoming a co-insurer. As set forth above, all amounts
collected by the Master Servicer under any hazard policy (except for amounts to
be applied to the restoration or repair of the Mortgaged Property or released to
the Mortgagor in accordance with the Master Servicer's normal servicing
procedures) will be deposited in the Certificate Account. In the event that the
Master Servicer maintains a blanket policy insuring against hazard losses on all
of the Mortgage Loans, it shall conclusively be deemed to have satisfied its
obligation relating to the maintenance of hazard insurance. Such blanket policy
may contain a deductible clause, in which case the Master Servicer will deposit
in the Certificate Account all sums which would have been deposited therein but
for such clause.
In general, the standard form of fire and extended coverage policy
covers physical damage to or destruction of the improvements on the property by
fire, lightening, explosion, smoke, windstorm and hail, and riot, strike and
civil commotion, subject to the conditions and exclusions particularized in each
policy. Although the policies relating to the Mortgage Loans will be
underwritten by different insurers under different state laws in accordance with
different applicable state forms and therefore will not contain identical terms
and conditions, the basic terms thereof are dictated by respective state laws,
and most such policies typically do not cover (among other things) any physical
damage resulting from the following: war, revolution, governmental actions,
floods and other water-related causes, earth movement (including earthquakes,
landslides and mud flows), nuclear reactions, wet or dry rot, vermin, rodents,
insects or domestic animals, theft and, in certain cases, vandalism. The
foregoing list is merely indicative of certain kinds of uninsured risks and is
not intended to be all inclusive.
If, however, any Mortgaged Property at the time of origination of the
related Mortgage Loan is located in an area identified by the Flood Emergency
Management Agency as having special flood hazards and flood insurance has been
made available, the Master Servicer will cause to be maintained with a generally
acceptable insurance carrier a flood insurance policy in accordance with
mortgage servicing industry practice. Such flood insurance policy will provide
coverage in an amount not less than the lesser of (i) the principal balance of
the Mortgage Loan or (ii) the minimum amount required under the terms of
coverage to compensate for any damage or loss on a replacement cost basis, but
not more than the maximum amount of such insurance available for the related
Mortgage Property under either the regular or emergency programs of the National
Flood Insurance Program.
The hazard insurance policies covering the Mortgaged Properties
typically contain a clause which, in effect, requires the insured at all times
to carry insurance of a specified percentage (generally 80% to 90%) of the full
replacement value of the improvements on the property in order to recover the
full amount of any partial loss. If the insured's coverage falls below this
specified percentage, such clause provides that the insurer's liability in the
event of partial loss does not exceed the larger 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. Since the amount of hazard insurance
the Master Servicer may cause to be maintained on the improvements securing the
Mortgage Loans declines as the principal balance owing thereon decrease, and
since improved real estate generally has appreciated in value over time in the
past, the effect of this requirement in the event of partial loss may be that
hazard insurance proceeds will be insufficient to restore fully the damaged
property.
Primary Mortgage Insurance
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The Master Servicer will maintain or cause to be maintained, as the
case may be, in full force and effect, to the extent specified in the related
Supplement, a Primary Mortgage Insurance Policy with regard to each Mortgage
Loan for which such coverage is required. The Master Servicer will not cancel or
refuse to renew any such Primary Mortgage Insurance Policy in effect at the time
of the initial issuance of a Series of Certificates that is required to be kept
in force under the applicable Pooling Agreement unless the replacement Primary
Mortgage Insurance Policy for such cancelled or nonrenewed policy is maintained
with an insurer (a "Primary Insurer") whose claims-paying ability is sufficient
to maintain the current rating of the classes of Certificates of such Series
that have been rated.
Although the terms and conditions of primary mortgage insurance vary,
the amount of a claim for benefits under a Primary Mortgage Insurance Policy
covering a Mortgage Loan will consist of the insured percentage of the unpaid
principal amount of the covered Mortgage Loan and accrued and unpaid interest
thereon and reimbursement of certain expenses, less (i) all rents or other
payments collected or received by the insured (other than the proceeds of hazard
insurance) that are derived from or in any way related to the Mortgaged
Property, (ii) hazard insurance proceeds in excess of the amount required to
restore the Mortgaged Property and which have not been applied to the payment of
the Mortgage Loan, (iii) amounts expended but not approved by the Primary
Insurer of the related Primary Mortgage Insurance Policy, (iv) claim payments
previously made by the Primary Insurer and (v) unpaid premiums.
Primary Mortgage Insurance Policies reimburse certain losses sustained
by reason of default in payments by borrowers. Primary Mortgage Insurance
Policies will not insure against, and exclude from coverage, a loss sustained by
reason of a default arising from or involving certain matters, including (i)
fraud or negligence in origination or servicing of the Mortgage Loans, including
misrepresentation by the originator, Mortgagor or other persons involved in the
origination of the Mortgage Loan; (ii) failure to construct the Mortgaged
Property subject to the Mortgage Loan in accordance with specified plans; (iii)
physical damage to the Mortgaged Property; and (iv) the related sub-servicer not
being approved as a servicer by the Primary Insurer.
Evidence of each Primary Mortgage Insurance Policy will be provided to
the Trustee simultaneously with the transfer to the Trustee of the related
Mortgage Loan. The Master Servicer, on behalf of itself, the Trustee and
Certificateholders, is required to present claims to the insurer under any
Primary Mortgage Insurance Policy and to take such reasonable steps as are
necessary to permit recovery thereunder with respect to defaulted Mortgage
Loans. Amounts collected by the Master Servicer on behalf of the Master
Servicer, the Trustee and Certificateholders shall be deposited in the
Certificate Account for distribution as set forth above. The Master Servicer
will not cancel or refuse to renew any Primary Mortgage Insurance Policy
required to be kept in force by the Pooling Agreement.
Claims Under Insurance Policies and Other Realization Upon Defaulted Mortgage
Loans
The Master Servicer, on behalf of the Trustee and Certificateholders,
will present claims to the insurer under any applicable Primary Mortgage
Insurance Policy and will take such reasonable steps as are necessary to permit
recovery under such other insurance policies respecting defaulted Mortgage
Loans. If any Mortgaged Property securing a defaulted Mortgage Loan is damaged
and proceeds, if any, from the related hazard insurance Policy are insufficient
to restore the damaged property to a condition sufficient to permit recovery
under any applicable Primary Mortgage Insurance Policy, the Master Servicer will
not be required to expend its own funds to restore the damaged property unless
the Master Servicer determines (i) that such restoration will increase the
proceeds to Certificateholders upon liquidation of the Mortgage Loan after
reimbursement of the Master Servicer for its expenses and (ii) that such
expenses will be recoverable to it through liquidation proceeds.
Regardless of whether recovery under any Primary Mortgage Insurance
Policy is available or any further amount is payable under the credit
enhancement for a Series of Certificates, the Master Servicer is nevertheless
obligated to follow such normal practices and procedures as it deems necessary
or advisable to realize upon the defaulted Mortgage Loan. If at any time no
further amount is payable under the credit enhancement for a Series of
Certificates, and if the proceeds of any liquidation of the Mortgaged Property
securing the defaulted Mortgage Loan are less than the principal balance of the
defaulted Mortgage Loan plus interest accrued thereon, Certificateholders will
realize a loss in the amount of such difference plus the aggregate of
unreimbursed advances of the Master Servicer with respect to such Mortgage Loan
and expenses incurred by the Master Servicer in connection with such proceedings
and which are reimbursable under the Pooling Agreement.
Servicing Compensation and Payment of Expenses
The Master Servicer's primary compensation for its activities as Master
Servicer will come from the payment to it, with respect to each interest payment
on a Mortgage Loan, of the amount specified in the related Supplement (the
"Master
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Servicing Fee"). As principal payments are made on the Mortgage Loans,
the portion of each monthly payment which represents interest will decline, and
thus servicing compensation to the Master Servicer will decrease as the Mortgage
Loans amortize. Prepayments and liquidations of Mortgage Loans prior to maturity
will also cause servicing compensation to the Master Servicer to decrease.
In addition, the Master Servicer will be entitled to retain all
prepayment fees, assumption fees and late payment charges, to the extent
collected from Mortgagors and any benefit that may accrue as a result of the
investment of funds in the Certificate Account (unless otherwise specified in
the related Supplement).
The Master Servicer will pay all expenses incurred in connection with
its activities as Master Servicer (subject to limited reimbursement), including
payments of expenses incurred in connection with distributions and reports to
Certificateholders of each Series and, if so specified in the related
Supplement, payment of the fees and disbursements of the Trustee and payment of
any fees for providing credit enhancement. The Master Servicer will be entitled
to reimbursement for certain expenses incurred by it in connection with any
defaulted Mortgage Loan as to which it has determined that all recoverable
liquidation proceeds and insurance proceeds have been received, such right of
reimbursement being prior to the rights of Certificateholders to receive any
such proceeds.
Evidence as to Compliance
Each Pooling Agreement will provide that the Master Servicer at its
expense shall cause a firm of independent public accountants to furnish a report
annually to the Trustee to the effect that such firm has performed certain
procedures specified in the Pooling Agreement and that such review has disclosed
no items of noncompliance with the provisions of such Pooling Agreement which,
in the opinion of such firm, are material, except for such items of
noncompliance as shall be set forth in such report.
Each Pooling Agreement will provide for delivery to the Trustee of an
annual statement signed by an officer of the Master Servicer to the effect that
the Master Servicer has fulfilled its obligations under the Pooling Agreement
throughout the preceding year.
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Certain Matters Regarding the Sponsor, the Seller and the Master Servicer
The Pooling Agreement for each Series of Certificates backed in whole
or in part by Mortgage Loans will provide that the Master Servicer may not
resign from its obligations and duties as Master Servicer thereunder, except
upon (a) appointment of a successor servicer and receipt by the Trustee of a
letter from the Rating Agency that such resignation and appointment will not
result in the downgrading of the Certificates or (b) determination that its
duties thereunder are no longer permissible under applicable law. No such
resignation under (b) above will become effective until the Trustee or a
successor has assumed the Master Servicer's obligations and duties under such
Pooling Agreement.
The Pooling Agreement for each such Series will also provide that
neither the Sponsor, the Master Servicer nor the Seller, nor any directors,
officers, employees or agents of any of them (collectively, the "Indemnified
Parties") will be under any liability to the Trust or Certificateholders or the
Trustee, any subservicer or others for any action taken (or not taken) by any
Indemnified Party, any subservicer or the Trustee in good faith pursuant to the
Pooling Agreement, or for errors in judgment; provided, however, that neither
the Sponsor, the Seller, the Master Servicer nor any such person will be
protected against any liability which would otherwise be imposed by reason of
willful misfeasance, bad faith or gross negligence in the performance of duties
or by reason of reckless disregard of obligations and duties thereunder. The
Pooling Agreement will further provide that each Indemnified Party is entitled
to indemnification by the Trust and will be held harmless against any loss,
liability or expense incurred in connection with any legal action relating to
the Pooling Agreement or the Certificates for such Series, other than any loss,
liability or expense related to any specific Mortgage Loan or Mortgage Loans
(except any such loss, liability or expense otherwise reimbursable pursuant to
the Pooling Agreement) and any loss, liability or expense incurred by reason of
willful misfeasance, bad faith or gross negligence in the performance of such
indemnified Party's duties thereunder or by reason of reckless disregard by such
indemnified Party of its obligations and duties thereunder. In addition, the
Pooling Agreement will provide that neither the Sponsor, the Seller nor the
Master Servicer is under any obligation to appear in, prosecute or defend any
legal action which is not incidental to, in the case of the Sponsor, the Seller
or the Master Servicer, its duties under the Pooling Agreement and which in its
opinion may involve it in any expense or liability. Each of the Sponsor, the
Seller and the Master Servicer may, however, in its discretion, undertake any
such action which it may deem necessary or desirable with respect to the Pooling
Agreement and the rights and duties of the parties thereto and the interests of
Certificateholders thereunder. In such event, the legal expenses and costs of
such action and any liability resulting therefrom will be expenses, costs and
liabilities of the Trust and the Sponsor, the Seller and the Master Servicer
will be entitled to be reimbursed therefor out of the Certificate Account.
Events of Default
Events of default by the Master Servicer under the Pooling Agreement
for each Series of Certificates evidencing an interest in Mortgage Loans will
consist of (i)(a) any failure by the Master Servicer to make an Advance which
continues unremedied for one business day or (b) any failure by the Master
Servicer to make or cause to be made any other required payment pursuant to the
Pooling Agreement which continues unremedied for five days; (ii) any failure by
the Master Servicer duly to observe or perform in any material respects any
other of its covenants or agreements in the Certificates or in such Pooling
Agreement which continues unremedied for 60 days after the giving of written
notice of such failure to the Master Servicer by the Trustee, or to the Master
Servicer and the Trustee by holders of Certificates evidencing not less than 25%
of the aggregate voting rights of the Certificates for such Series; and (iii)
certain events of insolvency, readjustment of debt, marshalling of assets and
liabilities or similar proceedings and certain actions by the Master Servicer
indicating insolvency, reorganization or inability to pay its obligations.
Rights Upon Event of Default
As long as an Event of Default under the Pooling Agreement for any
Series of Certificates evidencing an interest in Mortgage Loans remains
unremedied, the Trustee or holders of Certificates evidencing not less than a
majority of the aggregate voting rights of the Certificates for such Series may
terminate all of the rights and obligations of the Master Servicer under such
Pooling Agreement, whereupon the Trustee will succeed to all the
responsibilities, duties and liabilities of the Master Servicer under such
Pooling Agreement, including, if specified in the related Supplement, the
obligation to make Advances and will be entitled to similar compensation
arrangements and limitations on liability. In the event that the Trustee is
unwilling or unable so to act, it may appoint or petition a court of competent
jurisdiction for the appointment of a housing and home finance institution which
is a FNMA or FHLMC approved servicer with a net worth of at least $10,000,000 to
act as successor Master Servicer under such Pooling Agreement. Pending any such
appointment, the Trustee is obligated to act in such capacity. The Trustee and
such successor may agree upon the servicing compensation to be paid, which in no
event may be greater than the compensation to the Master Servicer under such
Pooling Agreement.
Enforcement
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No Certificateholder of any Series will have any right under the
applicable Pooling Agreement to institute any proceeding with respect to such
Pooling Agreement unless such Certificateholder previously has given to the
Trustee written notice of default and unless holders of Certificates evidencing
not less than 25% of the aggregate voting rights of the Certificates for such
Series have made written requests to the Trustee to institute such proceeding in
its own name as Trustee thereunder and have offered and provided to the Trustee
reasonable indemnity and the Trustee for 60 days has neglected or refused to
institute any such proceeding. However, the Trustee is under no obligation to
exercise any of the trusts or powers vested in it by the Pooling Agreement for
any Series or to make any investigation of matters arising thereunder or to
institute, conduct or defend any litigation thereunder or in relation thereto at
the request, order or direction of any Certificateholders, unless such
Certificateholders have offered and provided to the Trustee reasonable security
or indemnity against the costs, expenses and liabilities which may be incurred
therein or thereby.
Amendment
The Pooling Agreement for each Series may be amended by the Sponsor,
the Seller, the Master Servicer and the Trustee, without notice to or the
consent of any Certificateholder, (i) to cure any ambiguity, (ii) to correct a
defective provision or correct or supplement any provision therein that may be
inconsistent with any other provision therein, (iii) to make any other revisions
with respect to matters or questions arising under such Pooling Agreement which
are not inconsistent with the provisions of such Pooling Agreement, or (iv) to
comply with any requirements imposed by the Code or any regulation thereunder;
provided, however, that no such amendments (except those pursuant to clause
(iv)) will adversely affect in any material respect the interests of any
Certificateholder of that Series. Any such amendment except pursuant to clause
(iv) of the preceding sentence will be deemed not to adversely affect in any
material respect the interests of any Certificateholders if the Trustee receives
written confirmation from the Rating Agency rating such Certificates that such
amendment will not cause such Rating Agency to downgrade or withdrawal the then
current rating thereof. The Pooling Agreement for each Series may also be
amended by the Sponsor, the Seller, the Master Servicer and the Trustee with the
consent of holders of Certificates evidencing not less than 662/3% of the
aggregate voting rights of each class of Certificates for such Series affected
thereby for the purpose of adding any provisions to or changing in any manner or
eliminating any of the provisions of such Pooling Agreement or of modifying in
any manner the rights of holders of Certificates of that Series; provided,
however, that no such amendment may (i) reduce in any manner the amount of, or
delay the timing of, payments received on the Mortgage Assets that are required
to be distributed in respect any such Certificate without the consent of the
holder of such Certificate or (ii) with respect to any Series of Certificates,
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 Certificates of such Series then outstanding.
List of Certificateholders
In the event the Trustee is not the Certificate Registrar for a Series
of Certificates, upon written request of the Trustee, the Certificate Registrar
will provide to the Trustee within 30 days after the receipt of such request a
list of the names and addresses of all Certificateholders of record of a
particular Series as of the most recent Record Date for payment of distributions
to Certificateholders of that Series. Upon written request of three or more
Certificateholders of record of a Series of Certificates, for purposes of
communicating with other Certificateholders with respect to their rights under
the Pooling Agreement for such Series, the Trustee will afford such
Certificateholders access during business hours to the most recent list of
Certificateholders of that Series held by the Trustee.
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Termination; Optional Termination
The obligations of the Sponsor, the Seller, the Master Servicer and the
Trustee created by the Pooling Agreement will terminate upon the earlier of (i)
the maturity or other liquidation of the last Mortgage Loan or Mortgage
Certificate subject thereto and the disposition of all property acquired upon
foreclosure of any Mortgage Loan and (ii) the purchase by the Master Servicer
or, if REMIC treatment has been elected and if specified in the related
Supplement, by the holder of the residual interest in the REMIC, from the
related Trust of all of the remaining Mortgage Assets and all property acquired
in respect of such Mortgage Assets. In no event, however, will the Trust created
by any Pooling Agreement continue beyond the expiration of 21 years from the
death of the survivor of the persons named in such Pooling Agreement.
Unless otherwise specified in the related Supplement, any purchase of
Mortgage Assets and property acquired in respect of Mortgage Assets evidenced by
a Series of Certificates will be made at the option of the Master Servicer or,
if specified in the related Supplement for a Series of REMIC Certificates the
holders of the Residual Certificates of such Series, at a price, and in
accordance with the procedures, specified in the related Supplement. The
exercise of such right will effect early retirement of the Certificates of that
Series, but the right of the Master Servicer or, if applicable, such holder of
the Residual Certificates of such Series, to so purchase is subject to the
principal balance of the related Mortgage Assets being less than the percentage
specified in the related Supplement of the aggregate principal balance of the
Mortgage Assets at the Cut-off Date for the Series. The foregoing is subject to
the provision that if a REMIC election is made with respect to a Trust, any
repurchase pursuant to clause (ii) above will be made only in connection with a
"qualified liquidation" of the REMIC within the meaning of Section 860F(g)(4) of
the Code.
For each Series, the holder or holders of the Residual Certificates or
the Trustee, as the case may be, will give written notice of termination of the
Pooling Agreement to each Certificateholder, and the final distribution will be
made only upon surrender and cancellation of the Certificates at an office or
agency of the Trustee specified in the notice of termination.
The Trustee
The identity of the commercial bank, savings and loan association or
trust company named as Trustee for each Series of Certificates will be set forth
in the related Supplement. The Trustee may have normal banking relationships
with the Sponsor, the Seller, the Master Servicer and/or the subservicers.
CERTAIN LEGAL ASPECTS OF THE MORTGAGE LOANS
The following discussion contains summaries, which are general in
nature, of certain legal matters relating to the Mortgage Loans. Because such
legal aspects are governed primarily by applicable state law (which laws may
differ substantially), the summaries do not purport to be complete or to reflect
the laws of any particular state or to encompass the laws of all states in which
the security for the Mortgage Loans is situated. The summaries are qualified in
their entirety by reference to the appropriate laws of the states in which
Mortgage Loans may be originated.
General
The Mortgage Loans will be secured by deeds of trust, mortgages,
security deeds or deeds to secure debt, depending upon the prevailing practice
in the state in which the property subject to the loan is located. Deeds of
trust are used almost exclusively in California instead of mortgages. A mortgage
creates a lien upon the real property encumbered by the mortgage, which lien is
generally not prior to the lien for real estate taxes and assessments. Priority
between mortgages depends on their terms and generally on the order of recording
with a state or county office. There are two parties to a mortgage, the
mortgagor, who is the borrower and owner of the mortgaged property, and the
mortgagee, who is the lender. Under the mortgage instrument, the mortgagor
delivers to the mortgagee a note or bond and the mortgage. Although a deed of
trust is similar to a mortgage, a deed of trust formally has three parties, the
borrower-property owner called the trustor (similar to a mortgagor), a lender
(similar to a mortgagee) called the beneficiary, and a third-party grantee
called the trustee. Under a deed of trust, the borrower grants the property,
irrevocably until the debt is paid, in trust, generally with a power of sale, to
the trustee to secure payment of the obligation. A security deed and a deed to
secure debt are special types of deeds which indicate on their face that they
are granted to secure an underlying debt. By executing a security deed or deed
to secure debt, the grantor conveys title to, as opposed to merely creating a
lien upon, the subject property to the grantee until such time as the underlying
debt is repaid. The trustee's authority under a deed of trust, the mortgagee's
authority under a mortgage and the grantee's authority under a security deed or
deed to secure debt are governed by law and, with respect to some deeds of
trust, the directions of the beneficiary.
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Cooperatives. Certain of the Mortgage Loans may be Cooperative Loans.
The Cooperative owns all the real property that comprises the project, including
the land, separate dwelling units and all common areas. The Cooperative is
directly responsible for project management and, in most cases, payment of real
estate taxes and hazard and liability insurance. If there is a blanket mortgage
on the Cooperative and/or underlying land, as is generally the case, the
Cooperative, as project mortgagor, is also responsible for meeting these
mortgage obligations. A blanket mortgage is ordinarily incurred by the
Cooperative in connection with the construction or purchase of the Cooperative's
apartment building. The interest of the occupant under proprietary leases or
occupancy agreements to which that Cooperative is a party are generally
subordinate to the interest of the holder of the blanket mortgage in that
building. If the Cooperative is unable to meet the payment obligations arising
under its blanket mortgage, the mortgagee holding the blanket mortgage could
foreclose on that mortgage and terminate all subordinate proprietary leases and
occupancy agreements. In addition, the blanket mortgage on a Cooperative may
provide financing in the form of a mortgage that does not fully amortize with a
significant portion of principal being due in one lump sum at final maturity.
The inability of the Cooperative to refinance this mortgage and its consequent
inability to make such final payment could lead to foreclosure by the mortgagee
providing the financing. A foreclosure in either event by the holder of the
blanket mortgage could eliminate or significantly diminish the value of any
collateral held by the lender who financed the purchase by an individual
tenant-stockholder of Cooperative shares or, in the case of a Trust including
Cooperative Loans, the collateral securing the Cooperative Loans.
The Cooperative is owned by tenant-stockholders who, through ownership
of stock, shares or membership certificates in the corporation, receive
proprietary leases or occupancy agreements which confer exclusive rights to
occupy specific units. Generally, a tenant-stockholder of a Cooperative must
make a monthly payment to the Cooperative representing such tenant-stockholder's
pro rata share of the Cooperative's payments for its blanket mortgage, real
property taxes, maintenance expenses and other capital or ordinary expenses. An
ownership interest in a Cooperative and accompanying rights is financed through
a Cooperative share loan evidenced by a promissory note and secured by a
security interest in the occupancy agreement or proprietary lease and in the
related Cooperative shares. The lender takes possession of the share certificate
and a counterpart of the proprietary lease or occupancy agreement, and a
financing statement covering the proprietary lease or occupancy agreement and
the Cooperative shares is filed in the appropriate state and local offices to
perfect the lender's interest in its collateral. Subject to the limitations
discussed below, upon default of the tenant-stockholder, the lender may sue for
judgment on the promissory note, dispose of the collateral at a public or
private sale or otherwise proceed against the collateral or tenant-stockholder
as an individual as provided in the security agreement covering the assignment
of the proprietary lease or occupancy agreement and the pledge of Cooperative
shares.
Foreclosure/Repossession
Deed of Trust. Foreclosure of a deed of trust is generally accomplished
by a non-judicial sale under a specific provision in the deed of trust which
authorizes the trustee to sell the property at public auction upon any default
by the borrower under the terms of the note or deed of trust. In certain states,
such foreclosure also may be accomplished by judicial action in the manner
provided for foreclosure of mortgages. In some states, such as California, the
trustee must record a notice of default and send a copy to the borrower-trustor
and to any person who has recorded a request for a copy of any notice of default
and notice of sale. In addition, the trustee must provide notice in some states
to any other individual having an interest of record in the real property,
including any junior lienholders. If the deed of trust is not reinstated within
any applicable cure period, a notice of sale must be posted in a public place
and, in most states, including California, published for a specified period of
time in one or more newspapers. In addition, these notice provisions require
that a copy of the notice of sale be posted on the property and sent to all
parties having an interest of record in the property. In California, the entire
process from recording a notice of default to a non-judicial sale usually takes
four to five months.
In some states, including California, the borrower-trustor has the
right to reinstate the loan at any time following default until shortly before
the trustee's sale. In general, the borrower, or any other person having a
junior encumbrance on the real estate, may, during a reinstatement period, cure
the default by paying the entire amount in arrears plus the costs and expenses
incurred in enforcing the obligation. Certain state laws control the amount of
foreclosure expenses and costs, including attorney's fees, which may be
recoverable by a lender.
Mortgages. Foreclosure of a mortgage is generally accomplished by
judicial action. The action is initiated by the service of legal pleadings upon
all parties having an interest in the real property. Delays in completion of the
foreclosure may occasionally result from difficulties in locating necessary
parties. Judicial foreclosure proceedings are often not contested by any of the
parties. When the mortgagee's right to foreclosure is contested, the legal
proceedings necessary to resolve the issue can be time consuming. After the
completion of a judicial foreclosure proceeding, the court generally issues a
judgment of foreclosure and appoints a referee or other court officer to conduct
the sale of the property. In general, the borrower, or any other person having a
junior encumbrance on the real estate, may, during a statutorily prescribed
reinstatement period, cure a monetary default by paying the entire amount in
arrears plus other designated costs and expenses incurred in enforcing
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the obligation. Generally, state law controls the amount of foreclosure expenses
and costs, including attorney's fees, which may be recovered by a lender. After
the reinstatement period has expired without the default having been cured, the
borrower or junior lienholder no longer has the right to reinstate the loan and
must pay the loan in full to prevent the scheduled foreclosure sale. If the deed
of trust is not reinstated, a notice of sale must be posted in a public place
and, in most states, published for a specific period of time in one or more
newspapers. In addition, some state laws require that a copy of the notice of
sale be posted on the property and sent to all parties having an interest in the
real property.
Although foreclosure sales are typically public sales, frequently no
third party purchaser bids in excess of the lender's lien because of the
difficulty of determining the exact status of title to the property, the
possible deterioration of the property during the foreclosure proceedings and a
requirement that the purchaser pay for the property in cash or by cashier's
check. Thus the foreclosing lender often purchases the property from the trustee
or referee for an amount equal to the principal amount outstanding under the
loan, accrued and unpaid interest and the expenses of foreclosure. Thereafter,
the lender will assume the burden of ownership, including obtaining hazard
insurance and making such repairs at its own expense as are necessary to render
the property suitable for sale. The lender will commonly obtain the services of
a real estate broker and pay the broker's commission in connection with the sale
of the property. Depending upon market conditions, the ultimate proceeds of the
sale of the property may not equal the lender's investment in the property.
Courts have imposed general equitable principles upon foreclosure,
which are generally designed to mitigate the legal consequences to the borrower
of the borrower's defaults under the loan documents. Some courts have been faced
with the issue of whether federal or state constitutional provisions reflecting
due process concerns for fair notice require that borrowers under deeds of trust
receive notice longer than that prescribed by statute. For the most part, these
cases have upheld the notice provisions as being reasonable or have found that
the sale by a trustee under a deed of trust does not involve sufficient state
action to afford constitutional protection to the borrower.
Cooperative Loans. The Cooperative shares owned by the
tenant-stockholder and pledged to the lender are, in almost all cases, subject
to restrictions on transfer as set forth in the Cooperative's certificate of
incorporation and bylaws, as well as the proprietary lease or occupancy
agreement, and may be cancelled by the Cooperative for failure by the
tenant-stockholder to pay rent or other obligations or charges owed by such
tenant-stockholder, including mechanics' liens against the cooperative apartment
building incurred by such tenant-stockholder. The proprietary lease or occupancy
agreement generally permits the Cooperative to terminate such lease or agreement
in the event an obligor fails to make payments or defaults in the performance of
covenants required thereunder. Typically, the lender and the Cooperative enter
into a recognition agreement which establishes the rights and obligations of
both parties in the event of a default by the tenant-stockholder on its
obligations under the proprietary lease or occupancy agreement. A default by the
tenant-stockholder under the proprietary lease or occupancy agreement will
usually constitute a default under the security agreement between the lender and
the tenant-stockholder.
The recognition agreement generally provides that, in the event that
the tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the Cooperative will take no action to terminate such lease or
agreement until the lender has been provided with an opportunity to cure the
default. The recognition agreement typically provides that if the proprietary
lease or occupancy agreement is terminated, the Cooperative will recognize the
lender's lien against proceeds from the sale of the Cooperative apartment,
subject, however, to the Cooperative's right to sums due under such proprietary
lease or occupancy agreement. The total amount owed to the Cooperative by the
tenant-stockholder, which the lender generally cannot restrict and does not
monitor, could reduce the value of the collateral below the outstanding
principal balance of the Cooperative Loan and accrued and unpaid interest
thereon.
Recognition agreements also provide that in the event of a foreclosure
on a Cooperative Loan, the lender must obtain the approval or consent of the
Cooperative as required by the proprietary lease before transferring the
Cooperative shares or assigning the proprietary lease. Generally, the lender is
not limited in any rights it may have to dispossess the tenant-stockholders.
In some states, foreclosure on the Cooperative shares is accomplished
by a sale in accordance with the provisions of Article 9 of the Uniform
Commercial Code (the "UCC") and the security agreement relating to those shares.
Article 9 of the UCC requires that a sale be conducted in a "commercially
reasonable" manner. Whether a foreclosure sale has been conducted in a
"commercially reasonable" manner will depend on the facts in each case. In
determining commercial reasonableness, a court will look to the notice given the
debtor and the method, manner, time, place and terms of the foreclosure.
Generally, a sale conducted according to the usual practice of banks selling
similar collateral will be considered reasonably conducted.
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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. The 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 lease or occupancy agreement. If there are proceeds remaining, the
lender must account to the tenant-stockholder for the surplus. Conversely, if a
portion of the indebtedness remains unpaid, the tenant-stockholder is generally
responsible for the deficiency. See "Anti-Deficiency Legislation and Other
Limitations on Lenders" below.
Rights of Redemption
In some states after sale pursuant to a deed of trust or foreclosure of
a mortgage, the borrower and certain foreclosed junior lienors are given a
statutory period in which to redeem the property from the foreclosure sale. In
certain other states, including California, this right of redemption applies
only to sales following judicial foreclosure, and not to sales pursuant to a
non-judicial power of sale. In most states where the right of redemption is
available, statutory redemption may occur upon payment of the foreclosure
purchase price, accrued interest and taxes. In some states, the right to redeem
is an equitable right. The effect of a right of redemption is to diminish the
ability of the lender to sell the foreclosed property. The exercise of a right
of redemption would defeat the title of any purchaser at a foreclosure sale, or
of any purchaser from the lender subsequent to judicial foreclosure or sale
under a deed of trust. Consequently, the practical effect of the redemption
right is to force the lender to retain the property and pay the expenses of
ownership until the redemption period has run.
Anti-Deficiency Legislation and Other Limitations on Lenders
Certain states have imposed statutory restrictions that limit the
remedies of a beneficiary under a deed of trust or a mortgagee under a mortgage.
In some states, including California, statutes limit the right of the
beneficiary or mortgagee to obtain a deficiency judgment against the borrower
following foreclosure or sale under a deed of trust. A deficiency judgment is a
personal judgment against the borrower equal in most cases to the difference
between the amount due to the lender and the current fair market value of the
property at the time of the foreclosure sale.
Some state statutes may require the beneficiary or mortgagee to exhaust
the security afforded under a deed of trust or mortgage by foreclosure in an
attempt to satisfy the full debt before bringing a personal action against the
borrower. In certain other states, the lender has the option of bringing a
personal action against the borrower on the debt without first exhausting such
security; however, in some of these states, the lender, following judgment on
such personal action, may be deemed to have elected a remedy and may be
precluded from exercising remedies with respect to the security. Consequently,
the practical effect of the election requirement, when applicable, is that
lenders will usually proceed first against the security rather than bringing a
personal action against the borrower.
In some states, exceptions to the anti-deficiency statutes are provided
for in certain instances where the value of the lender's security has been
impaired by acts or omissions of the borrower, for example, in the event of
waste of the property.
In addition to anti-deficiency and related legislation, numerous other
federal and state statutory provisions, including the federal bankruptcy laws,
the federal Soldiers' and Sailors' Civil Relief Act of 1940 and state laws
affording relief to debtors, may interfere with or affect the ability of the
secured mortgage lender to realize upon its security. For example, in a
proceeding under the federal Bankruptcy Code, a lender may not foreclose on a
mortgaged property without the permission of the bankruptcy court. The
rehabilitation plan proposed by the debtor may provide, if the mortgaged
property is not the debtor's principal residence and the court determines that
the value of the mortgaged property is less than the principal balance of the
mortgage loan, for the reduction of the secured indebtedness to the value of the
mortgaged property as of the date of the commencement of the bankruptcy,
rendering the lender a general unsecured creditor for the difference, and also
may reduce the monthly payments due under such mortgage loan, change the rate of
interest and alter the mortgage loan repayment schedule. The effect of any such
proceedings under the federal Bankruptcy Code, including but not limited to any
automatic stay, could result in delays in receiving payments on the Mortgage
Loans underlying a Series of Certificates and possible reductions in the
aggregate amount of such payments.
The federal tax laws provide priority to certain tax liens over the
lien of a mortgage or secured party. Numerous federal and state consumer
protection laws impose substantive requirements upon mortgage lenders in
connection with the origination, servicing and enforcement of mortgage loans.
These laws include the federal Truth-in-Lending Act, Real Estate Settlement
Procedures Act, Equal Credit Opportunity Act, Fair Credit Billing Act, Fair
Credit Reporting Act and related statutes and regulations. These federal and
state laws impose specific statutory liabilities upon lenders who fail to comply
with the provisions of the law. In some cases, this liability may affect
assignees of the loans or contracts.
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Generally, Article 9 of the UCC governs foreclosure on Cooperative
shares and the related proprietary lease or occupancy agreement. Some courts
have interpreted section 9-504 of the UCC to prohibit a deficiency award unless
the creditor establishes that the sale of the collateral (which, in the case of
a Cooperative Loan, would be the shares of the Cooperative and the related
proprietary lease or occupancy agreement) was conducted in a commercially
reasonable manner.
Environmental Risks
Real property pledged as security to a lender may be subject to
unforeseen environmental risks. Under the laws of certain states, contamination
of a property may give rise to a lien on the property to assure the payment of
the costs of clean-up. In several states such a lien has priority over the lien
of an existing mortgage against such property. In addition, under the federal
Comprehensive Environmental Response, Compensation and Liability Act of 1980
("CERCLA"), the United States Environmental Protection Agency ("EPA") may impose
a lien on property where the EPA has incurred clean-up costs. However, a CERCLA
lien is subordinate to pre-existing, perfected security interests.
Under the laws of some states, and under CERCLA, it is conceivable that
a secured lender may be held liable as an "owner" or "operator" for the costs of
addressing releases or threatened releases of hazardous substances at a
Mortgaged Property, even though the environmental damage or threat was caused by
a prior or current owner or operator. CERCLA imposes liability for such costs on
any and all "responsible parties," including owners or operators. However,
CERCLA excludes from the definition of "owner or operator" a secured creditor
who holds indicia of ownership primarily to protect its security interest (the
"secured creditor exclusion"). Thus, if a lender's activities begin to encroach
on the actual management of a contaminated facility or property, the lender may
incur liability as an "owner or operator" under CERCLA. Similarly, if a lender
forecloses and takes title to a contaminated facility or property, the lender
may incur CERCLA liability in various circumstances, including, but not limited
to, when it holds the facility or property as an investment (including leasing
the facility or property to a third party), or fails to market the property in a
timely fashion.
If a lender is or becomes liable, it can bring an action for
contribution against any other "responsible parties," including a previous owner
or operator, who created the environmental hazard, but those persons or entities
may be bankrupt or otherwise judgment proof. The costs associated with
environmental cleanup may be substantial. It is conceivable that such costs
arising from the circumstances set forth above would result in a loss to
Certificateholders.
CERCLA does not apply to petroleum products, and the secured creditor
exclusion does not govern liability for cleanup costs under federal laws other
than CERCLA, in particular Subtitle I of the federal Resource Conservation and
Recovery Act ("RCRA"), which regulates underground petroleum storage tanks
(except heating oil tanks). The EPA has adopted a lender liability rule for
underground storage tanks under Subtitle I of RCRA. Under such rule, a holder of
a security interest in an underground storage tank or real property containing
an underground storage tank is not considered an operator of the underground
storage tank as long as petroleum is not added to, stored in or dispensed from
the tank. In addition, under the Asset Conservation, Lender Liability and
Deposit Insurance Protection Act of 1996, the protections accorded to lenders
under CERCLA are also accorded to holders of security interests in underground
tanks. It should be noted, however, that liability for cleanup of petroleum
contamination may be governed by state law, which may not provide for any
specific protection for secured creditors.
Except as otherwise specified in the applicable Supplement, at the time
the Mortgage Loans were originated, no environmental assessment or a very
limited environmental assessment of the Mortgage Properties was conducted.
Whether actions taken by a lender would constitute participation in the
management of a mortgaged property, or the business of a borrower, so as to
render the secured creditor exemption unavailable to a lender has been a matter
of judicial interpretation of the statutory language, and court decisions have
been inconsistent. In 1990, the Court of Appeals for the Eleventh Circuit
suggested that the mere capacity of the lender to influence a borrower's
decisions regarding disposal of hazardous substances was sufficient
participation in the management of the borrower's business to deny the
protection of the secured creditor exemption to the lender.
This ambiguity appears to have been resolved by the enactment of the
Asset Conservation, Lender Liability and Deposit Insurance Protection Act of
1996, which was signed into law by President Clinton on September 30, 1996. The
new legislation provides that in order to be deemed to have participated in the
management of a mortgaged property, a lender must actually participate in the
operational affairs of the property or the borrower. The legislation also
provides that participation in the management of the property does not include
"merely having the capacity to influence, or unexercised right to control"
operations. Rather, a lender will lose the protection of the secured creditor
exemption only if it exercises decision-making control over the borrower's
environmental compliance and hazardous substance handling and disposal
practices, or assumes day-to-day management of all operational functions of the
mortgaged property.
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Due-on-Sale Clauses
Unless otherwise provided in the related Supplement, each conventional
Mortgage Loan will contain a due-on-sale clause which will generally provide
that if the mortgagor or obligor sells, transfers or conveys the Mortgaged
Property, the loan may be accelerated by the mortgagee. In recent years, court
decisions and legislative actions have placed substantial restriction on the
right of lenders to enforce such clauses in many states. For instance, the
California Supreme Court in August 1978 held that due-on-sale clauses were
generally unenforceable. However, the Garn-St Germain Depository Institutions
Act of 1982 (the "Garn-St Germain Act"), subject to certain exceptions, preempts
state constitutional, statutory and case law prohibiting the enforcement of
due-on-sale clauses. As to loans secured by an owner-occupied residence, the
Garn-St Germain Act sets forth nine specific instances in which a mortgagee
covered by the Garn-St Germain Act may not exercise its rights under a
due-on-sale clause, notwithstanding the fact that a transfer of the property may
have occurred. The inability to enforce a due-on-sale clause may result in
transfer of the related Mortgaged Property to an uncreditworthy person, which
could increase the likelihood of default or may result in a mortgage bearing an
interest rate below the current market rate being assumed by a new home buyer,
which may affect the average life of the Mortgage Loans and the number of
Mortgage Loans which may extend to maturity.
Prepayment Charges
Under certain state laws, prepayment charges may not be imposed after a
certain period of time following the origination of mortgage loans with respect
to prepayments on loans secured by liens encumbering owner-occupied residential
properties. Since many of the Mortgaged Properties will be owner-occupied, it is
anticipated that prepayment charges may not be imposed with respect to many of
the Mortgage Loans. The absence of such a restraint on prepayment, particularly
with respect to fixed rate Mortgage Loans having higher Mortgage Rates, may
increase the likelihood of refinancing or other early retirement of such loans
or contracts.
Applicability of Usury Laws
Title V of the Depository Institutions Deregulation and Monetary
Control Act of 1980, enacted in March 1980 ("Title V"), provides that state
usury limitations shall not apply to certain types of residential first mortgage
loans originated by certain lenders after March 31, 1980. The Office of Thrift
Supervision, as successor to the Federal Home Loan Bank Board, is authorized to
issue rules and regulations and to publish interpretations governing
implementation of Title V. The statute authorized the states to reimpose
interest rate limits by adopting, before April 1, 1983, a law or constitutional
provision which expressly rejects an 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
Generally, 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 is a member of the National Guard or is in reserve status at the
time of the origination of the mortgage loan and is later called to active duty)
may not be charged interest 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. It is possible that such interest rate limitation could have an
effect, for an indeterminate period of time, on the ability of the Master
Servicer to collect full amounts of interest on certain of the Mortgage Loans.
Unless otherwise provided in the applicable Supplement, any shortfall in
interest collections resulting from the application of the Relief Act could
result in losses to the holders of the Certificates. In addition, the Relief Act
imposes limitations which would impair the ability of the Master Servicer to
foreclose on an affected Mortgage Loan during the borrower's period of active
duty status. Thus, in the event that such a Mortgage Loan goes into default,
there may be delays and losses occasioned by the inability to realize upon the
Mortgaged Property in a timely fashion.
ERISA CONSIDERATIONS
ERISA and Section 4975 of the Code impose certain requirements on those
employee benefit plans and arrangements to which either ERISA or the Code
applies (each a "Plan") and on those persons who are fiduciaries with respect to
such Plans. In accordance with ERISA's general fiduciary standards, before
investing in a Certificate a Plan fiduciary should determine whether such an
investment is permitted under the governing Plan instruments and is appropriate
for the Plan in view of its overall investment policy and the composition and
diversification of its portfolio. Other provisions of ERISA and the Code
prohibit certain transactions involving the assets of a Plan and persons who
have certain specified
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relationships to the Plan (i.e., "parties in interest" within the meaning of
ERISA or "disqualified persons" within the meaning of the Code). Thus, a Plan
fiduciary considering an investment in Certificates should also consider whether
such an investment might constitute or give rise to a prohibited transaction
under ERISA or the Code.
Plan Assets Regulations
If an investing Plan's assets were deemed to include an undivided
ownership interest in the assets included in a Trust, a Plan's investment in the
Certificates might be deemed to constitute a delegation under ERISA of the duty
to manage Plan assets by the fiduciaries deciding to invest in the Certificates,
and certain transactions involved in the operation of the Trust might be deemed
to constitute prohibited transactions under ERISA and the Code. ERISA and the
Code do not define "plan assets". The U.S. Department of Labor has published
regulations (the "Labor Regulations") concerning whether or not a Plan's assets
would be deemed to include an interest in the underlying assets of an entity for
purposes of the reporting, disclosure and fiduciary responsibility provisions of
ERISA, if the Plan acquires an "equity interest" in such entity (such as by
acquiring Certificates). The Labor Regulations state that the underlying assets
of an entity will not be considered "plan assets" if, immediately after the most
recent acquisition of any equity interest in the entity, whether from the issuer
or an underwriter, less than twenty-five percent (25%) of the value of each
class of equity interest is held by "benefit plan investors", individual
retirement accounts, and other employee benefit plans not subject to ERISA (for
example, governmental plans). The Sponsor cannot predict whether under the Labor
Regulations the assets of a Plan investing in Certificates will be deemed to
include an interest in the assets of the Trust.
The Labor Regulations provide that where a Plan acquires a "guaranteed
governmental mortgage pool certificate", the Plan's assets include such
certificate but do not solely by reason of the Plan's holdings of such
certificate include any of the mortgages underlying such certificate. The Labor
Regulations include in the definition of a "guaranteed governmental mortgage
pool certificate" the types of FHLMC Certificates, GNMA Certificates and FNMA
Certificates which may be included in a Trust underlying a Series of
Certificates. Accordingly, even if such Mortgage Certificates included in a
Trust were deemed to be assets of Plan investors, the mortgages underlying such
Mortgage Certificates would not be treated as assets of such Plans. Potential
Plan investors should consult the ERISA discussion in the related Supplement
before purchasing any such Certificates.
Underwriter's Exemptions
The U.S. Department of Labor has granted to certain underwriters
individual administrative exemptions (the "Underwriter's Exemptions") from
certain of the prohibited transaction rules of ERISA and the related excise tax
provisions of Section 4975 of the Code with respect to the initial purchase, the
holding and the subsequent resale by Plans of certificates in pass-through
trusts that consist of certain receivables, loans and other obligations that
meet the conditions and requirements of the Underwriter's Exemptions.
While each Underwriter's Exemption is an individual exemption
separately granted to a specific underwriter, the terms and conditions which
generally apply to the Underwriter's Exemptions are substantially identical, and
include the following:
(1) the acquisition of the certificates by a Plan is on terms
(including the price for the certificates) that are at least as
favorable to the Plan as they would be in an arm's-length transaction
with an unrelated party;
(2) the rights and interest evidenced by the certificates
acquired by the Plan are not subordinated to the rights and interests
evidenced by other certificates of the trust fund;
(3) the certificates required by the Plan have received a
rating at the time of such acquisition that is one of the three highest
generic rating categories from Standard & Poor's Ratings Group, a
division of The McGraw-Hill Companies ("S&P"), Moody's Investors
Service, Inc. ("Moody's"), Duff & Phelps Credit Rating Co. ("D&P") or
Fitch Investors Service, L.P. ("Fitch");
(4) the trustee must not be an affiliate of any other member
of the Restricted Group;
(5) the sum of all payments made to and retained by the
underwriters in connection with the distribution of the certificates
represents not more than reasonable compensation for underwriting the
certificates; the sum of all payments made to and retained by the
seller pursuant to the assignment of the loans to the trust fund
represents not more than the fair market value of such loans; the sum
of all payments made to and retained by the servicer and any other
servicer represents not more than reasonable compensation for such
person's services under
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the agreement pursuant to which the loans are pooled and
reimbursements of such person's reasonable expenses in connection
therewith; and
(6) the Plan investing in the certificates is an "accredited
investor" as defined in Rule 501(a)(1) of Regulation D of the
Securities and Exchange Commission under the Securities Act.
The trust fund must also meet the following requirements:
(i) the corpus of 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 rating categories of S&P,
Moody's, Fitch or D&P for at least one year prior to the Plan's
acquisition of certificates; and
(iii) certificates evidencing interests 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 certificates.
Moreover, the Underwriter's Exemptions generally provide relief from
certain self-dealing/conflict of interest prohibited transactions that may occur
when the Plan fiduciary causes a Plan to acquire certificates in a trust as to
which the fiduciary (or its affiliate) is an obligor on the receivables held in
the trust provided that, among other requirements: (i) in the case of an
acquisition in connection with the initial issuance of certificates, at least
fifty percent (50%) of each class of certificates in which Plans have invested
is acquired by persons independent of the Restricted Group, (ii) such fiduciary
(or its affiliate) is an obligor with respect to five percent (5%) or less of
the fair market value of the obligations contained in the trust; (iii) the
Plan's investment in certificates of any class does not exceed twenty-five
percent (25%) of all of the certificates of that class outstanding at the time
of the acquisition; and (iv) immediately after the acquisition, no more than
twenty-five percent (25%) of the assets of the Plan with respect to which such
person is a fiduciary is invested in certificates representing an interest in
one or more trusts containing assets sold or serviced by the same entity. The
Underwriter's Exemptions do not apply to Plans sponsored by the Seller, the
related underwriter, the Trustee, the Master Servicer, any insurer with respect
to the Mortgage Loans, any obligor with respect to Mortgage Loans included in
the Trust constituting more than five percent (5%) of the aggregate unamortized
principal balance of the assets in the Trust, or any affiliate of such parties.
The Supplement for each Series of Certificates will indicate the
classes of Certificates, if any, offered thereby as to which it is expected than
an Underwriter's Exemption will apply.
Other Exemptions
In addition to making its own determination as to the availability of
the exemptive relief provided in the Underwriter's Exemptions, the Plan
fiduciary should consider the possible availability of any other prohibited
transaction exemptions, in particular, Prohibited Transaction Class Exemption
83-1 for Certain Transactions Involving Mortgage Trust Investment Trusts ("PTE
83-1"). PTE 83-1 permits certain transactions involving the creation,
maintenance and termination of certain residential mortgage pools and the
acquisition and holding of certain residential mortgage pool pass-through
certificates by Plans, whether or not the Plan's assets would be deemed to
include an ownership interest in the mortgages in the mortgage pool, and whether
or not such transactions would otherwise be prohibited under ERISA. The Sponsor
believes that the "general conditions" set forth in Section II of PTE 83-1,
which are required for its applicability, would be met with respect to most
classes of Certificates evidencing ownership interest in a Trust consisting
solely of Mortgage Loans secured by first or second mortgages or deeds of trust
on single-family residential property. PTE 83-1 would not apply to Certificates
which are part of a class that is subordinate to one or more other classes of
the same Series of Certificates. It is not clear whether PTE 83-1 applies to
Residual Certificates, Certificates which do not pass through both principal and
interest, to any Certificates evidencing ownership interests in a Trust
containing Mortgage Certificates, or to any Certificates evidencing ownership
interests in the reinvestment income of funds on deposit in the related
Certificate Account or in Mortgage Loans secured by shares in a cooperative
corporation. Before purchasing any Certificates, a Plan fiduciary should consult
with its counsel and determine whether PTE 83-1 applies, including whether the
appropriate "specific conditions" set forth in Section I of PTE 83-1, in
addition to the "general conditions" set forth in Section II, would be met, or
whether any other ERISA prohibited transaction exemption is applicable.
Furthermore, a Plan fiduciary should consult the ERISA discussion in the related
Supplement relating to a Series of Certificates before purchasing Certificates.
The Sponsor, or certain affiliates of the Sponsor, might be considered
or might become "parties in interest" (as defined under ERISA) or "disqualified
persons" (as defined under the Code) with respect to a Plan. If so, the
acquisition or holding of Certificates by or on behalf of such Plan could be
considered to give rise to a "prohibited transaction" within the
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meaning of ERISA and the Code unless PTE 83-1, the Underwriter's Exemptions, or
some other exemption as available. Special caution ought to be exercised before
a Plan purchases a Certificate in such circumstances.
Employee benefit plans which are governmental plans (as defined in
Section 3(32) of ERISA), and certain church plans (as defined in Section 3(33)
of ERISA), are not subject to the ERISA fiduciary requirements. However, the
purchase of a Residual Certificate by some of such plans, or by most varieties
of ERISA Plans, may give rise to "unrelated business taxable income" as
described in Sections 511-515 and 860E of the Code. Prior to the purchase of
Residual Certificates, a prospective purchaser may be required to provide an
affidavit to the Trustee and the Sponsor that it is not a "disqualified
organization", which term as defined herein includes certain tax-exempt entities
not subject to Section 511 of the Code, including certain governmental plans. In
addition, prior to the transfer of a Residual Certificate, the Trustee or the
Sponsor may require an opinion of counsel to the effect that such transfer will
not result in a violation of the prohibited transactions provisions of ERISA and
the Code and will not subject the Trustee, the Sponsor or the Master Servicer to
additional obligations.
Due to the complexity of these rules and the penalties imposed upon
persons involved in prohibited transactions, it is particularly important that
potential Plan investors consult with their counsel regarding the consequences
under ERISA and the Code of their acquisition and ownership of Certificates.
LEGAL INVESTMENT CONSIDERATION
The Supplement for each Series of Certificates will specify which, if
any, of the classes of Certificates offered thereby will constitute "mortgage
related securities" for purposes of SMMEA. Classes of Certificates that qualify
as "mortgage related securities" will be legal investments for persons, trusts,
corporations, partnerships, associations, business trusts and business entities
(including depository institutions, life insurance companies and pension funds)
created pursuant to or existing under the laws of the United States or of any
state (including the District of Columbia and Puerto Rico) whose authorized
investments are subject to state regulation to the same extent as, under
applicable law, obligations issued by or guaranteed as to principal and interest
by the United States or any such entities. Under SMMEA, if a state enacts
legislation prior to October 4, 1991 specifically limiting the legal investment
authority of any such entities with respect to "mortgage related securities,"
the Certificates will constitute legal investments for entities subject to such
legislation only to the extent provided therein. Approximately twenty-one states
adopted such legislation prior to the October 4, 1991 deadline. SMMEA provides,
however, that in no event will the enactment of any such legislation affect the
validity of any contractual commitment to purchase, hold or invest in
Certificates, or require the sale or other disposition of Certificates, so long
as such contractual commitment was made or such Certificates acquired prior to
the enactment of such legislation.
SMMEA also amended the legal investment authority of
federally-chartered depository institutions as follows: federal savings and loan
associations and federal savings banks may invest in, sell or otherwise deal in
Certificates without limitations as to the percentage of their assets
represented thereby, federal credit unions may invest in mortgage related
securities, and national banks may purchase Certificates for their own account
without regard to the limitations generally applicable to investment securities
set forth in 12 U.S.C. ss.24 (Seventh), subject in each case to such regulations
as the applicable federal authority may prescribe. In this connection, federal
credit unions should review the National Credit Union Administration ("NCUA")
Letter to Credit Unions No. 96, as modified by Letter to Credit Unions No. 108,
which includes guidelines to assist federal credit unions in making investment
decisions for mortgage related securities, and the NCUA's regulation "Investment
and Deposit Activities" (12 C.F.R. Part 703), (whether or not the class of
Certificates under consideration for purchase constitutes a "mortgage related
security").
All depository institutions considering an investment in the
Certificates (whether or not the class of Certificates under consideration for
purchase constitutes a "mortgage related security") should review the Federal
Financial Institutions Examination Council's Supervisory Policy Statement on
Securities Activities (to the extent adopted by their respective regulators)
(the "Policy Statement"), setting forth, in relevant part, certain securities
trading and sales practices deemed unsuitable for an institution's investment
portfolio, and guidelines for (and restrictions on) investing in mortgage
derivative products, including "mortgage related securities" that are "high-risk
mortgage securities" as defined in the Policy Statement. According to the Policy
Statement, such "high-risk mortgage securities" include securities such as
Certificates not entitled to distributions allocated to principal or interest,
or Subordinate Certificates. Under the Policy Statement, it is the
responsibility of each depository institution to determine, prior to purchase
(and at stated intervals thereafter), whether a particular mortgage derivative
product is a "high-risk mortgage security", and whether the purchase (or
retention) of such a product would be consistent with the Policy Statement.
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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 that are not "interest
bearing" or "income paying."
There may be other restrictions on the ability of certain investors,
including depository institutions, either to purchase Certificates or to
purchase Certificates representing more than a specified percentage of the
investor's assets. Investors should consult their own legal advisors in
determining whether and to what extent the Certificates constitute legal
investments for such investors.
LEGAL MATTERS
The validity of the Certificates, including certain federal income tax
consequences with respect thereto, will be passed upon for the Sponsor by Brown
& Wood LLP, One World Trade Center, New York, New York 10048.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following summary of the anticipated material federal income tax
consequences of the purchase, ownership and disposition of Certificates is based
on the advice of Brown & Wood LLP, counsel to the Sponsor. This summary is based
on laws, regulations, including the REMIC regulations promulgated by the
Treasury Department on December 23, 1992, and generally effective for REMICs
with start-up dates on or after November 12, 1991 (the "REMIC Regulations"),
rulings and decisions now in effect or (with respect to regulations) proposed,
all of which are subject to change either prospectively or retroactively. This
summary does not address the federal income tax consequences of an investment in
Certificates applicable to all categories of investors, some of which (for
example, banks and insurance companies) may be subject to special rules.
Prospective investors should consult their tax advisors regarding the federal,
state, local and any other tax consequences to them of the purchase, ownership
and disposition of Certificates.
General
The federal income tax consequences to Certificateholders will vary
depending on whether an election is made to treat the Trust relating to a
particular Series of Certificates as a real estate mortgage investment conduit
("REMIC") under the Internal Revenue Code of 1986, as amended (the "Code"). The
Supplement for each Series of Certificates will specify whether a REMIC election
will be made.
Non-REMIC Certificates
If a REMIC election is not made, Brown & Wood LLP will deliver its
opinion that the Trust will be classified as a grantor trust under subpart E,
Part I of subchapter J of the Code. In this case, owners of Certificates will be
treated for federal income tax purposes as owners of a portion of the Trust's
assets as described below.
Single Class of Senior Certificates
Characterization. The Trust may be created with one class of Senior
Certificates and one class of Subordinate Certificates. In this case, each
Senior Certificateholder will be treated as the owner of a pro rata undivided
interest in the interest and principal portions of the Trust represented by that
Senior Certificate and will be considered the equitable owner of a pro rata
undivided interest in each of the Mortgage Loans in the Trust. Any amounts
received by a Senior Certificateholder in lieu of amounts due with respect to
any Mortgage Loan because of a default or delinquency in payment will be treated
for federal income tax purposes as having the same character as the payments
they replace.
Each holder of a Senior Certificate will be required to report on its
federal income tax return its pro rata share of the entire income from the
Mortgage Loans in the Trust represented by that Senior Certificate, including
interest, original issue discount, if any, prepayment fees, assumption fees, any
gain recognized upon an assumption and late payment charges received by the
Master Servicer in accordance with such Senior Certificateholder's method of
accounting. Under Code Sections 162 or 212 each Senior Certificateholder will be
entitled to deduct its pro rata share of servicing fees, prepayment fees,
assumption fees, any loss recognized upon an assumption and late payment charges
retained by the Master Servicer,
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provided that such amounts are reasonable compensation for services rendered to
the Trust. Senior Certificateholders that are individuals, estates or trusts
will be entitled to deduct their share of expenses only to the extent such
expenses plus all other Code Section 212 expenses exceed two percent of its
adjusted gross income. A Senior Certificateholder using the cash method of
accounting must take into account its pro rata share of income and deductions as
and when collected by or paid to the Master Servicer. A Senior Certificateholder
using an accrual method of accounting must take into account its pro rata share
of income and deductions as they become due or are paid to the Master Servicer,
whichever is earlier. If the Master Servicing Fees paid to the Master Servicer
were deemed to exceed reasonable servicing compensation, the amount of such
excess could be considered as a retained ownership interest by the Master
Servicer (or any person to whom the Master Servicer assigned for value all or a
portion of the Master Servicing Fees) in a portion of the interest payments on
the Mortgage Loans. The Mortgage Loans may then be subject to the "coupon
stripping" rules of the Code discussed below.
Unless otherwise specified in the related Supplement, as to each series
of Certificates Brown & Wood LLP will have advised the Sponsor that:
(i) a Senior Certificate owned by a "domestic building and loan
association" within the meaning of Code Section 7701(a)(19)
representing principal and interest payments on Mortgage Loans will be
considered to represent "loans . . . secured by an interest in real
property which is . . . residential property" within the meaning of
Code Section 7701(a)(19)(C)(v); provided that the real property
securing the Mortgage Loans represented by that Senior Certificate is
of a type described in such Code section;
(ii) a Senior Certificate owned by a real estate investment trust
representing an interest in Mortgage Loans will be considered to
represent "real estate assets" within the meaning of Code Section
856(c)(5)(A), and interest income on the Mortgage Loans will be
considered "interest on obligations secured by mortgages on real
property" within the meaning of Code Section 856(c)(3)(B); provided
that the real property securing the Mortgage Loans represented by that
Senior Certificate is of a type described in such Code section; and
(iii) a Senior Certificate owned by a REMIC will be an "obligation . .
. which is principally secured, directly or indirectly, by an interest
in real property" within the meaning of Code Section 860G(a)(3).
The assets constituting certain Trusts may include Buydown Mortgage
Loans. The characterization of any investment in Buydown Mortgage Loans will
depend upon the precise terms of the related Buydown Agreement, but to the
extent that such Buydown Mortgage Loans are secured in part by a bank account or
other personal property, they may not be treated in their entirety as assets
described in the foregoing sections of the Code. There are no directly
applicable precedents with respect to the federal income tax treatment or the
characterization of investments in Buydown Mortgage Loans. Accordingly, holders
of Senior Certificates should consult their own tax advisors with respect to
characterization of investments in Senior Certificates representing an interest
in a Trust that includes Buydown Mortgage Loans.
Premium. The price paid for a Senior Certificate by a holder will be
allocated to such holder's undivided interest in each Mortgage Loan based on
each Mortgage Loan's relative fair market value, so that such holder's undivided
interest in each Mortgage Loan will have its own tax basis. A Senior
Certificateholder that acquires an interest in Mortgage Loans at a premium may
elect to amortize such premium under a constant interest method, provided that
such Mortgage Loan was originated after September 27, 1985. Premium allocable to
a Mortgage Loan originated on or before September 27, 1985 should be allocated
among the principal payments on the Mortgage Loan and allowed as an ordinary
deduction as principal payments are made. Amortizable bond premium will be
treated as an offset to interest income on such Senior Certificate. The basis
for such Senior Certificate will be reduced to the extent that amortizable
premium is applied to offset interest payments.
It is not clear whether a reasonable prepayment assumption should be
used in computing amortization of premium allowable under Code Section 171.
If a premium is not subject to amortization using a reasonable
prepayment assumption, the holder of a Senior Certificate acquired at a premium
should recognize a loss, if a Mortgage Loan prepays in full, equal to the
difference between the portion of the prepaid principal amount of the Mortgage
Loan that is allocable to the Certificate and the portion of the adjusted basis
of the Certificate that is allocable to the Mortgage Loan. If a reasonable
prepayment assumption is used to amortize such premium, it appears that such a
loss would be available, if at all, only if prepayments have occurred at a rate
faster than the reasonable assumed prepayment rate. It is not clear whether any
other adjustments would be required to reflect differences between an assumed
prepayment rate and the actual rate of prepayments.
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Original Issue Discount. The Internal Revenue Service (the "IRS") has
stated in published rulings that, in circumstances similar to those described
herein, the special rules of the Code relating to "original issue discount"
(currently Code Sections 1271 through 1273 and 1275) will be applicable to a
Senior Certificateholder's interest in those Mortgage Loans meeting the
conditions necessary for these sections to apply. Rules regarding periodic
inclusion of original issue discount income are applicable to mortgages of
corporations originated after May 27, 1969, mortgages of noncorporate mortgagors
(other than individuals) originated after July 1, 1982, and mortgages of
individuals originated after March 2, 1984. Such original issue discount could
arise by the financing of points or other charges by the originator of the
mortgages in an amount greater than a statutory de minimis exception to the
extent that the points are not currently deductible under applicable Code
provisions or are not for services provided by the lender. Additionally, under
regulations issued on January 27, 1994, as amended on June 11, 1996, with
respect to original issue discount (the "OID Regulations"), original issue
discount may be created when the rate produced (on the issue date) by the index
formula on an adjustable rate mortgage ("ARM") is greater than the initial
interest rate payable on the ARM. Original issue discount generally must be
reported as ordinary gross income as it accrues under a constant interest
method. See "Accrual of Original Issue Discount" under "Multiple Classes of
Senior Certificates" below.
Market Discount. A Senior Certificateholder that acquires an undivided
interest in Mortgage Loans may be subject to the market discount rules of Code
Sections 1276 through 1278 to the extent an undivided interest in a Mortgage
Loan is considered to have been purchased at a "market discount". Generally,
market discount is the excess of the portion of the principal amount of such
Mortgage Loan allocable to such holder's undivided interest over such holder's
tax basis in such interest). Market discount with respect to a Senior
Certificate will be considered to be zero if the amount allocable to the Senior
Certificate is less than 0.25% of the Senior Certificate's stated redemption
price at maturity multiplied by the weighted average maturity remaining after
the date of purchase. Treasury regulations implementing the market discount
rules have not yet been issued; therefore, investors should consult their own
tax advisors regarding the application of these rules and the advisability of
making any of the elections allowed under Code Sections 1276 through 1278.
The Code provides that any principal payment (whether a scheduled
payment or a prepayment) or any gain on disposition of a market discount bond
acquired by the taxpayer after October 22, 1986 shall be treated as ordinary
income to the extent that it does not exceed the accrued market discount at the
time of such payment. The amount of accrued market discount for purposes of
determining the tax treatment of subsequent principal payments or dispositions
of the market discount bond is to be reduced by the amount so treated as
ordinary income.
