As filed with the Securities and Exchange Commission on January 15, 1997
Registration No. 333-16679
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO.1 TO
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 sale to 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. / /
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
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(1) Offering Fee(2)
Price(1)
<S> <C> <C> <C> <C>
Certificates . . . . . . . $850,000,000 100% $850,000,000 $257,575.76
</TABLE>
(1) Estimated for the purpose of calculating the registration fee.
(2) Of which, $303.04 has already been paid.
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.
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 JANUARY 15, 1997
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED ______________ ___, 1997)
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 ( ), 1997
_________________
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 ( ), 1997 (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 ( ), 1997, 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.
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, PARTICULARLY THE CLASS X
CERTIFICATES, THE RISK THAT A FASTER THAN ANTICIPATED RATE OF PRINCIPAL
PAYMENTS COULD RESULT IN AN ACTUAL YIELD THAT IS LOWER THAN THE ANTICIPATED
YIELD. IN CERTAIN EXTREME PREPAYMENT SCENARIOS, INVESTORS IN THE CLASS X
CERTIFICATES MAY FAIL TO RECOVER THEIR INITIAL INVESTMENTS. THE YIELD TO
INVESTORS IN THE OFFERED CERTIFICATES ALSO WILL BE ADVERSELY AFFECTED BY NET
INTEREST SHORTFALLS AND BY REALIZED LOSSES.
<TABLE>
<CAPTION>
Initial
Class
Certificate Principal Interest Pass-Through Price to Underwriting Proceeds to
Class Balance(1) Type Type Rate Public (4) Discount (4) Sponsor
<S> <C> <C> <C> <C> <C> <C> <C>
A-1 . . . $ ( %) (Variable $ $ $
Rate (2))
X . . . . $ (3) $ S S
M-1 . . . $ ( %) (Variable $ $ S
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) ( )%.
PROSPECTIVE INVESTORS IN THE OFFERED CERTIFICATES SHOULD REVIEW THE
INFORMATION SET FORTH UNDER "RISK FACTORS" ON PAGE S-7 OF THIS PROSPECTUS
SUPPLEMENT AND IN THE PROSPECTUS ON PAGE 13.
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.
------------------
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).
________________ ___, 1997
(Underwriter)
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.
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 ____________ ___, 1997 (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.
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.
Title of Securities Mortgage Pass-Through Certificates,
Series (199_-_) (the "Certificates").
Designations
Offered Certificates Class A-1, Class X and Class M-1
Certificates.
APPROXIMATE
INITIAL CLASS PASS-THROUGH
CLASS CERTIFICATE BALANCE RATE
----- ------------------- ----
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.
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 ( ), 1997.
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) 1997.
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-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 Certifi-
cates 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 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.
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 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.) However, in certain
circumstances the amount of available
subordination may be exhausted and shortfalls
in distributions on the Certificates may
result. Holders of the Senior Certificates
will bear their proportionate share of any
losses realized on the Mortgage Loans in
excess of the available subordination amount.
See "Credit Support -- Subordination of
Subordinated Certificates" and "--
Allocation of Losses" herein.
(B. Description of other types
of credit support,
if any)
Weighted Average
Lives (in years)* PSA
-----------------------------------------
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.
Last Scheduled
Distribution Date
CLASS Last Scheduled Distribution Date
----- --------------------------------
A-1
X
M-1
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.
(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
10% 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.
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:
CLASS
_____ _____ _____
A-1
X
M-1
See "Ratings" herein.
RISK FACTORS
Investors should consider the following factors in connection with the
purchase of the Certificates.
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.
RISKS OF HOLDING SUBORDINATED CERTIFICATES
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 SOURCE OF PAYMENTS - NO RECOURSE TO SELLER, MASTER SERVICER OR
TRUSTEE
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 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.
LIMITED 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)
CONSEQUENCES OF OWNING BOOK-ENTRY CERTIFICATES
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 "Cut-off 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.
In no event will the actual Cut-Off Date Pool Principal Balance of the
Mortgage Pool exceed the Cut-Off Date Pool Principal Balance stated herein by
more than 5%.
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 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.)
(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
MORTGAGE POOL
-------------
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 %
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 %)
________________
* 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.
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.
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
investment 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 investment
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. Headlands
also examines a prospective borrower's credit report. Each credit report
provides a credit score for the borrower. The credit score is based upon the
credit evaluation methodology developed by Fair, Isaac and Company ("FICO"),
a consulting firm specializing in creating default predictive models through
a high number of variable components.
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 a full
documentation program, a prospective borrower is required to have a minimum
FICO score of 620.
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, a prospective
borrower is required to have a minimum FICO score of 680. 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 December 31, 1996, Headlands' mortgage loan servicing portfolio
consisted of $34,196 one- to four-family residential mortgage loans with an
aggregate principal balance of $4,387 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.
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,
1995 and 1996, the total principal balance of loans serviced by Headlands was
(in millions) $4,283, $4,779, $4,149 and $4,387, respectively.
Delinquencies and foreclosures generally are expected to occur more
frequently after the first full year of the life of mortgage loans.
Accordingly, because a large number of mortgage loans serviced by Headlands
have been recently originated, the current level of delinquencies and
foreclosures may not be representative of the levels which may be experienced
over the lives of such mortgage loans. If the volume of Headlands' new loan
originations and acquisitions does not continue to grow at the rate
experienced in recent years, the levels of delinquencies and foreclosures as
percentages of the portfolio could rise significantly above the rates
indicated in the following table.
<TABLE>
<CAPTION>
December 31,
1993 1994 1995 1996
--------------- -------------- ------------- ---------------
Percent of Percent of Percent of Percent of
Number Servicing Number Servicing Number Servicing Number Servicing
of Loans Portfolio of Loans Portfoli of Loans Portfolio of Loans Portfolio
-------- --------- --------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Total Portfolio* 26,410 100% 29,076 100% 27,261 100% 34,196 100%
Period of
Delinquency:
30-59 days 265 1.0% 327 1.1% 283 1.0% 436 1.3%
60-89 days 49 0.2% 49 0.2% 62 0.2% 43 0.1%
90 days or more 40 0.2% 50 0.2% 47 0.2% 14 0.1%
------ ---- ------ ----- ------ ----- ------ -----
Total Delinquencies
(excluding
Foreclosures) 354 1.3% 426 1.5% 392 1.4% 493 1.4%
Foreclosures Pending 107 0.4% 102 0.3% 146 0.5% 197 0.6%
</TABLE>
__________________
* The total loans in portfolio have been reduced by the number of loans
which are pending service release or have been foreclosed.
(Discuss reasons for variations in delinquency and foreclosure experience, if
any.)
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
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. The form of Pooling Agreement
has been filed as an exhibit to the Registration Statement of which the
Prospectus Supplement and the Prospectus is a part. The following is a
summary of the material terms of the Offered Certificates. Reference is made
to the Prospectus for important additional information regarding the terms
and conditions of the Pooling Agreement and the Certificates. 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 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 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."
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 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.
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 10% 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.)
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 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.
(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 10% 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.
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.
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
-------------------------------------------------- ----------------------------------
DISTRIBUTION DATE % % % % % % % % % %
<S> <C> <C>
Initial Class
Certificate Balance
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
----------
Weighted Average
Life
(in years)<F1>
Years to Maturity
</TABLE>
- ----------------
<F1> 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.
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 IN THE CLASS X CERTIFICATES WOULD NOT RECOVER FULLY
THEIR INITIAL INVESTMENTS.
It is not likely that the Mortgage Loans will prepay at a constant rate
until maturity or that all of the Mortgage Loans will prepay at the same rate
or that they will have the characteristics assumed. There can be no
assurance that the Mortgage Loans will prepay at any of the rates shown in
the table or at any other particular rate. The timing of changes in the rate
of prepayments may affect significantly the yield realized by a holder of a
Class X Certificate and there can be no assurance that the pre-tax yield to
an investor in the Class X Certificates will correspond to any of the pre-tax
yields shown herein. Each investor must make its own decision as to the
appropriate prepayment assumptions to be used in deciding whether or not to
purchase a Class X Certificate.
SENSITIVITY OF THE CLASS X
CERTIFICATES TO PREPAYMENTS
(PRE-TAX YIELDS TO MATURITY)
<TABLE>
<CAPTION>
% of Prepayment Assumption
--------------------------------------------
50% 75% 100% 125% 200%
<S> <C> <C> <C> <C> <C>
Pre-Tax Yields to Maturity . . . . . . . . . . . % % % % %
</TABLE>
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.
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.
However, in certain circumstances the amount of available subordination may
be exhausted and shortfalls in distributions on the Certificates may result.
Holders of the Senior Certificates will bear their proportionate share of any
losses realized on the Mortgage Loans in excess of the available
subordination amount.
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 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.
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) assets described in section 7701(a)(19)(C) of the
Code, and (ii) "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
<PAGE>
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.
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 Seller or the
Sponsor, 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. The ratings also do not address the
possibility that, as a result of principal prepayments, holders of the
Certificates may receive a lower than anticipated yield and that in
extreme cases, holders of stripped pass-through certificates, such as
the Class X Certificates, may fail to recoup their initial investments.
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.
INDEX TO DEFINED TERMS
----------------------
Page
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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
S-17
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-30
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-5
FHLMC S-9
FICO S-14
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
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-17
Pool Principal Balance S-2,S-21
Prepayment Interest Shortfall S-20
Principal Balance S-21
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-22
Subordinate Prepayment Percentage Allocation S-22
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
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 JANUARY 15, 1997
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 will be either (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".
__________
FOR A DISCUSSION OF CERTAIN RISKS ASSOCIATED WITH AN INVESTMENT IN THE
CERTIFICATES, SEE THE INFORMATION UNDER "RISK FACTORS" ON PAGE 13.
__________
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.
_____________ ___, 1997
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. Neither the Sponsor nor the Master Servicer for any
Series intends to file with the Commission periodic reports with respect to
the related Trust following completion of the reporting period required by
Rule 15d-1 or Regulation 15D under the Exchange Act.
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.
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.
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.
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
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 specified 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.
B. Mortgage Certificates The Trust may include certain assets (the
"Mortgage Certificates") which are limited
to 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 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
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 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
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.
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").
A security rating is not a recommendation to
buy, sell or hold the Certificates of any
Series and is subject to revision or
withdrawal at any time by the Rating Agency.
Further, such ratings do not address the
effect of prepayments on the yield anticipated
by an investor. See "Rating" herein.
RISK FACTORS
Investors should consider the following factors in connection with the
purchase of Certificates.
