<PAGE>
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED FEBRUARY 25, 1997)
$228,344,859
(APPROXIMATE)
(Headlands logo appears here)
SPONSOR
HEADLANDS MORTGAGE COMPANY
SELLER AND MASTER SERVICER
Mortgage Pass-Through Certificates, Series 1997-2
Distributions payable on the 25th day of each month, commencing in May 1997
The Mortgage Pass-Through Certificates, Series 1997-2 (the "Certificates")
consist of all Classes identified in the chart below (the "Offered
Certificates") as well as certain additional Classes of Non-Offered Certificates
(as hereinafter defined) which are not being offered for sale hereunder. It is a
condition to their issuance that each Class of Certificates receive the
applicable rating(s) (set forth under "Summary of Terms -- Certificate Rating")
of Standard & Poor's and Fitch Investors Service, L.P.
<TABLE>
<CAPTION>
INITIAL CLASS PASS-THROUGH INITIAL CLASS PASS-THROUGH
CLASS CERTIFICATE BALANCE(1) RATE CLASS CERTIFICATE BALANCE(1) RATE
<S> <C> <C> <C> <C> <C>
A-I-1.................. $ 19,541,400 6.50% A-I-10................. $ 39,982,908 7.75%
A-I-2.................. $ 14,405,500 6.50% A-II................... $ 32,350,359 7.75%
A-I-3.................. $ 10,543,500 6.50% PO..................... $ 274,090 (5)
A-I-4.................. $ 12,540,000 7.00% X...................... (6) (6)
A-I-5.................. $ 11,060,000 7.00% B-1.................... $ 6,375,000 7.75%
A-I-6.................. $ 4,474,659 7.00% B-2.................... $ 4,057,000 7.75%
A-I-7.................. $ 63,547,150 (2) B-3.................... $ 2,898,000 7.75%
A-I-8.................. (3) (3) R-1.................... $ 100 7.75%
A-I-9.................. $ 6,295,093 (4) R-2.................... $ 100 7.75%
</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 10%.
(2) The Class A-I-7 Certificates will bear interest at 5.9875% per annum during
the first Interest Accrual Period (as defined herein). During each Interest
Accrual Period thereafter, the Class A-I-7 Certificates will bear interest,
subject to a maximum rate of 9.00% per annum and a minimum rate of 0.55% per
annum, at a rate per annum equal to 0.55% in excess of the London interbank
offered rate for one-month U.S. dollar deposits ("LIBOR"), as more fully
described under "Description of the Certificates -- LIBOR" herein.
(3) The Class A-I-8 Certificates will have a notional principal amount (the
"Class A-I-8 Notional Amount") equal to the Class Certificate Balance of the
Class A-I-7 Certificates. The Class A-I-8 Certificates will bear interest at
3.0125% per annum during the first Interest Accrual Period. During each
Interest Accrual Period thereafter, the Class A-I-8 Certificates will bear
interest, subject to a maximum rate of 8.45% per annum and a minimum rate of
0% per annum, at a rate per annum equal to 8.45% minus LIBOR, as more fully
described under "Description of the Certificates -- LIBOR" herein.
(4) For each Interest Accrual Period on or prior to the Distribution Date on
which the Class Certificate Balance of the Class A-I-9 Certificates has been
reduced to $2,608,502, the Class A-I-9 Certificates will bear interest at a
Pass-Through Rate calculated pursuant to the following formula: ([(Class
A-I-9 Class Certificate Balance-$2,608,502) x 7.00%] + [$2,608,502 x 7.75%])
Class A-I-9 Class Certificate Balance. For each Interest Accrual Period
thereafter the Class A-I-9 Certificates will bear interest at a Pass-Through
Rate equal to 7.75% per annum. The Class A-I-9 Certificates will bear
interest at approximately 7.3108% per annum during the first Interest
Accrual Period.
(5) The Class PO Certificates will be principal only Certificates and will not
bear interest.
(6) The Class X Certificates will have a notional principal amount (the "Class X
Notional Amount") equal to the aggregate of the Scheduled Principal Balances
of the Non-Discount Mortgage Loans in Mortgage Loan Group I and in Mortgage
Loan Group II. The Pass-Through Rate for the Class X Certificates for any
Distribution Date will be equal to the weighted average (based on the
Scheduled Principal Balances of the Non-Discount Loans), for each Mortgage
Loan Group, of the excess of (a) the weighted average of the Net Mortgage
Rates of the Non-Discount Mortgage Loans for such Mortgage Loan Group over
(b) 7.75% per annum. The Pass-Through Rate for the Class X Certificates for
the first Interest Accrual Period is expected to be approximately 0.60778%
per annum.
PROSPECTIVE INVESTORS IN THE OFFERED CERTIFICATES SHOULD REVIEW THE
INFORMATION SET FORTH UNDER "RISK FACTORS" COMMENCING ON PAGE S-10 OF THIS
PROSPECTUS SUPPLEMENT AND IN THE PROSPECTUS COMMENCING ON PAGE 14.
THE CERTIFICATES DO NOT REPRESENT AN INTEREST IN OR OBLIGATION OF THE
SPONSOR, THE SELLER, THE MASTER SERVICER, 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 offered hereby, other than the Class X, Class PO,
Class B-1, Class B-2 and Class B-3 Certificates, will be purchased by Bear,
Stearns & Co. Inc. ("Bear Stearns"), the Class X Certificates offered hereby
will be purchased by Lehman Brothers Inc. ("Lehman Brothers") and the Class B-1,
Class B-2 and Class B-3 Certificates offered hereby will be purchased by
PaineWebber Incorporated ("PaineWebber" and together with Lehman Brothers and
Bear Stearns, the "Underwriters") from the Sponsor and will be offered by the
respective Underwriter from time to time in negotiated transactions or otherwise
at varying prices to be determined at the time of sale. Proceeds to the Sponsor
from the sale of the Underwritten Certificates are expected to be approximately
102.36% of the aggregate principal balance of the Offered Certificates plus
accrued interest, before deducting issuance expenses payable by the Sponsor. The
Class PO Certificates will be issued to the Sponsor on or about April 30, 1997
as partial consideration for the sale of the Mortgage Loans to the Trust.
The Underwritten Certificates are offered by the respective Underwriter,
subject to prior sale, when, as and if delivered to and accepted by the
Underwriters and subject to their right to reject orders in whole or in part. It
is expected that delivery of the Underwritten Certificates, other than the Class
R-1 and Class R-2 Certificates, will be made in book-entry form only through the
facilities of The Depository Trust Company and that the Class R-1 and Class R-2
Certificates will be delivered at the offices of Bear, Stearns & Co. Inc. in New
York, New York, in each case on or about April 30, 1997.
BEAR, STEARNS & CO. INC. PAINEWEBBER INCORPORATED
THE DATE OF THIS PROSPECTUS SUPPLEMENT IS APRIL 24, 1997
<PAGE>
The Mortgage Loans will be sold to the Sponsor by Headlands Mortgage Company
(in such capacity, the "Seller").
An election will be made to treat the Trust as two "real estate mortgage
investment conduits" (the "Master REMIC" and the "Subsidiary REMIC" and each, a
"REMIC") for federal income tax purposes. As described more fully herein and in
the Prospectus, the Regular Certificates will constitute "regular interests" in
the Master REMIC and the Class R-1 Certificates and the Class R-2 Certificates
will constitute the sole class of "residual interest" in the Subsidiary REMIC
and the Master REMIC, respectively. Prospective investors are cautioned that a
Residual Certificateholder's REMIC taxable income and the tax liability thereon
will exceed cash distributions in certain periods, in which event such holder
must have sufficient alternative sources of funds to pay such tax liability. See
"Federal Income Tax Consequences" herein and in the Prospectus.
The Residual Certificates will be subject to certain transfer restrictions.
See "Description of the Certificates -- Restrictions on Transfer of the Residual
Certificates."
The Offered Certificates and the Non-Offered Certificates will represent, in
the aggregate, the entire beneficial ownership interest in a trust (the "Trust")
consisting primarily of a pool (the "Mortgage Pool") segregated into two groups
("Mortgage Loan Group I" and "Mortgage Loan Group II" and each, a "Mortgage Loan
Group") of conventional one- to four-family, fixed rate, first lien residential
mortgage loans with original terms to maturity (based on the date of origination
or any later modification) of up to 30 years ("Group I Mortgage Loans" and
"Group II Mortgage Loans," respectively, and collectively, the "Mortgage
Loans"). All Mortgage Loans in Mortgage Loan Group I have original terms to
stated maturity of greater than 15 but not more than 30 years and all of the
Mortgage Loans in Mortgage Loan Group II have original terms to stated maturity
of up to 15 years, including Mortgage Loans having a 30-year amortization
schedule with a balloon payment at the end of 15 years (the "Balloon Loans").
The characteristics of the Mortgage Loans comprising each Mortgage Loan Group
are described herein under "The Mortgage Pool".
Distributions of interest and principal on the Class A-I and Residual
Certificates, on the one hand, and distributions of interest and principal on
the Class A-II Certificates, on the other, will be based on interest and
principal received or advanced with respect to the Group I Mortgage Loans and
the Group II Mortgage Loans, respectively, except under the limited
circumstances described herein. Distributions of interest on the Class X
Certificates will be based upon interest received or advanced with respect to
the Non-Discount Mortgage Loans of both Mortgage Loan Groups. Distributions of
principal on the Class PO Certificates will be based on principal received or
advanced with respect to the Discount Mortgage Loans of both Mortgage Loan
Groups. The right of the holders of the Subordinate Certificates to receive
distributions with respect to the Mortgage Loans will be based upon interest and
principal received or advanced with respect to both Mortgage Loan Groups. Such
right in the case of the Subordinate Certificates will be subordinate to the
rights of the holders of the Senior Certificates (as defined herein). The rights
of holders of each Class of Subordinate Certificates will be subordinate to the
rights of any Class of Subordinate Certificates with a lower numerical
designation.
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 GENERALLY IN
THE RELATED MORTGAGE LOAN GROUP IN THE CASE OF THE CLASS A AND RESIDUAL
CERTIFICATES, THE NON-DISCOUNT MORTGAGE LOANS IN THE CASE OF THE CLASS X
CERTIFICATES, THE DISCOUNT MORTGAGE LOANS IN THE CASE OF THE CLASS PO
CERTIFICATES AND THE MORTGAGE LOANS IN BOTH MORTGAGE LOAN GROUPS IN THE CASE OF
THE SUBORDINATE CERTIFICATES. 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, PARTICULARLY THE CLASS PO CERTIFICATES, THE RISK THAT A LOWER THAN
ANTICIPATED RATE OF PRINCIPAL PAYMENTS ON THE APPLICABLE MORTGAGE LOANS COULD
RESULT IN AN ACTUAL YIELD THAT IS LOWER THAN THE ANTICIPATED YIELD AND, IN THE
CASE OF ANY OFFERED CERTIFICATES PURCHASED AT A PREMIUM, PARTICULARLY THE
NOTIONAL AMOUNT CERTIFICATES, THE RISK THAT A FASTER THAN ANTICIPATED RATE OF
PRINCIPAL PAYMENTS ON THE APPLICABLE MORTGAGE LOANS COULD RESULT IN AN ACTUAL
YIELD THAT IS LOWER THAN THE ANTICIPATED YIELD. IN CERTAIN RAPID PREPAYMENT
SCENARIOS ON THE APPLICABLE MORTGAGE LOANS, INVESTORS IN THE CLASS A-I-8 AND
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.
THE YIELD ON THE CLASS A-I-7 CERTIFICATES WILL BE SENSITIVE, AND THE YIELD
ON THE CLASS A-I-8 CERTIFICATES WILL BE HIGHLY SENSITIVE, TO THE RATE OF LIBOR.
ALTHOUGH THE CLASS A-I-10 CERTIFICATES ARE SENIOR CERTIFICATES, THE CLASS
A-I-10 CERTIFICATES ARE NOT EXPECTED TO RECEIVE PRINCIPAL DISTRIBUTIONS UNTIL
MAY 2002. SEE "DESCRIPTION OF THE CERTIFICATES -- PRINCIPAL" HEREIN.
Each Underwriter intends to make a secondary market in the Classes of
Underwritten Certificates being purchased by it, but no Underwriter has an
obligation to do so. 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 or that it will provide
Certificateholders with a sufficient level of liquidity of investment.
This Prospectus Supplement does not contain complete information about the
offering of the Offered Certificates. Additional information is contained in the
Prospectus dated February 25, 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.
(ii)
<PAGE>
SUMMARY OF TERMS
THIS SUMMARY OF TERMS IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE
DETAILED INFORMATION APPEARING ELSEWHERE IN THIS PROSPECTUS SUPPLEMENT AND IN
THE ACCOMPANYING PROSPECTUS. CERTAIN CAPITALIZED TERMS USED IN THIS SUMMARY OF
TERMS ARE DEFINED ELSEWHERE IN THIS PROSPECTUS SUPPLEMENT OR IN THE PROSPECTUS.
<TABLE>
<S> <C>
Title of Securities.................. Mortgage Pass-Through Certificates, Series 1997-2 (the "Certificates").
Designations
Offered Certificates............... Class A, Class PO, Class X, Class R-1, Class R-2, Class B-1, Class B-2 and
Class B-3 Certificates. Only the Offered Certificates are offered hereby.
The aggregate initial Class Certificate Balances of the Certificates will
be subject to a permitted variance in the aggregate of plus or minus 10%.
Variances in such Class Certificate Balances may result in variances in
the Class Notional Amounts of the Classes of Notional Amount Certificates.
The "Class X Notional Amount" for any Distribution Date will be equal to
the aggregate of the Scheduled Principal Balances of the Non-Discount
Mortgage Loans in Mortgage Loan Group I (the "Group I Notional Amount")
and in Mortgage Loan Group II (the "Group II Notional Amount") for such
Distribution Date. The initial Class X Notional Amount will be equal to
approximately $212,540,592. The "Class A-I-8 Notional Amount" for any
Distribution Date will be equal to the Class Certificate Balance of the
Class A-I-7 Certificates with respect to such Distribution Date. The
initial Class A-I-8 Notional Amount will be equal to approximately
$63,547,150. The Class X Notional Amount and the Class A-I-8 Notional
Amount are referred to herein collectively as the "Class Notional
Amounts."
Non-Offered Certificates........... In addition to the Offered Certificates, the following Classes of
Subordinate Certificates (the "Non-Offered Certificates") will be issued
in the indicated approximate initial Class Certificate Balances and will
bear interest at the indicated Pass-Through Rates, but are not offered
hereby:
</TABLE>
CLASS INITIAL CLASS PASS-THROUGH
CERTIFICATE BALANCE RATE
B-4 $ 1,507,000 7.75%
B-5 $ 580,000 7.75%
B-6 $ 1,390,094 7.75%
<TABLE>
<S> <C>
Class A-I Certificates............. Class A-I-1, Class A-I-2, Class A-I-3, Class A-I-4, Class A-I-5, Class
A-I-6, Class A-I-7, Class A-I-8, Class A-I-9 and Class A-I-10
Certificates.
Class A Certificates............... Class A-I and Class A-II Certificates.
Certificate Group.................. Either the Class A-I, Class R-1 and Class R-2 Certificates, collectively,
or the Class A-II Certificates, as the context requires.
Class B Certificates............... Class B-1, Class B-2, Class B-3, Class B-4, Class B-5 and Class B-6
Certificates.
Floating Rate Certificates......... Class A-I-7 Certificates.
Inverse Floating Rate Class A-I-8 Certificates.
Certificates.......................
Regular Certificates............... All Classes of Certificates other than the Residual Certificates.
</TABLE>
S-1
<PAGE>
<TABLE>
<S> <C>
Residual Certificates.............. Class R-1 and Class R-2 Certificates.
Senior Certificates................ Class A, Class PO, Class X, Class R-1 and Class R-2 Certificates.
Subordinate Certificates........... Class B Certificates.
Principal Only Certificates........ Class PO Certificates.
Notional Amount Certificates....... Class A-I-8 and Class X Certificates.
Fixed Rate Certificates............ All Classes of Certificates other than the Variable Rate Certificates.
Underwritten Certificates.......... Class A, Class X, Class R-1, Class R-2, Class B-1, Class B-2 and Class B-3
Certificates.
Variable Rate Certificates......... Class A-I-7, Class A-I-8, Class A-I-9 and Class X Certificates.
Book-Entry Certificates............ All Classes of Certificates other than the Physical Certificates.
Physical Certificates.............. Residual Certificates and Class B-4, Class B-5 and Class B-6 Certificates.
Sponsor.............................. Headlands Mortgage Securities Inc. (the "Sponsor"), a Delaware corporation
and a limited purpose finance subsidiary of Headlands Mortgage Company.
See "The Sponsor" in the Prospectus.
Seller and Master Servicer........... Headlands Mortgage Company (in its capacity as seller, the "Seller" and in
its capacity as Master Servicer, the "Master Servicer"). See "Servicing of
Mortgage Loans" herein. The Mortgage Loans were originated or acquired in
the normal course of its business by the Seller and will be acquired by
the Sponsor in a privately negotiated transaction. The Master Servicer
will be responsible for the servicing of the Mortgage Loans and will
receive the Master Servicing Fee from interest collected on the Mortgage
Loans. See "Servicing of Mortgage Loans -- Servicing Compensation and
Payment of Expenses" herein.
Trustee.............................. The Bank of New York, a banking corporation organized under the laws of
the State of New York (the "Trustee").
Cut-off Date......................... April 1, 1997.
Determination Date................... The 15th day of each month, or, if such day is not a Business Day, the
next succeeding Business Day.
Distribution Date.................... The 25th day of each month, or, if such day is not a Business Day, the
next succeeding Business Day, commencing in May 1997.
Record Date.......................... The Record Date for each Distribution Date will be the last business day
of the month preceding the month of such Distribution Date.
</TABLE>
S-2
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<TABLE>
<S> <C>
Mortgage Pool........................ The Mortgage Pool will consist primarily of conventional fixed-rate
mortgage loans (the "Mortgage Loans") secured by first liens on one- to
four-family residential properties (the "Mortgaged Properties") having, as
of the Cut-off Date, an aggregate principal balance equal to approximately
$231,821,952 (the "Cut-off Date Pool Principal Balance"). The Mortgage
Loans are divided into two groups ("Mortgage Loan Group I" and "Mortgage
Loan Group II", and each, a "Mortgage Loan Group"), designated the Group I
Mortgage Loans and the Group II Mortgage Loans, having aggregate principal
balances of $196,839,802 and $34,982,150, respectively, as of the Cut-off
Date. The Group I Mortgage Loans consist of Mortgage Loans with original
terms to maturity (based on the date of origination or any later
modification) of greater than 15 but not more than 30 years. The Group II
Mortgage Loans consist of Mortgage Loans with original terms to stated
maturity (based on the date of origination or any later modification) of
up to 15 years, including Mortgage Loans having a 30-year amortization
schedule with a balloon payment at the end of 15 years (the "Balloon
Loans").
As of the Cut-off Date the Mortgage Loans have the characteristics
(determined for each Mortgage Loan Group) set forth in the following table
and as further described under the heading "The Mortgage Pool" herein.