The Code also grants the Treasury Department authority to issue
regulations providing for the computation of accrued market discount on debt
instruments, the principal of which is payable in more than one installment.
While the Treasury Department has not yet issued regulations, rules described in
the relevant legislative history will control. Under those rules, the holder of
a market discount bond may elect to accrue market discount either on the basis
of a constant interest rate or according to one of the following methods. If a
Senior Certificate is issued with original issue discount, the amount of market
discount that accrues during any accrual period would be equal to the product of
(i) the total remaining market discount, multiplied by (ii) a fraction, the
numerator of which is the original issue discount accruing during the period and
the denominator of which is the total remaining original issue discount at the
beginning of the accrual period. For Senior Certificates issued without original
issue discount, the amount of market discount that accrues during a period is
equal to the product of (i) the total remaining market discount, multiplied by
(ii) a fraction, the numerator of which is the amount of stated interest paid
during the accrual period and the denominator of which is the total amount of
stated interest remaining to be paid at the beginning of the accrual period. For
purposes of calculating market discount under any of the above methods in the
case of instruments (such as the Senior Certificates) which provide for payments
which may be accelerated by reason of prepayments of other obligations securing
such instruments, the same prepayment assumption applicable to
calculating the accrual of original issue discount will apply. Because the
regulations described above have not been issued, it is impossible to predict
what effect those regulations might have on the tax treatment of a Senior
Certificate purchased at a discount or premium in the secondary market.
A holder who acquired a Senior Certificate at a market discount also
may be required to defer, until the maturity date of such Senior Certificate or
its earlier disposition in a taxable transaction, the deduction of a portion of
the amount of interest that the holder paid or accrued during the taxable year
on indebtedness incurred or maintained to purchase or carry the Senior
Certificate in excess of the aggregate amount of interest (including original
issue discount) includible in such holder's gross income for the taxable year
with respect to such Senior Certificate. The amount of such net interest expense
deferred in a taxable year may not exceed the amount of market discount accrued
on the Senior Certificate for the days during the taxable year on which the
holder held the Senior Certificate and, in general, would be deductible when
such market discount is includible in income. The amount of any remaining
deferred deduction is to be taken into account in the taxable year in which the
Senior Certificate matures or is disposed of in a taxable transaction. In the
case of a disposition in which gain or loss is not recognized in whole or in
part, any remaining deferred deduction will be allowed to the extent of gain
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recognized on the disposition. This deferral rule does not apply, if the Senior
Certificateholder elects to include such market discount in income currently as
it accrues on all market discount obligations acquired by such Senior
Certificateholder in that taxable year or thereafter.
Multiple Classes of Senior Certificates
Stripped Bonds and Stripped Coupons. Pursuant to Code Section 1286, the
separation of ownership of the right to receive some or all of the interest
payments on an obligation from ownership of the right to receive some or all of
the principal payments on such obligation results in the creation of "stripped
bonds" with respect to principal payments and "stripped coupons" with respect to
interest payments. For purposes of Code Sections 1271 through 1288, Code Section
1286 treats a stripped bond or a stripped coupon as an obligation issued on the
date that such stripped interest is purchased. If a Trust is created with two
classes of Senior Certificates, one class of Senior Certificates will represent
the right to principal and interest, or principal only, on all or a portion of
the Loans (the "Stripped Bond Certificates"), while the second class of Senior
Certificates will represent the right to some or all of the interest on such
portion (the "Stripped Coupon Certificates").
The precise tax treatment of Stripped Coupon Certificates is
substantially uncertain. The Code could be read literally to require that
original issue discount computations be made on a Loan by Loan basis. However,
based on the recent IRS guidance, it appears that a Stripped Coupon Certificate
should be treated as a single installment obligation subject to the original
issue discount rules of the Code. As a result, all payments on a Stripped Coupon
Certificate would be included in the certificate's stated redemption price at
maturity for purposes of calculating income on such certificate under the
original issue discount rules of the Code.
It is unclear under what circumstances, if any, the prepayment of
Mortgage Loans will give rise to a loss to the holder of a Stripped Bond
Certificate purchased at a premium or a Stripped Coupon Certificate. If such
Certificate is treated as a single instrument (rather than an interest in
discrete mortgage loans) and the effect of prepayments is taken into account in
computing yield with respect to such Senior Certificate, it appears that no loss
may be available as a result of any particular prepayment unless prepayments
occur at a rate faster than the assumed prepayment rate. However, if such
Certificate is treated as an interest in discrete Mortgage Loans, or if no
prepayment assumption is used, then when a Mortgage Loan is prepaid, the holder
of such Certificate should be able to recognize a loss equal to the portion of
the adjusted issue price of such Certificate that is allocable to such Mortgage
Loan.
Holders of Stripped Bond Certificates and Stripped Coupon Certificates
are urged to consult with their own tax advisors regarding the proper treatment
of these Certificates for federal income tax purposes.
Treatment of Certain Owners. Several Code sections provide beneficial
treatment to certain taxpayers that invest in mortgage loans of the type that
make up the Trust. With respect to these Code sections, no specific legal
authority exists regarding whether the character of the Senior Certificates for
federal income tax purposes, will be the same as that of the underlying Mortgage
Loans. While Code Section 1286 treats a stripped obligation as a separate
obligation for purposes of the Code provisions addressing original issue
discount, it is not clear whether such characterization would apply with regard
to these other Code sections. Although the issue is not free from
doubt, based on policy considerations, each class of Senior Certificates should
be considered to represent "real estate assets" within the meaning of Code
Section 856(c)(5)(A) and "loans . . . secured by, an interest in real property
which is . . . residential real property" within the meaning of Code Section
7701(a)(19)(C)(v), and interest income attributable to Senior Certificates
should be considered to represent "interest on obligations secured by mortgages
on real property". Within the meaning of Code Section 856(c)(3)(B), provided
that in each case the underlying Mortgage Loans and interest on such Mortgage
Loans qualify, for such treatment. Prospective purchasers to which such
characterization of an investment in Senior Certificates is material should
consult their own tax advisors regarding the characterization of the Senior
Certificates and the income therefrom. Senior Certificates will be
"obligation[s] (including any participation or certificate of beneficial
ownership therein) which [are] principally secured, directly or indirectly, by
an interest in real property" within the meaning of Code Section 860G(a)(3).
Senior Certificates Representing Interests in Loans Other Than ARMs.
Original issue discount on each Senior Certificate must be included in the
owner's ordinary income for federal income tax purposes as it accrues, in
accordance with a constant interest method that takes into account the
compounding of interest, in advance of receipt of the cash attributable to such
income. Based in part on the OID Regulations, the amount of original issue
discount required to be included in an owner's income in any taxable year with
respect to a Senior Certificate representing an interest in Mortgage Loans other
than ARMs likely will be computed as described below under "--Accrual of
Original Issue Discount." Owners should be aware, however, that the OID
Regulations either do not address, or are subject to varying interpretations
with regard to, several issues relevant to obligations, such as the Mortgage
Loans, which are subject to prepayment.
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Under the Code, the Mortgage Loans underlying the Senior Certificates
will be treated as having been issued on the date they were originated with an
amount of OID equal to the excess of such Mortgage Loan's stated redemption
price at maturity over its issue price. The issue price of a Mortgage Loan is
generally the amount lent to the mortgagee, which may be adjusted to take into
account certain loan origination fees. The stated redemption price at maturity
of a Mortgage Loan is the sum of all payments to be made on such Mortgage Loan
other than payments that are treated as qualified stated interest payments. The
accrual of this OID, as described below under "--Accrual of Original Issue
Discount," will, unless otherwise specified in the related Supplement, utilize
the original yield to maturity of the Senior Certificates calculated based on a
reasonable assumed prepayment rate for the mortgage loans underlying the Senior
Certificates (the "Prepayment Assumption"), and will take into account events
that occur during the calculation period. The Prepayment Assumption will be
determined in the manner prescribed by regulations that have not yet been
issued. The legislative history of the 1986 Act (the "Legislative History")
provides, however, that the regulations will require that the Prepayment
Assumption be the prepayment assumption that is used in determining the offering
price of such Certificate. No representation is made that any Senior Certificate
will prepay at the Prepayment Assumption. The prepayment assumption provision
contained in the Code literally only applies to debt instruments collateralized
by other debt instruments that are subject to prepayment rather than direct
ownership interest in such debt instruments, such as the Senior Certificates
represent. However, no other legal authority provides guidance with regard to
the proper method for accruing OID on obligations that are subject to
prepayment, and, until further guidance is issued, the Master Servicer intends
to calculate and report OID under the method described below.
Accrual of Original Issue Discount. Generally, the owner of a Senior
Certificate must include in gross income the sum of the "daily portions," as
defined below, of the OID on such Senior Certificate for each day on which it
owns such Senior Certificate, including the date of purchase but excluding the
date of disposition. In the case of an original owner, the daily portions of OID
with respect to each component generally will be determined as set forth under
the OID Regulations. A calculation will be made by the Master Servicer or such
other entity specified in the related Supplement of the portion of OID that
accrues during each successive monthly accrual period (or shorter period from
the date of original issue) that ends on the day in the calendar year
corresponding to each of the Distribution Dates on the Senior Certificates (or
the day prior to each such date). This will be done, in the case of each full
month accrual period, by adding (i) the present value at the end of the accrual
period (determined by using as a discount factor the original yield to maturity
of the respective component under the Prepayment Assumption) of all remaining
payments to be received under the Prepayment Assumption on the respective
component and (ii) any payments received during such accrual period, and
subtracting from that total the "adjusted issue price" of the respective
component at the beginning of such accrual period. The adjusted issue price of a
Senior Certificate at the beginning of the first accrual period is its issue
price; the adjusted issue price of a Senior Certificate at the beginning of a
subsequent accrual period is the adjusted issue priced at the beginning of the
immediately preceding accrual period plus the amount of OID allocable to that
accrual period reduced by the amount of any payment made at the end of or during
that accrual period. The OID accruing during such accrual period will then be
divided by the number of days in the period to determine the daily portion of
OID for each day in the period. With respect to an initial accrual period
shorter than a full monthly accrual period, the daily portions of OID must be
determined according to an appropriate allocation under any reasonable method.
Original issue discount generally must be reported as ordinary gross
income as it accrues under a constant interest method that takes into account
the compounding of interest as it accrues rather than when received. However,
the amount of original issue discount includible in the income of a holder of an
obligation is reduced when the obligation is acquired after its initial issuance
at a price greater than the sum of the original issue price and the previously
accrued original issue discount, less prior payments of principal. Accordingly,
if such Mortgage Loans acquired by a Certificateholder are purchased at a price
equal to the then unpaid principal amount of such Mortgage Loan, no original
issue discount attributable to the difference between the issue price and the
original principal amount of such Mortgage Loan (i.e. points) will be includible
by such holder. Other original issue discount on the Mortgage Loans (e.g., that
arising from a "teaser" rate) would still need to be accrued.
Senior Certificates Representing Interests in ARM Loans. The OID
Regulations do not address the treatment of instruments, which represent
interests in Mortgage Loans with Mortgage Rates which adjust periodically ("ARM
Loans"). Additionally, the IRS has not issued guidance under the Code's coupon
stripping rules with respect to such instruments. In the absence of any
authority, the Master Servicer will report original issue discount on Senior
Certificates attributable to ARM Loans ("Stripped ARM Obligations") to holders
in a manner it believes is consistent with the rules described above under the
heading "Senior Certificates Representing Interests in Loans Other Than ARM
Loans" and with the OID Regulations. In general, application of these rules may
require inclusion of income on a Stripped ARM Obligation in advance of the
receipt of cash attributable to such income. Further, the addition of interest
deferred by reason of negative amortization to the principal balance of an ARM
Loan may require the inclusion of such amount in the income of the
Certificateholder when such amount accrues. Furthermore, the addition of
Deferred Interest to the Certificate's principal
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balance will result in additional income (including possibly original issue
discount income) to the Certificateholder and the A-2 Certificateholder over the
remaining life of such Senior Certificates.
Because the treatment of Stripped ARM Obligations is uncertain,
investors are urged to consult their tax advisors regarding how income will be
includible with respect to such Certificates.
Sale or Exchange of a Senior Certificate
Sale or exchange of a Senior Certificate prior to its maturity will
result in gain or loss equal to the difference, if any, between the amount
received, and the owner's adjusted basis in the Senior Certificate. Such
adjusted basis generally will equal the seller's purchase price for the Senior
Certificate, increased by the original issue discount included in the seller's
gross income with respect to the Senior Certificate, and reduced by principal
payments on the Senior Certificate previously received by the seller. Such gain
or loss will be capital gain or loss to an owner for which a Senior Certificate
is a "capital asset" within the meaning of Code Section 1221, and will be
long-term or short-term depending on whether the Senior Certificate has been
owned for the long-term capital gain holding period (currently more than one
year).
Senior Certificates will be "evidences of indebtedness" within the
meaning of Code Section 582(c)(1), so that gain or loss recognized from the sale
of a Senior Certificate by a bank or a thrift institution to which such section
applies will be ordinary income or loss.
Non-U.S. Persons
Generally, to the extent that a Senior Certificate evidences ownership
in Mortgage Loans that are issued on or before July 18, 1984, interest or
original issue discount paid by the person required to withhold tax under Code
Section 1441 or 1442 to (i) an owner that is not a U.S. Person (as defined
below), or (ii) a Senior Certificateholder holding on behalf of an owner that is
not a U.S. Person, will be subject to federal income tax, collected by
withholding, at a rate of 30% or such lower rate as may be provided for interest
by an applicable tax treaty. Accrued original issue discount recognized by the
owner on the sale or exchange of such a Senior Certificate also will be subject
to federal income tax at the same rate. Generally, such payments would not be
subject to withholding to the extent that a Senior Certificate evidences
ownership in Mortgage Loans issued after July 18, 1984 if (i) such Senior
Certificateholder does not actually or constructively own 10 percent or more of
the combined voting power of all classes of equity in the issuer (which for
purposes of this discussion may be defined as the Trust (the "Issuer")); (ii)
such Senior Certificateholder is not a controlled foreign corporation (within
the meaning of Code Section 957) related to the Issuer; and (iii) such Senior
Certificateholder complies with certain identification requirements (including
delivery of a statement, signed by the Senior Certificateholder under penalties
of perjury, certifying that such Senior Certificateholder is not a U.S. Person
and providing the name and address of such Senior Certificateholder).
For purposes of this discussion, a "U.S. Person" means a citizen or
resident of the United States, a corporation or a partnership organized in or
under the laws of the United States, or any political subdivision thereof or an
estate or trust, the income of which, from sources outside the United States, is
includible in gross income for federal income tax purposes regardless of its
connection with the conduct of a trade or business within the United States.
Information Reporting and Backup Withholding
The Master Servicer will furnish or make available, within a reasonable
time after the end of each calendar year, to each Certificateholder at any time
during such year, such information as may be deemed necessary or desirable to
assist Certificateholders in preparing their federal income tax returns, or to
enable holders to make such information available to owners or other financial
intermediaries of holders that hold such Certificates as nominees. If a holder,
owner or other recipient of a payment on behalf of an owner fails to supply a
certified taxpayer identification number or if the Secretary of the Treasury
determines that such person has not reported all interest and dividend income
required to be shown on its federal income tax return, 31% backup withholding
may be required with respect to any payments. Any amounts deducted and withheld
from a distribution to a recipient would be allowed as a credit against such
recipient's federal income tax liability.
REMIC Certificates
The Trust relating to a Series of Certificates may elect to be treated
as a REMIC. Qualification as a REMIC requires ongoing compliance with certain
conditions. Although a REMIC is not generally subject to federal income tax
(see, however "Residual Certificates--Prohibited Transactions"), if a Trust with
respect to which a REMIC election is made fails to comply with one or more of
the ongoing requirements of the Code for REMIC status during any taxable year,
including the implementation of restrictions on the purchase and transfer of the
residual interest in a REMIC as described below under
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"Residual Certificates", the Code provides that a Trust will not be treated as a
REMIC for such year and thereafter. In that event, such entity may be taxable as
a separate corporation under Treasury regulations, and the related REMIC
Certificates may not be accorded the status or given the tax treatment described
below. While the Code authorizes the Treasury Department to issue regulations
providing relief in the event of an inadvertent termination of REMIC status, no
such regulations have been issued. Any such relief moreover, may be accompanied
by sanctions, such as the imposition of a corporate tax on all or a portion of
the REMIC's income for the period in which the requirements for such status are
not satisfied. With respect to each such Trust that elects REMIC status, Brown &
Wood LLP will deliver its opinion generally to the effect that, under then
existing law and assuming compliance with all provisions of the related
Agreement, such Trust will qualify as a REMIC and the related Certificates will
be considered to be regular interests ("Regular Certificates") or residual
interests ("Residual Certificates") in the REMIC.
The Supplement for each Series of Certificates will indicate whether
the Trust will make a REMIC election and whether a class of Certificates will be
treated as a regular or residual interest in the REMIC.
In general, with respect to each Series of Certificates for which a
REMIC election is made, (i) Certificates held by a thrift institution taxed as a
"domestic building and loan association" will constitute assets described in
Code Section 7701(a)(19)(C); (ii) Certificates held by a real estate investment
trust will constitute "real estate assets" within the meaning of Code Section
856(c)(5)(A); and (iii) interest on Certificates will be considered "interest on
obligations secured by mortgages on real property" within the meaning of Code
Section 856(c)(3)(B). If less than 95% of the REMIC's assets are assets
qualifying under any of the foregoing Code sections, the Certificates will be
qualifying assets only to the extent that the REMIC's assets are qualifying
assets. In addition, payments on Mortgage Loans held pending distribution on the
REMIC Certificates will be treated as real estate assets for purposes of Code
Section 856(c).
The Small Business Job Protection Act of 1996, as part of the repeal of
the bad debt reserve method for thrift institutions, repealed the application of
Code section 593(d) to any taxable year beginning after December 31, 1995.
Tiered REMIC Structures. For certain series of Certificates, two
separate elections may be made to treat designated portions of the related Trust
as REMICs (respectively, the "Subsidiary REMIC" and the "Master REMIC") for
federal income tax purposes. Upon the issuance of any such series of
Certificates, Brown & Wood LLP, counsel to the Sponsor, will deliver its opinion
generally to the effect that, assuming compliance with all provisions of the
related Pooling and Servicing Agreement and Trust Agreement, the Subsidiary
REMIC and the Master REMIC will each qualify as a REMIC and the REMIC
Certificates issued by the Subsidiary REMIC and the Master REMIC, respectively,
will be considered to evidence ownership of Regular Certificates or Residual
Certificates in the related REMIC within the meaning of the REMIC provisions.
Only REMIC Certificates (other than the Residual Certificates in the
Subsidiary REMIC) issued by the Master REMIC will be offered hereunder. The
Subsidiary REMIC and the Master REMIC will be treated as one REMIC solely for
purposes of determining whether the REMIC Certificates will be (i) "real estate
assets" within the meaning of Section 856(c)(5)(A) of the Code, (ii) "loans
secured by an interest in real property" under Section 7701(a)(19)(C) of the
Code and (iii) whether the income on such Certificates is Interest described in
Section 856(c)(3)(B) of the Code.
Regular Certificates
General. Except as otherwise stated in this discussion, Regular
Certificates will be treated for federal income tax purposes as debt instruments
issued by the REMIC and not as ownership interests in the REMIC or its assets.
Moreover, holders of Regular Certificates that otherwise report income under a
cash method of accounting will be required to report income with respect to
Regular Certificates under an accrual method.
Original Issue Discount and Premium. The Regular Certificates may be
issued with "original issue discount" within the meaning of Code Section
1273(a). Generally, such original issue discount, if any, will equal the
difference between the "stated redemption price at maturity" of a Regular
Certificate and its "issue price." Holders of any class of Certificates issued
with original issue discount will be required to include such original issue
discount in gross income for federal income tax purposes as it accrues, in
accordance with a constant interest method based on the compounding of interest,
as it accrues rather than in accordance with receipt of the interest payments.
The following discussion is based in part on Treasury regulations issued on
January 27, 1994, as amended on June 11, 1996, under Code Sections 1271 through
1273 and 1275 (the "OID Regulations ") and in part on the provisions of the Tax
Reform Act of 1986 (the "1986 Act"). The holder of a Regular Certificate should
be aware, however, that the OID Regulations do not adequately address certain
issues relevant to prepayable securities, such as the Regular Certificates.
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Rules governing original issue discount are set forth in Code Sections
1271 through 1273 and 1275. These rules require that the amount and rate of
accrual of original issue discount be calculated based on a Prepayment
Assumption and prescribe a method for adjusting the amount and rate of accrual
of such discount where the actual prepayment rate differs from the Prepayment
Assumption. Under the Code, the Prepayment Assumption must be determined in the
manner prescribed by regulations which have not yet been issued. The Legislative
History provides, however, that Congress intended the regulations to require
that the Prepayment Assumption be the prepayment assumption that is used in
determining the initial offering price of such Regular Certificates. The
Supplement for each Series of Regular Certificates will specify the Prepayment
Assumption to be used for the purpose of determining the amount and rate of
accrual of original issue discount. No representation is made that the Regular
Certificates will prepay at the Prepayment Assumption or at any other rate.
In general, each Regular Certificate will be treated as a single
installment obligation issued with an amount of original issue discount equal to
the excess of its "stated redemption price at maturity" over its "issue price."
The issue price of a Regular Certificate is the first price at which a
substantial amount of Regular Certificates of that class are sold to the public
(excluding bond houses, brokers, underwriters or wholesalers). The issue price
of a Regular Certificate also includes the amount paid by an initial Regular
Certificateholder for accrued interest that relates to a period prior to the
issue date of the Regular Certificate. The stated redemption price at maturity
of a Regular Certificate includes the original principal amount of the Regular
Certificate, but generally will not include distributions of interest if such
distributions constitute "qualified stated interest." Under the OID Regulations,
qualified stated interest generally means interest payable at a single fixed
rate or qualified variable rate (as described below) provided that such interest
payments are unconditionally payable at intervals of one year or less during the
entire term of the Regular Certificate. Interest is payable at a single fixed
rate only if the rate appropriately takes into account the length of the
interval between payments. Distributions of interest on Regular Certificates
with respect to which deferred interest will accrue, will not constitute
qualified stated interest payments, in which case the stated redemption price at
maturity of such Regular Certificates includes all distributions of interest as
well as principal thereon.
Where the interval between the issue date and the first Distribution
Date on a Regular Certificate is longer than the interval between subsequent
Distribution Dates, the greater of any original issue discount disregarding the
rate in the first period and any interest foregone during the first period is
treated as the amount by which the stated redemption price of the Regular
Certificate exceeds its issue price for purposes of the de minimis rule
described below. The OID Regulations suggest that all interest on a long first
period Regular Certificate that is issued with non-de minimis OID will be
treated as OID. Where the interval between the issue date and the first
Distribution Date on a Regular Certificate is shorter than the interval between
subsequent Distribution Dates, interest due on the first Distribution Date in
excess of the amount that accrued during the first period would be added to the
Certificates stated redemption price at maturity. Regular Certificateholders
should consult their own tax advisors to determine the issue price and stated
redemption price at maturity of a Regular Certificate.
Under the de minimis rule, original issue discount on a Regular
Certificate will be considered to be zero if such original issue discount is
less than 0.25% of the stated redemption price at maturity of the Regular
Certificate multiplied by the weighted average maturity of the Regular
Certificate. For this purpose, the weighted average maturity of the Regular
Certificate is computed as the sum of the amounts determined by multiplying the
number of full years (i.e., rounding down partial years) from the issue date
until each distribution in reduction of stated redemption price at maturity is
scheduled to be made by a fraction, the numerator of which is the amount of each
distribution included in the stated redemption price at maturity of the Regular
Certificate and the denominator of which is the stated redemption price at
maturity of the Regular Certificate. Although currently unclear, it appears that
the schedule of such distributions should be determined in accordance with the
assumed rate of prepayment of the Mortgage Loans and the anticipated
reinvestment rate, if any, relating to the Regular Certificates (the "Prepayment
Assumption"). The Prepayment Assumption with respect to a Series of Regular
Certificates will be set forth in the related Supplement. Holders generally must
report de minimis OID pro rata as principal payments are received, and such
income will be capital gain if the Regular Certificate is held as a capital
asset.
Generally, a Regular Certificateholder must include in gross income the
"daily portions," as determined below, of the original issue discount that
accrues on a Regular Certificate for each day the Regular Certificateholder
holds the Regular Certificate, including the purchase date but excluding the
disposition date. In the case of an original holder of a Regular Certificate, a
calculation will be made of the portion of the original issue discount that
accrues during each successive period ("an accrual period") that ends on the day
in the calendar year corresponding to a Distribution Date (or if Distribution
Dates are on the first day or first business day of the immediately preceding
month, interest may be treated as payable on the last day of the immediately
preceding month) and begins on the day after the end of the immediately
preceding accrual period (or on the issue date in the case of the first accrual
period). This will be done, in the case of each full accrual period, by (i)
adding (a) the present value at the end of the accrual period (determined by
using as a discount factor the original yield to maturity of the Regular
Certificates as calculated under the Prepayment Assumption) of all remaining
payments to be
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received on the Regular Certificate under the Prepayment Assumption, and (b) any
payments included in the stated redemption price at maturity received during
such accrual period, and (ii) subtracting from that total the "adjusted issue
price" of the Regular Certificates at the beginning of such 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" of a Regular
Certificate at the beginning of a subsequent accrual period is the "adjusted
issue price" at the beginning of the immediately preceding accrual period plus
the amount of original issue discount allocable to that accrual period and
reduced by the amount of any payment other than a payment of qualified stated
interest made at the end of or during that accrual period. The original issue
discount accrued during an accrual period will then be divided by the number of
days in the period to determine the daily portion of original issue discount for
each day in the accrual period. The calculation of original issue discount under
the method described above will cause the accrual of original issue discount to
either increase or decrease (but never below zero) in a given accrual period to
reflect the fact that prepayments are occurring faster or slower than under the
Prepayment Assumption. With respect to an initial accrual period shorter than a
full accrual period the daily portions of original issue discount must be
determined according to an appropriate allocation under any reasonable method.
A subsequent purchaser of a Regular Certificate issued with original
issue discount who purchases the Regular Certificate at a cost less than the
remaining stated redemption price at maturity will also be required to include
in gross income the sum of the daily portions of original issue discount on that
Regular Certificate. In computing the daily portions of original issue discount
for such a purchaser (as well as an initial purchaser that purchases at a price
higher than the adjusted issue price but less than the stated redemption price
at maturity), however, the daily portion is reduced by the amount that would be
the daily portion for such day (computed in accordance with the rules set forth
above) multiplied by a fraction, the numerator of which is the amount, if any,
by which the price paid by such holder for that Regular Certificate exceeds the
following amount: (a) the sum of the issue price plus the aggregate amount of
original issue discount that would have been includible in the gross income of
an original Regular Certificateholder (who purchased the Regular Certificate at
its issue price), (b) less any prior payments included in the stated redemption
price at maturity, and the denominator of which is the sum of the daily portions
for that Regular Certificate for all days beginning on the date after the
purchase date and ending on the maturity date computed under the Prepayment
Assumption. A holder who pays an acquisition premium instead may elect to accrue
OID by treating the purchase as a purchase of original issue.
The IRS recently finalized regulations (the "Contingent Regulations")
governing the calculation of OID on instruments having contingent interest
payments. The Contingent Regulations, effective for debt instruments issued
after August 13, 1996, represent the only guidance regarding the views of the
IRS with respect to contingent interest instruments and specifically do not
apply for purposes of calculating OID on debt instruments subject to Code
Section 1272(a)(6), such as the Regular Certificates. Additionally, the OID
Regulations do not contain provisions specifically interpreting Code Section
1272(a)(6). Until the Treasury issues guidance to the contrary, the Trustee
intends to base its computation on Code Section 1272(a)(6) and the OID
Regulations as described in this Prospectus. However, because no regulatory
guidance currently exists under Code Section 1272(a)(6), there can be no
assurance that such methodology represents the correct manner of calculating
OID.
Variable Rate Regular Certificates. Regular Certificates may provide
for interest based on a variable rate. Interest is treated as payable at a
variable rate and not as contingent interest if, generally, (i) the issue price
does not exceed the original principal balance by more than a specified amount,
and (ii) the compound compounds or is payable at least annually at current
values of certain objective rates measured by or based on lending rate for newly
borrowed funds. For a debt instrument issued after August 13, 1996, an objective
rate is a rate (other than a qualified floating rate) that is determined using a
single fixed formula and that is based on objective financial or economic
information. The variable interest generally will be qualified stated interest
to the extent it is unconditionally payable at least annually and, to the extent
successive variable rates are used, interest is not significantly accelerated or
deferred.
The amount of OID with respect to a Regular Certificate bearing a
variable rate of interest will accrue in the manner described above under
"Original Issue Discount," by assuming generally that the index used for the
variable rate will remain fixed throughout the term of the Certificate.
Approximate adjustments are made for the actual variable rate.
Although unclear at present, it is anticipated that Regular
Certificates bearing an interest rate that is a weighted average of the net
interest rates on Mortgage Loans will be treated as variable rate certificates.
In such case, the weighted average rates used to compute the initial
pass-through rate on the Regular Certificates will be deemed to be the index in
effect through the life of the Regular Certificates. It is possible, however,
that the IRS may treat some or all of the interest on Regular Certificates with
a weighted average rate as taxable under the rules relating to obligations
providing for contingent payments. Such treatment may effect the timing of
income accruals on such Regular Certificates. Additionally, if some or all of
the Mortgage Loans are subject to "teaser rates" (i.e., the initial rates on the
Mortgage Loans are less than subsequent rates on the Mortgage Loans) the
interest paid on some or all of the Regular Certificates may be subject to
accrual
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using a constant yield method notwithstanding the fact that such Certificates
may not have been issued with "true" non-de minimis original issue discount.
Election to Treat All Interest as OID. The OID Regulations permit a
Certificateholder to elect to accrue all interest, discount (including de
minimis market or original issue discount) and premium in income as interest,
based on a constant yield method for Certificates acquired on or after April 4,
1994. If such an election were to be made with respect to a Regular Certificate
with market discount, the Certificateholder would be deemed to have made an
election to include in income currently market discount with respect to all
other debt instruments having market discount that such Certificateholder
acquires during the year of the election or thereafter. Similarly, a
Certificateholder that makes this election for a Certificate that is acquired at
a premium will be deemed to have made an election to amortize bond premium with
respect to all debt instruments having amortizable bond premium with that such
Certificateholder owns or acquires. See "-- Regular Certificates -- Premium"
herein. The election to accrue interest, discount and premium on a constant
yield method with respect to a Certificate cannot be revoked without the consent
of the IRS.
Market Discount. A purchaser of a Regular Certificate also may be
subject to the market discount provisions of Code Sections 1276 through 1278.
Under these provisions and the OID Regulations "market discount" equals the
excess, if any, of (i) the Regular Certificate's stated principal amount or, in
the case of a Regular Certificate with original issue discount, the adjusted
issue price (determined for this purpose as if the purchaser had purchased such
Regular Certificate from an original holder) over (ii) the price for such
Regular Certificate paid by the purchaser. A Certificateholder that purchases a
REMIC Regular Certificate at a market discount, will recognize gain upon receipt
of each distribution representing stated redemption price. In particular, under
Section 1276 of the Code such a holder generally will be required to allocate
each such principal distribution first to accrued market discount not previously
included in income, and to recognize ordinary income to that extent. A
Certificateholder may elect to include market discount in income currently as it
accrues rather than including it on a deferred basis in accordance with the
foregoing. If made, such election will apply to all market discount bonds
acquired by such Certificateholder on or after the first day of the first
taxable year to which such election applies. In addition, the OID Regulations
permit a Certificateholder using either the accrual or cash method of accounting
to elect to accrue all interest, discount (including de minimis market or
original issue discount) and premium in income as interest, based on a constant
yield method. If such an election were made with respect to a REMIC Regular
Certificate with market discount, the Certificateholder would be deemed to have
made an election to include in income currently market discount with respect to
all other debt instruments having market discount that such Certificateholder
acquires during the year of the election or thereafter. Similarly, a
Certificateholder that makes this election for a Certificate that is acquired at
a premium is deemed to have made an election to amortize bond premium with
respect to all debt instruments having amortizable bond premium that such
Certificateholder owns or acquires. See "Taxation of Regular Certificates --
Premium". The election to accrue interest, discount and premium on a constant
yield method with respect to a Certificate is irrevocable.
Market discount with respect to a Regular Certificate will be
considered to be zero if the amount allocable to the Regular Certificate is less
than 0.25% of the Regular Certificate's stated redemption price at maturity
multiplied by the Regular Certificate's weighted average maturity remaining
after the date of purchase. If market discount on a Regular Certificate is
considered to be zero under this rule, the actual amount of market discount must
be allocated to the remaining principal payments on the Regular Certificate and
gain equal to such allocated amount will be recognized when the corresponding
principal payment is made. Treasury regulations implementing the market discount
rules have not yet been issued; therefore, investors should consult their own
tax advisors regarding the application of these rules and the advisability of
making any of the elections allowed under Code Sections 1276 through 1278.
The Code provides that any principal payment (whether a scheduled
payment or a prepayment) or any gain on disposition of a market discount bond
acquired by the taxpayer after October 22, 1986, shall be treated as ordinary
income to the extent that it does not exceed the accrued market discount at the
time of such payment. The amount of accrued market discount for purposes of
determining the tax treatment of subsequent principal payments or dispositions
of the market discount bond is to be reduced by the amount so treated as
ordinary income.
The Code also grants authority to the Treasury Department to issue
regulations providing for the computation of accrued market discount on debt
instruments, the principal of which is payable in more than one installment.
Until such time as regulations are issued by the Treasury, rules described in
the Legislative History will apply. Under those rules, the holder of a market
discount bond may elect to accrue market discount either on the basis of a
constant interest rate or according to one of the following methods. For Regular
Certificates issued with original issue
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discount, the amount of market discount that accrues during a period is equal to
the product of (i) the total remaining market discount, multiplied by (ii) a
fraction, the numerator of which is the original issue discount accruing during
the period and the denominator of which is the total remaining original issue
discount at the beginning of the period. For Regular Certificates issued without
original issue discount, the amount of market discount that accrues during a
period is equal to the product of (i) the total remaining market discount,
multiplied by (ii) a fraction, the numerator of which is the amount of stated
interest paid during the accrual period and the denominator of which is the
total amount of stated interest remaining to be paid at the beginning of the
period. For purposes of calculating market discount under any of the above
methods in the case of instruments (such as the Regular Certificates) which
provide for payments which may be accelerated by reason of prepayments of other
obligations securing such instruments, the same Prepayment Assumption applicable
to calculating the accrual of original issue discount will apply.
A holder of a Regular Certificate who acquires such Regular Certificate
at a market discount also may be required to defer, until the maturity date of
such Regular Certificate or its earlier disposition in a taxable transaction,
the deduction of a portion of the amount of interest that the holder paid or
accrued during the taxable year on indebtedness incurred or maintained to
purchase or carry the Regular Certificate in excess of the aggregate amount of
interest (including original issue discount) includible in such holder's gross
income for the taxable year with respect to such Regular Certificate. The amount
of such net interest expense deferred in a taxable year may not exceed the
amount of market discount accrued on the Regular Certificate for the days during
the taxable year on which the holder held the Regular Certificate and, in
general, would be deductible when such market discount is includible in income.
The amount of any remaining deferred deduction is to be taken into account in
the taxable year in which the Regular Certificate matures or is disposed of in a
taxable transaction. In the case of a disposition in which gain or loss is not
recognized in whole or in part any remaining deferred deduction will be allowed
to the extent of gain recognized on the disposition. This deferral rule does not
apply if the Regular Certificateholder elects to include such market discount in
income currently as it accrues on all market discount obligations acquired by
such Regular Certificateholder in that taxable year or thereafter.
Premium. A purchaser of a Regular Certificate who purchases the Regular
Certificate at a cost (not including accrued qualified stated interest) greater
than its remaining stated redemption price at maturity will be considered to
have purchased the Regular Certificate at a premium, and may elect to amortize
such premium under a constant yield method. It is not clear whether the
Prepayment Assumption would be taken into account in determining the life of the
Regular Certificate for this purpose. The Amortizable Bond Premium Regulations
described above specifically do not apply to prepayable debt instruments subject
to Code Section 1272(a)(6) such as the Regular Certificates. Absent further
guidance from the IRS, the Trustee intends to account for amortizable bond
premium in the manner described herein. However, the Legislative History states
that the same rules that apply to accrual of market discount (which rules
require use of a Prepayment Assumption in accruing market discount with respect
to Regular Certificates without regard to whether such Certificates have
original issue discount) will also apply in amortizing bond premium under Code
Section 171. The Code provides that amortizable bond premium will be allocated
among the interest payments on such Regular Certificates and will be applied as
an offset against such interest payment. Prospective purchasers of the Regular
Certificates should consult their tax advisors regarding the possible
application of the Amortizable Bond Premium Regulations.
Deferred Interest. Certain classes of Regular Certificates will provide
for the accrual of interest when one or more ARM Loans are adding interest to
their principal balance by reason of negative amortization ("Deferred
Interest"). Any Deferred Interest that accrues with respect to a class of
Regular Certificates will constitute income to the holders of such Certificates
prior to the time distributions of cash with respect to such Deferred Interest
are made. It is unclear, under the OID Regulations, whether any of the interest
on such Certificates will constitute qualified stated interest or whether all or
a portion of the interest payable on the Certificate must be included in the
stated redemption price at maturity of the Certificate and accounted for as
original issue discount (which could accelerate such inclusion). Interest on
Regular Certificates must in any event be accounted for under an accrual method
by the holders of such Certificates, and therefore applying the latter analysis
may result only in a slight difference in the timing of the inclusion in income
of interest on such Regular Certificates.
Accrued Interest Certificates. Certain of the Regular Certificates
("Payment Lag Certificates") may provide for payments of interest based on a
period that corresponds to the interval between Distribution Dates but that ends
prior to each such Distribution Date. The period between the Closing Date for
Payment Lag Certificates and their first Distribution Date may or may not exceed
such interval. Purchasers of Payment Lag Certificates for which the period
between the Closing Date and the first Distribution Date does not exceed such
interval could pay upon purchase of the Regular Certificates accrued interest in
excess of the accrued interest that would be paid if the interest paid on the
Distribution Date were interest accrued from Distribution Date to Distribution
Date. If a portion of the initial purchase price of a Regular Certificate is
allocable to interest that has accrued prior to the issue date
("pre-issuance accrued interest") and the Regular Certificate provides for a
payment of stated interest on the first payment date, within one year of the
issue date, that equals or exceeds the amount of the pre-issuance accrued
interest, then the Regular Certificates issue price may be computed by
subtracting from the issue price the amount of pre-issuance accrued interest,
rather than as an amount payable on the Regular Certificate. However, it is
unclear under this method how the OID Regulations treat interest on Payment Lag
Certificates as described above. Therefore, in the case of a Payment Lag
Certificate, the REMIC intends to include accrued interest in the issue price
and
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report interest payments made on the first Distribution Date as interest to
the extent such payments represent interest for the number of days which the
Certificateholder has held such Payment Lag Certificate during the first Accrual
Period.
Sale, Exchange or Redemption of Regular Certificates. If a Regular
Certificate is sold, exchanged, redeemed or retired, the seller will recognize
gain or loss equal to the difference between the amount realized on the sale,
exchange or redemption and the seller's adjusted basis in the Regular
Certificate. Such adjusted basis generally will equal the cost of the Regular
Certificate to the seller, increased by any original issue discount and market
discount included in the seller's gross income with respect to the Regular
Certificate, and reduced (but not below zero) by payments included in the stated
redemption price at maturity previously received by the seller and by any
amortized premium. Similarly, a holder who receives a payment which is part of
the stated redemption price at maturity of a Regular Certificate will recognize
gain equal to the excess, if any, of the amount of the payment over his adjusted
basis in the Regular Certificate. A holder of a Regular Certificate who receives
a final payment which is less than his adjusted basis in the Regular Certificate
will generally recognize a loss. Except as provided in the following paragraph
and as provided under "Market Discount" below, any such gain or loss will be
capital gain or loss, provided that the Regular Certificate is held as a
"capital asset" (generally, property held for investment) within the meaning of
Code Section 1221.
Gain from the sale or other disposition of a Regular Certificate that
might otherwise be capital gain will be treated as ordinary income to the extent
that such gain does not exceed the excess, if any, of (i) the amount that would
have been includible in such holder's income with respect to the Regular
Certificate had income accrued thereon at a rate equal to 110% of the AFR as
defined in Code Section 1274(d) determined as of the date of purchase of such
Regular Certificate, over (ii) the amount actually includible in such holder's
income. Additionally, gain will be treated as ordinary income if the Trust had
an "intention to call" the Regular Certificates prior to maturity. The OID
Regulations provide that the presence of a sinking fund or optimal call does not
give rise to such an intention, and the Seller does not believe such an
intention is otherwise present; however, the application of these rules to REMIC
Certificates is unclear.
Regular Certificates will be "evidences of indebtedness" within the
meaning of Code Section 582(c)(1), so that gain or loss recognized from the sale
of a Regular Certificate by a bank or a thrift institution to which such section
applies will be ordinary income or loss.
Because the regulations described above have not been issued, it is
impossible to predict what effect those regulations might have on the tax
treatment of a Regular Certificate purchased at a discount or premium in the
secondary market.
The Regular Certificate information reports will include a statement of
the adjusted issue price of the Regular Certificate at the beginning of each
accrual period. In addition, the reports will include information necessary to
compute the accrual of any market discount that may arise upon secondary trading
of Regular Certificates. Because exact computation of the accrual of market
discount on a constant yield method would require information relating to the
holder's purchase price which the REMIC may not have, it appears that this
provision will only require information pertaining to the appropriate
proportionate method of accruing market discount.
REMIC Expenses. As a general rule, all of the expenses of a REMIC will
be taken into account by holders of the Residual Interests. In the case of a
"single class REMIC", however, the expenses and a matching amount of additional
income will be allocated, under temporary Treasury regulations, among the
holders of the Regular Certificates and the holders of the Residual Interests on
a daily basis in proportion to the relative amounts of income accruing to each
Certificateholder on that day. In the case of individuals (or trusts, estates,
or other persons who compute their income in the same manner as individuals) who
own an interest in a Regular Certificate directly or through a pass-through
entity which is required to pass miscellaneous itemized deductions through to
its owners or beneficiaries (e.g. a partnership, an S corporation, or a grantor
trust), such expenses will be deductible only to the extent that such expenses,
plus other "miscellaneous itemized deductions" of the individual, exceed 2% of
such individual's adjusted gross income. In addition, the personal exemptions
and itemized deductions of individuals with adjusted gross incomes above
particular levels are subject to certain limitations which reduce or eliminate
the benefit of such items. The reduction or disallowance of this deduction
coupled with the allocation of additional income may have a significant impact
on the yield of the Regular Certificate to such a Holder. Further, holders
(other than corporations) subject to the alternative minimum tax may not deduct
miscellaneous itemized deductions in determining such holders' alternative
minimum taxable income. In general terms, a single class REMIC is one that
either (i) would qualify, under existing Treasury regulations, as a grantor
trust if it were not a REMIC (treating all interests as ownership interests,
even if they would be classified as debt for federal income tax purposes) or
(ii) is similar to such a trust and is structured with the principal purpose of
avoiding the single class REMIC rules. Unless otherwise stated in the related
Supplement, the expenses of the REMIC will be allocated to holders of the
related Residual Interests in their entirety and not to holders of the related
Regular Certificates.
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Non-U.S. Persons. Generally, payments of interest (including any
payment with respect to accrued original issue discount) on the Regular
Certificates to a Regular Certificateholder who is a non-U.S. Person not engaged
in a trade or business within the United States, will not be subject to federal
withholding tax if (i) such Regular Certificateholder does not actually or
constructively own 10 percent or more of the combined voting power of all
classes of equity in the issuer (which for purposes of this discussion may be
defined as the Trust or the beneficial owners of the related Residual
Certificates (the "Issuer")); (ii) such Regular Certificateholder is not a
controlled foreign corporation (within the meaning of Code Section 957) related
to the Issuer; and (iii) such Regular Certificateholder complies with certain
identification requirements (including delivery of a statement, signed by the
Regular Certificateholder under penalties of perjury, certifying that such
Regular Certificateholder is a foreign person and providing the name and address
of such Regular Certificateholder). If a Regular Certificateholder is not exempt
from withholding, distributions of interest, including distributions in respect
of accrued original issue discount, such holder may be subject to a 30%
withholding tax, subject to reduction under any applicable tax treaty.
Regular Certificateholders who are non-U.S. Persons and persons related
to such holders should not acquire any Residual Certificates, and Residual
Certificateholders and persons related to Residual Certificateholders should not
acquire any Regular Certificates without consulting their tax advisors as to the
possible adverse tax consequences of such acquisition.
Information Reporting and Backup Withholding. The Master Servicer will
furnish or make available, within a reasonable time after the end of each
calendar year, to each Regular Certificateholder at any time during such year,
such information as may be deemed necessary or desirable to assist Regular
Certificateholders in preparing their federal income tax returns, or to enable
holders to make such information available to owners or other financial
intermediaries of holders that hold such Regular Certificates as nominees. If a
holder, owner or other recipient of a payment on behalf of an owner fails to
supply a certified taxpayer identification number or if the Secretary of the
Treasury determines that such person has not reported all interest and dividend
income required to be shown on its federal income tax return, 31% backup
withholding may be required with respect to any payments.
Any amounts deducted and withheld from a distribution to a recipient
would be allowed as a credit against such recipient's federal income tax
liability.
Residual Certificates
Allocation of the Income of the REMIC to the Residual Certificates. The
REMIC will not be subject to federal income tax except with respect to income
from prohibited transactions and certain other transactions. See "Prohibited
Transactions and Other Taxes" herein. Instead, each original holder of a
Residual Certificate will report on its federal income tax return, as ordinary
income, its share of the taxable income of the REMIC for each day during the
taxable year on which such holder owns any Residual Certificates. The taxable
income of the REMIC for each day will be determined by allocating the taxable
income of the REMIC for each calendar quarter ratably to each day in the
quarter. Such a holder's share of the taxable income of the REMIC for each day,
will be based on the portion of the outstanding Residual Certificates that such
holder owns on that day. The taxable income of the REMIC will be determined
under an accrual method and will be taxable to the Residual Certificateholders
without regard to the timing or amounts of cash distributions by the REMIC.
Ordinary income derived from Residual Certificates will be "portfolio income"
for purposes of the taxation of taxpayers subject to the limitations on the
deductibility of "passive losses." As residual interests, the Residual
Certificates will be subject to tax rules, described below, that differ from
those that would apply if the Residual Certificates were treated for federal
income tax purposes as direct ownership interests in the Certificates, or as
debt instruments issued by the REMIC.
A Residual Certificateholder may be required to include taxable income
from the Residual Certificate in excess of the cash distributed. For example, a
structure where principal distributions are made serially on regular interests
(that is, a fast-pay, slow-pay structure) may generate such a mismatching of
income and cash distributions (that is, "phantom income"). This mismatching may
be caused by the use of certain required tax accounting methods by the REMIC,
variations in the prepayment rate of the underlying Mortgage Loans and certain
other factors. Depending upon the structure of a particular transaction, the
aforementioned factors may significantly reduce the after-tax yield of a
Residual Certificate to a Residual Certificateholder. Investors should consult
their own tax advisors concerning the federal income tax treatment of a Residual
Certificate and the impact of such tax treatment on the after-tax yield of a
Residual Certificate.
A subsequent Residual Certificateholder also will report on its federal
income tax return amounts representing a daily share of the taxable income of
the REMIC for each day that such Residual Certificateholder owns such Residual
Certificate. Those daily amounts generally would equal the amounts that would
have been reported for the same days by an original Residual Certificateholder,
as described above. The Legislative History indicates that certain adjustments
may be appropriate to reduce (or increase) the income of a subsequent holder of
a Residual Certificate that purchased such Residual
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Certificate at a price greater than (or less than) the adjusted basis (see
"Sales of Residual Certificates" below) such Residual Certificate would have in
the hands of an original Residual Certificateholder. It is not clear, however,
whether such adjustments will in fact be permitted or required and, if so, how
they would be made.
Taxable Income of the REMIC Attributable to Residual Interests. The
taxable income of the REMIC will reflect a netting of (i) the income from the
Mortgage Loans and the REMIC's other assets, and (ii) the deductions allowed to
the REMIC for interest and original issue discount on the Regular Certificates
and, except as described below under "Non-Interest Expenses of the REMIC," other
expenses.
For purposes of determining its taxable income, the REMIC will have an
initial aggregate tax basis in its assets equal to the sum of the issue prices
of the Regular and Residual Certificates (or, if a class of Certificates is not
sold initially, their fair market values). Such aggregate basis will be
allocated among the Mortgage Loans and other assets of the REMIC in proportion
to their respective fair market values. A Mortgage Loan will be deemed to have
been acquired with discount or premium to the extent that the REMIC's basis
therein is less than or greater than its principal balance, respectively. Any
such discount (whether market discount or original issue discount) will be
includible in the income of the REMIC as it accrues, in advance of receipt of
the cash attributable to such income, under a method similar to the method
described above for accruing original issue discount on the Regular
Certificates. The REMIC expects to elect under Code Section 171 to amortize any
premium on the Mortgage Loans. Premium on any Mortgage Loan to which such
election applies would be amortized under a constant yield method. It is not
clear whether the yield of a Mortgage Loan would be calculated for this purpose
based on scheduled payments or taking account of the Prepayment Assumption.
Additionally, such an election would not apply to any Mortgage Loan originated
on or before September 27, 1985. Instead, premium on such a Mortgage Loan would
be allocated among the principal payments thereon and would be deductible by the
REMIC as those payments become due.
The REMIC will be allowed a deduction for interest and original issue
discount on the Regular Certificates. The amount and method of accrual of
original issue discount will be calculated for this purpose in the same manner
as described above with respect to Regular Certificates (except that the 0.25%
per annum de minimis rule and adjustments for subsequent holders described
therein will not apply).
A Residual Certificateholder will not be permitted to amortize the cost
of the Residual Certificate as an offset to its share of the REMIC's taxable
income. However, that taxable income will not include cash received by the REMIC
that represents a recovery of the REMIC's basis in its assets, and, as described
above, the issue price of the Residual Certificates will be added to the issue
price of the Regular Certificates in determining the REMIC's initial basis in
its assets. See "Sales of Residual Certificates" herein. For a discussion of
possible adjustments to income of a subsequent holder of a Residual Certificate
to reflect any difference between the actual cost of such Residual Certificate
to such holder and the adjusted basis such Residual Certificate would have in
the hands of an original Residual Certificateholder, see "Allocation of the
Income of the REMIC to the Residual Certificates" above.
Net Losses of the REMIC. The REMIC will have a net loss for any
calendar quarter in which its deductions exceed its gross income. Such net loss
would be allocated among the Residual Certificateholders in the same manner as
the REMIC's taxable income. The net loss allocable to any Residual Certificate
will not be deductible by the holder to the extent that such net loss exceeds
such holder's adjusted basis in such Residual Certificate. Any net loss that is
not currently deductible by reason of this limitation may be used by such
Residual Certificateholder to offset its share of the REMIC's taxable income in
future periods (but not otherwise). The ability of Residual Certificateholders
that are individuals or closely held corporations to deduct net losses may be
subject to additional limitations under the Code.
Non-Interest Expenses of the REMIC. As a general rule, the REMIC's
taxable income will be determined in the same manner as if the REMIC were an
individual. However, all or a portion of the REMIC's servicing, administrative
and other non-interest expenses will be allocated as a separate item to Residual
Certificateholders that are "pass-through interest holders." Such a holder would
be required to add its allocable share, if any, of such expenses to its gross
income and to treat the same amount as an item of investment expense. An
individual would generally be allowed a deduction for such an expense item only
as a miscellaneous itemized deduction subject to the limitations under Code
Section 67. That section allows such deduction only to the extent that in the
aggregate all such expenses exceed two percent of an individual's adjusted gross
income. The REMIC is required to report to each pass-through interest holder and
to the IRS such holder's allocable share, if any, of the REMIC's non-interest
expenses. The term "pass-through interest holder" generally refers to
individuals, entities taxed as individuals and certain pass-through entities,
but does not include real estate investment trusts. Residual Certificateholders
that are "pass-through interest holders" should consult their own tax advisors
about the impact of these rules on an investment in the Residual Certificates.
See "Non-Interest Expenses of the REMIC" under "Regular Certificates" above.
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Deferred Interest. Any Deferred Interest that accrues with respect to
any ARM Loans held by the REMIC will constitute income to the REMIC and will be
treated in a manner similar to the Deferred Interest that accrues with respect
to Regular Certificates as described above under "Regular Certificates--Deferred
Interest."
Excess Inclusions. A portion of the income on a Residual Certificate
(referred to in the Code as an "excess inclusion") for any calendar quarter will
be subject to federal income tax in all events. Thus, for example, an excess
inclusion (i) may not be offset by any unrelated losses or loss carryovers of a
Residual Certificateholder; (ii) will be treated as "unrelated business taxable
income" within the meaning of Code Section 512 if the Residual Certificateholder
is a pension fund or any other organization that is subject to tax only on its
unrelated business taxable income (see "Tax-Exempt Investors" below); and (iii)
is not eligible for any reduction in the rate of withholding tax in the case of
a Residual Certificateholder that is a foreign investor. See "Non-U.S. Persons"
below. The exception for thrift institutions is available only to the
institution holding the Residual Certificate, and not to any affiliate of the
institution, unless the affiliate is a subsidiary all the stock of which, and
substantially all the indebtedness of which, is held by the institution, and
which is organized and operated exclusively in connection with the organization
and operation of one or more REMICs.
With respect to any Residual Certificateholder, the excess inclusion
for any calendar quarter is the excess, if any, of (i) the income of such
Residual Certificateholder for that calendar quarter from its Residual
Certificate over (ii) the sum of the "daily accruals" (as defined below) for all
days during the calendar quarter on which the Residual Certificateholder holds
such Residual Certificate. For this purpose, the daily accruals with respect to
a Residual Certificate are determined by allocating to each day in the calendar
quarter its ratable portion of the product of the "adjusted issue price" (as
defined below) of the Residual Certificate at the beginning of the calendar
quarter and 120 percent of the "Federal long-term rate" in effect at the time
the Residual Certificate is issued. For this purpose, the "adjusted issue price"
of a Residual Certificate at the beginning of any calendar quarter equals the
issue price of the Residual Certificate, increased by the amount of daily
accruals for all prior quarters, and decreased (but not below zero) by the
aggregate amount of payments made on the Residual Certificate before the
beginning of such quarter. The "Federal long-term rate" is an average of current
yields on Treasury securities with a remaining term of greater than nine years,
computed and published monthly by the IRS.
The Small Business Job Protection Act of 1996 has eliminated the
special rule permitting Section 593 institutions ("thrift institutions") to use
net operating losses and other allowable deductions to offset their excess
inclusion income from REMIC residual certificates that have "significant value"
within the meaning of the REMIC Regulations, effective for taxable years
beginning after December 31, 1995, except with respect to residual certificates
continuously held by a thrift institution since November 1, 1995.
In addition, the Small Business Job Protection Act of 1996 provides
three rules for determining the effect on excess inclusions on the alternative
minimum taxable income of a residual holder. First, alternative minimum taxable
income for such residual holder is determined without regard to the special rule
that taxable income cannot be less than excess inclusions. Second, a residual
holder's alternative minimum taxable income for a tax year cannot be less than
the excess inclusions for the year. Third, the amount of any alternative minimum
tax net operating loss deductions must be computed without regard to any excess
inclusions. These rules are effective for tax years beginning after December 31,
1986, unless a residual holder elects to have such rules apply only to tax years
beginning after August 20, 1996.
In the case of any Residual Certificates held by a real estate
investment trust, the aggregate excess inclusions with respect to such Residual
Certificates, reduced (but not below zero) by the real estate investment trust
taxable income (within the meaning of Code Section 857(b)(2), excluding any net
capital gain), will be allocated among the shareholders of such trust in
proportion to the dividends received by such shareholders from such trust, and
any amount so allocated will be treated as an excess inclusion with respect to a
Residual Certificate as if held directly by such shareholder. Regulated
investment companies, common trust funds, and certain cooperatives are subject
to similar rules.
Payments. Any payment made on a Residual Certificate to a Residual
Certificateholder will be treated as a non-taxable return of capital to the
extent it does not exceed the Residual Certificateholder's adjusted basis in
such Residual Certificate. To the extent a distribution exceeds such adjusted
basis, it will be treated as gain from the sale of the Residual Certificate.
Sale or Exchange of Residual Certificates. If a Residual Certificate is
sold or exchanged, the seller will generally recognize gain or loss equal to the
difference between the amount realized on the sale or exchange and its adjusted
basis in the Residual Certificate (except that the recognition of loss may be
limited under the "wash sale" rules described below). A holder's adjusted basis
in a Residual Certificate generally equals the cost of such Residual Certificate
to such Residual Certificateholder, increased by the taxable income of the REMIC
that was included in the income of such Residual Certificateholder with respect
to such Residual Certificate, and decreased (but not below zero) by the net
losses that have
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been allowed as deductions to such Residual Certificateholder with respect to
such Residual Certificate and by the distributions received thereon by such
Residual Certificateholder. In general, any such gain or loss will be capital
gain or loss provided the Residual Certificate is held as a capital asset.
However, Residual Certificates will be "evidences of indebtedness" within the
meaning of Code Section 582(c)(1), so that gain or loss recognized from sale of
a Residual Certificate by a bank or thrift institution to which such section
applies would be ordinary income or loss.
Except as provided in Treasury regulations, if the seller of a Residual
Certificate reacquires such Residual Certificate, or acquires any other Residual
Certificate, any residual interest in another REMIC or similar interest in a
"taxable mortgage pool" (as defined in Code Section 7701(i)) during the period
beginning six months before, and ending six months after, the date of such sale,
such sale will be subject to the "wash sale" rules of Code Section 1091. In that
event, any loss realized by the Residual Certificateholder on the sale will not
be deductible, but, instead, will increase such Residual Certificateholder's
adjusted basis in the newly acquired asset.
Mark to Market Rules. Prospective purchasers of a Residual Certificate
should be aware that the IRS recently released proposed regulations under Code
Section 475 (the "Proposed Mark-to-Market Regulations") which provide that any
REMIC Residual Certificate acquired after January 3, 1995 cannot be marked to
market. The Proposed Mark-to-Market Regulations change the temporary regulations
which allowed a Residual Certificate to be marked-to-market provided that it was
not a "negative value" residual interest. Prospective purchasers of a Residual
Certificate should consult their tax advisors regarding the possible application
of the Proposed Mark-to-Market Regulations.
Prohibited Transactions and Other Taxes
The REMIC is subject to a tax at a rate equal to 100 percent of the net
income derived from "prohibited transactions." In general, a prohibited
transaction means the disposition of a Mortgage Loan other than pursuant to
certain specified exceptions, the receipt of investment income from a source
other than a Mortgage Loan or certain other permitted investments, or the
disposition of an asset representing a temporary investment of payments on the
Mortgage Loans pending payment on the Residual Certificates or Regular
Certificates. In addition, the assumption of a Mortgage Loan by a subsequent
purchaser could cause the REMIC to recognize gain, which would also be subject
to the 100 percent tax on prohibited transactions.
In addition, certain contributions to a REMIC made after the Closing
Date could result in the imposition of a tax on the REMIC equal to 100% of the
value of the contributed property.
It is not anticipated that the REMIC will engage in any prohibited
transactions or receive any contributions subject to the contributions tax.
However, in the event that the REMIC is subject to any such tax, unless
otherwise disclosed in the related Supplement, such tax would be borne first by
the Residual Certificateholders, to the extent of amounts distributable to them,
and then by the Master Servicer.
Liquidation and Termination
If the REMIC adopts a plan of complete liquidation, within the meaning
of Code Section 860F(a)(4)(A)(i), which may be accomplished by designating in
the REMIC's final tax return a date on which such adoption is deemed to occur,
and sells all of its assets (other than cash) within a 90-day period beginning
on such date, the REMIC will recognize no gain or loss on the sale of its
assets, provided that the REMIC credits or distributes in liquidation all of the
sale proceeds plus its cash (other than the amounts retained to meets claims) to
holders of Regular and Residual Certificates within the 90-day period.
The REMIC will terminate shortly following the retirement of the
Regular Certificates. If a Residual Certificateholder's adjusted basis in the
Residual Certificate exceeds the amount of cash distributed to such Residual
Certificateholder in final liquidation of its interest, then, although the
matter is not entirely free from doubt, it would appear that the Residual
Certificateholder would be entitled to a loss equal to the amount of such
excess. It is unclear whether such a loss, if allowed, will be a capital loss or
an ordinary loss.
Administrative Matters
Solely for the purpose of the administrative provisions of the Code,
the REMIC will be treated as a partnership and the Residual Certificateholders
will be treated as the partners thereof; however, under Temporary Regulations if
there is at no time during the taxable year more than one Residual
Certificateholder, a REMIC shall not be subject to the rules of Subchapter C of
chapter 63 of the Code, relating to the treatment of Partnership items for a
taxable year. Accordingly, the REMIC will file an annual tax return on Form
1066, U.S. Real Estate Mortgage Investment Conduit Income Tax Return.
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In addition, certain other information will be furnished quarterly to each
Residual Certificateholder who held such Residual Certificate on any day in the
previous calendar quarter.
Each Residual Certificateholder is required to treat items on its
return consistently with their treatment on the REMIC's return, unless the
Residual Certificateholder either files a statement identifying the
inconsistency or establishes that the inconsistency resulted from incorrect
information received from the REMIC. The IRS may assert a deficiency resulting
from a failure to comply with the consistency requirement without instituting an
administrative proceeding at the REMIC level. The REMIC does not intend to
register as a tax shelter pursuant to Code Section 6111 because it is not
anticipated that the REMIC will have a net loss for any of the first five
taxable years of its existence. Any person that holds a Residual Certificate as
a nominee for another person may be required to furnish the REMIC, in a manner
to be provided in Treasury regulations, with the name and address of such person
and other information.
Tax-Exempt Investors
Any Residual Certificateholder that is a pension fund or other entity
that is subject to federal income taxation only on its "unrelated business
taxable income" within the meaning of Code Section 512 will be subject to
such tax on that portion of the distributions received on a Residual Certificate
that is considered an "excess inclusion." See "Excess Inclusions" herein.
Non-U.S. Persons
Non-U.S. Persons. Amounts paid to Residual Certificateholders who are
not U.S. Persons (see "Regular Certificates -- Non-U.S. Persons") are treated as
interest for purposes of the 30% (or lower treaty rate) United States
withholding tax. Amounts distributed to Residual Holders should qualify as
"portfolio interest," subject to the conditions described in "Regular
Certificates" above, but only to the extent that the Mortgage Loans were
originated after July 18,1984. Furthermore, the rate of withholding on any
income on a Residual Certificate that is an excess inclusion will not be subject
to reduction under any applicable tax treaties. See "Residual Certificates --
Excess Inclusions." If the portfolio interest exemption is unavailable, such
amount will be subject to United States withholding tax when paid or otherwise
distributed (or when the Residual Certificate is disposed of) under rules
similar to those for withholding upon disposition of debt instruments that have
original issue discount. The Code, however, grants the Treasury Department
authority to issue regulations requiring that those amounts be taken into
account earlier than otherwise provided where necessary to prevent avoidance of
tax (for example, where the Residual Certificates do not have significant
value). See "Residual Certificates -- Excess Inclusions." If the amounts paid to
Residual Certificateholders that are not U.S. persons are effectively connected
with their conduct of a trade or business within the United States, the 30% (or
lower treaty rate) withholding will not apply. Instead, the amounts paid to such
non-U.S. Person will be subject to U.S. federal income taxation at regular
graduated rates.
For this purpose, a "U.S. Person" includes a citizen or resident of the
United States, a corporation, partnership or other entity created or organized
under the laws of the United States or any political subdivision thereof, or an
estate or trust whose income from sources without the United States is
includible in gross income for United States federal income tax purposes
regardless of its connection with the conduct of a trade or business in the
United States.
Regular Certificateholders and persons related to such holders should
not acquire any Residual Certificates, and Residual Certificateholders and
persons related to Residual Certificateholders should not acquire any Regular
Certificates without consulting their tax advisors as to the possible adverse
tax consequences of doing so.