NATURE OF MORTGAGES
Property Values. There are several factors that could adversely affect
the value of Mortgaged Properties such that the outstanding balance of the
related Mortgage Loan would equal or exceed the value of the Mortgaged
Properties. Among the factors that could adversely affect the value of the
Mortgaged Properties are an overall decline in the residential real estate
market in the areas in which the Mortgaged Properties are located or a
decline in the general condition of the Mortgaged Properties as a result of
failure of borrowers to maintain adequately the Mortgaged Properties or of
natural disasters that are not necessarily covered by insurance, such as
earthquakes and floods. Although Mortgaged Properties located in certain
identified flood zones will be required to be covered, to the maximum extent
available, by flood insurance, as discussed under "The Pooling and Servicing
Agreement -- Hazard Insurance", no Mortgaged Property will otherwise be
required to be insured against earthquake damage or any other loss not
covered by a standard hazard insurance policy, as described under "The
Pooling and Servicing Agreement -- Hazard Insurance." If such a decline
or natural disaster occurs, the actual rates of delinquencies,
foreclosures and losses on all Mortgage Loans could be higher than
those currently experienced in the mortgage lending industry in general.
Losses on such Mortgage Loans will be borne by the holders of one or more
classes of Certificates of the related Series.
Delays Due to Liquidation. Even assuming that the Mortgaged Properties
provide adequate security for the Mortgage Loans, substantial delays could be
encountered in connection with the liquidation of defaulted Mortgage Loans
and corresponding delays in the receipt of related proceeds by
Certificateholders could occur. An action to foreclose on a Mortgaged
Property securing a Mortgage Loan is regulated by state statutes and rules
and is subject to many of the delays and expenses of other lawsuits if
defenses or counterclaims are interposed, sometimes requiring several years
to complete. Furthermore, in some states an action to obtain a deficiency
judgment is not permitted following a nonjudicial sale of a Mortgaged
Property. See "Certain Legal Aspects of teh Mortgage Loans" herein.
In the event of a default by a borrower, these restrictions, among
other things, may impede the ability of the Master Servicer to foreclose on
or sell the Mortgaged Property or to obtain liquidation proceeds sufficient
to repay all amounts due on the related Mortgage Loan. In addition, the
Master Servicer will be entitled to deduct from related liquidation proceeds
all expenses reasonably incurred in attempting to recover amounts due on
defaulted Mortgage Loans and not yet repaid, including legal fees and costs
of legal action, real estate taxes and maintenance and preservation expenses.
Disproportionate Effect of Liquidation Expenses. Liquidation expenses
with respect to defaulted Mortgage Loans do not vary directly with the
outstanding principal balance of the Mortgage Loan at the time of default.
Therefore, assuming that the Master Servicer took the same steps in realizing
upon a defaulted Mortgage Loan having a small remaining principal balance as
it would in the case of a defaulted Mortgage Loan having a large remaining
principal balance, the amount realized after expenses of liquidation would be
smaller as a percentage of the outstanding principal balance of the small
Mortgage Loan than would be the case with the defaulted Mortgage Loan having
a large remaining principal balance.
LIMITATIONS, REDUCTION AND SUBSTITUTION OF CREDIT ENHANCEMENT
With respect to each Series of Certificates, credit enhancement may be
provided in limited amounts to cover certain types of losses on the
underlying Mortgage Loans. Credit enhancement will be provided in one or
more of the forms referred to herein, including, but not limited to:
subordination of other Classes of Certificates of the same Series; a limited
guarantee; a financial guaranty insurance policy; a surety bond; a letter of
credit; a mortgage pool insurance policy; a special hazard insurance policy;
a mortgagor bankruptcy bond; a reserve fund; and any
combination thereof. See "Credit Enhancement" herein. Regardless of the
form of credit enhancement provided, the amount of coverage will be limited
in amount and in most cases will be subject to periodic reduction in
accordance with a schedule or formula. Furthermore, such credit enhancements
may provide only very limited coverage as to certain types of losses, and may
provide no coverage as to certain other types of losses. All or a portion of
the credit enhancement for any Series of Certificates may be permitted to be
reduced, terminated or substituted for, if each applicable Rating Agency
indicates that the then current rating thereof will not be adversely
affected. In the event losses exceed the amount of coverage provided by any
credit enhancement or losses of a type not covered by any credit enhancement
occur, such losses will be borne by the holders of the related Certificates
(or certain Classes thereof). The rating of any Series of Certificates by
any applicable Rating Agency may be lowered following the initial issuance
thereof as a result of the downgrading of the obligations of any applicable
credit support provider, or as a result of losses on the related Mortgage
Loans in excess of the levels contemplated by such Rating Agency at the time
of its initial rating analysis. Neither the Sponsor, the Seller, the Master
Servicer, the Trustee, nor any of their affiliates will have any obligation
to replace or supplement any credit enhancement, or to take any other action
to maintain any rating of any Class of Certificates of a Series.
BANKRUPTCY AND INSOLVENCY RISKS
The Seller and the Sponsor will treat the transfer of the Mortgage Loans
by the Seller to the Sponsor as a sale for accounting purposes. The Sponsor
and the Trust will treat the transfer of Mortgage Loans from the Sponsor
to the Trust as a sale for accounting purposes. As a sale of the
Mortgage Loans by the Seller to the Sponsor, the Mortgage Loans would not be
part of the Seller's bankruptcy estate and would not be available to the
Seller's creditors. However, in the event of the insolvency of the Seller,
it is possible that the bankruptcy trustee or a creditor of the Seller may
attempt to recharacterize the sale of the Mortgage Loans as a borrowing by
the Seller, secured by a pledge of the Mortgage Loans. Similarly, as a sale
of the Mortgage Loans by the Sponsor to the Trust, the Mortgage Loans
would not be part of the Sponsor's bankruptcy estate and would not be
available to the Sponsor's creditors. However, in the event of the
insolvency of the Sponsor, it is possible that the bankruptcy trustee or a
creditor of the Sponsor may attempt to recharacterize the sale of the
Mortgage Loans as a borrowing by the Sponsor, secured by a pledge of the
Mortgage Loans. In either case, this position, if argued before or accepted
by a court, could prevent timely payments of amounts due on the Certificates
and result in a reduction of payments due on the Certificates.
In the event of a bankruptcy or insolvency of the Master Servicer, the
bankruptcy trustee or receiver may have the power to prevent the Trustee or
the Certificateholders from appointing a successor Master Servicer.
The time period during which cash collections may be commingled with the
Master Servicer's own funds prior to deposit to the Certificate Account will
be specified in the related Supplement. In the event of the insolvency of the
Master Servicer and if such cash collections are commingled with the Master
Servicer's own funds for at least ten days, the Trust will likely not
have a perfected interest in such collections since such collections would
not have been deposited in a segregated account within ten days after the
collection thereof, and the inclusion thereof in the bankruptcy estate of the
Master Servicer may result in delays in payment and failure to pay amounts
due on the Certificates.
In addition, federal and state statutory provisions, including the
federal bankruptcy laws and state laws affording relief to debtors,
may interfere with or affect the ability of the secured mortgage
lenderto realize upon its security. For example, in a proceeding under
the Bankruptcy Reform Act of 1978, as amended (the "Bankruptcy Code"), a
lender may notforeclose on a Mortgaged Property without the permission of
the bankruptcy court. The rehabilitation plan proposedby the debtor may
provide, if the court determines that the value of the Mortgaged Property
is less than theprincipal balance of the Mortgage Loan, for the
reduction of the secured indebtedness to the value of the MortgagedProperty
as of the date of the commencement of the bankruptcy, rendering the lender
a general unsecured creditor for the difference, and also may
reducethe 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 the Certificates and
possible reductions in the aggregate amount of such payments.
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 term of any such
leasehold interest will exceed the term of the related Mortgage Note by at
least five years. For a discussion of leasehold mortgages, see "Certain
Legal Aspects of the Mortgage Loans -- General -- Leaseholds". The Mortgaged
Properties may include vacation and second homes and investment properties.
An investment property is a Mortgage Property owned in fee simple by the
borrower and is rented by the borrower to a third party. 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.
_______________
* 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.
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:
(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.
(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 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.
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 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.
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
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. 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
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 insuch 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 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>
<CAPTION>
CATEGORIES OF CLASSES DEFINITION
PRINCIPAL TYPES
<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.
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.
</TABLE>
<TABLE>
<CAPTION>
INTEREST TYPES
Categories of Classes Definition
<S> <C>
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 has occurred or
until such class of Partial Accrual Certificates is 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).
</TABLE>
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
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,
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:
(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;
(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
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 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 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
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 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.
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. The Sponsor is 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 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 of 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. The
Supplement for each Series of Certificates will indicate the types of
limited documentation programs pursuant to which the related Mortgage
Loans were originated and the underwriting standards
applicable to such limited documentation programs.
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.
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 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 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;
(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.
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
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 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.
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
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.
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.
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.
Leaseholds. Certain of the Mortgage Loans may be secured by a mortgage
on a ground lessee's interest in a ground lease. Leasehold mortgages are
subject to certain risks not associated with mortgage loans secured by the
fee estate of the mortgagor. The most significant of these risks is that the
ground lease creating the leasehold estate could terminate, leaving the
leasehold mortgagee without its security. The ground lease may terminate, if
among other reasons, the ground lessee breaches or defaults in its
obligations under the ground lease or there is a bankruptcy of the ground
lessee or the ground lessor. The terms of the ground lease may also
terminate prior to the maturity date of the indebtedness secured by the
mortgage. This risk may be minimized if the ground lease contains certain
provisions protective of the mortgagee, but the ground leases that secure
mortgage loans may not contain some of these protective provisions, and
mortgages may not contain the other protection discussed in the next
paragraph. Protective ground lease provisions include the right of the
leasehold mortgagee to receive notices from the ground lessor of any defaults
by the mortgagor; the right to cure such defaults, with adequate cure
periods; if a default is not susceptible of cure by the leasehold mortgagee,
the right to acquire the leasehold estate through foreclosure or otherwise;
the ability of the ground lease to be assigned to and by the leasehold
mortgagee or purchaser at a foreclosure sale and for the concomitant release
of the ground lessee's liabilities thereunder; and the right of the leasehold
mortgagee to enter into a new ground lease with the ground lessor on the same
terms and conditions as the old ground lease in the event of a termination
thereof.
In addition to the foregoing protections, a leasehold mortgagee may
require that the ground lease or leasehold mortgage prohibit the ground
lessee from treating the ground lease as terminated in the event of the
ground lessor's bankruptcy and rejection of the ground lease by the trustee
for the debtor-ground lessor. As further protection, a leasehold mortgage
may provide for the assignment of the debtor-ground lessee's right to reject
a lease pursuant to Section 365 of the Bankruptcy Code, although the
enforceability of such clause has not been established. Without the
protections described in the foregoing paragraph, a leasehold mortgagee
may lose the collateral securing its leasehold mortgage. In addition,
terms and conditions of a leasehold mortgage are subject to the terms and
conditions of the ground lease. Although certain rights given to a
ground lessee can be limited by the terms of a leasehold mortgage, the
rights of a ground lessee or a leasehold mortgagee with respect to, among
other things, insurance, casualty and condemnation will be governed by the
provisions of the ground lease.
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, including California, 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 o 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 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.
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.
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.
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 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
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 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. Section 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.
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.
FEDERAL INCOME TAX CONSEQUENCES
The following summary of the 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, 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.
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 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.
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
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 "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.
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 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 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 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 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.