</TABLE>
Mortgage Loan Group I
Range of Remaining Terms to Stated Maturity: 323
to 360 months
Weighted Average Remaining Term to Stated
Maturity(1): 359 months
Range of Original Principal Balances(1): $18,000
to $693,000
Average Original Principal Balance(1): $167,631
Range of Outstanding Principal
Balances(1): $18,000 to $693,000
Average Outstanding Principal
Balance(1): $167,523
Range of Mortgage Rates: 7.500% to 10.250%
Weighted Average Mortgage Rate(1): 8.59%
Weighted Average Net Mortgage Rate(1): 8.33%
Geographic Concentrations in Excess of
5%(1): California -- 68.53%
Oregon -- 7.55%
Washington -- 6.98%
(1) Approximate
Mortgage Loan Group II
Range of Remaining Terms to Stated Maturity: 175
to 180 months
Weighted Average Remaining Term to Stated
Maturity(1): 179 months
Range of Original Principal Balances(1): $25,000
to $1,100,000
Average Original Principal Balance(1): $166,880
Range of Outstanding Principal
Balances(1): $25,000 to $1,098,628
Average Outstanding Principal
Balance(1): $166,582
Range of Mortgage Rates: 7.500% to 9.750%
Weighted Average Mortgage Rate(1): 8.37%
Weighted Average Net Mortgage Rate(1): 8.11%
Geographic Concentrations in Excess of
5%(1): California -- 55.61%
Oregon -- 9.36%
Washington -- 8.06%
Colorado -- 7.52%
Utah -- 6.89%
(1) Approximate
S-3
<PAGE>
<TABLE>
<S> <C>
Priority of Distributions............ On each Distribution Date (i) the Senior Certificates will be entitled to
receive all amounts distributable to them for such Distribution Date
before any distributions are made to the Subordinate Certificates on such
date and (ii) each Class of the Subordinate Certificates will be entitled
to receive all amounts distributable to them for such Distribution Date
before any distributions are made on such date on any Class of Subordinate
Certificates with a higher numerical Class designation.
In general, an amount equal to the Group I Available Funds for such
Distribution Date will be allocated first, to pay interest due on the
Class A-I, Class X and Residual Certificates and then to reduce the Class
Certificate Balances of the Senior Certificates (other than the Class A-II
Certificates) and an amount equal to the Group II Available Funds for such
Distribution Date will be allocated first, to pay interest due on the
Class A-II and Class X Certificates and then to reduce the Class
Certificate Balances of the Senior Certificates (other than the Residual
Certificates and the Class A-I Certificates). Thereafter, the remaining
Group I Available Funds and the Group II Available Funds for such
Distribution Date will be allocated first, subject to the limitations
described herein, to pay the Class PO Deferred Amount, if any, for such
Distribution Date to the Class PO Certificates, and second to pay interest
on and then principal of each Class of Subordinate Certificates in the
order of their numerical Class designations. No distribution of interest
or principal from Group I Available Funds or from Group II Available Funds
will be made on any Class of Subordinate Certificates on any Distribution
Date until all distributions of interest and principal have been made on
such date on each Class of Certificates having a higher priority of
payment with respect to the same Available Funds.
In certain circumstances described herein under "Description of the
Certificates -- Distributions", Principal Prepayments relating to a
Mortgage Loan Group and otherwise distributable to the Class B
Certificates will in lieu thereof be distributed to certain Classes of
Certificates of the unrelated Certificate Group.
See "Description of the Certificates -- Distributions" herein.
Interest............................. On each Distribution Date, each Class of interest bearing Offered
Certificates, to the extent 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 (as to each such Class, the "Interest
Distribution Amount") equal to the sum of (i) interest accrued during the
applicable Interest Accrual Period at the applicable Pass-Through Rate set
forth or described on the cover page hereof (as to each Class, the
"Pass-Through Rate") on the related Class Certificate Balance or the
related Class 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."
</TABLE>
S-4
<PAGE>
<TABLE>
<S> <C>
With respect to each Distribution Date, the "Interest Accrual Period" for
each Class of interest-bearing Certificates (other than the Class A-I-7
and Class A-I-8 Certificates) will be the calendar month preceding the
month in which the Distribution Date occurs. The Interest Accrual Period
for the Class A-I-7 and Class A-I-8 Certificates for each Distribution
Date will commence on the 25th day of the calendar month preceding the
calendar month in which such Distribution Date occurs and will end on the
24th day of the calendar month in which such Distribution Date occurs.
Interest will be calculated on the basis of a 360-day year comprised of
twelve 30-day months.
Principal (including prepayments).... On each Distribution Date, to the extent funds are available therefor,
principal distributions in reduction of the Class Certificate Balances of
each Class of Certificates will be made in the order and subject to the
priorities set forth herein under "Description of the Certificates --
Distributions" in an aggregate amount equal to such Class' allocable
portion of the Group I Senior Principal Distribution Amount, the Group II
Senior Principal Distribution Amount, the Class PO Principal Distribution
Amount or the Subordinate Principal Distribution Amount, as applicable.
The Notional Amount Certificates do not have principal balances and are
not entitled to any distributions in respect of principal of the Mortgage
Loans. See "Description of the Certificates -- Distributions" and
" -- Principal" herein.
On each Distribution Date, the PO Percentage of the principal portion of
any Realized Loss in respect of a Discount Mortgage Loan will be allocated
to the Class PO Certificates. See "Description of the
Certificates -- Allocation of Losses" herein. On each Distribution Date on
or prior to the Distribution Date on which the Class Certificate Balances
of the Subordinate Certificates are reduced to zero (the "Cross-Over
Date"), the Class PO Certificates will be entitled to receive after
distributions of interest and principal on the Senior Certificates, any
Class PO Deferred Amount for such Distribution Date; provided, that
distributions in respect of the Class PO Deferred Amount on any
Distribution Date will not exceed the excess, if any, of (x) the Group I
Available Funds and Group II Available Funds remaining after distributions
of interest and principal on the Senior Certificates over (y) the amount
of the aggregate Interest Distribution Amount for such Distribution Date
for all Classes of Subordinate Certificates. Distributions in respect of
the Class PO Deferred Amount shall not reduce the Class Certificate
Balance of the Class PO Certificates. The "Class PO Deferred Amount"
means, as to each Distribution Date through the Cross-Over Date, the
aggregate of all amounts allocable on such date to the Class PO
Certificates in respect of the principal portion of Realized Losses (other
than Excess Losses) and Class PO Cash Shortfall and all amounts previously
allocated in respect of such losses (other than Excess Losses) and Class
PO Cash Shortfall to the Class PO Certificates and not distributed on
prior Distribution Dates.
See "Description of the Certificates -- Principal" herein.
</TABLE>
S-5
<PAGE>
<TABLE>
<S> <C>
Credit Support -- General............ Credit support for the Senior Certificates will be provided by the
Subordinate Certificates and credit enhancement for each Class of
Subordinate Certificates (other than the Class B-6 Certificates) will be
provided by the Class or Classes of Subordinate Certificates with higher
numerical Class designations, as described below. The aggregate of the
initial Class Certificate Balances of the Class B-4, Class B-5 and Class
B-6 Certificates, which are the only Certificates supporting the Class B-3
Certificates, is expected to be approximately $3,477,094, as described
below.
Subordination........................ The rights of holders of the Subordinate Certificates to receive
distributions with respect to the Mortgage Loans in the Trust will be
subordinated to such rights of holders of the Senior Certificates, and the
rights of holders of each Class of Subordinate Certificates (other than
the Class B-1 Certificates) to receive such distributions will be further
subordinated to such rights of the Class or Classes of Subordinate
Certificates with lower numerical Class designations, in each case only to
the extent described herein.
The subordination of the Subordinate Certificates to the Senior
Certificates, and the further subordination within the Subordinate
Certificates, are each intended to increase the likelihood of timely
receipt by the holders of Certificates with higher relative payment
priority of the maximum amount to which they are entitled on any
Distribution Date, to provide such holders protection against losses on
the Mortgage Loans to the extent described herein and, to a lesser extent,
against Special Hazard Losses, Bankruptcy Losses and Fraud Losses.
However, in certain circumstances the amount of available subordination
(including the limited subordination provided for certain types of losses)
may be exhausted and shortfalls in distributions on the Offered
Certificates 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 "Description of the
Certificates -- Allocation of Losses" and "Credit Support" herein.
Since the Subordinate Certificates will absorb Realized Losses on Mortgage
Loans in both Mortgage Loan Groups, a disproportionate amount of Realized
Losses with respect to Mortgage Loans in either Mortgage Loan Group will
adversely impact the availability of subordination to the Certificates
related to the other Mortgage Loan Group.
</TABLE>
S-6
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Weighted Average % OF THE PREPAYMENT ASSUMPTION
Lives (in
years)*.........
CLASS 50% 75% 100% 125% 150%
A-I-1............. 1.5 1.1 0.9 0.8 0.7
A-I-2............. 3.8 2.7 2.1 1.7 1.5
A-I-3............. 6.0 4.1 3.1 2.6 2.2
A-I-4............. 9.1 5.6 4.2 3.4 2.8
A-I-5............. 14.5 8.1 5.5 4.3 3.6
A-I-6............. 21.9 14.6 7.7 5.4 4.4
A-I-7............. 6.6 4.3 2.9 2.3 2.0
A-I-8............. 6.6 4.3 2.9 2.3 2.0
A-I-9............. 24.6 18.8 11.2 5.8 4.6
A-I-10............ 14.8 12.9 11.5 9.7 7.8
A-II.............. 7.2 5.7 4.7 3.9 3.2
PO................ 8.7 6.7 5.4 4.4 3.7
R-1............... 0.1 0.1 0.1 0.1 0.1
R-2............... 0.1 0.1 0.1 0.1 0.1
B-1............... 13.6 12.0 10.9 10.1 9.5
B-2............... 13.6 12.0 10.9 10.1 9.5
B-3............... 13.6 12.0 10.9 10.1 9.5
*Determined as described under "Prepayment and Yield
Considerations -- Decrement Tables" 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.
<S> <C>
Last Scheduled Distribution Date..... The "Last Scheduled Distribution Date" for distributions on the
Certificates, other than the Class A-II Certificates, is May 25, 2027 and
for the Class A-II Certificates is May 25, 2012. Each such Last Scheduled
Distribution Date is the Distribution Date in the month immediately
following the latest scheduled maturity date of any Mortgage Loan in the
related Mortgage Loan Group. Since the rate of payment (including
prepayments) of principal on the Mortgage Loans can be expected to exceed
the scheduled rate of payments, and could exceed the scheduled rate by a
substantial amount, the disposition of the last remaining Mortgage Loan in
a Mortgage Loan Group may be earlier, and could be substantially earlier,
than the Last Scheduled Distribution Date for the related Classes of
Certificates.
Advances............................. The Master Servicer is obligated to make cash advances ("Advances") with
respect to delinquent scheduled payments of principal and interest on the
Mortgage Loans to the extent described herein. The Trustee will be
obligated to make any such Advance if the Master Servicer fails in its
obligation to do so, to the extent provided in the Pooling Agreement.
Any Advance made by the Master 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 from funds on deposit
in the Certificate Account before distributions are made to holders of
Certificates.
See "Servicing of Mortgage Loans -- Advances" herein.
Optional Termination................. On any Distribution Date on which the Pool Principal Balance is less than
10% of the Cut-off Date Pool Principal Balance, the Master Servicer will
have the option to purchase, in whole, the Mortgage Loans and REO
Property, if any, remaining in the Trust. See "Description of the
Certificates -- Termination; Optional Termination" herein. IF THE MASTER
SERVICER EXERCISES SUCH OPTION, THE CERTIFICATES OUTSTANDING AT THE TIME
OF SUCH PURCHASE WILL BE RETIRED EARLIER THAN WOULD OTHERWISE BE THE CASE.
SEE "PREPAYMENT AND YIELD CONSIDERATIONS" HEREIN.
</TABLE>
S-7
<PAGE>
<TABLE>
<S> <C>
Federal Income
Tax Consequences................... For federal income tax purposes, the Trust will be treated as two "real
estate mortgage investment conduits" (the "Master REMIC" and the
"Subsidiary REMIC," and each, a "REMIC"). The Regular Certificates will
constitute "regular interests" in a REMIC and will be treated as debt
instruments of the Trust for federal income tax purposes with payment
terms equivalent to the terms of such Certificates. The Class R-1
Certificates and the Class R-2 Certificates will constitute the sole class
of "residual interest" in the Subsidiary REMIC and the Master REMIC,
respectively.
Holders of the Regular Certificates will be required to include in income
interest on such Certificates in accordance with the accrual method of
accounting. The Notional Amount Certificates and the Principal Only
Certificates will, and the other Classes of Regular 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 "Federal Income Tax Consequences"
herein and 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.
Subject to the considerations and conditions described under "ERISA
Considerations" herein, it is expected that the Senior Certificates (other
than the Residual Certificates) may be purchased by a Plan. The Residual
and the Subordinate Certificates may not be transferred except upon
satisfaction of certain conditions. See "ERISA Considerations" herein and
in the Prospectus.
Legal Investment..................... The Senior Certificates and the Class B-1 Certificates will constitute
"mortgage related securities" for purposes of the Secondary Mortgage
Market Enhancement Act of 1984 ("SMMEA"), so long as they are rated in one
of the two highest rating categories by at least one nationally recognized
statistical rating organization, and as such, will be legal investments
for certain entities to the extent provided in SMMEA.
It is anticipated that the Class B-2 and Class B-3 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.
Institutions whose investment activities are subject to review by federal
or state regulatory authorities should consult with their counsel or the
applicable authorities to determine whether an investment in the Offered
Certificates complies with applicable guidelines, policy statements or
restrictions. See "Legal Investment" in the Prospectus.
</TABLE>
S-8
<PAGE>
<TABLE>
<S> <C>
Certificate Rating................... It is a condition to their issuance that each Class of Offered
Certificates receives the rating(s) set forth below from Standard & Poor's
("S&P") and Fitch Investors Service, L.P. ("Fitch").
<CAPTION>
CLASS S&P FITCH
<S> <C> <C>
A (other than Class A-I-8).... AAA AAA
A-I-8......................... AAAr AAA
PO............................ AAAr AAA
X............................. AAAr AAA
R-1........................... AAA AAA
R-2........................... AAA AAA
B-1........................... -- AA
B-2........................... -- A
B-3........................... -- BBB
</TABLE>
<TABLE>
<S> <C>
S&P and Fitch are sometimes referred to herein as the "Rating Agencies".
The ratings of the Offered Certificates of any Class should be evaluated
independently from similar ratings on other types of securities. A rating
is not a recommendation to buy, sell or hold securities and may be subject
to revision or withdrawal at any time by the Rating Agencies. See
"Ratings" herein.
</TABLE>
S-9
<PAGE>
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 in the related Mortgage Loan Group. 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
(each, a "Mortgagor"), 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 Trust.
Mortgagors may prepay any Mortgage Loan at any time without penalty. Except in
limited circumstances described herein, principal distributions on the Class A-I
Certificates and the Residual Certificates relate to principal payments on the
Group I Mortgage Loans and principal distributions on the Class A-II
Certificates relate to principal payments on the Group II Mortgage Loans.
Principal distributions on the Class PO and Subordinate Certificates relate to
principal payments on both the Group I Mortgage Loans and Group II Mortgage
Loans.
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 occurs, 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 Notional
Amount Certificates will be highly sensitive to the rate and timing of
prepayments on the related Mortgage Loans. A rapid rate of principal prepayments
on such Mortgage Loans may have a material negative effect on the yield of the
Notional Amount 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 -- Yield on
Class A-I-8 Certificates", " -- Yield on Class X Certificates" and " -- Yield on
Class PO Certificates" herein.
RISKS OF HOLDING SUBORDINATE CERTIFICATES
The rights of the holders of the Subordinate Certificates to receive
distributions with respect to the Mortgage Loans will be subordinated to such
rights of the holders of the Senior Certificates and the rights of the holders
of each Class of Subordinate Certificates (other than the Class B-1
Certificates) to receive such distributions with respect to the Mortgage Loans
will be subordinated to such rights of the Class or Classes of Subordinate
Certificates with lower numerical Class designations, in each case only to the
extent described herein. 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 Subordinate Certificates. Because of the
priority of distributions, shortfalls resulting from delinquencies not so
advanced will be borne first by the Subordinate Certificates, in reverse order
of their numerical Class designations, and then by the related Senior
Certificates. If, as a result of such shortfalls, the aggregate of the Class
Certificate Balances of all Classes of Certificates exceeds the
S-10
<PAGE>
Pool Principal Balance, the Class of Subordinate Certificates then outstanding
with the highest numerical Class designation will be reduced by the amount of
such excess.
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. As a result of such reductions, less interest will accrue on such
Classes of Subordinate Certificates than otherwise would be the case. The yield
to maturity of the Subordinate Certificates will also be affected by
disproportionate allocations of principal prepayments to the Senior
Certificates, Net Interest Shortfalls, other cash shortfalls in Available Funds
and distributions of funds to Class PO Certificateholders otherwise available
for distribution on the Subordinate Certificates to the extent of reimbursement
for Class PO Deferred Amounts. See "Description of the
Certificates -- Allocation of Losses" herein. In addition, in certain
circumstances described in paragraph (D) herein under "Description of the
Certificates -- Distributions -- Allocation of Available Funds," Principal
Prepayments otherwise distributable to the Subordinate Certificates will in lieu
thereof be distributed to certain Classes of Senior Certificates.
If on any Distribution Date the Applicable Credit Support Percentage for
any Class of Subordinate Certificates is less than its Original Applicable
Credit Support Percentage, all partial principal prepayments, principal
prepayments in full and certain other unscheduled payments of principal as
described herein available for distribution on such Subordinate Certificates
will be allocated solely to all other Classes of Subordinate Certificates with
lower numerical Class designations, thereby accelerating the amortization
thereof relative to that of the Restricted Classes and reducing the weighted
average lives of such Classes of Subordinate Certificates receiving
distributions. Accelerating the amortization of the Classes of Subordinate
Certificates with lower numerical Class designations relative to the other
Classes of Subordinate Certificates is intended to preserve the availability of
the subordination provided by such other Classes.
LIMITED SOURCE OF PAYMENTS -- NO RECOURSE TO SPONSOR, SELLER, MASTER SERVICER OR
TRUSTEE
The Mortgage Loans are to be the sole source of payments on the
Certificates. The Certificates do not represent an interest in or obligation of
the Sponsor, the Seller, the Master Servicer, the Trustee or any of their
affiliates, except for the limited obligations of the Seller with respect to
certain breaches of its representations and warranties and of the Master
Servicer with respect to its servicing obligations. Neither the Certificates nor
the Mortgage Loans will be guaranteed by or insured by any governmental agency
or instrumentality, the Sponsor, 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 Sponsor, the
Seller, the Master Servicer, the Trustee or any of their affiliates.
LIMITED LIQUIDITY
Each Underwriter intends to make a secondary market in the Underwritten
Certificates being purchased by it, but no Underwriter has an obligation to do
so. 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 provide Certificateholders with a sufficient level of
liquidity of investment or that it will continue for the life of the
Certificates.
GEOGRAPHIC CONCENTRATION
Approximately 66.58% of the Mortgage Loans (by Cut-off Date Pool Principal
Balance) are secured by Mortgaged Properties located in the State of California.
Property values of residential real estate in California have declined in recent
years. If the California residential real estate market should experience an
overall decline
S-11
<PAGE>
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.