Tax-Related Restrictions on Transfer
An entity may not qualify as a REMIC unless there are reasonable
arrangements designed to ensure that residual interests in such entity are not
held by "disqualified organizations" (as defined below). Further, a tax is
imposed on the transfer of a residual interest in a REMIC to a "disqualified
organization." The amount of the tax equals the product of (A) an amount (as
determined under regulations) equal to the present value of the total
anticipated "excess inclusions" with respect to such interest for periods after
the transfer, and (B) the highest marginal federal income tax rate applicable to
corporations. The tax is imposed on the transferor unless the transfer is
through an agent (including a broker or other middlemen) for a disqualified
organization, in which event the tax is imposed on the agent. The person
otherwise liable for the tax shall be relieved of liability for the tax if the
transferee furnished to such person an affidavit that the transferee is not a
disqualified organization and, at the time of the transfer, such person does not
have actual knowledge that the affidavit is false. A "disqualified organization"
means (A) the United States, any State, possession, or political subdivision
thereof, any foreign government, any international organization, or any agency
or instrumentality of any of the foregoing (provided that such term does not
include an instrumentality if all its activities are subject to tax and, except
for FHLMC, a majority of its
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board of directors is not selected by any such governmental agency), (B) any
organization (other than certain farmers' cooperatives) generally exempt from
federal income taxes unless such organization is subject to the tax on
"unrelated business taxable income" and (C) a rural electric or telephone
cooperative.
A tax is imposed on a "pass-through entity" (as defined below) holding
a residual interest in a REMIC if at any time during the taxable year of the
pass-through entity a disqualified organization is the record holder of an
interest in such entity. The amount of the tax is equal to the product of (A)
the amount of excess inclusions for the taxable year allocable to the interest
held by the disqualified organization, and (B) the highest marginal federal
income tax rate applicable to corporations. The pass-through entity otherwise
liable for the tax, for any period during which the disqualified organization is
the record holder of an interest in such entity, will be relieved of liability
for the tax if such record holder furnishes to such entity an affidavit that
such record holder is not a disqualified organization and, for such period, the
pass-through entity does not have actual knowledge that the affidavit is false.
For this purpose, a "pass-through entity" means (i) a regulated investment
company, real estate investment trust or common trust fund, (ii) a partnership,
trust or estate and (iii) certain cooperatives. Except as may be provided in
Treasury regulations, any person holding an interest in a pass-through entity as
a nominee for another will, with respect to such interest, be treated as a
pass-through entity. The tax on pass-through entities is generally effective for
periods after March 31,1988, except that in the case of regulated investment
companies, real estate investment trusts, common trust funds and publicly-traded
partnerships the tax shall apply only to taxable years of such entities
beginning after December 31,1988.
In order to comply with these rules, the Agreement will provide that no
record or beneficial ownership interest in a Residual Certificate may be,
directly or indirectly, purchased, transferred or sold without the express
written consent of the Master Servicer. The Master Servicer will grant such
consent to a proposed transfer only if it receives the following: (i) an
affidavit from the proposed transferee to the effect that it is not a
disqualified organization and is not acquiring the Residual Certificate as a
nominee or agent for a disqualified organization, and (ii) a covenant by the
proposed transferee to the effect that the proposed transferee agrees to be
bound by and to abide by the transfer restrictions applicable to the Residual
Certificate.
Any attempted transfer or pledge in violation of the transfer
restrictions shall be absolutely null and void and shall vest no rights in any
purported transferee. Investors in Residual Certificates are advised to consult
their own tax advisors with respect to transfers of the Residual Certificates
and, in addition, pass-through entities are advised to consult their own tax
advisors with respect to any tax which may be imposed on a pass-through entity.
Noneconomic Residual Certificates. The REMIC Regulations disregard, for
federal income tax purposes, any transfer of a Noneconomic Residual Certificate
to a "U.S. Person," as defined in the following section of this discussion,
unless no significant purpose of the transfer is to enable the transferor to
impede the assessment or collection of tax. A Noneconomic Residual Certificate
is any Residual Certificate (including a Residual Certificate with a positive
value at issuance) unless, at the time of transfer, taking into account the
Prepayment Assumption, (i) the present value of the expected future
distributions on the Residual Certificate at least equals the product of the
present value of the anticipated excess inclusions and the highest corporate
income tax rate in effect for the year in which the transfer occurs and (ii) the
transferor reasonably expects that the transferee will receive distributions
from the REMIC at or after the time at which taxes accrue on the anticipated
excess inclusions in an amount sufficient to satisfy the accrued taxes. A
significant purpose to impede the assessment or collection of tax exists if the
transferor, at the time of the transfer, either knew or should have known that
the transferee would be unwilling or unable to pay taxes due on its share of the
taxable income of the REMIC. A transferor is presumed not to have such knowledge
if (i) the transferor conducted a reasonable investigation of the transferee and
(ii) the transferee acknowledges to the transferor that the residual interest
may generate tax liabilities in excess of the cash flow and the transferee
represents that it intends to pay such taxes associated with the residual
interest as they become due. If a transfer of a Noneconomic Residual Certificate
is disregarded, the transferor would continue to be treated as the owner of the
Residual Certificate and would continue to be subject to tax on its allocable
portion of the net income of the REMIC.
Foreign Investors. The REMIC Regulations provide that the transfer of a
Residual Certificate that has a "tax avoidance potential" to a "foreign person"
will be disregarded for federal income tax purposes. This rule appears to apply
to a transferee who is not a "U.S. Person", as defined below, unless such
transferee's income in respect of the Residual Certificate is effectively
connected with the conduct of a United States trade or business. A Residual
Certificate is deemed to have a tax avoidance potential unless, at the time of
transfer, the transferor reasonably expects that the REMIC will distribute to
the transferee amounts that will equal at least 30 percent of each excess
inclusion, and that such amounts will be distributed at or after the time the
excess inclusion accrues and not later than the end of the calendar year
following the year of accrual. If the non-U.S. Person transfers the Residual
Certificate to a U.S. Person, the transfer will be disregarded, and the foreign
transferor will continue to be treated as the owner, if the transfer has the
effect of allowing the transferor to avoid tax on accrued excess inclusions. The
provisions in the REMIC Regulations regarding transfers of Residual
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Certificates that have tax avoidance potential to foreign persons are effective
for all transfers after June 30,1992. Until further guidance is issued
concerning the treatment of Residual Certificates held by non-U.S. Persons, the
Pooling and Servicing Agreement will provide that no record or beneficial
ownership interest in a Residual Certificate may be, directly or indirectly,
transferred to a non-U.S. Person unless such person provides the Trustee with a
duly completed I.R.S. Form 4224 and the Trustee consents to such transfer in
writing.
For purposes of this discussion, a "U.S. Person" means a citizen or
resident of the United States, or any political subdivision thereof, or an
estate or trust, the income of which, from sources outside the United States, is
includible in gross income for federal income tax purposes regardless of its
connection with the conduct of a trade or business within the United States.
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STATE TAX CONSIDERATIONS
In addition to the federal income tax consequences described in
"Certain Federal Income Tax Considerations", potential investors should consider
the state income tax consequences of the acquisition, ownership, and disposition
of the 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 tax
consequences of investments in the Certificates.
PLANS OF DISTRIBUTION
Certificates are being offered hereby in Series from time to time (each
Series evidencing a separate Trust) through any of the following methods:
1. By negotiated firm commitment underwriting and public
reoffering by underwriters;
2. By agency placements through one or more placement agents
primarily with institutional investors and dealers; and
3. By placement directly by the Sponsor with institutional
investors.
A Supplement will be prepared for each Series which will describe the
method of offering being used for that Series and will set forth the identity of
any underwriters thereof and either the price at which such Series is being
offered, the nature and amount of any underwriting discounts or additional
compensation to such underwriters and the proceeds of the offering to the
Sponsor, or the method by which the price at which the underwriters will sell
the Certificates will be determined. Each Supplement for an underwritten
offering will also contain information regarding the nature of the underwriters'
obligations, any material relationship between the Sponsor and any underwriter
and, where appropriate, information regarding any discounts or concessions to be
allowed or reallowed to dealers or others and any arrangements to stabilize the
market for the certificates so offered. In firm commitment underwritten
offerings, the underwriters will be obligated to purchase all of the
Certificates of such Series if any such Certificates are purchased. Certificates
may be acquired by the underwriters for their own accounts and may be resold
from time to time in one or more transactions, including negotiated
transactions, at a fixed public offering price or at varying prices determined
at the time of sale.
Underwriters and agents may be entitled under agreements entered into
with the Sponsor to indemnification by the Sponsor against certain civil
liabilities, including liabilities under the Securities Act of 1933, as amended,
or to contribution with respect to payments which such underwriters or agents
may be required to make in respect thereof.
If a Series is offered other than through underwriters, the Supplement
relating thereto will contain information regarding the nature of such offering
and any agreements to be entered into between Sponsor and purchasers of
Certificates of such Series.
FINANCIAL INFORMATION
A new Trust will be formed with respect to each Series of Certificates
and no Trust will engage in any business activities or have any assets or
obligations prior to the issuance of the related Series of Certificates.
Accordingly, no financial statements with respect to any Trust will be included
in this Prospectus or in the related Supplement.
RATING
It is a condition to the issuance of the Certificates of each Series
offered hereby and by the Supplement that they shall be rated in one of the four
highest rating categories by the nationally recognized statistical rating agency
or agencies specified in the related Supplement.
Ratings on mortgage pass-through certificates address the likelihood of
receipt by certificateholders of all distributions on the mortgage assets in the
related trust. These ratings address the structural, legal and issuer-related
aspects associated with such certificates, the nature of the mortgage assets in
the related trust and the credit quality of the credit enhancer or guarantor, if
any. Ratings on mortgage pass-through certificates do not represent any
assessment of the likelihood of principal prepayments by mortgagors or of the
degree by which such prepayments might differ from those
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originally anticipated. As a result, certificateholders might suffer a lower
than anticipated yield, and, in addition, holders of stripped pass-through
certificates in extreme cases might fail to recoup their underlying investments.
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. Each security rating should be evaluated
independently of any other security rating.
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INDEX TO DEFINED TERMS
Page
1986 Act..................................................................60
Accrual Certificates......................................................21
Accrual Period ...........................................................61
Advance...................................................................10
Appraised Value...........................................................14
ARM.......................................................................55
ARM Loans.................................................................58
Assumed Reinvestment Rate ................................................22
Balloon Payments........................................................5,14
Bankruptcy Bond ........................................................9,29
Buydown Fund .............................................................14
Buydown Loans ............................................................14
CERCLA .................................................................. 47
Certificates.............................................................. 4
Certificate Account.................................................... 6,36
Certificate Balance....................................................... 7
Certificate Register......................................................20
Certificateholders.....................................................13,15
Class Certificate Balance.................................................21
Closing Date ............................................................. 4
Code..................................................................... 53
Commission................................................................ 2
Companion Classes.........................................................23
Contingent Regulations....................................................62
Cooperatives...............................................................4
Cooperative Loans.........................................................13
Cut-off Date ............................................................. 9
D&P...................................................................... 50
Deferred Interest........................................................ 64
Distribution Date......................................................... 7
Eligible Account..........................................................36
Eligible Investments ..................................................19,36
EPA.......................................................................47
ERISA.................................................................... 11
Exchange Act.............................................................. 2
FHA ....................................................................4,15
FHA Insurance.............................................................10
FHA Loans.................................................................15
FHLMC..................................................................... 1
FHLMC Act ................................................................16
FHLMC Certificate Group ..................................................17
Fitch ....................................................................50
FNMA ..................................................................... 1
FNMA Certificates.........................................................18
Fraud Loss..............................................................9,28
Garn--St Germain Act.......................................................48
GNMA...................................................................... 1
GNMA Certificates.........................................................16
GNMA I Certificates.......................................................16
GNMA II Certificates .....................................................16
GPMs......................................................................12
Housing Act...............................................................15
HUD ......................................................................15
Indemnified Parties.......................................................41
Index.....................................................................14
71
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Interest Accrual Period.................................................. 21
IO Certificates........................................................... 7
IRS...................................................................... 55
Issuer.................................................................59,66
Labor Regulations.........................................................49
Last Scheduled Distribution Date..........................................22
Legislative History.......................................................57
Lockout Periods.........................................................5,14
LTV ......................................................................14
Master REMIC..............................................................60
Master Servicer............................................................4
Master Servicing Fee..................................................... 40
Mezzanine Certificates................................................. 8,27
Moody's...................................................................50
Mortgage..................................................................13
Mortgage Assets...................................................... 1,4,13
Mortgage Certificates..................................................... 6
Mortgage Loans ........................................................... 4
Mortgage Margin...........................................................13
Mortgage Note(s) ...................................................... 5,13
Mortgage Pool.............................................................13
Mortgage Pool Insurance Policy..........................................8,27
Mortgage Rate..............................................................5
Mortgaged Properties......................................................13
NCUA......................................................................52
OID Regulations....................................................... 55,60
PACs......................................................................23
Pass-Through Rate..........................................................7
Payment Lag Certificates..................................................64
Phantom Income............................................................67
Plan......................................................................49
PO Certificates .......................................................... 7
Policy Statement..........................................................52
Pool Insurer .............................................................27
Pooling Agreement ........................................................ 4
Pre-Issuance Accrued Interest.............................................65
Prepayment Assumption .................................................57,61
Primary Insurer...........................................................39
Primary Mortgage Insurance Policy ........................................14
Principal Prepayments.....................................................22
Proposed Mark-to-Market Regulations.......................................69
PTE 83-1..................................................................51
Rating Agency............................................................ 12
RCRA......................................................................48
Record Date...............................................................20
Regular Certificates......................................................59
Relief Act................................................................49
REMIC.................................................................. 1,53
REMIC Regulations........................................................ 53
REO Property..............................................................26
Reserve Fund.......................................................... 8,29
Residual Certificates.................................................... 59
S&P.......................................................................50
Securities Act............................................................ 2
Seller............................................................... 1,4,13
Senior Certificates ...................................................... 7
Senior Certificateholders ................................................ 8
Series.................................................................... 4
SMMEA.................................................................... 11
72
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Special Hazard Insurer .................................................. 28
Special Hazard Insurance Policy .......................................... 9
Sponsor................................................................ 4,32
Stripped ARM Obligations .................................................58
Stripped Bond Certificates ...............................................56
Stripped Coupon Certificates .............................................56
Subordinate Certificates.................................................. 7
Subordinate Certificateholders............................................ 8
Subsidiary REMIC..........................................................60
Supplement.............................................................. 1,4
TACs......................................................................23
Thrift Institutions.......................................................68
Title V.................................................................. 49
Trust.................................................................. 1,13
Trustee................................................................... 4
UCC.......................................................................46
Underwriter's Exemptions..................................................50
U.S. Person.........................................................59,71,73
VA .................................................................... 4,15
VA Guaranty...............................................................10
Waiver Letter.......................................................... 9,28
73
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</TABLE>
<TABLE>
<CAPTION>
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<S> <C>
No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus Supplement or
the Prospectus and, if given or made, such information or representations $
must not be relied upon. This Prospectus Supplement and the Pro-
spectus do not constitute an offer to sell or a solicitation (Approximate)
of an offer to buy any of the securities offered hereby, nor
an offer of Offered Certificates in any state or
jurisdiction in which, or to any person to whom, such offer would
be unlawful. The delivery of this Prospectus Supple-
ment or the Prospectus at any time does not HEADLANDS MORTGAGE SECURITIES, INC.
imply that the information contained herein or Sponsor
therein is correct as of any time subsequent to its
date; however, if any material change occurs
while this Prospectus Supplement or the Prospectus [HEADLANDS MORTGAGE COMPANY]
is required by law to be delivered, this Pro- Seller and Master Servicer
spectus Supplement or the Prospectus is required
by law to be delivered, this Prospectus Supplement or
the Prospectus will be amended or supplemented
accordingly.
TABLE OF CONTENTS Mortgage Pass-Through
Page Certificates,
Prospectus Supplement Series 199_-_
Summary of Terms.....................................S-1
Risk Factors.........................................S-7
The Mortgage Pool....................................S-8
Servicing of Mortgage Loans.........................S-12
Description of the Certificates.....................S-16
Prepayment and Yield Considerations.................S-23 PROSPECTUS SUPPLEMENT
Credit Support......................................S-29
Use of Proceeds.....................................S-30
Certain Federal Income Tax Consequences.............S-30
ERISA Considerations................................S-30
Method of Distribution..............................S-31
Legal Matters.......................................S-31
Certificate Rating..................................S-31
Index of Defined Terms .............................S-33 _________, 199__
Prospectus
Prospectus Supplement..................................2
Additional Information.................................2
Incorporation of Certain Documents by Reference........2
Summary of the Prospectus..............................4
The Trusts............................................13
Description of Certificates...........................20
Credit Enhancement ...................................26
Yield and Prepayment Considerations ..................30
The Sponsor...........................................32
Use of Proceeds.......................................32
Mortgage Loan Program.................................32
The Pooling and Servicing Agreement...................34
Certain Legal Aspects of the Mortgage Loans...........43
ERISA Considerations..................................49
Legal Investment Considerations.......................52
Legal Matters.........................................53
Certain Federal Income Tax Consequences...............53
State Tax Considerations..............................74
Plans of Distribution.................................74
Financial Information.................................74
Rating................................................74
Index to Defined Terms................................76
========================================================== ===================================================================
</TABLE>
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution
The following table sets forth the estimated expenses in connection with
the issuance and distribution of the Certificates being registered under this
Registration Statement, other than underwriting discounts and commissions:
SEC Registration Fee...................................... $ 303.04
Printing and Engraving.................................... $ *
Legal Fees and Expenses................................... $ *
Trustee Fees and Expenses................................. $ *
Rating Agency Fees........................................ $ *
Miscellaneous............................................. $ *
============
Total..................................................... $ *
==========
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* To be completed by amendment.
Item 15. Indemnification of Directors and Officers.
The Registrant's Certificate of Incorporation and By-Laws provide for
indemnification of directors and officers of the Registrant to the fullest
extent permitted by Delaware law.
Section 145 of the Delaware General Corporation Law, provides, in
substance, that Delaware corporations shall have the power, under specified
circumstances, to indemnify their directors, officers, employees and agents in
connection with actions, suits or proceedings brought against them by a third
party or in the right of the corporation, by reason of the fact that they were
or are such directors, officers, employees or agents, against expenses incurred
in any such action, suit or proceeding. The Delaware General Corporation Law
also provides that the Registrant may purchase insurance on behalf of any such
director, officer, employee or agent.
Item 16. Financial Statement and Exhibits.
1.1 Form of Underwriting Agreement.
4.1 Form of Pooling and Servicing Agreement.
5.1* Opinion of Brown & Wood LLP as to legality of the Certificates (including
consent of such firm).
8.1* Opinion of Brown & Wood LLP as to certain tax
matters (included in exhibit 5.1 hereof).
23.1* Consent of Brown & Wood LLP
(included in exhibits 5.1 and 8.1 hereof).
24.1 Power of Attorney (included at II-3).
- -------------
*To be filed by Amendment
Item 17. Undertakings.
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high and of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate,
II-1
<PAGE>
the changes in volume and
price represent no more than 20 percent change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee" table
in the effective registration statement; and
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change of such information in the registration
statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering
thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(f) The undersigned registrant hereby undertakes to provide to the
underwriter at the closing specified in the underwriting agreements,
certificates in such denominations and registered in such names as required by
the underwriter to permit prompt delivery to each purchaser.
(h) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 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 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 of whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
II-2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Larkspur, State of California, on the 22nd day of
November, 1996.
HEADLANDS MORTGAGE SECURITIES, INC.
By /s/ Peter T. Paul
Name: Peter T. Paul
Title: President and Director
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned Directors and
Officers of Headlands Mortgage Securities, Inc., a Delaware corporation, hereby
constitute and appoint Peter T. Paul and Gilbert J. MacQuarrie, each with full
power of substitution and resubstitution, their true and lawful attorneys and
agents to sign the names of the undersigned Directors and Officers in the
capacities indicated below to the registration statement to which this Power of
Attorney is attached as an exhibit, and all amendments (including post-effective
amendments) and supplements thereto, and all instruments or documents filed as a
part thereof or in connection therewith, and to file the same, with all exhibits
thereto, and all other instruments or documents in connection therewith, with
the Securities and Exchange Commission; and each of the undersigned hereby
ratifies and confirms all that said attorneys, agents or any of them shall do or
cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ Peter T. Paul President and Director November 22, 1996
Peter T. Paul (Principal Executive Officer)
/s/ Gilbert J. MacQuarrie Vice President, Secretary, Treasurer November 22, 1996
Gilbert J. MacQuarrie and Director (Principal Financial
Officer and Principal Accounting Officer)
/s/ Becky S. Poisson Director November 22, 1996
Becky S. Poisson
/s/ Steve Abreu Director November 22, 1996
Steve Abreu
/s/ Kenneth Siprelle Director November 22, 1996
Kenneth Siprelle
/s/ John Edmonds Director November 22, 1996
John Edmonds
</TABLE>
<PAGE>
EXHIBIT INDEX
Exhibit
No. Description of Exhibit
1.1 Form of Underwriting Agreement.
4.1 Form of Pooling and Servicing Agreement.
5.1* Opinion of Brown & Wood LLP as to legality of the
Certificates (including consent of such firm).
8.1* Opinion of Brown & Wood LLP as to certain tax
matters (included in exhibit 5.1 hereof).
23.1* Consent of Brown & Wood LLP (included in exhibits
5.1 and 8.1 hereof).
24.1 Power of Attorney (included at II-3).
- -------------
*To be filed by Amendment
<PAGE>
Exhibit No. 1.1
Form of Underwriting Agreement
HEADLANDS MORTGAGE SECURITIES, INC.
$___________ (approximate)
Mortgage Pass-Through Certificates,
Series 199_-_
[ ], 1996
UNDERWRITING AGREEMENT
[Underwriter]
Ladies and Gentlemen:
SECTION 1. Introduction. Headlands Mortgage Securities, Inc.,
a Delaware corporation (the "Company"), proposes to sell to you (sometimes
referred to herein as the "Underwriter"), $__________ principal amount of its
Mortgage Pass-Through Certificates identified in Schedule I hereto (the "Offered
Certificates") having the aggregate Initial Certificate Balances set forth in
Schedule I (subject to an upward or downward variance, not to exceed the
percentage set forth in such Schedule I, the precise Initial Certificate Balance
within such range to be determined by the Company in its sole discretion). The
Offered Certificates, together with the two Classes of subordinate certificates
(the "Non-Offered Certificates") and the Class of residual certificates (the
"Residual Certificates"), collectively referred to herein as the "Certificates"
evidence the entire ownership interest in the assets of a trust fund (the
"Pool") consisting primarily of fully-amortizing, fixed interest rate,
conventional mortgage loans, as described in Schedule I (the "Mortgage Loans")
acquired by the Company pursuant to the Mortgage Loan Purchase Agreements (the
"Loan Purchase Agreement"), dated as of [ ], 1996, between the Company and
Headlands Mortgage Company (the "Seller"), and having, as of the close of
business on the date specified in Schedule I as the cut-off date (the "Cut-Off
Date"), the aggregate principal balance set forth in Schedule I. An election
will be made to treat the Pool as a real estate mortgage investment conduit (a
"REMIC") for purposes of federal income taxation. The Certificates are to be
issued pursuant to a pooling and servicing agreement (the "Pooling Agreement"),
dated
<PAGE>
as of the Cut-Off Date, among the Company, as sponsor, the Seller, Headlands
Mortgage Company, as master servicer (in such capacity, the "Master Servicer")
and [ ], as trustee (the "Trustee"). The Offered Certificates will be issued in
the denominations specified in Schedule I.
Capitalized terms used herein that are not otherwise defined herein
have the meanings assigned thereto in the Pooling Agreement.
SECTION 2. Representations and Warranties of the
Company. The Company represents and warrants to the Underwriter
as follows:
(a) A Registration Statement on Form S-3 (File No. 333-[ ]),
including a prospectus and such amendments thereto as may have been
required to the date hereof, relating to the certificates and the
offering thereof from time to time in accordance with Rule 415 under
the Securities Act of 1933, as amended (the "Act"), has been filed with
the Securities and Exchange Commission (the "Commission"), and such
registration statement, as amended, has become effective. As used in
this Agreement, "Effective Time" means the date and the time as of
which such Registration Statement, or the most recent post-effective
amendment thereto, if any, was declared effective by the Commission;
"Effective Date" means the date of the Effective Time. "Registration
Statement" means such registration statement at the Effective Time;
including any documents incorporated by reference therein at such time;
"Preliminary Prospectus" means each prospectus included in such
Registration Statement, or amendments thereof, including a preliminary
prospectus supplement which, as completed, is proposed to be used in
connection with the sale of the Offered Certificates; and "Prospectus"
means such final prospectus, as supplemented by a prospectus supplement
(the "Prospectus Supplement") relating to the Offered Certificates in
the form first used to confirm sales of the Offered Certificates.
Reference made herein to any Preliminary Prospectus or to the
Prospectus shall be deemed to refer to and include any documents
incorporated by reference therein pursuant to Item 12 of Form S-3 under
the Act, as of the date of such Preliminary Prospectus or the
Prospectus, as the case may be, and any reference to any amendment or
supplement to any Preliminary Prospectus or the Prospectus shall be
deemed to refer to and include any document filed under the Securities
Exchange Act of 1934 (the "Exchange Act") after the date of such
Preliminary Prospectus or the Prospectus, as the case may be, and
incorporated by reference in such Preliminary Prospectus or the
Prospectus,
2
<PAGE>
as the case may be; and any reference to any amendment to the
Registration Statement shall be deemed to include any report of the
Company filed with the Commission pursuant to Section 13(a) or 15(d) of
the Exchange Act after the Effective Time that is incorporated by
reference in the Registration Statement.
(b) The documents incorporated by reference in the Prospectus,
when they became effective or were filed with the Commission, as the
case may be, conformed in all material respects to the requirements of
the Act or the Exchange Act, as applicable, and the Rules and
Regulations of the Commission (the "Rules and Regulations"), and none
of such documents contained an untrue statement of a material fact or
omitted to state a material fact required to be stated therein or
necessary to make the statements therein not misleading; and any
further documents so filed and incorporated by reference in the
Prospectus, when such documents become effective or are filed with the
Commission, as the case may be, will conform in all material respects
to the requirements of the Act or the Exchange Act, as applicable, and
the Rules and Regulations and will not contain an untrue statement of a
material fact or omit to state a material fact necessary in order to
make the statements therein, in the light of the circumstances under
which they were made, not misleading.
(c) The Registration Statement at the Effective Date and at
all times subsequent thereto up to the Closing Date hereinafter
mentioned and the Prospectus as of the date of the Prospectus
Supplement, and any amendments or supplements thereto filed prior to
the Closing Date, conformed or will conform in all material respects
with the requirements of the Act and the Exchange Act and the Rules and
Regulations of the Commission thereunder, and at the Effective Time the
Registration Statement does not include any untrue statement of a
material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein not misleading, and
the Prospectus, as amended or supplemented at the Closing Date, if
applicable, will not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements
contained therein, in the light of the circumstances under which they
were made, not misleading; except that the foregoing does not apply to
statements or omissions in the Registration Statement or the
Prospectus, as amended or supplemented if applicable, based upon
written information furnished to the Company by the Underwriter
specifically for use therein.
3
<PAGE>
(d) Since the respective dates as of which information is
given in the Registration Statement and the Prospectus, except as
otherwise stated therein, (i) there has been no material adverse change
in the condition, financial or otherwise, earnings, affairs or business
prospects of the Company, whether or not arising in the ordinary course
of business and (ii) there have been no material transactions entered
into by the Company other than those in the ordinary course of
business.
(e) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State
of Delaware with corporate power and authority to execute, deliver and
perform the transactions contemplated by this Agreement, the Loan
Purchase Agreement and the Pooling Agreement.
(f) The Company is not in violation of its charter or in
default in the performance or observance of any obligation, agreement,
covenant or condition contained in any material contract, indenture,
mortgage, loan agreement, note, lease or other instrument to which it
is a party or by which it or any of its properties may be bound; no
consent, approval, authorization or order of any court or governmental
authority or agency is required for the consummation by the Company of
the transactions contemplated by this Agreement, except such as may be
required under the Act, the Rules and Regulations or state securities
or Blue Sky laws; and the execution and delivery of this Agreement and
the Pooling Agreement and the consummation of the transactions
contemplated herein and therein will not conflict with or constitute a
breach of, or default under, or result in the creation or imposition of
any lien, charge or encumbrance upon any property or assets of the
Company pursuant to, any material contract, indenture, mortgage, loan
agreement, note, lease or other instrument to which the Company is a
party or by which it may be bound or to which any of the property or
assets of the Company is subject, nor will such action result in any
violation of the provisions of the charter or by-laws of the Company or
any law, administrative regulation or administrative or court decree
applicable to the Company.
(g) Except as set forth in the Prospectus, there is no action,
suit or proceeding before or by any court or governmental agency or
body, domestic or foreign, now pending or, to the knowledge of the
Company, threatened against or affecting the Company, which might
result in any material adverse change in the condition, financial or
otherwise, earnings, affairs or business prospects of the
4
<PAGE>
Company, or might materially and adversely affect the properties or
assets thereof or might materially and adversely affect the offering of
the Offered Certificates; and there are no material contracts or other
documents which are required to be filed as exhibits to the
Registration Statement by the Act or by the Rules and Regulations which
have not been so filed.
(h) This Agreement has been duly authorized, executed and
delivered by the Company and is a valid and binding agreement of the
Company, except as rights to indemnity hereunder may be limited by
applicable law.
(i) The Pooling Agreement has been duly authorized, and when
executed and delivered by the Company, will be a valid and binding
agreement of the Company.
(j) The Certificates have been duly authorized, and, when
executed and authenticated in accordance with the provisions of the
Pooling Agreement and delivered to and, with respect to the Offered
Certificates, paid for by the Underwriter in accordance with this
Agreement, will be validly issued and outstanding and entitled to the
benefits of the Pooling Agreement.
(k) The Company is not aware of (i) any request by the
Commission for any further amendment of the Registration Statement or
the Prospectus or for any additional information, (ii) the issuance by
the Commission of any stop order suspending the effectiveness of the
Registration Statement or the institution or threatening of any
proceeding for that purpose or (iii) any notification with respect to
the suspension of the qualification of the Offered Certificates for
sale in any jurisdiction or the initiation or threatening of any
proceeding for such purpose.
SECTION 3. Purchase, Sale and Delivery of Offered
Certificates. On the basis of the representations, warranties and agreements
herein contained, but subject to the terms and conditions herein set forth, the
Company agrees to issue and sell to the Underwriter, and the Underwriter agrees
to purchase from the Company at a purchase price set forth in Schedule 1 hereto,
the respective principal amount of Offered Certificates set forth in Schedule I
hereto.
The Company will deliver the Offered Certificates to the Underwriter,
against payment of the purchase price therefor in same day funds wired to such
bank as may be designated by the Company, or by such other manner of payment as
may agreed upon by the Company and you, at the offices of Brown & Wood LLP, One
5
<PAGE>
World Trade Center, New York, New York at 10:00 A.M., New York time, on , 19 or
at such other place or time not later than seven full business days thereafter
as you and the Company determine, such time being referred to herein as the
"Closing Date."
The Offered Certificates so to be delivered will be in such
denominations and registered in such names as you request two full business days
prior to the Closing Date, as the case may be, and will be made available at the
office of [
] or, upon your request, through the facilities of The Depository
Trust Company, for checking and packaging at least one full business day prior
to the Closing Date.
SECTION 4. Offering by the Underwriter. It is understood that
the Underwriter proposes to offer the Offered Certificates subject to this
Agreement for sale to the public on the terms as set forth in the Prospectus.
SECTION 5. Covenants of the Company. The Company
hereby covenants and agrees with the Underwriter that:
(a) Immediately following the execution of this Agreement, the
Company will prepare the Prospectus Supplement setting forth the amount
of Offered Certificates covered thereby and the terms thereof not
otherwise specified in the Prospectus, the price at which the Offered
Certificates are to be purchased by the Underwriter from the Company,
either the initial public offering price or the method by which the
price at which the Offered Certificates are to be sold will be
determined, the selling concessions and allowances, if any, and such
other information as the Company deems appropriate in connection with
the offering of such Offered Certificates, but the Company will not
file any amendments to the Registration Statement as in effect with
respect to the Offered Certificates, or any amendments or supplements
to the Prospectus, without your consent, which will not be unreasonably
withheld; the Company will also advise you promptly of the filing or
effectiveness of any amendment or supplement to the Registration
Statement or the Prospectus, and of receipt of notification of the
institution by the Commission of any stop order proceedings in respect
of the Registration Statement or the initiation or threatening of any
proceeding for such purpose, and will use every reasonable effort to
prevent the issuance of any such stop order and to obtain as soon as
possible its lifting, if issued.
(b) If, during such period of time after the first
date of the public offering of the Offered Certificates as
6
<PAGE>
in the opinion of counsel for the Underwriter a prospectus relating to
the Offered Certificates is required by law to be delivered in
connection with sales by the Underwriter or dealer, any event occurs as
a result of which the Prospectus as then amended or supplemented would,
in the judgment of the Underwriter and its counsel, include any untrue
statement of a material fact, or omit to state a material fact
necessary to make the statements therein, in light of the circumstances
under which they were made, not misleading, or if it is necessary at
any time to amend or supplement the Prospectus to comply with the Act
or any other law, the Company will promptly prepare and file with the
Commission, an amendment or supplement which will correct such
statement or omission or an amendment that will effect such compliance
and will notify you and, upon your request, prepare and furnish without
charge to the Underwriter and to any dealer in securities as many
copies as you may from time to time reasonably request of an amended
Prospectus or a supplement to the Prospectus which will correct such
statement or omission or effect such compliance.
(c) The Company will deliver to each of you as many signed and
conformed copies of the Registration Statement and of each amendment
thereto (including exhibits filed therewith) as you may reasonably
request and will also deliver to you a conformed copy of the
Registration Statement and each amendment thereto for each of the
Underwriters.
(d) The Company will endeavor, in cooperation with you, to
qualify the Offered Certificates for offering and sale under the
applicable securities laws of such states and other jurisdictions of
the United States as you may designate, and will maintain such
qualifications in effect for as long as may be required for the
distribution of the Offered Certificates; provided, however, that the
Company shall not be required to qualify to do business in any
jurisdiction where it is now not qualified or to take any action which
would subject it to general or unlimited service of process in any
jurisdiction in which it is now subject to service of process. The
Company will file such statements and reports as may be required by the
laws of each jurisdiction in which the Offered Certificates have been
qualified as above provided.
(e) To the extent that the Underwriter (i) has provided to the
Company Collateral Term Sheets (as hereinafter defined) that the
Underwriter has provided to a prospective investor, the Company has
filed such Collateral
7
<PAGE>
term sheets as an exhibit to a report on Form 8-K within two business
days of its receipt thereof, or (ii) has provided to the Company
Structural Term Sheets or Computational Materials (each as defined
below) that the Underwriter has provided to a prospective investor, the
Company will file or cause to be filed with the Commission a report on
Form 8-K containing such Structural Term Sheet and Computational
Materials, as soon as reasonably practicable after the date of this
Agreement, but in any event, not later than the date on which the
Prospectus is filed with the Commission pursuant to Rule 424 of the
Rules and Regulations.
SECTION 6. Conditions to the Obligations of the Underwriter.
The obligations of the Underwriter to purchase and pay for the Offered
Certificates on the Closing Date will be subject to the accuracy of the
representations and warranties on the part of the Company herein as of the date
hereof and as of the Closing Date with the same force and effect as if made as
of that date, to the performance by the Company of its obligations hereunder and
to the following additional conditions precedent:
(a) Prior to the Closing Date no stop order suspending the
effectiveness of the Registration Statement shall have been issued and
no proceedings for that purpose shall have been instituted, or to the
knowledge of the Company or you, shall have been contemplated by the
Commission.
(b) Each Class of Offered Certificates shall have been rated
not less than "[ ]" and "[ ]" by [ ] and [ ], respectively, (each a
"Rating Agency") and such ratings shall not have been rescinded.
(c) You shall have received an opinion of Brown & Wood LLP,
dated the Closing Date, to the effect that:
(i) The Company has been duly incorporated and is
validly existing as a corporation in good standing under the
laws of Delaware with corporate power and authority to
execute, deliver and perform the transactions contemplated by
this Agreement, the Loan Purchase Agreement and the Pooling
Agreement;
(ii) Each of this Agreement, the Loan Purchase
Agreement and the Pooling Agreement has been duly authorized,
executed and delivered by the Company;
(iii) The Certificates have been duly authorized,
executed and delivered by the Company;
8
<PAGE>
(iv) No consent, approval, authorization or order
of any court or governmental authority or agency is required
in connection with the transactions contemplated by this
Agreement, the Loan Purchase Agreement or the Pooling
Agreement, except such as may be required under the state
securities or Blue Sky laws and such other approvals as have
been obtained; and, to the best of such counsel's knowledge
and information, the execution and delivery of this Agreement,
the Loan Purchase Agreement and the Pooling Agreement and the
consummation of the transactions contemplated herein will not
conflict with or constitute a breach of, or default under, or
result in the creation or imposition of any lien, charge or
encumbrance upon any property or assets of the Company
pursuant to any material contract, indenture, mortgage, loan
agreement, note, lease or other instrument to which the
Company is a party or by which it may be bound or to which any
of the property or assets of the Company is subject, nor will
such action result in any violation of the provisions of the
charter or by-laws of the Company, or any law, administrative
regulation or administrative or court decree applicable to the
Company; and
(v) Assuming each of the Loan Purchase Agreement
and the Pooling Agreement has been duly authorized, executed
and delivered by the parties thereto, each of such documents
constitutes a legal, valid and binding obligation of the
Company, enforceable against the Company in accordance with
its terms, subject, as to enforceability, to bankruptcy,
insolvency, reorganization, moratorium, or other similar laws
affecting creditors' rights generally and to general
principles of equity regardless of whether enforcement is
sought in a proceeding in equity or at law;
(vi) The Registration Statement has become
effective under the Act; to the best of such counsel's
knowledge, no stop order suspending the effectiveness of the
Registration Statement has been issued and no proceedings for
that purpose have been instituted or threatened under the Act;
and the Registration Statement and the Prospectus (other than
the financial and statistical information therein as to which
such counsel need express no opinion) as of their respective
effective or issue dates complied as to form in all material
respects with the requirements of the Act and the Rules and
Regulations;
9
<PAGE>
(vii) The Pooling Agreement and the Certificates
conform in all material respects to the descriptions thereof
contained in the Registration Statement and the Prospectus;
(viii) The Pooling Agreement will not be required to
be qualified under the Trust Indenture Act of 1939, as
amended, and the Pool is not required to be registered under
the Investment Company Act of 1940, as amended;
(ix) Assuming that the Certificates have been duly
authorized, executed and authenticated in the manner
contemplated in the Pooling Agreement, when delivered and paid
for by you as provided in this Agreement, the Certificates
purchased by you will be validly issued and outstanding and
entitled to the benefits of the Pooling Agreement;
(x) The statements in the Prospectus under the
headings "Certain Federal Income Tax Consequences" and "ERISA
Considerations" and the summaries thereof under the headings
"Summary of the Prospectus -- Tax Status of REMIC
Certificates," "-- Tax Status of Non-REMIC Certificates" and
"-- ERISA Considerations," to the extent they constitute
matters of Federal law or legal conclusions with respect
thereto, have been reviewed by such counsel and are correct in
all material respects; and
[ (xi) The Pool described in the Prospectus Supplement and the
Pooling Agreement will qualify as a "real estate investment
conduit" ("REMIC") within the meaning of Section 860D of the
Internal Revenue Code of 1986, as amended (the "Code"),
assuming: (i) an election is made to treat the Pool as a
REMIC, (ii) compliance with the Pooling Agreement and (iii)
compliance with changes in the law, including any amendments
to the Code or applicable Treasury regulations thereunder.]
Such counsel also shall state that it has no reason to believe that at
its effective date the Registration Statement contained any untrue
statement of a material fact or omitted to state any material fact
required to be stated therein or necessary to make the statements
therein not misleading or that the Prospectus on the Closing Date
includes any untrue statement of a material fact or omits to state a
material fact necessary to make the statements therein, in the light of
the circumstances under which they were made, not misleading (other
than the financial and
10
<PAGE>
statistical information contained therein as to which such
counsel need express no opinion);
(d) You shall have received an opinion of [ ],
counsel to the Seller, dated the Closing Date, to the effect
that:
(i) The Seller has been duly incorporated, is
validly existing as a corporation in good standing under the
laws of the state of its incorporation and is duly qualified
to do business in, and is in good standing as a foreign
corporation in each jurisdiction in which the Seller owns or
leases property or in which the conduct of its business
requires such qualification, except to the extent that the
failure to be so qualified or be in good standing would not
have a material adverse effect on the Seller;
(ii) Each of the Pooling Agreement and the Loan
Purchase Agreement has been duly authorized, executed
and delivered by the Seller;
(iii) No consent, approval, authorization or order
of any court or governmental authority or agency is required
for the consummation by the Seller of the transactions
contemplated by the terms of Loan Purchase Agreement or the
Pooling Agreement except such as may be required under the
"Blue Sky" or state securities laws of any jurisdiction in
connection with the offering, sale or acquisition of the
Certificates and such other approvals as have been obtained;
(iv) The sale of the Mortgage Loans to the Company
pursuant to the Loan Purchase Agreement and the consummation
of any of the transactions contemplated by the terms of the
Pooling Agreement or the Loan Purchase Agreement do not
conflict with or constitute a breach of, or default under, or
result in the creation or imposition of any lien, charge or
encumbrance upon any property or assets of the Seller pursuant
to, any material contract, indenture, mortgage, loan
agreement, note, lease or other instrument to which the Seller
is a party or by which it may be bound or to which any
property or assets of the Seller is subject, nor will such
action result in any violation of the provisions of the
charter or by-laws of the Seller, or any law, administrative
regulation or administrative or court decree;
11
<PAGE>
(v) There are no legal or governmental actions,
investigations or proceedings pending to which the Seller is a
party, or, to the best knowledge of such counsel, threatened
against the Seller, (A) asserting the invalidity of this
Agreement, the Pooling and Servicing Agreement or Loan
Purchase Agreement, (B) seeking to prevent the sale of the
Mortgage Loans to the Company or the consummation of any of
the transactions contemplated by this Agreement, the Loan
Purchase Agreement or the Pooling and Servicing Agreement or
(C) which might materially and adversely affect the
performance by the Seller of its obligations under, or the
validity or enforceability of, the Loan Purchase Agreement,
the Pooling Agreement or the Mortgage Loans;
(vi) Assuming that the Loan Purchase Agreement and
the Pooling and Servicing Agreement have each been duly
authorized, executed and delivered by the other parties
thereto, each constitutes a valid, legal and binding agreement
of the Seller enforceable against the Seller in accordance
with its terms, subject, as to enforceability to bankruptcy,
insolvency, reorganization, moratorium or other similar laws
affecting creditors' rights generally and to general
principles of equity regardless of whether enforcement is
sought in a proceeding in equity or at law; and
(e) You shall have received an opinion of [
], counsel to the Master Servicer,
dated the Closing Date, to the effect that:
(i) The Master Servicer has been duly incorporated, is
validly existing as a corporation in good standing under the
laws of the state of its incorporation and is duly qualified
to do business in, and is in good standing as a foreign
corporation in each jurisdiction in which the Master Servicer
owns or leases property or in which the conduct of its
business requires such qualification, except to the extent
that the failure to be so qualified or be in good standing
would not have a material adverse effect on the Master
Servicer;
(ii) The Pooling Agreement has been duly
authorized, executed and delivered by the Master
Servicer;
(iii) No consent, approval, authorization or order
of any court or governmental authority or agency is
12
<PAGE>
required for the consummation by the Master Servicer of the
transactions contemplated by the terms of the Pooling
Agreement except such as may be required under the "Blue Sky"
or state securities laws of any jurisdiction in connection
with the offering, sale or acquisition of the Certificates and
such other approvals as have been obtained;
(iv) The servicing of the Mortgage Loans pursuant
to the Pooling Agreement and the consummation of any of the
transactions contemplated by the terms of the Pooling
Agreement do not conflict with or constitute a breach of, or
default under, or result in the creation or imposition of any
lien, charge or encumbrance upon any property or assets of the
Master Servicer, pursuant to, any material contract,
indenture, mortgage, loan agreement, note, lease or other
instrument to which the Master Servicer is a party or by which
it may be bound or to which any property or assets of the
Master Servicer is subject, nor will such action result in any
violation of the provisions of the charter or by-laws of the
Master Servicer or any law, administrative regulation or
administrative or court decree;
(v) There are no legal or governmental actions,
investigations or proceedings pending to which the Master
Servicer is a party, or, to the best knowledge of such
counsel, threatened against the Master Servicer, (A) asserting
the invalidity of the Pooling Agreement, (B) seeking to
prevent the consummation of any of the transactions
contemplated by the Pooling Agreement or (C) which might
materially and adversely affect the performance by the Master
Servicer of its obligations under, or the validity or
enforceability of, the Pooling Agreement or the Mortgage
Loans; and
(vi) Assuming that the Pooling Agreement has been
duly authorized, executed and delivered by the other parties
thereto, the Pooling Agreement constitutes a valid, legal and
binding agreement of the Master Servicer enforceable against
the Master Servicer in accordance with its terms, subject, as
to enforceability to bankruptcy, insolvency, reorganization,
moratorium or other similar laws affecting creditors' rights
generally and to general principles of equity regardless of
whether enforcement is sought in a proceeding in equity or at
law.
(f) You shall have received copies of any opinions of
counsel for the Company that the Company is required to
13
<PAGE>
deliver to the Rating Agency. Any such opinions shall be dated the
Closing Date and addressed to the Underwriter or accompanied by
reliance letters addressed to the Underwriter.
(g) You shall have received from [ ], special counsel for the
Underwriter, such opinion or opinions, dated the Closing Date, in form
and substance satisfactory to you, with respect to the organization of
the Company, the validity of the Certificates, the Registration
Statement, the Prospectus and other related matters as you may require,
and the Company shall have furnished to such counsel such documents as
they may reasonably request for the purpose of enabling them to pass
upon such matters.
(h) At the Closing Date you shall have received a certificate
of an executive officer of the Company, dated as of the Closing Date,
to the effect that the representations and warranties of the Company
contained in Section 2 are true and correct with the same force and
effect as though made on and as of the Closing Date.
(i) You shall have received from [ ],
independent public accountants, two letters, the first
delivered the day of but prior to the execution of, and
dated the date of, this Agreement and the other dated the
Closing Date, addressed to the Underwriter, in the form
heretofore agreed (and in the case of the second such letter
consistent with the first such letter) with such variations
as are reasonably acceptable to you.
(j) You shall have received an opinion of
_______________________, counsel to the Trustee, dated the Closing
Date, in form and substance satisfactory to you and your counsel, to
the effect that:
(i) the Trustee has been duly incorporated and is
validly existing as a ______________ under the laws of the
_________________ and has the power and authority to enter
into and to perform all actions required of it under the
Pooling Agreement;
(ii) the Pooling Agreement has been duly
authorized, executed and delivered by the Trustee and
constitutes a legal, valid and binding obligation of the
Trustee, enforceable against the Trustee in accordance with
its terms, except as such enforceability may be limited by (A)
bankruptcy, insolvency, liquidation, reorganization,
moratorium, conservatorship, receivership or other similar
laws now
14
<PAGE>
or hereafter in effect relating to the enforcement of
creditors' rights in general, and (B) general principles of
equity (regardless of whether such enforceability is
considered in a proceeding in equity or at law) as well as
concepts of reasonableness, good faith and fair dealing;
(iii) the Certificates have been duly
authenticated and delivered by the Trustee;
(iv) the execution and delivery of the Pooling
Agreement by the Trustee and the performance by the Trustee of
the terms thereof do not conflict with or result in a
violation of (A) any law or regulation of the United States of
America or the State of ___________ governing the banking or
trust powers of the Trustee, or (B) the certificate of
incorporation or articles of association or by-laws of the
Trustee; and
(v) no approval, authorization or other action
by, or filing with, any governmental authority of the United
States of America or the State of ___________ having
jurisdiction over the banking or trust powers of the Trustee
is required in connection with the execution and delivery by
the Trustee of the Pooling Agreement or the performance by the
Trustee thereunder.
(k) At the Closing Date counsel for the Underwriter shall have
been furnished with such other documents and opinions as they may
reasonably require.
If any condition specified in this Section 6 shall not have
been fulfilled when and as required to be fulfilled, this Agreement may be
terminated by the Underwriter by notice to the Company at any time at or prior
to the Closing Date, and such termination shall be without liability of any
party to any other party except as provided in Section 7.
SECTION 7. Payment of Expenses. The Company will pay all
costs, expenses, fees and taxes incident to (i) the preparation by the Company,
including, printing, filing and distribution under the Act of the Registration
Statement (including financial statements and exhibits), of the Prospectus, each
Preliminary Prospectus and all amendments and supplements to any of them prior
to or during the period specified in Section 5(b), (ii) the preparation,
printing (including word processing and duplication costs) and delivery of this
Agreement, the Pooling Agreement, Preliminary and Supplemental Blue Sky
Memoranda and all other agreements, memoranda, correspondence and other
documents printed and delivered in connection with the
15
<PAGE>
offering of the Offered Certificates, (iii) the registration with the
Commission, and the issuance by the Company of the Offered Certificates, (iv)
the registration or qualification of the Offered Certificates for offer and sale
under the securities or Blue Sky laws of the several states as described in
Section 5(e) (including the reasonable fees and disbursements of your counsel
relating to such registration or qualification), (v) the fees and expenses of
the Rating Agencies, (vi) filings and clearance with the National Association of
Securities Dealers, Inc. in connection with the offering, if applicable, and
(vii) the performance by the Company of its other obligations under this
Agreement.
If this Agreement is terminated by you in accordance with the provisions of
Section 6 or Section 10(i), the Company shall reimburse you for all of your
out-of-pocket expenses, including the reasonable fees and disbursements of
counsel for the Underwriter.
SECTION 8. Indemnification and Contribution.
(a) The Company agrees to indemnify and hold harmless the
Underwriter and each person, if any, who controls the Underwriter
within the meaning of Section 15 of the Act or Section 20 of the
Exchange Act, from and against any and all losses, claims, damages,
liabilities or judgments (including without limiting the foregoing the
reasonable legal and other expenses incurred in connection with any
action, suit or proceeding or any claim asserted) arising out of any
untrue statement or alleged untrue statement of a material fact
contained in the Registration Statement or the Prospectus or any
Preliminary Prospectus, or caused by any omission or alleged omission
to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, except insofar
as such losses, claims, damages, liabilities or expenses are caused by
(i) any such untrue statement or omission or alleged untrue statement
or omission based upon information furnished in writing to the Company
by the Underwriter expressly for use therein or (ii) any such untrue
statement or omission made in Derived Information incorporated therein
as a result of any filing pursuant to Section 5(f), assuming all
Seller-Provided Information (as defined below) is accurate and complete
in all material respects. This indemnity agreement will be in addition
to any liability which the Company may otherwise have to the persons
referred to above in this Section 8(a).
(b) The Underwriter agrees to indemnify and hold
harmless the Company, the directors of the Company, the
16
<PAGE>
officers of the Company who sign the Registration Statement and each
person, if any, who controls the Company within the meaning of either
Section 15 of the Securities Act or Section 20 of the Exchange Act from
and against any and all losses, claims, damages and liabilities caused
by any untrue statement or alleged untrue statement of a material fact
contained in the Registration Statement or the Prospectus (as amended
or supplemented if the Company shall have furnished any amendments or
supplements thereto) or any Preliminary Prospectus, or caused by any
omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not
misleading, but only with reference to (i) information relating to the
Underwriter furnished to the Company in writing by the Underwriter
expressly for use in the Registration Statement, the Prospectus, any
amendment or supplement thereto, or any preliminary prospectus or (ii)
any such untrue statement or omission made in Derived Information
incorporated therein as a result of any filing pursuant to Section
5(f), assuming all Seller-Provided Information is accurate and complete
in all material respects. This indemnity agreement will be in addition
to any liability which the Underwriter may have to the persons referred
to above in this Section 8(b).
(c) In case any action or proceeding (including any
governmental or regulatory investigation or proceeding) shall be
instituted involving any person in respect of which indemnity may be
sought pursuant to either of the two preceding paragraphs, such person
(hereinafter called the indemnified party) shall promptly notify the
person against whom such indemnity may be sought (hereinafter called
the indemnifying party) in writing and the indemnifying party, upon
request of the indemnified party, shall assume the defense thereof,
including the employment of counsel reasonably satisfactory to the
indemnified party to represent the indemnified party and any others the
indemnifying party may designate and shall pay the fees and
disbursements of such counsel related to such proceeding. In any such
action or proceeding, any indemnified party shall have the right to
retain its own counsel, but the fees and expenses of such counsel shall
be at the expense of such indemnified party unless (i) the indemnifying
party and the indemnified party shall have mutually agreed to the
retention of such counsel or (ii) the named parties to any such
proceeding (including any impleaded parties) include both the
indemnifying party and the indemnified party and representation of both
parties by the same counsel would be inappropriate due to actual or
potential differing interests between them. It is understood that the
indemnifying party
17
<PAGE>
shall not, in connection with any proceeding or related proceedings in
the same jurisdiction, be liable for (a) the reasonable fees and
expenses of more than one separate firm (in addition to any local
counsel) for the Underwriter and all persons, if any, who control the
Underwriter within the meaning of either Section 15 of the Securities
Act or Section 20 of the Exchange Act and (b) the reasonable fees and
expenses of more than one separate firm (in addition to any local
counsel) for the Company, its directors, its officers who sign the
Registration Statement and each person, if any, who controls the
Company within the meaning of either such Section and that all such
fees and expenses shall be reimbursed as they are incurred. In the case
of any such separate firm for the Underwriter and such control persons
of the Underwriter, such firm shall be designated in writing by the
Underwriter. In the case of any such separate firm for the Company, and
such directors, officers and control persons of the Company, such firm
shall be designated in writing by the Company. The indemnifying party
shall not be liable for any settlement of any proceeding effected
without its written consent, but if settled with such consent or if
there be a final judgment for the plaintiff, the indemnifying party
agrees to indemnify the indemnified party from and against any loss or
liability by reason of such settlement or judgment. No indemnifying
party shall, without the prior written consent of the indemnified
party, effect any settlement of any pending or threatened proceeding in
respect of which any indemnified party is or could have been a party
and indemnity could have been sought hereunder by such indemnified
party, unless such settlement includes an unconditional release of such
indemnified party from all liability on claims that are the subject
matter of such proceeding.
(d) If the indemnification provided for in this Section 8 is
unavailable to an indemnified party in respect of any losses, claims,
damages, liabilities or judgments referred to therein, then each
indemnifying party, in lieu of indemnifying such indemnified party,
shall contribute to the amount paid or payable by such indemnified
party as a result of such losses, claims, damages, liabilities and
expenses (i) in such proportion as is appropriate to reflect the
relative benefits received by the Company on the one hand and the
Underwriter on the other from the offering of the Offered Certificates
or (ii) if the allocation provided by clause (i) above is not permitted
by applicable law, in such proportion as is appropriate to reflect not
only the relative benefits referred to in clause (i) above but also the
relative fault of the Company on the one hand and the
18
<PAGE>
Underwriter on the other in connection with the statements or omissions
which resulted in such losses, claims, damages, liabilities or
expenses, as well as any other relevant equitable considerations. The
relative benefits received by the Company on the one hand and the
Underwriter on the other shall be deemed to be in the same proportions
as the total net proceeds from the offering (before deducting expenses)
received by the Company bear to the total underwriting discounts and
commissions received by the Underwriter, in each case as set forth in
the table on the cover page of the Prospectus. The relative fault of
the Company on the one hand and the Underwriter on the other shall be
determined by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or the omission to state a
material fact relates to information supplied by the Company or by the
Underwriter and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or
omission.
(e) The Company and the Underwriter agree that it would not be
just and equitable if contribution pursuant to Section 8(d) were
determined by pro rata allocation or by any other method of allocation
which does not take account of the equitable considerations referred to
in the immediately preceding paragraph. The amount paid or payable by
an indemnified party as a result of the losses, claims, damages,
liabilities or judgments referred to in the immediately preceding
paragraph shall be deemed to include, subject to the limitations set
forth above, any legal or other expenses reasonably incurred by such
indemnified party in connection with investigating or defending any
such action or claim. Notwithstanding the provisions of Section 8(d),
in no event shall the Underwriter be required to contribute any amount
in excess of the amount by which the total price at which the Offered
Certificates underwritten by it and distributed to the public were
offered to the public exceeds the amount of any damages which the
Underwriter has otherwise been required to pay by reason of such untrue
or alleged untrue statement or omission or alleged omission. No person
guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Act) shall be entitled to contribution from any person who
was not guilty of such fraudulent misrepresentation.
(f) The Underwriter agrees to provide the Company (i) all
Collateral Term Sheets, immediately upon distribution to any potential
investor and (ii) any other Derived Information no later than [two]
[Four] Business Days prior to which the Prospectus Supplement is
required to be filed pursuant to Rule 424. For purposes of this
Agreement, the
19
<PAGE>
term "Derived Information" means such portion, if any, of the
information delivered to the Company by the Underwriter pursuant to
this Section for filing with the Commission on Form 8-K as:
(i) is not contained in the Prospectus without taking
into account information incorporated therein by reference;
(ii) does not constitute Seller-Provided Information;
and
(iii) is of the type of information defined as Collateral
Term Sheets, Structural Term Sheets or Computational Materials
(as such terms are interpreted in the No-Action Letters (as
defined below)).
"Seller-Provided Information" means the information contained on any
computer tape furnished to the Underwriter by a Seller concerning the
assets comprising the Trust.
The terms "Collateral Term Sheet" and "Structural Term Sheet"
shall have the respective meanings assigned to them in the February 13, 1995
letter (the "PSA Letter") of Cleary, Gottlieb, Steen & Hamilton on behalf of the
Public Securities Association (which letter, and the SEC staff's response
thereto, were publicly available February 17, 1995). The term "Collateral Term
Sheet" as used herein includes any subsequent Collateral Term Sheet that
reflects a substantive change in the information presented. The term
"Computational Materials" has the meaning assigned to it in the May 17, 1994
letter (the "Kidder Letter" and together with the PSA Letter, the "No-Action
Letters") of Brown & Wood on behalf of Kidder, Peabody & Co., Inc. (which
letter, and the SEC staff's response thereto, were publicly available May 20,
1994).
(g) The Underwriter confirms that the information set forth
(i) in the last paragraph on the cover page and (ii) in the second
paragraph under the caption "Method of Distribution" in the Prospectus
Supplement is correct and constitutes the only information furnished in
writing to the Company by or on behalf of the Underwriter specifically
for inclusion in the Registration Statement and the Prospectus.
SECTION 9. Representations, Warranties and Agreements to
Survive Delivery. All representations, warranties and agreements contained in
this Agreement, or contained in certificates of officers of the Company
submitted hereto, including indemnity and contribution agreements, shall remain
operative and in full force and effect, regardless of any
20
<PAGE>
termination of this Agreement, or any investigation made by or on behalf of the
Underwriter or any person controlling the Underwriter by or on behalf of the
Company, its officers or directors, and shall survive acceptance and payment for
the Offered Certificates hereunder.
SECTION 10. Effectiveness of Agreement and Termination. This
Agreement shall become effective upon the execution and delivery hereof by the
parties hereto.
This Agreement may be terminated for any reason at any time
prior to the Closing Date by the Underwriter upon the giving of written notice
of such termination to the Company, if prior to the Closing Date (i) there has
been, since the respective dates as of which information is given in the
Registration Statement, any material adverse change in the condition, financial
or otherwise, earnings, business affairs or business prospects of the Company,
whether or not arising in the ordinary course of business, or (ii) there has
occurred any outbreak or escalation of hostilities or other calamity or crisis
or material change in existing financial, political, economic or securities
market conditions, the effect of which is such as to make it, in the judgment of
the Underwriter, impracticable or inadvisable to market the Offered Certificates
in the manner contemplated in the Prospectus or enforce contracts for the sale
of the Offered Certificates, or (iii) trading generally on either the American
Stock Exchange or the New York Stock Exchange has been suspended, or minimum or
maximum prices for trading have been fixed, or maximum ranges for prices for
securities have been required, by either of said exchanges or by order of the
Commission or any other governmental authority, or if a banking moratorium has
been declared by either Federal New York State or New York City authorities. In
the event of any such termination, the provisions of Section 7, the indemnity
agreement and contribution provisions set forth in Section 8, and the provisions
of Sections 9 and 14 shall remain in effect.
[ SECTION 11. Default. If, on the Closing Date any one or more of the
Underwriters shall fail or refuse to purchase Offered Certificates that it or
they have agreed to purchase hereunder on such date, and the aggregate principal
amount of Offered Certificates which such defaulting Underwriter or Underwriters
agreed but failed or refused to purchase is not more than one-tenth of the
aggregate principal amount of the Offered Certificates to be purchased on such
date, the other Underwriters shall be obligated severally in the proportions
that the principal amount of Offered Certificates set forth opposite their
respective names in Schedule I bears to the aggregate principal amount of
Offered Certificates set forth opposite the names of all such non-defaulting
Underwriters, or in such other
21
<PAGE>
proportions as you may specify, to purchase the Offered Certificates which such
defaulting Underwriter or Underwriters agreed but failed or refused to purchase
on such date; provided that in no event shall the principal amount of Offered
Certificates that any Underwriter has agreed to purchase pursuant to Section 3
be increased pursuant to this Section 11 by an amount in excess of one-ninth of
such principal amount of Offered Certificates without the written consent of
such Underwriter. If, on the Closing Date any Underwriter or Underwriters shall
fail or refuse to purchase Offered Certificates and the aggregate principal
amount of Offered Certificates and the aggregate principal amount of Offered
Certificates with respect to which such default occurs is more than one-tenth of
the aggregate principal amount of Offered Certificates to be purchased on such
date, and arrangements satisfactory to you and the Company for the purchase of
such Offered Certificates are not made within 36 hours after such default, this
Agreement shall terminate without liability on the part of any non-defaulting
Underwriter or the Company. In any such case either you or the Company shall
have the right to postpone the Closing Date but in no event for longer than
seven days, in order that the required changes, if any, in the Registration
Statement and in the Prospectus or in any other documents or arrangements may be
effected. Any action taken under this paragraph shall not relieve any defaulting
Underwriter from liability in respect of any default of such Underwriter under
this Agreement.]
SECTION 12. Notices. All notices and other communications
hereunder shall be in writing and shall be deemed to have been duly given if
mailed or transmitted by any standard form of telecommunication. Notices to the
Underwriter directed to [ ]; notices to the Company shall be directed to it at
Headlands Mortgage Securities, Inc., 700 Larkspur Landing Circle, Suite 250,
Larkspur, California 94939, attention: [ ].
SECTION 13. Parties. This Agreement shall inure to the benefit
of and be binding upon the Company, the Underwriter, any controlling persons
referred to herein and their respective successors and assigns. Nothing
expressed or mentioned in this Agreement is intended or shall be construed to
give any other person, firm or corporation any legal or equitable right, remedy
or claim under or in respect of this Agreement or any provision herein
contained. No purchaser of Offered Certificates from the Underwriter shall be
deemed to be a successor by reason merely of such purchase.
SECTION 14. Governing Law. This Agreement shall be governed by
the laws of the State of New York.
22
<PAGE>
SECTION 15. Counterparts. This Agreement may be signed in two
or more counterparts each of which shall be an original, with the same effect as
if the signatures thereto and hereto were upon the same instrument.
23
<PAGE>
If the foregoing is in accordance with your understanding of our
agreement, please sign this Agreement and return it to us.
Very truly yours,
HEADLANDS MORTGAGE SECURITIES, INC.
By ________________________________
Name:
Title:
Confirmed and Accepted, as of the date first above written:
[UNDERWRITER]
By
By
24
<PAGE>
SCHEDULE I
Offered Certificates: Mortgage Pass Through Certificates, Series
1996-1, Class A-1, Class X and Class M-1.
Initial Principal Amount of Offered Certificates:
Initial Class Certificate
Class Balance
- ------------------------------ -----------------------------------------
Class A-1 $
Class X $
Class M-1 $
Purchase Price:
Class Purchase Price
Class A-1 %*
Class X %*
Class M-1 %*
- -----------------------
*Plus accrued interest at the applicable Certificate Rate from the Cut-off Date
to, but not including, the Closing Date.
A-1
<PAGE>
Classes of Book-Entry Certificates:
Description of Mortgage Loans: Fixed rate, conventional first
mortgage loans having an
aggregate principal balance as
of the Cut-Off Date of approxi-
mately $_____________. The
Mortgage Loans are fully-
amortizing, ___ to ___ month,
fixed interest rate, conven-
tional mortgage loans secured
by one- to four-family
residential properties.