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 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.
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 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.
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, an estate 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 or a trust if a court within the United States is able to
exercise primary supervision of the administration of the trust and one or
more United States fiduciaries have the authority to control all substantial
decisions of the trust.
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 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 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.
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
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. Further, such ratings do not address the
effect of prepayments on the yield anticipated by the investor. Each
security rating should be evaluated independently of any other security
rating.
INDEX TO DEFINED TERMS
PAGE
----
1986 Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
Accrual Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Accrual Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
Advance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Appraised Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
ARM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
ARM Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
Assumed Reinvestment Rate . . . . . . . . . . . . . . . . . . . . . . . 24
Balloon Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,16
Bankruptcy Bond . . . . . . . . . . . . . . . . . . . . . . . . . . . 9, 31
Bankruptcy Code . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Buydown Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Buydown Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
CERCLA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Certificate Account . . . . . . . . . . . . . . . . . . . . . . . . . . 6,38
Certificate Balance . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Certificate Register . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Certificateholders . . . . . . . . . . . . . . . . . . . . . . . . . . 15,17
Class Certificate Balance . . . . . . . . . . . . . . . . . . . . . . . . 23
Closing Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Code . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
Commission . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Companion Classes . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Contingent Regulations . . . . . . . . . . . . . . . . . . . . . . . . . 64
Cooperatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Cooperative Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Cut-off Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
D&P . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
Deferred Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
Distribution Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Eligible Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Eligible Investments . . . . . . . . . . . . . . . . . . . . . . . . . 21,38
EPA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Exchange Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
FHA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,17
FHA Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
FHA Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
FHLMC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
FHLMC Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
FHLMC Certificate Group . . . . . . . . . . . . . . . . . . . . . . . . 19
Fitch . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
FNMA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
FNMA Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Fraud Loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,30
Garn--St Germain Act . . . . . . . . . . . . . . . . . . . . . . . . . . 51
GNMA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
GNMA Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
GNMA I Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
GNMA II Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . 18
GPMs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Housing Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
HUD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Indemnified Parties . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Interest Accrual Period . . . . . . . . . . . . . . . . . . . . . . . . . 23
IO Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
IRS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
Issuer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61,68
Labor Regulations . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
Last Scheduled Distribution Date . . . . . . . . . . . . . . . . . . . . 24
Legislative History . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
Lockout Periods . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,16
LTV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Master REMIC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
Master Servicer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Master Servicing Fee . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Mezzanine Certificates . . . . . . . . . . . . . . . . . . . . . . . . 7,29
Moody's . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
Mortgage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Mortgage Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,4,15
Mortgage Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Mortgage Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Mortgage Note(s) . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,15
Mortgage Pool . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Mortgage Pool Insurance Policy . . . . . . . . . . . . . . . . . . . . 8,29
Mortgage Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Mortgaged Properties . . . . . . . . . . . . . . . . . . . . . . . . . . 15
NCUA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
OID Regulations . . . . . . . . . . . . . . . . . . . . . . . . . . . 57,63
PACs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Pass-Through Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Payment Lag Certificates . . . . . . . . . . . . . . . . . . . . . . . . 67
Phantom Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
PO Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Policy Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
Pool Insurer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Pooling Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Pre-Issuance Accrued Interest . . . . . . . . . . . . . . . . . . . . . . 67
Prepayment Assumption . . . . . . . . . . . . . . . . . . . . . . . . 60,64
Primary Insurer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Primary Mortgage Insurance Policy . . . . . . . . . . . . . . . . . . . 16
Principal Prepayments . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Proposed Mark-to-Market Regulations . . . . . . . . . . . . . . . . . . . 72
PTE 83-1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
Rating Agency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
RCRA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
Record Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Regular Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . 62
Relief Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
REMIC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,56
REMIC Regulations . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
REO Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Reserve Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,31
Residual Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . 62
S&P . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
Securities Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Seller . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,4,15
Senior Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Senior Certificateholders . . . . . . . . . . . . . . . . . . . . . . . 8
Series . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
SMMEA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Special Hazard Insurer . . . . . . . . . . . . . . . . . . . . . . . . . 30
Special Hazard Insurance Policy . . . . . . . . . . . . . . . . . . . . 9
Sponsor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,34
Stripped ARM Obligations . . . . . . . . . . . . . . . . . . . . . . . . 60
Stripped Bond Certificates . . . . . . . . . . . . . . . . . . . . . . . 59
Stripped Coupon Certificates . . . . . . . . . . . . . . . . . . . . . . 59
Subordinate Certificates . . . . . . . . . . . . . . . . . . . . . . . . 7
Subordinate Certificateholders . . . . . . . . . . . . . . . . . . . . . 8
Subsidiary REMIC . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
Supplement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,4
TACs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Thrift Institutions . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
Title V . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,15
Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
UCC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Underwriter's Exemptions . . . . . . . . . . . . . . . . . . . . . . . . 52
U.S. Person . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61,73,75
VA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,17
VA Guaranty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Waiver Letter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,30
<TABLE>
<CAPTION>
- --------------------------------------------- --------------------------------------------
<C> <C>
No person has been authorized to give any
information or to make any representations
other than those contained in this Prospec-
tus Supplement or the Prospectus and, if $
given or made, such information or repre-
sentations must not be relied upon. This (Approximate)
Prospectus Supplement and the Prospectus do
not constitute an offer to sell or a solici-
tation of an offer to buy any of the secu-
rities offered hereby, nor an offer of Of-
fered Certificates in any state or jurisdic-
tion in which, or to any person to whom,
such offer would be unlawful. The delivery HEADLANDS MORTGAGE SECURITIES INC.
of this Prospectus Supplement or the Pro- Sponsor
spectus at any time does not imply that the
information contained herein or therein is
correct as of any time subsequent to its (HEADLANDS MORTGAGE COMPANY)
date; however, if any material change occurs Seller and Master Servicer
while this Prospectus Supplement or the Pro-
spectus is required by law to be delivered,
this Prospectus Supplement or the Prospectus
will be amended or supplemented accordingly.
------------------ Mortgage Pass-Through
Certificates,
TABLE OF CONTENTS Series 199_-_
PAGE
PROSPECTUS SUPPLEMENT
Summary of Terms . . . . . . . . . . . S-1
Risk Factors . . . . . . . . . . . . . S-7
The Mortgage Pool . . . . . . . . . . . S-8 ---------------------
Servicing of Mortgage Loans . . . . . . S-12 PROSPECTUS SUPPLEMENT
Description of the Certificates . . . . S-17 ----------------------
Prepayment and Yield Considerations . . S-24
Credit Support . . . . . . . . . . . . S-29
Use of Proceeds . . . . . . . . . . . . S-30
Federal Income Tax Consequences . . . . S-30
ERISA Considerations . . . . . . . . . S-30
Method of Distribution . . . . . . . . S-31
Legal Matters . . . . . . . . . . . . . S-31 _________, 199__
Certificate Rating . . . . . . . . . . S-31
Index of Defined Terms . . . . . . . . S-33
PROSPECTUS
PROSPECTUS
Prospectus Supplement . . . . . . . . . . 2
Additional Information . . . . . . . . . 2
Incorporation of Certain Documents by
Reference . . . . . . . . . . . . . . . . 2
Summary of the Prospectus . . . . . . . . 4
Risk Factors. . . . . . . . . . . . . . . 13
The Trusts. . . . . . . . . . . . . . . . 15
Description of Certificates . . . . . . . 22
Credit Enhancement. . . . . . . . . . . . 28
Yield and Prepayment Considerations . . . 32
The Sponsor . . . . . . . . . . . . . . . 34
Use of Proceeds . . . . . . . . . . . . . 34
Mortgage Loan Program . . . . . . . . . . 34
The Pooling and Servicing Agreement . . . 36
Certain Legal Aspects of the Mortgage
Loans . . . . . . . . . . . . . . . . . 45
ERISA Considerations . . . . . . . . . . 52
Legal Investment Considerations . . . . . 54
Legal Matters . . . . . . . . . . . . . . 55
Federal Income Tax Consequences . . . . . 55
State Tax Considerations . . . . . . . . . 76
Plans of Distribution. . . . . . . . . . . 76
Financial Information. . . . . . . . . . . 76
Rating . . . . . . . . . . . . . . . . . . 76
Index to Defined Terms . . . . . . . . . . 78
- ---------------------------------------------- -----------------------------------------
</TABLE>
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 $ 257,575.76
Printing and Engraving $ 75,000.00
Legal Fees and Expenses $ 150,000.00
Trustee Fees and Expenses $ 25,000.00
Rating Agency Fees $ 120,000.00
Miscellaneous $ 15,000.00
Total $ 642,575.76
____________________
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.
3.1 Certificate of Incorporation of the Registrant.
3.2 Bylaws of the Registrant.
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.
_____________
*Filed previously with the Commission on November 22, 1996 as an exhibit to
the Registration Statement on Form S-3 (No. 333-16779).
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, 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.
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 15th day of January, 1997.
HEADLANDS MORTGAGE SECURITIES INC.
By /s/ Gilbert J. MacQuarrie
-------------------------------------
Name: Gilbert J. MacQuarrie
Title: Vice President
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.
Signature Title Date
- --------- ----- ----
* President and Director January 15, 1997
- ------------------
Peter T. Paul (Principal Executive Officer)
/s/ Gilbert J. MacQuarrie Vice President, Secretary, January 15, 1997
- ------------------------- Treasurer and Director
Gilbert J. MacQuarrie (Principal Financial
Officer and Principal
Accounting Officer)
* Director January 15, 1997
- -------------------------
Becky S. Poisson
* Director January 15, 1997
- ----------------------------------
Steve Abreu
* Director January 15, 1997
- ----------------------------------
Kenneth Siprelle
* Director January 15, 1997
- ----------------------------------
John Edmonds
*By:/s/ Gilbert J. MacQuarrie
-----------------------------------
Name: Gilbert J. MacQuarrie
Attorney-in-Fact
Exhibit Index
Exhibit No. Description of Exhibit
1.1* Form of Underwriting Agreement
3.1 Certificate of Incorporation of the Registrant
3.2 Bylaws of the Registrant
4.1* Form of Pooling and Servicing Agreement
5.1 Opinion of Brown & Wood LLP as to legality of the
Certificates (including the consent of such firm)
8.1 Opinion of Brown & Wood LLP as to certain tax matters
(including consent of such firm)
23.1 Consent of Brown & Wood LLP (included in exhibits 5.1
and 8.1 hereof).
24.1* Power of Attorney
______________
* Filed previously with the Commission on November 22, 1996 as an exhibit
to the Registration Statement on Form S-3 (No. 333-16779)
Exhibit 3.1
Certificate of Incorporation
CERTIFICATE OF INCORPORATION
OF
HEADLANDS MORTGAGE SECURITIES INC.
(A DELAWARE CORPORATION)
FIRST: Name. The name of the corporation (the "Corporation") is
----
Headlands Mortgage Securities Inc.
SECOND: Delaware Office and Registered Agent. The address of its
------------------------------------
registered office in the State of Delaware is The Corporation Trust Company,
1209 Orange Street, in the City of Wilmington, County of New Castle. The
name of its registered agent at such address is The Corporation Trust
Company.