BALLOON LOANS
Approximately 63.01% of the Group II Mortgage Loans (by aggregate Scheduled
Principal Balance of the Group II Mortgage Loans as of the Cut-off Date) are
Balloon Loans. With respect to the Balloon Loans, general credit risk may be
greater to holders of the related Classes of Certificates than to holders of
instruments representing interests in level payment fully amortizing first
mortgage loans. The ability of a borrower to make a balloon payment may depend
on the ability of the borrower to obtain refinancing of the balance due on a
Balloon Loan at maturity. An increase in interest rates over the Mortgage Rate
applicable at the time a Balloon Loan was originated may have an adverse effect
on the borrower's ability to obtain refinancing or to pay the required monthly
payment.
CONSEQUENCES OF OWNING BOOK-ENTRY CERTIFICATES
Since transactions in the Book-Entry Certificates generally can be effected
only through DTC and Financial Intermediaries, 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 physical certificates 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. 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 more than 5% of the Cut-off Date Pool Principal Balance of the
Mortgage Pool deviate from the characteristics of the Mortgage Loans described
herein.
As of the Cut-off Date, the aggregate of the Scheduled Principal Balances
of the Mortgage Loans is approximately $231,821,952 (the "Cut-off Date Pool
Principal Balance"). The Mortgage Loans are divided into Mortgage Loan Group I
and Mortgage Loan Group II, with aggregate Scheduled Principal Balances as of
the Cut-off Date of $196,839,802 and $34,982,150, respectively. The Group I
Mortgage Loans consist of 1,175 Mortgage Loans having original terms to stated
maturity (based on the date of origination or any later modification) of greater
than 15 years but not more than 30 years. The Group II Mortgage Loans consist of
210 Mortgage Loans having original terms to scheduled maturity (based on the
date of origination or any later modification) of up to 15 years, including 109
Mortgage Loans having aggregate Scheduled Principal Balances as of the Cut-off
Date of $22,041,160 having a 30-year amortization schedule with a balloon
payment at the end of 15 years (the "Balloon Loans"). 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 included in the Mortgage Pool
were originated or acquired by the Seller in the normal course of its mortgage
banking business substantially in accordance with the underwriting criteria
specified herein. 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 Mortgage Loans may be prepaid at any time without penalty.
S-12
<PAGE>
Each Mortgage Loan accrues interest at a fixed-rate (the "Mortgage Rate")
specified in the related Mortgage Note.
The latest date on which any Mortgage Loan matures is April 1, 2027. The
earliest stated maturity date of any Mortgage Loan is November 1, 2011.
One of the Mortgage Loans is assumable. None of the Mortgage Loans is 30 or
more days delinquent in payment as of the Closing Date.
Three of the Mortgage Loans are subject to a buydown agreement.
No Mortgage Loan will have a Loan-to-Value Ratio at origination of more
than 95.00%. As of the Cut-off Date, the weighted average of the Loan-to-Value
Ratios at origination of the Mortgage Loans was approximately 74.07%. Each
Mortgage Loan with a Loan-to-Value Ratio at origination of greater than 80% is
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 provides
coverage in an amount equal at least to the excess of the original principal
balance of the related Mortgage Loan plus accrued interest thereon and related
foreclosure expenses over 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, the numerator of which is the principal
balance of the related Mortgage Loan at the date of determination and the
denominator of which is the lesser of the selling price of the related Mortgaged
Property and its appraised value determined in an appraisal at origination, or
in the case of refinancings, the value set forth in an appraisal at the time of
such refinancing. 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.
Approximately 66.58% (by Cut-off Date Pool Principal Balance) will be
secured by Mortgaged Properties located in California. Except as indicated in
the preceding sentence no more than approximately 7.82% (by Cut-off Date Pool
Principal Balance) of the Mortgage Loans will be secured by Mortgaged Properties
located in any one state.
MORTGAGE LOAN GROUP I STATISTICS
The following information sets forth in tabular format certain information,
as of the Cut-off Date, as to the Group I Mortgage Loans. Other than with
respect to rates of interest, percentages (approximate) are stated by aggregate
Scheduled Principal Balance of the Mortgage Loans as of the Cut-off Date and
have been rounded in order to total 100%.
YEARS OF FIRST PAYMENT OF THE GROUP I MORTGAGE LOANS(1)
<TABLE>
<CAPTION>
AGGREGATE PRINCIPAL
NUMBER OF BALANCE % OF
MORTGAGE OUTSTANDING AS OF MORTGAGE
YEAR OF FIRST PAYMENT LOANS CUT-OFF DATE LOANS
<S> <C> <C> <C>
1994.................................................................. 1 $ 138,797 0.07%
1997.................................................................. 1,174 196,701,005 99.93
Total............................................................... 1,175 $ 196,839,802 100.00%
</TABLE>
(1) As of the Cut-off Date, the weighted average seasoning of the Group I
Mortgage Loans is approximately 1 month.
S-13
<PAGE>
TYPES OF MORTGAGED PROPERTIES SECURING THE GROUP I MORTGAGE LOANS
<TABLE>
<CAPTION>
AGGREGATE PRINCIPAL
NUMBER OF BALANCE % OF
MORTGAGE OUTSTANDING AS OF MORTGAGE
PROPERTY TYPE LOANS CUT-OFF DATE LOANS
<S> <C> <C> <C>
Single-Family......................................................... 842 $ 142,832,425 72.57%
Two- to Four-Family................................................... 122 17,519,118 8.90
Planned Unit Development.............................................. 128 26,818,628 13.62
Condominium........................................................... 83 9,669,631 4.91
Total............................................................... 1,175 $ 196,839,802 100.00%
</TABLE>
OCCUPANCY OF MORTGAGED PROPERTIES SECURING THE GROUP I MORTGAGE LOANS(1)
<TABLE>
<CAPTION>
AGGREGATE PRINCIPAL
NUMBER OF BALANCE % OF
MORTGAGE OUTSTANDING AS OF MORTGAGE
OCCUPANCY STATUS LOANS CUT-OFF DATE LOANS
<S> <C> <C> <C>
Primary Residence..................................................... 825 $ 158,753,955 80.65%
Second Home........................................................... 32 6,036,863 3.07
Investor Property..................................................... 318 32,048,984 16.28
Total............................................................... 1,175 $ 196,839,802 100.00%
</TABLE>
(1) Based on representations of the Mortgagor at the time of origination of the
related Mortgage Loan.
GEOGRAPHICAL DISTRIBUTION OF THE MORTGAGED PROPERTIES SECURING THE GROUP I
MORTGAGE LOANS(1)
<TABLE>
<CAPTION>
AGGREGATE PRINCIPAL
NUMBER OF BALANCE % OF
MORTGAGE OUTSTANDING AS OF MORTGAGE
STATE LOANS CUT-OFF DATE LOANS
<S> <C> <C> <C>
Arizona............................................................... 63 $ 7,258,491 3.69%
California............................................................ 694 134,895,221 68.52
Colorado.............................................................. 47 5,919,308 3.01
Florida............................................................... 4 594,135 0.30
Georgia............................................................... 1 172,977 0.09
Idaho................................................................. 31 3,071,344 1.56
Illinois.............................................................. 1 169,912 0.09
Massachusetts......................................................... 3 267,854 0.14
Minnesota............................................................. 3 343,165 0.17
Montana............................................................... 17 1,409,942 0.72
Nevada................................................................ 54 7,045,552 3.58
New York.............................................................. 15 1,889,944 0.96
Ohio.................................................................. 1 68,600 0.03
Oregon................................................................ 106 14,860,555 7.55
Rhode Island.......................................................... 2 110,411 0.06
Texas................................................................. 3 716,078 0.36
Utah.................................................................. 33 4,244,811 2.16
Washington............................................................ 96 13,742,702 6.98
Wisconsin............................................................. 1 58,800 0.03
Total............................................................... 1,175 $ 196,839,802 100.00%
</TABLE>
(1) As of the Cut-off Date, no more than approximately 1.15% of the Group I
Mortgage Loans (by aggregate principal balance of the Group I Mortgage Loans
as of the Cut-off Date) are secured by properties located in any one zip
code.
S-14
<PAGE>
LOAN PURPOSES OF THE GROUP I MORTGAGE LOANS
<TABLE>
<CAPTION>
AGGREGATE PRINCIPAL
NUMBER OF BALANCE % OF
MORTGAGE OUTSTANDING AS OF MORTGAGE
LOAN PURPOSE LOANS CUT-OFF DATE LOANS
<S> <C> <C> <C>
Purchase.............................................................. 634 $ 103,931,350 52.80%
Rate and Term Refinance............................................... 217 39,672,749 20.15
Cash-Out Refinance.................................................... 324 53,235,703 27.05
Total............................................................... 1,175 $ 196,839,802 100.00%
</TABLE>
DISTRIBUTION OF GROUP I MORTGAGE LOAN ORIGINAL PRINCIPAL BALANCES(1)
<TABLE>
<CAPTION>
AGGREGATE PRINCIPAL
NUMBER OF BALANCE % OF
MORTGAGE OUTSTANDING AS OF MORTGAGE
RANGE OF ORIGINAL MORTGAGE LOAN PRINCIPAL BALANCES LOANS CUT-OFF DATE LOANS
<S> <C> <C> <C>
$50,000 or less....................................................... 69 $ 2,702,548 1.37%
$50,001-$100,000...................................................... 314 24,464,352 12.43
$100,001-$150,000..................................................... 273 33,610,875 17.08
$150,001-$200,000..................................................... 173 30,204,438 15.34
$200,001-$250,000..................................................... 127 28,745,506 14.60
$250,001-$300,000..................................................... 91 24,556,409 12.48
$300,001-$350,000..................................................... 52 16,968,660 8.62
$350,001-$400,000..................................................... 25 9,261,927 4.71
$400,001-$450,000..................................................... 13 5,490,550 2.79
$450,001-$500,000..................................................... 11 5,244,390 2.66
$500,001-$550,000..................................................... 11 5,844,037 2.97
$550,001-$600,000..................................................... 9 5,233,084 2.66
$600,001-$650,000..................................................... 6 3,820,026 1.94
greater than $650,000................................................. 1 693,000 0.35
Total............................................................... 1,175 $ 196,839,802 100.00%
</TABLE>
(1) As of the Cut-off Date, the average outstanding principal balance of the
Group I Mortgage Loans is approximately $167,523.
S-15
<PAGE>
ORIGINAL LOAN-TO-VALUE RATIOS OF THE GROUP I MORTGAGE LOANS(1)
<TABLE>
<CAPTION>
AGGREGATE PRINCIPAL
NUMBER OF BALANCE % OF
MORTGAGE OUTSTANDING AS OF MORTGAGE
RANGE OF ORIGINAL LOAN-TO-VALUE RATIOS LOANS CUT-OFF DATE LOANS
<S> <C> <C> <C>
50.00% or less........................................................ 55 $ 7,534,370 3.83%
50.01%-55.00%......................................................... 20 2,706,124 1.37
55.01%-60.00%......................................................... 43 5,637,080 2.86
60.01%-65.00%......................................................... 56 7,067,711 3.59
65.01%-70.00%......................................................... 163 21,833,429 11.09
70.01%-75.00%......................................................... 275 54,402,091 27.64
75.01%-80.00%......................................................... 493 87,964,361 44.69
80.01%-85.00%......................................................... 4 727,205 0.37
85.01%-90.00%......................................................... 56 6,827,018 3.47
90.01%-95.00%......................................................... 10 2,140,413 1.09
Total............................................................... 1,175 $ 196,839,802 100.00%
</TABLE>
(1) As of the Cut-off Date, the weighted average Loan-to-Value Ratio at
origination of the Group I Mortgage Loans is approximately 74.44%.
MORTGAGE RATES OF THE GROUP I MORTGAGE LOANS(1)
<TABLE>
<CAPTION>
AGGREGATE PRINCIPAL
NUMBER OF BALANCE % OF
MORTGAGE OUTSTANDING AS OF MORTGAGE
MORTGAGE RATE (%) LOANS CUT-OFF DATE LOANS
<S> <C> <C> <C>
7.500................................................................ 1 $ 349,740 0.18%
7.625................................................................ 1 262,300 0.13
7.750................................................................ 7 1,854,480 0.94
7.875................................................................ 16 4,195,537 2.13
8.000................................................................ 23 5,549,196 2.82
8.125................................................................ 47 9,015,022 4.58
8.250................................................................ 77 14,878,851 7.56
8.375................................................................ 125 23,331,098 11.85
8.500................................................................ 183 33,410,251 16.97
8.625................................................................ 176 31,223,291 15.86
8.750................................................................ 166 27,431,070 13.94
8.875................................................................ 127 17,933,943 9.11
9.000................................................................ 85 9,664,777 4.91
9.125................................................................ 60 7,731,064 3.93
9.250................................................................ 48 5,770,624 2.93
9.375................................................................ 20 2,791,604 1.42
9.500................................................................ 8 898,880 0.46
9.625................................................................ 4 433,322 0.22
10.250................................................................ 1 114,752 0.06
Total.......................................................... 1,175 $ 196,839,802 100.00%
</TABLE>
(1) As of the Cut-off Date, the weighted average Mortgage Rate of the Group I
Mortgage Loans is approximately 8.592% per annum.
S-16
<PAGE>
ORIGINAL TERMS OF THE GROUP I MORTGAGE LOANS(1)
<TABLE>
<CAPTION>
AGGREGATE PRINCIPAL
NUMBER OF BALANCE % OF
MORTGAGE OUTSTANDING AS OF MORTGAGE
ORIGINAL TERM LOANS CUT-OFF DATE LOANS
<S> <C> <C> <C>
360 Month Fully Amortizing............................................ 1,175 $ 196,839,802 100.00%
Total............................................................... 1,175 $ 196,839,802 100.00%
</TABLE>
(1) As of the Cut-off Date, the weighted average stated remaining term of the
Group I Mortgage Loans is approximately 359 months.
DOCUMENTATION TYPES OF THE GROUP I MORTGAGE LOANS
<TABLE>
<CAPTION>
AGGREGATE PRINCIPAL
NUMBER OF BALANCE % OF
MORTGAGE OUTSTANDING AS OF MORTGAGE
DOCUMENTATION TYPE LOANS CUT-OFF DATE LOANS
<S> <C> <C> <C>
Full.................................................................. 414 $ 65,508,641 33.28%
Alternative........................................................... 1 66,462 0.03
Limited............................................................... 567 101,323,717 51.48
Reduced/No Ratio...................................................... 149 23,928,531 12.16
No Income/No Asset.................................................... 44 6,012,451 3.05
Total............................................................... 1,175 $ 196,839,802 100.00%
</TABLE>
DISTRIBUTION OF CREDIT SCORES FOR THE GROUP I MORTGAGE LOANS(1)
<TABLE>
<CAPTION>
AGGREGATE PRINCIPAL
NUMBER OF BALANCE % OF
MORTGAGE OUTSTANDING AS OF MORTGAGE
RANGE OF CREDIT SCORES LOANS CUT-OFF DATE LOANS
<S> <C> <C> <C>
Unknown............................................................... 6 $ 890,974 0.45%
501-549............................................................... 1 247,854 0.13
550-599............................................................... 1 81,210 0.04
600-619............................................................... 8 1,536,773 0.78
620-639............................................................... 41 6,326,714 3.21
640-659............................................................... 106 19,823,272 10.07
660-679............................................................... 143 24,564,750 12.48
680-699............................................................... 174 29,403,927 14.94
700-719............................................................... 181 30,677,357 15.58
720-739............................................................... 166 26,412,610 13.42
740-759............................................................... 149 25,281,393 12.84
760-779............................................................... 124 20,683,710 10.51
780-799............................................................... 71 10,247,236 5.21
800 or greater........................................................ 4 662,022 0.34
Total............................................................... 1,175 $ 196,839,802 100.00%
</TABLE>
(1) As of the Cut-off Date, the weighted average Credit Score of the Group I
Mortgage Loans is approximately 711 for Mortgage Loans with Credit Scores.
For a description of Credit Scores see "Servicing of Mortgage
Loans -- Underwriting Standards."
MORTGAGE LOAN GROUP II STATISTICS
The following information sets forth in tabular format certain information,
as of the Cut-off Date, as to the Group II Mortgage Loans. Other than with
respect to rates of interest, percentages (approximate) are stated by
S-17
<PAGE>
aggregate Scheduled Principal Balance of the Group II Mortgage Loans as of the
Cut-off Date and have been rounded in order to total 100%.
YEARS OF FIRST PAYMENT OF THE GROUP II MORTGAGE LOANS(1)
<TABLE>
<CAPTION>
AGGREGATE PRINCIPAL
NUMBER OF BALANCE % OF
MORTGAGE OUTSTANDING AS OF MORTGAGE
YEAR OF FIRST PAYMENT LOANS CUT-OFF DATE LOANS
<S> <C> <C> <C>
1996.................................................................. 4 $ 281,967 0.81%
1997.................................................................. 206 34,700,183 99.19
Total............................................................... 210 $34,982,150 100.00%
</TABLE>
(1) As of the Cut-off Date, the weighted average seasoning of the Group II
Mortgage Loans is approximately 1 month.
TYPES OF MORTGAGED PROPERTIES SECURING GROUP II MORTGAGE LOANS
<TABLE>
<CAPTION>
AGGREGATE PRINCIPAL
NUMBER OF BALANCE % OF
MORTGAGE OUTSTANDING AS OF MORTGAGE
PROPERTY TYPE LOANS CUT-OFF DATE LOANS
<S> <C> <C> <C>
Single-Family......................................................... 158 $27,561,606 78.79%
Two- to Four-Family................................................... 24 2,895,563 8.28
Planned Unit Development.............................................. 15 3,100,615 8.86
Condominium........................................................... 13 1,424,366 4.07
Total............................................................... 210 $34,982,150 100.00%
</TABLE>
OCCUPANCY OF MORTGAGED PROPERTIES SECURING GROUP II MORTGAGE LOANS(1)
<TABLE>
<CAPTION>
AGGREGATE PRINCIPAL
NUMBER OF BALANCE % OF
MORTGAGE OUTSTANDING AS OF MORTGAGE
OCCUPANCY STATUS LOANS CUT-OFF DATE LOANS
<S> <C> <C> <C>
Primary Residence..................................................... 134 $26,940,693 77.01%
Second Home........................................................... 11 1,213,527 3.47
Investor Property..................................................... 65 6,827,930 19.52
Total............................................................... 210 $34,982,150 100.00%
</TABLE>
(1) Based on representations of the Mortgagor at the time of origination of the
related Mortgage Loan.
S-18
<PAGE>
GEOGRAPHICAL DISTRIBUTION OF THE MORTGAGED PROPERTIES SECURING GROUP II MORTGAGE
LOANS(1)
<TABLE>
<CAPTION>
AGGREGATE PRINCIPAL
NUMBER OF BALANCE % OF
MORTGAGE OUTSTANDING AS OF MORTGAGE
STATE LOANS CUT-OFF DATE LOANS
<S> <C> <C> <C>
Arizona............................................................... 10 $ 1,157,047 3.31%
California............................................................ 104 19,452,202 55.60
Colorado.............................................................. 15 2,629,697 7.52
Connecticut........................................................... 1 81,343 0.23
Idaho................................................................. 2 178,170 0.51
Minnesota............................................................. 1 87,490 0.25
Montana............................................................... 5 1,506,024 4.31
Nevada................................................................ 6 773,083 2.21
New Hampshire......................................................... 1 279,226 0.80
New York.............................................................. 2 232,663 0.67
Oregon................................................................ 23 3,274,649 9.36
Texas................................................................. 1 98,182 0.28
Utah.................................................................. 17 2,411,161 6.89
Washington............................................................ 22 2,821,213 8.06
Total............................................................... 210 $34,982,150 100.00%
</TABLE>
(1) As of the Cut-off Date, no more than approximately 3.26% of the Group II
Mortgage Loans (by aggregate principal balance of the Group II Mortgage
Loans as of the Cut-off Date) are secured by properties located in any one
zip code.