Denominations: The Offered Certificates will
be issued in book-entry form.
Each such Class of
Certificates will be evidenced
by one or more certificates
registered in the name of CEDE
& Co. ("CEDE") in the
aggregate amount equal to the
Initial Class Certificate
Balance of such Class.
Interests in such Classes of
Offered Certificates issued in
the name of CEDE may be
purchased by investors in
minimum denominations of
$[ ] and integral
multiples of $[ ].
Cut-Off Date: ________________
Certificate Rate:
Class Rate
- ------------------------------ --------------------------------
Class A-1 % per annum
Class X % per annum
Class M-1 % per annum
A-2
<PAGE>
Exhibit 4.1
Form of Pooling and Servicing Agreement
HEADLANDS MORTGAGE SECURITIES, INC.
as Sponsor
HEADLANDS MORTGAGE COMPANY
as Seller and Master Servicer,
and
[ ],
as Trustee
POOLING AND SERVICING AGREEMENT
Dated as of , 199
-----------------------
Mortgage Pass-Through Certificates
Series 199 -
<PAGE>
TABLE OF CONTENTS
Section Page
ARTICLE I
Definitions
1.01. .........................................................I-6
Accretion Directed Certificates...................................I-6
Accrual Amount....................................................I-6
Accrual Certificates..............................................I-6
Accrual Termination Date..........................................I-6
Agreement.........................................................I-6
Allocable Share...................................................I-6
Allocated Amount..................................................I-6
Allocated Amount Decline..........................................I-6
Amortization Payment..............................................I-7
Amount Held for Future Distribution...............................I-7
Applicable Credit Support Percentage..............................I-7
Appraised Value...................................................I-7
Available Funds...................................................I-7
Bankruptcy Bond...................................................I-7
Bankruptcy Coverage Termination Date..............................I-8
Bankruptcy Loss...................................................I-8
Blanket Mortgage..................................................I-8
Book-Entry Certificate............................................I-8
Business Day......................................................I-8
Certificate.......................................................I-8
Certificate Account...............................................I-8
Certificate Account Deposit Date..................................I-8
Certificateholder or Holder.......................................I-8
Certificate Insurance Policy......................................I-9
Certificate Insurance Premium.....................................I-9
Certificate Insurance Proceeds....................................I-9
Certificate Insurer...............................................I-9
Certificate Owner.................................................I-9
Certificate Register and Certificate Registrar....................I-9
Class .........................................................I-9
Class Certificate Balance.........................................I-9
Class Interest Shortfall.........................................I-10
Class Optimum Interest Distribution Amount.......................I-10
Class Subordination Percentage...................................I-10
Class Unpaid Interest Shortfall..................................I-10
Closing Date.....................................................I-10
Code ........................................................I-10
COFI ........................................................I-10
COFI Certificates................................................I-10
Component........................................................I-10
Component Balance................................................I-10
i
<PAGE>
Section Page
Component Certificates...........................................I-11
Converted Mortgage Loan..........................................I-11
Convertible Mortgage Loan........................................I-11
Cooperative Corporation..........................................I-11
Coop Shares......................................................I-11
Cooperative Loan.................................................I-11
Cooperative Property.............................................I-11
Cooperative Unit.................................................I-11
Core Percentage..................................................I-11
Corporate Trust Office...........................................I-11
Credit Enhancement Fee...........................................I-11
Credit Enhancement Fee Rate......................................I-11
Credit Support Termination Date..................................I-12
Current Bankruptcy Amount........................................I-12
Curtailment......................................................I-12
Custodian........................................................I-12
Cut-Off Date.....................................................I-12
Cut-Off Date Pool Principal Balance..............................I-12
Cut-Off Date Principal Balance...................................I-12
Debt Service Reduction...........................................I-12
Debt Service Reduction Mortgage Loan.............................I-13
Defective Mortgage Loan..........................................I-13
Deficient Valuation..............................................I-13
Deficient Valuation Mortgage Loan................................I-13
Definitive Certificates..........................................I-13
Delinquent Installments..........................................I-13
Denomination.....................................................I-13
Depository.......................................................I-14
Depository Participant...........................................I-14
Determination Date...............................................I-14
Distribution Date................................................I-14
Due Date ........................................................I-14
Duff & Phelps....................................................I-14
Eligible Account.................................................I-14
ERISA ........................................................I-15
Escrow Account...................................................I-15
Event of Default.................................................I-15
Expenses ........................................................I-15
Expense Fee......................................................I-15
Expense Rate.....................................................I-15
FDIC ........................................................I-15
FHLMC ........................................................I-15
Final Distribution Date..........................................I-15
Fitch ........................................................I-15
FNMA ........................................................I-15
Fraud Coverage Termination Date..................................I-15
Fraud Loan.......................................................I-15
Fraud Loss.......................................................I-15
ii
<PAGE>
Section Page
Fraud Loss Coverage Amount.......................................I-16
Fraud Loss Coverage Termination Date.............................I-16
Gross Margin.....................................................I-16
Guide ........................................................I-16
Independent......................................................I-16
Index ........................................................I-16
Initial Adjustment Date..........................................I-17
Initial Bankruptcy Coverage Amount...............................I-17
Initial Class Certificate Balance................................I-17
Initial Component Balance........................................I-17
Initial Fraud Loss Coverage Amount...............................I-17
Initial LIBOR Rate...............................................I-17
Initial Special Hazard Coverage Amount...........................I-17
Insurance Proceeds...............................................I-17
Insured Expenses.................................................I-18
Interest Accrual Period..........................................I-18
Investment Depository............................................I-18
LIBOR Certificates...............................................I-18
Liquidated Deficient Valuation Loss..............................I-18
Liquidated Deficient Valuation Mortgage Loan.....................I-18
Liquidated Mortgage Loan.........................................I-18
Liquidation Expenses.............................................I-18
Liquidation Period...............................................I-18
Liquidation Proceeds.............................................I-19
Loan-to-Value Ratio..............................................I-19
Maintenance......................................................I-19
Master Servicer..................................................I-19
Master Servicer's Certificate....................................I-19
Master Servicing Fee.............................................I-19
Master Servicing Fee Rate........................................I-19
Maximum Rate.....................................................I-19
Mezzanine Certificates...........................................I-19
Minimum Rate.....................................................I-19
Monthly Advance..................................................I-19
Moody's ........................................................I-19
Mortgage ........................................................I-20
Mortgage File....................................................I-20
Mortgage Interest Rate...........................................I-20
Mortgage Loans...................................................I-20
Mortgage Loan Schedule...........................................I-20
Mortgage Note....................................................I-20
Mortgaged Property...............................................I-20
Mortgagor........................................................I-20
Net Liquidation Proceeds.........................................I-20
Net Mortgage Interest Rate or NMR................................I-21
Net Prepayment Interest Shortfalls...............................I-21
Net Realized Loss................................................I-21
Net Special Hazard Losses........................................I-21
iii
<PAGE>
Section Page
NMR ........................................................I-21
Nonrecoverable Advance...........................................I-21
Non-Delay Certificates...........................................I-22
Non-U.S. Person..................................................I-22
Notional Amount..................................................I-22
Notional Amount Certificates.....................................I-22
Offered Certificates.............................................I-22
Officers' Certificate............................................I-22
Opinion of Counsel...............................................I-22
Original Applicable Credit Support Percentage....................I-22
Original Mortgage Loans..........................................I-22
Original Subordinate Certificate Balance.........................I-23
Outside Reference Date...........................................I-23
Outstanding Mortgage Loan........................................I-23
Ownership Interest...............................................I-23
Pass-Through Rate................................................I-23
Paying Agent.....................................................I-23
Percentage Interest..............................................I-23
Periodic Rate Cap................................................I-23
Permitted Investments............................................I-23
Permitted Transferee.............................................I-24
Person ........................................................I-25
Physical Certificates............................................I-25
Planned Principal Classes........................................I-25
Pool or Trust Fund...............................................I-25
Pool Insurance Policy............................................I-25
Pool Insurer.....................................................I-25
Pool Scheduled Principal Balance.................................I-25
Prepayment Interest Shortfall....................................I-25
Primary Insurance Policy.........................................I-26
Principal Only Certificates......................................I-26
Principal Prepayment.............................................I-26
Principal Prepayment in Full.....................................I-26
Private Certificates.............................................I-26
Proprietary Lease................................................I-26
Prospectus.......................................................I-26
Prospectus Supplement............................................I-26
Purchase Price...................................................I-26
Qualified Insurer................................................I-26
Rating Agency....................................................I-27
Recognition Agreement............................................I-27
Record Date......................................................I-27
Reduced Scheduled Principal Balance..............................I-27
Reference Date...................................................I-27
Regular Certificate..............................................I-27
Relief Act.......................................................I-27
Relief Act Reductions............................................I-27
Remaining Liquidated Amount......................................I-28
iv
<PAGE>
Section Page
REMIC ........................................................I-28
REMIC Certificate Maturity Date..................................I-28
REMIC Change of Law..............................................I-28
REMIC Provisions.................................................I-28
REO Mortgage Loan................................................I-28
REO Proceeds.....................................................I-28
Required Insurance Policy........................................I-28
Residual Certificates............................................I-28
Responsible Officer..............................................I-28
S&P ........................................................I-29
Scheduled Principal Balance......................................I-29
Seller ........................................................I-29
Seller's Agreement...............................................I-29
Senior Certificate...............................................I-29
Senior Certificate Balance.......................................I-29
Senior Percentage................................................I-29
Senior Prepayment Percentage.....................................I-29
Senior Principal Distribution Amount.............................I-30
Servicer ........................................................I-31
Servicing Fee....................................................I-31
Servicing Fee Rate...............................................I-31
Servicing Officer................................................I-31
Special Hazard Coverage Termination Date.........................I-31
Special Hazard Event.............................................I-31
Special Hazard Fee...............................................I-32
Special Hazard Fee Rate..........................................I-32
Special Hazard Insurance Policy..................................I-32
Special Hazard Insurer...........................................I-32
Special Hazard Loss Coverage Amount..............................I-32
Special Hazard Mortgage Loan.....................................I-33
Splinter Loss....................................................I-33
Subordinate Certificate..........................................I-33
Subordinate Percentage...........................................I-33
Subordinate Percentage Allocation................................I-33
Subordinate Prepayment Percentage................................I-33
Subordinate Prepayment Percentage Allocation.....................I-33
Subordinate Principal Distribution Amount........................I-33
Substitute Mortgage Loan.........................................I-34
Substitution Adjustment Amount...................................I-34
Substitution Date................................................I-34
Supplemental Mortgage Loan Schedule..............................I-34
Targeted Principal Classes.......................................I-35
Tax Matters Person...............................................I-35
Tax Matters Person Certificate...................................I-35
Trust Fund or Pool...............................................I-35
Trustee Fee......................................................I-35
Trustee Fee Rate.................................................I-35
v
<PAGE>
Section Page
Underwriter......................................................I-35
Voting Rights....................................................I-35
ARTICLE II
Conveyance of Mortgage Loans;
Original Issuance of Certificates
2.01. Conveyance of Mortgage Loans............................II-1
2.02. Acceptance by Trustee...................................II-2
2.03. Representations and Warranties of the Seller,
the Sponsor and the Trustee.............................II-3
2.04. Substitution of Mortgage Loans..........................II-8
2.05. Designation of Interests in REMIC......................II-10
2.06. Designation of Start-up Day............................II-10
2.07. REMIC Certificate Maturity Date........................II-10
2.08. Purchase of Converted Mortgage Loans...................II-10
ARTICLE III
Administration and Servicing
of Mortgage Loans
3.01. The Master Servicer to Act as Servicer.................III-1
3.02. Servicing Agreements between Master Servicer
and Servicers; Enforcement of Servicer's and
Seller's Obligations...................................III-2
3.03. Liability of the Master Servicer.......................III-3
3.05. Collection of Taxes, Assessments and Similar
Items; Master Servicing Accounts.......................III-7
3.06. Permitted Withdrawals from the Certificate
Account................................................III-8
3.07. Maintenance of the Primary Insurance Policies;
Collections Thereunder.................................III-9
3.08. Maintenance of Hazard Insurance and Errors and
Omissions and Fidelity Coverage.......................III-10
3.09. Enforcement of Due-On-Sale Clauses; Assumption
Agreements............................................III-12
3.10. Realization upon Defaulted Mortgage Loans.............III-13
3.11. Trustee to Cooperate; Release of Mortgage
Files.................................................III-15
3.12. Servicing and Other Compensation; Payment of
Certain Expenses by the Master Servicer...............III-16
3.13. Annual Statement as to Compliance.....................III-17
3.14. Annual Independent Public Accountants' Servic-
ing Report............................................III-18
3.15. Access to Certain Documentation and Informa-
tion Regarding the Mortgage Loans.....................III-18
vi
<PAGE>
Section Page
3.16. Rights of the Sponsor in Respect of the Master
Servicer..............................................III-18
ARTICLE IV
Master Servicer's Certificate; Monthly Advances
4.01. Master Servicer's Certificate...........................IV-1
4.02. Monthly Advances........................................IV-1
ARTICLE V
Payments and Statements to
Certificateholders
5.01. Distributions............................................V-1
5.02. Priorities of Distribution...............................V-1
5.03. Allocation of Net Realized Losses........................V-3
5.04. Statements to Certificateholders.........................V-4
5.05. Tax Returns and Reports to Certificateholders............V-8
5.06. Tax Matters Person.......................................V-9
5.07. Rights of the Tax Matters Person in Respect of
the Trustee..............................................V-9
5.08. REMIC Related Covenants..................................V-9
5.09. Determination of Pass-Through Rates for COFI
Certificates............................................V-10
ARTICLE VI
The Certificates
6.01. The Certificates........................................VI-1
6.02. Registration of Transfer and Exchange of
Certificates............................................VI-1
6.03. Mutilated, Destroyed, Lost or Stolen Certifi-
cates...................................................VI-7
6.04. Persons Deemed Owners...................................VI-7
ARTICLE VII
The Sponsor and the Master Servicer
7.01. Respective Liabilities of the Sponsor and the
Master Servicer........................................VII-1
7.02. Merger or Consolidation of the Sponsor or the
Master Servicer........................................VII-1
7.03. Limitation on Liability of the Sponsor, the
Master Servicer and Others.............................VII-1
7.04. Sponsor and Master Servicer Not to Resign..............VII-2
vii
<PAGE>
Section Page
ARTICLE VIII
Default
8.01. Events of Default.....................................VIII-1
8.02. Remedies of Trustee...................................VIII-2
8.03. Directions by Certificateholders and Duties of
Trustee During Event of Default.......................VIII-3
8.04. Action upon Certain Failures of the Master
Servicer and upon Event of Default....................VIII-3
8.05. Trustee to Act; Appointment of Successor..............VIII-4
8.06. Notification to Certificateholders....................VIII-5
ARTICLE IX
The Trustee
9.01. Duties of Trustee.......................................IX-1
9.02. Certain Matters Affecting the Trustee...................IX-2
9.03. Trustee Not Liable for Certificates.....................IX-3
9.04. Trustee May Own Certificates............................IX-3
9.05. Eligibility Requirements for Trustee....................IX-3
9.06. Resignation and Removal of Trustee......................IX-4
9.07. Successor Trustee.......................................IX-5
9.08. Merger or Consolidation of Trustee......................IX-5
9.09. Appointment of Co-Trustee or Separate Trustee...........IX-6
9.10. Authenticating Agents...................................IX-7
9.11. Trustee's Fees and Expenses.............................IX-8
9.12. Tax Returns.............................................IX-9
ARTICLE X
Termination
10.01. Termination upon Purchase by the Master
Servicer or Liquidation of All Mortgage Loans............X-1
10.02. Additional Termination Requirements......................X-3
ARTICLE XI
Miscellaneous Provisions
11.01. Amendment...............................................XI-1
11.02. Recordation of Agreement................................XI-2
11.03. Limitation on Rights of Certificateholders..............XI-2
11.04. Governing Law...........................................XI-3
11.05. Notices.................................................XI-4
11.06. Severability of Provisions..............................XI-4
viii
<PAGE>
Section Page
11.07. Certificates Nonassessable and Fully Paid...............XI-4
11.08. Access to List of Certificateholders....................XI-5
ix
<PAGE>
Section Page
EXHIBITS
Exhibit A - Form of Face of Senior Certificates.........................A-1
Exhibit B - Form of Face of Residual Certificates.......................B-1
Exhibit C - Reserved
Exhibit D - Form of Face of Subordinate Certificate.....................D-1
Exhibit E - Form of Reverse of all Certificates.........................E-1
Exhibit F - Mortgage Loan Schedule......................................F-1
Exhibit G - Seller's Agreement..........................................G-1
Exhibit H - Request for Release of Documents............................H-1
Exhibit I - Form of Affidavit regarding Transfer of
Residual Certificates pursuant
to Section 6.02.................................I-1
Exhibit 1 Certain Definitions from Article I of the
Agreement
Exhibit 2 Excerpt from Section 6.02 of the Agreement
Exhibit J - Form of Investment Letter...................................J-1
Exhibit K - Form of Master Servicer's Certificate.......................K-1
Exhibit L - Form of Opinion of Counsel pursuant to
Section 6.02....................................L-1
<PAGE>
THIS POOLING AND SERVICING AGREEMENT, dated as of ,
-------
199 , among Headlands Mortgage Securities, Inc., as sponsor
-
(together with its permitted successors and assigns, the
"Sponsor"), Headlands Mortgage Company, as seller and master
servicer (in each such capacity together with its permitted
successors and assigns, the "Seller" and the "Master Servicer")
and [ ], as trustee (together with its permitted successors and
assigns, the "Trustee").
W I T N E S S E T H T H A T:
In consideration of the mutual agreements herein contained, the
Sponsor, the Master Servicer, the Seller and the Trustee agree as follows:
PRELIMINARY STATEMENT
The Sponsor is the owner of the Trust Fund that is hereby conveyed to
the Trustee in return for the Certificates. [The Trust Fund for federal income
tax purposes will consist of a single REMIC. The Certificates will represent the
entire beneficial ownership interest in the Trust Fund. The Regular Certificates
will represent the "regular interest" in the REMIC and the Residual Certificates
will represent the single "residual interest" in the REMIC. The "latest possible
maturity date" for federal income tax purposes of all interests created hereby
will be the Latest Possible Maturity Date.]
The following table sets forth characteristics of the Certificates,
together with the minimum denominations and integral multiples in excess thereof
in which such Classes shall be issuable (except that one Certificate of each
Class of Certificates may be issued in any amount in excess of the minimum
denomination and, in addition, one Residual Certificate representing the Tax
Matters Person Certificate may be issued in a different amount):
<PAGE>
<TABLE>
<CAPTION>
===================================================================================================
Integral Multiples in
Class Certificate Excess of Minimum
Balance Pass-Through Rate Minimum Denomination Denomination
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A-1 [Variable Rate (1)]
- ---------------------------------------------------------------------------------------------------
Class X (2) (3)
- ---------------------------------------------------------------------------------------------------
[Class R] [ ] [ ] [ ] [N/A]
- ---------------------------------------------------------------------------------------------------
Class M-1 [ ]%[Variable Rate (1)]
- ---------------------------------------------------------------------------------------------------
Class B-1 [ ]%[Variable Rate (1)]
- ---------------------------------------------------------------------------------------------------
Class B-2 [ ]%[Variable Rate (1)]
===================================================================================================
</TABLE>
- ------------------------------------
[(1) The Pass-Through Rate for any Distribution Date will equal the weighted
average of the Net Mortgage Rates then in effect for each Mortgage Loan. The
Net Mortgage Rate for each Mortgage Loan will equal the Mortgage Rate thereon
on the first date of the month of the related Distribution Date less the
related Expense Rate. The Pass-Through Rate for the first Distribution Date is
expected to be approximately % per annum.]
(2) The Class X Certificates will have no principal balances and will bear
interest on the Notional Amount.
(3) The Pass-Through Rate for this Class for any Distribution Date will be
equal to the excess of (a) the weighted average of the Net Mortgage Rates of
the Mortgage Loans over (b) %.
I-2
<PAGE>
Set forth below are designations of Classes of Certificates to the
categories used herein:
Accretion Directed
Certificates.......................... [ ].
Accrual Certificates.................... [ ].
Book-Entry Certificates................. All Classes of Certificates
other than the Physical Certif-
icates.
COFI Certificates....................... [ ].
Component Certificates.................. [ ].
Components.............................. For purposes of calculating
distributions of principal, the
Component Certificates will be
comprised of multiple payment
components having the
designations, Initial Component
Balances and Pass-Through Rates
set forth below:
Initial
Component
Designation Balance Pass-Through Rate
N/A N/A N/A
Delay Certificates...............All interest-bearing Classes of
Certificates other than the Non-
Delay Certificates, if any.
ERISA-Restricted
Certificates...................The Class M-1, Class B-1 and
Class B-2
Floating Rate Certificates.......[ ].
Inverse Floating Rate
Certificates...................[ ].
LIBOR Certificates...............[ ].
I-3
<PAGE>
Mezzanine Certificates.......... The Class M-1 Certificates.
Non-Delay Certificates.......... [ ].
Notional Amount Certificates.... The Class X Certificates.
Offered Certificates............ All Classes of Certificates
other than the Private
Certificates.
Physical Certificates........... The [Class X,] Class R and
Subordinated Certificates.
Planned Principal Classes....... [ ].
Primary Planned Principal
Classes....................... [ ].
Principal Only Certificates..... [ ].
Private Certificates............ The Class R, Class B-1 and Class
B-2 Certificates.
Rating Agencies................. [ ].
Regular Certificates............ All Classes of Certificates
other than the Class R
Certificates.
Residual Certificates........... Class R Certificates.
Scheduled Classes............... [ ].
Secondary Planned
Principal Classes............. [ ].
Senior Certificates............. Class A-1, Class X and [Class R]
Certificates.
Subordinated Certificates....... The Mezzanine Certificates,
Class B-1 and Class B-2
Certificates.
Targeted Principal Classes...... [ ].
With respect to any of the foregoing designations as to which the
corresponding reference is "None," all defined terms and provisions herein
relating solely to such designations shall be of no force or effect, and any
calculations herein incorporating references to such designations shall be
interpreted without reference to such designations and amounts.
I-4
<PAGE>
Defined terms and provisions herein relating to statistical rating agencies not
designated above as Rating Agencies shall be of no force or effect.
I-5
<PAGE>
ARTICLE I
Definitions
Section 1.01. Whenever used in this Agreement, the following words and
phrases, unless the context otherwise requires, shall have the meanings
specified in this Article.
Accretion Directed Certificates: As specified in the
Preliminary Statement.
Accrual Amount: With respect to any Class of Accrual Certificates and
any Distribution Date prior to the Accrual Termination Date, the amount
allocable to interest on each such Class of Accrual Certificates with respect to
such Distribution Date pursuant to Section 5.02(a)(i).
Accrual Certificates: As specified in the Preliminary
Statement.
Accrual Termination Date:
Advancing Date: The fourth Business Day preceding the
related Distribution Date.
Agreement: This Pooling and Servicing Agreement and all
amendments hereof and supplements hereto.
Allocable Share: As to each Class of Regular Certificates, such Class'
share of the interest reduction in respect of any Debt Service Reduction
Mortgage Loan or Deficient Valuation Mortgage Loan or any Mortgage Loan that is
the subject of a Relief Act Reduction, such share being determined by the ratio
of one month's interest at the related Pass-Through Rate on such Class' Senior
Percentage or, in the case of the Subordinate Certificates, the Subordinate
Percentage Allocation of the Scheduled Principal Balance of such Mortgage Loan
and one month's interest on the Scheduled Principal Balance of such Mortgage
Loan at the related Net Mortgage Rate.
[Allocated Amount]:
[Allocated Amount Decline: As to each respective Allocated Amount and
Distribution Date, the excess of (x) such Allocated Amount immediately following
the Due Date in the month preceding the month of such Distribution Date over (y)
such Allocated Amount immediately following the Due Date in the month of such
Distribution Date; provided that the Allocated Amount determined pursuant to
clause (y) shall be zero immediately following the
I-6
<PAGE>
Due Date in the month in which the Final Distribution Date
occurs.]
Amortization Payment: As to any REO Mortgage Loan and any month, the
payment of principal and accrued interest due in such month in accordance with
the terms of the related Mortgage Note as contemplated by the second paragraph
of Section 3.10.
Amount Held for Future Distribution: As to any Distribution Date, the
total of the amounts held in the Certificate Account at the close of business on
the preceding Determination Date on account of (i) Principal Prepayments and
Liquidation Proceeds received or made in the month of such Distribution Date and
(ii) payments which represent receipt of scheduled payments of principal and
interest in respect of a Due Date or Due Dates subsequent to the related Due
Date.
[Applicable Credit Support Percentage: As defined in
Section 5.02(d).]
Appraised Value: The value of the property underlying a Mortgage Loan
based, in the case of origination of such Mortgage Loan, on the lower of an
appraisal at the time of origination or the sales price of such property or
based, in the case of a refinancing, on an appraisal at the time of refinancing.
Available Funds: As to any Distribution Date, an amount equal to (a)
the sum of (i) the amount collected in respect of the Mortgage Loans as of the
close of business on the preceding Determination Date, (ii) the amount of any
Monthly Advance made on the preceding Certificate Account Deposit Date, (iii)
the aggregate of the Purchase Prices for Defective Mortgage Loans repurchased on
such Distribution Date pursuant to Sections 2.02 or 2.03, (iv) the aggregate of
the Substitution Adjustment Amounts in connection with any Substitute Mortgage
Loans substituted for Defective Mortgage Loans on such Distribution Date
pursuant to Section 2.04, (v) any amount required to be deposited in the
Certificate Account on the preceding Certificate Account Deposit Date pursuant
to Section 3.04(a), reduced by (b) the sum as of the close of business on such
preceding Determination Date of (x) the Amount Held for Future Distribution, (y)
amounts permitted to be withdrawn by the Master Servicer from the Certificate
Account in respect of the Mortgage Loans pursuant to clauses (i)-(vi),
inclusive, of Section 3.06 and (z) all income from Permitted Investments that
are held in the Investment Account for the account of the Master Servicer.
[Balloon Payment: The principal component of a payment due
on a Mortgage Loan on its maturity date.]
I-7
<PAGE>
[Bankruptcy Bond: The limited purpose bond with respect to
proceedings relating to Mortgagors under the Federal Bankruptcy
Code, which proceedings result in Bankruptcy Losses, and all
amendments or endorsements thereto, or any replacement bond
obtained by the Master Servicer pursuant to Section 3.17.]
Bankruptcy Coverage Termination Date: The point of time at
which the Current Bankruptcy Amount is reduced to zero.
Bankruptcy Loss: Any Deficient Valuation or Debt Service
Reduction.
[Blanket Mortgage: The mortgage or mortgages encumbering
the Cooperative Property.]
Book-Entry Certificate: As specified in the Preliminary
Statement.
Business Day: Any day other than (i) a Saturday or a Sunday or (ii) a
day on which banking institutions in the State of North Carolina or in the state
where the Corporate Trust Office is located are required or authorized by law or
executive order to be closed.
Certificate: Any Regular Certificate or Residual Certifi-
cate.
Certificate Account: The segregated account or accounts established and
maintained by the Master Servicer pursuant to Section 3.04(b). Such accounts
shall be entitled " , as Trustee, for the benefit of Certificateholders of
Mortgage Pass-Through Certificates, Series 199 - Certificate Account" and shall
each be an Eligible Account. Funds deposited in the Certificate Account (other
than any income on Permitted Investments included therein) shall be held in
trust for Certif-icateholders.
Certificate Account Deposit Date: As to any Distribution Date, the
Business Day preceding such Distribution Date or if the Certificate Account is
held at ____________________, such Distribution Date.
Certificateholder or Holder: The Person in whose name a Certificate is
registered in the Certificate Register, except that, solely for the purpose of
giving any consent pursuant to this Agreement, any Certificate registered in the
name of the Sponsor, the Master Servicer or any affiliate thereof shall be
deemed not to be outstanding and the Percentage Interest evidenced thereby shall
not be taken into account in determining whether the requisite amount of
Percentage Interests necessary to effect any such consent has been obtained,
unless such entity is
I-8
<PAGE>
the registered owner of the entire Class of Certificates, provided that the
Trustee shall not be responsible for knowing that any Certificate is registered
in the name of such an affiliate unless one of its Responsible Officers has
actual knowledge.
[Certificate Insurance Policy: The certificate guaranty
surety bond, policy number [ ], dated ,
19 , issued by the Certificate Insurer in favor of the Trustee
for the benefit of the Certificateholders.]
Certificate Insurance Premium: The semiannual premium payable by the
Trustee to the Certificate Insurer under the Certificate Insurance Policy
specified in the agreement between the Certificate Insurer and the Sponsor.
Certificate Insurance Proceeds: Any proceeds of the
Certificate Insurance Policy.
Certificate Insurer: So long as the Certificate Insurance
Policy is in force, [ ], a
[ ], or any successor thereto, as
issuer of the Certificate Insurance Policy.]
Certificate Owner: With respect to a Book-Entry Certif-
icate, the person who is the beneficial owner of a Book-Entry
Certificate.
Certificate Register and Certificate Registrar: The regis-
ter maintained and the registrar appointed pursuant to Section
6.02.
Class: As to the Certificates, the Class A-1, Class X,
Class M-1, Class B-1 and Class B-2 Certificates or the Residual
Certificates, as the case may be.
Class Certificate Balance: As to any Distribution Date and any Class of
Regular Certificates (other than the Notional Amount Certificates), the related
Initial Class Certificate Balance reduced by the sum of (i) the amount
distributed to Holders of such Class of Certificates on prior Distribution Dates
and allocable to principal and (ii) the sum of (a) in the case of such Classes
of Regular Certificates, the amount of the related Net Realized Losses
previously applied in reduction of the Class Certificate Balance of such Class
pursuant to Section 5.03 hereof and (b) in the case of the Class of Subordinate
Certificates then outstanding with the lowest priority of distribution pursuant
to Section 5.02(a), the amount by which the Pool Scheduled Principal Balance as
of the Due Date in the month of such Distribution Date exceeds the aggregate of
the Class Certificate Balances as of such Distribution Date (after giving effect
to (x) distributions to Holders of Regular Certificates on such Distribution
Date
I-9
<PAGE>
allocable to principal and (y) any allocation of the related Net Realized Losses
on such Distribution Date).
Class Interest Shortfall: As to any Distribution Date and Class of
Regular Certificates, the amount by which the amount described in clause (i) of
the definition of Class Optimum Interest Distribution Amount for the related
Class of Certificates exceeds the amount of interest actually distributed on
such Class of Certificates on such Distribution Date.
Class Optimum Interest Distribution Amount: As to any Distribution Date
and each Class of Regular Certificates, the sum of (i) one month's interest
accrued during the related Interest Accrual Period at the related Pass-Through
Rate on the applicable Class Certificate Balance or Notional Amount, subject to
reduction pursuant to Section 5.02(b), and (ii) any Class Unpaid Interest
Shortfall for such Class.
[Class Subordination Percentage: With respect to any Distribution Date
and each Class of Subordinated Certificates, the quotient (expressed as a
percentage) of (a) the Class Certificate Balance of such Class of Certificates
immediately prior to such Distribution Date divided by (b) the aggregate of the
Class Certificate Balances immediately prior to such Distribution Date of all
Classes of Certificates.]
Class Unpaid Interest Shortfall: As to any Distribution Date and each
Class of Regular Certificates, the amount by which the aggregate Class Interest
Shortfalls for such Class on prior Distribution Dates exceeds the amount of
interest actually distributed on such Class on such prior Distribution Dates
pursuant to clause (ii) of the definition of Class Optimum Interest Distribution
Amount.
Closing Date: , 199 .
Code: The Internal Revenue Code of 1986, as the same may be
amended from time to time.
[COFI: The Monthly Weighted Average Cost of Funds Index for
the Eleventh District Savings Institutions published by the
Federal Home Loan Bank of San Francisco.]
[COFI Certificates: As specified in the Preliminary
Statement.]
[Component: As specified in the Preliminary Statement.]
[Component Balance: With respect to any Component and any
Distribution Date, the Initial Component Balance thereof on the
Closing Date, less all amounts applied in reduction of the
I-10
<PAGE>
principal balance of such Component and Net Realized Losses
allocated thereto on previous Distribution Dates.]
Component Certificates: As specified in the Preliminary
Statement.
[Converted Mortgage Loan: A Convertible Mortgage Loan that
has converted from an adjustable Mortgage Rate to a fixed
Mortgage Rate.
Convertible Mortgage Loan: A Mortgage Loan with a Mortgage
Note that provides for the conversion thereof at the option of
the Mortgagor from an adjustable Mortgage Interest Rate to a
fixed Mortgage Interest Rate.]
[Coop Shares: Shares issued by a Cooperative Corporation.]
[Cooperative Corporation: The entity that holds title (fee
or an acceptable leasehold estate) to the real property and
improvements constituting the Cooperative Property and which
governs the Cooperative Property, which Cooperative Corporation
must qualify as a Cooperative Housing Corporation under Section
216 of the Code.]
[Cooperative Loan: Any Mortgage Loan secured by Coop Shares
and a Proprietary Lease.]
[Cooperative Property: The real property and improvements
owned by the Cooperative Corporation, that includes the
allocation of individual dwelling units to the holders of the
Coop Shares of the Cooperative Corporation.]
[Cooperative Unit: A single family dwelling located in a
Cooperative Property.]
[Core Percentage:]
Corporate Trust Office: The principal office of the Trustee at which at
any particular time its corporate business shall be administered, which office
at the date of the execution of this instrument is located at
_______________________________.
[Credit Enhancement Fee: As to each Mortgage Loan, the
amount payable to the Pool Insurer and the Special Hazard Insurer
in respect of such Mortgage Loan.]
[Credit Enhancement Fee Rate: With respect to any Mortgage
Loan, the sum of the Pool Insurer Fee Rate and the Special Hazard
Fee Rate.]
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Credit Support Termination Date: The point of time at which
the Class Certificate Balances of all of the Subordinate
Certificates are reduced to zero.
Current Bankruptcy Amount: As of any Determination Date, the Current
Bankruptcy Amount shall equal the Initial Bankruptcy Coverage Amount as reduced
by the aggregate amount of Bankruptcy Losses previously incurred during the
period from the Cut-Off Date through the last day of the month preceding the
month of such Distribution Date; provided, however, that such amount may be
reduced from time to time with the written consent of the Rating Agencies
without resulting in a downgrading to the current rating of the Certificates.
Curtailment: Either any Principal Prepayment which is not a Principal
Prepayment in Full, any REO Proceeds treated as such pursuant to the second
paragraph of Section 3.10 or any Deficient Valuation that was covered by the
Current Bankruptcy Amount.
Custodian: [ ]
Cut-Off Date: 1, 199 .
Cut-Off Date Pool Principal Balance: The aggregate of the
Cut-Off Date Principal Balances of the Mortgage Loans which is
$ .
Cut-Off Date Principal Balance: As to any Mortgage Loan, the unpaid
principal balance thereof as of the close of business on the Cut-Off Date,
reduced by all installments of principal due on or prior thereto and not paid.
Debt Service Reduction: As to any Mortgage Loan and any Determination
Date, the excess of (i) the installment of principal and interest due on the
related Due Date under the terms of such Mortgage Loan over (ii) the amount of
the monthly payment of principal and/or interest required to be paid with
respect to such Due Date by the Mortgagor as established by a court of competent
jurisdiction (pursuant to an order which has become final and nonappealable) as
a result of a proceeding initiated by or against the related Mortgagor under the
Bankruptcy Code, as amended from time to time (11 U.S.C.); provided that no such
occurrence shall be considered a Debt Service Reduction so long as the Master
Servicer is pursuing an appeal of the court order giving rise to any such
modification and (a) such Mortgage Loan is not in default with respect to
payment due thereunder in accordance with the terms of such Mortgage Loan as in
effect on the Cut-Off Date or (b) scheduled monthly payments of principal and
interest are being advanced by the Master Servicer in accordance with the terms
of such Mortgage Loan as in effect on the Cut-Off Date.
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Debt Service Reduction Mortgage Loan: Any Mortgage Loan
that became the subject of a Debt Service Reduction.
Defective Mortgage Loan: Any Mortgage Loan which is
required to be repurchased pursuant to Section 2.02 or 2.03.
Deficient Valuation: As to any Mortgage Loan and any Determination
Date, the excess of (i) the then outstanding indebtedness under such Mortgage
Loan over (ii) the secured valuation thereof established by a court of competent
jurisdiction (pursuant to an order which has become final and nonappealable) as
a result of a proceeding initiated by or against the related Mortgagor under the
Bankruptcy Code, as amended from time to time (11 U.S.C.), pursuant to which
such Mortgagor retained such Mortgaged Property; provided that no such
occurrence shall be considered a Deficient Valuation so long as the Master
Servicer is pursuing an appeal of the court order giving rise to any such
modification and (a) such Mortgage Loan is not in default with respect to
payments due thereunder in accordance with the terms of such Mortgage Loan as in
effect on the Cut-Off Date or (b) scheduled monthly payments of principal and
interest are being advanced by the Master Servicer in accordance with the terms
of such Mortgage Loan as in effect on the Cut-Off Date.
Deficient Valuation Mortgage Loan: Any Mortgage Loan that
became the subject of a Deficient Valuation.
Definitive Certificates: As defined in Section 6.02.
Delinquent Installments: The aggregate of interest installments at the
related Mortgage Interest Rate (net of the Master Servicing Fee Rate and the
Servicing Fee Rate for such Mortgage Loan), together with the aggregate of
principal installments on the Mortgage Loans due from and payable by Mortgagors
on the Due Date for a month, in the amounts required under the Mortgage Notes as
in effect on the Cut-Off Date, but not paid as of the close of business on the
Withdrawal Date in such calendar month, regardless of whether the unpaid
installments are a result of a bankruptcy court's reduction of the principal
balance of or the interest rate on a Mortgage Loan, including a reduction in
interest payable as a result of a principal reduction during the pendency of a
proceeding under the Bankruptcy Code, or a reduction resulting from the
extension of the term of a Mortgage Loan by the bankruptcy court.
Denomination: With respect to each Certificate, the amount set forth on
the face thereof as the "Initial Certificate Balance of this Certificate" or the
"Initial Notional Amount of this Certificate" or, if neither of the foregoing,
the Percentage Interest appearing on the face thereof.
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Depository: The initial Depository shall be The Depository Trust
Company, the nominee of which is CEDE & Co., as the registered Holder of the
Book-Entry Certificates. The Depository shall at all times be a "clearing
corporation" as defined in Section 8-102(3) of the Uniform Commercial Code of
the State of New York.
Depository Participant: A broker, dealer, bank or other financial
institution or other Person for whom from time to time a Depository effects
book-entry transfers and pledges of securities deposited with the Depository.
Determination Date: As to any Distribution Date, the day of each month
or if such day is not a Business Day the next succeeding Business Day; provided,
however, that if such next succeeding Business Day is less than two Business
Days prior to the related Distribution Date the Determination Date shall be the
next Business Day preceding the day of such month.
Distribution Date: The day of each month beginning
199 or, if such day is not a Business Day, the
Business Day immediately following.
Due Date: As to any Distribution Date and Mortgage Loan the
first day in the calendar month of such Distribution Date.
Duff & Phelps: Duff & Phelps Credit Rating Company, or any
successor thereto.
Eligible Account: Either (A) segregated account or accounts maintained
with an institution whose deposits are insured by the Bank Insurance Fund or the
Savings Association Insurance Fund of the FDIC, the unsecured and
uncollateralized debt obligations of which shall be rated at least "[ ]" by [ ]
and "[ ]" by [ ], and which has a short term rating of at least "[ ]" by [ ] and
"[ ]" by [ ], and which is either (i) a federal savings and loan association
duly organized, validly existing and in good standing under the federal banking
laws, (ii) an institution duly organized, validly existing and in good standing
under the applicable banking laws of any state, (iii) a national banking
association duly organized, validly existing and in good standing under the
federal banking laws and (iv) a principal subsidiary of a bank holding company
or (B) a trust account (which shall be a "special deposit account") maintained
with the trust department of a federal or state chartered depository institution
or of a trust company, having capital and surplus of not less than $50,000,000,
acting in its fiduciary capacity. Any Eligible Accounts maintained with the
Trustee shall conform to the preceding clause (B).
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<PAGE>
ERISA: The Employee Retirement Income Security Act of 1974,
as amended.
Escrow Account: The Escrow Account or Accounts established and
maintained as separate accounts by each Servicer pursuant to its Servicing
Agreement and caused to be established and maintained by the Master Servicer,
pursuant to Section 3.05.
Event of Default: As defined in Section 8.01.
Expenses: As to each Mortgage Loan, the sum of the related
Servicing Fee, Master Servicing Fee and Trustee Fee.
Expense Fee: As to each Mortgage Loan and Distribution Date the sum of
the related Servicing Fee, Master Servicing Fee and Trustee Fee multiplied by
the Scheduled Principal Balance of such Mortgage Loan on the Due Date in the
month preceding such Distribution Date.
Expense Rate: As to each Mortgage Loan, the sum of the
related Servicing Fee Rate, Master Servicing Fee Rate, the
Trustee Fee Rate [and the Credit Enhancement Fee Rate].
FDIC: The Federal Deposit Insurance Corporation, or any
successor thereto.
FHLMC: The Federal Home Loan Mortgage Corporation, or any
successor thereto.
Final Distribution Date: The Distribution Date on which the
final distribution in respect of the Certificates will be made
pursuant to Section 10.01.
Fitch: Fitch Investors Service, Inc., or any successor
thereto.
FNMA: The Federal National Mortgage Association, or any
successor thereto.
Fraud Coverage Termination Date: The point of time at which
the Fraud Loss Coverage Amount is reduced to zero.
Fraud Loan: Any Liquidated Mortgage Loan as to which a loss is
sustained by reason of a denial of coverage under any related Primary Insurance
Policy because of fraud, dishonesty or misrepresentation.
Fraud Loss: As to any Fraud Loan, the Net Realized Loss
with respect thereto.
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Fraud Loss Coverage Amount: As of any Distribution Date an amount equal
to (i) during the period from the Cut-Off Date to the first anniversary thereof,
the Initial Fraud Loss Coverage Amount, reduced by Fraud Losses allocated to the
Certificates since the Closing Date (ii) during the period from the first
anniversary to the _____ anniversary of the Cut-Off Date, an amount equal to the
lesser of (a) ___% of the Pool Scheduled Principal Balance immediately prior to
each such anniversary reduced by Fraud Losses allocated to the Certificates
since such anniversary and (b) the excess of the Initial Fraud Loss Coverage
Amount over the cumulative amount of Fraud Losses allocated to the Certificates
prior to such Distribution Date, (iii) during the period from the _____
anniversary to the _____ anniversary of the Cut-Off Date, an amount equal to the
lesser of (a) ____% of the Pool Scheduled Principal Balance immediately prior to
each such anniversary reduced by Fraud Losses allocated to the Certificates
since such anniversary and (b) the excess of the Initial Fraud Loss Coverage
Amount over the cumulative amount of Fraud Losses allocated to the Certificates
prior to such Distribution Date, and (iv) after the _____ anniversary of the
Closing Date, zero. The Fraud Loss Coverage Amount may be further reduced from
time to time below the amounts specified above with the written consent of the
Rating Agencies and without resulting in a downgrading to the then current
rating of the Certificates.
Fraud Loss Coverage Termination Date: The point in time at
which the Fraud Loss Coverage Amount is reduced to zero.
[Gross Margin: With respect to each Mortgage Loan, the
percentage set forth in the related Mortgage Note to be added to
the Index to determine the Mortgage Rate on each Adjustment Date,
and which is set forth in the Mortgage Loan Schedule.]
[Guide:]
Headlands: Headlands Mortgage Company, a California
corporation, or its successors in interest.
Independent: When used with respect to any specified Person means such
a Person who (i) is in fact independent of the Sponsor or the Master Servicer,
(ii) does not have any direct financial interest or any material indirect
financial interest in the Sponsor or the Master Servicer or in an affiliate of
either, and (iii) is not connected with the Sponsor or the Master Servicer as an
officer, employee, promoter, underwriter, trustee, partner, director or person
performing similar functions.
[Index: As to each Mortgage Loan, the index for the
adjustment of the Mortgage Rate set forth as such in the related
Mortgage Note, such index being [the average weekly quoted yield
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on U.S. Treasury securities adjusted to a constant maturity of one year as
published in the Federal Reserve Statistical Release H.15(519)] [the weekly
average of secondary market interest rates on six-month negotiable certificates
of deposit as published in the Federal Reserve Statistical Release H.15(519)]
[the average of the London interbank offered rates for six month dollar deposits
in the London market based on quotations at five major banks, as set forth in
the "Money Rates" section of The Wall Street Journal, Western Edition], or, if
the [Federal Reserve Statistical Release H.15(519)] [Money rates] section ceases
to be published or becomes unavailable for any reason, then as set forth in a
comparable publication selected by the Master Servicer, in each case as of a
date 45 days preceding such Mortgage Loan's Adjustment Date. Should the Index
become unavailable, the Master Servicer, on behalf of the Trustee, will select a
new index that is based upon comparable information.
[Initial Adjustment Date: As to each Mortgage Loan, its
first Adjustment Date following the origination of such Mortgage
Loan.]
Initial Bankruptcy Coverage Amount: $ .
Initial Class Certificate Balance: As to each Class of Certificates,
the aggregate of the Initial Class Certificate Balances of all Certificates of
the same Class, which is as follows:
Class A-1: $
Class M-1: $
Class B-1: $
Class B-2: $
Class R: $
As to each Certificate of the same Class of Certificates, the Initial
Class Certificate Balance set forth on the face thereof.
Initial Component Balance: As specified in the Preliminary
Statement.
Initial Fraud Loss Coverage Amount: $ .
----------------------------------
Initial LIBOR Rate: [ ]
Initial Special Hazard Coverage Amount: $ .
--------------------------------------
Insurance Proceeds: Proceeds paid by any insurer pursuant to any
Primary Insurance Policy and any insurance policy covering a Mortgage Loan,
including any amounts required to be paid pursuant to Section 3.08(a), in each
case other than (i) any amount
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included in such Insurance Proceeds in respect of Insured Expenses and (ii)
amounts required to be paid over to the Mortgagor pursuant to law or the related
Mortgage or Mortgage Note.
Insured Expenses: Expenses in connection with a Mortgage
Loan covered by any Primary Insurance Policy or any other
insurance policy.
Interest Accrual Period: As to any Distribution Date and each Class of
Regular Certificates, the period from and including the first day of the month
preceding the calendar month of such Distribution Date to but not including the
first day of the calendar month of such Distribution Date.
Investment Depository: A bank or trust company so long as the long-term
debt obligations of such other bank or trust company have been assigned
short-term ratings of at least " " by [ ] and of at least "K" by [ ].
LIBOR Certificates: As specified in the Preliminary
Statement.
Liquidated Deficient Valuation Loss: As to any Liquidated
Deficient Valuation Mortgage Loan, the Net Realized Loss with
respect thereto.
Liquidated Deficient Valuation Mortgage Loan: Any Mortgage Loan that
became the subject of a Deficient Valuation after the Bankruptcy Coverage
Termination Date and subsequently became a Liquidated Mortgage Loan.
Liquidated Mortgage Loan: Any defaulted Mortgage Loan as to which the
Master Servicer has determined that all amounts which it expects to recover from
or on account of such Mortgage Loan have been recovered.
Liquidation Expenses: Expenses which are incurred by the Master
Servicer in connection with the liquidation of any defaulted Mortgage Loan and
not recovered by the Master Servicer under any Primary Insurance Policy or any
other insurance policy for reasons other than the Master Servicer's failure to
comply with Section 3.07, such expenses including, without limitation, legal
fees and expenses, any unreimbursed amount expended by the Master Servicer
pursuant to Section 3.08(a) (to the extent such amount is reimbursable under the
terms of Section 3.08(a)) respecting the related Mortgage Loan and any related
and unreim-bursed expenditures for real estate property taxes or for property
restoration or preservation.
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Liquidation Period: The period beginning on the date of adoption by the
Residual Certificateholders of a plan of complete liquidation of the Pool and
ending on the day that is 90 days after the date such plan is adopted.
Liquidation Proceeds: Cash (including Insurance Proceeds and any REO
Proceeds) received in connection with the liquidation of defaulted Mortgage
Loans, whether through trustee's sale, foreclosure sale or otherwise.
Loan-to-Value Ratio: As of any date, the fraction, expressed as a
percentage, the numerator of which is the current principal balance of the
related Mortgage Loan at the date of determination and the denominator of which
is the Appraised Value of the related Mortgaged Property.
[Maintenance: With respect to any Cooperative Unit, the
rent paid by the Mortgagor to the Cooperative Corporation
pursuant to the Proprietary Lease.]
Master Servicer: Headlands Mortgage Company, or its
successor in interest, or any successor servicer appointed as
herein provided.
Master Servicer's Certificate: A certificate completed by
and executed on behalf of the Master Servicer in accordance with
Section 4.01.
Master Servicing Fee: The amount payable to the Master
Servicer pursuant to Section 3.12 hereof.
Master Servicing Fee Rate: As to any Mortgage Loan, [ ]%
per annum.
[Maximum Rate: With respect to each Mortgage Loan, the
maximum rate of interest set forth as such in the related
Mortgage Note.]
Mezzanine Certificates: As specified in the Preliminary
Statement.
[Minimum Rate: With respect to each Mortgage Loan, the
minimum rate of interest set forth in the related Mortgage Note.]
Monthly Advance: As to any Distribution Date, the aggregate of the
advances made by the Master Servicer pursuant to Section 4.02, the amount of any
such Monthly Advance being equal to the Delinquent Installments on the Mortgage
Loans for the month during which such Distribution Date occurs, to the extent
that the Master Servicer determines that such Monthly Advance will not be a
Nonrecoverable Advance.
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<PAGE>
Moody's: Moody's Investors Service, Inc., or any successor
thereto.
Mortgage: The mortgage, deed of trust or other instrument creating a
first lien on a Mortgaged Property securing a Mortgage Note or creating a first
lien on a leasehold interest.
Mortgage File: The mortgage documents listed in Section 2.01 pertaining
to a particular Mortgage Loan and any additional documents required to be added
to the Mortgage File pursuant to this Agreement.
Mortgage Interest Rate: As to any Mortgage Loan, the per annum rate of
interest at which interest accrues on the principal balance of such Mortgage
Loan in accordance with the terms of the related Mortgage Note.
Mortgage Loans: Such of the mortgage loans transferred and assigned to
the Trustee pursuant to Section 2.01 as from time to time are held as a part of
the Pool, including any Substitute Mortgage Loans and REO Mortgage Loans, the
Mortgage Loans originally so held being identified in the Mortgage Loan
Schedule.
Mortgage Loan Schedule: As of any date of determination, the schedule
of Mortgage Loans included in the Pool. The initial schedule of such Mortgage
Loans as of the Cut-Off Date is attached hereto as Exhibit F, such schedule
setting forth the following information as to each such Mortgage Loan: (i) the
Mortgage Loan identifying number; (ii) the Mortgagor's name; (iii) the street
address of the Mortgaged Property, including the state; (iv) the property type
of the related Mortgaged Property; (v) the original number of months to
maturity; (vi) the Loan-to-Value Ratio as of the Cut-Off Date; (vii) the
Mortgage Interest Rate as of the date of origination; (viii) the scheduled
amount of the monthly installment of principal and interest; (ix) the original
principal amount; (x) the Cut-Off Date Principal Balance; and (xi) the related
Servicing Fee Rate and Master Servicing Fee Rate.
Mortgage Note: The originally executed note or other evidence of
indebtedness evidencing the indebtedness of a Mortgagor under a Mortgage Loan,
together with all riders thereto and amendments thereof.
Mortgaged Property: The property subject to a Mortgage[,
which, with respect to a Cooperative Loan, is the related Coop
Shares and Proprietary Lease].
Mortgagor: The obligor on a Mortgage Note.
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<PAGE>
Net Liquidation Proceeds: As to any Liquidated Mortgage
Loan, Liquidation Proceeds net of Liquidation Expenses.
Net Mortgage Interest Rate or NMR: As to any Mortgage Loan,
such Mortgage Loan's Mortgage Interest Rate reduced by the
related Expense Rate.
Net Prepayment Interest Shortfalls: As to any Distribution Date, the
amount by which the aggregate of Prepayment Interest Shortfalls during the
calendar month preceding the month of such Distribution Date exceeds the Master
Servicing Fee for such period.
Net Realized Loss: Any of the following:
(a) as to any Liquidated Mortgage Loan, the amount, if any, by
which (i) the Scheduled Principal Balance of such Liquidated Mortgage
Loan or the Reduced Scheduled Principal Balance if such Liquidated
Mortgage Loan is a Liquidated Deficient Valuation Mortgage Loan exceeds
(ii) the portion of Net Liquidation Proceeds realized thereon that is
applied to a reduction of the principal balance of such Mortgage Loan;
(b) as to any Mortgage Loan that is subject to a Debt Service
Reduction and as to any Determination Date, the lesser of (i) the
excess, if any, of (A) the principal component of the monthly
installment of principal and interest (without giving effect to the
Debt Service Reduction) over (B) the amount applied in reduction of the
principal balance of such Mortgage Loan on the related Due Date (from
Insurance Proceeds, Liquidation Proceeds or payments by the Mortgagor)
and (ii) the principal component of such Debt Service Reduction for
such Due Date; and
(c)(i) as to any Mortgage Loan that is a Liquidated Deficient
Valuation Mortgage Loan, the amount of the related Deficient Valuation
and (ii) as to any Mortgage Loan that experiences a Deficient Valuation
prior to the Bankruptcy Coverage Termination Date, the Deficient
Valuation with
respect thereto.
Net Special Hazard Losses: As to any Special Hazard Mort-
gage Loan, the Net Realized Loss with respect thereto.
NMR: See definition of Net Mortgage Interest Rate.
Nonrecoverable Advance: Any Monthly Advance or any portion
of a Monthly Advance previously made or proposed to be made in
respect of a Mortgage Loan which has not been previously
reimbursed and which, in the good faith judgment of the Master
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Servicer, will not or, in the case of a proposed Monthly Advance, would not be
ultimately recoverable from Liquidation Proceeds or other recoveries in respect
of the related Mortgage Loan. The determination by the Master Servicer that it
has made a Nonrecoverable Advance or that any proposed advance, if made, would
constitute a Nonrecoverable Advance, shall be evidenced by a certificate of a
Servicing Officer of the Master Servicer delivered to the Trustee and the
Sponsor and detailing the reasons for such determination.
Non-Delay Certificates: As specified in the Preliminary
Statement.
Non-U.S. Person: An individual, corporation, partnership or
other person other than a citizen or resident of the United
States, a corporation, partnership or other entity created or
organized in or under the laws of the United States or any
political subdivision thereof, or an estate or trust that is
subject to U.S. federal income tax regardless of the source of
its income.
Notional Amount: [As to any Distribution Date, the Pool
Scheduled Principal Balance].
Notional Amount Certificates: As specified in the
Preliminary Statement.
Offered Certificates: As specified in the Preliminary
Statement.
Officers' Certificate: A certificate signed by the Chairman of the
Board, Vice Chairman of the Board, President, a Vice President [and by] the
Treasurer, the Secretary or one of the Assistant Treasurers or Assistant
Secretaries, or any other duly authorized officer of the Sponsor or the Master
Servicer, as the case may be, and delivered to the Trustee.
Opinion of Counsel: A written opinion of counsel acceptable to the
Trustee, who may be counsel for the Sponsor or the Master Servicer[, except that
any opinion of counsel relating to the qualification of the Trust Fund as a
REMIC or compliance with the REMIC Provisions must be an opinion of Independent
counsel.]
[Original Applicable Credit Support Percentage: With
respect to each of the following Classes of Subordinate
Certificates, the corresponding percentage described below, as of
the Closing Date:
Class M-1 ______%
Class B-1 ______%
Class B-2 ______%]
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Original Mortgage Loans: The Mortgage Loans identified in Exhibit F
hereto, and conveyed, transferred, sold and assigned to, and deposited with, the
Trustee pursuant to Section 2.01 hereof on the Closing Date.
Original Subordinate Certificate Balance: $__________.
[Outside Reference Date: As to any Interest Accrual Period
for the COFI Certificates, the close of business on the tenth day
thereof.]
Outstanding Mortgage Loan: As to any Due Date, a Mortgage Loan which
was not the subject of a Principal Prepayment in Full prior to such Due Date,
which did not become a Liquidated Mortgage Loan prior to such Due Date and which
was not purchased prior to such Due Date pursuant to Section 2.02 or 2.03.
Ownership Interest: As to any Certificate, any ownership or security
interest in such Certificate, including any interest in such Certificate as the
Holder thereof and any other interest therein, whether direct or indirect, legal
or beneficial, as owner or as pledgee.
Pass-Through Rate: As to each Class of Regular Certifi-
cates, the per annum rate set forth or described below:
Class of Certificates Pass-Through Rate
A-1: ____%
X ____%
M-1 ____%
B-1: ____%
B-2: ____%
Paying Agent: ___________________________________ or such other
successor paying agent appointed by the Trustee which is authorized to make
distributions with respect to the Certificates on behalf of the Trustee, and
authorized to exercise corporate trust powers under the laws of its jurisdiction
of organization.
Percentage Interest: As to any Certificate, the percentage interest set
forth on the face thereof or equal to the percentage obtained by dividing the
Denomination of such Certificate by the aggregate of the Denominations of all
Certificates of the same Class.
Periodic Rate Cap: The provision in each Mortgage Note that limits
permissible increases and decreases in the Mortgage Rate on any Adjustment Date
to not more than one percentage point.
Permitted Investments: One or more of the following:
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(i) Direct obligations of, and obligations fully guaranteed as
to timely payment of principal and interest by, the United States,
FHLMC, FNMA, the Farm Credit Banks (but only if acceptable to the
Rating Agencies), the Student Loan Marketing Association (but only with
respect to obligations backed by letters of credit or senior
obligations) or any agency or instrumentality of the United States the
obligations of which are backed by the full faith and credit of the
United States; provided, however, that no instrument or security
evidences a right to receive only interest payments or the right to
receive principal and interest payments derived from the underlying
investment which provides a yield to maturity in excess of 120% of the
yield to maturity at par of such underlying instrument;
(ii) Repurchase agreements with an entity whose unsecured
obligations are rated not less than " " by [ ] and " " by [ ] with
respect to any security described in clause (i) above or any other
security issued or guaranteed by an agency or instrumentality of the
United States, the obligations of which are backed by the full faith
and credit of the United States;
(iii) Federal funds, certificates of deposit, time deposit and
bankers' acceptances of any U.S. bank or trust company incorporated
under the laws of the United States or any state, provided that the
unsecured short term debt obligations of such bank or trust company
(or, in the case of the principal bank in a bank holding company
system, debt obligations of the bank holding company) at the date of
acquisition thereof have a rating of not less than " " from [ ] and " "
from [ ]; and money market funds investing exclusively in any of the
investments discussed in this definition of Permitted Investments;
(iv) Any demand or time deposit or certificate of
deposit which is fully insured by the FDIC; and
(v) Commercial paper of any corporation incorporated under the
laws of the United States or any state thereof which on the date of
acquisition has a rating of not less than " " from [ ] and " " from [
].
Permitted Transferee: Any Person other than (i) the United States, or
any State or any political subdivision thereof, or any agency or instrumentality
of any of the foregoing, (ii) a foreign government, international organization
or any agency or instrumentality of either of the foregoing, (iii) an
organization which is exempt from tax imposed by Chapter 1 of the Code
(including the tax imposed by section 511 of the Code on unrelated business
taxable income) (except certain farmers' cooperatives described
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in Code section 521), (iv) rural electric and telephone cooperatives described
in Code section 1381(a)(2)(C), (v) any Non-U.S. Person and (vi) any other Person
so designated by the Master Servicer based on an Opinion of Counsel to the
effect that any transfer to such Person may cause the Pool or any other Holder
of a Residual Certificate to incur tax liability that would not be imposed other
than on account of such transfer. The terms "United States", "State" and
"international organization" shall have the meanings set forth in Code section
7701 or successor provisions.
Person: Any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization or
government or any agency or political subdivision thereof.
Physical Certificates: As specified in the Preliminary
Statement.
Planned Principal Classes: As specified in the Preliminary
Statement.
Pool or Trust Fund: The corpus of the trust created by this Agreement,
to the extent described herein, consisting of the Mortgage Loans, such assets as
shall from time to time be identified as deposited in the Certificate Account,
in accordance with this Agreement, property which secured a Mortgage Loan and
which has been acquired by foreclosure or deed in lieu of foreclosure or
otherwise, the Primary Insurance Policies, and any Required Insurance Policy.
[Pool Insurance Policy: ].
[Pool Insurer: ].
Pool Scheduled Principal Balance: As to any Distribution Date, the
aggregate Scheduled Principal Balances of each Mortgage Loan that was an
Outstanding Mortgage Loan on the Due Date in the applicable month as to which
such determination is being made.
Prepayment Interest Shortfall: As to any Mortgage Loan and Principal
Prepayment, and as to any Liquidated Mortgage Loan, the amount by which one
month's interest at the related Net Mortgage Interest Rate on such Principal
Prepayment or the Scheduled Principal Balance of such Liquidated Mortgage Loan,
as the case may be, exceeds the amount of interest paid in connection with such
Principal Prepayments or interest at the related Net Mortgage Interest Rate for
the number of days in the month prior to the date such Liquidated Mortgage Loan
was liquidated, as the case may be.
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Primary Insurance Policy: Each primary policy of mortgage guaranty
insurance issued by a Qualified Insurer or any replacement policy therefor
referred to in Section 2.03(a)(viii).
Principal Only Certificates: As specified in the
Preliminary Statement.
Principal Prepayment: Any payment or other recovery of principal on a
Mortgage Loan (other than Liquidation Proceeds) which is received in advance of
its scheduled Due Date and is not accompanied by an amount as to interest
representing scheduled interest due on any date or dates in any month or months
subsequent to the month of prepayment.
Principal Prepayment in Full: Any Principal Prepayment of
the entire principal balance of a Mortgage Loan.
Private Certificates: As specified in the Preliminary
Statement.
Proprietary Lease: With respect to any Cooperative Unit,
means a lease or occupancy agreement between a Cooperative
Corporation and a holder of related Coop Shares.
Prospectus: The Prospectus Supplement together with the
related Prospectus dated _____________, 199_.
Prospectus Supplement: The Prospectus Supplement, dated
________, 199_, relating to the offering of the Senior Certif-
icates and the Mezzanine Certificates.
Purchase Price: As to any Defective Mortgage Loan repurchased on any
date pursuant to Section 2.02, 2.03 or 2.08, an amount equal to the sum of (i)
the unpaid principal balance thereof and (ii) the unpaid accrued interest
thereon at the applicable Mortgage Interest Rate from the Due Date to which
interest was last paid by the Mortgagor to the first day of the month following
the month in which such Mortgage Loan became eligible to be repurchased;
provided, however, that if at the time of repurchase the Seller is the Master
Servicer, the amount described in clause (ii) shall be computed at the Mortgage
Interest Rate net of the Master Servicing Fee Rate.
Qualified Insurer: A mortgage guaranty insurance company duly qualified
as such under the laws of the state of its principal place of business and each
state having jurisdiction over such insurer in connection with the insurance
policy issued by such insurer, duly authorized and licensed in such states to
transact a mortgage guaranty insurance business in such states and to write the
insurance provided by the insurance policy issued by it, approved as a
FNMA-approved mortgage insurer and
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having a claims paying ability rating of at least " " by [ ]. Any replacement
insurer with respect to a Mortgage Loan must have at least as high a claims
paying ability rating by [ ] and [ ] as the insurer it replaces had on the
Closing Date.
Rating Agency: Each of the Rating Agencies specified in the Preliminary
Statement. If either such organization or a successor is no longer in existence,
"Rating Agency" shall be such nationally recognized statistical rating
organization, or other comparable Person, as is designated by the Sponsor,
notice of which designation shall be given to the Trustee. References herein to
a given rating or rating category of a Rating Agency shall mean such rating
category without giving effect to any modifiers.
Recognition Agreement: With respect to any Cooperative Loan, an
agreement between the Cooperative Corporation and the originator of such
Mortgage Loan, to establish the rights of such originator in the Cooperative
Property.
Record Date: The last day of the month (or if such last day is not a
Business Day, the Business Day immediately preceding such last day) next
preceding the month of the related Distribution Date.
Reduced Scheduled Principal Balance: As to any Liquidated
Deficient Valuation Mortgage Loan, the Scheduled Principal Balance thereof
reduced by any Deficient Valuation at the time of the related Deficient
Valuation.