THIRD: Purpose. The nature of the business to be conducted is limited
-------
solely to the following:
(a) to become a member of, and to make investments in, Headlands
Mortgage L.L.C., a Delaware limited liability company ("HMLLC"), and to enter
into and perform agreements relating to the operations of HMLLC or making
contributions to or purchases from HMLLC;
(b) to acquire mortgage loans and participation in interests in
mortgage loans and mortgage securities issued and/or guaranteed as to timely
payment of interest and/or principal by the Government National Mortgage
Association, Federal National Mortgage Association and Federal Home Loan
Mortgage Corporation (such mortgage loans, participation interests and
mortgage securities, collectively, "mortgage assets") by contribution or
purchase for the purpose of effecting the securitization thereof, either
directly or through other entities, and whether such securitization involves
securities ("Securities") backed by or evidencing an interest in, such
mortgage assets;
(c) to enter into agreements for the servicing of mortgage assets;
(d) to hold, sell, transfer or pledge ownership interests in mortgage
assets and the proceeds therefrom from time to time;
(e) to issue debt secured by mortgage assets; and
(f) to engage in any activity and to exercise any powers permitted to
corporations under the laws of the State of Delaware, provided that they are
incident to the foregoing and necessary or convenient to accomplish the
foregoing.
FOURTH: Capitalization. The total number of shares of stock which the
--------------
Corporation shall have authority to issue is one hundred (100) shares, all of
one class and designated Common Stock, and having a par value of one cent
($.01) per share.
FIFTH: Incorporator. The name and mailing address of the incorporator
------------
is as follows: Phillip R. Pollock, Esq., c/o Tobin & Tobin, One Montgomery
Street, 15th Floor, San Francisco, California 94104.
SIXTH: Indemnification. The Corporation shall, to the full extent
---------------
permitted by Section 145 of the General Corporation Law of the State of
Delaware, as amended from time to time (the "Delaware General Corporation
Law"), indemnify all persons whom it may indemnify pursuant thereto.
SEVENTH: Special Provisions. The following provisions are for the
------------------
management of the business and for the conduct of the affairs of the
Corporation and for the further creation, definition, limitation and
regulation of the powers of the Corporation and of its directors and
stockholders:
(a) Subject to the remainder of this subparagraph (a), the number of
directors of the Corporation shall be fixed by, or in the manner
provided in, the Bylaws of the Corporation. At all times, there
shall be not fewer than two (2) Independent Directors on the board
of directors of the Corporation. For purposes of this Certificate
of Incorporation, "Independent Director" shall mean an individual
who is not, and has not been during the preceding five years, a
direct, indirect or beneficial limited partner, officer, director,
general partner, employee, affiliate, associate, financier or
customer of, or supplier to, any of Headlands Mortgage Company, a
California corporation ("HMC"), any Subsidiary of HMC, or any
Affiliate of HMC (other than the Corporation) (each of HMC and each
such Subsidiary or Affiliate is herein referred to as an "HMC
Person"). As used herein, the term "Affiliate," when used with
respect to a Person, means any other Person controlling, controlled
by, or under common control with, such Person; the term "Person"
means an individual, partnership, corporation (including a business
trust), joint stock company, trust, unincorporated association,
joint venture, limited liability company, limited liability
partnership, government or any agency or political subdivision
thereof or any other entity; and the term "Subsidiary" means any
corporation with respect to which more than 50% of the outstanding
capital stock having ordinary voting power to elect a majority of
the board of directors of such corporation (irrespective of whether
at the time capital stock of any other class or classes of such
corporation shall or might have voting power upon the occurrence of
any contingency) is at the time directly or indirectly owned by
HMC.
(b) The directors of the Corporation may from time to time adopt, amend
or repeal any of the Bylaws of the Corporation, including Bylaws
adopted by the stockholders, but stockholders may from time to time
specify provisions of the Bylaws that may not be amended or
repealed by the directors.
(c) Meetings of stockholders may be held within or without the State of
Delaware, as the Bylaws provide.
(d) Notwithstanding any other provision of this Certificate of
Incorporation and any provision of law that otherwise so empowers
the Corporation, the Corporation shall not, without the prior
approval of the board of directors of the Corporation, which
approval shall include the affirmative vote of all the directors of
the Corporation (including each Independent Director) do any of the
following:
(1) amend or change this Certificate of Incorporation (including
adoption of any new provisions or the repeal of any existing
provisions hereto);
(2) enter into any transaction with any HMC Person;
(3) dissolve, liquidate, consolidate, merge or sell all or
substantially all of the Corporation's assets;
(4) commence a voluntary case or other proceeding with respect to
the Corporation under any applicable bankruptcy, insolvency,
reorganization, debt, arrangement, dissolution, or other
similar law, or permit or arrange for the appointment of, or
the taking of possession of any of the Corporation's property
by, a receiver, liquidator, assignee, trustee, custodian or
other similar official;
(5) approve a reduction in, or transfer to surplus of, any of the
capital of the Corporation pursuant to Section 244 of the
Delaware General Corporation Law;
(6) issue any debt securities or undertake any direct or indirect
debt obligations of any kind; provided, however, that the
-------- -------
Corporation shall not issue, assume or guarantee any liability
(regardless of unanimous board of directors approval) unless
such liability is approved in writing by each of the rating
agencies that have rated any Securities at the time
outstanding, except as permitted in Article THIRD and for
liabilities incurred in connection with the administration of
the Corporation;
(7) consent to any change in either the Certificate of Formation
of HMLLC or the Limited Liability Company Agreement of HMLLC;
(8) consent to the commencement by HMLLC of a voluntary case or
other proceeding under any applicable bankruptcy, insolvency,
reorganization, debt, arrangement, dissolution, or other
similar law, or permit or arrange for the appointment of, or
the taking of possession of any of HMLLC's property by, a
receiver, liquidator, assignee, trustee, custodian or similar
official;
(9) withdraw as a member from HMLLC; or
(10) approve (as a member of HMLLC) any action with respect to
HMLLC that requires a unanimous vote of HMLLC's members under
the Limited Liability Company Agreement of HMLLC.
(e) In approving any of the actions in clause (3), (4), (6), or (8),
clause (10) (to the extent such vote is required pursuant to
Section 7.07(3) or Section 7.07(4) or Section 7.07(6) (to the
extent such action would affect Section 7.07(3) or (4)), of HMLLC's
Limited Liability Company Agreement), or clause (1) (to the extent
the proposed action would affect such clause (3), (4), (6), (8), or
(10)) of subparagraph (d) above, the directors of the Corporation
shall, to the extent permitted by applicable law, take into account
the interests of the secured creditors of HMLLC. In approving any
of the actions in clause (3), (4), or (6) or clause (1) (to the
extent the proposed action would affect such clause (3), (4), or
(6)) or subparagraph (d) above, the directors of the Corporation
shall, to the extent permitted by applicable law, take into account
the interests of the secured creditors of the Corporation.
(f) An Independent Director of the Corporation shall not act as a
trustee in bankruptcy for any HMC Person.
(g) If an Independent Director resigns or otherwise ceases to be a
director of the Corporation, a replacement Independent Director of
the Corporation shall be selected pursuant to the provisions of the
Bylaws of the Corporation.
(h) Notwithstanding any provision set forth herein or in the Bylaws of
the Corporation which may be to the contrary, the board of
directors of the Corporation shall not vote at a meeting or by
unanimous consent without a meeting pursuant to Section 141 of the
Delaware General Corporation Law with respect to any of the actions
set forth in any of clauses (1) through (10) inclusive of
subparagraph (d) of this paragraph, or subparagraph (f) of this
paragraph unless, at the time of such vote, at least one
Independent Director is serving as a member of said board of
directors.
(i) The following provisions shall be applicable to the Corporation's
conduct of business:
(1) the Corporation's assets shall not be commingled with those of
any other entity, including any corporate parent or other
Affiliate of the Corporation, provided that such restriction
shall not preclude the Corporation from repaying indebtedness
or making distributions to any shareholder of the Corporation,
so long as all such transactions are properly reflected on the
books and records of the Corporation;
(2) the Corporation shall pay from its own funds all obligations
and indebtedness incurred by it, provided that the
organizational expenses of the Corporation may be initially
paid by Affiliates of the Corporation so long as they are
promptly reimbursed by the Corporation;
(3) if the Corporation maintains offices in the office of any
Affiliate of the Corporation, the Corporation shall pay fair
market rent for any such office space of such Affiliate;
(4) the Corporation shall conduct its own business in its own
name;
(5) the Corporation shall maintain separate bank accounts, books,
records and financial statements;
(6) the Corporation shall maintain its books, records, resolutions
and agreements as official records;
(7) the Corporation shall maintain adequate capital in light of
contemplated business operations;
(8) the Corporation shall observe all corporate and other
organizational formalities;
(9) the Corporation shall maintain an arm's-length relationship
with Affiliates;
(10) the Corporation shall not guarantee or become obligated for
the debts of any other entity or hold out its credit as being
available to satisfy the obligations of others;
(11) the Corporation shall not acquire obligations or securities of
Affiliates;
(12) the Corporation shall not make any loans to any other person
or entity;
(13) the Corporation shall use separate stationery, invoices and
checks;
(14) the Corporation shall not pledge its assets to secure the
obligations of any other entity;
(15) the Corporation shall hold itself out as a separate entity,
and not fail to correct any known misunderstanding regarding
its separate identity; and
(16) the Corporation shall not identify itself or any of its
Affiliates as a division or part of the other.
(j) In addition to the powers and authorities hereinabove or by law
expressly conferred upon them, the directors of the Corporation are
hereby empowered to exercise all such powers and to do all such
acts and things as may be exercised or done by the Corporation,
subject to the provisions of the Delaware General Corporation
Law, of this Certificate of Incorporation and of the Bylaws
of the Corporation; provided, however, that no bylaw, whether
-------- -------
adopted by the stockholders or by the directors of the Corporation,
shall invalidate any prior act of the directors which would have
been valid if such bylaw had not been adopted.
EIGHTH: Personal Liability of Directors. A director of this
-------------------------------
Corporation shall not be personally liable to the Corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except for liability:
(a) for any breach of the director's duty of loyalty to the Corporation
or its stockholders,
(b) for acts or omissions not in good faith, or which involve
intentional misconduct or a knowing violation of law,
(c) under Section 174 of the Delaware General Corporation Law, or
(d) for any transaction from which the director derived an improper
personal benefit.
NINTH: Amendments. The Corporation reserves the right to amend, alter,
----------
change or repeal any provision contained in this Certificate of Incorporation
in the manner now or hereafter prescribed by law, subject to the restrictions
contained in subparagraphs (d) and (3) of paragraph SEVENTH hereof, and all
rights and powers conferred hereby on stockholders, directors and officers of
the Corporation are subject to this reservation; provided, however, that no
amendment to Article THIRD, SEVENTH or NINTH shall be effective without the
Corporation having received confirmation from each rating agency rating any
outstanding Securities that such amendment will not result in the termination
or lowering of the rating of such Securities.