LOAN PURPOSES OF THE GROUP II MORTGAGE LOANS
<TABLE>
<CAPTION>
AGGREGATE PRINCIPAL
NUMBER OF BALANCE % OF
MORTGAGE OUTSTANDING AS OF MORTGAGE
LOAN PURPOSE LOANS CUT-OFF DATE LOANS
<S> <C> <C> <C>
Purchase.............................................................. 85 $13,586,462 38.83%
Rate and Term Refinance............................................... 43 7,900,752 22.59
Cash-Out Refinance.................................................... 82 13,494,936 38.58
Total............................................................... 210 $34,982,150 100.00%
</TABLE>
S-19
<PAGE>
DISTRIBUTION OF GROUP II MORTGAGE LOAN ORIGINAL PRINCIPAL BALANCES(1)
<TABLE>
<CAPTION>
AGGREGATE PRINCIPAL
NUMBER OF BALANCE % OF
MORTGAGE OUTSTANDING AS OF MORTGAGE
RANGE OF ORIGINAL MORTGAGE LOAN PRINCIPAL BALANCES LOANS CUT-OFF DATE LOANS
<S> <C> <C> <C>
$50,000 or less....................................................... 20 $ 773,482 2.21%
$50,001-$100,000...................................................... 61 4,855,865 13.88
$100,001-$150,000..................................................... 45 5,805,856 16.60
$150,001-$200,000..................................................... 29 5,003,494 14.30
$200,001-$250,000..................................................... 20 4,603,061 13.16
$250,001-$300,000..................................................... 13 3,659,112 10.46
$300,001-$350,000..................................................... 7 2,283,893 6.53
$350,001-$400,000..................................................... 4 1,552,500 4.44
$400,001-$450,000..................................................... 3 1,239,459 3.54
$450,001-$500,000..................................................... 3 1,451,074 4.15
$500,001-$550,000..................................................... 1 543,226 1.55
$550,001-$600,000..................................................... 1 562,500 1.61
$600,001-$650,000..................................................... 1 650,000 1.86
$ greater than $800,001............................................... 2 1,998,628 5.71
Total............................................................... 210 $34,982,150 100.00%
</TABLE>
(1) As of the Cut-off Date, the average outstanding principal balance of the
Group II Mortgage Loans is approximately $166,582.
ORIGINAL LOAN-TO-VALUE RATIOS OF THE GROUP II MORTGAGE LOANS(1)
<TABLE>
<CAPTION>
AGGREGATE PRINCIPAL
NUMBER OF BALANCE % OF
MORTGAGE OUTSTANDING AS OF MORTGAGE
RANGE OF ORIGINAL LOAN-TO-VALUE RATIOS LOANS CUT-OFF DATE LOANS
<S> <C> <C> <C>
50.00% or less........................................................ 24 $ 1,698,815 4.86%
50.01%-55.00%......................................................... 9 1,092,042 3.12
55.01%-60.00%......................................................... 11 1,943,942 5.56
60.01%-65.00%......................................................... 15 2,389,238 6.83
65.01%-70.00%......................................................... 25 4,096,189 11.71
70.01%-75.00%......................................................... 40 8,642,222 24.70
75.01%-80.00%......................................................... 79 14,206,198 40.61
85.01%-90.00%......................................................... 6 663,654 1.90
90.01%-95.00%......................................................... 1 249,850 0.71
Total............................................................... 210 $34,982,150 100.00%
</TABLE>
(1) As of the Cut-off Date, the weighted average Loan-to-Value Ratio at
origination of the Group II Mortgage Loans is approximately 71.96%.
S-20
<PAGE>
MORTGAGE RATES OF THE GROUP II MORTGAGE LOANS(1)
<TABLE>
<CAPTION>
AGGREGATE PRINCIPAL
NUMBER OF BALANCE % OF
MORTGAGE OUTSTANDING AS OF MORTGAGE
MORTGAGE RATE (%) LOANS CUT-OFF DATE LOANS
<S> <C> <C> <C>
7.500................................................................ 2 $ 294,449 0.84%
7.625................................................................ 1 134,597 0.38
7.750................................................................ 6 929,016 2.66
7.875................................................................ 12 1,921,071 5.49
8.000................................................................ 20 3,790,975 10.84
8.125................................................................ 15 2,525,780 7.22
8.250................................................................ 27 5,262,082 15.04
8.375................................................................ 40 7,329,726 20.96
8.500................................................................ 29 4,855,072 13.88
8.625................................................................ 19 2,669,824 7.63
8.750................................................................ 13 2,201,081 6.29
8.875................................................................ 6 896,852 2.56
9.000................................................................ 5 509,960 1.46
9.125................................................................ 7 736,512 2.11
9.250................................................................ 4 530,802 1.52
9.375................................................................ 2 227,611 0.65
9.500................................................................ 1 81,343 0.23
9.750................................................................ 1 85,397 0.24
Total 210 $34,982,150 100.00%
</TABLE>
(1) As of the Cut-off Date, the weighted average Mortgage Rate of the Group II
Mortgage Loans is approximately 8.367% per annum.
ORIGINAL TERMS OF THE GROUP II MORTGAGE LOANS(1)
<TABLE>
<CAPTION>
AGGREGATE PRINCIPAL
NUMBER OF BALANCE % OF
MORTGAGE OUTSTANDING AS OF MORTGAGE
ORIGINAL TERM LOANS CUT-OFF DATE LOANS
<S> <C> <C> <C>
180 Month Balloon(2).................................................. 109 $22,041,159 63.01%
180 Month Fully Amortizing............................................ 101 12,940,991 36.99
Total............................................................... 210 $34,982,150 100.00%
</TABLE>
(1) As of the Cut-off Date, the weighted average stated remaining term of the
Group II Mortgage Loans is approximately 179 months.
(2) Based on a 30-year amortization schedule.
DOCUMENTATION TYPES OF THE GROUP II MORTGAGE LOANS
<TABLE>
<CAPTION>
AGGREGATE PRINCIPAL
NUMBER OF BALANCE % OF
MORTGAGE OUTSTANDING AS OF MORTGAGE
DOCUMENTATION TYPE LOANS CUT-OFF DATE LOANS
<S> <C> <C> <C>
Full.................................................................. 79 $12,674,179 36.23%
Alternative........................................................... 1 47,015 0.13
Limited............................................................... 95 17,655,306 50.48
Reduced/No Ratio...................................................... 32 4,348,658 12.43
No Income/No Asset.................................................... 3 256,992 0.73
Total............................................................... 210 $34,982,150 100.00%
</TABLE>
S-21
<PAGE>
DISTRIBUTION OF CREDIT SCORES FOR THE GROUP II MORTGAGE LOANS(1)
<TABLE>
<CAPTION>
AGGREGATE PRINCIPAL
NUMBER OF BALANCE % OF
MORTGAGE OUTSTANDING AS OF MORTGAGE
RANGE OF CREDIT SCORES LOANS CUT-OFF DATE LOANS
<S> <C> <C> <C>
Unknown............................................................... 2 $ 195,131 0.56%
550-599............................................................... 2 145,397 0.42
600-619............................................................... 2 231,956 0.66
620-639............................................................... 13 2,670,718 7.63
640-659............................................................... 18 2,647,189 7.57
660-679............................................................... 23 3,321,375 9.49
680-699............................................................... 30 4,858,200 13.89
700-719............................................................... 28 5,611,610 16.03
720-739............................................................... 24 4,997,701 14.29
740-759............................................................... 32 4,591,083 13.12
760-779............................................................... 20 2,699,221 7.72
780-799............................................................... 14 2,394,569 6.85
800 or greater........................................................ 2 618,000 1.77
Total............................................................... 210 $34,982,150 100.00%
</TABLE>
(1) As of the Cut-off Date, the weighted average Credit Score of the Group II
Mortgage Loans is approximately 711 for Mortgage Loans with Credit Scores.
For a description of Credit Scores see "Servicing of Mortgage
Loans -- Underwriting Standards."
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 Trust, 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 or in blank, 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 or the applicable jurisdiction retains the originals
of such documents, 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 not later
than 270 days after the Closing Date.
The Trustee will review each item of the Mortgage File within 45 days of
the Closing Date (and will review each document permitted to be delivered to the
Trustee after the Closing Date, if received by the Trustee after the initial
45-day period, promptly after its delivery to the Trustee). If, as a result of
its review, the Trustee determines that any document is missing, does not appear
regular on its face, or appears to be unrelated to the Mortgage Loans identified
in the Mortgage Loan Schedule (a "Material Defect"), the Trustee shall notify
the Seller of
S-22
<PAGE>
such Material Defect. The Seller shall correct or cure any such Material Defect
within 60 days from the date of the notice from the Trustee of the Material
Defect and if the Seller does not correct or cure such Material Defect within
such period and such defect materially and adversely affects the interests of
the Certificateholders in the related Mortgage Loan, the Seller will, within 90
days of the date of notice, provide the Trustee with a substitute Mortgage Loan
(if within two years of the Closing Date) or purchase the related Mortgage Loan
at the applicable Repurchase Price; provided, however, that if such Material
Defect relates solely to the inability of the Sponsor to deliver or cause to
deliver the original Mortgage or intervening assignments, or a certified copy
because such documents have not been returned from the applicable recording
office, the Seller shall not be required to repurchase or substitute for such
Mortgage Loan if the Sponsor delivers or causes such documents to be delivered
promptly upon receipt thereof, but in no event later than 270 days after the
Closing Date.
The Trustee also will review the Mortgage Files within 180 days of the
Closing Date. If the Trustee discovers a Material Defect, the Trustee shall
notify the Seller of such Material Defect. The Seller shall correct or cure any
such Material Defect within 60 days from the date of notice from the Trustee of
the Material Defect and if the Seller does not correct or cure such Material
Defect within such period and such defect materially and adversely affects the
interests of the Certificateholders in the related Mortgage Loan, the Seller
will, within 90 days of the date of notice, provide the Trustee with a
substitute Mortgage Loan (if within two years of the Closing Date) or purchase
the related Mortgage Loan at the applicable Repurchase Price.
The "Repurchase Price" means, with respect to any Mortgage Loan required to
be repurchased, an amount equal to 100% of the unpaid principal balance of such
Mortgage Loan plus accrued and unpaid interest on such principal balance at the
related Mortgage Rate through and including the last day of the month of
repurchase less any portion of the Master Servicing Fee and unreimbursed
Advances made with respect thereto and payable to the purchaser of the Mortgage
Loan.
Rather than repurchase the Mortgage Loan as provided above, the Seller may
remove such Mortgage Loan (a "Deleted Mortgage Loan") from the Trust and
substitute in its place another mortgage loan (a "Replacement Mortgage Loan");
however, such substitution is permitted only within two years of the Closing
Date and may not be made unless an opinion of counsel is provided to the Trustee
to the effect that such substitution will not disqualify either REMIC or result
in a prohibited transaction tax under the Code. Any Replacement Mortgage Loan
generally will, on the date of substitution, among other characteristics set
forth in the Pooling Agreement, (i) have a principal balance, after deduction of
all scheduled payments due in the month of substitution, not in excess of, and
not more than 10% less than, the Scheduled Principal Balance of the Deleted
Mortgage Loan (the amount of any shortfall to be deposited by the Seller in the
Certificate Account and held for distribution to the Certificateholders on the
related Distribution Date (a "Substitution Adjustment Amount")), (ii) have a
Mortgage Rate not lower than, and not more than 1% per annum higher than, that
of the Deleted Mortgage Loan, (iii) have a Loan-to-Value Ratio not higher than
that of the Deleted Mortgage Loan, (iv) have a remaining term to maturity not
greater than (and not more than one year less than) that of the Deleted Mortgage
Loan, and (v) comply with all of the representations and warranties set forth in
the Pooling Agreement as of the date of substitution. This cure, repurchase or
substitution obligation constitutes the sole remedy available to
Certificateholders or the Trustee for omission of, or a Material Defect in, a
Mortgage Loan document.
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 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.
S-23
<PAGE>
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 Federal Housing Authority ("FHA") or
partially guaranteed by the Veterans Administration ("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 principal
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 refinance 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.
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<PAGE>
Headlands also examines a prospective borrower's credit report. Generally,
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. FICO scores generally range
from 350 to 850 and are available from the three major credit bureaus: TRW,
Equifax and Trans Union. Headlands attempts to obtain for each borrower a credit
score from each credit bureau. If three credit scores are obtained, Headlands
applies the middle score. If two scores are obtained, Headlands applies the
lower score. These scores estimate, on a relative basis, which loans are most
likely to default in the future. Lower scores imply higher default risk relative
to a higher score. FICO scores are empirically derived from historical credit
bureau data and represent a numerical weighing of a borrower's credit
characteristics over a two-year period. A FICO score is generated through the
statistical analysis of a number of credit-related characteristics or variables.
Common characteristics include number of credit lines (trade lines), payment
history, past delinquencies, severity of delinquencies, current levels of
indebtedness, types of credit and length of credit history. Attributes are the
specific values of each characteristic. A scorecard (the model) is created with
weights or points assigned to each attribute. An individual loan applicant's
credit score is derived by summing together the attribute weights for that
applicant.
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. Generally, 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
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acceptable to FNMA and FHLMC. As part of Headlands' pre-funding quality control
procedures, either field or desk appraisal reviews are obtained on 10% 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 Pooling Agreement.
As of March 31, 1997, Headlands' mortgage loan servicing portfolio
consisted of 29,152 one- to four-family residential mortgage loans with an
aggregate principal balance of $3,302 million. Headlands' primary source of
mortgage servicing rights is from mortgage loans originated through mortgage
brokers.
Headlands' Servicing Center was established in January 1994. As of March
31, 1997, it had a staff of 57 employees. Prior to January 1994, Headlands'
servicing portfolio was subserviced by a third party.
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 (including home equity 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, 1995 and 1996, and March 31, 1997, the total principal balance of
loans serviced by Headlands was (in millions) $4,149, $4,387 and $3,302,
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, MARCH 31,
1995 1996 1997
PERCENT OF PERCENT OF PERCENT OF
NUMBER SERVICING NUMBER SERVICING NUMBER SERVICING
OF LOANS PORTFOLIO OF LOANS PORTFOLIO OF LOANS PORTFOLIO
<S> <C> <C> <C> <C> <C> <C>
Total Portfolio*............................... 27,261 100% 34,363 100% 29,152 100%
Period of Delinquency:
30-59 days................................... 283 1.0% 466 1.4% 292 1.0%
60-89 days................................... 62 0.2% 43 0.1% 70 0.2%
90 days or more.............................. 47 0.2% 14 0.0% 16 0.1%
Total Delinquencies (excluding
Foreclosures)**.............................. 392 1.4% 523 1.5% 378 1.3%
Foreclosures Pending........................... 146 0.5% 197 0.6% 179 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.
** Percentages may not total properly due to rounding.
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
table. The statistics shown above represent the respective delinquency and
foreclosure experience only at the dates presented, whereas the aggregate
delinquency and foreclosure experience on the Mortgage Loans will
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depend on the results obtained over the life of the Trust. 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. 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 0.26% per annum of the Scheduled 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") and (b) fees payable to the Trustee in respect of its
activities as trustee under the Pooling Agreement. The Master Servicing Fee will
be 0.25% per annum of the Scheduled Principal Balance of each Mortgage Loan. The
Master Servicer is obligated to pay certain ongoing expenses associated with the
Trust and incurred by the Master Servicer, including, without limitation,
sub-servicing and other related compensation payable to a sub-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 certain other accounts. The "Net Mortgage Rate" of a
Mortgage Loan is the Mortgage Rate thereof minus the Expense Rate with respect
to such Mortgage Loan.
ADJUSTMENT TO MASTER SERVICING FEE IN CONNECTION WITH PREPAID MORTGAGE LOANS
Prepayment Interest Shortfalls (as defined herein) will result because (i)
Mortgagors are obligated to pay interest on prepayments in full only to the date
of prepayment by the Mortgagor and (ii) (a) partial prepayments are generally
not required to be accompanied by interest on the amount of such partial
prepayment and (b) partial prepayments applied prior to the Due Date in the
month of the Distribution Date will result in a reduction of the Scheduled
Principal Balance of the related Mortgage Loan without a corresponding reduction
of the Class Certificate Balance of any Certificate. Pursuant to the Pooling
Agreement, Prepayment Interest Shortfalls resulting from prepayments in full or
in part in any calendar month will be offset by the Master Servicer on the
Distribution Date in the following calendar month to the extent such Prepayment
Interest Shortfalls do not exceed the lesser of (i) the Master Servicing Fee in
connection with such Distribution Date and (ii) 1/12 of 0.125% of the aggregate
Scheduled Principal Balances of the Mortgage Loans for such Distribution Date
(the amount of the Master Servicing Fee used to offset Prepayment Interest
Shortfalls is referred to herein as "Compensating Interest Payments" and the
remaining amount of Prepayment Interest Shortfalls after applying Compensating
Interest Payments is referred to herein as "Net Prepayment Interest
Shortfalls"). Any Net Prepayment Interest Shortfalls for a month will reduce the
amount of interest available to be distributed to Certificateholders. See
"Description of the Certificates -- Interest" herein.
ADVANCES
If the scheduled payment on a Mortgage Loan which was due on the Due Date
in the month of a Distribution Date is delinquent other than as a result of
application of the Relief Act and such payment exceeds the amount deposited in
the Certificate Account as a Certificate Account Advance (as defined below) with
respect to such Mortgage Loan, the Master Servicer will deposit in the
Certificate Account not later than the fourth Business Day immediately preceding
the Distribution Date an amount equal to such deficiency net of the related
Master Servicing Fee except to the extent the Master Servicer determines any
such advance to be nonrecoverable from Liquidation Proceeds, Insurance Proceeds
or from future payments on the Mortgage Loan for which such
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advance is made. Subject to the foregoing, such advances will be made through
liquidation of the related Mortgaged Property. Any amount used as a Certificate
Account Advance shall be replaced by the Master Servicer by deposit in the
Certificate Account on or before any future date to the extent that funds in the
Certificate Account on such date are less than the amount required to be
transferred to the Certificate Account. If applicable, on the fifth Business Day
preceding each Distribution Date, the Master Servicer shall present an Officer's
Certificate to the Trustee (i) stating that the Master Servicer elects not to
make a Monthly Advance in a stated amount and (ii) detailing the reason it deems
the advance to be nonrecoverable.
As of any Determination Date, a "Certificate Account Advance" is the amount
on deposit in a Protected Account or another permitted account which is not
required to be transferred to the Certificate Account for distribution during
the calendar month in which such Determination Date occurs but which is used to
make a distribution to Certificateholders during such calendar month on account
of scheduled payments on the Mortgage Loans due on the Due Date for such month
not being paid on or before the Determination Date except insofar as such unpaid
amounts are the result of application of the Soldiers' and Sailors' Civil Relief
Act of 1940, as amended (the "Relief Act").