Reference Date: As defined in Section 5.09.
Regular Certificate: As specified in the Preliminary
Statement.
Relief Act: The Soldiers' and Sailors' Civil Relief Act of
1940, as amended.
Relief Act Reductions: With respect to any Distribution Date, for any
Mortgage Loan as to which there has been a reduction in the amount of interest
collectible thereon for the most recently ended calendar month as a result of
the application of the Relief Act, the amount, if any, by which (i) interest
collectible on such Mortgage Loan for the most recently ended calendar month is
less than (ii) interest accrued pursuant to the Mortgage Note on the same
principal amount and for the same period as the interest collectible on such
Mortgage Loan for the most recently ended calendar month.
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Remaining Liquidated Amount: As to any Distribution Date and Mortgage
Loan which became a Liquidated Mortgage Loan during the preceding calendar
month, the lesser of (a) Subordinate Percentage of the applicable Core
Percentage of the Scheduled Principal Balance of such Liquidated Mortgage Loan
and (b) the applicable Core Percentage of Net Liquidation Proceeds applied to
the reduction of the principal balance of such Liquidated Mortgage Loan, reduced
by the Senior Liquidated Amount for such Mortgage Loan without giving effect to
any reduction pursuant to clause (B) of the definition thereof.
REMIC: A "real estate mortgage investment conduit" within
the meaning of Section 860D of the Code.
REMIC Certificate Maturity Date: The "latest possible maturity date" of
the Regular Certificates as that term is defined in Section 2.07.
REMIC Change of Law: Any proposed, temporary or final regulation,
revenue ruling, revenue procedure or other official announcement or
interpretation relating to the REMIC and the REMIC Provisions issued after the
Closing Date.
REMIC Provisions: Provisions of the federal income tax law relating to
real estate mortgage investment conduits, which appear at Section 860A through
860G of Subchapter M of Chapter 1 of the Code, and related provisions, and
regulations promulgated thereunder, as the foregoing may be in effect from time
to time.
REO Mortgage Loan: Any defaulted Mortgage Loan which is not a
Liquidated Mortgage Loan and as to which the related Mortgaged Property is held
as part of the Pool.
REO Proceeds: Proceeds, net of any related expenses of the Master
Servicer, received in respect of any REO Mortgage Loan (including, without
limitation, proceeds from the rental of the related Mortgaged Property) which
are received prior to the final liquidation of such Mortgaged Property.
Required Insurance Policy: With respect to any Mortgage Loan, any
insurance policy which is required to be maintained from time to time under this
Agreement in respect of such Mortgage Loan.
Residual Certificates: The Certificates signed by the
Sponsor and countersigned by the Trustee, substantially in the
form of Exhibits B and E.
Responsible Officer: When used with respect to the Trustee,
any officer in its corporate trust department or successor group.
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S&P: Standard & Poor's Ratings Group.
Scheduled Principal Balance: As to any Mortgage Loan and Due Date, the
unpaid principal balance of such Mortgage Loan as of the Due Date as specified
in the amortization schedule at the time relating thereto (before any adjustment
to such amortization schedule by reason of any moratorium or similar waiver or
grace period) after giving effect to any previous Curtailments and to the
payment of principal due on such Due Date and irrespective of any delinquency in
payment by the related Mortgagor. For purposes of calculating the Allocated
Amounts, the Scheduled Principal Balance of a Mortgage Loan shall be zero
immediately following the Due Date in the month such Mortgage Loan becomes a
Liquidated Mortgage Loan or is required to be repurchased pursuant to Section
2.02 or 2.03.
Seller: [ ], as seller of the
Mortgage Loans under the Seller's Agreement as the context
requires.
Seller's Agreement: The Seller's Agreement dated as of
__________, 199_, between the Seller and Sponsor, as purchaser
with respect to the sale of the Mortgage Loans.
Senior Certificate: Any one of the Class A-1 and Class X Certificates
signed by the Sponsor and countersigned by the Trustee, substantially in the
form of Exhibits A and E, hereto.
[Senior Certificate Balance: As to any Distribution Date,
the aggregate of the Class Certificate Balances of all Classes of
Senior Certificates on such Distribution Date.]
Senior Percentage: With respect to any Distribution Date, the lesser of
(i) 100% and (ii) the percentage carried six places rounded up, obtained by
dividing the Class Certificate Balance of the Class A-1 Certificates,
immediately prior to such Distribution Date by the aggregate of the Scheduled
Principal Balances of the Mortgage Loans immediately prior to the Due Date in
the month of any such Distribution Date.
Senior Prepayment Percentage: [For any Distribution Date occurring
during the first five years beginning on the first Distribution Date shall be,
except as provided herein, equal to 100%. The Senior Prepayment Percentage for
any Distribution Date occurring on or after the fifth anniversary of the first
Distribution Date will be as follows: for any Distribution Date in the first
year thereafter the Senior Percentage for such Distribution Date plus 70% of the
Subordinate Percentage for such Distribution Date; for any Distribution Date in
the second year thereafter, the Senior Percentage for such Distribution Date
plus 60% of the Subordinate Percentage for such Distribution Date; in the third
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year thereafter, the Senior Percentage for such Distribution Date plus 40% of
the Subordinate Percentage for such Distribution Date; in the fourth year
thereafter, the Senior Percentage for such Distribution Date plus 20% of the
Subordinate Percentage for such Distribution Date; and for any Distribution Date
thereafter, the Senior Percentage for such Distribution Date (unless on any of
the foregoing Distribution Dates the Senior Percentage exceeds the initial
Senior Percentage, in which case the Senior Prepayment Percentage for such
Distribution Date will once again equal 100%). Notwithstanding the foregoing, no
reduction to the Senior Prepayment Percentage will occur if (i) as of the first
Distribution Date as to which any such reduction applies, the dollar amount of
all monthly payments on the Mortgage Loans due in each of the preceding six
months that are delinquent 60 days or more exceeds a monthly average of % of all
monthly payments due in such month (including for this purpose any Mortgage
Loans in foreclosure and Mortgage Loans with respect to which the related
Mortgaged Property has been acquired by the Trust Fund) and (ii) cumulative
Realized Losses with respect to the Mortgage Loans exceed (a) with respect to
the Distribution Date in on the fifth anniversary of the first Distribution Date
% of the Original Subordinate Certificate Balance, (b) with respect to the
Distribution Date on the sixth anniversary of the first Distribution Date, % of
the Original Subordinate Certificate Balance, (c) with respect to the
Distribution Date on the seventh anniversary of the first Distribution Date, %
of the Original Subordinate Certificate Balance, (d) with respect to the
Distribution Date on the eighth anniversary of the first Distribution Date, % of
the Original Subordinate Certificate Balance, and (e) with respect to the
Distribution Date on the ninth anniversary of the first Distribution Date, % of
the Original Subordinate Certificate Balance.]
Senior Principal Distribution Amount: As to any Distribution Date and
the Class A-1 Certificates, the sum of (a) the Senior Percentage of (i) all
scheduled payments of principal due on each Outstanding Mortgage Loan on the Due
Date for such Mortgage Loan in the month in which such Distribution Date occurs,
(ii) the Scheduled Principal Balance of each Mortgage Loan that was repurchased
by the Seller or another person on the related Certificate Account Deposit Date
pursuant to Sections 2.02 or 2.03, (iii) the Substitution Adjustment Amount in
connection with any substitution of the Mortgage Loans on the related
Certificate Account Deposit Date pursuant to Section 2.04, (iv) Liquidation
Proceeds received during such preceding calendar month and allocable to
recoveries of principal of Mortgage Loans that are not yet Liquidated Mortgage
Loans, and (v) the Scheduled Principal Balance of each Mortgage Loan that became
a Liquidated Mortgage Loan during the month preceding the month of such
Distribution Date and (b) the Senior Prepayment
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Percentage of all Curtailments and all Principal Prepayments in Full for such
Distribution Date.
Servicer: Any Person with which the Master Servicer has
entered into a Servicing Agreement and which satisfies the
requirements set forth therein.
Servicing Fee: The amount payable to the Servicers pursuant
to Section 3.12 hereof.
Servicing Fee Rate: With respect to any Mortgage Loan, the
rate specified as such on the Mortgage Loan Schedule.
Servicing Officer: Any officer of the Master Servicer involved in, or
responsible for, the administration and servicing of the Mortgage Loans whose
name appears on a list of servicing officers furnished to the Trustee by the
Master Servicer, as such list may from time to time be amended.
Special Hazard Coverage Termination Date: The point of time
at which the Special Hazard Loss Coverage Amount is reduced to
zero.
Special Hazard Event: As to a Mortgaged Property, any loss on account
of direct physical loss, exclusive of (i) any loss covered by a hazard policy or
a flood insurance policy maintained in respect of such Mortgaged Property
pursuant to Section 3.11 and (ii) any loss caused by or resulting from:
(a) (i) wear and tear, deterioration, rust or
corrosion, mold, wet or dry rot; inherent vice or latent
defect; animals, birds, vermin, insects;
(ii) settling, subsidence, cracking, shrinkage,
building or expansion of pavements, foundations, walls,
floors, roofs or ceilings.
(b) errors in design, faulty workmanship or
faulty materials, unless the collapse of the property
or a part thereof ensues and then only for the ensuing
loss;
(c) nuclear or chemical reaction or nuclear radiation
or radioactive or chemical contamination, all whether
controlled or uncontrolled, and whether such loss is direct or
indirect, proximate or remote or be in whole or in part caused
by, contributed to or aggravated by a peril insured against in
the Special Hazard Insurance Policy; and
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(d) (i) hostile or warlike action in time of peace or
war, including action in hindering, combating or defending
against an actual, impending or expected attack (a) by any
government or sovereign power (de jure or de facto), or by any
authority maintaining or using military, naval or air forces;
or (b) by military, naval or air forces; or (c) by an agent of
any such government, power, authority or forces;
(ii) any weapon or war or facility for producing
same employing atomic fission, radioactive force or chemical
or biological contaminants, whether in time of peace or war;
(iii) insurrection, rebellion, revolution, civil
war, usurped power or action taken by governmental authority
in hindering, combating or defending against such an
occurrence, seizure or destruction under quarantine or customs
regulations, confiscation by order of any government or public
authority, or risks of contraband or illegal transportation or
trade.
Special Hazard Fee: As to any Distribution Date and Mortgage Loan,
one-twelfth of the Special Hazard Fee Rate on the Scheduled Principal Balance of
such Mortgage Loan on the first day of the month preceding such Distribution
Date.
Special Hazard Fee Rate: With respect to any Mortgage Loan,
- -----%.
Special Hazard Insurance Policy: The Special Hazard Insurance Policy
issued by the Special Hazard Insurer insuring the Mortgage Loans and all
amendments or endorsements thereto, or any replacement policy obtained by the
Master Servicer pursuant to Section 3.20 hereof.
Special Hazard Insurer: [ ], or any successor
thereto or the named insurer in any replacement policy obtained
by the Master Servicer pursuant to Section 3.20 hereof.
Special Hazard Loss Coverage Amount: [As to any Distribution Date, the
lesser of (a) the greatest of (i) 1% of the aggregate principal balance of the
Mortgage Loans, (ii) twice the principal balance of the largest Mortgage Loan,
and (iii) the aggregate principal balance of all Mortgage Loans secured by the
Mortgage Properties located in the single [State] postal zip code having the
highest aggregate principal balance of any zip code area, all principal balances
to be calculated as of the first day of the month preceding such Distribution
Date after giving effect to scheduled installments of principal and interest on
the Mortgage Loans then due, whether or not paid and (b) $__________,
reduced (but not below zero) by the amount of Net Realized Losses in respect of
Special Hazard Mortgage Loans previously incurred during the period from the
Cut-Off Date through the last day of the month preceding the month of such
Distribution Date.] The
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Special Hazard Loss Coverage Amount may be further reduced from time to time
below the amounts specified above with the written consent of the Rating
Agencies and without resulting in a downgrading to the then current rating of
the Certificates.
Special Hazard Mortgage Loan: Any Liquidated Mortgage Loan
as to which the ability to recover thereon was substantially
impaired by reason of a Special Hazard Event.
Splinter Loss: A Net Realized Loss (x) with respect to a Special Hazard
Mortgage Loan or a Fraud Loan or (y) specified in subclauses (b) and (c) of the
definition of Net Realized Loss.
Subordinate Certificate: Any one of the Class M-1, Class B-1 or Class
B-2 Certificates signed by the Sponsor and countersigned by the Trustee,
substantially in the form of Exhibits D and E, hereto.
Subordinate Percentage: As of any Distribution Date, 100% minus the
Senior Percentage for such Distribution Date.
Subordinate Percentage Allocation: For any Distribution Date and Class
of Subordinate Certificates, a fraction, the numerator of which is the related
Class Certificate Balance immediately prior to such date and the denominator of
which is the aggregate of the Class Certificate Balances of all Subordinate
Certificates immediately prior to such date.
Subordinate Prepayment Percentage: As to any Distribution
Date, 100% minus the Senior Prepayment Percentage for such
Distribution Date.
Subordinate Prepayment Percentage Allocation: As to any Distribution
Date and any Class of Subordinate Certificates, the portion of the Subordinate
Prepayment Percentage allocated to such Class equal to the Subordinate
Prepayment Percentage for such Distribution Date multiplied by a fraction the
numerator of which is the Class Certificate Balance of any such Class and the
denominator of which is the aggregate Class Certificate Balance of the
Subordinate Certificates.
Subordinate Principal Distribution Amount: As to any Distribution Date
and each Class of Subordinate Certificates, the sum of (a) the Subordinate
Percentage Allocation of the sum of (i) all scheduled payments of principal due
on each Outstanding Mortgage Loan on the Due Date for such Mortgage Loan in the
month in which such Distribution Date occurs, (ii) the Scheduled Prin-
cipal Balance of each Mortgage Loan that was repurchased by the Seller or
another person on the related Certificate Account Deposit Date pursuant to
Section 2.02 or 2.03, (iii) the Substitution Adjustment Amount in connection
with any substitution of
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Mortgage Loans on the related Certificate Account Deposit Date pursuant to
Section 2.04, (iv) Liquidation Proceeds received during such preceding calendar
month and allocable to recoveries of principal of Mortgage Loans that are not
yet Liquidated Mortgage Loans, and (v) the Scheduled Principal Balance of each
Mortgage Loan that became a Liquidated Mortgage Loan during the month preceding
the month of such Distribution Date and (b) the Subordinate Prepayment
Percentage Allocation of all Curtailments and all Principal Prepayments in Full
for such Distribution Date.
Substitute Mortgage Loan: A Mortgage Loan delivered to the Trustee on a
Substitution Date pursuant to Section 2.04 hereof for which all payments of
principal and interest due on or before the Substitution Date have been received
and which has the following characteristics:
(a) (i) a Mortgage Interest Rate at least equal to and not
more than 2% greater than that of the Mortgage Loan for which it is
being substituted and (ii) Loan-to-Value Ratio not greater than that of
the Mortgage Loan for which it is being substituted;
(b) a date of maturity no later than, and no more than one
year prior to, that of the Mortgage Loan or Mortgage Loans for which it
is being substituted; and
(c) an original term to maturity equal to that of the Mortgage
Loan or Mortgage Loans for which it is being substituted.
Any Substitute Mortgage Loan with a Mortgage Interest Rate greater but
not more than 2% greater than that of the Mortgage Loan for which it is being
substituted shall be treated for all purposes under this Agreement as though it
had the same Net Mortgage Interest Rate as the Mortgage Loan for which it is
being substituted.
Substitution Adjustment Amount: The meaning ascribed to such term
pursuant to Section 2.04(b).
Substitution Date: The meaning ascribed to such term pursuant to
Section 2.04(b).
Supplemental Mortgage Loan Schedule: As defined in Section 2.04(b).
Targeted Principal Classes: As specified in the Preliminary Statement.
Tax Matters Person: The person designated as "tax matters person" in
the manner provided under Treasury regulations
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ss. 1.860F-4(d) and temporary Treasury regulation ss. 301.6231(a)(7)-IT.
Initially, the Tax Matters Person shall be ---------------.
Tax Matters Person Certificate: The Class R Certificate with a
denomination of __________.
Trust Fund or Pool: See definition of Pool.
Trustee Fee: The amount payable to the Trustee pursuant to an
agreement between the Trustee and the Master Servicer.
Trustee Fee Rate: With respect to any Mortgage Loan, the rate
specified in the agreement between the Trustee and the Master Servicer.
Underwriter: _____________ as underwriter of the public offering of
the Regular Certificates.
Voting Rights: The portion of the voting rights of all of the
Certificates which is allocated to any Certificate. As of any date of
determination, (a) 1% of all Voting Rights shall be allocated to each Class of
Notional Amount Certificates, if any (such Voting Rights to be allocated among
the holders of Certificates of each such Class in accordance with their
respective Percentage Interests), and (b) the remaining Voting Rights (or 100%
of the Voting Rights if there is no Class of Notional Amount Certificates) shall
be allocated among Holders of the remaining Classes of Certificates in
proportion to the Certificate Balances of their respective Certificates on such
date.
Withdrawal Date: As to any Distribution Date, the Business Day
preceding such Distribution Date.
[Yield Maintenance Premium: The amount payable as a prepayment penalty
or yield maintenance premium by a Mortgagor in connection with the prepayment in
whole or in part of a Mortgage Loan.]
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ARTICLE II
Conveyance of Mortgage Loans;
Original Issuance of Certificates
Section 2.01. Conveyance of Mortgage Loans. (a) The Sponsor,
concurrently with the execution and delivery of this Agreement, does hereby
sell, transfer, assign, set over and otherwise convey to the Trustee without
recourse all the right, title and interest of the Sponsor in and to the Mortgage
Loans and the Mortgage Notes, including all interest and principal received on
or with respect to the Mortgage Loans (other than payments of principal and
interest due and payable on the Mortgage Loans on or before the Cut-Off Date)
together with the Sponsor's rights under the Seller's Agreement, the
representations and warranties of the Seller thereunder together with all rights
of the Sponsor to require the Seller to cure any breach thereof or to repurchase
or substitute for any affected Mortgage Loan in accordance with the Seller's
Agreement and any proceeds of the foregoing.
(b) In connection with the above transfer and assignment, the Sponsor
hereby deposits with the Trustee, with respect to each Mortgage Loan, (i) the
original Mortgage Note, endorsed without recourse to the order of the Trustee
and showing an unbroken chain of endorsements from the original payee thereof to
the Person endorsing it to the Trustee, (ii) the original Mortgage, which shall
have been recorded, with evidence of such recording indicated thereon, (iii) the
assignment (which may be in the form of a blanket assignment if permitted in the
jurisdiction in which the Mortgaged Property is located) to the Trustee of the
Mortgage, with evidence or recording with respect to each Mortgage Loan in the
name of the Trustee thereon, (iv) all intervening assignments of the Mortgage,
if any, to the extent available to the Sponsor with evidence of recording
thereon, (v) the original or a copy of the policy or certificate of primary
mortgage guaranty insurance, to the extent available, if any, (vi) the original
policy of title insurance or mortgagee's certificate of title insurance or
commitment or binder for title insurance and (vii) originals of all assumption
and modification agreements, if any; provided, however, that in lieu of the
foregoing, the Sponsor may deliver the following documents, under the
circumstances set forth below: (x) in lieu of the original policy of title
insurance, the Sponsor may deliver a binder or commitment therefor, or, in
California, a preliminary title report, or, in Iowa, an attorney's certificate;
(y) in lieu of the original Mortgage or intervening assignments thereof or
assumption or modification agreements which have been delivered or are being
delivered to recording offices for recording and have not been returned to the
Sponsor in time to permit their
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delivery as specified above, the Sponsor may deliver a true copy thereof with a
certification by Headlands or the title company issuing the commitment for title
insurance, on the face of such copy, substantially as follows: "Certified to be
a true and correct copy of the original, which has been transmitted for
recording"; and (z) in lieu of the Mortgage, assignment to the Trustee or
intervening assignments thereof or assumption or modification agreements, if the
original has been lost or the applicable jurisdiction retains the originals of
such documents (as evidenced by a certification from Headlands to such effect)
the Sponsor may deliver photocopies of such documents containing an original
certification by the judicial or other governmental authority of the
jurisdiction where such documents were recorded; and provided, further, however,
that in the case of Mortgage Loans which have been prepaid in full after the
Cut-Off Date and prior the Closing Date, the Sponsor, in lieu of delivering the
above documents, may deliver to the Trustee a certification of a Servicing
Officer to such effect and shall deposit all amounts paid in respect of such
Mortgage Loans in the Certificate Account on the Closing Date. The Sponsor shall
deliver such original documents (including any original documents as to which
certified copies had previously been delivered) or such certified copies
together with the original title insurance policy (or, if a master title policy
has been issued by the title insurer, a mortgagee's certificate of title
insurance) if a title insurance binder or commitment or other assurance of title
was originally deposited, to the Trustee promptly after they are received. The
Master Servicer shall cause, at its expense, the Mortgage and intervening
assignments, if any, and the assignment of the Mortgage to the Trustee to be
recorded not later than 270 days after the Closing Date.
Section 2.02. Acceptance by Trustee. The Trustee acknowledges receipt
of the documents referred to in Section 2.01 subject to the examination referred
to below, and declares that the Trustee holds and will hold such documents in
trust, upon the terms herein set forth, for the use and benefit of all present
and future Certificateholders. The Trustee agrees, for the benefit of
Certificateholders, to have the Custodian review each Mortgage File within 90
days after execution and delivery of this Agreement, to ascertain that all
required documents have been executed, received and recorded, if applicable, and
that such documents relate to the Mortgage Loans identified in Exhibit F hereto.
In performing such review, the Trustee may rely upon the purported genuineness
and due execution of any such document and on the purported genuineness of any
signature thereon. If in the course of such review the Trustee finds any
document or documents constituting a part of a Mortgage File to have been
omitted or be defective in any material respect, the Trustee shall promptly so
notify the Master Servicer, the Seller and the Sponsor. The Master Servicer
shall promptly request that the Seller correct or
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cure such omission or defect within 90 days from the date the Seller was
notified of such omission or defect and, if the Seller does not correct or cure
such omission or defect within such period, the Seller shall purchase such
Mortgage Loan from the Trustee (i) on the Distribution Date in the month
following the month in which such 90-day period expired at the Purchase Price of
such Mortgage Loan or (ii) upon the expiration of such 90-day period if the
omission or defect would result in the related Mortgage Loan not being a
Qualified Mortgage Loan for purposes of Section 860G(a)(3) of the Code;
provided, however, that if such defect relates solely to the inability of Seller
to deliver the original Security Instrument or intervening assignments thereof
or assumption or modification agreement, or a certified copy because the
originals of such documents, or a certified copy have not been returned by the
applicable jurisdiction, Seller shall not be required to purchase such Mortgage
Loan if Seller delivers such original documents or certified copy promptly upon
receipt, but in no event later than 270 days after the Closing Date. The
Purchase Price for the purchased Mortgage Loan shall be deposited in the
Certificate Account no later than the related Certificate Account Deposit Date
and, upon receipt by the Trustee of written notification of such deposit signed
by an officer of the Seller, the Trustee shall release to the applicable Seller
the related Mortgage File and the Trustee shall execute and deliver such
instruments of transfer or assignment, in each case without recourse, as shall
be necessary to vest in the Seller or its designee any Mortgage Loan released
pursuant hereto. It is understood and agreed that the obligation of the Seller
to purchase any Mortgage Loan as to which a material defect in or omission of a
constituent document exists shall constitute the sole remedy against the Seller
respecting such defect or omission available to Certificateholders or the
Trustee on behalf of Certificateholders. An Opinion of Counsel to the effect set
forth in Section 2.04(d) shall be delivered to the Trustee in connection with
any such repurchase.
Section 2.03. Representations and Warranties of the Seller, Headlands,
the Sponsor and the Trustee. (a) The Seller hereby represents and warrants to
the Trustee, as to the Mortgage Loans sold by it to the Sponsor, that:
(i) As of the Cut-Off Date, no Mortgage Loan is 30
days or more delinquent in payment of principal and interest
and no Mortgage Loan was 30 days;
(ii) The information set forth in Exhibit F hereto with
respect to each Mortgage Loan is true and correct in all material
respects at the date or dates respecting which such information is
furnished;
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(iii) As of the Closing Date, and prior to the transfer
of the Mortgage Loans to the Sponsor, the Seller had good title to the
Mortgage Loans and the Mortgage Notes were subject to no offsets,
defenses or counterclaims;
(iv) Each Mortgage Loan was originated by (a) an
institution which is a member of the Federal Reserve system or the
deposits of which are insured by the FDIC, or (b) an institution which
is an "approved mortgagee" by the Federal Housing Administration;
(v) Each Mortgage Loan was originated in compliance
with all applicable state and federal laws including usury, equal
credit opportunity, disclosure and recording laws;
(vi) Other than with respect to Mortgaged Property
underlying a Cooperative Loan, the Mortgage Loans are conventional,
[fixed rate], [adjustable rate] mortgage loans with original terms to
maturity of months; each Mortgage Note is payable in monthly
installments of principal and interest, with interest payable in
arrears on a monthly basis;
(vii) As of the Closing Date, the issuer of each Primary
Insurance Policy is a Qualified Insurer and each such policy is valid
and remains in full force and effect;
(viii) A lender's title policy (or preliminary report
(binder)) or opinion of title was issued on the date of the origination
of each Mortgage Loan and each such policy or other evidence of title
is valid and remains in full force and effect;
(ix) As of the Closing Date, [and any Mortgage Loan that
is not a Cooperative Loan,] each related Mortgage is a valid first lien
on the related Mortgaged Property (subject only to (a) liens for
current real property taxes and special assessments not yet due and
payable, (b) covenants, conditions and restrictions, rights of way,
easements and other matters of public record as of the date of
recording of such Mortgage, such exceptions appearing of record being
acceptable to mortgage lending institutions generally or specifically
reflected in the mortgage originator's appraisal, and (c) other matters
to which like properties are commonly subject which either individually
or in the aggregate do not materially interfere with the benefits of
the security intended to be provided by the Mortgage);
(x) As of the Closing Date, each Mortgaged Property
is free of damage and is in good repair;
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(xi) As of the Closing Date, there are no delinquent
tax or assessment liens against any Mortgaged Property;
(xii) Each Mortgage Property is a [single family]
[multifamily] residential property containing [no more than four units]
[five or more units];
(xiii) Each Mortgage Note has been endorsed to the Trustee
in a form and in a manner sufficient to convey to the Trustee all
right, title and interest therein of the Seller in all relevant
jurisdictions;
(xiv) Each Mortgage Loan is secured by a fee simple
interest in the related Mortgaged Property [and not by a
leasehold interest];
[(xv Each Cooperative Loan is secured by a valid,
subsisting and enforceable perfected first lien and security interest
in the related Mortgaged Property, subject only to (i) the rights of
the Cooperative Corporation to collect Maintenance and assessments from
the Mortgagor, (ii) the lien of the Blanket Mortgage, if any, on the
Cooperative Property and of real property taxes, water and sewer
charges, rents and assessments on the Cooperative Property not yet due
and payable, and (iii) other matters to which like Cooperative Units
are commonly subject which do not materially interfere with the
benefits of the security intended to be provided by the Security
Agreement or the use, enjoyment, value or marketability of the
Cooperative Unit. Each original UCC financing statement, continuation
statement or other governmental filing or recordation necessary to
create or preserve the perfection and priority of the first priority
lien and security interest in the Coop Shares and Proprietary Lease has
been timely and properly made. Any security agreement, chattel mortgage
or equivalent document related to the Cooperative Loan and delivered to
the Sponsor or its designee establishes in the Seller a valid and
subsisting perfected first lien on and security interest in the
property described therein, and the Seller has full right to sell and
assign the same;] and
(xvi As of the Closing Date, all policies of insurance
covering the Seller or any Servicer, and required by this Agreement or
by a Servicing Agreement have been validly issued and remain in full
force and effect.
It is understood and agreed that the representations and warranties set
forth in this Section 2.03(a) shall survive delivery of the respective Mortgage
Files to the Trustee or any Custodian.
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Upon discovery by any of the Sponsor, the Master Servicer or the
Trustee of a breach of any of the representations and warran-ties set forth in
this Section 2.03(a) which materially and adversely affects the value of the
Mortgage Loans or the interests of the Certificateholders in the related
Mortgage Loan, the party discovering such breach shall give prompt written
notice to the other parties. Within 60 days of its discovery or its receipt of
notice of breach, or, with the prior written consent of a Responsible Officer of
the Trustee, such longer period specified in such consent, the Seller shall cure
such breach in all material respects or shall purchase the Mortgage Loan from
the Trustee. Any such purchase by the Seller shall, in the case of a breach of a
representation or warranty, be at the Purchase Price, and in each case shall be
accomplished in the manner set forth in Section 2.02. It is understood and
agreed that the obligation of the Seller to purchase any Mortgage Loan as to
which such a breach has occurred and is continuing shall constitute the sole
remedy against the Seller respecting such breach available to Certificateholders
or the Trustee on behalf of Certificateholders. An Officers' Certificate and
Opinion of Counsel to the effect set forth in Section 2.04(d) shall be delivered
to the Trustee in connection with any such repurchase.
(b) Pursuant to Section 2.01, the Sponsor has hereby assigned,
transferred and conveyed to the Trustee its rights under the Seller's Agreement,
including without limitation, the representations, warranties and covenants of
the Seller therein and set forth in Section 2.03(a), together with all rights of
the Sponsor to require the Seller to cure any breach thereof or to repurchase or
substitute for any affected Mortgage Loan in accordance with the Seller's
Agreement and the Trustee hereby accepts such assignment. It is understood and
agreed that the representations, warranties and covenants so assigned shall
survive delivery of the respective Mortgage Files to the Trustee.
(c) The Sponsor hereby represents and warrants to the Trustee as
follows:
(i) The Sponsor has entered into the Seller's Agree-
ment with the Seller from which it acquired the Mortgage Loans;
(ii) The Seller has made the foregoing representations,
warranties and covenants in the Seller's Agreement as to the Mortgage
Loans sold by it to the Sponsor and that such representations,
warranties and covenants run to and are for the benefit of the
Sponsor;
(iii) Pursuant to Section 2.01 and 2.03(b) of this
Agreement the Sponsor has transferred and assigned to the Trustee
all rights of the Sponsor to cause the Seller to
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repurchase a Mortgage Loan in the event of a breach of the foregoing
representations, warranties and covenants and that the each Seller has
agreed to repurchase a Mortgage Loan as to which there has occurred an
uncured breach of such representations, warranties and covenants in
accordance with the provisions of the Seller's Agreement;
(iv) Immediately prior to the delivery of the Mortgage
Loans to the Trustee on the Closing Date, the Sponsor will own
full legal and equitable title to each Mortgage Loan and will have
good and marketable title thereto free and clear of any equity, lien,
encumbrance, pledge, charge, security interest or other claim. Upon
endorsement and delivery to the Trustee of the executed original
Mortgage Notes and execution and delivery of the related assignments
of all of the Mortgages by the Sponsor in favor of the Trustee, all of
the Sponsor's right, title and interest in and to the Mortgage Loans
will be validly and effectively transferred to the Trustee free
and clear of any equity, lien, encumbrance, pledge, charge,
security interest or other claim; and
(v) Except as otherwise described in the
Prospectus Supplement, each Mortgage Loan was underwritten in
accordance with the applicable Seller's standards applicable at the
time the Sponsor acquired such Mortgage Loan, and that the
Seller meets all the requirements of an approved seller for the
loan purchase program and has complied with all the terms, conditions
and requirements for the sale for Mortgage Loans set forth in the
Seller's Agreement.
(d) The Trustee hereby represents and warrants to the
Master Servicer, as of the Closing Date, that:
(i) The Trustee is a [national] banking [association] in
good standing under the [federal] banking laws of [the United States];
(ii) The Trustee has full power, authority and legal
right to execute and deliver this Agreement and to authenticate the
Certificates and to perform its obligations under this Agreement and
the Certificates, and has taken all necessary action to authorize the
execution, delivery and performance by it of this Agreement and the
authentication and performance of the Certificates; and
(iii) To the best of the Trustee's knowledge, after
reasonable investigation, the execution and delivery by the Trustee of
this Agreement and the authentication of Certificates and the
performance by the Trustee of its obligations under this Agreement and
the Certificates will not violate any provision of any law or
regulation governing
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the Trustee or any order, writ, judgment or decree of any court,
arbitrator or governmental authority or agency applicable to the
Trustee or any of its assets. To the best of the Trustee's knowledge,
after reasonable investigation, such execution, delivery,
authentication and performance will not require the authorization,
consent or approval of, the giving of notice to, the filing or
registration with, or the taking of any other action with respect to,
any governmental authority or agency regulating the activities of
national banking associations. To the best of the Trustee's knowledge,
after reasonable investigation, such execution, delivery,
authentication and performance will not conflict with, or result in a
breach or violation of, any material indenture, mortgage, deed of
trust, lease or other agreement or instrument to which the Trustee is
bound.
(e) Headlands, as Master Servicer and Seller, hereby represents and
warrants to the Trustee as of the Closing Date that:
(i) It is a corporation duly organized, validly
existing and in good standing under the laws of the state of its
incorporation and is in good standing as a foreign corporation in each
jurisdiction where such qualification is necessary and throughout the
term of this Agreement will remain a corporation duly organized,
validly existing and in good standing under the laws of the state of
its incorporation or any state of reincorporation and in good standing
as a foreign corporation in each jurisdiction where such qualification
is necessary (except, in the case of foreign corporation qualification
both on the date hereof and in the future, where the failure so to
qualify would not reasonably be expected to have a material adverse
effect on the Master Servicer's ability to enter into this Agreement or
to perform its obligations hereunder), and has the corporate power and
authority to perform its obligations under this Agreement;
(ii) The execution and delivery of this Agreement have
been duly authorized by all requisite corporate action;
(iii) This Agreement, assuming due authorization,
execution, and delivery by the other parties hereto, will constitute
its legal, valid and binding obligation, enforceable in accordance with
its terms, except only as such enforcement may be limited by applicable
Debtor Relief Laws and that certain equitable remedies may not be
available regardless of whether enforcement is sought in equity or at
law;
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(iv) Its execution and delivery of this Agreement and
its performance and compliance with the terms of this
Agreement will not (A) violate its certificate of incorporation or
bylaws (B) to its knowledge, violate any law or regulation, or any
administrative or judicial decree or order to which it is subject or
(C) constitute a default (or an event which, with notice or lapse of
time, or both, would constitute a default) under, or result in the
breach of, any material contract, agreement or other instrument to
which it is a party or which may be applicable to it or any of its
assets;
(v) To its best knowledge, after reasonable
investigation, it is not in default with respect to any order or decree
of any court or any order, regulation or demand of any federal, state,
municipal or governmental agency, which default would reasonably be
expected to have consequences that would materially and adversely
affect its financial condition or operations or its performance
hereunder;
(vi) It does not believe, nor does it have any reason or
cause to believe, that it cannot perform each and every covenant
contained in this Agreement to be performed by it;
(vii) The consummation of the transactions contemplated
by this Agreement are in the ordinary course of its business;
(viii) No litigation is pending or, to its best knowledge,
threatened against it, which could be reasonably expected to materially
and adversely affect its entering into this Agreement or performing its
obligations under this Agreement or which would have a material adverse
effect on its financial condition; and
(ix) As to each Mortgage Loan, the Seller's Agreement
is in full force and effect.
Section 2.04. Substitution of Mortgage Loans. (a) On a Distribution
Date within two years following the Closing Date and which is on or before the
date on which the Seller would otherwise be required to repurchase a Mortgage
Loan under Section 2.01 or 2.02, the Seller may deliver to the Trustee one or
more Substitute Mortgage Loans in substitution for any one or more of the
Original Mortgage Loans which the Seller would otherwise be required to
repurchase pursuant to Sections 2.02 and 2.03; provided, however, that:
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(1) Substitute Mortgage Loans must have an aggregate
unpaid principal balance not greater than, nor more
than 30% less than the Scheduled Principal Balance of
the Original Mortgage Loans for which they will be
substituted; and
(2) Substitute Mortgage Loans will not have a scheduled
maturity date later than the latest maturity date of
any Mortgage Loan prior to any such substitution;
(b) The Seller shall notify the Master Servicer and the Trustee in
writing not less than five Business Days before the related Distribution Date
which is on or before the date of which the Seller would otherwise be required
to repurchase such Mortgage Loan pursuant to Section 2.02 or 2.03 of its
intention to effect a substitution under this Section. On such Distribution Date
(the "Substitution Date"), the Seller shall deliver to the Trustee (1) the
Substitute Mortgage Loans to be substituted for the Original Mortgage Loans, (2)
a list of the Original Mortgage Loans to be substituted for by such Substitute
Mortgage Loans, (3) an Officers' Certificate (A) stating that no failure by the
Master Servicer described in Section 8.01 shall have occurred and be continuing,
(B) stating that the aggregate principal balance of all Substitute Mortgage
Loans (determined with respect to each Substitute Mortgage Loan as of the
Distribution Date on which it was substituted) including the principal balance
of Substitute Mortgage Loans being substituted on such Distribution Date does
not exceed an amount equal to 5% of the aggregate principal balance of all
Mortgage Loans as of the Closing Date, (C) stating that all conditions precedent
to such substitution specified in subsection (a) have been satisfied and
attaching as an exhibit a supplemental Mortgage Loan schedule (the "Supplemental
Mortgage Loan Schedule") setting forth the same type of information as appears
on the Mortgage Loan Schedule and representing as to the accuracy thereof and
(D) confirming that the representations and warranties contained in Section 2.03
(excluding paragraph (ii) of Section 2.03(a)) are true and correct in all
material respects with respect to the Substitute Mortgage Loans on and as of
such Distribution Date, provided that remedies for the inaccuracy of such
representations are limited as set forth in Sections 2.02, 2.03 and this Section
2.04, (4) an Opinion of Counsel and Officers' Certificate to the effect set
forth below and (5) a certificate stating that cash in the amount by which the
aggregate unpaid principal balance of the Substitute Mortgage Loans is less than
the Scheduled Principal Balance of the Mortgage Loans for which they are being
substituted (which amount cannot be more than 15% of the Scheduled Principal
Balance of the Mortgage Loans for which they are being substituted) has been
deposited in the Certificate Account no later than the related Certificate
Account Deposit Date (such amount, the "Substitution Adjustment Amount").
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Upon receipt of the foregoing, the Trustee shall release such Original Mortgage
Loans to the Seller.
(c) Concurrently with the satisfaction of the conditions set forth in
Section 2.04(a) and (b) above and the grant of such Substitute Mortgage Loans to
the Trustee pursuant to Section 2.04(a) above, Exhibit F to this Agreement shall
be deemed to be amended to exclude all Mortgage Loans being replaced by such
Substitute Mortgage Loans and to include, the information set forth on the
Supplemental Mortgage Loan Schedule with respect to such Substitute Mortgage
Loans, and all references in this Agreement to Mortgage Loans shall include such
Substitute Mortgage Loans.
[(d) In connection with any Mortgage Loan that the Seller is required
to purchase or replace, the Seller shall deliver to the Trustee an Opinion of
Counsel to the effect that such purchase or substitution will not cause (x) any
federal tax to be imposed on the REMIC, including without limitation, any
Federal tax imposed on "prohibited transactions" under Section 860F(a)(1) of the
Code or on "contributions after the start-up day" under Section 860G(d)(1) of
the Code or (y) any portion of the Trust Fund to fail to qualify as a REMIC at
any time that any Certificate is outstanding. In the event that such opinion or
certificate indicates that a repurchase or substitution will result in the
imposition of a prohibited transaction tax, give rise to net taxable income or
be deemed a contribution to the REMIC after the "start-up day", the Seller shall
not be required to repurchase or replace any such Mortgage Loan unless and until
the Master Servicer has determined there is an actual or imminent default with
respect thereto or that such defect or breach adversely affects the
enforceability of such Mortgage Loan.]
Section 2.05. Designation of Interests in REMIC. (a) The Regular
Certificates are hereby designated as the "regular interests" and the Residual
Certificates are hereby designated as the single "residual interest" in the
REMIC for purposes of the REMIC Provisions.
(b) The Holder of the Residual Certificate is hereby designated as "tax
matters person" with respect to the REMIC for purposes of the REMIC Provisions.
Section 2.06. Designation of Start-up Day. The Closing Date is hereby
designated as the "start-up day" of the REMIC within the meaning of Section
860G(a)(9) of the Code.
Section 2.07. REMIC Certificate Maturity Date. Solely for purposes of
satisfying Section 1.860G-1(a)(4)(iii) of the Treasury Regulations, the "latest
possible maturity date" of each
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Class of Regular Certificates is the Distribution Date in _________, 20__.
[Section 2.08. Purchase of Converted Mortgage Loans. On the Business
Day immediately preceding the Due Date on which a Convertible Mortgage Loan
becomes a Converted Mortgage Loan, the Master Servicer shall notify the Sponsor
and the Trustee in writing that such Mortgage Loan has become a Converted
Mortgage Loan. The [Seller] [Master Servicer] shall purchase such Converted
Mortgage Loan from the Trust Fund by paying to the [Master Servicer] [Trustee]
for the benefit of the Trustee the applicable Purchase Price on or before the
Certificate Account Deposit Date occurring in the month of such Due Date and the
Trustee shall enforce such obligation. The Purchase Price for such Converted
Mortgage Loan shall be deposited by the [Master Servicer] [Trustee] in the
Certificate Account and, upon receipt by the Trustee of written notification of
such deposit signed by a Servicing Officer, the Trustee shall release to the
[Seller] [Master Servicer] the related Mortgage File and shall execute and
deliver such instruments of transfer or assignment, in each case without
recourse, as shall be necessary to vest in the [Seller] [Master Servicer] or its
designee or assignee title to any Mortgage Loan released pursuant hereto. The
termination of the Master Servicer obligation as Master Servicer shall not
terminate its obligation to purchase Converted Mortgage Loans pursuant to
Section 2.05. [Any successor Master Servicer under this Agreement, including,
without limitation, the Trustee acting in such capacity, shall not be required
to purchase any Converted Mortgage Loan.] In the event the [Seller] [Master
Servicer] defaults upon its obligation to repurchase any Converted Mortgage
Loan, and such default remains unremedied for a period of ten Business Days
after written notice of such default shall have been given by the Trustee to the
[Seller] [Master Servicer], the Trustee shall use its best efforts to cause such
Converted Mortgage Loan to be sold at a price equal to the Purchase Price for
settlement as soon as practicable thereafter. Any such Converted Mortgage Loan
which is not purchased by the [Seller] [Master Servicer] and which the Trustee
is unable to sell at the Purchase Price shall remain in the Trust Fund.]
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ARTICLE III
Administration and Servicing
of Mortgage Loans
Section 3.01. The Master Servicer to Act as Servicer. The Master
Servicer shall service and administer the Mortgage Loans and shall have full
power and authority, acting alone and/or through Servicers, to do any and all
things in connection with such servicing and administration which it may deem
necessary or desirable in connection therewith. Without limiting the generality
of the foregoing, the Master Servicer in its own name is hereby authorized and
empowered by the Trustee, to execute and deliver, on behalf of the
Certificateholders and the Trustee or any of them, any and all instruments of
satisfaction or cancellation, or of partial or full release or discharge and all
other comparable instruments, with respect to the Mortgage Loans and with
respect to the properties subject to the Mortgages. The Trustee shall furnish
the Master Servicer with any powers of attorney and other documents reasonably
necessary or appropriate to enable the Master Servicer to carry out its
servicing and administrative duties hereunder.
Unless otherwise specified herein with respect to specific obligations
of the Master Servicer, the Master Servicer shall service and administer the
Mortgage Loans in the best interests of and for the benefit of, the
Certificateholders, in accordance with prudent mortgage loan servicing standards
and procedures accepted in the mortgage banking industry and in accordance with
the Guide. The Master Servicer shall promptly notify the Trustee in writing of
any event, circumstance or occurrence which may adversely affect the ability of
the Master Servicer to service any Mortgage Loan or to otherwise perform and
carry out its duties, responsibilities and obligations under and in accordance
with this Agreement. The Master Servicer shall at all times maintain accurate
records and books of account and an adequate system of audit and internal
controls. All accounting and loan servicing records pertaining to each Mortgage
Loan shall be maintained in such manner as will permit the Trustee, or its duly
authorized representatives and designees to examine and audit and make legible
reproductions of records during reasonable business hours. [All such records
shall be maintained for the period required by the Guide or such longer period
as is required by law.]
[The Master Servicer intends to perform its servicing and
administration functions, as Master Servicer, pursuant to this Agreement through
its agent, the Servicing Agent. All actions by the Servicing Agent with respect
to the servicing and administration of the Mortgage Loans shall be treated as
though done by the
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Master Servicer itself. All documents, instruments or contracts executed by the
Servicing Agent on behalf of the Master Servicer shall be treated by the Trustee
as though executed by the Master Servicer itself.]
All costs incurred by the Master Servicer or by any Servicer in
effecting the timely payment of taxes and assessments on the properties subject
to the Mortgage Loans shall not, for the purpose of calculating monthly
distributions to Certificateholders, be added to the amount owing under the
related Mortgage Loans, notwithstanding that the terms of such Mortgage Loan so
permit, and such costs shall be recoverable by the Master Servicer to the extent
permitted by Section 3.06.
[In the event that any tax is imposed on "prohibited transactions"
under Section 860F(a) of the Code or on "contributions after the start-up date"
under Section 860G(d) of the Code on the Trust Fund, such tax shall be charged
(i) to the Trustee pursuant to this Section 3.01, if such tax arises out of or
results from a breach by the Trustee of any of its obligations under this
Agreement, which breach constitutes gross negligence or willful misconduct of
the Trustee or (ii) to the Master Servicer pursuant to this Section 3.01, if
such tax arises out of or results from a breach by the Master Servicer of any of
its obligations under this Agreement or (iii) to the Sponsor pursuant to this
Section 3.01, if such tax arises out of or results from a breach by the Sponsor
of any of its obligations under this Agreement or (iv) to the Seller pursuant to
this Section 3.01, if such tax arises out of or results from a breach by the
Seller of any of its obligations under this agreement or (v) to the Residual
Certificates on a pro rata basis to the extent such taxes are not allocable
pursuant to clauses (i) through (iv) above. In no event will the Trustee be
liable to pay or advance the payment of any taxes referred to in this paragraph
other than as provided in clause (i) above. No taxes referred to in this
paragraph shall be paid from any assets constituting the Pool.]
Section 3.02. Servicing Agreements between Master Servicer and
Servicers; Enforcement of Servicer's and Seller's Obligations. (a) The Master
Servicer may enter into Servicing Agreements with Servicers for the servicing
and administration of certain of the Mortgage Loans. References in this
Agreement to actions taken or to be taken by the Master Servicer in servicing
the Mortgage Loans include actions taken or to be taken by a Servicer on behalf
of the Master Servicer. Each Servicing Agreement will be upon such terms and
conditions as are not inconsistent with this Agreement and as the Master
Servicer and the Servicer have agreed and as shall have been approved by the
Sponsor and shall be effective as of the date of conveyance of the Mortgage
Loans by the Sponsor to the Trustee. With the approval of the Master Servicer, a
Servicer may delegate its
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servicing obligations to third-party servicers, but such Servicers will remain
obligated under the related Servicing Agreement. The Master Servicer and the
Servicer may enter into amendments thereto; provided, however, that any such
amendments shall be consistent with and not violate the provisions of this
Agreement. [Each Servicer shall be either (i) an institution the accounts of
which are insured by the FDIC or (ii) another entity that engages in the
business of originating or servicing mortgage loans, and in either case shall be
authorized to transact business in the state or states in which the related
Mortgaged Properties it is to service are situated, if and to the extent
required by applicable law to enable the Servicer to perform its obligations
hereunder and under the Servicing Agreement, and in either case shall be a FHLMC
or FNMA approved mortgage servicer. Any Servicing Agreement entered into by the
Master Servicer shall include the provision that such Agreement may be
immediately terminated (x) with cause and without any termination fee by any
Master Servicer hereunder other than Headlands or (y) without cause in which
case the Master Servicer shall be responsible for any termination fee or penalty
resulting therefrom.]
(b) As part of its servicing activities hereunder, the Master Servicer,
for the benefit of the Trustee and the Certifi-cateholders, shall enforce the
obligations of each Servicer under the related Servicing Agreement and of the
Seller under the Seller's Agreement, including, without limitation, the
obligation to make advances in respect of delinquent payments as required by a
Servicing Agreement, to purchase a Mortgage Loan on account of defective
documentation, as described in Section 2.02, or on account of a breach of a
representation or warranty, as described in Section 2.03. Such enforcement,
including, without limitation, the legal prosecution of claims, termination of
Servicing Agreements and the pursuit of other appropriate remedies, shall be in
such form and carried out to such an extent and at such time as the Master
Servicer, in its good faith business judgment, would require were it the owner
of the related Mortgage Loans. The Master Servicer shall pay the costs of such
enforcement at its own expense, but shall be reimbursed therefor only (i) from a
general recovery resulting from such enforcement only to the extent, if any,
that such recovery exceeds all amounts due in respect of the related Mortgage
Loans or (ii) from a specific recovery of costs, expenses or attorneys fees
against the party against whom such enforcement is directed.
Section 3.03. Liability of the Master Servicer. Notwithstanding any
Servicing Agreement, any of the provisions of this Agreement relating to
agreements or arrangements between the Master Servicer or a Servicer or
reference to actions taken through a Servicer or otherwise, the Master Servicer
shall remain obligated and liable to the Trustee and Certificateholders for the
servicing and administering of the Mortgage Loans in accor-
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dance with the provisions of Section 3.01 without diminution of such obligation
or liability by virtue of such Servicing Agreements or arrangements or by virtue
of indemnification from the Servicer and to the same extent and under the same
terms and conditions as if the Master Servicer alone were servicing and
administering the Mortgage Loans. For purposes of making distributions to
Certificateholders all amounts received by a Servicer in connection with the
Mortgage Loans shall be deemed to have been received by the Master Servicer, and
with respect to any successor Master Servicer from the time such successor
Master Servicer becomes the Master Servicer, whether or not such amounts are
actually remitted by the Servicer to the Master Servicer. The Master Servicer
shall be entitled to enter into any agreement with a Servicer or Seller for
indemnification of the Master Servicer and nothing contained in this Agreement
shall be deemed to limit or modify such indemnification.
Section 3.04. Collection of Certain Mortgage Loan Payments; Certificate
Account; Distribution Account. (a) The Master Servicer shall make reasonable
efforts to collect all payments called for under the terms and provisions of the
Mortgage Loans, and shall, to the extent such procedures shall be consistent
with this Agreement and the terms of any related Primary Insurance Policy,
follow such collection procedures as it follows with respect to mortgage loans
comparable to the Mortgage Loans in its own servicing portfolio; provided,
however, that the Master Servicer agrees not to permit any modification with
respect to any Mortgage Loan that would change the Mortgage Interest Rate,
forgive any principal or interest, or change the terms of such Mortgage Note.
Consistent with the foregoing, the Master Servicer may in its discretion (i)
waive any late payment charge or any assumption fees or other fees which may be
collected in the ordinary course of servicing such Mortgage Loan and (ii)
arrange with a Mortgagor a schedule for the payment of principal and interest
due and unpaid for a period of not more than 120 days after the applicable Due
Date. Any arrangement of the sort described in clause (ii) above shall not
affect the amount or timing of any Monthly Advance which is required to be made
with respect to a Mortgage Loan pursuant to the then current amortization
schedule applicable to such Mortgage Loan.
In those cases where a Servicer is servicing Mortgage Loans pursuant to
a Servicing Agreement, the Master Servicer shall cause the Servicer, pursuant to
the Servicing Agreement, to establish and maintain one or more Servicing
Accounts, each of which shall be an Eligible Account. The Servicer will be
required under its Servicing Agreement to deposit into the Servicing Account on
a daily basis no later than the Business Day following receipt of all proceeds
of Mortgage Loans received by the Servicer, less its Servicing Fees and
unreimbursed Servicer Advances and expenses, to the extent permitted by the
Servicing
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Agreement. The Servicer shall not be required to deposit in the Servicing
Account payments or collections in the nature of pre- payment charges or late
charges.
(b) The Master Servicer shall establish and maintain a Certificate
Account into which the Master Servicer shall deposit or cause to be deposited on
a daily basis within one Business Day of receipt, except as otherwise
specifically provided herein, the following payments and collections remitted by
Servicers or received by it in respect of Mortgage Loans subsequent to the
Cut-off Date (other than in respect of principal and interest due on the
Mortgage Loans on or before the Cut-off Date) and the following amounts required
to be deposited hereunder:
(i) all payments on account of principal on the
Mortgage Loans, including Principal Prepayments [and
Balloon Payments] and the principal component of any
Servicer Advance;
(ii) all payments on account of interest on the Mortgage
Loans, net of the sum of the related Master Servicing Fee and
related Servicing Fee, and the interest component of any
Servicer Advance [and any Yield Maintenance Premiums];
(iii) all Insurance Proceeds and Liquidation Proceeds (net
of any related expenses of the related Servicer), other than
proceeds to be applied to the restoration or repair of the
Mortgaged Property or released to the Mortgagor in accordance
with the Master Servicer's normal servicing procedures;
(iv) any amount required to be deposited by the Master
Servicer pursuant to Section 3.04(d) in connection with any
losses on Permitted Investments;
(v) any amounts required to be deposited by the
Master Servicer pursuant to Sections 3.08 and 3.10
hereof;
(vi) all Purchase Prices from the Master Servicer
or Seller and all Substitution Adjustment Amounts;
(vii) all Advances made by the Master Servicer
pursuant to Section 4.02; and
(viii) any other amounts required to be deposited
hereunder.
The foregoing requirements for remittance by the Master Servicer shall
be exclusive, it being understood and agreed that,
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without limiting the generality of the foregoing, payments in the nature of
[prepayment penalties,] late payment charges or assumption fees, if collected,
need not be remitted by the Master Servicer. In the event that the Master
Servicer shall remit any amount not required to be remitted, it may at any time
withdraw or direct the institution maintaining the Certificate Account to
withdraw such amount from the Certificate Account, any provision herein to the
contrary notwithstanding. Such withdrawal or direction may be accomplished by
delivering written notice thereof to the Trustee or such other institution
maintaining the Certificate Account which describes the amounts deposited in
error in the Certificate Account. The Master Servicer shall maintain adequate
records with respect to all withdrawals made pursuant to this Section. All funds
deposited in the Certificate Account shall be held in trust for the
Certificateholders until withdrawn in accordance with Section 3.06.
(c) The Trustee shall establish and maintain, on behalf of
the Certificateholders, the Distribution Account. The Trustee
shall, promptly upon receipt, deposit in the Distribution Account
and retain therein the following:
(i) the aggregate amount remitted by the Master
Servicer to the Trustee pursuant to Section 3.06(vii);
(ii) any amount deposited by the Master Servicer
pursuant to Section 3.04(d) in connection with any losses on
Permitted Investments; and
(iii) any other amounts deposited hereunder which are
required to be deposited in the Distribution Account.
In the event that the Master Servicer shall remit any amount not
required to be remitted, it may at any time direct the Trustee to withdraw such
amount from the Distribution Account, any provision herein to the contrary
notwithstanding. Such direction may be accomplished by delivering an Officer's
Certificate to the Trustee which describes the amounts deposited in error in the
Distribution Account. All funds deposited in the Distribution Account shall be
held by the Trustee in trust for the Certificateholders until disbursed in
accordance with this Agreement or withdrawn in accordance with Section 3.06(b).
In no event shall the Trustee incur liability for withdrawals from the
Distribution Account at the direction of the Master Servicer.
(d) Each institution at which the Certificate Account or the
Distribution Account is maintained shall invest the funds therein as directed in
writing by the Master Servicer in Permitted Investments, which shall mature not
later than (i) in the case of the Certificate Account, the second Business Day
next preceding the related Certificate Account Deposit Date (except
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that if such Permitted Investment is an obligation of the institution that
maintains such account, then such Permitted Investment shall mature not later
than the Business Day next preceding such Certificate Account Deposit Date) and
(ii) in the case of the Distribution Account, the Business Day next preceding
the Distribution Date (except that if such Permitted Investment is an obligation
of the institution that maintains such account, then such Permitted Investment
shall mature not later than such Distribution Date) and, in each case, shall not
be sold or disposed of prior to its maturity. All such Permitted Investments
shall be made in the name of the Trustee, for the benefit of the
Certificateholders. All income and gain net of any losses realized from any such
investment shall be for the benefit of the Master Servicer as servicing
compensation and shall be remitted to it monthly as provided herein. The amount
of any realized losses in the Certificate Account or the Distribution Account
incurred in any such account in respect of any such investments shall promptly
be deposited by the Master Servicer in the Certificate Account or paid to the
Trustee for deposit into the Distribution Account, as applicable. The Trustee in
its fiduciary capacity shall not be liable for the amount of any loss incurred
in respect of any investment or lack of investment of funds held in the
Certificate Account or the Distribution Account and made in accordance with this
Section 3.04.
(e) The Master Servicer shall give notice to the Trustee, the Seller,
each Rating Agency and the Sponsor of any proposed change of the location of the
Certificate Account not more than 45 days but in no event not less than 30 days
prior to any change thereof. The Trustee shall give notice to the Master
Servicer, the Seller, each Rating Agency and the Sponsor of any proposed change
of the location of the Distribution Account not more than 45 days but in no
event not less than 30 days prior to any change thereof.
Section 3.05. Collection of Taxes, Assessments and Similar Items;
Master Servicing Accounts. (a) To the extent required by the related Mortgage
Note and not violative of current law, the Master Servicer shall cause each
Servicer to establish and maintain one or more accounts (each, an "Escrow
Account") and deposit and retain therein all collections from the Mortgagors (or
advances by the Servicer) for the payment of taxes, assessments, [replacement
reserves,] hazard insurance premiums or comparable items for the account of the
Mortgagors. Nothing herein shall require the Master Servicer or any Servicer to
compel a Mortgagor to establish an Escrow Account in violation of applicable
law.
(b) Withdrawals of amounts so collected from the Master Servicing
Accounts may be made only to effect timely payment of taxes, assessments, hazard
insurance premiums, Primary Insurance
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Policy premiums, if applicable, to repair or otherwise protect the Mortgaged
Property or comparable items, to reimburse the Master Servicer out of related
collections for any payment of taxes or assessments or any payments made
pursuant to Sections 3.07 (with respect to the Primary Insurance Policy) and
3.08 (with respect to hazard insurance), to refund to any Mortgagors any sums as
may be determined to be overages, to pay interest, if required, to Mortgagors on
balances in the Master Servicing Account or to clear and terminate the Master
Servicing Account at the termination of this Agreement in accordance with
Section 10.01.
Section 3.06. Permitted Withdrawals from the Certificate Account. (a)
The Master Servicer may, from time to time as provided herein, make withdrawals
from the Certificate Account of amounts on deposit therein attributable to the
Mortgage Loans for the following purposes:
(i) as reimbursement for previously unreimbursed
Monthly Advances made pursuant to Section 4.02, the right to withdraw
amounts pursuant to this subclause (i) being limited to amounts
received on particular Mortgage Loans (including, for this purpose,
Insurance Proceeds, Liquidation Proceeds and proceeds from the
repurchase of the Mortgage Loan pursuant to Sections 2.02 and 2.03)
which represent late recoveries of payments of principal and/or
interest with respect to which any such Monthly Advance was made;
(ii) to pay as servicing compensation that portion of
any payment as to interest as provided in Section 3.12;
(iii) to pay to itself or the Seller, as the case may be,
with respect to each Mortgage Loan or property acquired in respect
thereof that has been purchased pursuant to Section 2.02, 2.03, 2.08 or
10.01, all amounts received thereon following such purchase and not
distributed as of the date on which the related Scheduled Principal
Balance or Purchase Price is determined;
(iv) as reimbursement for any Nonrecoverable Advance
in the manner and to the extent provided below or for the
payment of taxes as permitted by the last paragraph of
Section 3.01;
(v) to pay, or reimburse itself for the payment of,
the Trustee Fee, [specify other fees];
(vi) as reimbursement for expenses incurred by and
reimbursable to it or the Sponsor pursuant to Section 7.03;
and
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(vii) on or prior to each Certificate Account Deposit
Date, to withdraw an amount equal to related Available Funds for such
Distribution Date, and remit such amount to the Trustee for deposit in
the Distribution Account.
Since, in connection with withdrawals pursuant to subclauses (i)
through (iii), inclusive, the Master Servicer's entitlement thereto is limited
to collections or other recoveries on the related Mortgage Loan, the Master
Servicer shall keep and maintain separate accounting, on a Mortgage Loan by
Mortgage Loan basis, for the purpose of justifying any withdrawal from the
Certificate Account pursuant to such subclauses (i) through (iii), inclusive.
The Master Servicer shall be entitled to reimburse itself for any
Monthly Advance made in respect of a Mortgage Loan that it determines to be a
Nonrecoverable Advance by withdrawal from the Certificate Account of amounts on
deposit therein attributable to the Mortgage Loans on the Business Day preceding
any Distribution Date first succeeding the date of such determination. The
Master Servicer's right of reimbursement in respect of a Nonrecoverable Advance
on any such Business Day shall be limited to an amount not exceeding the portion
of such Monthly Advance previously paid to Certificateholders (and not
thereto-fore reimbursed to the Master Servicer).
(b) The Trustee shall withdraw funds from the Distribution Account for
distributions to Certificateholders in the manner specified in this Agreement.
In addition, the Trustee may from time to time make withdrawals from the
Distribution Account for the following purposes:
(i) to pay to the Master Servicer as additional
servicing compensation earnings on or investment income with
respect to funds in the Distribution Account;
(ii) to withdraw and return to the Master Servicer
any amount deposited in the Distribution Account and not
required to be deposited therein; and
(iii) to clear and terminate the Distribution Account
upon termination of the Agreement pursuant to Section 9.01
hereof.
Section 3.07. Maintenance of the Primary Insurance Policies;
Collections Thereunder. The Master Servicer shall exercise its best reasonable
efforts to maintain and keep in full force and effect each Primary Insurance
Policy, with respect to each conventional Mortgage Loan as to which as of the
Cut-Off Date such a Primary Insurance Policy was in effect (or, in the case of a
substitute Mortgage Loan, the date of substitution) and the original principal
amount of the related Mortgage Note
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exceeded 80% of the Appraised Value, in an amount at least equal to the excess
of such original principal amount over 75% of such Appraised Value until the
principal amount of any such Mortgage Loan is reduced below 80% of the Appraised
Value or, based upon a new appraisal, the principal amount of such Mortgage Loan
represents less than 80% of the new appraised value. The Master Servicer and the
related Sub-Servicer shall have the power to substitute for any Primary
Insurance Policy another substantially equivalent policy issued by another
Qualified Insurer; provided that such substitution is subject to the condition,
to be evidenced by a writing from each Rating Agency, that it would not cause
the ratings on the Certificates to be downgraded or withdrawn. The Master
Servicer agrees to effect the timely payment of the premiums on each Primary
Insurance Policy, and such costs not otherwise recoverable shall be recoverable
by the Servicer from the related Liquidation Proceeds.
In connection with its activities as administrator and servicer of the
Mortgage Loans, the Master Servicer agrees to present, on behalf of itself, the
Trustee and Certificateholders, claims to the insurer under any Primary
Insurance Policies and, in this regard, to take such reasonable action as shall
be necessary to permit recovery under any Primary Insurance Policies respecting
defaulted Mortgage Loans. Pursuant to Section 3.04, any amounts collected by the
Master Servicer under any Primary Insurance Policies shall be deposited in the
Certificate Account, subject to withdrawal pursuant to Section 3.06.
Section 3.08. Maintenance of Hazard Insurance and Errors and Omissions
and Fidelity Coverage. (a) The Master Servicer shall maintain and keep, with
respect to each Mortgage Loan, in full force and effect hazard insurance (fire
insurance with extended coverage) equal to at least the lesser of the
Outstanding Principal Balance of the Mortgage Loan or the current replacement
cost of the Mortgage Property, and containing a standard mortgagee clause;
provided, however, that the amount of hazard insurance may not be less than the
amount necessary to prevent loss due to the application of any co-insurance
provision of the related policy. Unless applicable state law requires a higher
deductible, the deductible on such hazard insurance policy may be no more than
$1,000 or 1% of the applicable amount of coverage, which ever is less. In the
case of a condominium unit or a unit in a planned unit development, the required
hazard insurance shall take the form of a multiperil policy covering the entire
condominium project or planned unit development, in an amount equal to at least
100% of the insurable value based on replacement cost.