IN WITNESS WHEREOF, the undersigned incorporator hereby formally
acknowledges under penalties of perjury that this is his act and deed and
that the facts stated herein are true, and accordingly has hereunto set his
hand this 15th day of November, 1996.
/s/ Phillip R. Pollock
--------------------------------
Phillip R. Pollock, Incorporator
Exhibit 3.2
Bylaws
BYLAWS
OF
HEADLANDS MORTGAGE SECURITIES INC.
(hereinafter called the "Corporation")
ARTICLE I
OFFICES
-------
Section 1. Registered Office. The registered office of the
--------- -----------------
Corporation shall be in the City of Wilmington, County of New Castle, State
of Delaware.
Section 2. Other Offices. The Corporation may also have offices
--------- -------------
at such other places both within and without the State of Delaware as the
Board of Directors may from time to time determine.
ARTICLE II
MEETINGS OF STOCKHOLDERS
------------------------
Section 1. Place of Meetings. Meetings of the stockholders for
--------- -----------------
the election of directors or for any other purpose shall be held at such time
and place, either within or without the State of Delaware, as shall be
designated from time to time by the Board of Directors and stated in the
notice of the meeting or in a duly executed waiver of notice thereof.
Section 2. Annual Meetings. The Annual Meetings of Stockholders
--------- ---------------
shall be held on such date and at such time as shall be designated from time
to time by the Board of Directors and stated in the notice of the meeting, at
which meetings the stockholders shall elect by a plurality vote a Board of
Directors, and transact such other business as may properly be brought before
the meeting. Written notice of the Annual Meeting stating the place, date
and hour of the meeting shall be given to each stockholder entitled to vote
at such meeting not less than ten nor more than sixty days before the date of
the meeting.
Section 3. Special Meetings. Unless otherwise prescribed by law
--------- ----------------
or by the Certificate of Incorporation, Special Meetings of Stockholders, for
any purpose or purposes, may be called by either (i) the Chairman, if there
be one, or (ii) the President, (iii) any Vice President, if there be one,
(iv) the Secretary or (v) any Assistant Secretary, if there be one, and shall
be called by any such officer at the request in writing of a majority of the
Board of Directors or at the request in writing of stockholders owning a
majority of the capital stock of the Corporation issued and outstanding and
entitled to vote. Such request shall state the purpose or purposes of the
proposed meeting. Written notice of a Special Meeting stating the place,
date and hour of the meeting and the purpose or purposes for which the
meeting is called shall be given not less than ten nor more than sixty days
before the date of the meeting to each stockholder entitled to vote at such
meeting.
Section 4. Quorum. Except as otherwise provided by law or by the
--------- ------
Certificate of Incorporation, the holders of a majority of the capital stock
issued and outstanding and entitled to vote thereat, present in person or
represented by proxy, shall constitute a quorum at all meetings of the
stockholders for the transaction of business. If, however, such quorum shall
not be present or represented at any meeting of the stockholders, the
stockholders entitled to vote thereat, present in person or represented by
proxy, shall have power to adjourn the meeting from time to time, without
notice other than announcement at the meeting, until a quorum shall be
present or represented. At such adjourned meeting at which a quorum shall
be present or represented, any business may be transacted which might have
been transacted at the meeting as originally noticed. If the adjournment
is for more than thirty days, or if after the adjournment a new record date
is fixed for the adjourned meeting, a notice of the adjourned meeting shall
be given to each stockholder entitled to vote at the meeting.
Section 5. Voting. Unless otherwise required by law, the
--------- ------
Certificate of Incorporation or these Bylaws, any question brought before any
meeting of stockholders shall be decided by the vote of the holders of a
majority of the stock represented and entitled to vote thereat. Each
stockholder represented at a meeting of stockholders shall be entitled to
cast one vote for each share of the capital stock entitled to vote thereat
held by such stockholder. Such votes may be cast in person or by proxy but
no proxy shall be voted on or after three years from its date, unless such
proxy provides for a longer period. The Board of Directors, in its
discretion, or the officer of the Corporation presiding at a meeting of
stockholders, in his or her discretion, may require that any votes cast at
such meeting shall be cast by written ballot.
Section 6. Consent of Stockholders in Lieu of Meeting. Unless
--------- ------------------------------------------
otherwise provided in the Certificate of Incorporation, any action required
or permitted to be taken at any Annual or Special Meeting of Stockholders of
the Corporation, may be taken without a meeting, without prior notice and
without a vote, if a consent in writing, setting forth the action so taken,
shall be signed by the holders of outstanding stock having not less than the
minimum number of votes that would be necessary to authorize or take such
action at a meeting at which all shares entitled to vote thereon were present
and voted. Prompt notice of the taking of the corporate action without a
meeting by less than unanimous written consent shall be given to those
stockholders who have not consented in writing.
Section 7. List of Stockholders Entitled to Vote. The officer of
--------- -------------------------------------
the Corporation who has charge of the stock ledger of the Corporation shall
prepare and make, at least ten days before every meeting of stockholders, a
complete list of the stockholders entitled to vote at the meeting, arranged
in alphabetical order, and showing the address of each stockholder and the
number of shares registered in the name of each stockholder. Such list shall
be open to the examination by any stockholder, for any purpose germane to the
meeting, during ordinary business hours, for a period of at least ten
days prior to the meeting, either at a place within the city where the
meeting is to be held, which place shall be specified in the notice of the
meeting, or, if not so specified, at the place where the meeting is to be
held. The list shall also be produced and kept at the time and place of the
meeting during the whole time thereof, and may be inspected by any
stockholder of the Corporation who is present.
Section 8. Stock Ledger. The stock ledger of the Corporation
--------- ------------
shall be the only evidence as to who are the stockholders entitled to examine
the stock ledger, the list required by Section 7 of this Article II or the
books of the Corporation, or to vote in person or by proxy at any meeting of
stockholders.
ARTICLE III
DIRECTORS
---------
Section 1. Number and Election of Directors. The Board of
--------- --------------------------------
Directors shall consist of not less than two nor more than fifteen members,
the exact number of which shall initially be fixed by the Incorporator and
thereafter from time to time by the Board of Directors, subject to Section 11
of this Article. Except as provided in Section 2 of this Article, directors
shall be elected by a plurality of the votes cast at Annual Meetings of
Stockholders, and each director so elected shall hold office until the next
Annual Meeting and until his or her successor is duly elected and qualified,
or until his or her earlier resignation or removal. Any director may
resign at any time upon notice to the Corporation. Directors need not be
stockholders.
Section 2. Vacancies. Subject to Section 11 of this Article,
--------- ---------
vacancies and newly created directorships resulting from any increase in the
authorized number of directors may be filled by a majority of the directors
then in office, though less than a quorum, or by a sole remaining director,
and the directors so chosen shall hold office until the next annual election
and until their successors are duly elected and qualified, or until their
earlier resignation or removal.
Section 3. Duties and Powers. The business of the Corporation
--------- -----------------
shall be managed by or under the direction of the Board of Directors which
may exercise all such powers of the Corporation, subject to the Certificate
of Incorporation, and do all such lawful acts and things as are not by
statute or by the Certificate of Incorporation or by these Bylaws directed or
required to be exercised or done by the stockholders.
Section 4. Meetings. The Board of Directors of the Corporation
--------- --------
may hold meetings, both regular and special, either within or without the
State of Delaware. Regular meetings of the Board of Directors may be held
without notice at such time and at such place as may from time to time be
determined by the Board of Directors. Special meetings of the Board of
Directors may be called by the Chairman, if there be one, the President, or
any directors. Notice thereof stating the place, date and hour of the
meeting shall be given to each director either by mail not less than
forty-eight (48) hours before the date of the meeting, by telephone or
telegram on twenty-four (24) hours' notice, or on such shorter notice
as the person or persons calling such meeting may deem necessary or
appropriate in the circumstances.
Section 5. Quorum. Except as may be otherwise specifically
--------- ------
provided by law, the Certificate of Incorporation or these Bylaws, at all
meetings of the Board of Directors, a majority of the entire Board of
Directors shall constitute a quorum for the transaction of business and the
act of a majority of the directors present at any meeting at which there is a
quorum shall be the act of the Board of Directors. If a quorum shall not be
present at any meeting of the Board of Directors, the directors present
thereat may adjourn the meeting from time to time, without notice other than
announcement at the meeting, until a quorum shall be present.
Section 6. Actions of Board. Unless otherwise provided by the
--------- ----------------
Certificate of Incorporation or these Bylaws, any action required or
permitted to be taken at any meeting of the Board of Directors or of any
committee thereof may be taken without a meeting, if all the members of the
Board of Directors or committee, as the case may be, consent thereto in
writing, and the writing or writings are filed with the minutes of
proceedings of the Board of Directors or committee.
Section 7. Meetings by Means of Conference Telephone. Unless
--------- -----------------------------------------
otherwise provided by the Certificate of Incorporation or these Bylaws,
members of the Board of Directors of the Corporation, or any committee
designated by the Board of Directors, may participate in a meeting of the
Board of Directors or such committee by means of a conference telephone or
similar communications equipment by means of which all persons participating
in the meeting can hear each other, and participation in a meeting pursuant
to this Section 7 shall constitute presence in person at such meeting.
Section 8. Committees. The Board of Directors may, by resolution
--------- ----------
passed by a majority of the entire Board of Directors, designate one or more
committees, each committee to consist of two or more of the directors of the
Corporation. The Board of Directors may designate one or more directors as
alternate members of any committee, who may replace any absent or
disqualified member at any meeting of any such committee. In the absence or
disqualification of a member of a committee, and in the absence of a
designation by the Board of Directors of an alternate member to replace the
absent or disqualified member, the member or members thereof present at any
meeting and not disqualified from voting, whether or not he, she or they
constitute a quorum, may unanimously appoint another member of the Board of
Directors to act at the meeting in the place of any absent or disqualified
member. Any committee, to the extent allowed by law and provided in the
resolution establishing such committee, shall have and may exercise all
the powers and authority of the Board of Directors in the management of
the business and affairs of the Corporation. Each committee shall keep
regular minutes and report to the Board of Directors when required.
Section 9. Compensation. The directors may be paid their
--------- ------------
expenses, if any, of attendance at each meeting of the Board of Directors and
may be paid a fixed sum for attendance at each meeting of the Board of
Directors or a stated salary as director. No such payment shall preclude any
director from serving the Corporation in any other capacity and receiving
compensation therefor. Members of special or standing committees may be
allowed like compensation for attending committee meetings.