DESCRIPTION OF THE CERTIFICATES
GENERAL
The Certificates will be issued pursuant to the Pooling and Servicing
Agreement, dated as of April 1, 1997 (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 are 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 Offered Certificates. When
particular provisions or terms used in the Pooling Agreement are referred to,
the actual provisions (including definitions of terms) are hereby incorporated
by reference.
The Mortgage Pass-Through Certificates, Series 1997-2 (the "Certificates")
will consist of the Class A-I-1, Class A-I-2, Class A-I-3, Class A-I-4, Class
A-I-5, Class A-I-6, Class A-I-7, Class A-I-8, Class A-I-9, Class A-I-10,
(collectively, the "Class A-I Certificates"), Class A-II (the "Class A-II
Certificates" and together with the Class A-I Certificates, the "Class A
Certificates"), Class PO, Class X, Class R-1, Class R-2, Class B-1, Class B-2,
Class B-3, Class B-4, Class B-5 and Class B-6 Certificates. Only the Offered
Certificates are offered hereby.
The Certificates will evidence in the aggregate the entire beneficial
ownership interest in the Trust. The Trust will consist of (i) the Mortgage
Loans; (ii) such assets as from time to time are identified as deposited in
respect of the Mortgage Loans in the account (the "Protected Account")
established by the Master Servicer for the collection of payments on the
Mortgage Loans and in the Certificate Account and belonging to the Trust; (iii)
property acquired by foreclosure of such Mortgage Loans or by deed in lieu of
foreclosure; (iv) any applicable Primary Insurance Policies and standard hazard
insurance policies; and (v) all proceeds of the foregoing.
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 Certificates of
such Class as payments of principal, (ii) the amount of Realized Losses
(including Excess Losses) allocated to such Class and (iii) in the case of any
Class of Subordinate Certificates, any amounts allocated to such Class in
reduction of its Class Certificate Balance in respect of payments of Class PO
Deferred Amounts, as described below under " -- Allocation of Losses". In
addition, the Class Certificate Balance of the Class of Subordinate Certificates
then outstanding with the highest numerical Class designation will be reduced if
and to the extent that the aggregate of the Class Certificate Balances of all
Classes of Certificates, following all distributions and the allocation of
Realized Losses on a Distribution Date, exceeds the Pool Principal Balance as of
the Due Date occurring in the month of such Distribution Date.
The Book-Entry Certificates will be issuable in book-entry form only. The
Physical Certificates will be issued in fully registered certificated form. Each
of the Class R-1 and Class R-2 Certificates will be issued as a single
Certificate in a denomination of $100.
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<PAGE>
A "Business Day" is generally any day other than a Saturday, a Sunday or a
day on which the New York Stock Exchange is closed or on which banking
institutions in New York City or California are authorized or obligated by law
or executive order to be closed.
BOOK-ENTRY CERTIFICATES
The Offered Certificates (other than the Physical 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 or notional amount of each such Class of Book-Entry
Certificates which will be held by a nominee of The Depository Trust Company
("DTC," and 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 $25,000 initial
principal balance, or in the case of the Class A-I-8 and Class X Certificates,
$500,000 and $1,000,000 initial notional amounts, respectively, and in integral
multiples of $1 in excess thereof, except that one Book-Entry Certificate of
each such Class may be issued in any amount in excess of the minimum
denomination. 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.
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<PAGE>
None of the Sponsor, the Seller, 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 Trust 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, beneficial owners having not less than 51% of the aggregate voting
rights of 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
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.
PROTECTED ACCOUNT
The Master Servicer and each permitted sub-servicer will establish and
maintain an account (each, a "Protected Account") into which it will deposit
daily all collections of principal and interest on any Mortgage Loan, including
Principal Prepayments, Insurance Proceeds and Liquidation Proceeds. All
Protected Accounts shall be held in a depository institution, the accounts of
which are insured by the FDIC to the maximum extent permitted by law, segregated
on the books of such institution and held in trust. The amount at any time
credited to a Protected Account shall be fully insured by the FDIC to the
maximum extent permitted by law or, to the extent that such balance exceeds the
limits of such insurance, such excess must be transferred either to another
account or invested in Eligible Investments meeting the requirements of the
Rating Agencies or to the Certificate Account.
Prior to each Distribution Date, the Master Servicer shall withdraw or
shall cause to be withdrawn from the Protected Accounts and any other permitted
accounts and shall deposit or cause to be deposited in the Certificate Account
amounts representing the following collections and payments (other than with
respect to principal of or interest on the Mortgage Loans due on or before the
Cut-off Date):
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(i) Scheduled payments on the related Mortgage Loans received or
advanced by the Master Servicer which were due on the related Due Date, net
of servicing fees due the Master Servicer;
(ii) Full principal prepayments, Insurance Proceeds and any
Liquidation Proceeds received by the Master Servicer with respect to such
Mortgage Loans in the related Prepayment Period, with interest to the date
of prepayment or liquidation, net of servicing fees due the Master
Servicer; and
(iii) Partial prepayments of principal received by the Master Servicer
for such Mortgage Loans in the related Prepayment Period.
CERTIFICATE ACCOUNT
The Trustee shall establish and maintain in the name of the Trustee, for
the benefit of Certificateholders, an account (the "Certificate Account") as a
non-interest bearing trust account. The Trustee will deposit in the Certificate
Account, as received, the following amounts:
(i) Any amounts withdrawn from a Protected Account or other permitted
account;
(ii) Any Advance and Compensating Interest Payments;
(iii) Any Insurance Proceeds or Liquidation Proceeds received by the
Master Servicer which were not deposited in a Protected Account or other
permitted account;
(iv) The Repurchase Price with respect to any Mortgage Loans
repurchased, any Substitution Adjustment Amounts and all proceeds of any
Mortgage Loans or property acquired in connection with the optional
termination of the Trust;
(v) Any amounts required to be deposited with respect to losses on
Eligible Investments; and
(vi) Any other amounts received by the Master Servicer or the Trustee
and required to be deposited in the Certificate Account pursuant to the
Pooling Agreement.
All amounts deposited to the Certificate Account shall be held by the
Trustee in the name of the Trustee in trust for the benefit of the
Certificateholders in accordance with the terms and provisions of the Pooling
Agreement, subject to the right of the Master Servicer to require the Trustee to
make withdrawals therefrom as provided in the Pooling Agreement. The amount at
any time credited to the Certificate Account shall at the written direction of
the Master Servicer be invested, in the name of the Trustee, in such Eligible
Investments as the Master Servicer may direct. As provided in the Pooling
Agreement, all such Eligible Investments will mature before the next
Distribution Date and all investment earnings will be paid to the Master
Servicer, as additional servicing compensation. The amount of any loss on an
Eligible Investment will be remitted to the Certificate Account by the Master
Servicer.
On each Distribution Date, the Trustee shall make the following payments
from the funds in the Certificate Account:
(i) First, the Trustee's fees shall be paid to the Trustee; and
(ii) Second, the amount distributable to the Certificateholders shall
be paid, to the extent of the Available Funds in respect of such
Distribution Date, in accordance with the provisions set forth under
"Description of the Certificates -- Distributions."
To the extent provided in the Pooling Agreement, the Master Servicer is not
required to deposit in, and may cause the withdrawal from, the Protected Account
or the Certificate Account the amount of any servicing fees or advances which
the Master Servicer is entitled to be paid.
AVAILABLE FUNDS
Available Funds for any Distribution Date will be determined separately
with respect to each Mortgage Loan Group (the "Group I Available Funds" and the
"Group II Available Funds", respectively) and in each case will be equal to the
sum of the following amounts with respect to the related Mortgage Loans (i) all
scheduled installments of interest (net of related Expense Fees) and principal
due on the Due Date in the month in which such
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Distribution Date occurs and received prior to the related Determination Date,
together with any Advances in respect thereof, (ii) all proceeds of any primary
mortgage guaranty insurance policies and any other insurance policies with
respect to the Mortgage Loans, to the extent such proceeds are not applied to
the restoration of the related Mortgaged Property or released to the Mortgagor
in accordance with the Master Servicer's normal servicing procedures
(collectively, "Insurance Proceeds") and all other cash amounts received and
retained in connection with the liquidation of defaulted Mortgage Loans, by
foreclosure or otherwise ("Liquidation Proceeds") during the related Prepayment
Period (in each case, net of unreimbursed expenses incurred in connection with a
liquidation or foreclosure and unreimbursed Advances, if any), (iii) all partial
and full prepayments received during the related Prepayment Period and (iv) the
amounts received in respect of a Mortgage Loan that became required to be
repurchased or substituted during the month preceding such Distribution Date,
including any Substitution Adjustment Amounts, reduced by amounts in
reimbursement for Advances previously made and other amounts as to which the
Master Servicer or a sub-servicer is entitled to be reimbursed from the
Certificate Account pursuant to the Pooling Agreement. See "The Mortgage
Pool -- Assignment of Mortgage Loans" herein.
"Available Funds" for any Distribution Date will equal the sum of the Group
I Available Funds and the Group II Available Funds.
With respect to any Mortgage Loan and any Distribution Date, the
"Prepayment Period" is the period (i) from the 16th day of the month preceding
such Distribution Date (or, in the case of the first Distribution Date, the
Cut-off Date) through the 15th day of the month of such Distribution Date with
respect to any Mortgage Loan that was the subject of a voluntary prepayment in
full or (ii) from the first day through the last day of the month preceding the
month of such Distribution Date with respect to any other unscheduled prepayment
of principal.
DISTRIBUTIONS
GENERAL. Distributions on each Distribution Date will be made by check
mailed to the address of the person entitled thereto as it appears on the
applicable certificate register or, in the case of a Certificateholder who holds
100% of a Class of Certificates or who holds Certificates of a Class with an
aggregate initial certificate balance or notional amount of at least $5,000,000
and who has so notified the Trustee in writing in accordance with the Pooling
Agreement by wire transfer in immediately available funds to the account of such
Certificateholder at a bank or other depository institution having appropriate
wire transfer facilities; provided, however, that the final distribution in
retirement of the Certificates will be made only upon presentment and surrender
of such Certificates at the Corporate Trust Office of the Trustee.
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 or Class Notional Amount, as applicable. See "Description of
the Certificates -- Reports to Certificateholders" in the Prospectus for a
detailed description of the information to be included in such statements.
ALLOCATION OF AVAILABLE FUNDS. Interest and principal on the Certificates
will be distributed monthly on each Distribution Date, commencing in May 1997,
in an aggregate amount equal to the Available Funds for such Distribution Date
to holders of record of such Offered Certificates on the last business day of
the month preceding the month of such Distribution Date (the "Record Date").
(A) On each Distribution Date on or prior to the Distribution Date on which
the Class Certificate Balance of the Subordinate Certificates are reduced to
zero (the "Cross-Over Date"), an amount equal to the Group I Available Funds
will be distributed in the following order of priority among the following
Classes of Certificates:
FIRST, to (a) the Class A-I and Residual Certificates, the Interest
Distribution Amount on each such Class for such Distribution Date and (b)
the Class X Certificates, the Group I Class X Interest Distribution
Amount(as defined herein) for such Distribution Date, any shortfall in
available amounts being allocated among such Classes in proportion to the
amount such Classes are entitled to receive pursuant to this clause for
such Distribution Date; and
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SECOND, to the Class A-I Certificates (other than the Class A-I-8
Certificates), the Residual Certificates and the Class PO Certificates in
reduction of the Class Certificate Balances thereof:
(a) the Group I Senior Principal Distribution Amount (as defined
herein) for such Distribution Date, in the following order of priority:
(i) to the Class A-I-10 Certificates, up to the Class A-I-10
Principal Distribution Amount (as defined herein) for such Distribution
Date, until the Class Certificate Balance thereof has been reduced to zero;
(ii) concurrently, to the Class R-1 and Class R-2 Certificates,
PRO RATA, based upon their Class Certificate Balances, until the respective
Class Certificate Balances thereof have been reduced to zero;
(iii) 50.00000000% and 50.00000000% concurrently to the Class
A-I-1 Certificates and Class A-I-7 Certificates, until the Class
Certificate Balance of the Class A-I-1 Certificates has been reduced to
zero;
(iv) 50.00000000% and 50.00000000% concurrently to the Class
A-I-2 Certificates and Class A-I-7 Certificates, until the Class
Certificate Balance of the Class A-I-2 Certificates has been reduced to
zero;
(v) 50.00000000% and 50.00000000% concurrently to the Class A-I-3
Certificates and Class A-I-7 Certificates, until the Class Certificate
Balance of the Class A-I-3 Certificates has been reduced to zero;
(vi) 62.50000000% and 37.50000000% concurrently to the Class
A-I-4 Certificates and Class A-I-7 Certificates, until the Class
Certificate Balance of the Class A-I-4 Certificates has been reduced to
zero;
(vii) 62.50000000% and 37.50000000% concurrently to the Class
A-I-5 Certificates and Class A-I-7 Certificates, until the Class
Certificate Balance of the Class A-I-5 Certificates has been reduced to
zero;
(viii) 34.2675677745%, 37.5000000000% and 28.2324322255%
concurrently to the Class A-I-6 Certificates, Class A-I-7 Certificates and
Class A-I-9 Certificates until the Class Certificate Balances of the Class
A-I-6 Certificates and Class A-I-7 Certificates have been reduced to zero;
(ix) to the Class A-I-9 Certificates, until the Class Certificate
Balance thereof has been reduced to zero, and
(b) the Group I Class PO Principal Distribution Amount (as defined
herein) for such Distribution Date, to the Class PO Certificates, until the
Class Certificate Balance thereof has been reduced to zero.
If, after distributions have been made pursuant to priorities (A) FIRST
above on any Distribution Date, remaining Group I Available Funds are less than
the sum of the Group I Senior Principal Distribution Amount and the Group I
Class PO Principal Distribution Amount for such Distribution Date, such amounts
shall be proportionately reduced, and such remaining Group I Available Funds
will be distributed on the Class A-I Certificates (other than the Class A-I-8
Certificates), Residual Certificates and Class PO Certificates in accordance
with clauses (a) and (b) of priority (A) SECOND above on the basis of such
reduced amounts. Notwithstanding any reduction in principal distributable to the
Class PO Certificates pursuant to this paragraph, the Class Certificate Balance
of the Class PO Certificates shall be reduced not only by principal so
distributed but also by the difference between (i) principal distributable to
the Class PO Certificates in accordance with clause (b) of priority (A) SECOND
above and (ii) principal actually distributed to the Class PO Certificates
pursuant to such clause after giving effect to this paragraph (the "Class PO
Cash Shortfall"). Any such Class PO Cash Shortfall with respect to any
Distribution Date will be added to the Class PO Deferred Amount.
(B) On each Distribution Date on or prior to the Cross-Over Date, an amount
equal to the Group II Available Funds will be distributed in the following order
of priority among the Certificates:
FIRST, to (a) the Class A-II Certificates, the Interest Distribution Amount
on such Class for such Distribution Date and (b) the Class X Certificates, the
Group II Class X Interest Distribution Amount (as defined herein) for such
Distribution Date, any shortfall in available amounts being allocated between
such Classes in proportion to the amount such Classes are entitled to receive
pursuant to this clause for such Distribution Date; and
SECOND, to the Class A-II Certificates and the Class PO Certificates in
reduction of the Class Certificate Balance thereof:
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(a) the Group II Senior Principal Distribution Amount (as defined
herein) for such Distribution Date, to the Class A-II Certificates until
the Class Certificate Balance has been reduced to zero; and
(b) the Group II Class PO Principal Distribution Amount for such
Distribution Date, to the Class PO Certificates, until the Class
Certificate Balance thereof has been reduced to zero.
If, after distributions have been made pursuant to priorities (B) FIRST
above on any Distribution Date, remaining Group II Available Funds are less than
the sum of the Group II Senior Principal Distribution Amount and the Group II
Class PO Principal Distribution Amount for such Distribution Date, such amounts
shall be proportionately reduced, and such remaining Group II Available Funds
will be distributed on the Class A-II Certificates and Class PO Certificates in
accordance with clauses (a) and (b) of priority (B) SECOND above on the basis of
such reduced amounts. Notwithstanding any reduction in principal distributable
to the Class PO Certificates pursuant to this paragraph, the principal balance
of the Class PO Certificates shall be reduced not only by principal so
distributed but also by the difference between (i) principal distributable to
the Class PO Certificates in accordance with clause (b) of priority (B) SECOND
above and (ii) principal actually distributed to the Class PO Certificates
pursuant to such clause after giving effect to this paragraph (the "Class PO
Cash Shortfall"). Any such Class PO Cash Shortfall with respect to any
Distribution Date will be added to the Class PO Deferred Amount.
(C) On each Distribution Date on or prior to the Cross-Over Date, any
amount equal to any remaining Group I Available Funds and Group II Available
Funds following the distributions in (A) and (B) above will be distributed in
the following order of priority among the Certificates:
FIRST, the Class PO Deferred Amount for such Distribution Date to the
Class PO Certificates; provided that (i) on any Distribution Date,
distributions pursuant to this clause (C) FIRST, shall not exceed the
excess, if any, of (x) the Available Funds remaining after giving effect to
distributions pursuant to priorities (A) and (B) above over (y) the
aggregate of the Interest Distribution Amounts for such Distribution Date
on all Classes of Subordinate Certificates then outstanding, (ii) such
distributions shall not reduce the Class Certificate Balance of the Class
PO Certificates and (iii) no distribution will be made in respect of the
Class PO Deferred Amount after the Cross-Over Date.
SECOND, sequentially, to the Class B-1, Class B-2, Class B-3, Class
B-4, Class B-5 and Class B-6 Certificates, in that order, up to an amount
equal to and in the following order: (a) the related Interest Distribution
Amount thereon for such Distribution Date and (b) the Pro Rata Share (as
defined herein) for such Class for such Distribution Date.
(D) On each Distribution Date prior to the occurrence of the Cross-Over
Date but after the reduction of the Class Certificate Balance of the Class A-I
Certificates or Class A-II Certificates to zero, the remaining Class or Classes
of Class A Certificates (other than the Class A-I-8 Certificates) will be
entitled to receive, in addition to any Principal Prepayments related to such
Certificate Group's Mortgage Loan Group, 100% of the Principal Prepayments on
the Mortgage Loans in the other Mortgage Loan Group (in the case of Mortgage
Loan Group I in accordance with the priorities set forth in priority (A) SECOND
above) in reduction of the Class Certificate Balances thereof. In addition, if
on any Distribution Date on which the aggregate Class Certificate Balance of the
Class A-I Certificates would be greater than the aggregate Scheduled Principal
Balance of the Group I Mortgage Loans (other than the related PO Percentage (as
defined herein) of the Discount Mortgage Loans in Mortgage Loan Group I) and
Class B Certificates are still outstanding, after giving effect to distributions
to be made on such Distribution Date, 100% of the Principal Prepayments
otherwise allocable to the Class B Certificates on the Mortgage Loans in
Mortgage Loan Group II will be distributed to the Class A-I Certificates, in
accordance with the priorities set forth in priority (A) SECOND above, in
reduction of the Class Certificate Balances thereof, until the aggregate Class
Certificate Balance of the Class A-I Certificates is equal to the aggregate
Scheduled Principal Balance of the Mortgage Loans in Mortgage Loan Group I
(other than the related PO Percentage of the Discount Mortgage Loans in Mortgage
Loan Group I).