(b) Any amounts collected by the Master Servicer under any
such hazard insurance policy (other than amounts to be applied to the
restoration or repair of the Mortgage Property or
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amounts released to the Mortgagor in accordance with the Master Servicer's
normal servicing procedures, the terms of the Mortgage Note, the Mortgage or
applicable law) shall be deposited in the Certificate Account.
(c) Any cost incurred by a Master Servicer in maintaining any
such hazard insurance policy shall not be added to the amount owing under the
Mortgage Loan for the purpose of calculating monthly distributions to
Certificateholders, notwithstanding that the terms of the Mortgage Loan so
permit. Such costs shall be recoverable by the Master Servicer or a Sub-Servicer
out of related late payments by the Mortgagor or out of Insurance Proceeds or
Liquidation Proceeds or by the Master Servicer from the Repurchase Price, to the
extent permitted by Section 3.06.
(d) No earthquake or other additional insurance is to be
required of any Mortgagor or maintained on property acquired with respect to a
Security Instrument other than pursuant to such applicable laws and regulations
as shall at any time be in force and shall require such additional insurance.
When, at the time of origination of the Mortgage Loan, the Mortgage Property is
located in a federally designated special flood hazard area, the Master Servicer
shall use its best reasonable efforts to cause with respect to the Mortgage
Loans, flood insurance (to the extent available and in accordance with mortgage
servicing industry practice) to be maintained. Such flood insurance shall cover
the Mortgaged Property, including all items taken into account in arriving at
the Appraised Value on which the Mortgage Loan was based, and shall be in an
amount equal to the lesser of (i) the Outstanding Principal Balance of the
related Mortgage Loan and (ii) the minimum amount required under the terms of
coverage to compensate for any damage or loss on a replacement cost basis, but
not more than the maximum amount of such insurance available for the related
Mortgaged Property under either the regular or emergency programs of the
National Flood Insurance Program (assuming that the area in which such Mortgaged
Property is located is participating in such program). Unless applicable state
law requires a higher deductible, the deductible on such flood insurance may not
exceed $1,000 or 1% of the applicable amount of coverage, whichever is less.
(e) If insurance has not been maintained complying with
Subsections 3.08(a) and (d) and there shall have been a loss which would have
been covered by such insurance had it been maintained, the Master Servicer shall
pay for any necessary repairs.
(f) The Master Servicer shall present claims under the related
hazard insurance or flood insurance policy.
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(g) The Master Servicer shall obtain and maintain at its own
expense and for the duration of this Agreement a blanket fidelity bond and shall
cause each Sub-Servicer to obtain and maintain an errors and omissions insurance
policy covering such Sub-Servicer's officers, employees and other persons acting
on its behalf in connection with its activities under this Agreement. The amount
of coverage shall be at least equal to the coverage maintained by the Master
Servicer acceptable to FNMA or FHLMC to service loans for it or otherwise in an
amount as is commercially available at a cost that is generally not regarded as
excessive by industry standards. The Master Servicer shall promptly notify the
Trustee of any material change in the terms of such bond or policy. The Master
Servicer shall provide annually to the trustee a certificate of insurance that
such bond and policy are in effect. If any such bond or policy ceases to be in
effect, the Master Servicer shall, to the extent possible, give the Trustee ten
days' notice prior to any such cessation and shall use its best efforts to
obtain an comparable replacement bond or policy, as the case may be. Any amounts
relating to the Mortgage Loans collected under such bond or policy shall be
remitted to the Certificate Account to the extent that such amounts have not
previously been paid to such account.
Section 3.09. Enforcement of Due-On-Sale Clauses; Assumption
Agreements. (a) In any case in which the Master Servicer is notified by any
Mortgagor that a Mortgaged Property relating to a Mortgage Loan has been or is
about to be conveyed by the Mortgagor, the Master Servicer shall enforce any
due-on-sale clause contained in the related Mortgage to the extent permitted
under the terms of the related Mortgage Note and by applicable law unless the
Master Servicer reasonably believes such enforcement is likely to result in
legal action by the Mortgagor. The Master Servicer may repurchase a Mortgage
Loan at the Purchase Price when the Master Servicer requires acceleration of the
Mortgage Loan, but only if the Master Servicer is satisfied, as evidenced by an
Officer's Certificate delivered to the Trustee, that either (i) such Mortgage
Loan is in default or default is reasonably foreseeable or (ii) if such Mortgage
Loan is not in default or default is not reasonably foreseeable, such repurchase
will have no adverse tax consequences for the Trust Fund or any
Certificateholder. If the Master Servicer reasonably believes that such
due-on-sale clause cannot be enforced under applicable law or if the Mortgage
Loan does not contain a due-on-sale clause, the Master Servicer is authorized to
consent to a conveyance subject to the lien of the Mortgage, and to take or
enter into an assumption agreement from or with the Person to whom such property
has been or is about to be conveyed, pursuant to which such Person becomes
liable under the related Mortgage Note and unless prohibited by applicable state
law, such Mortgagor remains liable thereon, on condition, however, that the
related Mortgage Loan shall continue to be covered (if so covered
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before the Master Servicer enters into such agreement) by any Primary Insurance
Policy. The Master Servicer shall notify the Trustee, whenever possible, before
the completion of such assumption agreement, and shall forward to the Trustee
the original copy of such assumption agreement, which copy shall be added by the
Trustee to the related Mortgage File and which shall, for all purposes, be
considered a part of such Mortgage File to the same extent as all other
documents and instruments constituting a part thereof. In connection with any
such assumption agreement, the interest rate on the related Mortgage Loan shall
not be changed and no other material alterations in the Mortgage Loan shall be
made unless such material alteration would not cause the REMIC Trust to fail to
qualify as a REMIC for federal income tax purposes, as evidenced by an Opinion
of Counsel. Any fee or additional interest collected by the Master Servicer for
consenting to any such conveyance or entering into any such assumption agreement
may be retained by the Master Servicer as additional servicing compensation.
(b) Notwithstanding the foregoing paragraph or any other provision of
this Agreement, the Master Servicer shall not be deemed to be in default, breach
or any other violation of its obligations hereunder by reason of any assumption
of a Mortgage Loan by operation of law or any conveyance by the Mortgagor of the
related Mortgaged Property or assumption of a Mortgage Loan which the Master
Servicer reasonably believes it may be restricted by law from preventing, for
any reason whatsoever or if the exercise of such right would impair or threaten
to impair any recovery under any applicable Insurance Policy, or, in the Master
Servicer's judgment, be reasonably, likely to result in legal action by the
Mortgagor.
Section 3.10. Realization upon Defaulted Mortgage Loans. (a) The Master
Servicer shall foreclose upon or otherwise comparably convert the ownership of
properties securing any Mortgage Loans that come into and continue in default
and as to which no satisfactory arrangements can be made for collection of
delinquent payments pursuant to Section 3.04 except that the Master Servicer
shall not foreclose upon or otherwise comparably convert a Mortgaged Property if
there is evidence of toxic waste thereon and the Master Servicer determines it
would be imprudent to do so or not in accordance with appropriate servicing
standards. The Master Servicer can conclusively rely on results of third party
inspections from parties it reasonably believes are qualified to conduct such
inspections. In connection with such foreclosure or other conversion, the Master
Servicer shall use its best reasonable efforts to preserve REO Property and to
realize upon defaulted Mortgage Loans in such manner as to maximize the receipt
of principal and interest by the Certificateholders, taking into account, among
other things, the timing of foreclosure and the considerations set forth in
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Subsection 3.10(b). The foregoing is subject to the proviso that the Master
Servicer shall not be required to expend its own funds in connection with any
foreclosure or towards the restoration of an property unless it determines in
good faith (i) that such restoration or foreclosure will increase the proceeds
of liquidation of the Mortgage Loan to Certificateholders after reimbursement to
itself for such expenses and (ii) that such expenses will be recoverable to it
either through Liquidation Proceeds (respecting which it shall have priority for
purposes of reimbursements from the Certificate Account pursuant to Section
3.06) or through Insurance Proceeds (respecting which it shall have similar
priority). The Master Servicer shall be responsible for all other costs and
expenses incurred by it in any such proceedings; provided, however, that it
shall be entitled to reimbursement thereof (as well as its normal servicing
compensation) to the extent that transfers or withdrawals from the Certificate
Account with respect thereto are permitted under Section 3.06. Any income from
or other funds (net of any income taxes) generated by REO Property shall be
deemed for purposes of this Agreement to be Insurance Proceeds.
(b) The Trust Fund shall not acquire any real property (or any personal
property incident to such real property) except in connection with a default or
imminent default of a Mortgage Loan. In the event that the Trust Fund acquires
any real property (or personal property incident to such real property) in
connection with a default or imminent default of a Mortgage Loan, such property
shall be disposed of by the Trust Fund within two years after its acquisition by
the Trust Fund unless the Trustee shall have received an Opinion of Counsel with
respect to such longer retention or the Master Servicer applies for and receives
an extension of the two-year period under Section 856(e)(3) of the Code, in
which case such two-year period will be extended by the period set forth in such
Opinion of Counsel or approved application, as the case may be. The Trustee
shall have no obligation to pay for such Opinion of Counsel.
The Master Servicer shall prepare or cause to be prepared and submit to
the Trustee, and the Trustee shall file or cause to be filed with the Internal
Revenue Service a report and the Master Servicer shall deliver such report to
the Mortgagor in the manner required by applicable law and such report shall
contain the information required to be reported regarding any Mortgaged Property
which is abandoned or which has been foreclosed. The Master Servicer shall
provide a copy of any such report to the Trustee. In connection with any
Mortgage Loan as to which the Master Servicer has accepted a deed in lieu of
foreclosure, the Master Servicer shall insure that, at all times, the related
property constitutes "foreclosure property" within the meaning of Code Section
860G(a)(8) and that such property is administered so
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that no tax on "net income from foreclosure property" within the meaning of Code
Section 860G(c) is imposed on the Trust Fund.
Section 3.11. Trustee to Cooperate; Release of Mortgage Files. (a) Upon
payment in full of any Mortgage Loan or the receipt by the Master Servicer of a
notification that payment in full will be escrowed in a manner customary for
such purposes, the Master Servicer will immediately notify the Trustee by a
certification signed by a Servicing Officer in the Form of Exhibit H (which
certification shall include a statement to the effect that all amounts received
or to be received in connection with such payment which are required to be
deposited in the Certificate Account have been or will be so deposited in the
appropriate subaccount thereof) and shall request delivery to the Master
Servicer of the Mortgage File. Upon receipt of such certification and request,
the Trustee shall promptly release the related Mortgage File to the Master
Servicer and execute and deliver to the Master Servicer, without recourse, the
request for reconveyance, deed of reconveyance or release or satisfaction of
mortgage or such instrument releasing the lien of the Mortgage (furnished by the
Master Servicer), together with the Mortgage Note with written evidence of
cancellation thereon. No expenses incurred in connection with any instrument of
satisfaction or deed of reconveyance shall be chargeable to the Certificate
Account.
(b) From time to time as is appropriate for the servicing or
foreclosure of any Mortgage Loan or collection under a Required Insurance
Policy, the Master Servicer shall deliver to the Trustee a Request for Release
signed by a Servicing Officer on behalf of the Master Servicer in substantially
the form attached as Exhibit H hereto. Upon receipt of the Request for Release,
the Trustee shall deliver the Mortgage File or any document therein to the
Master Servicer.
(c) The Master Servicer shall cause each Mortgage File or any document
therein released pursuant to Subsection 3.11(b) to be returned to the Trustee
when the need therefor no longer exists, and in any event within 21 days of the
Master Servicer's receipt thereof, unless the Mortgage Loan has become a
Liquidated Mortgage Loan and the Liquidation Proceeds relating to the Mortgage
Loan have been deposited in the Certificate Account or such Mortgage File is
being used to pursue foreclosure or other legal proceedings. Prior to return of
a Mortgage File or any document to the Trustee, the Master Servicer or the
related Insurer to whom such file or document was delivered shall retain such
file or document in its respective control unless the Mortgage File or such
document has been delivered to an attorney, or to a public trustee or other
public official as required by law, to initiate or pursue legal action or other
proceedings for the foreclosure of the Mortgaged Property either judicially or
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non-judicially, and the Master Servicer has delivered to the Trustee a
certificate of a Servicing Officer certifying as to the name and address of the
Person to which such Mortgage File or such document was delivered and the
purpose or purposes of such delivery. If a Mortgage Loan becomes a Liquidated
Mortgage Loan, the Trustee shall deliver the Request for Release with respect
thereto to the Master Servicer upon deposit of the related Liquidation Proceeds
in the Certificate Account.
(d) The Trustee shall execute and deliver to the Master Servicer any
court pleadings, requests for trustee's sale or other documents necessary to (i)
the foreclosure or trustee's sale with respect to a Mortgaged Property; (ii) any
legal action brought to obtain judgment against any Mortgagor on the Mortgage
Note or Mortgage; (iii) obtain a deficiency judgment against the Mortgagor; or
(iv) enforce any other rights or remedies provided by the Mortgage Note or
Mortgage or otherwise available at law or equity. Together with such documents
or pleadings the Master Servicer shall deliver to the Trustee a certificate of a
Servicing Officer in which it requests the Trustee to execute the pleadings or
documents. The certificate shall certify and explain the reasons for which the
pleadings or documents are required. It shall further certify that the Trustee's
execution and delivery of the pleadings or documents will not invalidate any
insurance coverage under the Required Insurance Policies, affect the REMIC
status of the Trust or invalidate or otherwise affect the lien of the Mortgage,
except for the termination of such a lien upon completion of the foreclosure or
trustee's sale.
Section 3.12. Servicing and Other Compensation; Payment of Certain
Expenses by the Master Servicer. The Master Servicer, as compensation for its
activities hereunder, shall be entitled to receive on each Distribution Date an
amount with respect to each Mortgage Loan as to which a monthly installment of
principal and interest has been received equal to one-twelfth of the Master
Servicing Fee Rate for such Mortgage Loan multiplied by the principal balance on
which such installment of interest accrued. The Master Servicer is also entitled
to retain additional servicing compensation in the form of prepayment charges,
if any, assumption fees, tax service fees, fees for statement of account or
payoff, late payment charges, interest on amounts deposited in the Certificate
Account or Permitted Investments of such amounts, or otherwise. The Master
Servicer may retain, as additional servicing compensation, amounts in respect of
interest paid by borrowers in connection with any principal prepayment in full
received by the Master Servicer from the first day through the 15th day of each
month, other than the month of the Cut-off Date. The Master Servicer shall be
required to pay all expenses incurred by it in connection with its activities
hereunder (including payment of the fees of its counsel and all other fees and
expenses not expressly stated hereunder to be for the account
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of the Holders of Certificates) and shall not be entitled to reimbursement
therefor except as specifically provided herein.
As compensation for its activities under its Servicing Agreement, each
Servicer shall be entitled to an amount with respect to each Mortgage Loan as to
which a monthly installment of principal and interest has been received equal to
one-twelfth of the Servicing Fee Rate for such Mortgage Loan multiplied by the
principal balance on which such installment of interest accrued. Each Servicer
is required to pay all expenses incurred by it in connection with its servicing
activities under its Servicing Agreement (including payment of premiums for
Primary Mortgage Insurance Policies, if required) and shall not be entitled to
reimbursement therefor except as specifically provided in the Servicing
Agreement and not inconsistent with this Agreement.
The Master Servicing Fee for any month shall be reduced to the extent
described as follows. Not later than the Determination Date in each month that
follows a month in which a Mortgage Loan was prepaid in full or in part or a
final liquidation of a Mortgage Loan has occurred, the Master Servicer shall
determine for each such Mortgage Loan the amount, if any, by which (x) the
annual interest at the related Mortgage Interest Rate (net of the related Master
Servicing Fee Rate and related Servicing Fee Rate) on the prepaid or liquidated
principal balance of such Mortgage Loan divided by twelve exceeds (y) the
interest required to be paid by the Mortgagor from the due date of the last
scheduled payment of principal and interest on such Mortgage Loan to the date of
such prepayment [or final liquidation or receipt of proceeds under the related
Pool Insurance Policy or Special Hazard Policy (adjusted to the Mortgage
Interest Rate (net of the related Master Servicing Fee Rate and related
Servicing Fee Rate)]. Not later than the Advancing Date immediately succeeding
such Determination Date, the Master Servicer shall deposit in the Certificate
Account from its own funds the amount determined by aggregating, for each such
Mortgage Loan for which the amount determined pursuant to (x) above exceeds the
amount determined pursuant to (y) above, the amount of each such excess, but
only to the extent of (and in reduction of) the compensation payable to it
pursuant to this Section 3.12 for the calendar month in which such prepaid or
liquidated principal balance is received.
Section 3.13. Annual Statement as to Compliance. The Master Servicer,
at its expense, will deliver to each Rating Agency, the Trustee and the Sponsor,
[on or before of each year, beginning with in the year that begins not less than
three months after the Cut-Off Date,] [quarterly on each _______, _______,
_______, and ______, beginning ____________ ____, _____] an Officers'
Certificate stating that (a) a review of the activities of the Master
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Servicer during the preceding [calendar year] [quarter] and of its performance
under this Agreement has been made under such officers' supervision, and (b) to
the best of such officers' knowledge, based on such review, the Master Servicer
has fulfilled all its obligations under this Agreement throughout such [year]
[quarter], or, if there has been a default in the fulfillment of any such
obligation, specifying each such default known to such Officer and the nature
and status thereof and (c) to the best of such officer's knowledge, each
Servicer has fulfilled all its obligations under its Servicing Agreement
throughout such year, or, if there has been a default in the fulfillment of any
such obligation, specifying each such default known to such officer and the
nature and status thereof. Copies of such statements shall be provided by the
Master Servicer to Holders of Certificates upon request or by the Trustee at the
expense of the Master Servicer should the Master Servicer fail to so provide
such copies.
Section 3.14. Annual Independent Public Accountants' Servicing Report.
On or before of each year, beginning with the first that occurs at least three
months after the Cut-Off Date, the Master Servicer at its expense shall cause a
firm of independent public accountants which is a member of the American
Institute of Certified Public Accountants to furnish a statement to each Rating
Agency, the Sponsor and the Trustee to the effect that such firm has examined
certain documents and records relating to the servicing of the mortgage loans
under pooling and servicing agreements substantially similar one to another
(such statement to have attached thereto a schedule setting forth the pooling
and servicing agreements covered thereby, including this Agreement) and that, on
the basis of such examination conducted substantially in compliance with the
Uniform Single Audit Program for Mortgage Bankers or the Audit Program for
Mortgages serviced for FHLMC, such servicing has been conducted in compliance
with such pooling and servicing agreements except for such significant
exceptions or errors in records that, in the opinion of such firm, the Uniform
Single Audit Program for Mortgage Bankers or the Audit Program for Mortgages
serviced for FHLMC requires it to report and which are set forth in such report.
Copies of the statement shall be provided by the Master Servicer to
Certificateholders, or by the Trustee at the Master Servicer's expense if the
Master Servicer fails to provide the requested copies.
Section 3.15. Access to Certain Documentation and Information Regarding
the Mortgage Loans. The Master Servicer shall provide to the Trustee, the Office
of Thrift Supervision, Certificateholders which are federally insured savings
and loan associations, the FDIC and the Supervisory Agents and examiners of such
board and such corporation and their agents and
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accountants access to the documentation regarding the Mortgage Loans requested
by the Trustee, in case of access by it, or required by applicable regulations,
such access being afforded without charge but only upon reasonable request and
during normal business hours at the offices of the Master Servicer. Nothing in
this Section 3.15 shall derogate from the obligation of the Master Servicer to
observe any applicable law prohibiting disclosure of information regarding the
Mortgagors and the failure of the Servicer to provide access as provided in this
Section 3.15 as a result of such obligation shall not constitute a breach of
this Section 3.15.
Section 3.16. Rights of the Sponsor in Respect of the Master Servicer.
The Master Servicer shall afford the Sponsor, upon reasonable notice, during
normal business hours access to all records maintained by the Master Servicer in
respect of its rights and obligations hereunder and access to officers of the
Master Servicer responsible for such obligations. Upon request, the original
Master Servicer shall furnish the Sponsor with its most recent financial
statements and such other information as the Master Servicer possesses regarding
its business, affairs, property and condition, financial or otherwise. Unless
there has been an Event of Default hereunder the Sponsor may, but is not
obligated to, enforce the obligations of the Master Servicer hereunder and may,
but is not obligated to, perform, or cause a designee to perform, any defaulted
obligation of the Master Servicer hereunder or exercise the rights of the Master
Servicer hereunder; provided that the Master Servicer shall not be relieved of
any of its obligations hereunder by virtue of such performance by the Sponsor or
its designee. The Sponsor shall not have any responsibility or liability for any
action or failure to act by the Master Servicer and is not obligated to
supervise the performance of the Master Servicer under this Agreement or
otherwise.
[Section 3.17. Bankruptcy Bond. The Master Servicer shall obtain a
Bankruptcy Bond from ____________ covering (i) certain losses resulting from
Deficient Valuations or Debt Service Reductions on a Mortgage Loan, (ii) the
unpaid interest on the amount of any principal reduction during the pendency of
a proceeding under the Bankruptcy Code and (iii) losses resulting from the
extension of the term of the Mortgage Loan by a bankruptcy court. As of the
Closing Date, the Bankruptcy Bond shall be in the amount of the Bankruptcy
Coverage Initial Amount and any time thereafter be in the amount of the Current
Bankruptcy Amount. The coverage under the Bankruptcy Bond may be canceled or
reduced to the extent permitted by the Rating Agencies rating the Certificates,
so long as such cancellation or reduction does not adversely affect the ratings
then assigned to the Certificates by the Rating Agencies. The Master Servicer
shall use its reasonable efforts to maintain such Bankruptcy Bond
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and to supervise the filing of claims with respect to such
Bankruptcy Bond.
In the event that the Bankruptcy Bond shall cease to be in effect or
________ or any successor thereto ceases to be a Qualified Insurer, the Master
Servicer shall exercise its reasonable efforts to obtain from a Qualified
Insurer, a comparable replacement policy or bond with a total coverage which is
equal to the previously existing coverage of the Bankruptcy Bond; provided,
however, that if the cost of any such replacement bond shall be greater than the
cost of the Bankruptcy Bond, the amount of coverage of such replacement bond
shall be reduced to a level such that the premium rate therefor shall not exceed
100% of the premium rate on the Bankruptcy Bond.
At any time, the Master Servicer may substitute a surety bond, letter
of credit, another insurance policy or other credit enhancement for the
Bankruptcy Bond or any substitute therefor to the extent permitted by each
Rating Agency without a downgrading of the then current rating of the
Certificates which shall be confirmed in writing to the Trustee by each Rating
Agency. [In addition, prior to any such substitution, the Trustee shall have
received an Opinion of Counsel to the effect that such new bond, letter of
credit, insurance policy or other arrangement is an enforceable obligation of
the issuer thereof and that such substitution will not adversely affect the
status of the Pool as a REMIC or otherwise give rise to any prohibited
transaction tax pursuant to Section 860F(a) of the Code or any tax on
contributions after the start-up date under Section 860G(a) of the Code.]
[Section 3.18. Maintenance of the Pool Insurance Policy. The Master
Servicer shall exercise its best reasonable efforts to maintain and keep the
Pool Insurance Policy in full force and effect throughout the term of this
Agreement, unless coverage thereunder has been exhausted through payment of
claims. The Master Servicer agrees to remit the premiums as provided in Section
3.06 for the Pool Insurance Policy on a timely basis. The Master Servicer shall
use its reasonable efforts to file claims with respect to the Pool Insurance
Policy. In the event that (i) the Pool Insurer shall cease to be a Qualified
Insurer because it shall not be qualified to transact a mortgage guaranty
insurance business or financial guaranty insurance business, as applicable,
under the laws of the state of its principal place of business or any other
state which has jurisdiction over such Pool Insurer in connection with the
related Pool Insurance Policy or (ii) the Pool Insurance Policy is cancelled or
terminated for any reason (other than the exhaustion of the total coverage), the
Master Servicer shall exercise its best reasonable efforts to obtain from
another Qualified Insurer a replacement policy comparable to such Pool Insurance
Policy with a total coverage
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which is equal to the then existing coverage of such Pool Insurance Policy;
provided, however, that if the cost of any such replacement policy shall be
greater than the cost of such Pool Insurance Policy, the amount of coverage of
such replacement policy shall be reduced to a level such that the premium rate
therefor shall not exceed 100% of the premium rate on such Pool Insurance
Policy. In the event that the Pool Insurer shall cease to be a Qualified Insurer
because it is no longer approved as an insurer by either FHLMC or FNMA or
because the rating assigned to the insurer by the Rating Agency has been reduced
below the rating category necessary to maintain the then current rating of the
Certificates assigned by such Rating Agency, the Master Servicer agrees to
review, not less often than quarterly, the financial condition of the Pool
Insurer with a view towards determining whether recoveries under the Pool
Insurance Policy are jeopardized for reasons related to the financial condition
of the Pool Insurer. If the Master Servicer determines that recoveries are so
jeopardized, the Master Servicer shall exercise its best reasonable efforts to
obtain from another Qualified Insurer a replacement insurance policy subject to
the cost limitation set forth above.
At any time, the Master Servicer may substitute a surety bond, letter
or credit, another mortgage guaranty pool insurance policy or other credit
enhancement for the Pool Insurance Policy or any substitute therefor to the
extent permitted by the Rating Agency without a downgrading of the then current
rating of the Certificates which shall be confirmed in writing to the Trustee by
the Rating Agency.]
[Section 3.19. Bankruptcy Reserve Fund. (a) The Master Servicer shall
establish and maintain with the Trustee a separate trust account to be
designated the "Bankruptcy Reserve Fund for the benefit of Holders of the
Mortgage Pass-Through Certificates Series 199_-_. Amounts on deposit in the
Bankruptcy Reserve Fund shall be withdrawn therefrom in accordance with this
Section in satisfaction of the Master Servicer's obligation to cover payment
deficiencies on the Certificates occasioned by Debt Service Reductions and/or
Deficient Valuations (the "Bankruptcy Support Obligation"). On the Closing Date,
the Master Servicer shall deposit the Initial Bankruptcy Coverage Amount in the
Bankruptcy Reserve Fund. Neither the Bankruptcy Reserve Fund nor any amounts
deposited therein shall constitute a part of the assets included in the Trust
Fund.
(b) The Master Servicer grants to the Trustee for the exclusive benefit
of the Certificateholders a valid and perfected first priority security interest
in and to all of its right, title and interest in the Bankruptcy Reserve Fund,
all amounts deposited therein and in the investments thereof and all proceeds of
the conversion, voluntary or involuntary, of any of the
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foregoing to secure the obligations of the Master Servicer pursuant to the final
paragraph of Section 3.01; provided, however, that all income from the
investment of funds in the Bankruptcy Reserve Fund shall be excluded from such
grant. This grant is made in trust for the uses and purposes provided herein.
The Trustee acknowledges such grant and accepts the trusts under this Section in
accordance with the provisions hereof. The Trustee shall maintain the Bankruptcy
Reserve Fund, the amounts deposited therein and all investments thereof
continuously in the State of ___________________.
(c) The Master Servicer will cause a valid and perfected first priority
security interest under the Uniform Commercial Code as in effect in the State of
____________ from time to time to be maintained in the Bankruptcy Reserve Fund,
the amounts deposited therein and the investments thereof (other than any income
from the investment of funds in the Bankruptcy Reserve Fund) in favor of the
Trustee for the benefit of the Certificateholders in order to secure the full
and timely performance by the Master Servicer of its Bankruptcy Support
Obligation provided by Section 3.01. In that regard, the Master Servicer will
cause to be filed, if required to maintain a perfected first priority security
interest, on or before the Closing Date appropriate financing statements where
required to perfect such security interest.
(d) Amounts on deposit in the Bankruptcy Reserve Fund shall be invested
by the Trustee at the written direction of the Seller, in one or more Permitted
Investments in the name of the Trustee on behalf of the Certificateholders. The
amount of losses, if any, incurred in respect of any such investments of amounts
on deposit in the Bankruptcy Reserve Fund shall be deducted from the respective
amounts on deposit therein. The Trustee shall not be liable for any losses
realized on such investments made in accordance with this Section 3.19(d). Such
investments shall mature no later than the Business Day preceding the next
Distribution Date. On each Distribution Date the Trustee will withdraw from the
Bankruptcy Reserve Fund for remittance to the Seller the amount by which the
amount on deposit therein exceeds the Current Bankruptcy Amount. In addition, on
the Final Distribution Date the Trustee will withdraw from the Bankruptcy
Reserve Fund for remittance to the Seller the amount, if any, remaining on
deposit in the Bankruptcy Reserve Fund after distribution to the
Certificateholders on such Distribution Date.
(e) On each Certificate Account Deposit Date, the Trustee shall
withdraw from the Bankruptcy Reserve Fund and deposit into the Certificate
Account an amount equal to the lesser of (i) the Current Bankruptcy Amount for
such Distribution Date and (ii) the Bankruptcy Support Obligation for such
Distribution Date.
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(f) At any time, the Master Servicer may substitute a surety bond,
letter of credit, insurance policy or other credit enhancement for the
Bankruptcy Reserve Fund and amounts on deposit therein or any substitute
therefor to the extent permitted by the Rating Agency without a downgrading of
the then current rating of the Certificates which shall be confirmed in writing
to the Trustee by the Rating Agency.]
[Section 3.20. Maintenance of Special Hazard Policy. (a) The Master
Servicer shall obtain a Special Hazard Insurance Policy from the Special Hazard
Insurer covering (i) physical loss or damage to properties subject to defaulted
Mortgage Loans caused by certain hazards (including earthquakes, mud flows and
to a limited extent, floods) not insured against under customary standard forms
of fire and hazard insurance policies with extended coverage (or a flood
insurance policy if the related Mortgaged Property is in a federally designated
flood area), and (ii) losses on such Mortgage Loans caused by reason of the
application of the co-insurance clause typically contained in customary standard
hazard insurance policies. Aggregate claims under the Special Hazard Insurance
Policy for the Mortgage Loans will be limited to the Special Hazard Loss
Coverage Amount on the Closing Date. The Master Servicer shall use its
reasonable efforts to maintain such Special Hazard Insurance Policy and to file
claims with respect to such Special Hazard Insurance Policy. In the event that
the rating on the claims paying ability of the Special Hazard Insurer is reduced
below such rating that was assigned by the Rating Agency at the time the Special
Hazard Insurer became the Special Hazard Insurer, the Master Servicer shall
exercise reasonable efforts to obtain from another Qualified Insurer, acceptable
to the Rating Agency, a replacement policy comparable to such Special Hazard
Policy with total coverage which is equal to the then existing Special Hazard
Policy provided that the annual cost of such replacement policy shall not exceed
100% of the annual cost of the Special Hazard Policy.
In the event that the Special Hazard Insurance Policy shall cease to be
in effect, or the Special Hazard Insurer or any successor thereto ceases to be a
Qualified Insurer, the Master Servicer shall exercise its reasonable efforts to
obtain from a Qualified Insurer a comparable replacement policy with a total
coverage which is equal to the previously existing coverage as long as the
replacement policy can be obtained for the same premium. Any amounts collected
under any such policy (other than any amount to be applied to the restoration or
repair of the property encumbered by the related Mortgage Loan with respect to
which such amount was collected) shall be deposited in the Certificate Account
pursuant to Section 3.04 hereof.
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At any time, the Master Servicer may substitute a surety bond, letter
of credit, another special hazard insurance policy or other credit enhancement
for either Special Hazard Insurance Policy or any substitute therefor to the
extent permitted by each Rating Agency without a downgrading of the then current
rating of the Certificates which shall be confirmed in writing to the Trustee by
the Rating Agency.
(b) On or before the Closing Date, the Trustee shall establish and
thereafter shall maintain an account (the "Special Hazard Premium Account")
entitled "Special Hazard Premium Account, _______ in trust for _______." On each
Distribution Date, the Trustee will deposit to the Special Hazard Premium
Account an amount equal to the Special Hazard Fee from amounts withdrawn from
the Certificate Account pursuant to Section 3.06(v) hereof. Amounts on deposit
in the Special Hazard Premium Account shall be invested in accordance with the
instructions of the Seller in Permitted Investments which shall mature not later
than the Business Day preceding the next Distribution Date (except that if such
Permitted Investments are an obligation of the Trustee, then such Permitted
Investment shall mature not later than such Distribution Date on which the
Annual Special Hazard premium is due). Neither the Special Hazard Premium
Account nor any amounts deposited therein shall constitute a part of the assets
of any trust created under this Agreement. Annually, on the Distribution Date
occurring in commencing in 199_, so long as the Special Hazard Insurer is not in
default of amounts payable under the Special Hazard Policy the Trustee will
withdraw from the Special Hazard Premium Account and pay to the Special Hazard
Insurer the premium amount due for such annual period pursuant to the terms of
the Special Hazard Insurance Policy. Any amount remaining in the Special Hazard
Premium Account following the above described withdrawal shall be withdrawn from
the Special Hazard Premium Account and remitted to the Seller.]
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ARTICLE IV
Master Servicer's Certificate; Monthly Advances
Section 4.01. Master Servicer's Certificate. Each month, not later than
12:00 noon Eastern time on the Business Day following each Determination Date,
but in no event later than the close of business on the 20th day of the month or
the preceding Business Day if such 20th day is not a Business Day, the Master
Servicer shall deliver to the Trustee, a Master Servicer's Certificate
substantially in the form of Exhibit K, certified by a Servicing Officer.
Such statement shall be provided by the Trustee to any Holder of a
Certificate upon request and shall also, to the extent available, include
information regarding delinquencies on Mortgage Loans, indicating the number and
aggregate principal amount of Mortgage Loans which are either one, two, three or
more than three months delinquent and the book value of any Mortgaged Property
acquired as part of the Pool through foreclosure, deed in lieu of foreclosure or
other exercise of a security interest in the Mortgaged Property.
Section 4.02. Monthly Advances. On or before 11:00 A.M. New York time
on the Advancing Date [occurring on or before the Certificate Account Deposit
Date in _________], the Master Servicer shall (a) either (i) deposit in the
Certificate Account from its own funds an amount equal to the Monthly Advance,
if any, or (ii) cause to be made an appropriate entry in the records of the
Certificate Account that all or a portion of the Amount Held for Future
Distribution has been, as permitted by this Section 4.02, used by the Master
Servicer in discharge of any such Monthly Advance or (iii) make advances in the
form of any combination of clauses (i) and (ii) above aggregating the amount of
such Monthly Advance or (b) in the event that the Master Servicer is unable to
make such Monthly Advance, notify the Trustee in order to enable the Trustee to
exercise its remedies hereunder, including but not limited to Section 8.01. The
obligation of the Master Servicer or any successor Master Servicer to make the
Monthly Advance required by this Section 4.02 is not a guaranty of payment on
the Certificates and is contingent upon the Master Servicer's determination that
such Monthly Advances are recoverable in accordance herewith. Any portion of the
Amount Held for Future Distribution so used shall be replaced by the Master
Servicer by deposit in the Certificate Account on or before 11:00 A.M. Eastern
time on any future Certificate Account Deposit Date to the extent that funds
attributable to the Mortgage Loans that are available in the Certificate Account
on such Certificate Account Deposit Date
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shall be less than payments to Certificateholders required to be made on the
following Distribution Date.
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ARTICLE V
Payments and Statements to
Certificateholders
Section 5.01. Distributions. On each Distribution Date, the Trustee
shall distribute out of the Distribution Account (i) to each Certificateholder
of record on the related Record Date (other than as provided in Section 10.01
respecting the final distribution) by check mailed to such Certificateholder
entitled to receive a distribution on such Distribution Date at the address
appearing in the Certificate Register, or upon written request by a Regular
Certificateholder (in the event such Certi-ficateholder owns of record Regular
Certificates of any Class having denominations aggregating at least $5,000,000),
by wire transfer or by such other means of payment as such Certifi-cateholder
and the Trustee shall agree upon, such Certificateholder's Percentage Interest
in, the amount to which the related Class of Certificates is entitled in
accordance with the priorities set forth below in Section 5.02.
Neither the Holders of any Class of Regular Certificates or the
Residual Certificates, the Master Servicer, nor the Trustee shall in any way be
responsible or liable to Holders of any Class of Certificates in respect of
amounts properly previously distributed on any Class of Regular Certificates.
Amounts distributed with respect to any Class of Regular Certificates
shall be applied first to the distribution of interest thereon and then to
principal thereon.
Section 5.02. Priorities of Distribution. (a) On each Distribution
Date, the Trustee shall withdraw the Available Funds from the Distribution
Account and apply such funds to distributions on the Certificates in the
following order of priority and to the extent of Available Funds:
(i) to each Class of Senior Certificates, an amount allocable
to interest equal to the related Class Optimum Interest
Distribution Amount for such Distribution Date, any shortfall
being allocated among such Classes in proportion to the amount
of the Class Optimum Interest Distribution Amount that would
have been distributed in the absence of such shortfall;
(ii) to the Class A-1 Certificates, an amount allocable to
principal equal to the Senior Principal Distribution Amount,
up to the Class Certificate Balance thereof;
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(iii) subject to Section 5.02(d), to each Class of
Subordinate Certificates as follows:
(A) to the Class M-1 Certificates, an amount
allocable to interest equal to the Class Optimal
Interest Distribution Amount for such Class for such
Distribution Date;
(B) to Class M-1 Certificates, an amount allocable to
principal equal to the Subordinate Principal
Distribution Amount for such Class, up to the Class
Certificate Balance thereof;
(C) to the Class B-1 Certificates, an amount
allocable to interest equal to the Class Optimal
Interest Distribution Amount for such Class for such
Distribution Date;
(D) to Class B-1 Certificates, an amount allocable to
principal equal to the Subordinate Principal
Distribution Amount for such Class, up to the Class
Certificate Balance thereof;
(E) to the Class B-2 Certificates, an amount
allocable to interest equal to the Class Optimal
Interest Distribution Amount for such Class for such
Distribution Date; and
(F) to the Class B-2 Certificates, an amount
allocable to principal equal to the Subordinate
Principal Distribution Amount for such Class, up to
the Class Certificate Balance thereof; and
(iv) to the Residual Certificates any remaining
Available Funds.
(b) On each Distribution Date, the Class Optimum Interest Distribution
Amount for such Distribution Date for each interest-bearing Class of Regular
Certificates shall be reduced by (i) the related Class' pro rata share of Net
Prepayment Interest Shortfalls based on such Class' Class Optimum Interest
Distribution Amount without taking into account such Net Prepayment Interest
Shortfalls, (ii) after the Special Hazard Coverage Termination Date, with
respect to each Mortgage Loan that became a Special Hazard Mortgage Loan during
the preceding calendar month, the related Class' pro rata share (based on the
amount of interest such Class would otherwise have been entitled to receive in
respect of such Mortgage Loan) of one month's interest at the related Net
Mortgage Interest Rate on the Scheduled Principal Balance of such Mortgage Loan,
(iii) such Class' Allocable Share of (a) after the Bankruptcy Coverage
Termination Date, the
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interest portion of Debt Service Reductions and Deficient Valuations and (b)
Relief Act Reductions during the preceding calendar month and (iv) after the
Fraud Coverage Termination Date, with respect to each Mortgage Loan that became
a Fraud Loan during the preceding calendar month, the related Class' pro rata
share (based on the amount of interest such Class would otherwise be entitled to
receive in respect of such Mortgage Loan) of one month's interest at the related
Net Mortgage Interest Rate on the Scheduled Principal Balance of such Mortgage
Loan.
(c) For any Distribution Date following the Special Hazard Coverage
Termination Date, Fraud Loss Coverage Termination Date and Bankruptcy Coverage
Termination Date, as the case may be, the amount the Regular Certificates in the
aggregate are entitled to receive shall be reduced in the aggregate by the
related Splinter Loss with respect to any such Special Hazard Mortgage Loan,
Fraud Loan and Mortgage Loan that was subject to a Bankruptcy Loss. Any such
reduction shall be allocated pro rata based on Class Certificate Balances.
[(d) Notwithstanding the priority and allocation contained in Section
5.02(a)(iii), if with respect to any Class of Subordinate Certificates on any
Distribution Date the sum of the related Class Subordination Percentages of all
Classes of Subordinate Certificates which have a lower relative priority in
right of distribution pursuant to Section 5.02(a)(iii) than such Class (the
"Applicable Credit Support Percentage") is less than the Original Applicable
Credit Support Percentage for such Class, no distribution of Principal
Prepayments will be made to any such Classes (the "Restricted Classes") having
lower relative priority in right of distribution pursuant to Section
5.02(a)(iii) than such Class and the amount of such Principal Prepayments
otherwise distributable to the Restricted Classes shall be allocated to such
Class and any Classes of Subordinate Certificates having a higher relative
priority in right of distribution pursuant to Section 5.02(a)(iii) than such
Class, pro rata, based on their respective Class Certificate Balances
immediately prior to such Distribution Date and shall be distributed in the
order provided in Section 5.02(a)(iii).]
Section 5.03. Allocation of Net Realized Losses. (a) On or prior to
each Determination Date, the Master Servicer shall determine the total amount of
Net Realized Losses, if any, that occurred during the preceding calendar month.
(b) Net Realized Losses shall be allocated as follows:
(i) Net Realized Losses (other than Splinter Losses),
first, sequentially, to the Class B-2, Class B-1 and Class M-1
Certificates in that order, until the Class
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Certificate Balance of each such Class is reduced to zero, and second,
to the Class A-1 Certificates.
(ii) Net Realized Losses that are Splinter Losses,
(a) prior to the Special Hazard Coverage Termination Date, the
Bankruptcy Loss Coverage Termination Date or the Fraud Loss Coverage
Termination Date, as applicable, first, sequentially, to the Class B-2,
Class B-1 and Class M-1 Certificates, in that order, until the Class
Certificate Balance of such Class is reduced to zero and second, to the
Class A-1 Certificates, until Class Certificate Balance is reduced to
zero and (b) after the Special Hazard Coverage Termination Date, the
Bankruptcy Loss Coverage Termination Date or Fraud Loss Coverage
Termination Date, as applicable, to the Senior Certificates and the
Subordinate Certificates then outstanding, pro rata on the basis of
their respective Class Certificate Balances.
Any Net Realized Losses allocated to a Class of Certificates shall be allocated
among the Certificates of such Class in proportion to the respective portion of
the Initial Class Certificate Balance represented by a Certificate.
(b) Any allocation of Net Realized Losses to a Certificate shall be
accomplished by reducing the Class Certificate Balance thereof immediately
following the related Distribution Date in accordance with the definition of
"Class Certificate Balance."
Section 5.04. Statements to Certificateholders. (a) Prior to the
Distribution Date in each month, based upon the information provided to the
Trustee on the Master Servicer's Certificate delivered to the Trustee pursuant
to Section 4.01, the Trustee shall determine the following information with
respect to the following Distribution Date:
(i) the amount received or deemed to have been received
by the Master Servicer as of the close of business on the preceding
Determination Date in respect of the Mortgage Loans, reduced by the sum
of the amounts specified in clauses (x)-(z), inclusive, of the
definition of Available Funds;
(ii) the aggregate Purchase Prices for any Defective
Mortgage Loans or Converted Mortgage Loans to be purchased on the
immediately succeeding Certificate Account Deposit Date pursuant to
Section 2.02, 2.03 or 2.08 and (b) the amount to be deposited in the
Certificate Account prior to the related Certificate Account Deposit
Date pursuant to Section 2.04 in respect of Substitute Mortgage Loans;
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(iii) the amount, if any, required to be deposited in
the Certificate Account pursuant to Section 3.08(a);
(iv) the Available Funds for the following Distribu-
tion Date;
(v) the Class Optimum Interest Distribution Amount for
each Class of Regular Certificates for the following Distribution Date
and the amount to be distributed on account of interest on each Class
of Regular Certificates for the following Distribution Date;
(vi) the amount to be distributed and allocable to
principal for each Class of Regular Certificates (other than
the Notional Certificates) for the following Distribution
Date;
(vii) the aggregate amount of Net Realized Losses
indicating separately the amount of Net Special Hazard Losses, Fraud
Losses and Bankruptcy Losses during the preceding calendar month;
(viii) the amount of Bankruptcy Coverage Amount,
Special Hazard Loss Coverage and the Fraud Loss Coverage
Amount for the related Distribution Date;
(ix) the Senior Percentage for the following Distri-
bution Date;
(x) the Senior Prepayment Percentage for the
following Distribution Date;
(xi) the Subordinate Percentage and the Subordinate
Percentage Allocation on a Class by Class basis for the
following Distribution Date;
(xii) the Subordinate Prepayment Percentage and the
Subordinate Prepayment Percentage Allocation on a Class by
Class basis for the following Distribution Date;
(xiii) the Pool Scheduled Principal Balance for the
second following Distribution Date; and
(xiv) the Class Certificate Balance for each Class of
Regular Certificates after giving effect to the distribution to be made
on the following Distribution Date and any adjustments to the Class
Certificate Balances of such Certificates on such following
Distribution Date as a result of Net Realized Losses; and
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(b) No later than each Distribution Date, the Trustee, based upon
information supplied to it on the Master Servicer's Certificate, shall prepare
and mail to each Holder of a Certificate, each Rating Agency and the Master
Servicer a statement setting forth:
(i) (a) the amount of such distribution to Holders of
each Class of Regular Certificates allocable to interest, any Class
Unpaid Interest Shortfall for such Class included in such distribution
and any remaining Class Unpaid Interest Shortfall for such Class after
giving effect to such distribution and (b) the amounts of (v) Net
Prepayment Interest Shortfall; (w) the amount of Prepayment Interest
Shortfalls offset by the Master Servicing Fee; (x) the interest portion
of Net Special Hazard Losses and Fraud Losses; (y) the interest portion
of Debt Service Reductions and Deficient Valuations; and (z) Relief Act
Reductions, in each case allocated to each Class on such Distribution
Date;
(ii) the amount of such distribution to Holders of each
Class of Regular Certificates allocable to principal, separately
identifying the aggregate amount of any Principal Prepayments included
therein;
(iii) the amount of any Monthly Advance pursuant to
Section 4.02;
(iv) the Class Certificate Balance of each Class of
Regular Certificates on such Distribution Date after giving effect to
the distribution of principal and any adjustments to the Class
Certificate Balances of such Certificates as a result of Net Realized
Losses resulting from (a) Special Hazard Losses, (b) Deficient
Valuations or Debt Service Reductions, (c) Fraud Losses and (d) Net
Realized Losses not included in clauses (a) - (c) above, separately
listing the amounts of adjustments resulting from each such category;
(v) the Pool Scheduled Principal Balance of the
Mortgage Loans for the following Distribution Date;
(vi) the aggregate amount of Net Special Hazard Losses,
Bankruptcy Losses and Fraud Losses during the preceding calendar month
(separately stating the amount of principal reduction and interest
reduction pursuant to Sections 5.02(b) and 5.02(c)) and the Special
Hazard Loss Coverage Amount, Bankruptcy Coverage Amount and the Fraud
Loss Coverage Amount for the following Distribution Date;
(vii) the number and aggregate principal balances of
Mortgage Loans delinquent as of the end of the previous
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month (a) one month, (b) two months and (c) three or more
months and loans in foreclosure;
(viii) the book value (within the meaning of 12 C.F.R.
ss. 571.13 or comparable provision) of any real estate
acquired through foreclosure or grant of a deed in lieu of
foreclosure;
(ix) the amount of Net Realized Losses allocated to
each such Class;
(x) the Senior Percentage for the following
Distribution Date;
(xi) the Senior Prepayment Percentage for the
following Distribution Date; and
(xii) the Subordinate Percentage and the Subordinate
Percentage Allocation on a Class by Class basis for the
following Distribution Date; and
(xiii) the Subordinate Prepayment Percentage and the Subordinate
Prepayment Percentage Allocation on a Class by Class basis for the
following Distribution Date.
In the case of information furnished pursuant to subclauses (i), (ii)
and (ix) above, the amounts shall be expressed as a dollar amount or Notional
Amount, as the case may be, per Certificate with a $1,000 denomination.
[Within a reasonable period of time after the end of each calendar
year, the [Master Servicer] shall forward to the Trustee for mailing to each
Person who at any time during the calendar year was the Holder of a Regular
Certificate, or Residual Certificate a statement containing the information set
forth in subclauses (i) and (ii) above in the case of a Regular
Certifi-cateholder, in each case aggregated for such calendar year or applicable
portion thereof during which such Person was a Certificateholder. Such
obligation of the [Master Servicer] shall be deemed to have been satisfied to
the extent that substantially comparable information shall be provided by the
[Master Servicer] pursuant to any requirements of the Code as from time to time
in force.]
[The Master Servicer shall provide on an aggregate basis with respect
to each Class of Certificates to enable the Trustee to deliver to the Holders of
Certificates any reports or information the Trustee is required by this
Agreement or the Code, Treasury Regulations or REMIC Provisions to deliver to
the Holders of Certificates, and Master Servicer shall prepare and provide to
the Trustee, and the Trustee shall forward to
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Certificateholders in the form so provided (by mail, telephone, or publication
as may be permitted by applicable Treasury Regulations) as directed by the
Master Servicer, such other reasonable information as the Master Servicer deems
necessary or appropriate or is required by the Code, Treasury Regulations, and
the REMIC Provisions including, but not limited to, (i) information to be
reported to the Holders of the Residual Certificates for quarterly notices on
Schedule Q (Form 1066) (which information shall be forwarded to the Holders of
the Certificates by the Master Servicer), (ii) information to be provided to the
Holders of Certificates with respect to amounts which should be included as
interest and original issue discount in such Holders' gross income and (iii)
information to be provided to all Holders of Certificates setting forth the
percentage of the REMIC's assets, determined in accordance with Treasury
Regulations using a convention, not inconsistent with Treasury Regulations,
selected by the Master Servicer in its absolute discretion, that constitute
qualifying real property loans under Section 593 of the Code, real estate assets
under Section 856 of the Code, and assets described in Section 7701(a)(19)(C) of
the Code; provided, however, that in setting forth the percentage of such assets
of the REMIC, nothing contained in this Agreement, including without limitation
Section 7.03 hereof, shall be interpreted to require the Master Servicer
periodically to appraise the fair market values of the assets of the Pool or to
indemnify the Pool or any Certificateholders from any adverse federal, state or
local tax consequences associated with a change subsequently required to be made
in the Master Servicer's initial good faith determinations of such fair market
values (if subsequent determinations are required pursuant to the REMIC
Provisions) made from time to time.]
Section 5.05. Tax Returns and Reports to Certificate-holders. (a) For
federal income tax purposes, the Trust Fund shall have a calendar year taxable
year and shall maintain its books on the accrual method of accounting.
[(b) The Master Servicer shall prepare or cause to be prepared and
shall deliver to the Trustee for signature, and the Trustee shall file or cause
to be filed with the Internal Revenue Service and applicable state or local tax
authorities income tax information returns for each taxable year with respect to
the Trust Fund containing such information at the times and in the manner as may
be required by the Code or state or local tax laws, regulations, or rules, and
shall furnish or cause to be furnished to the Trust Fund and the
Certificateholders the schedules, statements or information at such times and in
such manner as may be required thereby. Within thirty (30) days of the Closing
Date, the Trustee shall furnish or cause to be furnished to the Internal Revenue
Service, on Form 8811 or as otherwise required by the Code, the name, title,
address and telephone number of the
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person that Holders of the Certificates may contact for tax information relating
thereto, together with such additional information at the time or times and in
the manner required by the Code. Such federal, state, or local income tax or
information returns shall be signed by the Trustee, or such other Person as may
be required to sign such returns by the Code or state or local tax laws,
regulations, or rules.]
[(c) In the first federal income tax return of the Trust Fund for its
short taxable year ending December 31, 199 , REMIC status shall be elected for
such taxable year and all succeeding taxable years.]
[(d) The Trustee will maintain or cause to be maintained such records
relating to the Trust Fund, including but not limited to the income, expenses,
assets and liabilities of the Pool, and the fair market value and adjusted basis
of the Pool property and assets determined at such intervals as may be required
by the Code, as may be necessary to prepare the foregoing returns, schedules,
statements or information.]
[Section 5.06. Tax Matters Person. The Tax Matters Person shall have
the same duties with respect to the Trust Fund as those of a "tax matters
partner" under Subchapter C of Chapter 63 of Subtitle F of the Code.
[Section 5.07. Rights of the Tax Matters Person in Respect of the
Trustee. The Trustee shall afford the Tax Matters Person, upon reasonable notice
during normal business hours, access to all records maintained by the Trustee in
respect of its duties hereunder and access to officers of the Trustee
responsible for performing such duties. Upon request, the Trustee shall furnish
the Tax Matters Person with its most recent statement of condition publicly
available. The Trustee shall make available to the Tax Matters Person such
books, documents or records relating to the Trustee's services hereunder as the
Tax Matters Person shall reasonably request. The Tax Matters Person shall not
have any responsibility or liability for any action or failure to act by the
Trustee and is not obligated to supervise the performance of the Trustee under
this Agreement or otherwise.]
[Section 5.08. REMIC Related Covenants. For as long as the
Pool shall exist, the Trustee shall act in accordance herewith to
assure continuing treatment of the Trust Fund as a REMIC and
avoid the imposition of tax on the Trust Fund. In particular:
(a) The Trustee shall not create, or permit the creation of,
any "interests" in the Trust Fund within the meaning of Code Section 860D(a)(2)
other than the interests represented
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by the Trust Fund, Regular Certificates and the Residual Certifi-
cates, respectively.
(b) Except as otherwise provided in the Code, the Sponsor and
the Master Servicer shall not grant and the Trustee shall not accept property
unless (i) substantially all of the property held in the Trust Fund constitutes
either "qualified mortgages" or "permitted investments" as defined in Code
Sections 860G(a)(3) and (5), respectively, and (ii) no property shall be
contributed to the Trust Fund after the start-up day unless such grant would not
subject the Pool to the 100% tax on contributions to a REMIC after the start-up
day of the REMIC imposed by Code Section 860G(d).
(c) The Trustee shall not accept on behalf of the Trust Fund
any fee or other compensation for services and shall not accept on behalf of the
Pool any income from assets other than those permitted to be held by a REMIC.
(d) The Trustee shall not sell or permit the sale of all or
any portion of the Mortgage Loans (other than in accordance with Sections 2.02
or 2.03), unless such sale is pursuant to a "qualified liquidation" as defined
in Code Section 860F(a)(4)(A) and in accordance with Article X.
(e) The Trustee shall maintain books with respect to the Trust
Fund on a calendar year taxable year and on an accrual basis.
Neither the Master Servicer nor the Trustee shall engage in a
"prohibited transaction" (as defined in Code Section 860F(a)(2)), except that,
with the prior written consent of the Master Servicer and the Sponsor, the
Trustee may engage in the activities otherwise prohibited by the foregoing
clauses (b), (c) and (d), provided that the Master Servicer shall have delivered
to the Trustee an Opinion of Counsel to the effect that such transaction will
not result in the imposition of a tax on the Trust Fund and will not disqualify
the Trust Fund from treatment as a REMIC; and provided, that the Master Servicer
shall have demonstrated to the satisfaction of the Trustee that such action will
not adversely affect the rights of the holders of the Certificates and the
Trustee and that such action will not adversely impact the rating of the
Certificates.]
[SECTION 5.09. Determination of Pass-Through Rates for COFI
Certificates.
The Pass-Through Rate for each Class of COFI Certificates for each
Interest Accrual Period after the initial Interest Accrual Period shall be
determined by the Trustee as provided below on the basis of the Index and the
applicable formulae
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appearing in footnotes corresponding to the COFI Certificates in (1) to the
table relating to the Certificates in the Preliminary Statement.
Except as provided below, with respect to each Interest Accrual Period
following the initial Interest Accrual Period, the Trustee shall not later than
two Business Days following the publication of the applicable Index determine
the Pass-Through Rate at which interest shall accrue in respect of the COFI
Certificates during the related Interest Accrual Period.
Except as provided below, the Index to be used in determining the
respective Pass-Through Rates for the COFI Certificates for a particular
Interest Accrual Period shall be COFI for the second calendar month preceding
such Interest Accrual Period. If at the Outside Reference Date for any Interest
Accrual Period, COFI for the second calendar month preceding such Interest
Accrual Period has not been published, the Trustee shall use COFI for the third
calendar month preceding such Interest Accrual Period. If COFI for neither the
second nor third calendar months preceding any Interest Accrual Period has been
published on or before the related Outside Reference Date, the Index for such
Interest Accrual Period and for all subsequent Interest Accrual Periods shall be
the National Cost of Funds Index for the third calendar month preceding such
Interest Accrual Period (or the fourth preceding calendar month if such National
Cost of Funds Index for the third preceding calendar month has not been
published by such Outside Reference Date). In the event that the National Cost
of Funds Index for neither the third nor fourth calendar months preceding an
Interest Accrual Period has been published on or before the related Outside
Reference Date, then for such Interest Accrual Period and for each succeeding
Interest Accrual Period, the Index shall be LIBOR, determined in the manner set
forth below.
On each Interest Determination Date so long as the COFI Certificates
are outstanding and the applicable Index therefor is LIBOR, the Trustee shall
either (i) request each Reference Bank to inform the Trustee of the quotation
offered by its principal London office for making one-month United States dollar
deposits in leading banks in the London interbank market, as of 11:00 a.m.
(London time) on such Interest Determination Date or (ii) in lieu of making any
such request, rely on such Reference Bank quotations that appear at such time on
the Reuters Screen LIBO Page (as defined in the International Swap Dealers
Association Inc. Code of Standard Wording, Assumptions and Provisions for Swaps,
1986 Edition), to the extent available.
With respect to any Interest Accrual Period for which the applicable
Index is LIBOR, LIBOR for such Interest Accrual Period
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will be established by the Trustee on the related Interest
Determination Date as follows:
(a) If on any Interest Determination Date two or more
Reference Banks provide such offered quotations, LIBOR for the next
Interest Accrual Period shall be the arithmetic mean of such offered
quotations (rounding such arithmetic mean upwards if necessary to the
nearest whole multiple of 1/32%).
(b) If on any Interest Determination Date only one or none of
the Reference Banks provides such offered quotations, LIBOR for the
next Interest Accrual Period shall be whichever is the higher of (i)
LIBOR as determined on the previous Interest Determination Date or (ii)
the Reserve Interest Rate. The "Reserve Interest Rate" shall be the
rate per annum which the Trustee determines to be either (i) the
arithmetic mean (rounded upwards if necessary to the nearest whole
multiple of 1/32%) of the one-month United States dollar lending rates
that New York City banks selected by the Trustee are quoting, on the
relevant Interest Determination Date, to the principal London offices
of at least two of the Reference Banks to which such quotations are, in
the opinion of the Trustee, being so made, or (ii) in the event that
the Trustee can determine no such arithmetic mean, the lowest one-month
United States dollar lending rate which New York City banks selected by
the Trustee are quoting on such Interest Determination Date to leading
European banks.
From such time as the applicable Index becomes LIBOR until all of the
COFI Certificates are paid in full, the Trustee will at all times retain at
least four Reference Banks for the purposes of determining LIBOR with respect to
each interest Determination Date. The Master Servicer initially shall designate
the Reference Banks. Each "Reference Bank" shall be a leading bank engaged in
transactions in Eurodollar deposits in the international Eurocurrency market,
shall not control, be controlled by, or be under common control with, the
Trustee and shall have an established place of business in London. If any such
Reference Bank should be unwilling or unable to act as such or if the Master
Servicer should terminate its appointment as Reference Bank, the Trustee shall
promptly appoint or cause to be appointed another Reference Bank. The Trustee
shall have no liability or responsibility to any Person for (i) the selection of
any Reference Bank for purposes of determining LIBOR or (ii) any inability to
retain at least four Reference Banks which is caused by circumstances beyond its
reasonable control.
In determining LIBOR and any Pass-Through Rate for the COFI
Certificates or any Reserve Interest Rate, the Trustee may
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<PAGE>
conclusively rely and shall be protected in relying upon the offered quotations
(whether written, oral or on the Reuters Screen) from the Reference Banks or the
New York City banks as to LIBOR or the Reserve Interest Rate, as appropriate, in
effect from time to time. The Trustee shall not have any liability or
responsibility to any Person for (i) the Trustee's selection of New York City
banks for purposes of determining any Reserve Interest Rate or (ii) its
inability, following a good-faith reasonable effort, to obtain such quotations
from the Reference Banks or the New York City banks or to determine such
arithmetic mean, all as provided for in this Section 4.05.
The establishment of LIBOR and each Pass-Through Rate for the LIBOR
Certificates by the Trustee shall (in the absence of manifest error) be final,
conclusive and binding upon each Holder of a Certificate and the Trustee.]
[SECTION 5.10. Determination of Pass-Through Rates for
LIBOR Certificates.
On each Interest Determination Date so long as the LIBOR Certificates
are outstanding, the Trustee shall either (i) request each Reference Bank to
inform the Trustee of the quotation offered by its principal London office for
making one month United States dollar deposits in leading banks in the London
interbank market, as of 11:00 a.m. (London time) on such Interest Determination
Date or (ii) in lieu of making any such request, rely on such Reference Bank
quotations that appear at such time on the Reuters Screen LIBO Page (as defined
in the International Swap Dealers Association Inc. Code of Standard Wording,
Assumptions and provisions for Swaps, 1986 Edition), to the extent available.
LIBOR for the next Interest Accrual Period will be established by the
Trustee on each interest Determination Date as follows:
(a) If on any interest Determination Date two or more
Reference Banks provide such offered quotations, LIBOR for the next
Interest Accrual Period shall be the arithmetic mean of such offered
quotations (rounding such arithmetic mean upwards if necessary to the
nearest whole multiple of 1/32%).
(b) If on any Interest Determination Date only one or none of
the Reference Banks provides such offered quotations, LIBOR for the
next Interest Accrual Period shall be whichever is the higher of (i)
LIBOR as determined on the previous Interest Determination Date or (ii)
the Reserve Interest Rate. The "Reserve Interest Rate" shall be the
rate per annum which the Trustee determines to be either (i)
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<PAGE>
the arithmetic mean (rounded upwards if necessary to the nearest whole
multiple of 1/32) of the one-month United States dollar lending rates
that New York City banks selected by the Trustee are quoting, on the
relevant Interest Determination Date, to the principal London offices
of at least two of the Reference Banks to which such quotations are, in
the opinion of the Trustee, being so made, or (ii) in the event that
the Trustee can determine no such arithmetic mean, the lowest one-month
United States dollar lending rate which New York City banks selected by
the Trustee are quoting on such Interest Determination Date to leading
European banks.
(c) If on any interest Determination Date the trustee is
required but is unable to determine the Reserve Interest Rate in the
manner provided in paragraph (b) above, LIBOR shall be LIBOR as
determined on the preceding Interest Determination Date, or, in the
case of the first Interest Determination Date, the Initial LIBOR Rate.
Until all of the LIBOR Certificates are paid in full, the Trustee will
at all times retain at least four Reference Banks for the purpose of determining
LIBOR with respect to each Interest Determination Date. The Master Servicer
initially shall designate the Reference Banks. Each "Reference Bank" shall be a
leading bank engaged in transactions in Eurodollar deposits in the international
Eurocurrency market, shall not control, be controlled by, or be under common
control with, the Trustee and shall have an established place of business in
London. If any such Reference Bank should be unwilling or unable to act as such
or if the Master Servicer should terminate its appointment as Reference Bank,
the Trustee shall promptly appoint or cause to be appointed another Reference
Bank. The Trustee shall have no liability or responsibility to any Person for
(i) the selection of any Reference Bank for purposes of determining LIBOR or
(ii) any inability to retain at least four Reference Banks which is caused by
circumstances beyond its reasonable control.
The Pass-Through Rate for each Class of LIBOR Certificates for each
Interest Accrual Period shall be determined by the Trustee on each Interest
Determination Date so long as the LIBOR Certificates are outstanding on the
basis of LIBOR and the respective formulae appearing in footnotes corresponding
to the LIBOR Certificates in the table relating to the Certificates in the
Preliminary Statement.
In determining LIBOR, any Pass-Through Rate for the LIBOR Certificates
or any Reserve Interest Rate, the Trustee may conclusively rely and shall be
protected in relying upon the offered quotations (whether written, oral or on
the Reuters Screen) from the Reference Banks or the New York City banks as to
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<PAGE>
LIBOR or the Reserve Interest Rate, as appropriate, in effect from time to time.
The Trustee shall not have any liability or responsibility to any Person for (i)
the Trustee's selection of New York City banks for purposes of determining any
Reserve Interest Rate or (ii) its inability, following a good-faith reasonable
effort, to obtain such quotations from the Reference Banks or the New York City
banks or to determine such arithmetic mean, all as provided for in this Section
5.10.
The establishment of LIBOR and each Pass-Through Rate for the LIBOR
Certificates by the Trustee shall (in the absence of manifest error) be final,
conclusive and binding upon each Holder of a Certificate and the Trustee.]