Section 10. Interested Directors. No contract or transaction
---------- --------------------
between the Corporation and one or more of its directors or officers, or
between the Corporation and any other corporation, partnership, association,
or other organization in which one or more of its directors or officers are
directors or officers, or have a financial interest, shall be void or
voidable solely for this reason, or solely because the director or officer is
present at or participates in the meeting of the Board of Directors or
committee thereof which authorizes the contract or transaction, or solely
because his, her or their votes are counted for such purpose if (i) the
material facts as to his, her or their relationship or interest and as to
the contract or transaction are disclosed or are known to the Board of
Directors or the committee, and the Board of Directors or committee in
good faith authorizes the contract or transaction by the affirmative votes
of a majority of the disinterested directors, even though the disinterested
directors be less than a quorum; or (ii) the material facts as to his,
her or their relationship or interest as to the contract or transaction
are disclosed or are known to the stockholders entitled to vote thereon,
and the contract or transaction is specifically approved in good faith by
vote of the stockholders; or (iii) the contract or transaction is fair as
to the Corporation as of the time it is authorized, approved or ratified,
by the Board of Directors, a committee thereof or the stockholders. Common
or interested directors may be counted in determining the presence of a
quorum at a meeting of the Board of Directors or of a committee which
authorizes the contract or transaction.
Section 11. Independent Directors.
---------- ---------------------
(a) At all times, there shall be not less than two (2) Independent
Directors (as such term is defined in Paragraph SEVENTH of the Certificate of
Incorporation).
(b) If at any time a director ceases to be an Independent Director
of the Corporation, such director who has ceased to be an Independent
Director shall immediately resign as a director and shall be replaced
pursuant to the terms of Section 5 of this Article III by an Independent
Director qualifying as such under this Section 11. The failure of any director
to resign upon such director's ceasing to be an Independent Director under the
circumstances set forth in the immediately preceding sentence hereof shall be
grounds for removal of such director for cause.
ARTICLE IV
OFFICERS
--------
Section 1. General. The officers of the Corporation shall be
--------- -------
chosen by the Board of Directors and shall be a President, a Secretary and a
Treasurer. The Board of Directors, in its discretion, may also choose a
Chairman of the Board of Directors (who must be a director) and one or more
Vice Presidents, Assistant Secretaries, Assistant Treasurers and other
officers. Any number of offices may be held by the same person, unless
otherwise prohibited by law, the Certificate of Incorporation or these
Bylaws. The officers of the Corporation need not be stockholders of the
Corporation nor, except in the case of the Chairman of the Board of
Directors, need such officers be directors of the Corporation.
Section 2. Election. The Board of Directors at its first meeting
--------- --------
held after each Annual Meeting of the Stockholders shall elect the officers
of the Corporation who shall hold their offices for such terms and shall
exercise such powers and perform such duties as shall be determined from
time to time by the Board of Directors; and all officers of the Corporation
shall hold office until their successors are chosen and qualified, or until
their earlier resignation or removal. Any officer elected by the Board of
Directors may be removed at any time by the affirmative vote of a majority of
the Board of Directors. Any vacancy occurring in any office of the
Corporation shall be filled by the Board of Directors. The salaries of all
officers of the Corporation shall be fixed by the Board of Directors.
Section 3. Voting Securities Owned by the Corporation. Powers of
--------- ------------------------------------------
attorney, proxies, waivers of notice of meeting, consents and other
instruments relating to securities owned by the Corporation may be executed
in the name of and on behalf of the Corporation by the President or any Vice
President and any such officer may, in the name of and on behalf of the
Corporation, take all such action as any such officer may deem advisable to
vote in person or by proxy at any meeting of security holders of any
corporation in which the Corporation may own securities and at any such
meeting shall possess and may exercise any and all rights and power incident
to the ownership of such securities and which, as the owner thereof, the
Corporation might have exercised and possessed if present. The Board of
Directors may, by resolution, from time to time confer like powers upon any
other person or persons.
Section 4. Chairman of the Board of Directors. The Chairman of
--------- ----------------------------------
the Board of Directors, if there be one, shall preside at all meetings of the
stockholders and of the Board of Directors. He or she shall be the Chief
Executive Officer of the Corporation, and except where by law the signature
of the President is required, the Chairman of the Board of Directors shall
possess the same power as the President to sign all contracts, certificates
and other instruments of the Corporation which may be authorized by the Board
of Directors. During the absence or disability of the President, the
Chairman of the Board of Directors shall exercise all the powers and
discharge all the duties of the President. The Chairman of the Board of
Directors shall also perform such other duties and may exercise such other
powers as from time to time may be assigned to him or her by these Bylaws or
by the Board of Directors.
Section 5. President. The President shall, subject to the control
--------- ---------
of the Board of Directors and, if there be one, the Chairman of the Board of
Directors, have general supervision of the business of the Corporation and
shall see that all orders and resolutions of the Board of Directors are
carried into effect. He or she shall execute all bonds, mortgages, contracts
and other instruments of the Corporation requiring a seal, under the seal of
the Corporation, except where required or permitted by law to be otherwise
signed and executed and except that the other officers of the Corporation may
sign and execute documents when so authorized by these Bylaws, the Board of
Directors or the President. In the absence or disability of the Chairman
of the Board of Directors, or if there be none, the President shall
preside at all meetings of the stockholders and the Board of Directors.
If there be no Chairman of the Board of Directors, the President shall be
the Chief Executive Officer of the Corporation. The President shall also
perform such other duties and may exercise such other powers as from time
to time may be assigned to him or her by these Bylaws or by the Board of
Directors.
Section 6. Vice Presidents. At the request of the President or
--------- ---------------
in his or her absence or in the event of his or her inability or refusal to
act (and if there be no Chairman of the Board of Directors), the Vice
President or the Vice Presidents if there is more than one (in the order
designated by the Board of Directors) shall perform the duties of the
President, and when so acting, shall have all the powers of and be subject to
all the restrictions upon the President. Each Vice President shall perform
such other duties and have such other powers as the Board of Directors from
time to time may prescribe. If there be no Chairman of the Board of
Directors and no Vice President, the Board of Directors shall designate the
officer of the Corporation who, in the absence of the President or in the
event of the inability or refusal of the President to act, shall perform the
duties of the President, and when so acting, shall have all the powers of
and be subject to all the restrictions upon the President.
Section 7. Secretary. The Secretary shall attend all meetings of
--------- ---------
the Board of Directors and all meetings of stockholders and record all the
proceedings thereat in a book to be kept for that purpose; the Secretary
shall also perform like duties for the standing committees when required.
The Secretary shall give, or cause to be given, notice of all meetings of the
stockholders and special meetings of the Board of Directors, and shall
perform such other duties as may be prescribed by the Board of Directors or
President, under whose supervision he or she shall be. If the Secretary
shall be unable or shall refuse to cause to be given notice of all meetings
of the stockholders and special meetings of the Board of Directors, and if
there be no Assistant Secretary, then either the Board of Directors or the
President may choose another officer to cause such notice to be given. The
Secretary shall have custody of the seal of the Corporation and the Secretary
or any Assistant Secretary, if there be one, shall have authority to affix
the same to any instrument requiring it and when so affixed, it may be
attested by the signature of the Secretary or by the signature of any such
Assistant Secretary. The Board of Directors may give general authority to
any other officer to affix the seal of the Corporation and to attest the
affixing by his or her signature. The Secretary shall see that all books,
reports, statements, certificates and other documents and records required
by law to be kept or filed are properly kept or filed, as the case may be.
Section 8. Treasurer. The Treasurer shall have the custody of the
--------- ---------
corporate funds and securities and shall keep full and accurate accounts of
receipts and disbursements in books belonging to the Corporation and shall
deposit all moneys and other valuable effects in the name and to the credit
of the Corporation in such depositories as may be designated by the Board of
Directors. The Treasurer shall disburse the funds of the Corporation as may
be ordered by the Board of Directors, taking proper vouchers for such
disbursements, and shall render to the President and the Board of Directors,
at its regular meetings, or when the Board of Directors so requires, an
account of all his or her transactions as Treasurer and of the financial
condition of the Corporation. If required by the Board of Directors, the
Treasurer shall give the Corporation a bond in such sum and with such surety
or sureties as shall be satisfactory to the Board of Directors for the
faithful performance of the duties of his or her office and for the
restoration to the Corporation, in case of his or her death, resignation,
retirement or removal from office, of all books, papers, vouchers, money and
other property of whatever kind in his or her possession or under his or her
control belonging to the Corporation.
Section 9. Assistant Secretaries. Except as may be otherwise
--------- ---------------------
provided in these Bylaws, Assistant Secretaries, if there be any, shall
perform such duties and have such powers as from time to time may be assigned
to them by the Board of Directors, the President, any Vice President, if
there be one, or the Secretary, and in the absence of the Secretary or in the
event of his or her disability or refusal to act, shall perform the duties of
the Secretary, and when so acting, shall have all the powers of and be
subject to all the restrictions upon the Secretary.
Section 10. Assistant Treasurers. Assistant Treasurers, if there
---------- --------------------
be any, shall perform such duties and have such powers as from time to time
may be assigned to them by the Board of Directors, the President, any Vice
President, if there be one, or the Treasurer, and in the absence of the
Treasurer or in the event of his or her disability or refusal to act, shall
perform the duties of the Treasurer, and when so acting, shall have all the
powers of and be subject to all the restrictions upon the Treasurer. If
required by the Board of Directors, an Assistant Treasurer shall give the
Corporation a bond in such sum and with such surety or sureties as shall be
satisfactory to the Board of Directors for the faithful performance of the
duties of his or her office and for the restoration to the Corporation, in
case of his or her death, resignation, retirement or removal from office, of
all books, papers, vouchers, money and other property of whatever kind in
his or her possession or under his or her control belonging to the
Corporation.
Section 11. Other Officers. Such other officers as the Board of
---------- --------------
Directors may choose shall perform such duties and have such powers as from
time to time may be assigned to them by the Board of Directors. The Board of
Directors may delegate to any other officer of the Corporation the power to
choose such other officers and to prescribe their respective duties and
powers.
ARTICLE V
STOCK
-----
Section 1. Form of Certificates. Every holder of stock in the
--------- --------------------
Corporation shall be entitled to have a certificate signed in the name of the
Corporation (i) by the Chairman of the Board of Directors, the President or a
Vice President and (ii) by the Treasurer or an Assistant Treasurer, or the
Secretary or an Assistant Secretary of the Corporation, certifying the number
of shares owned by him or her in the Corporation.
Section 2. Signatures. Any or all of the signatures on a
--------- ----------
certificate may be a facsimile. In case any officer, transfer agent or
registrar who has signed or whose facsimile signature has been placed upon a
certificate shall have ceased to be such officer, transfer agent or registrar
before such certificate is issued, it may be issued by the Corporation with
the same effect as if he or she were such officer, transfer agent or
registrar at the date of issue.
Section 3. Lost Certificates. The Board of Directors may direct
--------- -----------------
a new certificate to be issued in place of any certificate theretofore issued
by the Corporation alleged to have been lost, stolen or destroyed, upon the
making of an affidavit of that fact by the person claiming the certificate of
stock to be lost, stolen or destroyed. When authorizing such issue of a new
certificate, the Board of Directors may, in its discretion and as a condition
precedent to the issuance thereof, require the owner of such lost, stolen or
destroyed certificate, or his or her legal representative, to advertise the
same in such manner as the Board of Directors shall require and/or to give
the Corporation a bond in such sum as it may direct as indemnity against any
claim that may be made against the Corporation with respect to the
certificate alleged to have been lost, stolen or destroyed.