(E) On each Distribution Date after the Cross-Over Date, interest and
principal will be distributed as described above with respect to any
Distribution Date on or prior to the Cross-Over Date, provided, however,
distributions of principal on the outstanding Class A-I Certificates (other than
the Class A-I-8 Certificates) and Residual Certificates will be made PRO RATA
among all such Certificates (regardless of the allocation, or sequential
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nature, of principal payments described in priority (A) SECOND above), based
upon the then Class Certificate Balances of such Certificates.
(F) On each Distribution Date, any Group I Available Funds and Group II
Available Funds remaining after payment of interest and principal as described
above will be distributed to the Class R-1 and Class R-2 Certificates; provided
that if on any Distribution Date there are any Group I Available Funds remaining
after payment of interest and principal as described in the preceding
paragraphs, such Group I Available Funds will be distributed to the Classes of
the unrelated Certificate Group in accordance with the priorities in paragraph
(B) or (E) above, as applicable above, until all amounts due to such
Certificates have been paid in full before any amounts are distributed to the
Residual Certificates. Similarly, if on any Distribution Date there are any
Group II Available Funds remaining after payment of interest and principal as
described in the preceding paragraphs, such Group II Available Funds will be
distributed to the Classes of the unrelated Certificate Group in accordance with
the priorities in priority (A) or (E) above, as applicable, until all amounts
due to such Senior Certificates have been paid in full before any amounts are
distributed to the Residual Certificates. It is not anticipated that there will
be any significant amounts remaining for such distribution.
INTEREST
The Pass-Through Rate for each Class of Offered Certificates for each
Distribution Date (each, a "Pass-Through Rate") will be as described on the
cover hereof.
On each Distribution Date, each Class of interest bearing Offered
Certificates, to the extent of funds available therefore on such Distribution
Date as described above under " -- Distributions", will be entitled to receive
an amount allocable to interest (as to each such Class, the "Interest
Distribution Amount") equal to the sum of (i) interest accrued during the
applicable Interest Accrual Period at the applicable Pass-Through Rate on the
related Class Certificate Balance or the related Class Notional Amount, as
applicable, 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"). Interest will be
calculated and payable on the basis of a 360-day year divided into twelve 30-day
months.
For purposes of determining the portion of each of the Group I Available
Funds and the Group II Available Funds that will be applied to the distribution
of the Interest Distribution Amount for the Class X Certificates, the Interest
Distribution Amount for the Class X Certificates may also be expressed as the
sum of the Group I Class X Interest Distribution Amount and Group II Class X
Interest Distribution Amount. For each Distribution Date, the portion of the
Group I Available Funds applied to the distribution of the Interest Distribution
Amount for the Class X Certificates will equal (the "Group I Class X Interest
Distribution Amount") the sum of (i) interest accrued during the applicable
Interest Accrual Period at the applicable Pass-Through Rate for the Class X
Certificates on the Group I Notional Amount for 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 to the Class X Certificates from Group I Available Funds on such
prior Distribution Dates and not subsequently distributed. For each Distribution
Date, the portion of the Group II Available Funds applied to the distribution of
the Interest Distribution Amount for the Class X Certificates will equal (the
"Group II Class X Interest Distribution Amount") the sum of (i) interest accrued
during the applicable Interest Accrual Period at the applicable Pass-Through
Rate for the Class X Certificates on the Group II Notional Amount for 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 to the Class X Certificates from Group
II Available Funds on such prior Distribution Dates and not subsequently
distributed.
The interest entitlement described above for each Class of Certificates
will be reduced by "Net Interest Shortfalls" experienced by the related Mortgage
Loan Group for such Distribution Date. With respect to any Distribution Date,
the "Net Interest Shortfall" for a Mortgage Loan Group is equal to the sum of
(i) the amount of interest any Class of Certificateholders would otherwise have
been entitled to receive with respect to any Mortgage Loan in such Mortgage Loan
Group 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) any Net
Prepayment Interest Shortfalls. A "Relief Act Reduction" is a
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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" for a Mortgage Loan Group is the
amount by which the aggregate of Prepayment Interest Shortfalls experienced by
the Mortgage Loans in such Mortgage Loan Group in respect of a Distribution Date
exceeds the aggregate amount of the Compensating Interest Payments for such
Distribution Date allocated to such Mortgage Loan Group. With respect to any
Distribution Date, the "Prepayment Interest Shortfall" for a Mortgage Loan Group
is equal to the aggregate shortfall, if any, in collections of interest
(adjusted to the related Net Mortgage Rates) resulting from (a) prepayments in
full received from the 16th day (or, in the case of the first Distribution Date,
from the Cut-off Date) through the last day of the month preceding such
Distribution Date and (b) partial principal prepayments received during the
related Prepayment Period to the extent applied prior to the Due Date in the
month of the Distribution Date, in each case in respect of the Mortgage Loans in
the related Mortgage Loan Group. Net Interest Shortfalls for a Mortgage Loan
Group on any Distribution Date will be allocated PRO RATA among all Classes of
the related Certificate Group, the Class X Certificates and the Subordinate
Certificates, based on the amount of interest each such Class of Certificates
would otherwise be entitled to receive on such Distribution Date in respect of
such Mortgage Loan Group before taking into account any reduction in such
amounts resulting from such Net Interest Shortfalls. The amount the Class X
Certificates would otherwise be entitled to receive before taking into account
any such reduction in respect of a Mortgage Loan Group will be based upon the
Group I Class X Interest Distribution Amount or the Group II Class X Interest
Distribution Amount, as applicable, for such Distribution Date. The amount a
Class of Subordinate Certificates would otherwise be entitled to receive before
taking into account any such reduction in respect of a Mortgage Loan Group will
be based upon the amount of interest accruing at the applicable Pass-Through
Rate on such Class' proportionate share (based upon Class Certificate Balance)
of the Class B Group I Class Certificate Balance or the Class B Group II Class
Certificate Balance, as applicable, for such Distribution Date.
With respect to any Distribution Date, the "Class B Group I Class
Certificate Balance" equals the aggregate Class Certificate Balance of the Class
B Certificates as of such Distribution Date less the Class B Group II Class
Certificate Balance as of such Distribution Date. With respect to any
Distribution Date, the "Class B Group II Class Certificate Balance" equals the
sum of the Scheduled Principal Balances of the Group II Mortgage Loans as of
such Distribution Date (other than the PO Percentage of the Scheduled Principal
Balance of each Discount Mortgage Loan in such Mortgage Loan Group) less the
Class Certificate Balance of the Class A-II Certificates as of such Distribution
Date.
In the event that, on a particular Distribution Date, Available Funds on
such Distribution Date applied in the order described above under
" -- Distributions," 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. Any Unpaid Interest 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.
With respect to each Distribution Date, the "Interest Accrual Period" for
each Class of interest-bearing Certificates (other than the Class A-I-7 and
Class A-I-8 Certificates) will be the calendar month preceding the month in
which the Distribution Date occurs. The Interest Accrual Period for the Class
A-I-7 and Class A-I-8 Certificates for each Distribution Date will commence on
the 25th day of the calendar month preceding the calendar month in which such
Distribution Date occurs and will end on the 24th day of the calendar month in
which such Distribution Date occurs.
LIBOR
Commencing on May 22, 1997 and monthly thereafter on the second Business
Day prior to the first day of the related Interest Accrual Period for the Class
A-I-7 and Class A-I-8 Certificates (each, a "LIBOR Determination Date"), until
the Class Certificate Balance of the Class A-I-7 Certificates and the Class
A-I-8 Notional Amount have been reduced to zero, the Trustee will request each
of the designated reference banks meeting the
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criteria set forth herein (the "Reference Banks") to inform the Trustee of the
quotation offered by its principal London office for making one-month United
Stated dollar deposits in leading banks in the London interbank market, as of
11:00 a.m. (London time) on such LIBOR Determination Date. For purposes of
calculating LIBOR, "Business Day" means a day on which banks are open for
dealing in foreign currency and exchange in London and New York City. In lieu of
making a request of the Reference Banks, the Trustee may rely on the quotations
for those Reference Banks that appear at such time on the page (the "Relevant
Screen Page"), whatever its designation, on which LIBOR is for the time being
displayed on the Reuters Monitor Money Rates Service or the appropriate
Associated Press -- Dow Jones Telerate Service.
LIBOR will be established by the Trustee on each LIBOR Determination Date
as follows:
(a) If on any LIBOR Determination Date two or more Reference Banks provide
such offered quotations, LIBOR for the next Interest Accrual Period shall be the
arithmetic mean of such offered quotations (rounded upwards if necessary to the
nearest whole multiple of 1/32%).
(b) If on any LIBOR Determination Date only one or none of the Reference
Banks provides such offered quotations, LIBOR for the next Interest Accrual
Period shall be whichever is the higher of (i) LIBOR as determined on the
previous LIBOR Determination Date or (ii) the Reserve Interest Rate. The
"Reserve Interest Rate" shall be the rate per annum which the Trustee determines
to be either (i) the arithmetic mean (rounded upwards if necessary to the
nearest whole multiple of 1/32%) of the one-month United States dollar lending
rates that New York City banks selected by the Sponsor are quoting, on the
relevant LIBOR Determination Date, to the principal London offices of at least
two of the Reference Banks to which such quotations are in the opinion of the
Trustee, being so made, or (ii) in the event that the Trustee can determine no
such arithmetic mean, the lowest one-month United States dollar lending rate
which New York City banks selected by the Sponsor are quoting on such LIBOR
Determination Date to leading European banks.
(c) If on any LIBOR Determination Date, the Trustee is required but is
unable to determine the Reserve Interest Rate in the manner provided in
paragraph (b) above, LIBOR shall be 5.4375%.
Each Reference Bank shall (i) be a leading bank engaged in transactions in
Eurodollar deposits in the international Eurocurrency market, (ii) not control,
be controlled by, or be under common control with the Sponsor, and have an
established place of business in London. If any such Reference Bank should be
unwilling or unable to act as such or if the Sponsor should terminate the
appointment of any such Reference Bank, the Sponsor will promptly appoint
another leading bank meeting the criteria specified above.
The establishment of LIBOR on each LIBOR Determination Date by the Trustee
and the Trustee's calculation of the rate of interest applicable to the Class
A-I-7 and A-I-8 Certificates for the related Interest Accrual Period shall (in
the absence of manifest error) be final and binding. Each such rate of interest
may be obtained by telephoning the Trustee at (212) 815-2007.
PRINCIPAL
An amount equal to all amounts payable in respect of principal of the Group
I Mortgage Loans will be allocated between (i) the Senior Certificates (other
than the Class A-I-8, Class A-II, Class PO and Class X Certificates) and the
Subordinate Certificates, on the one hand, and (ii) the Class PO Certificates,
on the other, in each case based on the applicable Non-PO Percentage and the
applicable PO Percentage, respectively, of such amounts. An amount equal to all
amounts payable in respect of principal of the Group II Mortgage Loans will be
allocated between (i) the Class A-II Certificates and the Subordinate
Certificates, on the one hand, and (ii) the Class PO Certificates, on the other
hand, in each case based on the applicable Non-PO Percentage and the applicable
PO Percentage, respectively, of such amounts.
The "Non-PO Percentage" with respect to any Mortgage Loan with a Net
Mortgage Rate less than 7.75% per annum (each such Mortgage Loan, a "Discount
Mortgage Loan") will be equal to the Net Mortgage Rate thereof divided by 7.75%.
The "Non-PO Percentage" with respect to any Mortgage Loan with a Net Mortgage
Rate equal to or greater than 7.75% (each such Mortgage Loan, a "Non-Discount
Mortgage Loan") will be 100%. The "PO Percentage" with respect to any Discount
Mortgage Loan will be the fraction, expressed as a percentage, equal to 7.75%
minus the Net Mortgage Rate thereof divided by 7.75%. The "PO Percentage" with
respect to any Non-Discount Mortgage Loan will be 0%.
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The "Net Mortgage Rate" of a Mortgage Loan is the Mortgage Rate thereof
minus the Expense Rate with respect to such Mortgage Loan.
The amount to which the Senior Certificates (other than the Class A-I-8,
Class PO and Class X Certificates) are entitled as principal on any Distribution
Date will be determined separately for the Class A-I Certificates and the
Residual Certificates (the "Group I Senior Principal Distribution Amount") and
for the Class A-II Certificates (the "Group II Senior Principal Distribution
Amount") and in each case will be an amount equal to the sum of:
(i) the applicable Senior Percentage (as defined below) of the
applicable Non-PO Percentage of all scheduled payments of principal due on
each Mortgage Loan in the related Mortgage Loan Group on the first day of
the month in which the Distribution Date occurs, as specified in the
amortization schedule at the time applicable thereto (after adjustment for
previous principal prepayments and the principal portion of Debt Service
Reductions after the Bankruptcy Coverage Termination Date, but before any
adjustment to such amortization schedule by reason of other bankruptcy or
similar proceeding or any moratorium or similar waiver or grace period);
(ii) the applicable Senior Prepayment Percentage (as defined below) of
the applicable Non-PO Percentage of the Scheduled Principal Balance of each
Mortgage Loan in the related Mortgage Loan Group which was the subject of
prepayment in full received by the Master Servicer during the applicable
Prepayment Period (as defined below);
(iii) the applicable Senior Prepayment Percentage of the applicable
Non-PO Percentage of all partial prepayments of principal received on each
Mortgage Loan in the related Mortgage Loan Group during the applicable
Prepayment Period;
(iv) with respect to each Mortgage Loan in the related Mortgage Loan
Group that became a Liquidated Mortgage Loan during the related Prepayment
Period, the lesser of (x) the applicable Senior Percentage of the
applicable Non-PO Percentage of the Scheduled Principal Balance of such
Mortgage Loan and (y) either (A) the applicable Senior Prepayment
Percentage or (B) if an Excess Loss was sustained with respect to such
Liquidated Mortgage Loan during such preceding calendar month, the
applicable Senior Percentage of the applicable Non-PO Percentage of the
Liquidation Proceeds and Insurance Proceeds allocable to principal received
with respect to such Mortgage Loan; and
(v) the applicable Senior Prepayment Percentage of the applicable
Non-PO Percentage of the sum of (a) the Scheduled Principal Balance of each
Mortgage Loan in the related Mortgage Loan Group which was repurchased by
the Master Servicer in connection with such Distribution Date, (b) the
Substitution Adjustment Amount in connection with any Mortgage Loan in the
related Mortgage Loan Group that has been replaced by the Seller with a
substitute Mortgage Loan pursuant to the Pooling Agreement in connection
with such Distribution Date and (c) other unscheduled payments of principal
not otherwise referred to in this definition.
The "Class A-I-10 Principal Distribution Amount" for any Distribution Date
occurring prior to the Distribution Date in May 2002 will equal zero. The Class
A-I-10 Principal Distribution Amount for any Distribution Date occurring after
the first five years following the Closing Date will be as follows: for any
Distribution Date during the sixth year after the Closing Date, 30% of the Class
A-I-10 Pro Rata Principal Distribution Amount (as defined below) for such
Distribution Date; for any Distribution Date during the seventh year after the
Closing Date, 40% of the Class A-I-10 Pro Rata Principal Distribution Amount for
such Distribution Date; for any Distribution Date during the eighth year after
the Closing Date, 60% of the Class A-I-10 Pro Rata Principal Distribution Amount
for such Distribution Date; for any Distribution Date during the ninth year
after the Closing Date, 80% of the Class A-I-10 Pro Rata Principal Distribution
Amount for such Distribution Date; and for any Distribution Date during and
after the tenth year after the Closing Date, 100% of the Class A-I-10 Pro Rata
Principal Distribution Date Amount. Notwithstanding the foregoing, if on any
Distribution Date the Class Certificate Balance of each Class of Class A-I
Certificates (other than the Class A-I-10 Certificates) has been reduced to
zero, the Class A-I-10 Principal Distribution Amount shall equal the Group I
Senior Principal Distribution Amount to the extent not distributed on such
Distribution Date to other Classes of Class A-I Certificates or Residual
Certificates.
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<PAGE>
For any Distribution Date, the "Class A-I-10 Pro Rata Principal
Distribution Amount" shall be an amount equal to the product of (x) the Group I
Senior Principal Distribution Amount for such Distribution Date multiplied by
(y) a fraction, the numerator of which is the Class Certificate Balance of the
Class A-I-10 Certificates immediately prior to such Distribution Date and the
denominator of which is the aggregate Class Certificate Balances of all Classes
of Class A-I Certificates and Residual Certificates immediately prior to such
Distribution Date.
The "Class A-I Senior Percentage" and the "Class A-II Senior Percentage"
(each, a "Senior Percentage") will each initially equal approximately 92.74%.
Each Senior Percentage will be recalculated with respect to each Distribution
Date to equal the lesser of (i) 100% and (ii) the percentage (carried to six
places rounded up) obtained by dividing the aggregate Class Certificate Balances
of all of the Class A-I Certificates and the Residual Certificates in the case
of the Class A-I Senior Percentage and the Class A-II Certificates in the case
of the Class A-II Senior Percentage immediately preceding such Distribution Date
by the aggregate Scheduled Principal Balance of all the Mortgage Loans in the
related Mortgage Loan Group (other than the PO Percentage of the Scheduled
Principal Balance of each Discount Mortgage Loan in such Mortgage Loan Group)
immediately preceding such Distribution Date.
The "Senior Prepayment Percentage" with respect to each Mortgage Loan Group
on any Distribution Date occurring during the periods set forth below will be as
follows:
<TABLE>
<CAPTION>
PERIOD (DATES INCLUSIVE) SENIOR PREPAYMENT PERCENTAGE
<S> <C>
May 25, 1997-April 25, 2002.......................................... 100%
May 25, 2002-April 25, 2003.......................................... applicable Senior Percentage plus 70% of
the applicable Subordinate Percentage
May 25, 2003-April 25, 2004.......................................... applicable Senior Percentage plus 60% of
the applicable Subordinate Percentage
May 25, 2004-April 25, 2005.......................................... applicable Senior Percentage plus 40% of
the applicable Subordinate Percentage
May 25, 2005-April 25, 2006.......................................... applicable Senior Percentage plus 20% of
the applicable Subordinate Percentage
May 25, 2006 and thereafter.......................................... applicable Senior Percentage
</TABLE>
Notwithstanding the foregoing, if on any Distribution Date the weighted
average of the Class A-I Senior Percentage and the Class A-II Senior Percentage
(based upon the Scheduled Principal Balance of the Mortgage Loans in the related
Mortgage Loan Group other than the PO Percentage of the Scheduled Principal
Balance of each Discount Mortgage Loan) exceeds such weighted average as of the
Cut-off Date, each Senior Prepayment Percentage for such Distribution Date will
equal 100%. Upon reduction of the Class Certificate Balances of the Class A-I
Certificates and the Residual Certificates or the Class A-II Certificates, as
applicable, to zero, the related Senior Prepayment Percentage will equal 0%;
provided, that in the circumstances described in paragraph (D) above under
" -- Distributions," prepayments resulting from Mortgage Loans in one Mortgage
Loan Group and otherwise distributable to the Subordinate Certificates will be
distributed to the Senior Certificates related to the other Mortgage Loan Group
(other than the Class PO and Class X Certificates).