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<PAGE>
ARTICLE VI
The Certificates
Section 6.01. The Certificates. The Classes of Senior Certificates, the
Residual Certificates and the Subordinate Certificates shall be substantially in
the forms set forth in Exhibits A, B, D and E (reverse of all Certificates) and
shall, on original issue, be executed by the Sponsor and shall be countersigned
and delivered by the Trustee to or upon the order of the Sponsor upon receipt by
the Trustee of the documents specified in Section 2.01. The Senior Certificates
shall be available to investors in interests representing minimum dollar
Certificate Balances of $[ ] and integral multiples of $[ ] in excess thereof.
The Subordinate Certificates shall be available to investors in fully registered
form in interests representing minimum dollar Certificate Balances of $[ ] and
integral dollar multiples of $[ ] in excess thereof (except one Certificate of
such Class may be issued with a Certificate Balance in any amount in excess of
the minimum denomination).
The Residual Certificates shall be in fully registered form in minimum
Percentage Interests of 10% and integral multiples of 10% in excess thereof
(except one Residual Certificate may be available in a Percentage Interest which
is equal to 0.001%).
The Certificates shall be executed by manual or facsimile signature on
behalf of the Sponsor by an authorized officer or signatory. Certificates
bearing the manual or facsimile signatures of individuals who were, at the time
when such signatures were affixed, authorized to sign on behalf of the Sponsor
shall bind the Sponsor, notwithstanding that such individuals or any of them
have ceased to be so authorized prior to the execution and delivery of such
Certificates or did not hold such offices or positions at the date of such
Certificate. No Certificate shall be entitled to any benefit under this
Agreement, or be valid for any purpose, unless such Certificate shall have been
manually countersigned by the Trustee substantially in the form provided for
herein, and such countersignature upon any Certificate shall be conclusive
evidence, and the only evidence, that such Certificate has been duly
authenticated and delivered hereunder. All Certificates shall be dated the date
of their countersignature.
Section 6.02. Registration of Transfer and Exchange of Certificates.
The Trustee shall cause to be kept at an office or agency in the city in which
the Corporate Trust Office of the Trustee is located a Certificate Register in
which, subject to such reasonable regulations as it may prescribe, the Trustee
shall provide for the registration of Certificates and of transfers and
exchanges of Certificates as herein provided. The
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Trustee shall initially serve as Certificate Registrar for the purpose of
registering Certificates and transfers and exchanges of Certificates as herein
provided.
At the option of the Certificateholders, Certificates may be exchanged
for other Certificates of authorized denominations of a like Class, tenor and
aggregate Percentage Interest, upon surrender of the Certificates to be
exchanged at any such office or agency. Whenever any Certificates are so
surrendered for exchange the Sponsor shall execute and the Trustee shall
authenticate, countersign and deliver the Certificates which the
Certificateholder making the exchange is entitled to receive. Every Certificate
presented or surrendered for transfer or exchange shall (if so required by the
Trustee or the Certificate Registrar) be duly endorsed by, or be accompanied by
a written instrument of transfer in form satisfactory to the Trustee and the
Certificate Registrar duly executed by, the Holder thereof or his attorney duly
authorized in writing.
No transfer of a Private Certificate shall be made unless such transfer
is exempt from the registration requirements of the Securities Act of 1933, as
amended, and any applicable state securities laws or is made in accordance with
said Act and laws. In the event of any such transfer, (i) unless such transfer
is made in reliance upon Rule 144A under the 1933 Act, the Trustee or the
Sponsor may require a written Opinion of Counsel (which may be in-house counsel)
acceptable to and in form and substance reasonably satisfactory to the Trustee
and the Sponsor that such transfer may be made pursuant to an exemption,
describing the applicable exemption and the basis therefor, from said Act and
laws or is being made pursuant to said Act and laws, which Opinion of Counsel
shall not be an expense of the Trustee or the Sponsor and (ii) the Trustee shall
require the transferee to execute an investment letter (in substantially the
form attached hereto as Exhibit J) acceptable to and in form and substance
reasonably satisfactory to the Sponsor and the Trustee certifying to the Sponsor
and the Trustee the facts surrounding such transfer, which investment letter
shall not be an expense of the Trustee or the Sponsor. The Holder of a Private
Certificate desiring to effect such transfer shall, and does hereby agree to,
indemnify the Trustee and the Sponsor against any liability that may result if
the transfer is not so exempt or is not made in accordance with such federal and
state laws.
Except as provided below, the Book-Entry Certificates shall at all
times remain registered in the name of the Depository or its nominee and at all
times: (i) registration of the Certificates may not be transferred by the
Trustee except to another Depository; (ii) the Depository shall maintain
book-entry records with respect to the Certificate Owners and with respect to
ownership and transfers of such Book-Entry Certificates;
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<PAGE>
(iii) ownership and transfers of registration of the Book-Entry Certificates on
the books of the Depository shall be governed by applicable rules established by
the Depository; (iv) the Depository may collect its usual and customary fees,
charges and expenses from its Depository Participants; (v) the Trustee shall
deal with the Depository, Depository Participants and indirect participating
firms as representatives of the Certificate Owners of the Book-Entry
Certificates for purposes of exercising the rights of Holders under this
Agreement, and requests and directions for and votes of such representatives
shall not be deemed to be inconsistent if they are made with respect to
different Certificate Owners; and (vi) the Trustee may rely and shall be fully
protected in relying upon information furnished by the Depository with respect
to its Depository Participants and furnished by the Depository Participants with
respect to indirect participating firms and persons shown on the books of such
indirect participating firms as direct or indirect Certificate Owners.
All transfers by Certificate Owners of Book-Entry Certificates shall be
made in accordance with the procedures established by the Depository Participant
or brokerage firm representing such Certificate Owner. Each Depository
Participant shall only transfer Book-Entry Certificates of Certificate Owners it
represents or of brokerage firms for which it acts as agent in accordance with
the Depository's normal procedures.
If (x) (i) the Depository or the Sponsor advises the Trustee in writing
that the Depository is no longer willing or able to properly discharge its
responsibilities as Depository, and (ii) the Trustee or the Sponsor is unable to
locate a qualified successor, (y) the Sponsor at its option advises the Trustee
in writing that it elects to terminate the book-entry system through the
Depository or (z) after the occurrence of an Event of Default, Certificate
Owners representing at least 51% of the Class Certificate Balance of the
Book-Entry Certificates together advise the Trustee and the Depository through
the Depository Participants in writing that the continuation of a book-entry
system through the Depository is no longer in the best interests of the
Certificate Owners, the Trustee shall notify all Certificate Owners, through the
Depository, of the occurrence of any such event and of the availability of
definitive, fully registered Certificates (the "Definitive Certificates") to
Certificate Owners requesting the same. Upon surrender to the Trustee of the
related Class of Certificates by the Depository, accompanied by the instructions
from the Depository for registration, the Trustee shall issue the Definitive
Certificates. Neither the Master Servicer, the Sponsor nor the Trustee shall be
liable for any delay in delivery of such instruction and may conclusively rely
on, and shall be protected in relying on, such instructions. The Master Servicer
shall provide the Trustee with an adequate
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inventory of certificates to facilitate the issuance and transfer of Definitive
Certificates. Upon the issuance of Definitive Certificates all references herein
to obligations imposed upon or to be performed by the Depository shall be deemed
to be imposed upon and performed by the Trustee, to the extent applicable with
respect to such Definitive Certificates and the Trustee shall recognize the
Holders of the Definitive Certificates as Certifi-cateholders hereunder.
No transfer of a ERISA Restricted Certificate shall be made unless the
Trustee shall have received either (i) a representation letter from the
transferee of such Certificate, acceptable to and in form and substance
satisfactory to the Trustee and the Master Servicer, to the effect that such
trans-feree is not an employee benefit plan subject to Section 406 of ERISA, nor
a person acting on behalf of any such plan, which representation letter shall
not be an expense of the Trustee or the Master Servicer, or (ii) in the case of
any ERISA Restricted Certificate presented for registration in the name of an
employee benefit plan subject to ERISA, and Section 4975 of the Code (or
comparable provisions of any subsequent enactments), or a trustee of any such
plan, an Opinion of Counsel satisfactory to the Trustee and the Master Servicer
to the effect that the purchase or holding of such ERISA Restricted Certificate
will not result in the assets of the Trust Fund being deemed to be "plan assets"
and subject to the prohibited transaction provisions of ERISA and the Code and
will not subject the Trustee or the Master Servicer to any obligation in
addition to those undertaken in this Agreement, which opinion of counsel shall
not be an expense of the Trustee or the Master Servicer.
Each Person who has or who acquires any Ownership Interest in a
Residual Certificate shall be deemed by the acceptance or acquisition of such
Ownership Interest to have agreed to be bound by the following provisions and to
have irrevocably appointed the Sponsor or its designee as its attorney-in-fact
to negotiate the terms of any mandatory sale under clause (v) below and to
execute all instruments of transfer and to do all other things necessary in
connection with any such sale, and the rights of each Person acquiring any
Ownership Interest in a Residual Certificate are expressly subject to the
following provisions:
(i) Each Person holding or acquiring any Ownership
Interest in a Residual Certificate shall be a Permitted Transferee and
shall promptly notify the Trustee of any change or impending change in
its status as a Permitted Transferee.
(ii) No Person shall acquire an Ownership Interest in a
Residual Certificate unless such Ownership Interest is a pro rata
undivided interest.
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(iii) No Ownership Interest in a Residual Certificate may
be transferred without the express written consent of the Trustee. In
connection with any proposed transfer of any Ownership Interest in a
Residual Certificate, the Trustee shall as a condition to such consent,
require delivery to it, in form and substance satisfactory to it, of
each of the following:
A. an affidavit in the form of Exhibit I hereto from
the proposed transferee to the effect that such transferee is
a Permitted Transferee and that it is not acquiring its
Ownership Interest in the Residual Certificate that is the
subject of the proposed transfer as a nominee, trustee or
agent for any Person who is not a Permitted Transferee; and
B. a covenant of the proposed transferee to the
effect that the proposed transferee agrees to be bound
by and to abide by the transfer restrictions applicable
to the Residual Certificates.
(iv) Any attempted or purported transfer of any
Ownership Interest in a Residual Certificate in violation of the
provisions of this Section 6.02 shall be absolutely null and void and
shall vest no rights in the purported trans-feree. If any purported
transferee shall, in violation of the provisions of this Section 6.02,
become a Holder of a Residual Certificate, then the prior Holder of
such Residual Certificate that is a Permitted Transferee shall, upon
discovery that the registration of transfer of such Residual
Certificate was not in fact permitted by this Section 6.02, be restored
to all rights as Holder thereof retroactive to the date of registration
of transfer of such Residual Certificate. The Trustee shall be under no
liability to any Person for any registration of transfer of a Residual
Certificate that is in fact not permitted by this Section 6.02 or for
making any distributions due on such Residual Certificate to the Holder
thereof or taking any other action with respect to such Holder under
the provisions of the Agreement so long as the transfer was not
registered upon the express written consent of the Trustee. The Trustee
shall be entitled to recover from any Holder of a Residual Certificate
that was in fact not a Permitted Transferee at the time such
distributions were made all distributions made on such Residual
Certificate. Any such distributions so recovered by the Trustee shall
be distributed and delivered by the Trustee to the prior Holder of such
Residual Certificate that is a Permitted Transferee.
(v) If any Person other than a Permitted Transferee
acquires any Ownership Interest in a Residual Certificate in
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violation of the restrictions in this Section 6.02, then the Trustee
shall have the right but not the obligation, without notice to the
Holder of such Residual Certificate or any other Person having an
Ownership Interest therein, to notify the Underwriter to arrange for
the sale of such Residual Certificate. The proceeds of such sale, net
of commissions (which may include commissions payable to the Trustee or
its affiliates), expenses and taxes due, if any, will be remitted by
the Trustee to the previous Holder of such Residual Certificate that is
a Permitted Transferee, except that in the event that the Trustee
determines that the Holder of such Residual Certificate may be liable
for any amount due under this Section 6.02 or any other provisions of
this Agreement, the Trustee may withhold a corresponding amount from
such remittance as security for such claim. The terms and conditions of
any sale under this clause (v) shall be determined in the sole
discretion of the Trustee, and it shall not be liable to any Person
having an Ownership Interest in a Residual Certificate as a result of
its exercise of such discretion.
(vi) If any Person other than a Permitted Transferee
acquires any Ownership Interest in a Residual Certificate in violation
of the restrictions in this Section 6.02, then the Trustee, based on
information provided to the Trustee by the Master Servicer will provide
to the Internal Revenue Service, and to the persons specified in
Section 860E(e)(3) and (6) of the Code, information needed to compute
the tax imposed under Section 860E(e)(5) of the Code on transfers of
residual interests to disqualified organizations.
The foregoing provisions of Section 6.02 shall cease to apply to transfers
occurring on or after the date on which there shall have been delivered to the
Trustee, in form and substance satisfactory to the Trustee, (i) written
notification from each Rating Agency that the removal of the restrictions on
Transfer set forth in this Section 6.02 will not cause such Rating Agency to
downgrade its rating of the Certificates and (ii) an Opinion of Counsel to the
effect that such removal will not cause the Trust Fund to fail to qualify as a
REMIC.
No service charge shall be imposed for any transfer or exchange of
Certificates of any Class, but the Trustee may require payment of a sum
sufficient to cover any tax or governmental charge that may be imposed in
connection with any transfer or exchange of Certificates.
All Certificates surrendered for transfer and exchange shall be
destroyed by the Certificate Registrar.
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Section 6.03. Mutilated, Destroyed, Lost or Stolen Certificates. If (i)
any mutilated Certificate is surrendered to the Certificate Registrar or the
Certificate Registrar receives evidence to its satisfaction of the destruction,
loss or theft of any Certificate, and (ii) there is delivered to the Trustee,
the Sponsor and the Certificate Registrar such security or indemnity reasonably
satisfactory to each, to save each of them harmless, then, in the absence of
actual notice to the Trustee or the Certificate Registrar that such Certificate
has been acquired by a bona fide purchaser, the Trustee shall countersign and
deliver, in exchange for or in lieu of any such mutilated, destroyed, lost or
stolen Certificate, a new Certificate of like tenor, Class and Percentage
Interest but bearing a number not contemporaneously outstanding. Upon the
issuance of any new Certificate under this Section, the Trustee may require the
payment of a sum sufficient to cover any tax or other governmental charge that
may be imposed in relation thereto and any other expenses (including the fees
and expenses of the Trustee and the Certificate Registrar) connected therewith.
Any duplicate Certificate issued pursuant to this Section shall constitute
complete and indefeasible evidence of ownership in the Pool, as if originally
issued, whether or not the lost, stolen or destroyed Certificate shall be found
at any time.
Section 6.04. Persons Deemed Owners. Prior to due presentation of a
Certificate for registration of transfer, the Sponsor, the Master Servicer, the
Trustee, the Certificate Registrar and any agent of the Sponsor, the Master
Servicer, the Trustee or the Certificate Registrar may treat the Person in whose
name any Certificate is registered as the owner of such Certificate for the
purpose of receiving distributions pursuant to Section 5.01 and for all other
purposes whatsoever, and neither the Sponsor, the Master Servicer, the Trustee,
the Certificate Registrar nor any agent of the Master Servicer, the Trustee or
the Certificate Registrar shall be affected by notice to the contrary.
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ARTICLE VII
The Sponsor and the Master Servicer
Section 7.01. Respective Liabilities of the Sponsor and the Master
Servicer. The Sponsor and the Master Servicer shall each be liable in accordance
herewith only to the extent of the obligations specifically and respectively
imposed upon and undertaken by the Sponsor and the Master Servicer herein. By
way of illustration and not limitation, the Sponsor is not liable for the
servicing and administration of the Mortgage Loans, nor is it obligated by
Section 3.16 or Section 8.01 to assume any obligations of the Master Servicer or
to appoint a designee to assume such obligations, nor is it liable for any other
obligation hereunder that it may, but is not obligated to, assume unless it
elects to assume such obligation in accordance herewith.
Section 7.02. Merger or Consolidation of the Sponsor or the Master
Servicer. The Sponsor and the Master Servicer will each keep in full effect its
existence, rights and franchises as a corporation under the laws of the state of
its incorporation, and will each obtain and preserve its qualification to do
business as a foreign corporation in each jurisdiction in which such
qualification is or shall be necessary to protect the validity and
enforceability of this Agreement, the Certificates or any of the Mortgage Loans
and to perform its respective duties under this Agreement.
Any Person into which the Sponsor or the Master Servicer may be merged
or consolidated, or any corporation resulting from any merger or consolidation
to which the Sponsor or the Master Servicer shall be a party, or any Person
succeeding to the business of the Sponsor or the Master Servicer, shall be the
successor of the Sponsor or the Master Servicer, as the case may be, hereunder,
without the execution or filing of any paper or any further act on the part of
any of the parties hereto, anything herein to the contrary notwithstanding;
provided, however, that the successor or surviving Person to the Master Servicer
shall be qualified to service mortgage loans on behalf of FNMA or FHLMC.
Section 7.03. Limitation on Liability of the Sponsor, the Master
Servicer and Others. Neither the Sponsor, the Master Servicer nor any of the
directors, officers, employees or agents of the Sponsor or of the Master
Servicer shall be under any liability to the Pool or the Certificateholders for
any action taken or for refraining from the taking of any action in good faith
pursuant to this Agreement, or for errors in judgment; provided, however, that
this provision shall not protect the Sponsor, the Master Servicer or any such
person against any breach of warranties or representations made herein or any
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liability which would otherwise be imposed by reason of willful misfeasance, bad
faith or gross negligence in the performance of duties or by reason of reckless
disregard of obligations and duties hereunder. The Sponsor, the Master Servicer
and any director, officer, employee or agent of the Sponsor or the Master
Servicer may rely in good faith on any document of any kind prima facie properly
executed and submitted by any Person respecting any matters arising hereunder.
The Sponsor, the Master Servicer and any director, officer, employee or agent of
the Sponsor or the Master Servicer shall be indemnified by the Pool and held
harmless against any loss, liability or expense incurred in connection with any
legal action relating to this Agreement or the Certificates, other than any
loss, liability or expense related to any specific Mortgage Loan or Mortgage
Loans (except as any such loss, liability or expense shall be otherwise
reimbursable pursuant to this Agreement) and any loss, liability or expense
incurred by reason of willful misfeasance, bad faith or gross negligence in the
performance of duties hereunder or by reason of reckless disregard of
obligations and duties hereunder. Neither the Sponsor nor the Master Servicer
shall be under any obligation to appear in, prosecute or defend any legal action
which is not incidental to its respective duties under this Agreement and which
in its opinion may involve it in any expense or liability; provided, however,
that the Sponsor or the Master Servicer may in its discretion undertake any such
action which it may deem necessary or desirable in respect to this Agreement and
the rights and duties of the parties hereto and the interests of the
Certificateholders hereunder. In such event, the legal expenses and costs of
such action and any liability resulting therefrom shall be expenses, costs and
liabilities of the Pool, and the Sponsor and the Master Servicer shall be
entitled to be reimbursed therefor out of amounts attributable to the Mortgage
Loans on deposit in the Certificate Account as provided by Section 3.06.
Section 7.04. Sponsor and Master Servicer Not to Resign. Subject to the
provisions of Section 7.02, neither the Sponsor nor the Master Servicer shall
resign from its respective obligations and duties hereby imposed on it except
upon determination that its duties hereunder are no longer permissible under
applicable law. Any such determination permitting the resignation of the Sponsor
or the Master Servicer shall be evidenced by an Opinion of Counsel to such
effect delivered to the Trustee. No such resignation by the Master Servicer
shall become effective until the Trustee or a successor servicer shall have
assumed the Master Servicer's responsibilities and obligations in accordance
with Section 8.02 hereof.
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ARTICLE VIII
Default
Section 8.01. Events of Default. If any one of the follow-
ing events ("Events of Default") shall occur and be continuing:
(i) Any failure by the Master Servicer to deposit
amounts in the Certificate Account in the amount and manner provided
herein so as to enable the Trustee to distribute to Holders of
Certificates any payment required to be made under the terms of such
Certificates and this Agreement which continues unremedied for a period
of five (5) days; or
(ii) Failure on the part of the Master Servicer duly to
observe or perform in any material respect any other covenants or
agreements of the Master Servicer set forth in the Certificates or in
this Agreement, which covenants and agreements continue unremedied for
a period of 60 days after the date on which written notice of such
failure, requiring the same to be remedied, shall have been given to
the Master Servicer by the Trustee, or to the Master Servicer and the
Trustee by the Holders of Certificates evidencing Voting Rights
aggregating not less than 25% of all Voting Rights; or
(iii) The entry of a decree or order by a court or agency
or supervisory authority having jurisdiction in the premises for the
appointment of a conservator, receiver or liquidator in any insolvency,
readjustment of debt, marshalling of assets and liabilities or similar
proceedings against the Master Servicer, or for the winding up or
liquidation of the Master Servicer's affairs, and the continuance of
any such decree or order unstayed and in effect for a period of 60
consecutive days; or
(iv) The consent by the Master Servicer to the
appointment of a conservator or receiver or liquidator in any
insolvency, readjustment of debt, marshalling of assets and liabilities
or similar proceedings of or relating to the Master Servicer or of or
relating to substantially all of its property; or the Master Servicer
shall admit in writing its inability to pay its debts generally as they
become due, file a petition to take advantage of any applicable
insolvency or reorganization statute, make an assignment for the
benefit of its creditors, or voluntarily suspend payment of its
obligations; or
(v) the failure of the Master Servicer to remit the
Monthly Advance required to be remitted pursuant to Section
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4.02 which failure continues unremedied for a period of two Business
Days after the date upon which notice of such failure shall have been
given to the Master Servicer by the Trustee.
then, and in each and every such case, so long as an Event of Default shall not
have been remedied by the Master Servicer, either the Trustee or the Holders of
Certificates evidencing not less than 51% of all Voting Rights may by notice
then given in writing to the Master Servicer, terminate all of the rights and
obligations of the Master Servicer as servicer under this Agreement. If an Event
of Default described in clause (v) hereof shall occur, the Trustee shall, by
notice to the Master Servicer, terminate all of the rights and obligations of
the Master Servicer under this Agreement and in and to the Mortgage Loans and
proceeds thereof and shall, as successor Master Servicer, shall make the Monthly
Advance which the Master Servicer failed to make. On or after the receipt by the
Master Servicer of such written notice, all authority and power of the Master
Servicer under this Agreement, whether with respect to the Certificates or the
Mortgage Loans or otherwise, shall pass to and be vested in the Trustee pursuant
to and under this Section 8.01, and, without limitation, the Trustee is hereby
authorized and empowered to execute and deliver, on behalf of the Master
Servicer, as attorney-in-fact or otherwise, any and all documents and other
instruments, and to do or accomplish all other acts or things necessary or
appropriate to effect the purposes of such notice of termination, whether to
complete the transfer and endorsement of the Mortgage Loans and related
documents, or otherwise, including, without limitation, the recordation of the
assignments of the Mortgage Loans to it. The Master Servicer agrees to cooperate
with the Trustee in effecting the termination of the responsibilities and rights
of the Master Servicer hereunder, including, without limitation, the transfer to
the Trustee for the administration by it of all cash amounts that have been
deposited by the Master Servicer in the Certificate Account or thereafter
received by the Master Servicer with respect to the Mortgage Loans. Upon
obtaining notice or knowledge of the occurrence of any Event of Default, the
Person obtaining such notice or knowledge shall give prompt written notice
thereof to Certificateholders at their respective addresses appearing in the
Certificate Register and to the Rating Agency.
Section 8.02. Remedies of Trustee. During the continuance of any Event
of Default, so long as such Event of Default shall not have been remedied, the
Trustee, in addition to the rights specified in Section 8.01, shall have the
right, in its own name as trustee of an express trust, to take all actions now
or hereafter existing at law, in equity or by statute to enforce its rights and
remedies and to protect the interests, and enforce its rights and remedies, of
the Certificateholders (including the
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institution and prosecution of all judicial, administrative and other
proceedings and the filing of proofs of claim and debt in connection therewith).
Except as otherwise expressly provided in this Agreement, no remedy provided for
by this Agreement shall be exclusive of any other remedy, and each and every
remedy shall be cumulative and in addition to any other remedy and no delay or
omission to exercise any right or remedy shall impair any such right or remedy
or shall be deemed to be a waiver of any Event of Default.
Section 8.03. Directions by Certificateholders and Duties of Trustee
During Event of Default. During the continuance of any Event of Default, Holders
of Certificates evidencing Voting Rights aggregating not less than 25% of all
Voting Rights may direct the time, method and place of conducting any proceeding
for any remedy available to the Trustee, or exercising any trust or power
conferred upon the Trustee under this Agreement, provided, however, that the
Trustee shall be under no obligation to pursue any such remedy, or to exercise
any of the trusts or powers vested in it by this Agreement (including, without
limitation, (a) the conducting or defending of any administrative action or
litigation hereunder or in relation hereto, and (b) the terminating of the
Master Servicer or any successor servicer from its rights and duties as servicer
hereunder) at the request, order or direction of any of the Certificateholders,
unless such Certificateholders shall have offered to the Trustee reasonable
security or indemnity against the costs, expenses and liabilities which may be
incurred therein or thereby and, provided further, that, subject to the
provisions of Section 9.01, the Trustee shall have the right to decline to
follow any such direction if the Trustee, in accordance with an Opinion of
Counsel, determines that the action or proceeding so directed may not lawfully
be taken or if the Trustee in good faith determines that the action or
proceeding so directed would involve it in personal liability or be unjustly
prejudicial to the non-assenting Certificateholders.
Section 8.04. Action upon Certain Failures of the Master Servicer and
upon Event of Default. In the event that the Trustee shall have knowledge of any
failure of the Master Servicer specified in Section 8.01(i) or (ii) which would
become an Event of Default upon the Master Servicer's failure to remedy the same
after notice, the Trustee may, but need not if the Trustee deems it not in the
Certificateholder's best interest, give notice thereof to the Master Servicer.
In the event that the Trustee shall have knowledge of an Event of Default, the
Trustee shall give prompt written notice thereof to the Certifi-cateholders.
Section 8.05. Trustee to Act; Appointment of Successor.
(a) On and after the time the Master Servicer receives a notice
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of termination pursuant to Section 8.01, the Trustee shall be the successor in
all respects to the Master Servicer in its capacity as servicer under this
Agreement and the transactions set forth or provided for herein and shall be
subject to all the responsibilities, duties and liabilities relating thereto
placed on the Master Servicer by the terms and provisions hereof.
Notwithstanding anything provided herein to the contrary, under no circumstances
shall any provision of this Agreement, including but not limited to Section 4.02
herein, be construed to require the Trustee, acting in its capacity as successor
to the Master Servicer in its obligation to make Monthly Advances, to advance,
expend or risk its own funds or otherwise incur any financial liability in the
performance of its duties hereunder if it shall have reasonable grounds for
believing that such funds are nonrecoverable. As compensation therefor, the
Trustee shall be entitled to such compensation as the Master Servicer would have
been entitled to hereunder if no such notice of termination had been given.
Notwithstanding the above, the Trustee may, if it shall be unwilling so to act,
or shall, if it is legally unable so to act, appoint, or petition a court of
competent jurisdiction to appoint, any established housing and home finance
institution having a net worth of not less than $10,000,000 as the successor to
the Master Servicer hereunder in the assumption of all or any part of the
responsibilities, duties or liabilities of the Master Servicer hereunder;
provided, however, that any such institution appointed as successor Master
Servicer shall not as evidenced in writing by the Rating Agency adversely affect
the then current rating of any Class of Certificates immediately prior to the
termination of the Master Servicer. Pending appointment of a successor to the
Master Servicer hereunder, unless the Trustee is prohibited by law from so
acting, the Trustee shall act in such capacity as hereinabove provided. In
connection with such appointment and assumption, the Trustee may make such
arrangements for the compensation of such successor out of payments on Mortgage
Loans as it and such successor shall agree; provided, however, that no such
compensation shall be in excess of that permitted the Master Servicer hereunder.
The Trustee and such successor shall take such action, consistent with this
Agreement, as shall be necessary to effectuate any such succession.
(b) Any successor, including the Trustee, to the Master Servicer as
servicer shall during the term of its service as servicer maintain in force (i)
a policy or policies of insurance covering errors and omissions in the
performance of its obligations as servicer hereunder and (ii) a fidelity bond in
respect of its officers, employees and agents to the same extent as the Master
Servicer is so required pursuant to Section 3.08.
Section 8.06. Notification to Certificateholders. Upon any
termination or appointment of a successor to the Master Servicer
pursuant to this Article VIII, the Trustee shall give prompt
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written notice thereof to Certificateholders at their respective addresses
appearing in the Certificate Register and to each Rating Agency.
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ARTICLE IX
The Trustee
Section 9.01. Duties of Trustee. (a) The Trustee, except during the
continuance of a default by (a) the Seller or (b) the occurrence of one or more
of the events specified in Section 8.01, undertakes to perform such duties and
only such duties as are specifically set forth in this Agreement. In case of
default or the occurrence of any such event as specified above, the Trustee
shall exercise such of the rights and powers vested in it by this Agreement and
use the same degree of care and skill in their exercise as a prudent investor
would exercise or use under the circumstances in the conduct of such investor's
own affairs.
The Trustee, upon receipt of all resolutions, certificates, statements,
opinions, reports, documents, orders or other instruments furnished to the
Trustee which are specifically required to be furnished pursuant to any
provision of this Agreement, shall examine them to determine whether they are in
the form required by this Agreement; provided, however, that the Trustee shall
not be responsible for the accuracy or content of any such certificate,
statement, opinion, report, or other order or instrument furnished by the Master
Servicer or the Sponsor to the Trustee pursuant to this Agreement.
(b) No provision of this Agreement shall be construed to relieve the
Trustee from liability for its own gross negligent action, its own gross
negligent failure to act or its own willful misconduct; provided, however, that:
(i) This paragraph shall not be construed to
limit the effect of paragraph (a) of this Section 9.01;
(ii) The Trustee and co-trustee shall not be personally
liable with respect to any action taken, suffered or omitted to be
taken by it in good faith in accordance with the direction of
Certificateholders as provided in Section 8.03 hereof;
(iii) For all purposes under this Agreement, the Trustee
shall not be deemed to have notice, of any event described in Section
8.01(ii) through (v) unless a Responsible Officer assigned to and
working in the Trustee's corporate trust division has actual knowledge
thereof or unless written notice of any event is received at the
Corporate Trust Office, and such notice references the Certificates and
this Agreement; and
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(iv) No provision of this Agreement shall require the
Trustee to expend or risk its own funds or otherwise incur any
financial liability in the performance of any of its duties hereunder,
or in the exercise of any of its rights or powers, if it shall have
reasonable grounds for believing that repayment of such funds or
adequate indemnity against such risk or liability is not reasonably
assured to it.
Section 9.02. Certain Matters Affecting the Trustee.
Except as otherwise provided in Section 9.01:
(i) The Trustee may rely and shall be protected in
acting or refraining from acting upon any resolution, Officer's
Certificate, certificate of auditor or any other certificate,
statement, instrument, opinion, report, notice, request, consent,
order, approval, bond or other paper or document believed by it to be
genuine and to have been signed or presented by the proper party or
parties;
(ii) The Trustee may consult with counsel and any
Opinion of Counsel shall be full and complete authorization and
protection in respect of any action taken or suffered or omitted by it
hereunder in good faith and in accordance with such Opinion of Counsel;
(iii) The Trustee and any co-trustee shall not be
personally liable for any action taken, suffered or omitted by it in
good faith and reasonably believed by it to be authorized or within the
discretion or rights or powers conferred upon it by this Agreement;
(iv) Unless a default in respect of the Mortgage Loans
or an event specified in Section 8.01 shall have occurred and be
continuing and, in each case is known to a Responsible Officer of the
Trustee, the Trustee shall not be bound to make any investigation into
the facts or matters stated in any resolution, certificate, statement,
instrument, opinion, report, notice, request, consent, order, approval,
bond or other paper or document, unless requested in writing to do so
by Holders of Certificates evidencing not less than 50% of all Voting
Rights; provided, however, that if the payment within a reasonable time
to the Trustee of the costs, expenses or liabilities likely to be
incurred by it in the making of such investigation is, in the opinion
of the Trustee, not reasonably assured to the Trustee by the security
afforded to it by the terms of this Agreement, the Trustee may require
reasonable indemnity against such expense or liability or payment of
such estimated expenses as a condition to proceeding. The reasonable
expense of every such examination shall be an expense of the Pool; and
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(v) The Trustee and any co-trustee may execute any of
the trusts or powers hereunder or perform any duties hereunder either
directly or by or through agents or attorneys and the Trustee and any
co-trustee shall not be responsible for any willful misconduct or gross
negligence on the part of any agent or attorney appointed with due care
by it hereunder.
Section 9.03. Trustee Not Liable for Certificates. The Trustee makes no
representations as to the validity or sufficiency of this Agreement or of the
Certificates save that the Trustee represents that, assuming due execution and
delivery by the other parties hereto, this Agreement has been duly authorized,
executed and delivered by it and constitutes its legal, valid and binding
obligation, enforceable against it in accordance with its terms, subject, as to
enforcement of remedies, to applicable bankruptcy, reorganization, insolvency,
moratorium and other laws affecting the rights of creditors generally, and to
general principles of equity and the discretion of the court (regardless of
whether enforcement of such remedies is considered in a proceeding in equity or
at law). The Trustee shall not be accountable for the use or application by the
Sponsor of funds paid to the Sponsor in consideration of the assignment of the
Mortgage Loans hereunder by the Sponsor, or for the use or application of any
funds paid to Servicers or the Master Servicer in respect of the Mortgage Loans
or deposited into the Certificate Account by the Master Servicer.
Section 9.04. Trustee May Own Certificates. The Trustee in its
individual or any other capacity may become the owner or pledgee of Certificates
with the same rights it would have if it were not Trustee and may otherwise deal
with the Master Servicer, any Servicer or any of their respective affiliates
with the same right it would have if it were not the Trustee.
Section 9.05. Eligibility Requirements for Trustee. The Trustee
hereunder shall at all times be (i) an institution the deposits of which are
fully insured by the FDIC and (ii) a corporation or national banking association
organized and doing business under the laws of the United States of America or
of any State, authorized under such laws to exercise corporate trust powers,
having a combined capital and surplus of not less than $30,000,000 and subject
to supervision or examination by Federal or State authority and, with respect to
every successor trustee hereunder except as pursuant to Section 9.08 (iii)
either an institution (a) the long-term unsecured debt obligations of which are
rated at least "[ ]" by [ ] or (b) whose serving as Trustee hereunder would not
result in the lowering of the ratings originally assigned to any Class of
Certificates. The Trustee shall not be an affiliate of the Sponsor or the Master
Servicer. If such corporation or national banking association publishes
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reports of condition at least annually, pursuant to law or to the requirements
of the aforesaid supervising or examining authority, then for the purposes of
this Section 9.05, the combined capital and surplus of such corporation or
national banking association shall be deemed to be its combined capital and
surplus as set forth in its most recent report of condition so published. In
case at any time the Trustee shall cease to be eligible in accordance with the
provision of this Section 9.05, the Trustee shall resign immediately in the
manner and with the effect specified in Section 9.06.
Section 9.06. Resignation and Removal of Trustee. The Trustee may at
any time resign and be discharged from the trust hereby created by giving
written notice thereof to the Master Servicer and mailing a copy of such notice
to all Holders of record. The Trustee shall also mail a copy of such notice of
resignation to each Rating Agency. Upon receiving such notice of resignation,
the Master Servicer shall use its best efforts to promptly appoint a successor
trustee by written instrument, in duplicate, one copy of which instrument shall
be delivered to the resigning Trustee and one copy to the successor trustee. If
no successor trustee shall have been so appointed and shall have accepted
appointment within 30 days after the giving of such notice of resignation, the
resigning Trustee may petition any court of competent jurisdiction for the
appointment of a successor trustee.
If at any time the Trustee shall cease to be eligible in accordance
with the provision of Section 9.05 and shall fail to resign after written
request therefor by the Master Servicer, or if at any time the Trustee shall
become incapable of acting, or shall be adjudged a bankrupt or insolvent, or a
receiver of the Trustee or of its property shall be appointed, or any public
officer shall take charge or control of the Trustee or of its property, or any
public officer shall take charge or control of the Trustee or of its property or
affairs for the purpose of rehabilitation, conservation or liquidation, then the
Master Servicer may remove the Trustee and appoint a successor trustee by
written instrument, in duplicate, one copy of which instrument shall be
delivered to the Trustee so removed and one copy to the successor.
The Holders of Certificates evidencing not less than 50% of all Voting
Rights may at any time remove the Trustee by written instrument or instruments
delivered to the Master Servicer and the Trustee; the Master Servicer shall
thereupon use its best efforts to appoint a successor trustee in accordance with
this Section.
Any resignation or removal of the Trustee and appointment of
a successor trustee pursuant to any of the provisions of this
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Section 9.06 shall become effective upon acceptance of appointment by the
successor trustee as provided in Section 9.07.
Section 9.07. Successor Trustee. Any successor trustee appointed as
provided in Section 9.06 shall execute, acknowledge and deliver to the Master
Servicer and to its predecessor trustee an instrument accepting such appointment
hereunder, and thereupon the resignation or removal of the predecessor trustee
shall become effective and such successor trustee, without any further act, deed
or conveyance, shall become fully vested with all the rights, powers, duties and
obligations of its predecessor hereunder, with like effect as if originally
named as Trustee herein. The predecessor trustee shall duly assign, transfer,
deliver and pay over to the successor trustee the whole of the Mortgage Files
and related documents and statements held by it hereunder, together with all
necessary instruments of transfer and assignment or other documents properly
executed necessary to effect such transfer and such of the records or copies
thereof maintained by the predecessor trustee in the administration hereof as
may be requested by the successor trustee and shall thereupon be discharged from
all duties and responsibilities under this Agreement.
No successor trustee shall accept appointment as provided in this
Section 9.07 unless at the time of such appointment such successor trustee shall
be eligible under the provisions of Section 9.05.
Upon acceptance of appointment by a successor trustee as provided in
this Section 9.07, the Master Servicer shall mail notice of the succession of
such trustee hereunder to all Holders of Certificates at their addresses as
shown in the Certificate Register and to the Rating Agency. If the Master
Servicer fails to mail such notice within 10 days after acceptance of
appointment by the successor trustee, the successor trustee shall cause such
notice to be mailed at the expense of the Master Servicer.
Section 9.08. Merger or Consolidation of Trustee. Any corporation or
national banking association into which the Trustee may be merged or converted
or with which it may be consolidated, or any corporation or national banking
association resulting from any merger, conversion or consolidation to which the
Trustee shall be a party, or any corporation or national banking association
succeeding to all or substantially all of the corporate trust business of the
Trustee, shall be the successor of the Trustee hereunder, provided such
corporation or national banking association shall be eligible under the
provisions of Section 9.05, without the execution or filing of any paper or any
further act on the part of any of the parties hereto, anything herein to the
contrary notwithstanding.
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Section 9.09. Appointment of Co-Trustee or Separate Trustee.
Notwithstanding any of the provisions hereof, at any time, for the purpose of
meeting any legal requirements of any jurisdiction in which any Mortgaged
Property may at the time be located or for any other reason, the Master Servicer
and the Trustee acting jointly shall have the power and shall execute and
deliver all instruments to appoint one or more Persons approved by the Trustee,
or separate trustee or separate trustees, of all or any part of the Pool, and to
vest in such Person or Persons, in such capacity, such title to the Pool, or any
part thereof, and, subject to the other provision of this Section 9.09, such
powers, duties, obligations, rights and trusts as the Master Servicer and the
Trustee may consider necessary or desirable. If the Master Servicer shall not
have joined in such appointment within 10 days after the receipt by it of a
request to do so, the Trustee alone shall have the power to make such
appointment. No co-trustee or separate trustee hereunder shall be required to
meet the terms of eligibility as a successor trustee under Section 9.05
hereunder and no notice to Holders of Certificates of the appointment of
co-trustee(s) or separate trustee(s) shall be required under Section 9.07
hereof.
In the case of any appointment of a co-trustee or separate trustee
pursuant to this Section 9.09, all rights, powers, duties and obligations
conferred or imposed upon the Trustee shall be conferred or imposed upon and
exercised or performed by the Trustee and such separate trustee or co-trustee
jointly, except to the extent that under any law of any jurisdiction in which
any particular act or acts are to be performed (whether as Trustee hereunder or
as successor to the Master Servicer hereunder), the Trustee shall be incompetent
or unqualified to perform such act or acts, in which event such rights, powers,
duties and obligations (including the holding of title to the Pool or any
portion thereof in any such jurisdiction) shall be exercised and performed by
such separate trustee or co-trustee at the direction of the Trustee.
Any notice, request or other writing given to the Trustee shall be
deemed to have been given to each of the then separate trustee and co-trustee,
as effectively as if given to each of them. Every instrument appointing any
separate trustee or co-trustee shall refer to this Agreement and the conditions
of this Article IX. Each separate trustee and co-trustee, upon its acceptance of
the trusts conferred, shall be vested with the estates or property specified in
its instrument of appointment, either jointly with the Trustee or separately, as
may be provided therein, subject to all the provisions of this Agreement,
specifically including every provision of this Agreement relating to the conduct
of, affecting the liability of, or affording protection to, the Trustee. Every
such instrument shall be filed with the Trustee.
IX-6
<PAGE>
Any separate trustee or co-trustee may, at any time, constitute the
Trustee, its agent or attorney-in-fact, with full power and authority, to the
extent not prohibited by law, to do any lawful act under or in respect of this
Agreement on its behalf and in its name. If any separate trustee or co-trustee
shall become incapable of acting, resign or be removed, or shall be adjudged a
bankrupt or insolvent, or a receiver of its property shall be appointed, or any
public officer shall take charge or control of such trustee or co-trustee or of
its property or affairs for the purpose of rehabilitation, conservation or
liquidation, all of its estates, properties, rights, remedies and trusts shall
vest in and be exercised by the Trustee, to the extent permitted by law, without
the appointment of a new or successor trustee.
Section 9.10. Authenticating Agents. The Trustee may appoint one or
more authenticating agents ("Authenticating Agents") which shall be authorized
to act on behalf of the Trustee in authenticating or countersigning
Certificates. Wherever reference is made in this Agreement to the authentication
or countersigning of Certificates by the Trustee or the Trustee's certificate of
authentication or countersigning, such reference shall be deemed to include
authentication or countersigning on behalf of the Trustee by an Authenticating
Agent and a certificate of authentication or countersignature executed on behalf
of the Trustee by an Authenticating Agent. Each Authenticating Agent must be
acceptable to the Master Servicer and must be a corporation or national banking
association organized and doing business under the laws of the United States of
America or of any State, having a principal office and place of business in [ ],
having a combined capital and surplus of at least $15,000,000, authorized under
such laws to do a trust business and subject to supervision or examination by
Federal or State authorities.
Any corporation or national banking association into which any
Authenticating Agent may be merged or converted or with which it may be
consolidated, or any corporation or national banking association resulting from
any merger, conversion or consolidation to which any Authenticating Agent shall
be a party, or any corporation or national banking association succeeding to the
corporate agency business of any Authenticating Agent, shall continue to be the
Authenticating Agent without the execution or filing of any paper or any further
act on the part of the Trustee or the Authenticating Agent.
Any Authenticating Agent may at any time resign by giving
written notice of resignation to the Trustee and to the Master
Servicer. The Trustee may at any time terminate the agency of
any Authenticating Agent by giving written notice of termination
to such Authenticating Agent and to the Master Servicer. Upon
IX-7
<PAGE>
receiving a notice of resignation or upon such a termination, or in case, at any
time any Authenticating Agent shall cease to be eligible in accordance with the
provisions of this Section 9.10, the Trustee may appoint a successor
Authenticating Agent, shall give written notice of such appointment to the
Master Servicer and shall mail notice of such appointment to all
Certificate-holders. Any successor Authenticating Agent upon acceptance of its
appointment hereunder shall become vested with all the rights, powers, duties
and responsibilities of its predecessor hereunder, with like effect as if
originally named as Authenticating Agent.
Section 9.11. Trustee's Fees and Expenses. The Trustee, as compensation
for its activities hereunder, shall be entitled to receive on each Distribution
Date an amount equal to the Trustee Fee for such Distribution Date. The Trustee
and any director, officer, employee or agent of the Trustee shall be indemnified
by the Master Servicer and held harmless against any loss, liability or expense
(including reasonable attorney's fees) (i) incurred in connection with any claim
or legal action relating to (a) this Agreement, (b) the Certificates, or (c) the
performance of any of the Trustee's duties hereunder, other than any loss,
liability or expense incurred by reason of willful misfeasance, bad faith or
negligence in the performance of any of the Trustee's duties hereunder and (ii)
resulting from any error in any tax or information return prepared by the Master
Servicer. Such indemnity shall survive the termination of this Agreement or the
resignation or removal of the Trustee hereunder. Without limiting the foregoing,
the Master Servicer covenants and agrees, except as otherwise agreed upon in
writing by the Sponsor and the Trustee, and except for any such expense,
disbursement or advance as may arise from the Trustee's negligence, bad faith or
willful misconduct, to pay or reimburse the Trustee, for all reasonable
expenses, disbursements and advances incurred or made by the Trustee in
accordance with any of the provisions of this Agreement with respect to (A) the
reasonable compensation and the expenses and disbursements of its counsel not
associated with the closing of the issuance of the Certificates, (B) the
reasonable compensation, expenses and disbursements of any accountant, engineer
or appraiser that is not regularly employed by the Trustee, to the extent that
the Trustee must engage such persons to perform acts or services hereunder and
(C) printing and engraving expenses in connection with preparing any Definitive
Certificates). Except as otherwise provided herein, the Trustee shall not be
entitled to payment or reimbursement for any routine ongoing expenses incurred
by the Trustee in the ordinary course of its duties as Trustee, Certificate
Registrar, Tax Matter's Person or Paying Agent hereunder or for any other
expenses.
IX-8
<PAGE>
Section 9.12. Tax Returns. The Trustee will prepare any
federal, state and local income tax or information returns of the
Pool and shall file or cause to be filed such returns.
IX-9
<PAGE>
ARTICLE X
Termination
Section 10.01. Termination upon Purchase by the Master Servicer or
Liquidation of All Mortgage Loans. Subject to Section 10.02, the respective
obligations and responsibilities of the Seller, the Sponsor, the Master Servicer
and the Trustee created hereby (other than the obligation of Trustee to make
certain payments to Certificateholders after the Final Distribution Date, the
obligations of the Master Servicer to send certain notices as hereinafter set
forth and pursuant to Sections 9.11 and 9.12 hereof and the obligation of the [
] pursuant to Section 5.05(b)) shall terminate upon the last action required to
be taken by the Trustee on the Final Distribution Date pursuant to this Article
X following the earlier of (a) the purchase by the Master Servicer of all
Mortgage Loans and all property acquired in respect of any Mortgage Loan
remaining in the Pool at a price equal to the sum of (A) 100% of the Scheduled
Principal Balance of each Mortgage Loan (other than any Mortgage Loan as to
which title to the underlying Mortgaged Property has been acquired and whose
fair market value is included pursuant to clause (B) below) and (B) the fair
market value of such acquired property (as determined by the Master Servicer as
of the close of business on the third Business Day next preceding the date upon
which notice of any such termination is furnished to Certificateholders pursuant
to the third paragraph of this Article X), plus any Class Unpaid Interest
Shortfall for any Class of Certificates as well as one month's interest at the
related Mortgage Interest Rate (net of the related Master Servicing Fee Rate and
the related Servicing Fee Rate) on the Scheduled Principal Balance of each
Mortgage Loan (including any Mortgage Loan as to which title to the underlying
Mortgaged Property has been acquired) or (b) the final payment or other
liquidation (or any advance with respect thereto) of the last Mortgage Loan
remaining in the Pool or the disposition of all property acquired upon
foreclosure or deed in lieu of foreclosure of any Mortgage Loan; provided,
however, that in no event shall the trust created hereby continue beyond the
earlier of (a) the expiration of 21 years from the death of the last survivor of
the descendants of Joseph P. Kennedy, the late ambassador of the United States
to the Court of St. James, living on the date hereof and (b) the Distribution
Date in _____________.
The right of the Master Servicer to repurchase all Mortgage Loans
pursuant to (a) above is conditioned upon the Pool Scheduled Principal Balance
as of the Final Distribution Date being less than __ percent of the Cut-Off Date
Pool Principal Balance. If such right is exercised, the Master Servicer shall
provide to the Trustee the certification required by Section 3.11
X-1
<PAGE>
and the Trustee shall, promptly following payment of the purchase price, release
to the purchaser the Mortgage Files pertaining to the Mortgage Loans being
purchased.
Notice of any termination, specifying the Final Distribution Date
(which shall be a date that would otherwise be a Distribution Date) upon which
the Certificateholders may surrender their Certificates to the Trustee for
payment of the final distribution and for cancellation, shall be given promptly
by the Master Servicer (if exercising its right to purchase the assets of the
Pool) or by the Trustee (in any other case) by letter to Certifi-cateholders
mailed not earlier than the 15th day and not later than the 25th day of the
month next preceding the month of such final distribution specifying (A) the
Final Distribution Date upon which final payment of the Certificates will be
made upon presentation and surrender of Certificates at the office or agency of
the Trustee therein designated, (B) the amount of any such final payment and (C)
that the Record Date otherwise applicable to such Distribution Date is not
applicable, payments being made only upon presentation and surrender of the
Certificates at the office or agency of the Trustee therein specified. If the
Master Servicer is obligated to give notice to Certificateholders as aforesaid,
it shall give such notice to the Trustee and the Certificate Registrar at the
time such notice is given to Certificateholders. In the event such notice is
given by the Master Servicer, the Master Servicer shall deposit in the
Certificate Account on or before the Final Distribution Date in immediately
available funds an amount equal to the amount necessary to make the amount, if
any, on deposit in the Certificate Account on the Final Distribution Date equal
to the purchase price for the assets of the Pool computed as above provided
together with a statement as to the amount to be distributed on each Class of
Certificates pursuant to the next succeeding paragraph.
Upon presentation and surrender of the Certificates, the Trustee shall
cause to be distributed to Certificateholders of each Class, in the order set
forth in Section 5.02 hereof, on the final Distribution Date and in proportion
to their respective Percentage Interests, with respect to Certificateholders of
the same Class, an amount equal to (i) as to each Class of Regular Certificates,
the Class Certificate Balance thereof plus accrued interest thereon (or on their
Notional Amount, if applicable) in the case of an interest bearing Certificate
and (ii) as to the Residual Certificates, the amount, if any, which remains on
deposit in the Distribution Account (other than the amounts retained to meet
claims) after application pursuant to clause (i) above.
X-2
<PAGE>
In the event that all of the Certificateholders shall not surrender
their Certificates for final payment cancellation on or before the Final
Distribution Date, the Trustee shall on such date cause all funds in the Trustee
Certificate Account not distributed in final distribution to Certificateholders
to continue to be held by the Trustee in an Eligible Account for the benefit of
such Certificateholders and the Master Servicer (if it exercised its right to
purchase the assets of the Pool) or the Trustee (in any other case) shall give a
second written notice to the remaining Certificateholders to surrender their
Certificates for cancellation and receive the final distribution with respect
thereto. If within one year after the second notice all the Certificates shall
not have been surrendered for cancellation, the Trustee may take appropriate
steps, or may appoint an agent to take appropriate steps, to contact the
remaining Certificate-holders concerning surrender of their Certificates, and
the cost thereof shall be paid out of the funds on deposit in such Eligible
Account.
[Section 10.02. Additional Termination Requirements. (a) In the event
the Master Servicer exercises its purchase option as provided in Section 10.01
the Trust Fund shall be terminated in accordance with the following additional
requirements, unless the Trustee has received an Opinion of Counsel to the
effect that the failure of the Trust Fund to comply with the requirements of
this Section 10.02 will not (i) result in the imposition of taxes on "prohibited
transactions" of the Trust Fund as defined in Section 860F of the Code, or (ii)
cause the Trust Fund to fail to qualify as a REMIC at any time that any
Certificates are outstanding:
(i) Within 90 days prior to the Final Distribution Date
set forth in the notice given by the Master Servicer under Section
10.01, the holders of 100% of the aggregate Percentage Interests
evidenced by the Residual Certificates shall adopt a plan of complete
liquidation of the Trust Fund; and
(ii) At or after the time of adoption of such a plan of
complete liquidation and at or prior to the Final Distribution Date,
the Trustee shall sell all of the assets of the Trust Fund to the
Master Servicer for cash.
(b) By their acceptance of the Residual Certificates, the Holders
thereof hereby agree to adopt such a plan of complete liquidation upon the
written request of the Master Servicer and to take such other action in
connection therewith as may be reasonably requested by the Master Servicer.]
X-3
<PAGE>
ARTICLE XI
Miscellaneous Provisions
Section 11.01. Amendment. This Agreement may be amended from time to
time by the Sponsor, the Seller, the Master Servicer and the Trustee, without
the consent of any of the Certificate-holders, (i) to cure any ambiguity, (ii)
to correct or supplement any provisions herein or therein which may be defective
or inconsistent with any other provisions herein or therein, as the case may be,
(iii) to modify, eliminate or add to any of its provisions to such extent as
shall be necessary to maintain the qualification of the Trust Fund as a REMIC or
(iv) to add any other provisions with respect to matters or questions arising
under this Agreement which shall not be inconsistent with the provisions of this
Agreement; provided, however, that (x) as evidenced by an Opinion of Counsel in
each case such action shall not, adversely affect in any material respect the
interests of any Certificateholder, (y) in each case, such action is necessary
or desirable to maintain the qualification of the Trust Fund as a REMIC or shall
not adversely affect such qualification and (z) if the opinion called for in
clause (x) cannot be delivered with regard to an amendment pursuant to clause
(iii) above, such amendment is necessary to maintain the qualification of the
Trust Fund as a REMIC; and provided, further, that the amendment shall not be
deemed to adversely affect in any material respect the interests of the
Certificateholders and no Opinion of Counsel to that effect shall be required if
the Person requesting the amendment obtains a letter from the Rating Agency
stating that the amendment would not result in the downgrading or withdrawal of
the respective ratings then assigned to the Certificates.
This Agreement may also be amended from time to time by the Sponsor,
the Seller, the Master Servicer and the Trustee, with the consent of the Holders
of Certificates of each Class of Certificates which is affected by such
amendment, evidencing not less than 66-2/3% of all Voting Rights, for the
purpose of adding any provisions to or changing in any manner or eliminating any
of the provisions of this Agreement or of modifying in any manner the rights of
the Holders of such Certificates; provided, however, that no such amendment
shall (a) reduce in any manner the amount of, or delay the timing of,
collections of payments on Mortgage Loans or distributions which are required to
be made on any Certificate without the consent of the Holder of such Certificate
or (b) reduce the aforesaid percentage required to consent to any such
amendment, without the consent of the Holders of all Certificates then
Outstanding.
XI-1
<PAGE>
Prior to the solicitation of consent of Certificateholders in
connection with any such amendment, the party seeking such amendment shall
furnish the Trustee with an Opinion of Counsel stating whether such amendment
would adversely affect the qualification of the Trust Fund as a REMIC and notice
of the conclusion expressed in such Opinion of Counsel shall be included with
any such solicitation. An amendment made with the consent of all
Certificateholders and executed in accordance with this Section 11.01 shall be
permitted or authorized by this Agreement notwithstanding that such Opinion of
Counsel may conclude that such amendment would adversely affect the
qualification of the Trust Fund as a REMIC.
Promptly after the execution of any such amendment or consent the
Trustee shall furnish written notification of the substance of or a copy of such
amendment to each Certificateholder and to the Rating Agency.
It shall not be necessary for the consent of Certificate-holders under
this Section 11.01 to approve the particular form of any proposed amendment, but
it shall be sufficient if such consent shall approve the substance thereof. The
manner of obtaining such consents and of evidencing the authorization of the
execution thereof by Certificateholders shall be subject to such reasonable
requirements as the Trustee may prescribe.
Section 11.02. Recordation of Agreement. This Agreement is subject to
recordation in all appropriate public offices for real property records in all
the counties or other comparable jurisdictions in which any or all of the
properties subject to the Mortgages are situated, and in any other appropriate
public recording office or elsewhere, such recordation to be effected by the
Master Servicer and at its expense on direction by the Trustee, who will act at
the direction of Holders of Certificates evidencing not less than 50% of all
Voting Rights but only upon direction of the Trustee accompanied by an Opinion
of Counsel to the effect that such recordation materially and beneficially
affects the interests of Certificateholders.
For the purpose of facilitating the recordation of this Agreement as
herein provided and for other purposes, this Agreement may be executed
simultaneously in any number of counterparts, each of which counterparts shall
be deemed to be an original, and such counterparts shall constitute but one and
the same instrument.
Section 11.03. Limitation on Rights of Certificateholders. The death or
incapacity of any Certificateholder shall not operate to terminate this
Agreement or the Pool, nor entitle such Certificateholder's legal
representatives or heirs to claim an
B XI-2
<PAGE>
accounting or to take any action or commence any proceeding in any court for a
partition or winding up of the Pool, nor otherwise affect the rights,
obligations and liabilities of the parties hereto or any of them.
No Certificateholder shall have any right to vote (except as provided
herein) or in any manner otherwise control the operation and management of the
Pool, or the obligations of the parties hereto, nor shall anything herein set
forth, or contained in the terms of the Certificates, be construed so as to
constitute the Certificateholders from time to time as partners or members of an
association; nor shall any Certificateholder be under any liability to any third
person by reason of any action taken by the parties to this Agreement pursuant
to any provision hereof.
No Certificateholder shall have any right by virtue or by availing
itself of any provisions of this Agreement to institute any suit, action or
proceeding in equity or at law upon or under or with respect to this Agreement,
unless such Holder previously shall have given to the Trustee a written notice
of default and of the continuance thereof, as hereinbefore provided, and unless
also the Holders of Certificates evidencing not less than 25% of all Voting
Rights shall have made written request upon the Trustee to institute such
action, suit or proceeding in its own name as Trustee hereunder and shall have
offered to the Trustee such reasonable indemnity as it may require against the
costs, expenses and liabilities to be incurred therein or thereby, and the
Trustee, for 60 days after its receipt of such notice, request and offer of
indemnity, shall have neglected or refused to institute any such action, suit or
proceeding; it being understood and intended, and being expressly covenanted by
each Certificateholder with every other Certificateholder and the Trustee, that
no one or more Holders of Certificates shall have any right in any manner
whatever by virtue or by availing itself or themselves of any provisions of this
Agreement to affect, disturb or prejudice the rights of the Holders of any other
of the Certificates, or to obtain or seek to obtain priority over or preference
to any other such Holder, or to enforce any right under this Agreement, except
in the manner herein provided and for the equal, ratable and common benefit of
all Certificate-holders. For the protection and enforcement of the provisions of
this Section 11.03, each and every Certificateholder and the Trustee shall be
entitled to such relief as can be given either at law or in equity.
Section 11.04. Governing Law. This Agreement shall be construed in
accordance with the 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.
XI-3
<PAGE>
Section 11.05. Notices. All demands, notices and communications
required to be delivered hereunder shall be in writing and shall be deemed to
have been duly given if personally delivered at or mailed by certified mail,
return receipt requested, (provided, however, that notices to the Trustee shall
be deemed effective upon receipt) to (a) in the case of the Sponsor, Headlands
Mortgage Securities, Inc., Attention: [ ], (b) in the case of the Master
Servicer and Seller, Headlands Mortgage Company, Attention: [ ], (d) in the case
of the Trustee, [ ] Attention: [ ], or, as to each party, at such other address
as shall be designated by such party in a written notice to each other party,
(e) in the case of Moody's, Moody's Investors Service, Inc., 99 Church Street,
New York, New York 10007, Attn: Residential Pass-Through Monitoring, (f) in the
case of S&P, Standard & Poor's Ratings Group, 26 Broadway, 15th Floor, New York,
New York 10004, Attention: Residential Mortgage Surveillance, (g) in the case of
Duff & Phelps, Duff & Phelps Credit Rating Co., 17 State Street, 12th Floor, New
York, New York 10007, Attention: MBS Monitoring, and (h) in the case of Fitch,
Fitch Investors Service, Inc., One State Street Plaza, New York, New York 10004,
Attn: Residential Mortgage Surveillance Group. Any notice required or permitted
to be mailed to a Certificateholder shall be given by first class mail, postage
prepaid, at the address of such Holder as shown in the Certificate Register. Any
notice so mailed within the time prescribed in this Agreement shall be
conclusively presumed to have been duly given, whether or not the
Certificateholder receives such notice.
Section 11.06. Severability of Provisions. If any one or more of the
covenants, agreements, provisions or terms of this Agreement shall be for any
reason whatsoever held invalid, then such covenants, agreements, provisions or
terms shall be deemed severable from the remaining covenants, agreements,
provisions or terms of this Agreement and shall in no way affect the validity or
enforceability of the other provisions of this Agreement or of the Certificates
or the rights of the Holders thereof.
Section 11.07. Certificates Nonassessable and Fully Paid. It is the
intention of the Trustee that Certificateholders shall not be personally liable
for obligations of the Pool, that the beneficial ownership interests represented
by the Certificates shall be nonassessable for any losses or expenses of the
Pool or for any reason whatsoever, and that Certificates upon execution,
countersignature and delivery thereof by the Trustee pursuant to Section 6.01
are and shall be deemed fully paid.
Section 11.08. Access to List of Certificateholders. The
Certificate Registrar will furnish or cause to be furnished to
XI-4
<PAGE>
the Trustee, within 15 days after the receipt of a request by the Trustee in
writing, a list, in such form as the Trustee may reasonably require, of the
names and addresses of the Certifi-cateholders as of the most recent Record Date
for payment of distributions to Certificateholders.
If three or more Certificateholders (hereinafter referred to as
"applicants") apply in writing to the Trustee, and such application states that
the applicants desire to communicate with other Certificateholders with respect
to their rights under this Agreement or under the Certificates and is
accompanied by a copy of the communication which such applicants propose to
transmit, then the Trustee shall, within five Business Days after the receipt of
such application, afford such applicants access during normal business hours to
the most recent list of Certificate-holders held by the Trustee. If such a list
is as of a date more than 90 days prior to the date of receipt of such
applicants' request, the Trustee shall promptly request from the Certificate
Registrar a current list as provided above, and shall afford such applicants
access to such list promptly upon receipt.
Every Certificateholder, by receiving and holding such list, agrees
with the Certificate Registrar and the Trustee that neither the Certificate
Registrar nor the Trustee shall be held accountable by reason of the disclosure
of any such information as to the names and addresses of the Certificateholders
hereunder, regardless of the source from which such information was derived.
XI-5
<PAGE>
IN WITNESS WHEREOF, the Sponsor, the Master Servicer, the Seller and
the Trustee have caused this Agreement to be duly executed by their respective
officers thereunto duly authorized to be hereunto affixed, all as of the day and
year first above written.
HEADLANDS MORTGAGE SECURITIES, INC.
as Sponsor
By
Title: Vice President
HEADLANDS MORTGAGE COMPANY
as Seller and Master Servicer
By
Title:
-----------------------------------
as Trustee
By
Title: Vice President
<PAGE>
State of New York )
) ss.:
County of New York )
On the ______ day of ___________, 199_, before me, a notary
public in and for the State of New York, personally appeared
_________________________, known to me who, being by me duly sworn, did depose
and say that s/he is the _________________ of Headlands Mortgage Securities,
Inc., a Delaware corporation, one of the parties that executed the foregoing
instrument; and that s/he signed their name thereto by order of the Board of
Directors of such corporation.
Notary Public
[Notarial Seal]
State of New York )
) ss.:
County of New York )
On the _____ day of _______________, 199_, before me, a notary
public in and for the State of New York, personally appeared
_________________________, known to me who, being by me duly sworn, did depose
and say that s/he is an Authorized Signatory of __________________, one of the
parties that executed the foregoing instrument; and that s/he signed their name
thereto by order of the Board of Directors of said corporation.
Notary Public
[Notarial Seal]
<PAGE>
State of New York )
) ss.:
County of New York )
On the _________ day of ________________, 199_, before me, a
notary public in and for the State of New York, personally appeared
_________________________, known to me who, being by me duly sworn, did depose
and say that s/he is a [ ] of ______________________________, one of the parties
that executed the foregoing instrument; and that s/he signed their name thereto
by order of the Board of Directors of said corporation.
Notary Public
[Notarial Seal]
<PAGE>
EXHIBIT A
[FORM OF SENIOR CERTIFICATE]
[UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE
DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), TO THE TRUSTEE OR ITS
AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE , OR PAYMENT, AND ANY CERTIFICATE
ISSUED IS REGISTERED IN THE NAME OF AN ENTITY REQUESTED BY AN AUTHORIZED
REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO. OR TO SUCH OTHER
ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER,
PLEDGE, OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS
WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST
HEREIN.]