Section 4. Transfers. Stock of the Corporation shall be
--------- ---------
transferable in the manner prescribed by the law and in these Bylaws.
Transfers of stock shall be made on the books of the Corporation only by the
person named in the certificate or by his or her attorney lawfully
constituted in writing and upon the surrender of the certificate therefor,
which shall be canceled before a new certificate shall be issued.
Section 5. Record Date. In order that the Corporation may
--------- -----------
determine the stockholders entitled to notice of or to vote at any meeting of
stockholders or any adjournment thereof, or entitled to express consent to
corporate action in writing without a meeting, or entitled to receive payment
of any dividend or other distribution or allotment of any rights, or entitled
to exercise any rights in respect of any change, conversion or exchange of
stock, or for the purpose of any other lawful action, the Board of Directors
may fix, in advance, a record date, which shall not be more than sixty days
nor less than ten days before the date of such meeting, nor more than sixty
days prior to any other action. A determination of stockholders of record
entitled to notice of or to vote at a meeting of stockholders shall apply to
any adjournment of the meeting; provided, however, that the Board of
Directors may fix a new record date for the adjourned meeting.
Section 6. Beneficial Owners. The Corporation shall be entitled
--------- -----------------
to recognize the exclusive right of a person registered on its books as the
owner of shares to receive dividends, and to vote as such owner, and to hold
liable for calls and assessments a person registered on its books as the
owner of shares, and shall not be bound to recognize any equitable or other
claim to or interest in such share or shares on the part of any other person,
whether or not it shall have express or other notice thereof, except as
otherwise provided by law.
ARTICLE VI
NOTICES
-------
Section 1. Notices. Whenever written notice is required by law,
--------- -------
the Certificate of Incorporation or these Bylaws, to be given to any
director, member of a committee or stockholder, such notice may be given by
mail, addressed to such director, member of a committee or stockholder, at
his or her address as it appears on the records of the Corporation, with
postage thereon prepaid, and such notice shall be deemed to be given at the
time when the same shall be deposited in the United States mail. Written
notice may also be given personally or by telegram, telex or cable.
Section 2. Waivers of Notice. Whenever any notice is required by
--------- -----------------
law, the Certificate of Incorporation or these Bylaws, to be given to any
director, member of a committee or stockholder, a waiver thereof in writing,
signed by the person or persons entitled to said notice, whether before or
after the time stated therein, shall be deemed equivalent thereto.
ARTICLE VII
GENERAL PROVISIONS
------------------
Section 1. Dividends. Dividends upon the capital stock of the
--------- ---------
Corporation, subject to the provisions of the Certificate of Incorporation,
if any, may be declared by the Board of Directors at any regular or special
meeting, and may be paid in cash, in property or in shares of the capital
stock. Before payment of any dividend, there may be set aside out of
any funds of the Corporation available for dividends such sum or sums as
the Board of Directors from time to time, in its absolute discretion, deems
proper as a reserve or reserves to meet contingencies, or for equalizing
dividends, or for repairing or maintaining any property of the
Corporation, or for any proper purpose, and the Board of Directors may modify
or abolish any such reserve.
Section 2. Disbursements. All checks or demands for money and
--------- -------------
notes of the Corporation shall be signed by such officer or officers or such
other person or persons as the Board of Directors may from time to time
designate.
Section 3. Fiscal Year. The fiscal year of the Corporation shall
--------- -----------
be fixed by resolution of the Board of Directors.
Section 4. Corporate Seal. The corporate seal shall have
--------- --------------
inscribed thereon the name of the Corporation, the year of its organization
and the words "Corporate Seal, Delaware." The seal may be used by causing it
or a facsimile thereof to be impressed or affixed or reproduced or otherwise.
ARTICLE VIII
INDEMNIFICATION
---------------
Section 1. Power to Indemnify in Actions, Suits or Proceedings
---------
Other Than Those by or in the Right of the Corporation. Subject to Section 3
of this Article VIII, the Corporation shall indemnify any person who was-----
- --------------------------- or is a party or is threatened to be made a party
to any threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative or investigative (other than an action by or
in the right of the Corporation) by reason of the fact that he or she is or
was a director or officer of the Corporation, or is or was a director or
officer of the Corporation serving at the request of the Corporation as a
director or officer, employee or agent of another corporation, partnership,
joint venture, trust, employee benefit plan or other enterprise, against
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by him or her in connection with
such action, suit or proceeding if he or she acted in good faith and in a
manner he or she reasonably believed to be in or not opposed to the best
interests of the Corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his or her conduct was
unlawful. The termination of any action, suit or proceeding by judgment
order, settlement, conviction, or upon a plea of nolo contendere or its
equivalent, shall not, of itself, create a presumption that the person did not
act in good faith and in a manner which he or she reasonably believed to be
in or not opposed to the best interests of the Corporation, and, with
respect to any criminal action or proceeding, had reasonable cause to believe
that his or her conduct was unlawful.
Section 2. Power to Indemnify in Actions, Suits or Proceedings by
---------
or in the Right of the Corporation. Subject to Section 3 of this Article
VIII, the Corporation shall indemnify any person who was or is a party or is-
- ----------- threatened to be made a party to any threatened, pending or
completed action or suit by or in the right of the Corporation to procure a
judgment in its favor by reason of the fact that he or she is or was a
director, or officer of the Corporation, or is or was a director or officer
of the Corporation serving at the request of the Corporation as a director,
officer, employee or agent of another corporation, partnership, joint
venture, trust, employee benefit plan or other enterprise against expenses
(including attorneys' fees) actually and reasonably incurred by him or her in
connection with the defense or settlement of such action or suit if he or she
acted in good faith and in a manner he or she reasonably believed to be in or
not opposed to the best interests of the Corporation; except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the Corporation
unless and only to the extent that the Court of Chancery or the court in
which such action or suit was brought shall determine upon application that,
despite the adjudication of liability but in view of all the circumstances
of the case, such person is fairly and reasonably entitled to indemnity for
such expenses which the Court of Chancery or such other court shall deem
proper.
Section 3. Authorization of Indemnification. Any indemnification
--------- --------------------------------
under this Article VIII (unless ordered by a court) shall be made by the
Corporation only as authorized in the specific case upon a determination that
indemnification of the director or officer is proper in the circumstances
because he or she has met the applicable standard of conduct set forth in
Section 1 or Section 2 of this Article VIII, as the case may be. Such
determination shall be made (i) by the Board of Directors by a majority vote
of a quorum consisting of directors who were not parties to such action, suit
or proceeding, or (ii) if such a quorum is not obtainable, or, even if
obtainable a quorum of disinterested directors so directs, by independent
legal counsel in a written opinion or (iii) by the stockholders. To the
extent, however, that a director or officer of the Corporation has been
successful on the merits or otherwise in defense of any action, suit or
proceeding described above, he or she shall be indemnified against expenses
(including attorneys' fees) actually and reasonably incurred by him or her in
connection therewith, without the necessity of authorization in the specific
case.
Section 4. Good Faith Described. For purposes of any
--------- --------------------
determination under Section 3 of this Article VIII, a person shall be deemed
to have acted in good faith and in a manner he or she reasonably believed to
be in or not opposed to the best interests of the Corporation, or, with
respect to any criminal action or proceeding, to have had no reasonable cause
to believe his or her conduct was unlawful, if his or her action is based on
the records or books of account of the Corporation or another enterprise, or
on information supplied to him or her by the officers of the Corporation or
any other enterprise in the course of their duties, or on the advice of legal
counsel for the Corporation or another enterprise or on information or
records given or reports made to the Corporation or another enterprise by an
independent certified public accountant or by an appraiser or other expert
selected with reasonable care by the Corporation or another enterprise. The
term "another enterprise" as used in this Section 4 shall mean any other
corporation or any partnership, joint venture, trust, employee benefit plan
or other enterprise of which such person is or was serving at the request of
the Corporation as a director, officer, employee or agent. The provisions of
this Section 4 shall not be deemed to be exclusive or to limit in any way the
circumstances in which a person may be deemed to have met the applicable
standard of conduct set forth in Sections 1 and 2 of this Article VIII, as
the case may be.
Section 5. Indemnification by a Court. Notwith-standing any
--------- --------------------------
contrary determination in the specific case under Section 3 of this Article
VIII, and notwithstanding the absence of any determination thereunder, any
director or officer may apply to any court of competent jurisdiction in the
State of Delaware for indemnification to the extent otherwise permissible
under Sections 1 and 2 of this Article VIII. The basis of such
indemnification by a court shall be a determination by such court that
indemnification of the director or officer is proper in the circumstances
because he or she has met the applicable standards of conduct set forth in
Sections 1 or 2 of this Article VIII, as the case may be. Neither a contrary
determination in the specific case under Section 3 of this Article VIII nor
the absence of any determination thereunder shall be a defense to such
application or create a presumption that the director or officer seeking
indemnification has not met any applicable standard of conduct. Notice of
any application for indemnification pursuant to this Section 5 shall be given
to the Corporation promptly upon the filing of such application. If
successful, in whole or in part, the director or officer seeking
indemnification shall also be entitled to be paid the expense of prosecuting
such application.
Section 6. Expenses Payable in Advance. Expenses incurred by a
--------- ---------------------------
director or officer in defending or investigating a threatened or pending
action, suit or proceeding shall be paid by the Corporation in
advance of the final disposition of such action, suit or proceeding upon
receipt of an undertaking by or on behalf of such director or officer to
repay such amount if it shall ultimately be determined that he or she is not
entitled to be indemnified by the Corporation as authorized in this Article
VIII.
Section 7. Nonexclusivity of Indemnification and Advancement of
---------
Expenses. The indemnification and advancement of expenses provided by or
granted pursuant to this Article VIII shall not be deemed exclusive of any
other rights to which those seeking indemnification or advancement of
expenses may be entitled under any Bylaw, agreement, contract, vote of
stockholders or disinterested directors or pursuant to the direction
(howsoever embodied) of any court of competent jurisdiction or otherwise,
both as to action in his or her official capacity and as to action in another
capacity while holding such office, it being the policy of the Corporation
that indemnification of the persons specified in Sections 1 and 2 of this
Article VIII shall be made to the fullest extent permitted by law. The
provisions of this Article VIII shall not be deemed to preclude the
indemnification of any person who is not specified in Sections 1 or 2 of this
Article VIII but whom the Corporation has the power or obligation to
indemnify under the provisions of the General Corporation Law of the
State of Delaware, or otherwise.
Section 8. Insurance. The Corporation may purchase and maintain
--------- ---------
insurance on behalf of any person who is or was a director or officer of the
Corporation, or is or was a director or officer of the Corporation serving at
the request of the Corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust, employee benefit plan
or other enterprise against any liability asserted against him or her and
incurred by him or her in any such capacity, or arising out of his or her
status as such, whether or not the Corporation would have the power or the
obligation to indemnify him or her against such liability under the
provisions of this Article VIII.