In addition, no reduction of a Senior Prepayment Percentage shall occur on
any Distribution Date (such limitation being the "Senior Prepayment Percentage
Stepdown Limitation") unless, as of the last day of the month preceding such
Distribution Date, either (a)(i)(A) the aggregate outstanding principal balance
of Mortgage Loans in both Mortgage Loan Groups delinquent 60 days or more
(including for this purpose any Mortgage Loans in foreclosure and Mortgage Loans
with respect to which the related Mortgaged Property has been acquired by the
Trust), averaged over the last six months, as a percentage of the aggregate
Class Certificate Balances of the Subordinate Certificates averaged over the
last six months, does not exceed 50% or (B) the aggregate outstanding principal
balance of the Mortgage Loans in both Mortgage Loan Groups delinquent 60 days or
more averaged over the last six months, as a percentage of the aggregate
outstanding principal balance of all Mortgage Loans averaged over the last six
months, does not exceed 2% and (ii) cumulative Realized Losses on the Mortgage
Loans in both Mortgage Loan Groups do not exceed (A) 30% of the aggregate Class
Certificate Balances of the Subordinate Certificates as of the Cut-off Date (the
"Original Subordinate Principal Balance") if such Distribution Date occurs
between and including May 2002 and April 2003, (B) 35% of the related Original
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<PAGE>
Subordinate Principal Balance if such Distribution Date occurs between and
including May 2003 and April 2004, (C) 40% of the related Original Subordinate
Principal Balance if such Distribution Date occurs between and including May
2004 and April 2005, (D) 45% of the related Original Subordinate Principal
Balance if such Distribution Date occurs between and including May 2005 and
April 2006, (E) 50% of the related Original Subordinate Principal Balance if
such Distribution Date occurs during or after May 2006 or (b) (i) the
outstanding principal balance of the Mortgage Loans in both Mortgage Loan Groups
delinquent 60 days or more averaged over the last six months, as a percentage of
the aggregate outstanding principal balance of all Mortgage Loans averaged over
the last six months, does not exceed 4% and (ii) Realized Losses on the Mortgage
Loans in both Mortgage Loan Groups to date for such Distribution Date are less
than 10% of the Original Subordinate Principal Balance.
The "Class PO Principal Distribution Amount" with respect to each
Distribution Date will be an amount equal to the sum of the Group I Class PO
Principal Distribution Amount and the Group II Class PO Principal Distribution
Amount. The "Group I Class PO Principal Distribution Amount" will be calculated
with respect to the Group I Mortgage Loans and the "Group II Class PO Principal
Distribution Amount" will be calculated with respect to the Group II Mortgage
Loans. Each amount will be determined separately and in each case will be an
amount equal to the sum of:
(i) the applicable PO Percentage of all scheduled payments of
principal due on each Discount Mortgage Loan in the related Mortgage Loan
Group on the first day of the month in which the Distribution Date occurs,
as specified in the amortization schedule at the time applicable thereto
(after adjustment for previous principal prepayments and the principal
portion of Debt Service Reductions after the Bankruptcy Coverage
Termination Date, but before any adjustment to such amortization schedule
by reason of any other bankruptcy or similar proceeding or any moratorium
or similar waiver or grace period);
(ii) the applicable PO Percentage of the Scheduled Principal Balance
of each Discount Mortgage Loan in the related Mortgage Loan Group which was
the subject of a prepayment in full received by the Master Servicer during
the applicable Prepayment Period;
(iii) the applicable PO Percentage of all partial prepayments of
principal on each Discount Mortgage Loan in the related Mortgage Loan Group
received during the applicable Prepayment Period;
(iv) with respect to each Discount Mortgage Loan in the related
Mortgage Loan Group that became a Liquidated Mortgage Loan during the
related Prepayment Period, the applicable PO Percentage of the amount of
Liquidation Proceeds and Insurance Proceeds received during the related
Prepayment Period; and
(v) the applicable PO Percentage of the sum of (a) the Scheduled
Principal Balance of each Discount Mortgage Loan in the related Mortgage
Loan Group which was repurchased by the Seller in connection with such
Distribution Date, (b) the Substitution Adjustment Amount in connection
with any Discount Mortgage Loan that has been replaced by the Seller with a
substitute Discount Mortgage Loan pursuant to the Pooling Agreement in
connection with such Distribution Date and (c) other unscheduled payments
of principal not otherwise referred to in this definition.
The "Subordination Percentage" with respect to each Mortgage Loan Group,
which will initially equal approximately 7.26% with respect to each of Mortgage
Loan Group I and Mortgage Loan Group II and will be recalculated for each
Distribution Date to equal 100% minus the related Senior Percentage for such
Distribution Date. The "Subordinate Prepayment Percentage" with respect to each
Mortgage Loan Group on any Distribution Date will equal 100% minus the related
Senior Prepayment Percentage, except that on any Distribution Date after the
Class Certificate Balances of the Classes of the related Certificate Group have
been reduced to zero, the applicable Subordinate Prepayment Percentage will
equal 100%.
The "Subordinate Principal Distribution Amount" with respect to each
Distribution Date will be an amount equal to the sum of the following (but in no
event greater than the aggregate Class Certificate Balances of the Subordinate
Certificates immediately prior to such Distribution Date) amounts calculated for
each Mortgage Loan Group:
(i) the applicable Subordinate Percentage of the applicable Non-PO
Percentage of all scheduled payments of principal due on each Mortgage Loan
in the related Mortgage Loan Group on the first day of the
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<PAGE>
month in which the Distribution Date occurs, as specified in the
amortization schedule at the time applicable thereto (after adjustment for
previous principal prepayments and the principal portion of Debt Service
Reductions after the Bankruptcy Coverage Termination Date, but before any
adjustment to such amortization schedule by reason of any other bankruptcy
or similar proceeding or any moratorium or similar waiver or grace period);
(ii) the applicable Subordinate Prepayment Percentage of the
applicable Non-PO Percentage of the Scheduled Principal Balance of each
Mortgage Loan in the related Mortgage Loan Group which was the subject of a
prepayment in full received by the Master Servicer during the applicable
Prepayment Period;
(iii) the applicable Subordinate Prepayment Percentage of the
applicable Non-PO Percentage of all partial prepayments of principal
received on each Mortgage Loan in the related Mortgage Loan Group during
the applicable Prepayment Period (plus, on the Distribution Date on which
the Class Certificate Balances of the related Senior Certificates (other
than the Class PO Certificates) have all been reduced to zero, 100% of any
applicable Senior Principal Distribution Amount remaining undistributed on
such date);
(iv) with respect to each Mortgage Loan in the related Mortgage Loan
Group that became a Liquidated Mortgage Loan during the related Prepayment
Period, the applicable Non-PO Percentage of the Liquidation Proceeds and
Insurance Proceeds allocable to principal received with respect to such
Mortgage Loan during such Prepayment Period, after application of amounts
pursuant to clause (iv) of the definition of the applicable Senior
Principal Distribution Amount, up to the Subordinate Percentage of the
applicable Non-PO Percentage of the Scheduled Principal Balance of such
Mortgage Loan; and
(v) the applicable Subordinate Prepayment Percentage of the applicable
Non-PO Percentage of the sum of (a) the Scheduled Principal Balance of each
Mortgage Loan in the related Mortgage Loan Group which was repurchased by
the Master Servicer in connection with such Distribution Date, (b) the
Substitution Adjustment Amount in connection with any Mortgage Loan in the
related Mortgage Loan Group that has been replaced by the Seller with a
substitute Mortgage Loan pursuant to the Pooling Agreement in connection
with such Distribution Date and (c) other unscheduled payments of principal
not otherwise referred to in this definition.
On any Distribution Date, any reduction in funds available for distribution
to the Classes of Subordinate Certificates resulting from a distribution of the
Class PO Deferred Amount will be allocated to the Classes of Subordinate
Certificates, in reduction of the Pro Rata Shares thereof, in reverse order of
their numerical Class designations.
The "Pro Rata Share" with respect to any Class of Subordinate Certificates
on any Distribution Date will generally equal such Class's PRO RATA share (based
on the Class Certificate Balances of each Class entitled thereto) of the amount
calculated pursuant to the definition of the Subordinate Principal Distribution
Amount for each Mortgage Loan Group for such Distribution Date.
With respect to each Class of Subordinate Certificates, if on any
Distribution Date the sum of the related Class Subordination Percentages of such
Class and all Classes of Subordinate Certificates which have higher numerical
Class designations than such Class (the "Applicable Credit Support Percentage"),
is less than the Applicable Credit Support Percentage for such Class on the date
of issuance of the Certificates (the "Original Applicable Credit Support
Percentage"), no distribution of the amount calculated pursuant to clauses (ii),
(iii) and (v) of the definitions of Subordinate Principal Distribution Amount
will be made to any such Classes (the "Restricted Classes") and the amount
otherwise distributable to the Restricted Classes in respect thereof will be
allocated among the remaining Classes of Subordinate Certificates, PRO RATA,
based upon their respective Class Certificate Balances, and distributed in the
order described above.
The Class Subordination Percentage with respect to any Distribution Date
and each Class of Subordinate Certificates will equal the fraction (expressed as
a percentage) the numerator of which is the Class Certificate Balance of such
Class of Subordinate Certificates, immediately prior to such Distribution Date
and the denominator of which is the aggregate of the Class Certificate Balances
of all Classes of Certificates immediately prior to such Distribution Date.
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<PAGE>
The approximate Original Applicable Credit Support Percentages for the
Subordinated Certificates on the date of issuance of the Certificates are
expected to be as follows:
<TABLE>
<S> <C>
Class B-1.................................................................. 7.25%
Class B-2.................................................................. 4.50%
Class B-3.................................................................. 2.75%
Class B-4.................................................................. 1.50%
Class B-5.................................................................. 0.85%
Class B-6.................................................................. 0.60%
</TABLE>
"Scheduled 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 principal prepayments and Liquidation
Proceeds and Insurance Proceeds received 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 Scheduled 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.
"Principal Prepayment" is any payment or other recovery of principal on a
Mortgage Loan which is received in advance of its scheduled Due Date to the
extent that it is not accompanied by an amount as to interest representing
scheduled interest due on any date or dates in any month or months subsequent to
the month of prepayment, including Insurance Proceeds and amounts received in
connection with the repurchase or substitution of a Mortgage Loan, but excluding
Liquidation Proceeds and Insurance Proceeds received at the time a Mortgage Loan
becomes a Liquidated Mortgage Loan.
ALLOCATION OF LOSSES
On each Distribution Date, the applicable PO Percentage of any Realized
Loss, including any Excess Loss, on a Discount Mortgage Loan will be allocated
to the Class PO Certificates until the Class Certificate Balance thereof is
reduced to zero. The amount of any such Realized Loss, other than an Excess
Loss, allocated on or prior to the Cross-Over Date plus the amount of any Class
PO Class Shortfall will be treated as a Class PO Deferred Amount. To the extent
funds are available therefore on such Distribution Date or on any future
Distribution Date on or prior to the Cross-Over Date as calculated above under
" -- Distributions", Class PO Deferred Amounts will be paid on the Class PO
Certificates. Any distribution in respect of unpaid Class PO Deferred Amounts
will not further reduce the Class Certificate Balance of the Class PO
Certificates. The Class PO Deferred Amounts will not bear interest. The Class
Certificate Balance of the Class of Subordinate Certificates then outstanding
with the highest numerical Class designation will be reduced by the amount of
any payments in respect of Class PO Deferred Amounts. After the Cross-Over Date,
no new Class PO Deferred Amounts will be created. In addition, the Class
Certificate Balance of the Class of Subordinate Certificates then outstanding
with the highest numerical Class designation will be reduced if and to the
extent that the aggregate of the Class Certificate Balances of all Classes of
Certificates, following all distributions and the allocation of Realized Losses
on a Distribution Date, exceeds the Pool Principal Balance as of the Due Date
occurring in the month of such Distribution Date.
On each Distribution Date, the applicable Non-PO Percentage of any Realized
Loss, other than any Excess Loss, will be allocated first to the Subordinate
Certificates, in the reverse order of their numerical Class designations
(beginning with the Class of Subordinate Certificates then outstanding with the
highest numerical Class designation), in each case until the Class Certificate
Balance of the respective Class of Certificates has been reduced to zero, and
then to the Senior Certificates of the related Certificate Group (other than the
Notional Amount Certificates and the Class PO Certificates), pro rata, based
upon their respective Class Certificate Balances.
On each Distribution Date, the applicable Non-PO Percentage of Excess
Losses will be allocated pro rata among the Classes of Senior Certificates
(other than the Notional Amount Certificates and the Class PO Certificates) and
the Subordinate Certificates based upon their respective Class Certificate
Balances.
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<PAGE>
Because principal distributions are paid to certain Classes of Certificates
(other than the Class PO Certificates) before other Classes of Certificates,
holders of such Certificates that are entitled to receive principal later bear a
greater risk of being allocated Realized Losses on the Mortgage Loans than
holders of Classes that are entitled to receive principal earlier.
In general, a "Realized Loss" with respect to a Mortgage Loan is (i) a
Bankruptcy Loss or (ii) as to any 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. A "Fraud Loss" is a Realized Loss
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 "Special Hazard Loss" is a Realized Loss attributable to damage or a
direct physical loss suffered by a Mortgaged Property (including any Realized
Loss due to the presence or suspected presence of hazardous wastes or substances
on a Mortgaged Property) other than any such damage or loss covered by a hazard
policy or a flood insurance policy required to be maintained in respect of such
Mortgaged Property under the Pooling Agreement or any loss due to normal wear
and tear or certain other causes.
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.
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
Trust, thereby effecting early retirement of the Certificates and causing the
termination of the REMIC status of the Trust, 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 " -- Distributions."
The amount distributed with respect to each Certificate will be 100% of its then
outstanding principal balance plus any Class PO Deferred Amounts in the case of
the Class PO Certificates and, in the case of any interest bearing Certificate,
any unpaid accrued interest thereon at the applicable Pass-Through Rate. 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 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) May
25, 2029. The termination of the Trust will be effected in a manner consistent
with applicable federal income tax regulations and the REMIC status of the
Trust.
LAST SCHEDULED DISTRIBUTION DATE
The "Last Scheduled Distribution Date" for distributions on the
Certificates, other than the Class A-II Certificates, is May 25, 2027 and for
the Class A-II Certificates is May 25, 2012. Each such Last Scheduled
Distribution Date is the Distribution Date in the month immediately following
the latest scheduled maturity date of any Mortgage Loan in the related Mortgage
Loan Group. 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 related Mortgage Loans as well as
the frequency and severity of losses experienced by the Trust, 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
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<PAGE>
given as to the actual payment experience of the Mortgage Loans. See "Maturity,
Prepayment and Weighted Average Life of Certificates" in the Prospectus.
VOTING RIGHTS
Voting rights of the Trust in general will be allocated 1% to each of the
Class A-I-8 and Class X Certificates with the balance allocated among the
Classes of Certificates based upon their respective Class Principal Balances.
THE TRUSTEE
The Bank of New York will be the Trustee under the Pooling Agreement. The
Sponsor and the Master Servicer 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 101 Barclay
Street, 12 E, New York, New York 10286, Attention: Corporate Trust
Administration or at such other addresses as the Trustee may designate from time
to time.
SEPARATE REMIC STRUCTURE
For federal income tax purposes, the Trust will include two segregated
asset pools, each of which will be treated as a separate REMIC. The assets of
the Subsidiary REMIC will generally consist of the Mortgage Loans. The assets of
the Master REMIC will generally consist of uncertificated regular interests
issued by the Subsidiary REMIC, which in the aggregate will correspond to the
Certificates.
RESTRICTIONS ON TRANSFER OF THE RESIDUAL CERTIFICATES
The Residual Certificates will be subject to the restrictions on transfer
described in the Prospectus under "Federal Income Tax Consequences -- REMIC
Certificates -- Tax-Related Restrictions on Transfers," " -- Noneconomic
Residual Interests" and " -- Foreign Investors." The Pooling Agreement provides
that the Residual Certificates (in addition to certain other Classes of
Certificates) may not be acquired by an ERISA Plan. See "ERISA Considerations"
herein. The Residual Certificates will contain a legend describing the foregoing
restrictions.
PREPAYMENT AND YIELD CONSIDERATIONS
GENERAL
The effective yield to the holders of the interest bearing Certificates
(other than the Class A-I-7 and Class A-I-8 Certificates) will be lower than the
yield otherwise produced by the applicable rate at which interest is passed
through to such holders and the purchase price of such Certificates because
monthly distributions will not be payable to such holders until the 25th day
(or, if such day is not a Business Day, the following Business Day) of the month
following the month in which interest accrues on the Mortgage Loans (without any
additional distribution of interest or earnings thereon in respect of such
delay).
Delinquencies on the Mortgage Loans in a Mortgage Loan Group which are not
advanced by or on behalf of the Master Servicer (because amounts, if advanced,
would be nonrecoverable) will adversely affect the yield on the related Classes
of Certificates. Because of the priority of distributions, shortfalls resulting
from delinquencies not so advanced will be borne first by the Subordinate
Certificates, in the reverse order of their numerical Class designations, and
then by the Senior Certificates of the related Certificate Group. If, as a
result of such shortfalls, the aggregate of the Class Certificate Balances of
all Classes of Certificates exceeds the Pool Principal Balance, the Class
Certificate Balance of the Class of Subordinate Certificates then outstanding
with the highest numerical Class designation will be reduced by the amount of
such excess.
Net Interest Shortfalls will adversely affect the yields on the related
Classes of Certificates. In addition, although all losses initially will be
borne by the Subordinate Certificates, in the reverse order of their numerical
Class designations (either directly or through distributions in respect of Class
PO Deferred Amounts on the Class PO Certificates), Excess Losses will be borne
by all Classes of Certificates (other than the Notional
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<PAGE>
Amount Certificates) on a pro rata basis. Moreover, distributions on the
Subordinate Certificates for each Distribution Date will be reduced by the
amount of any distributions on such Distribution Date in respect of Class PO
Deferred Amounts. As a result, the yields on the Offered Certificates will
depend on the rate and timing of Realized Losses, including Excess Losses.
Excess Losses could occur at a time when one or more Classes of Subordinate
Certificates are still outstanding and otherwise available to absorb other types
of Realized Losses.
The yield on the Class A-I-7 Certificates will be sensitive, and the yield
on the Class A-I-8 Certificates will be highly sensitive, to the rate of LIBOR.
Except in the limited circumstances described herein, principal
distributions on the Class A-I Certificates and the Residual Certificates relate
to principal payments on the Group I Mortgage Loans and principal distributions
on the Class A-II Certificates relate to principal payments on the Group II
Mortgage Loans. Principal distributions to the Class PO and Subordinate
Certificates relate to principal payments on both the Group I Mortgage Loans and
Group II Mortgage Loans.
PREPAYMENT CONSIDERATIONS AND RISKS
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 in the related
Mortgage Loan Group. 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 A-I-8
Certificates and the Class X Certificates will be highly sensitive to the rate
and timing of prepayments on the Group I Mortgage Loans and the Mortgage Loans,
respectively. A rapid rate of principal prepayments on such Mortgage Loans (as
defined below) may have a material negative effect on the yield of the Class
A-I-8 Certificates and Class X Certificates, as applicable. Investors must make
their own decisions as to the appropriate prepayment assumptions to be used in
deciding whether to purchase the Offered Certificates. See " -- Yield on Class
A-I-8 Certificates", " -- Yield on Class X Certificates" and " -- Yield on Class
PO Certificates" herein.