Certificate No. CUSIP No.:
Class [X] [A-] Certificate
Date of Pooling and Servicing Initial Weighted Average
Agreement and Cut-Off Date: Pass-Through Rate:
________________, 199__ %
First Distribution Date: Initial [Certificate
________________, 199__ Balance] [Notional Amount] of
all Class [A-][X] Certificates:
$
Last Scheduled Initial [Certificate Balance]
Distribution Date: [Notional Amount] of this
Certificate:
$
A-9
<PAGE>
MORTGAGE PASS-THROUGH CERTIFICATE,
SERIES 199__-__
evidencing a percentage interest in the distributions allocable to the
Certificates specified above from payments on and proceeds of a pool (the
"Pool") of fixed rate, one- to four-family first mortgage loans formed and sold
by
HEADLANDS MORTGAGE SECURITIES, INC.
This Certificate does not evidence an obligation of, or an interest in,
and is not guaranteed by Headlands Mortgage Securities Inc., Headlands Mortgage
Company, or the Trustee referred to below or any of their respective affiliates.
Neither this Certificate nor the underlying Mortgage Loans are guaranteed or
insured by any governmental agency or instrumentality.
THIS CERTIFIES THAT _____________________ is the registered owner of
the pro rata share evidenced by this Certificate in certain monthly
distributions on the Certificates specified above from payments on and proceeds
of the assets contained in the Pool consisting of a pool of fixed rate one- to
four-family first mortgage loans (the "Mortgage Loans"). The Pool was created
pursuant to a Pooling and Servicing Agreement dated as specified above (the
"Agreement") among Headlands Mortgage Securities, Inc., as sponsor (the
"Sponsor"), Headlands Mortgage Company, as master servicer and seller (in such
capacities, the "Master Servicer" and the "Seller"), and [ ], as Trustee (the
"Trustee"). To the extent not defined herein, the capitalized terms used herein
have the meanings assigned in the Agreement. This Certificate is issued under
and is subject to the terms, provisions and conditions of the Agreement, to
which Agreement the Holder of this Certificate by virtue of the acceptance
hereof assents and by which such Holder is bound.
Pursuant to the terms of the Agreement, distributions will be made on
the 25th day of each month or, if such 25th day is not a Business Day, the
Business Day immediately following such 25th day (the "Distribution Date"),
commencing on the first Distribution Date specified above, to the Person in
whose name this Certificate is registered at the close of business on the Record
Date, of an amount equal to the pro rata share evidenced by this Certificate of
the aggregate amount required to be distributed to Holders of Certificates
specified above pursuant to the Agreement.
Distributions on this Certificate will be made by the Trustee by check
mailed to the Person entitled thereto at the address appearing in the
Certificate Register, or upon written request by the Certificateholder, by wire
transfer (in the case of any Holder of Certificates entitled to such form of
payment as provided in the Agreement) or by such other means of payment as such
Person and the
A-10
<PAGE>
Trustee shall agree. Except as otherwise provided in the Agreement, the final
distribution on this Certificate will be made in the applicable manner described
above, after due notice by the Trustee of the pendency of such distribution and
only upon presentation and surrender of this Certificate at the office or agency
of the Trustee specified in such notice.
This Certificate shall not be entitled to any benefit under the
Agreement or be valid for any purpose unless manually countersigned by any
authorized signatory of the Trustee.
A-11
<PAGE>
IN WITNESS WHEREOF, the Trustee has caused this Certificate to be duly
executed.
Dated:
HEADLANDS MORTGAGE SECURITIES,
INC.
By:__________________________
Name:
Title:
Countersigned:
By_______________________________
Authorized Signatory of the
Trustee, as defined herein
A-12
<PAGE>
EXHIBIT B
[FORM OF RESIDUAL CERTIFICATE]
THIS CERTIFICATE IS SUBORDINATED IN RIGHT OF PAYMENT TO THE REGULAR
CERTIFICATES AS DESCRIBED IN THE POOLING AND SERVICING AGREEMENT
REFERRED TO HEREIN.
SOLELY FOR U.S. FEDERAL INCOME TAX PURPOSES, THIS CERTIFICATE IS A "RESIDUAL
INTEREST" IN A "REAL ESTATE MORTGAGE INVESTMENT CONDUIT," AS THOSE TERMS ARE
DEFINED, RESPECTIVELY, IN SECTIONS 860G AND 860D OF THE INTERNAL REVENUE CODE.
THIS CERTIFICATE IS NOT TREATED AS INDEBTEDNESS OF THE ISSUER FOR FEDERAL INCOME
TAX PURPOSES.
NO EMPLOYEE BENEFIT PLAN (A "PLAN") SUBJECT TO THE EMPLOYEE RETIREMENT INCOME
SECURITY ACT OF 1974, AS AMENDED (AN "ERISA PLAN"), NOR ANY INDIVIDUAL
RETIREMENT ACCOUNT (AN "ACCOUNT") OR ANY PLAN SUBJECT TO SECTION 4975 OF THE
INTERNAL REVENUE CODE OF 1986, AS AMENDED (THE "CODE") (A "SECTION 4975 PLAN"),
MAY PURCHASE OR INVEST IN THIS CERTIFICATE. THIS CERTIFICATE WILL NOT BE
ACCEPTED FOR REGISTRATION OF TRANSFER UNLESS IT IS ACCOMPANIED BY EITHER (I) A
REPRESENTATION LETTER FROM THE PROPOSED TRANSFEREE, ACCEPTABLE TO THE TRUSTEE,
TO THE EFFECT THAT SUCH PROPOSED TRANSFEREE IS NOT AN ERISA PLAN, ACCOUNT OR
SECTION 4975 PLAN OR (II) IN THE CASE OF ANY SUCH PROPOSED TRANSFEREE WHICH IS A
PLAN, AN OPINION OF COUNSEL SATISFACTORY TO THE TRUSTEE AND THE MASTER SERVICER
TO THE EFFECT SET FORTH IN THE AGREEMENT.
THIS CERTIFICATE HAS NOT BEEN AND WILL NOT BE REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE
RESOLD OR TRANSFERRED UNLESS IT IS REGISTERED PURSUANT TO SUCH ACT AND LAWS OR
IS SOLD OR TRANSFERRED IN TRANSACTIONS WHICH ARE EXEMPT FROM REGISTRATION UNDER
SUCH ACT AND UNDER APPLICABLE STATE LAW AND IS TRANSFERRED IN ACCORDANCE WITH
THE PROVISIONS OF SECTION 6.02 OF THE POOLING AND SERVICING AGREEMENT REFERRED
TO HEREIN.
[THIS CERTIFICATE REPRESENTS A "TAX MATTERS PERSON RESIDUAL INTEREST" ISSUED
UNDER THE POOLING AND SERVICING AGREEMENT REFERRED TO HEREIN AND MAY NOT BE
TRANSFERRED TO ANY PERSON EXCEPT IN CONNECTION WITH THE ASSUMPTION BY THE
TRANSFEREE OF THE DUTIES OF THE MASTER SERVICER UNDER SUCH AGREEMENT.]
Certificate No. Percentage Interest of this
Residual Certificate: %
Residual Certificate
Date of Pooling and Servicing
Agreement and Cut-Off Date: First Distribution Date:
_________________, 199__ _________________, 199__
B-1
<PAGE>
MORTGAGE PASS-THROUGH CERTIFICATE,
SERIES 199___-__
evidencing a percentage interest in the distributions allocable to the Class of
Certificates specified above from payments on and proceeds of a pool (the
"Pool") of fixed rate, one- to four-family first mortgage loans formed and sold
by
HEADLANDS MORTGAGE SECURITIES, INC.
This Certificate does not evidence an obligation of, or an interest in,
and is not guaranteed by Headlands Mortgage Securities Inc., Headlands Mortgage
Company, or the Trustee referred to below or any of their respective affiliates.
Neither this Certificate nor the underlying Mortgage Loans are guaranteed or
insured by any governmental agency or instrumentality.
THIS CERTIFIES THAT _____________________ is the registered owner of
the pro rata share evidenced by this Certificate in certain monthly
distributions on the Certificates specified above from payments on and proceeds
of the assets contained in the Pool consisting of a pool of fixed rate one- to
four-family first mortgage loans (the "Mortgage Loans"). The Pool was created
pursuant to a Pooling and Servicing Agreement dated as specified above (the
"Agreement") among Headlands Mortgage Securities, Inc., as sponsor (the
"Sponsor"), Headlands Mortgage Company, as master servicer and seller (in such
capacities, the "Master Servicer" and the "Seller"), and [ ], as Trustee (the
"Trustee"). The Trust Fund will consist primarily of one asset pool, with
respect to which an election will be made to treat it as a real estate mortgage
investment conduit (a "REMIC") for federal income tax purposes. The Residual
Certificates will constitute "residual interests" in the Pool. To the extent not
defined herein, the capitalized terms used herein have the meanings assigned in
the Agreement. This Certificate is issued under and is subject to the terms,
provisions and conditions of the Agreement, to which Agreement the Holder of
this Certificate by virtue of the acceptance hereof assents and by which such
Holder is bound.
Pursuant to the terms of the Agreement, a distribution will be made on
the 25th day of each month or, if such 25th day is not a Business Day, the
Business Day immediately following such 25th day (the "Distribution Date"),
commencing on the first Distribution Date specified above, to the Person in
whose name this Certificate is registered at the close of business on the last
day (or if such last day is not a Business Day, the Business Day immediately
preceding such last day) of the month next preceding the month of such
distribution (the "Record Date"), in an amount equal to the pro rata share
evidenced by this Certificate of the aggregate amount required to be distributed
to Holders of Certificates of the Class specified above pursuant to the
Agreement.
Distributions, if any, on this Certificate will be made by the Trustee
by check mailed to the address of the Person entitled thereto, as such name and
address shall appear on the Certificate
B-2
<PAGE>
Register received by the Trustee five Business Days before a Record Date, by
wire transfer (in the case of any Holder of Certificates entitled to such form
of payment as provided in the Agreement) or by such other means of payment as
such Person and the Trustee shall agree. Except as otherwise provided in the
Agreement, the final distribution on this Certificate will be made in the
applicable manner described above, after due notice by the Trustee of the
pendency of such distribution and only upon presentation and surrender of this
Certificate at the office or agency of the Trustee specified in such notice.
No transfer of a Residual Certificate will be made unless such transfer
is exempt from the registration requirements of the Securities Act of 1933, as
amended, and any applicable state securities laws or is made in accordance with
said Act and laws. In the event of such a transfer, (i) the Trustee or the
Sponsor may require an Opinion of Counsel acceptable to and in form and
substance satisfactory to the Trustee and the Sponsor that such transfer is
exempt (describing the applicable exemption and the basis therefor) from or is
being made pursuant to the registration requirements of the Securities Act of
1933, as amended, and of any applicable statute of any state and (ii) the
Trustee shall require the transferee to execute an investment letter acceptable
to and in form and substance satisfactory to the Trustee and the Sponsor
certifying as to the fact surrounding such transfer. The Holder hereof desiring
to effect such transfer shall, and does hereby agree to, indemnify the Trustee
and the Sponsor against any liability that may result if the transfer is not so
exempt or is not made in accordance with such Federal and state laws.
No transfer of a Residual Certificate shall be made unless the Trustee
shall have received either (i) a representation letter from the transferee of
such Certificate, acceptable to and in form and substance satisfactory to the
Trustee and the Master Servicer, to the effect that such transferee is not an
employee benefit plan subject to Section 406 of ERISA, nor a person acting on
behalf of any such plan, or (ii) in the case of any such Residual Certificate
presented for registration in the name of an employee benefit plan subject to
ERISA, and Section 4975 of the Code (or comparable provisions of any subsequent
enactments), or a trustee of any such plan, an Opinion of Counsel satisfactory
to the Trustee and the Sponsor to the effect that the purchase or holding of
such Residual Certificate will not result in the assets of the pool being deemed
to be "plan assets" and subject to the prohibited transaction provisions of
ERISA and the Code and will not subject the Trustee or the Master Servicer to
any obligation in addition to those undertaken in the Agreement.
Neither this Certificate nor any Ownership Interest herein may be
transferred and any proposed transferee hereof shall not become the registered
Holder hereof, without the express written consent of the Trustee. In connection
with any proposed transfer of any Ownership Interest, the Trustee shall as a
condition to such
B-3
<PAGE>
consent require delivery to it, and the proposed transferee shall deliver to the
Trustee, (i) an affidavit (a "Transfer Affidavit") of the proposed transferee
(in the form of Exhibit I to the Agreement) representing and warranting that
such transferee is a Permitted Transferee (as defined in the Agreement), that it
is not acquiring its Ownership Interest that is the subject of the proposed
transfer as a nominee, trustee or agent for any Person who is not a Permitted
Transferee and (ii) a covenant of the proposed transferee that it will abide by
the transfer restrictions applicable to the Residual Certificates set forth in
the Agreement.
A Permitted Transferee is any Person other than (i) the United States
or any State or any political subdivision of any of the foregoing, (ii) a
foreign government, international organization or any agency or instrumentality
of either of the foregoing, (iii) an organization which is exempt from tax
imposed by Chapter 1 of the Code (including the tax imposed by Section 511 of
the Code on unrelated business taxable income) (except certain farmers'
cooperatives described in Code Section 521)), (iv) rural electric and telephone
cooperatives described in Code Section 1381(a)(2)(C) and (v) any other Person so
designated by the Master Servicer based on an Opinion of Counsel to the effect
that any Transfer to such Person may cause the Pool or any other Holder of a
Residual Certificate to incur tax liability that would not be imposed other than
on account of such Transfer. The terms "United States", "State" and
"international organization" shall have the meanings set forth in Code Section
7701 or successor provisions.
Any purported transfer of a Residual Certificate in violation of the
restriction on transfer will be null and void and vest no rights in the
purported transferee.
This Certificate shall not be entitled to any benefit under the
Agreement or be valid for any purpose unless manually countersigned by any
authorized signatory of the Trustee.
B-4
<PAGE>
IN WITNESS WHEREOF, the Sponsor has caused this Certificate to be duly
executed.
Dated:
HEADLANDS MORTGAGE SECURITIES,
INC.
By____________________________
Name:
Title:
Countersigned:
By_______________________________
Authorized Signatory of
the Trustee, as defined herein
B-5
<PAGE>
EXHIBIT D
[FORM OF SUBORDINATED CERTIFICATE]
THIS CERTIFICATE IS SUBORDINATED IN RIGHT OF PAYMENT TO CERTAIN
OTHER CLASSES OF REGULAR CERTIFICATES AS DESCRIBED IN THE POOLING
AND SERVICING AGREEMENT REFERRED TO HEREIN.
SOLELY FOR U.S. FEDERAL INCOME TAX PURPOSES, THIS CERTIFICATE IS A
"REGULAR INTEREST" IN A "REAL ESTATE MORTGAGE INVESTMENT CONDUIT,"
AS THOSE TERMS ARE DEFINED, RESPECTIVELY, IN SECTIONS 860G AND 860D
OF THE INTERNAL REVENUE CODE.
[THIS CERTIFICATE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "ACT"). ANY RESALE OR TRANSFER OF THIS CERTIFICATE WITHOUT
REGISTRATION THEREOF UNDER THE ACT MAY ONLY BE MADE IN A TRANSACTION EXEMPTED
FROM THE REGISTRATION REQUIREMENTS OF THE ACT AND IN ACCORDANCE WITH THE
PROVISIONS OF THE AGREEMENT REFERRED TO HEREIN.
NO EMPLOYEE BENEFIT PLAN (A "PLAN") SUBJECT TO THE EMPLOYEE RETIREMENT INCOME
SECURITY ACT OF 1974, AS AMENDED (AN "ERISA PLAN"), NOR ANY INDIVIDUAL
RETIREMENT ACCOUNT (AN "ACCOUNT") OR ANY PLAN SUBJECT TO SECTION 4975 OF THE
INTERNAL REVENUE CODE OF 1986, AS AMENDED (THE "CODE") (A "SECTION 4975 PLAN"),
MAY PURCHASE OR INVEST IN THIS CERTIFICATE. THIS CERTIFICATE WILL NOT BE
ACCEPTED FOR REGISTRATION OF TRANSFER UNLESS IT IS ACCOMPANIED BY EITHER (I) A
REPRESENTATION LETTER FROM THE PROPOSED TRANSFEREE, ACCEPTABLE TO THE TRUSTEE,
TO THE EFFECT THAT SUCH PROPOSED TRANSFEREE IS NOT AN ERISA PLAN, ACCOUNT OR
SECTION 4975 PLAN OR (II) IN THE CASE OF ANY SUCH PROPOSED TRANSFEREE WHICH IS A
PLAN, AN OPINION OF COUNSEL SATISFACTORY TO THE TRUSTEE AND THE MASTER SERVICER
TO THE EFFECT SET FORTH IN THE AGREEMENT.
Certificate No. CUSIP No.:
Class [M-] [B-] Certificate
Date of Pooling and Servicing
Agreement and Cut-Off Date: Pass-Through Rate:
____________________, 199__ %
First Distribution Date: Initial Certificate
____________________, 199__ Balance of all Class [M-] [B-]
Certificates:
$
Last Scheduled Initial Certificate Balance
Distribution Date: of this Certificate:
$
D-1
<PAGE>
MORTGAGE PASS-THROUGH CERTIFICATE,
SERIES 199__-__
evidencing a percentage interest in the distributions allocable to the
Certificates specified above from payments on and proceeds of a pool (the
"Pool") of fixed rate, one- to four-family first mortgage loans formed and sold
by
HEADLANDS MORTGAGE SECURITIES, INC.
This Certificate does not evidence an obligation of, or an interest in,
and is not guaranteed by Headlands Mortgage Securities Inc., Headlands Mortgage
Company, or the Trustee referred to below or any of their respective affiliates.
Neither this Certificate nor the underlying Mortgage Loans are guaranteed or
insured by any governmental agency or instrumentality.
THIS CERTIFIES THAT _____________________ is the registered owner of
the pro rata share evidenced by this Certificate in certain monthly
distributions on the Certificates specified above from payments on and proceeds
of the assets contained in the Pool consisting of a pool of fixed rate one- to
four-family first mortgage loans (the "Mortgage Loans"). The Pool was created
pursuant to a Pooling and Servicing Agreement dated as specified above (the
"Agreement") among Headlands Mortgage Securities, Inc., as sponsor (the
"Sponsor"), Headlands Mortgage Company, as master servicer and seller (in such
capacities, the "Master Servicer" and the "Seller"), and [ ], as Trustee (the
"Trustee"). To the extent not defined herein, the capitalized terms used herein
have the meanings assigned in the Agreement. This Certificate is issued under
and is subject to the terms, provisions and conditions of the Agreement, to
which Agreement the Holder of this Certificate by virtue of the acceptance
hereof assents and by which such Holder is bound.
Pursuant to the terms of the Agreement, distributions will be made on
the 25th day of each month or, if such 25th day is not a Business Day, the
Business Day immediately following such 25th day (the "Distribution Date"),
commencing on the first Distribution Date specified above, to the Person in
whose name this Certificate is registered at the close of business on the Record
Date, of an amount equal to the pro rata share evidenced by this Certificate of
the aggregate amount required to be distributed to Holders of Certificates
specified above pursuant to the Agreement.
Distributions on this Certificate will be made by the Trustee by check
mailed to the Person entitled thereto at the address appearing in the
Certificate Register, or upon written request by the Certificateholder, by wire
transfer (in the case
D-2
<PAGE>
of any Holder of Certificates entitled to such form of payment as provided in
the Agreement) or by such other means of payment as such Person and the Trustee
shall agree. Except as otherwise provided in the Agreement, the final
distribution on this Certificate will be made in the applicable manner described
above, after due notice by the Trustee of the pendency of such distribution and
only upon presentation and surrender of this Certificate at the office or agency
maintained for that purpose by the Trustee in [ ].
[No transfer of a Certificate of this Class shall be made unless such
transfer is made pursuant to an effective registration statement under the
Securities Act and any applicable state securities laws or is exempt from the
registration requirements under said Act and such laws. In the event that a
transfer is to be made in reliance upon an exemption from the Securities Act and
such laws, in order to assure compliance with the Securities Act and such laws,
the Certificateholder desiring to effect such transfer and such
Certificateholder's prospective transferee shall each certify to the Trustee in
writing the facts surrounding the transfer. In the event that such a transfer is
to be made within three years from the date of the initial issuance of
Certificates pursuant hereto, there shall also be delivered (except in the case
of a transfer pursuant to Rule 144A of the Securities Act) to the Trustee an
Opinion of Counsel that such transfer may be made pursuant to an exemption from
the Securities Act and such state securities laws, which Opinion of Counsel
shall not be obtained at the expense of the Trustee, the Seller, the Master
Servicer or the Depositor. The Holder hereof desiring to effect such transfer
shall, and doe hereby agree to, indemnify the Trustee and the Depositor against
any liability that may result if the transfer is not so exempt or is not made in
accordance with such federal and state laws.
No transfer of this Certificate shall be made unless the Trustee shall
have received either (i) a representation letter from the transferee of such
Certificate, acceptable to and in form and substance satisfactory to the Trustee
and the Master Servicer, to the effect that such transferee is not an employee
benefit plan subject to Section 406 of ERISA, nor a person acting on behalf of
any such plan, or (ii) in the case of any such this Certificate presented for
registration in the name of an employee benefit plan subject to ERISA, and
Section 4975 of the Code (or comparable provisions of any subsequent
enactments), or a trustee of any such plan, an Opinion of Counsel satisfactory
to the Trustee and the Sponsor to the effect that the purchase or holding of
such this Certificate will not result in the assets of the
D-3
<PAGE>
Pool being deemed to be "plan assets" and subject to the prohibited transaction
provisions of ERISA and the Code and will not subject the Trustee or the
Master Servicer to any obligation in addition to those undertaken in the
Agreement.
This Certificate shall not be entitled to any benefit under the
Agreement or be valid for any purpose unless manually countersigned by any
authorized signatory of the Trustee.
D-4
<PAGE>
IN WITNESS WHEREOF, the Trustee has caused this Certificate to be duly
executed.
Dated:
HEADLANDS MORTGAGE SECURITIES,
INC.
By:__________________________
Name:
Title:
Countersigned:
By_______________________________
Authorized Signatory of the
Trustee, as defined herein
D-5
<PAGE>
EXHIBIT E
MORTGAGE PASS-THROUGH CERTIFICATE,
SERIES 199___-__
This Certificate is one of a duly authorized issue of Certificates
designated Mortgage Pass-Through Certificates (the "Certificates"), Series
199___-__, and representing a beneficial ownership interest in (i) the Mortgage
Loans, and the proceeds thereof, (ii) property acquired by the Pool by
foreclosure or deed in lieu of foreclosure or otherwise, and (iii) the interest
of the Certificateholders in any insurance policies in respect of the Mortgage
Loans.
The Certificates are limited in right of payment to certain payments
on, and collections in respect of, the Mortgage Loans, all as more specifically
set forth in the Agreement. Each Certificateholder, by its acceptance of this
Certificate, agrees that it will look solely to the funds on deposit in the
Certificate Account for payment hereunder and that the Trustee is not personally
liable to the Certificateholders for any amount payable under this Certificate
or the Agreement or, except as expressly provided in the Agreement, subject to
any liability under the Agreement.
This Certificate does not purport to summarize the Agreement and
reference is made to the Agreement for the interests, rights and limitations of
rights, benefits, obligations and duties evidenced hereby, and the rights,
duties and immunities of the Trustee.
The Agreement permits, with certain exceptions therein provided, the
amendment thereof and the modification of the rights and obligations of the
Sponsor, the Master Servicer, the Trustee and the Seller and the rights of the
Certificateholders under the Agreement at any time by the Sponsor, the Seller,
the Master Servicer and the Trustee with the consent of the Holders of
Certificates evidencing interests aggregating not less than 66-2/3% of all
Voting Rights. Any such consent by the Holder of this Certificate shall be
conclusive and binding on such Holder and upon all future Holders of this
Certificate and of any Certificate issued upon the transfer hereof or in
exchange hereof or in lieu hereof whether or not notation of such consent is
made upon this Certificate. The Agreement also permits the amendment thereof, in
certain limited circumstances, without the consent of the Holders of any of the
Certificates.
As provided in the Agreement and subject to certain limitations therein
set forth, the transfer of this Certificate is
E-1
<PAGE>
registrable in the Certificate Register of the Trustee upon surrender of this
Certificate for registration of transfer at the office or agency of the Trustee
in [ ], accompanied by a written instrument of transfer in form satisfactory
to the Trustee and the Certificate Registrar duly executed by the holder hereof
or such holder's attorney duly authorized in writing, and thereupon one or
more new Certificates of authorized denominations evidencing the same aggregate
Percentage Interest in the Pool will be issued to the designated transferee or
trans-ferees.
The Certificates are issuable only as registered Certificates without
coupons in denominations specified in the Agreement. As provided in the
Agreement and subject to certain limitations therein set forth, Certificates are
exchangeable for new Certificates of authorized denominations evidencing the
same aggregate Percentage Interest, as requested by the Holder surrendering the
same.
No service charge will be made for any such registration of transfer or
exchange, but the Trustee may require payment of a sum sufficient to cover any
tax or other governmental charge payable in connection therewith.
The Sponsor, the Master Servicer, the Trustee and the Certificate
Registrar and any agent of the Sponsor, the Master Servicer, the Trustee or the
Certificate Registrar may treat the Person in whose name this Certificate is
registered as the owner hereof for all purposes, and neither the Sponsor, the
Master Servicer, the Trustee, the Certificate Registrar nor any such agent shall
be affected by any notice to the contrary.
The obligations and responsibilities created by the Agreement and the
Pool created thereby shall terminate upon payment to the Certificateholders, or
provision therefor, in accordance with the Agreement upon the earlier of (a) the
repurchase by the Master Servicer of all Mortgage Loans and all property
acquired in respect of any Mortgage Loan remaining in the Pool at a price
determined as provided in the Agreement, (b) the final payment or other
liquidation (or any advance with respect thereto) of the last Mortgage Loan
remaining in the Pool or the disposition of all property acquired upon
foreclosure or by deed in lieu of foreclosure of any Mortgage Loan, or (c) the
Distribution Date in ____________________. The exercise of the right of the
Master Servicer to repurchase all the Mortgage Loans and property in respect of
Mortgage Loans will result in early retirement of the Certificates, the right of
the Master Servicer to repurchase being subject to the Pool Scheduled Principal
Balance of the Mortgage Loans at the time of repurchase being less than [ ]
E-2
<PAGE>
percent of the aggregate of the Cut-Off Date Pool Scheduled Principal Balance of
such Mortgage Loans.
This Certificate shall be governed by and construed in accordance with
the laws of the State of New York.
E-3
<PAGE>
ASSIGNMENT
FOR VALUE RECEIVED, the undersigned hereby sell(s), assign(s)
and transfer(s) unto -------------------------------------------
- ----------------------------------------------------------------
- ----------------------------------------------------------------
- --------------------.
(Please print or typewrite name and address including postal zip
code of assignee)
the beneficial interest evidenced by the within Mortgage Pass-Through
Certificate and hereby authorizes the transfer of registration of such interest
to assignee on the Certificate Register of the Pool.
I (We) further direct the Certificate Registrar to issue a new Certificate of
a like denomination and Class, to the above named assignee and deliver such
Certificate to the following address:
- ----------------------------------------------------------------.
Dated:
-------------------------------------
Signature by or on behalf of assignor
-------------------------------------
Signature Guaranteed
DISTRIBUTION INSTRUCTIONS
The assignee should include the following for purposes of distribution:
Distributions shall be made, by wire transfer or otherwise, in
immediately available funds to _________________________________
- ---------------------------------------------------------------.
for the account of______________________________________________
account number ______________, or, if mailed by check, to ______
- ---------------------------------------------------------------.
Applicable statements should be mailed to ______________________
- ---------------------------------------------------------------.
This information is provided by ____________________________, the assignee
named above, or __________________________________, as its agent.
E-4
<PAGE>
EXHIBIT F
MORTGAGE LOAN SCHEDULE
F-1
<PAGE>
EXHIBIT G
SELLER'S AGREEMENT FOR
MORTGAGE LOANS
Dated as of _____________, 199__
HEADLANDS MORTGAGE COMPANY
as Seller
and
HEADLANDS MORTGAGE SECURITIES, INC.
as Purchaser
G-1
<PAGE>
CONTENTS
Section Page
Statement of the Transaction......................................... 1
ARTICLE I DEFINITIONS.......................................... 2
ARTICLE II CONVEYANCE OF THE MORTGAGE LOANS..................... 4
ARTICLE III REPRESENTATIONS AND WARRANTIES....................... 6
ARTICLE IV ACKNOWLEDGEMENTS..................................... 8
ARTICLE V MISCELLANEOUS........................................ 9
Schedule A - Mortgage Loan Schedule
G-i
<PAGE>
Statement of the Transaction
Subject to the terms and conditions hereof, Headlands Mortgage
Company, (the "Seller") agrees to sell and transfer to Headlands Mortgage
Securities, Inc. (the "Purchaser") and the Purchaser hereby agrees to purchase
and accept from the Seller, those mortgage loans listed in the Mortgage Loan
Schedule attached hereto as Schedule A, having been identified thereon as being
sold by it (the "Mortgage Loans"), having aggregate Principal Balances on the
Cut-Off Date of approximately $___________ at the respective Mortgage Loan
Purchase Price.
Each Mortgage Loan will be serviced by the Master Servicer for
the related Master Servicing Fee indicated on Schedule A. The Mortgage Loans
will be serviced in accordance with the terms of the Pooling Agreement.
Simultaneously with the sale of the Mortgage Loans to the
Purchaser on the Closing Date, the Mortgage Loans will be sold to a trust in
exchange for the Mortgage Pass-Through Certificates, Series 199___-__ (the
"Certificates").
The Seller agrees to cooperate and use its best efforts to
facilitate the execution and delivery of the Pooling Agreement (as defined
herein) pursuant to which the Certificates will be issued.
The following sets forth the terms and conditions of the
contemplated transaction, to which the parties have agreed, as evidenced by the
execution of this Agreement.
G-1
<PAGE>
ARTICLE I
DEFINITIONS
Section 1.01 Whenever used in the Agreement, the following
words and phrases, unless the context otherwise requires, shall have the
following meanings (capitalized terms not otherwise defined herein are used
herein with the meanings assigned thereto in the Pooling Agreement):
Agreement: This Seller's Agreement for Mortgage Loans
including all schedules, amendments and supplements hereto.
Closing Date: _____________, 199__.
Mortgage File: As to each Mortgage Loan:
(a) the original Mortgage Note, endorsed without recourse to
the order of the Trustee and showing an unbroken chain of endorsements from the
original payee thereof to the Person endorsing it to the Trustee, (b) the
original Mortgage, which shall have been recorded, with evidence of such
recording indicated thereon, (c) the assignment (which may be in the form of a
blanket assignment if permitted in the jurisdiction in which the Mortgaged
Property is located) to the Trustee of the Mortgage, with evidence or recording
with respect to each Mortgage Loan in the name of the Trustee thereon, (d) all
intervening assignments of the Mortgage, if any, to the extent available to the
Sponsor with evidence of recording thereon, (e) the original or a copy of the
policy or certificate of primary mortgage guaranty insurance, to the extent
available, if any, (f) the original policy of title insurance or mortgagee's
certificate of title insurance or commitment or binder for title insurance and
(g) originals of all assumption and modification agreements, if any.
Mortgage Loan Purchase Price: $________________ plus
accrued interest from ____________, 199__ at the weighted average
Mortgage Interest Rate to, but not including, the Closing Date.
Mortgage Loans: Each Mortgage Loan identified on the
Mortgage Loan Schedule attached as Schedule A hereto.
Mortgage Loan Schedule: As of any date of determination, the
schedule of Mortgage Loans included in the Pool. The initial schedule of
Mortgage Loans attached hereto as Schedule A, which sets forth the following
information as to each Mortgage Loan: (i) the Mortgage Loan identifying number;
(ii) the Mort-gagor's name; (iii) the street address of the Mortgaged Property,
including the state; (iv) the property type of the related Mor-
G-2
<PAGE>
tgaged Property; (v) the original number of months to maturity; (vi) the
Loan-to-Value Ratio as of the Cut-Off Date; (vii) the Mortgage Interest
Rate as of the date of origination; (viii) the scheduled amount of the monthly
installment of principal and interest; (ix) the original principal amount; (x)
the Cut-Off Date Principal Balance; (xi) identifying number of related Servicer,
and (xii) the related Servicing Fee Rate and the Master Servicing Rate.
Pooling Agreement: The Pooling and Servicing Agree-
ment, dated as of __________________, 199__ among the Purchaser,
as Sponsor, Headlands Mortgage Company, as Seller and Master
Servicer and the Trustee, as Trustee.
Person: Any individual, corporation, partnership, joint
venture, association, joint-stock company, trust, unincorporated organization or
government or any agency or political subdivision thereof.
Master Servicer: Headlands Mortgage Company
Trustee: [ ]
Underwriting Agreement: The Underwriting Agreement,
dated _______________________, 199__, between Headlands Mortgage
Securities, Inc. and [ ].
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<PAGE>
ARTICLE II
CONVEYANCE OF THE MORTGAGE LOANS
Section 2.01 Delivery and Examination of Mortgage
File.
Conveyance of Mortgage Loans. The Seller, concurrently with
the execution and delivery of this Agreement, does hereby sell, transfer,
assign, set over and otherwise convey to the Purchaser without recourse all the
right, title and interest of the Seller in and to the related Mortgage Loans and
the related Mortgage Notes, including all interest and principal received on or
with respect to such Mortgage Loans (other than payments of principal and
interest due and payable on the Mortgage Loans on or before the Cut-Off Date).
In connection with such transfer and assignment, the Seller
does hereby deliver to the Purchaser or the Trustee as the Purchaser's designee
the Mortgage File pertaining to each Mortgage Loan so transferred and assigned;
provided however, that in any instances where the original recorded Mortgage or
interim recorded assignments of Mortgage cannot be delivered by the Seller to
the Trustee prior to or concurrently with the execution and delivery of this
Agreement, due to a delay in connection with recording, the Seller may in lieu
of delivering such original recorded Mortgage or interim assignment, deliver to
the Purchaser or the Trustee a copy thereof, provided that the Seller certifies
that the original Mortgage or interim assignment has been delivered to a title
insurance company for recordation after receipt of its policy of title insurance
or binder therefor or to the appropriate public recording office in the
applicable jurisdiction. In all such instances, the Seller will deliver or cause
to be delivered the original recorded Mortgage or interim assignment to the
Trustee promptly upon receipt thereof. The Seller shall exercise its best
reasonable efforts to deliver or cause to be delivered to the Trustee within 180
days of the execution and delivery of this Agreement the original title
insurance policy with respect to each Mortgage Loan assigned to the Purchaser
pursuant to this Section 2.01.
In the case of Mortgage Loans which have been prepaid in full
after the Cut-Off Date and prior to the date of execution and delivery of this
Agreement, the Seller, in lieu of delivering the above documents to the
Purchaser or the Trustee, shall make the deposit required by Section 3.11 of the
Pooling Agreement and shall deliver to the Trustee a certification of a
Servicing Officer of the nature set forth in Section 3.11 of the Pooling
Agreement.
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Section 2.02 Acceptance by Purchaser.
The Purchaser acknowledges receipt of the documents referred to in
Section 2.01.
Section 2.03 Closing.
On the Closing Date the Purchaser shall pay to the Seller the
applicable Mortgage Loan Purchase Price for the related Mortgage Loans by wire
transfer of immediately available funds or such other method of payment as the
parties hereto may agree.
Section 2.04 Survival of Representations and Warran-
ties, Repurchase Obligation of the
Seller.
It is understood and agreed that the representations and
warranties set forth in Article III are continuing representations and
warranties and shall survive delivery and release of the Mortgage Files to the
Purchaser or its designee and shall inure to the benefit of the Purchaser, the
Master Servicer, any holder of Certificates representing an undivided interest
in the Mortgage Loans, or the Trustee (referred to herein collectively as
"Interested Persons"), notwithstanding any restrictive or qualified endorsement
on any Mortgage Note or any examination of the Mortgage File.
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ARTICLE III
REPRESENTATIONS AND WARRANTIES
Section 3.01 Representations and Warranties of the
Seller.
(a) The Seller hereby repeats and affirms the representations
and warranties made to the Purchaser in the Pooling Agreement as if
such representations and warranties were set forth herein;
(b) The Seller is a corporation, validly existing and in good
standing under the laws of California; the Seller has the power and
authority to execute, deliver and perform this Agreement; the
execution, delivery and performance of this Agreement (including all
instruments of transfer to be delivered pursuant to this Agreement) by
the Seller and the consummation of the transactions contemplated hereby
have been duly and validly authorized; this Agreement evidences the
valid, binding and enforceable obligation of the Seller; and all
requisite corporate action has been taken by the Seller to make this
Agreement valid and binding upon the Seller in accordance with its
terms.
(c) No approval of the transactions contemplated by this
Agreement from any federal or state regulatory authority having
jurisdiction over the Seller is required or, if required, such approval
has been or, prior to the Closing Date, will be obtained. There are no
actions or proceedings pending, or affecting the Seller which would
adversely affect its ability to perform hereunder.
(d) The consummation of the transactions contemplated by this
Agreement are in the ordinary course of business of the Seller and will
not result in the breach of any term or provision of the charter or
by-laws of the Seller or result in the breach of any term or provision
of, or conflict with or constitute a default under or result in the
acceleration of any obligation under, any agreement, indenture or loan
or credit agreement or other instrument to which the Seller or its
property is subject, or result in the violation of any law, rule,
regulation, order, judgment or decree to which the Seller or its
property is subject.
(e) Neither the Agreement nor any statement, report or other
document furnished or to be furnished pursuant to the Agreement or in
connection with the transaction contemplated hereby contains any untrue
statement of fact or omits to
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<PAGE>
state a fact necessary to make the statements contained therein not
misleading.
(f) The collection practices used by the Seller with respect
to each Mortgage Note and Mortgage have been in all respects legal,
proper, prudent and customary in the mortgage servicing business. With
respect to escrow deposits and payments, there exist no deficiencies in
connection therewith for which customary arrangements for repayment
thereof have not been made and no escrow deposits or payments or other
charges or payments due to the Seller have been capitalized under any
Mortgage or the related Mortgage Note.
[(g) The Seller has fully complied, and will continue to
maintain full compliance with the provisions of Section 13(e) of the
Federal Deposit Insurance Act (12 U.S.C.
ss. 1823(E)).]
The Seller agrees to comply with the provisions of Section
2.03 of the Pooling Agreement in respect of a breach of any of the
representations and warranties set forth in this Section 3.01.
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<PAGE>
ARTICLE IV
ACKNOWLEDGEMENTS
Section 4.01 Acknowledgement of the Purchaser.
The Purchaser hereby acknowledges the receipt of the Mortgage
Loans in consideration for the payment of the Mortgage Loan Purchase Price.
Section 4.02 Acknowledgement of the Seller.
The Seller hereby acknowledges the receipt of the respective
Mortgage Loan Purchase Price in consideration for the sale of the Mortgage
Loans.
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<PAGE>
ARTICLE V
MISCELLANEOUS
Section 5.01 Recordation of Agreement.
This Agreement or a memorandum hereof is subject to
recordation in all appropriate public offices for real property records in each
state and county or other comparable jurisdiction in which any of the Mortgaged
Property is situated, and in any other appropriate public recording office or
elsewhere, such recordation to be effected by either the Seller and at the
Seller's expense, on direction by Purchaser, but only upon direction preceded or
accompanied by the advice of counsel to Purchaser to the effect that such
recordation is necessary to protect the interests of Purchaser in the Mortgage
Loans.
Section 5.02 Notices.
All demands, notices and communications hereunder shall be in
writing and shall be deemed to have been duly given if mailed by registered or
certified mail, return receipt requested, or, if by other means, when received
by the other party or at the address, in the case of the Seller: Headlands
Mortgage Company, 700 Larkspur Landing Circle, Suite 250, Larkspur, California
94939 Attn: [ ]; in the case of the Purchaser: Headlands Mortgage Securities,
Inc., 700 Larkspur Landing Circle, Suite 250, Larkspur, California 94939,
Attention: [
], or such other address as may hereafter be furnished to the other party by
like notice. Any such demand, notice or communication hereunder shall be deemed
to have been given on the date delivered to the premises of the addressee (as
evidenced, in the case of registered or certified mail, by the date noted on the
return receipt).
Section 5.03 Separability Clause.
Any provision, representation or warranty of this Agreement
which is prohibited or unenforceable in any jurisdiction shall, as to such
jurisdiction, be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions hereof, and any
such prohibition or unen-forceability in any jurisdiction shall not invalidate
or render unenforceable such provision in any other jurisdiction. To the extent
permitted by applicable law, the parties hereto waive any provision of law which
prohibits or renders unenforceable any provision hereof.
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<PAGE>
Section 5.04 Counterparts.
For the purpose of facilitating the proving of this Agreement,
as herein provided and for other purposes, this Agreement may be executed
simultaneously in any number of counterparts, each of which counterparts shall
be deemed to be an original, and such counterparts shall constitute but one and
the same instrument.
Section 5.05 Place of Delivery and Governing Law.
The Agreement shall be deemed in effect when a fully executed
counterpart thereof is received by Purchaser in [New York]. The Agreement shall
be construed in accordance with the 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.
Section 5.06 Remedies Cumulative; No Waiver.
All rights and remedies of the Purchaser or any assignee of
the Purchaser under the Agreement shall, to the extent permitted by law, be
deemed cumulative and not exclusive of any thereof or of any other rights and
remedies available to the Purchaser or such assignee to exercise any right or
power accruing upon any default occurring and continuing as aforesaid shall
impair any such right or power, or shall be construed to be a waiver of any such
default or an acquiescence therein; and every right and remedy arising under
this Agreement or by law to Purchaser or such assignee may be exercised from
time to time, and as often as shall be deemed expedient, by Purchaser or such
assignee.
Section 5.07 Miscellaneous.
This Agreement may be amended or supplemented from time to
time only with the written consent of both the Seller and the Purchaser or any
assignee of the Purchaser and the Rating Agency. This Agreement contains the
entire understanding and agreement of the parties and supersedes and
incorporates all prior negotiations, understandings and agreements which are
fully merged herein.
Section 5.08 Agreement of the Seller.
The Seller agrees to execute and deliver such instruments and
take such actions as Purchaser or any assignee of Purchaser may, from time to
time, reasonably request in order to effectuate the purpose and to carry out the
terms of this Agreement.
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<PAGE>
Section 5.09 Successors and Assigns.
This Agreement shall bind and inure to the benefit of and be
enforceable by the Seller, the Purchaser, and the respective successors and
assigns of the Seller, the Purchaser and any Purchaser's designee. The parties
hereto acknowledge that the Purchaser is acquiring the Mortgage Loans for the
purpose of contributing them to a trust that will issue Certificates
representing undivided interests in the Mortgage Loans. As an inducement to the
Purchaser to purchase the Mortgage Loans, the Seller acknowledges and consents
to the assignment to the Trustee by the Purchaser of all of the Purchaser's
rights against the Seller hereunder in respect of the Mortgage Loans sold by it
to the Purchaser and that the enforcement or exercise of any right or remedy
against the Seller hereunder by the Trustee or to the extent permitted under the
Pooling Agreement shall have the same force and effect as if enforced or
exercised by Purchaser directly.
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<PAGE>
IN WITNESS WHEREOF, the Seller and the Purchaser have caused
their names to be signed hereto by their respective officers thereunto duly
authorized and their respective seals, duly attested, to be hereunto affixed,
all as of the day and year first above written.
Dated as of _______________, 199__
HEADLANDS MORTGAGE COMPANY
as Seller
By
Name:
Title:
HEADLANDS MORTGAGE SECURITIES, INC.
as Purchaser
By
Name:
Title:
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<PAGE>
State of [ ])
) ss.:
County of [ ])
On the [ ] day of _________________, 199__ before me, a notary
public in and for the State of ________________, personally appeared
___________________, known to me who, being by me duly sworn, did depose and say
that he is an Authorized Signatory of Headlands Mortgage Company, a California
corporation, one of the parties that executed the foregoing instrument; and that
s/he signed their name thereto by order of the Board of Directors of such
corporation.
Notary Public
[Notarial Seal]
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<PAGE>
State of [ ])
) ss.:
County of [ ])
On the [ ] day of _______________, 199__ before me, a notary
public in and for the State of [ ], personally appeared ___________________,
known to me who, being by me duly sworn, did depose and say that he is a [ ] of
Headlands Mortgage Securities, Inc., a Delaware corporation, one of the parties
that executed the foregoing instrument; and that s/he signed their name thereto
by order of the Board of Directors of such corporation.
Notary Public
[Notarial Seal]
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<PAGE>
Seller's Agreement
Schedule A
Mortgage Loan Schedule
Cut-Off Date: _____________, 199__
[The Mortgage Loan Schedule is attached as
Exhibit F to the Pooling and Servicing Agreement]
\ G-15
<PAGE>
EXHIBIT H
REQUEST FOR RELEASE OF DOCUMENTS
- --------------------------------------------------------------------------------
[ ]
[ ]
PARTICIPANT NAME AND ADDRESS DATE:
[ ]
- --------------------------------------------------------------------------------
IN CONNECTION WITH THE ADMINISTRATION OF THE POOL OF MORTGAGES HELD BY YOU IN
CUSTODY FOR [ ], THE UNDERSIGNED PARTICIPANT REQUESTS THE RELEASE OF MORTGAGE
DOCUMENTS DESCRIBED BELOW FOR THE REASON INDICATED.
- --------------------------------------------------------------------------------
MORTGAGOR'S NAME, ADDRESS AND ZIP CODE LOAN NO.
POOL ID
- --------------------------------------------------------------------------------
ORIGINAL MORTGAGE AMOUNT............... $___________
DATE OF ORIGINAL MORTGAGE............... ___________
INITIAL INTEREST RATE................... ___________
PAID THROUGH DATE....................... ___________
- --------------------------------------------------------------------------------
REASON FOR REQUESTING DOCUMENTS AMOUNT SETTLEMENT DATE
[ ] MORTGAGE PAID IN FULL $________ _______________
[ ] FORECLOSURE $________ _______________
[ ] EXHIBITS ATTACHED FOR SUBSTITUTION $________ _______________
[ ] OTHER (explain)___________________ $________ _______________
- --------------------------------------------------------------------------------
WE CERTIFY THAT ALL AMOUNTS RECEIVED OR TO BE RECEIVED IN CONNECTION WITH SUCH
PAYMENT WHICH ARE REQUIRED TO BE CREDITED TO THE PROTECTED ACCOUNT OR DEPOSITED
TO THE CERTIFICATE ACCOUNT HAVE BEEN OR, WITHIN TWO BUSINESS DAYS, RECEIPT OF
SUCH PAYMENT WILL BE CREDITED OR DEPOSITED.
- -------------------------------------------------- -------------------
SIGNATURE DATE
- --------------------------------------------------
PARTICIPANT AUTHORIZED SIGNATURE
- --------------------------------------------------
CUSTODIAN'S RELEASE AUTHORIZATION
- -------------------------------------------------- --------------------
NAME AND TITLE SIGNATURE DATE
- --------------------------------------------------------------------------------
TO CUSTODIAN: PLEASE ACKNOWLEDGE BELOW BY YOUR SIGNATURE THE EXECUTION OF THE
ABOVE REQUEST. YOU MUST RETAIN THIS FORM FOR YOUR FILES. A COPY OF THIS FORM,
SIGNED AND DATED BY YOU, SHALL BE FORWARDED TO: [ ]
H-2
<PAGE>
DOCUMENT RETURNED TO CUSTODY:
- ----------------------------- -------------
SIGNATURE DATE
EXHIBIT I
TRANSFER AFFIDAVIT
STATE OF [ ])
:ss.:
COUNTY OF [ ])
The undersigned, being first duly sworn, deposes and says as follows:
1. The undersigned (the "Transferee") is acquiring a beneficial
ownership interest in Headlands Mortgage Securities, Inc., Mortgage Pass-Through
Certificates, Series 199__-__, Residual Certificates, issued pursuant to the
Pooling and Servicing Agreement, dated as of ____________, 199__ (the
"Agreement"), by and among Headlands Mortgage Securities, Inc., as Sponsor,
Headlands Mortgage Company, as Master Servicer and Seller, and [
], as Trustee. Capitalized terms used, but not defined herein,
shall have the meanings ascribed to such terms in the Agreement. The Transferee
has authorized the undersigned to make this affidavit on behalf of the
Transferee.
2. The Transferee is, as of the date hereof, and will be, as of the
date of any Transfer, a Permitted Transferee. The Transferee is acquiring the
Residual Certificates either (i) for its own account or (ii) as nominee, trustee
or agent for another Person and has attached hereto an affidavit from such
Person in substantially the same form as this affidavit. The Transferee has no
knowledge that any such affidavit is false.
3. The Transferee has been advised of, and understands that (i) a tax
shall be imposed on Transfers of Residual Certificates to Persons that are not
Permitted Transferees; (ii) such tax is imposed on the transferor, or, if such
Transfer is through an agent (which includes a broker, nominee or middleman) for
a Person that is not a Permitted Transferee, on the agent; and (iii) the Person
otherwise liable for the tax shall be relieved of liability for the tax if the
subsequent Transferee furnished to such Person an affidavit that such subsequent
Transferee is a Permitted Transferee and, at the time of the Transfer, such
Person does not have actual knowledge that the affidavit is false.
4. The Transferee has been advised and understands that a tax shall be
imposed on a "pass-through entity" holding Residual Certificates if at any time
during the taxable year of the pass-through entity a Person that is not a
Permitted Transferee is the record holder of an interest in such entity. The
Transferee understands that no tax will be imposed for any period for which
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<PAGE>
the record holder furnishes to the pass-through entity an affidavit stating that
the record holder is a Permitted Trans- feree and the pass-through entity does
not have actual knowledge that such affidavit is false. (For this purpose, a
"pass-through entity" includes a regulated investment company, a real estate
investment trust or common trust fund, a partnership, trust or estate, and
certain cooperatives and, except as may be provided in Treasury Regulations,
persons holding interests in pass-through entities as nominees for other
Persons.)
5. The Transferee has reviewed the provisions of Section 6.02 of the
Agreement, which is incorporated herein by reference, and understands the legal
consequences of the acquisition of the Residual Certificates including, without
limitations, the restrictions on subsequent Transfers and the provisions
regarding voiding the Transfer and mandatory sales. The Transferee expressly
agrees to be bound by and to abide by the provisions of Section 6.02 of the
Agreement. The Transferee understands and agrees that any breach of any of the
representations included herein shall render the Transfer to the Transferee
contemplated hereby null and void.
6. The Transferee does not have the intention to impede the assessment
or collection of any federal, state or local income taxes legally required to be
paid with respect to the Residual Certificate.
7. The Transferee agrees to require a Transfer Affidavit from any
Person to whom the Transferee attempts to make a Transfer and in connection with
any Transfer by a Person for whom the Transferee is acting as nominee, trustee
or agent, and the Transferee will not make any Transfer or cause any Transfer to
be made to any Person that the Transferee knows is not a Permitted Transferee.
8. The Transferee taxpayer identification number is
- --------------.
I-2
<PAGE>
IN WITNESS WHEREOF, the Transferee has caused this instrument to be
executed on its behalf, by its duly authorized officer, this __th day of
_______, 199_.
By: ___________________________
Name:
Title:
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<PAGE>
EXHIBIT 1
Certain Definitions from Article I of the Agreement
Ownership Interest: As to any Certificate, any ownership or security
interest in such Certificate, including any interest in such Certificate as the
Holder thereof and any other interest therein, whether direct or indirect, legal
or beneficial, as owner or as pledgee.
Permitted Transferee: Any Person other than (i) the United States, or
any State or any political subdivision thereof, or any agency or instrumentality
of any of the foregoing, (ii) a foreign government, international organization
or any agency or instrumentality of either of the foregoing, (iii) an
organization which is exempt from tax imposed by Chapter 1 of the Code
(including the tax imposed by section 511 of the Code on unrelated business
taxable income) (except certain farmers' cooperatives described in Code section
521), (iv) rural electric and telephone cooperatives described in Code section
1381(a)(2)(C), (v) any Non-U.S. Person and (vi) any other Person so designated
by the Master Servicer based on an Opinion of Counsel to the effect that any
transfer to such Person may cause the Pool or any other Holder of a Residual
Certificate to incur tax liability that would not be imposed other than on
account of such transfer. The terms "United States", "State" and "international
organization" shall have the meanings set forth in Code section 7701 or
successor provisions.
Person: Any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization or
government or any agency or political subdivision thereof.
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<PAGE>
EXHIBIT 2
Excerpt from Section 6.02 of the Agreement
Each Person who has or who acquires any Ownership Interest in a
Residual Certificate shall be deemed by the acceptance or acquisition of such
Ownership Interest to have agreed to be bound by the following provisions and to
have irrevocably appointed the Sponsor or its designee as its attorney-in-fact
to negotiate the terms of any mandatory sale under clause (v) below and to
execute all instruments of transfer and to do all other things necessary in
connection with any such sale, and the rights of each Person acquiring any
Ownership Interest in a Residual Certificate are expressly subject to the
following provisions:
(i) Each Person holding or acquiring any Ownership Interest in
a Residual Certificate shall be a Permitted Transferee and shall
promptly notify the Trustee of any change or impending change in its
status as a Permitted Transferee.
(ii) No Person shall acquire an Ownership Interest in a Residual
Certificate unless such Ownership Interest is a pro rata undivided
interest.
(iii) No Ownership Interest in a Residual Certificate may be
transferred without the express written consent of the Trustee. In
connection with any proposed transfer of any Ownership Interest in a
Residual Certificate, the Trustee shall as a condition to such consent,
require delivery to it, in form and substance satisfactory to it, each
of the following:
A. an affidavit in the form of Exhibit I hereto from
the proposed transferee to the effect that such transferee is
a Permitted Transferee and that it is not acquiring its
Ownership Interest in the Residual Certificate that is the
subject of the proposed transfer as a nominee, trustee or
agent for any Person who is not a Permitted Transferee; and
B. a covenant of the proposed transferee to the
effect that the proposed transferee agrees to be bound
by and to abide by the transfer restrictions applicable
to the Residual Certificates.
(iv) Any attempted or purported transfer of any Ownership Interest
in a Residual Certificate in violation of the provisions of this
Section 6.02 shall be absolutely null and
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<PAGE>
void and shall vest no rights in the purported transferee. If any
purported transferee shall, in violation of the pro visions of this
Section 6.02, become a Holder of a Residual Certificate, then
the prior Holder of such Certificate that is a Permitted
Transferee shall, upon discovery that the registration of transfer
of such Residual Certificate was not in fact permitted by this Section
6.02, be restored to all rights as Holder thereof retroactive to the
date of registration of transfer of such Residual Certificate. The
Trustee shall be under no liability to any Person for any
registration of transfer of a Residual Certificate that is in fact not
permitted by this Section 6.02 or for making any distributions due on
such Certificate to the Holder thereof or taking any other action with
respect to such Holder under the provisions of the Agreement so long as
the transfer was not registered upon the express written consent of the
Trustee. The Trustee shall be entitled to recover from any Holder of a
Residual Certificate that was in fact not a Permitted Transferee at the
time such distributions were made all distributions made on such
Residual Certificate. Any such distributions so recovered by the
Trustee shall be distributed and delivered by the Trustee to the prior
Holder of such Certificate that is a Permitted Transferee.
(v) If any Person other than a Permitted Transferee acquires
any Ownership Interest in a Residual Certificate in violation of the
restrictions in this Section 6.02, then the Trustee shall have the
right, without notice to the Holder of such Residual Certificate or any
other Person having an Ownership Interest therein, to notify the
Underwriter to arrange for the sale of such Residual Certificate to a
purchaser selected by the Trustee on such terms as the Trustee may
choose. Such purchaser may be the Trustee itself or any affiliate of
the Trustee. The proceeds of such sale, net of commissions (which may
include commissions payable to the Trustee or its affiliates), expenses
and taxes due, if any, will be remitted by the Trustee to the previous
Holder of such Residual Certificate that is a Permitted Transferee,
except that in the event that the Trustee determines that the Holder of
such Residual Certificate may be liable for any amount due under this
Section 6.02 or any other provisions of this Agreement, the Trustee may
withhold a corresponding amount from such remittance as security for
such claim. The terms and conditions of any sale under this clause (v)
shall be determined in the sole discretion of the Trustee, and it shall
not be liable to any Person having an Ownership Interest in a Residual
Certificate as a result of its exercise of such discretion.
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<PAGE>
EXHIBIT J
[FOR CLASSES M-1, B-1 AND B-2]
INVESTMENT LETTER
_________________ __, 19__
[ ]
[Trustee]
Re: Purchase of Headlands Mortgage Securities, Inc.
Mortgage Pass-Through Certificates, Series 19__-__
Class M-1, B-1 and B-2 Certificates
Ladies and Gentlemen:
In connection with our purchase of $_____________ of the Class ___
Certificates (the "Certificates"), we hereby represent to the Trustee that we
are not an employee benefit plan within the meaning of, and subject to, Section
406 of the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), nor a person acting on behalf of any such plan.
Very truly yours,
[Transferee]
By:______________________
Authorized Officer
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<PAGE>
[FOR CLASS B-1 AND B-2]
INVESTMENT LETTER
____________ __, 19__
[Trustee]
Re: Purchase of Headlands Mortgage Securities, Inc.
Mortgage Pass-Through Certificates, Series 199___-__
Class B-1 and B-2 Certificates
Ladies and Gentlemen:
In connection with our purchase of $_____________ of the Class [ ]
Certificates (the "Certificates") we confirm that (a) we understand that the
Certificates are not being registered under the Securities Act of 1933, as
amended (the "Act"), or any state securities laws ("Blue Sky Laws") and are
being sold to us in a transaction that is exempt from the registration
requirements of the Act and any such laws, (b) we are an "accredited investor",
as defined in Regulation D under the Act, and have such knowledge and experience
in financial and business matters that we are capable of evaluating the merits
and risks of investments such as the Certificates, (c) we confirm that we are
acquiring the Certificates for investment for our own account and not with a
view to any distribution of such Certificates (but without prejudice to our
right at all times to sell or otherwise dispose of the Certificates in
accordance with clause (f) below and otherwise in accordance with Section 6.02
of the Pooling and Servicing Agreement, dated as of ________________, 199__,
among Headlands Mortgage Securities, Inc. (the "Sponsor"), Headlands Mortgage
Company, as master servicer, and seller (in such capacities, the "Master
Servicer" and the "Seller"), and you, as Trustee, (the "Pooling Agreement"), (d)
we have discussed with our advisors, counsel and accountants the legal, tax and
financial implications of investment in the Certificates and have undertaken our
own independent analysis of the investment in the Certificates, and our decision
to invest in the Certificates is not based on any representation (other than
those contained in the Pooling Agreement, (e) we have not offered or sold any
Certificates to, or solicited offers to buy any Certificates from, any person,
or otherwise approached or negotiated with any person with respect thereto, or
taken any other action which would result in a violation of Section 5 of the Act
or any
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<PAGE>
applicable Blue Sky Law, (f) we will not sell, transfer or otherwise dispose
of any Certificates unless (1) such sale, transfer or other disposition is
made pursuant to an effective registration statement under the Act and any
applicable Blue Sky Law or is exempt from such registration requirements, and
if requested we will at our expense provide an opinion of counsel satisfactory
to Trustee that such sale, transfer or other disposition may be made pursuant
to an exemption from the Act and any applicable Blue Sky Laws and (2) the
purchaser or transferee of such Certificate has executed and delivered to
you a letter to substantially the same effect as this letter, (g) none of the
Sponsor, the Seller or the Trustee shall be obligated to register the
Certificates under the Act or any Blue Sky Laws or to take any action not
otherwise required under the Pooling Agreement to permit the sale, transfer
or other disposition of the Certificates and (h) we have not relied upon the
Sponsor or the Master Servicer or upon any information or materials prepared
or furnished by [ ] or their agents or counsel in determining whether our
investment in the Certificates is legal for us under applicable federal
and/or state laws and regulations.
We hereby represent to, and covenant with, the Seller, the Master
Servicer and the Trustee that we are not an employee benefit plan within the
meaning of, and subject to, Section 406 of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), nor a person acting on behalf of any
such plan.
Very truly yours,
[Transferee]
By:______________________
Authorized Officer
J-3
<PAGE>
EXHIBIT K
[ ]
PRINCIPAL AND INTEREST DISTRIBUTION SUMMARY
- ---------------------- ---------------------
Trustee Cut-Off Date
- ---------------------- ---------------------
Address Reporting Month
- ---------------------- [ ]
City, State, Zip Code
- ---------------------- ---------------------
Attention (___) ___-____
- ---------------------------------------------------------------------------
REMITTANCE:
Principal $
Principal Curtailments $
Liquidation $
Adjustments $
Total Principal $
Interest Distribution
Class A-1 $
Class M-1 $
Class B-1 $
Class B-2 $
Total Interest Distribution Amount $
Principal Distribution
Class A-1 $
Class M-1 $
Class B-1 $
Class B-2 $
Total Principal & Interest Distribution Amount $
OUTSTANDING BALANCES: Security Balance
Beginning Security Balance
Less: Principal Payments, Curtailments & Adj.
Liquidation & Repurchase ____________________
Ending Security Balance ____________________
MORTGAGE LOANS: No. of Mortgage Loans P&I Constant
Beginning Balance
Less: Liquidation/Repurch
Rolls/Adjustments
Ending Balance
K-1
<PAGE>
DELINQUENCIES: No. of Mortgage Loans Principal Amount
30 Days ( 0 to 30)
60 Days (31 to 60)
90+ Days (61 to 90+)
Foreclosure
Real Estate Owned
K-2
<PAGE>
[ ] - SERIES 199___-__
TRUSTEE'S CERTIFICATE ACCOUNT STATEMENT
I Status of Certificate Account
As of the Determination Date $
Amount on deposit on Certificate Account
Deposit Date $
Deposits: $
Required deposit to Certificate Account pursuant
to Section 3.11(a) $
P & I $
Curtailments $
Liquidations (proceeds net of expenses) $
Repurchases $
Insurance proceeds $
Monthly Advances $
Fraud Losses $
Withdrawals: $
Payment to Special Hazard Insurer $
Payment to Trustee $
Payment to Pool Insurer $
Reimbursement for Advances (recoverable
and nonrecoverable) $
Total Servicing Compensation $
Reimbursement (for expenses) $
Repurchases (reimbursement)
II Distribution:
Principal $
Interest $
III Total Service Compensation $
Master Service Compensation $
Sub Service Compensation $
IV Security Balance $
V Percentage of Amount Available %
Amount Available $
Security Balance $
VI Percentage of Special Hazard Coverage %
Special Hazard Loss Coverage $
Bankruptcy Coverage Amount $
Fraud Loss Coverage $
Security Balance $
(VII) Amount Held for Future Distribution P/I $
(VIII) Proceeds from Permitted Investments held in
Investment Account $
[ ]
by ___________________________________
K-3
<PAGE>
Schedule A
Listings of the following Mortgage Loans:
I. Special Hazard Mortgage Loans
II. Liquidated Deficient Valuation Mortgage Loans
III. Debt Service Reduction Mortgage Loans
IV. Total Fraud Loss - Liquidated Mortgage Loans
V. Liquidated Mortgage Loans (except for those included in I or II)
K-4
<PAGE>
Schedule B
(I) Net Special Hazard Losses $
(II) Liquidated Deficient Valuation Losses $
(III) Net Realized Losses
(other than those included in I and II above) $
(IV) Total Fraud Loss - Liquidated Mortgage Loans $
No. of Mortgage Principal Amount
(V) Deficient Valuation
(VI) Debt Service Reduction
Net Prepayment Shortfalls $
Relief Act Reductions $
K-5
<PAGE>
Schedule C
Amount to be deposited into Certificate Account $
Fraud Loss Coverage remaining $
Bankruptcy Loss Coverage Amount remaining $
Special Hazard Loss Coverage Amount $
K-6
<PAGE>
EXHIBIT L
FORM OF OPINION OF COUNSEL PURSUANT TO SECTION 6.02
Such counsel is of the opinion that the transfer of the
Certificates from _____ to _____ [under the circumstances to
be described in such opinion] is not a transaction requiring
registration of the Certificates under the Securities Act of
1933, as amended, or under any applicable state securities
laws.
or
The Certificates have been registered under the Securities Act
of 1933, as amended, and no action is required to be taken
under applicable state securities laws or that such action has
been taken.
L-1
<PAGE>