Section 9. Certain Definitions. For purposes of this Article
--------- -------------------
VIII, references to "the Corporation" shall include, in addition to the
resulting corporation, any constituent corporation (including any constituent
of a constituent) absorbed in a consolidation or merger which, if its
separate existence had continued, would have had power and authority to
indemnify its directors or officers, so that any person who is or was a
director or officer of such constituent corporation, or is or was a director
or officer of such constituent corporation serving at the request of such
constituent corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust, employee benefit
plan or other enterprise, shall stand in the same position under the
provisions of this Article VIII with respect to the resulting or surviving
corporation as he or she would have with respect to such constituent
corporation if its separate existence had continued. For purposes of this
Article VIII, references to "fines" shall include any excise taxes assessed
on a person with respect to an employee benefit plan; and references to
"serving at the request of the Corporation" shall include any service as
a director, officer, employee or agent of the Corporation which imposes
duties on, or involves services by, such director or officer with respect
to an employee benefit plan, its participants or beneficiaries; and a person
who acted in good faith and in a manner he or she reasonably believed to be
in the interests of the participants and beneficiaries of an employee
benefit plan shall be deemed to have acted in a manner "not opposed to the
best interests of the Corporation" as referred to in this Article VIII.
Section 10. Survival of Indemnification and Advancement of
----------
Expenses. The indemnification and advancement of expenses provided by, or
granted pursuant to, this Article VIII shall, unless otherwise provided when
authorized or ratified, continue as to a person who has ceased to be a
director or officer and shall inure to the benefit of the heirs,
executors and administrators of such a person.
Section 11. Limitation on Indemnification. Notwithstanding
---------- -----------------------------
anything contained in this Article VIII to the contrary, except for
proceedings to enforce rights to indemnification (which shall be governed by
Section 5 hereof), the Corporation shall not be obligated to indemnify any
director or officer in connection with a proceeding (or part thereof)
initiated by such person unless such proceeding (or part thereof) was
authorized or consented to by the Board of Directors of the Corporation.
Section 12. Indemnification of Employees and Agents. The
---------- ---------------------------------------
Corporation may, to the extent authorized from time to time by the Board of
Directors, provide rights to indemnification and to the advancement of
expenses to employees and agents of the Corporation similar to those
conferred in this Article VIII to directors and officers of the Corporation.
ARTICLE IX
AMENDMENTS
----------
Section 1. These Bylaws may be altered, amended or repealed, in
---------
whole or in part, or new Bylaws may be adopted by the stockholders or by the
Board of Directors, provided, however, that notice of such alteration,
amendment, repeal or adoption of new Bylaws be contained in the notice of
such meeting of stockholders or Board of Directors, as the case may be. All
such amendments must be approved by either the holders of a majority of
the outstanding capital stock entitled to vote thereon or by a majority of
the entire Board of Directors, provided, however, that Section 11 of Article
III may only be amended by the unanimous vote of the entire Board of
Directors.
Section 2. Entire Board of Directors. As used in this Article IX
--------- -------------------------
and in these Bylaws generally, the term "entire Board of Directors" means the
total number of directors which the Corporation would have if there were no
vacancies.
SECRETARY'S CERTIFICATE OF ADOPTION OF BYLAWS
OF
HEADLANDS MORTGAGE SECURITIES INC.
I, the undersigned, do hereby certify:
1. That I am the duly elected and acting Secretary of Headlands
Mortgage Securities Inc., a Delaware corporation.
2. That the foregoing Bylaws constitute the Bylaws of said
Corporation as adopted by the Board of Directors of said Corporation on
November 18, 1996.
IN WITNESS WHEREOF, I have hereunto subscribed my name this
18th day of November, 1996.
/s/ Gilbert J. MacQuarrie
----------------------------
Secretary
Exhibit 5.1
Opinion of Brown & Wood LLP with Respect to Legality
January 15, 1997
Headlands Mortgage Securities Inc.
700 Larkspur Landing Circle, Suite 250
Larkspur, California 94939
Re: Headlands Mortgage Securities Inc.
Registration Statement on Form S-3 (No. 333-16679)
-----------------------------------------
Ladies and Gentlemen:
We have acted as counsel to Headlands Mortgage Securities Inc., a
Delaware corporation (the "Company"), in connection with the preparation of a
registration statement on Form S-3 (the "Registration Statement") for the
registration with the Securities and Exchange Commission under the Securities
Act of 1933, as amended (the "Act"), of mortgage pass-through certificates
(the "Certificates") in an aggregate principal amount of up to $850,000,000.
As described in the Registration Statement, the Certificates will be issued
from time to time in series. Each series of Certificates will be issued by a
trust (each, a "Trust") formed by the Company pursuant to a pooling and
servicing agreement (each, a "Pooling and Servicing Agreement") among the
Company, a master servicer (the "Master Servicer"), a seller (the "Seller")
and a trustee (the "Trustee"). Each series of Certificates issued by a Trust
may include one or more classes of Certificates. The Certificates will be
sold from time to time pursuant to certain underwriting agreements (each, an
"Underwriting Agreement") among the Company and the underwriter or
underwriters named therein.
We have examined and relied upon copies of the Company's Certificate of
Incorporation, the Company's By-laws, the Registration Statement, the form of
Pooling and Servicing Agreement and the forms of Certificates included as
exhibits thereto, the form of Underwriting Agreement and such other records,
documents and statutes as we have deemed necessary for purposes of this
opinion.
In our examination we have assumed the genuineness of all signatures,
the authenticity of all documents submitted to us as originals, the
conformity to original documents of all documents submitted to us as certified
or photostatic copies and the authenticity of the originals of such
documents. As to any facts material to the opinions expressed herein that
were not independently established or verified, we have relied upon statements
and representations of officers and other representatives of the Company
and others.
Based upon the foregoing, we are of the opinion that:
1. When any Pooling and Servicing Agreement relating to a series of
Certificates has been duly and validly authorized by all necessary action on
the part of the Company and has been duly executed and delivered by the
Company, the Master Servicer, the Seller, the Trustee and any other party
thereto, such Pooling and Servicing Agreement will constitute a legal, valid
and binding agreement of the Company, enforceable against the Company in
accordance with its terms, except as enforcement thereof may be limited by
bankruptcy, insolvency or other laws relating to or affecting
creditors' rights generally or by general equity principles.
2. When a series of Certificates has been duly authorized by all
necessary action on the part of the Company (subject to the terms thereof
being otherwise in compliance with applicable law at such time), duly
executed and authenticated by the Trustee for such series in accordance with
the terms of the related Pooling and Servicing Agreement and issued and
delivered against payment therefor as described in the Registration
Statement, such series of Certificates will be legally and validly issued,
fully paid and nonassessable, and the holders thereof will be entitled to the
benefits of the related Pooling and Servicing Agreement.
In rendering the foregoing opinions, we express no opinion as to the
laws of any jurisdiction other than the laws of the State of New York
(excluding choice of law principles therein) and the federal laws of the
United States of America.
We hereby consent to the filing of this letter as an exhibit to the
Registration Statement and to the references to this firm under the heading
"Legal Matters" in the base prospectus and prospectus supplement forming a
part of the Registration Statement, without admitting that we are "experts"
within the meaning of the Act or the Rules and Regulations of the Commission
issued thereunder, with respect to any part of the Registration Statement,
including this exhibit.
Very truly yours,
/s/ Brown & Wood LLP
Exhibit 8.1
Opinion of Brown & Wood LLP
with respect to Tax Matters
January 15, 1997
Headlands Mortgage Securities Inc.
700 Larkspur Landing Circle, Suite 250
Larkspur, California 94939
Re: Headlands Mortgage Securities Inc.
Registration Statement on Form S-3 (No. 333-16679)
--------------------------------------------------
Ladies and Gentlemen:
We have acted as special tax counsel to Headlands Mortgage Securities
Inc., a Delaware corporation (the "Company"), in connection with the
preparation of a registration statement on Form S-3 (the "Registration
Statement") for the registration with the Securities and Exchange Commission
(the "Commission") under the Securities Act of 1933, as amended (the "Act"),
of mortgage pass-through certificates (the "Certificates") in an aggregate
principal amount of up to $850,000,000. As described in the Registration
Statement, the Certificates will be issued from time to time in series. Each
series of Certificates will be issued by a trust (each, a "Trust") formed by
the Company pursuant to a pooling and servicing agreement (each, a "Pooling
and Servicing Agreement") among the Company, a master servicer (the "Master
Servicer"), a seller (the "Seller") and a trustee (the "Trustee"). Each
series of Certificates issued by a Trust may include one or more classes of
Certificates. The Certificates will be sold from time to time pursuant to
certain underwriting agreements (each, an "Underwriting Agreement") among the
Company and the underwriter or underwriters named therein.
In arriving at the opinion expressed below, we have assumed that each
Pooling and Servicing Agreement will be duly authorized by all necessary
corporate action on the part of the Company, the Seller, the Trustee and the
Master Servicer for such series of Certificates and will be duly executed and
delivered by the Company, the Seller, the Trustee and the Master Servicer
substantially in the applicable form filed or incorporated by reference as an
exhibit to the Registration Statement, that each series of Certificates will
be duly executed and delivered in substantially the forms set forth in the
related Pooling and Servicing Agreement filed or incorporated by reference as
an exhibit to the Registration Statement, and that Certificates will be sold
as described in the Registration Statement.
We have advised the Registrant with respect to certain federal income
tax consequences of the proposed issuance of the Certificates. This advice
is summarized under the headings "Summary of The Prospectus -- Tax Status of
REMIC Certificates", "-- Tax Status of Non-REMIC Certificates" and "Federal
Income Tax Consequences" in the prospectus relating to the Certificates (the
"Prospectus"), all a part of the Registration Statement. Such description
does not purport to discuss all possible federal income tax ramifications of
the proposed issuance of the Certificates, but with respect to those tax
consequences that are discussed, in our opinion, the description is accurate
in all material respects.
This opinion is based on the facts and circumstances set forth in the
Registration Statement and in the other documents reviewed by us. Our
opinion as to the matters set forth herein could change with respect to a
particular series of Certificates as a result of changes in facts or
circumstances, changes in the terms of the documents reviewed by us, or
changes in the law subsequent to the date hereof. Because the Prospectus
contemplates series of Certificates with numerous different characteristics,
you should be aware that the particular characteristics of each series of
Certificates must be considered in determining the applicability of this
opinion to a particular series of Certificates.
We hereby consent to the filing of this letter as an exhibit to the
Registration Statement and to a reference to this firm (as counsel to the
Registrant) under the heading "Federal Income Tax Consequences" in the
Prospectus forming a part of the Registration Statement, without implying or
admitting that we are "experts" within the meaning of the Act or the rules
and regulations of the Commission issued thereunder, with respect to any part
of the Registration Statement, including this exhibit.
Very truly yours,
/s/ Brown & Wood LLP