As described herein under "Description of the Certificates -- Principal",
the applicable Senior Prepayment Percentage of the applicable Non-PO Percentage
of all Principal Prepayments and certain other unscheduled payments of principal
will be initially distributed to the Classes of the related Certificate Group
then entitled to receive principal prepayment distributions. This may result in
all (or a disproportionate percentage) of such principal prepayments being
distributed to holders of such Classes of Senior 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 "Senior Prepayment Percentage."
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<PAGE>
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 required by the Pooling
Agreement. See "The Mortgage Pool -- Assignment of Mortgage Loans" and
"Description of the Certificates -- Termination; Optional Termination" herein.
See "Description of the Certificates -- Termination; Optional Termination"
herein and "Pooling and Servicing Agreement -- Termination; Optional
Termination" in the Prospectus for a description of the Master Servicer's option
to purchase the Mortgage Loans when the Pool Principal Balance is less than 10%
of the Cut-off Date Pool Principal Balance. Any such purchase will shorten the
weighted average lives of the Classes of Offered Certificates.
Substantially all of the Mortgage Loans will include due-on-sale clauses
which allow the holder of a 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.
ADDITIONAL INFORMATION
The Sponsor intends to file certain additional yield tables and other
computational materials with respect to one or more Classes of Offered
Certificates with the Commission in a report on Form 8-K. Such tables and
materials were prepared by one or more of the Underwriters at the request of
certain prospective investors, based on assumptions provided by, and satisfying
the special requirements of, such prospective investors. Such tables and
assumptions may be based on assumptions that differ from the Structuring
Assumptions. Accordingly, such tables and other materials may not be relevant to
or appropriate for investors other than those specifically requesting them.
WEIGHTED AVERAGE LIVES OF THE OFFERED CERTIFICATES
The weighted average life of a Certificate refers to the average amount of
time that will elapse from the date of its issuance until each dollar of
principal of such Certificate is distributed to the investor. The weighted
average life of a Certificate is determined by (a) multiplying the amount of the
reduction, if any, of the principal balance of such Certificate from one
Distribution Date to the next Distribution Date by the number of years from the
date of issuance to the second such Distribution Date, (b) summing the results
and (c) dividing the sum by the aggregate amount of the reductions in the
principal balance of such Certificate referred to in clause (a). The weighted
average lives of the Certificates will be influenced by, among other factors,
the rate at which principal is paid on the Mortgage Loans. Principal payments of
such Mortgage Loans may be in the form of scheduled amortization or prepayments,
including those prepayments resulting from foreclosure proceedings and from the
purchase of Mortgage Loans in advance of their stated maturities as required or
permitted by the Pooling Agreement. In general, the Mortgage Loans may be
prepaid by the Mortgagors at any time without payment of any prepayment fee or
penalty.
The prepayment model used in this Prospectus Supplement (the "Prepayment
Assumption") represents an assumed rate of prepayment each month relative to the
then outstanding principal balance of a pool of mortgage loans. A 100%
Prepayment Assumption assumes a Constant Prepayment Rate ("CPR") of 4.0% per
annum of the then outstanding principal balance of such mortgage loans in the
first month of the life of the mortgage loans and an additional amount of
approximately 1.090909% (precisely 12/11%) per annum in each month thereafter
until the twelfth month. Beginning in the twelfth month and in each month
thereafter during the life of the mortgage loans,
S-46
<PAGE>
a 100% Prepayment Assumption assumes a CPR of 16% per annum each month. As used
in the tables below, a 50% Prepayment Assumption assumes prepayment rates equal
to 50% of the Prepayment Assumption. Correspondingly, a 150% Prepayment
Assumption assumes prepayment rates equal to 150% of the Prepayment Assumption,
and so forth. The Prepayment Assumption does not purport to be a historical
description of prepayment experience or a prediction of the anticipated rate of
prepayment of any pool of mortgage loans, including the Mortgage Loans.
PRICING ASSUMPTION
The Certificates were structured assuming, among other things, a 100%
Prepayment Assumption with respect to the Certificates. The prepayment
assumptions to be used for pricing purposes for the respective Classes may vary
as determined at the time of sale. The actual rate of prepayment may vary
considerably from the rate used for any prepayment assumption.
DECREMENT TABLES
The "Decrement Tables" indicate the percentages of the initial principal
amount (or notional amount) of each Class of Offered Certificates that would be
outstanding after each of the dates shown at various constant percentages of the
Prepayment Assumption and the corresponding weighted average lives of such
Classes of Offered Certificates.
The following Decrement Tables have been prepared based on the assumptions
(the "Structuring Assumptions") that: (i) the Group I Mortgage Loans consist of
two Mortgage Loans with the following characteristics and the Group II Mortgage
Loans consist of four Mortgage Loans with the following characteristics:
GROUP I MORTGAGE LOANS
<TABLE>
<CAPTION>
ORIGINAL REMAINING
AMORTIZATION AMORTIZATION
PRINCIPAL APPROXIMATE APPROXIMATE NET TERM TO MATURITY TERM TO MATURITY
BALANCE MORTGAGE RATE MORTGAGE RATE (IN MONTHS) (IN MONTHS) BALLOON DATE
<S> <C> <C> <C> <C> <C>
$184,628,549.43 8.6380679% 8.3780679% 360 359 --
$ 12,211,252.46 7.8967105% 7.6367105% 360 359 --
</TABLE>
GROUP II MORTGAGE LOANS
<TABLE>
<CAPTION>
ORIGINAL REMAINING
AMORTIZATION AMORTIZATION
PRINCIPAL APPROXIMATE APPROXIMATE NET TERM TO MATURITY TERM TO MATURITY
BALANCE MORTGAGE RATE MORTGAGE RATE (IN MONTHS) (IN MONTHS) BALLOON DATE
<S> <C> <C> <C> <C> <C>
$ 18,551,143.21 8.4827400% 8.2227400% 360 359 March, 2012
$ 9,360,899.11 8.4852853% 8.2252853% 180 179 --
$ 3,580,091.58 7.9245140% 7.6645140% 179 178 --
$ 3,490,016.34 7.8854333% 7.6254333% 360 359 March, 2012
</TABLE>
(ii) the Mortgage Loans prepay at the specified constant percentages of the
Prepayment Assumption, (iii) no defaults in the payment by Mortgagors of
principal of and interest on the Mortgage Loans are experienced, (iv) scheduled
payments on the Mortgage Loans are received on the first day of each month
commencing in May 1997 and are computed prior to giving effect to prepayments
received on the last day of the prior month, (v) prepayments are allocated as
described herein without giving effect to loss and delinquency tests, (vi) there
are no Net Interest Shortfalls and prepayments represent prepayments in full of
individual Mortgage Loans and are received on the last day of each month,
commencing in April 1997, (vii) the scheduled monthly payment for each Mortgage
Loan has been calculated based on its outstanding balance, interest rate and
remaining term to maturity such that each Mortgage Loan will amortize in amounts
sufficient to repay the balance of such Mortgage Loan by its remaining term to
maturity, (viii) the initial principal or notional amounts of the Certificates
are as set forth on the cover page hereof and under "Summary of
Terms -- Non-Offered Certificates", (ix) interest accrues on each Class of
Certificates at the applicable interest rate described herein or in the case of
the Class A-I-7 and Class A-I-8 Certificates, at their initial rates, (x)
distributions in respect of the Certificates are received in cash on the 25th
day of each month, commencing in May 1997, (xi) the Offered Certificates are
purchased on April 30, 1997 and (xii) the Master Servicer does not exercise the
option to purchase the Mortgage Loans described under the caption "Description
of the Certificates -- Termination; Optional Termination."
S-47
<PAGE>
The Decrement Tables set forth below have been prepared on the basis of the
Structuring Assumptions described above. There will likely be discrepancies
between the characteristics of the actual Mortgage Loans included in the Trust
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 Trust 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 the Prepayment Assumption 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 the Prepayment Assumption
specified.
S-48
<PAGE>
Based upon the foregoing Structuring 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 Prepayment Assumption. Neither the
Prepayment Assumption nor any other prepayment model or assumption purports to
be a historical description of prepayment experience or a prediction of the
anticipated rate of prepayment of any pool of mortgage loans, including the
Mortgage Loans. Variations in the actual prepayment experience and the balance
of the Mortgage Loans that prepay may increase or decrease the percentage of
initial Class Certificate Balance (and weighted average life) shown in the
following tables. Such variations may occur even if the average prepayment
experience of all such Mortgage Loans equals any of the specified percentages of
the Prepayment Assumption.
PERCENTAGE OF INITIAL CLASS CERTIFICATE BALANCE OUTSTANDING FOR THE OFFERED
CERTIFICATES AT THE
RESPECTIVE PERCENTAGES OF THE PREPAYMENT ASSUMPTION SET FORTH BELOW:
<TABLE>
<CAPTION>
CLASS A-I-1 CLASS A-I-2
DISTRIBUTION DATE 50% 75% 100% 125% 150% 50% 75% 100% 125% 150%
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage.................... 100% 100% 100 % 100 % 100 % 100% 100% 100 % 100 % 100 %
April 1998............................ 69 55 41 27 13 100 100 100 100 100
April 1999............................ 28 0 0 0 0 100 96 56 17 0
April 2000............................ 0 0 0 0 0 87 27 0 0 0
April 2001............................ 0 0 0 0 0 40 0 0 0 0
April 2002............................ 0 0 0 0 0 0 0 0 0 0
April 2003............................ 0 0 0 0 0 0 0 0 0 0
April 2004............................ 0 0 0 0 0 0 0 0 0 0
April 2005............................ 0 0 0 0 0 0 0 0 0 0
April 2006............................ 0 0 0 0 0 0 0 0 0 0
April 2007............................ 0 0 0 0 0 0 0 0 0 0
April 2008............................ 0 0 0 0 0 0 0 0 0 0
April 2009............................ 0 0 0 0 0 0 0 0 0 0
April 2010............................ 0 0 0 0 0 0 0 0 0 0
April 2011............................ 0 0 0 0 0 0 0 0 0 0
April 2012............................ 0 0 0 0 0 0 0 0 0 0
April 2013............................ 0 0 0 0 0 0 0 0 0 0
April 2014............................ 0 0 0 0 0 0 0 0 0 0
April 2015............................ 0 0 0 0 0 0 0 0 0 0
April 2016............................ 0 0 0 0 0 0 0 0 0 0
April 2017............................ 0 0 0 0 0 0 0 0 0 0
April 2018............................ 0 0 0 0 0 0 0 0 0 0
April 2019............................ 0 0 0 0 0 0 0 0 0 0
April 2020............................ 0 0 0 0 0 0 0 0 0 0
April 2021............................ 0 0 0 0 0 0 0 0 0 0
April 2022............................ 0 0 0 0 0 0 0 0 0 0
April 2023............................ 0 0 0 0 0 0 0 0 0 0
April 2024............................ 0 0 0 0 0 0 0 0 0 0
April 2025............................ 0 0 0 0 0 0 0 0 0 0
April 2026............................ 0 0 0 0 0 0 0 0 0 0
April 2027............................ 0 0 0 0 0 0 0 0 0 0
Weighted Average Life (in years)**.... 1.5 1.1 0.9 0.8 0.7 3.8 2.7 2.1 1.7 1.5
</TABLE>
** The weighted average life of an Offered Certificate is determined by (i)
multiplying the amount of the reduction, if any, of the principal balance of
such Certificate from one Distribution Date to the next Distribution Date by
the number of years from the date of the issuance to the second such
Distribution Date, (ii) summing the results and (iii) dividing the sum by the
aggregate amount of the reductions in the principal balance of such
Certificate.
S-49
<PAGE>
PERCENTAGE OF INITIAL CLASS CERTIFICATE BALANCE OUTSTANDING FOR THE OFFERED
CERTIFICATES AT THE
RESPECTIVE PERCENTAGES OF THE PREPAYMENT ASSUMPTION SET FORTH BELOW:
<TABLE>
<CAPTION>
CLASS A-I-3 CLASS A-I-4
DISTRIBUTION DATE 50% 75% 100% 125% 150% 50% 75% 100% 125% 150%
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage.................... 100% 100% 100 % 100 % 100 % 100% 100% 100 % 100 % 100 %
April 1998............................ 100 100 100 100 100 100 100 100 100 100
April 1999............................ 100 100 100 100 72 100 100 100 100 100
April 2000............................ 100 100 62 0 0 100 100 100 92 25
April 2001............................ 100 55 0 0 0 100 100 65 0 0
April 2002............................ 95 0 0 0 0 100 81 0 0 0
April 2003............................ 49 0 0 0 0 100 27 0 0 0
April 2004............................ 8 0 0 0 0 100 0 0 0 0
April 2005............................ 0 0 0 0 0 75 0 0 0 0
April 2006............................ 0 0 0 0 0 48 0 0 0 0
April 2007............................ 0 0 0 0 0 28 0 0 0 0
April 2008............................ 0 0 0 0 0 8 0 0 0 0
April 2009............................ 0 0 0 0 0 0 0 0 0 0
April 2010............................ 0 0 0 0 0 0 0 0 0 0
April 2011............................ 0 0 0 0 0 0 0 0 0 0
April 2012............................ 0 0 0 0 0 0 0 0 0 0
April 2013............................ 0 0 0 0 0 0 0 0 0 0
April 2014............................ 0 0 0 0 0 0 0 0 0 0
April 2015............................ 0 0 0 0 0 0 0 0 0 0
April 2016............................ 0 0 0 0 0 0 0 0 0 0
April 2017............................ 0 0 0 0 0 0 0 0 0 0
April 2018............................ 0 0 0 0 0 0 0 0 0 0
April 2019............................ 0 0 0 0 0 0 0 0 0 0
April 2020............................ 0 0 0 0 0 0 0 0 0 0
April 2021............................ 0 0 0 0 0 0 0 0 0 0
April 2022............................ 0 0 0 0 0 0 0 0 0 0
April 2023............................ 0 0 0 0 0 0 0 0 0 0
April 2024............................ 0 0 0 0 0 0 0 0 0 0
April 2025............................ 0 0 0 0 0 0 0 0 0 0
April 2026............................ 0 0 0 0 0 0 0 0 0 0
April 2027............................ 0 0 0 0 0 0 0 0 0 0
Weighted Average Life (in years)**.... 6.0 4.1 3.1 2.6 2.2 9.1 5.6 4.2 3.4 2.8
</TABLE>
** The weighted average life of an Offered Certificate is determined by (i)
multiplying the amount of the reduction, if any, of the principal balance of
such Certificate from one Distribution Date to the next Distribution Date by
the number of years from the date of the issuance to the second such
Distribution Date, (ii) summing the results and (iii) dividing the sum by the
aggregate amount of the reductions in the principal balance of such
Certificate.
S-50
<PAGE>
PERCENTAGE OF INITIAL CLASS CERTIFICATE BALANCE OUTSTANDING FOR THE OFFERED
CERTIFICATES AT THE
RESPECTIVE PERCENTAGES OF THE PREPAYMENT ASSUMPTION SET FORTH BELOW:
<TABLE>
<CAPTION>
CLASS A-I-5 CLASS A-I-6
DISTRIBUTION DATE 50% 75% 100% 125% 150% 50% 75% 100% 125% 150%
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage................... 100% 100% 100 % 100 % 100 % 100% 100% 100 % 100 % 100 %
April 1998........................... 100 100 100 100 100 100 100 100 100 100
April 1999........................... 100 100 100 100 100 100 100 100 100 100
April 2000........................... 100 100 100 100 100 100 100 100 100 100
April 2001........................... 100 100 100 81 * 100 100 100 100 100
April 2002........................... 100 100 79 0 0 100 100 100 77 0
April 2003........................... 100 100 17 0 0 100 100 100 3 0
April 2004........................... 100 81 0 0 0 100 100 64 0 0
April 2005........................... 100 46 0 0 0 100 100 30 0 0
April 2006........................... 100 22 0 0 0 100 100 13 0 0
April 2007........................... 100 7 0 0 0 100 100 7 0 0
April 2008........................... 100 0 0 0 0 100 92 2 0 0
April 2009........................... 90 0 0 0 0 100 76 0 0 0
April 2010........................... 71 0 0 0 0 100 63 0 0 0
April 2011........................... 55 0 0 0 0 100 51 0 0 0
April 2012........................... 39 0 0 0 0 100 40 0 0 0
April 2013........................... 25 0 0 0 0 100 31 0 0 0
April 2014........................... 12 0 0 0 0 100 23 0 0 0
April 2015........................... 0 0 0 0 0 99 17 0 0 0
April 2016........................... 0 0 0 0 0 84 11 0 0 0
April 2017........................... 0 0 0 0 0 70 5 0 0 0
April 2018........................... 0 0 0 0 0 58 1 0 0 0
April 2019........................... 0 0 0 0 0 46 0 0 0 0
April 2020........................... 0 0 0 0 0 35 0 0 0 0
April 2021........................... 0 0 0 0 0 25 0 0 0 0
April 2022........................... 0 0 0 0 0 16 0 0 0 0
April 2023........................... 0 0 0 0 0 7 0 0 0 0
April 2024........................... 0 0 0 0 0 0 0 0 0 0
April 2025........................... 0 0 0 0 0 0 0 0 0 0
April 2026........................... 0 0 0 0 0 0 0 0 0 0
April 2027........................... 0 0 0 0 0 0 0 0 0 0
Weighted Average Life (in years)**... 14.5 8.1 5.5 4.3 3.6 21.9 14.6 7.7 5.4 4.4
</TABLE>
* Less than 0.5% but greater than 0%.
** The weighted average life of an Offered Certificate is determined by (i)
multiplying the amount of the reduction, if any, of the principal balance of
such Certificate from one Distribution Date to the next Distribution Date by
the number of years from the date of the issuance to the second such
Distribution Date, (ii) summing the results and (iii) dividing the sum by the
aggregate amount of the reductions in the principal balance of such
Certificate.
S-51
<PAGE>
PERCENTAGE OF INITIAL CLASS CERTIFICATE BALANCE OUTSTANDING FOR THE OFFERED
CERTIFICATES AT THE
RESPECTIVE PERCENTAGES OF THE PREPAYMENT ASSUMPTION SET FORTH BELOW:
<TABLE>
<CAPTION>
CLASS A-I-7 AND CLASS A-I-8 CLASS A-I-9
DISTRIBUTION DATE 50% 75% 100% 125% 150% 50% 75% 100% 125% 150%
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage.................... 100% 100% 100 % 100 % 100 % 100% 100% 100 % 100 % 100 %
April 1998............................ 90 86 82 78 73 100 100 100 100 100
April 1999............................ 78 68 59 50 42 100 100 100 100 100
April 2000............................ 66 53 40 29 21 100 100 100 100 100
April 2001............................ 56 39 26 16 8 100 100 100 100 100
April 2002............................ 46 28 16 6 0 100 100 100 87 0
April 2003............................ 38 21 10 * 0 100 100 100 43 0
April 2004............................ 31 16 5 0 0 100 100 79 0 0
April 2005............................ 27 12 2 0 0 100 100 59 0 0
April 2006............................ 24 10 1 0 0 100 100 49 0 0
April 2007............................ 21 8 1 0 0 100 100 45 0 0
April 2008............................ 19 7 * 0 0 100 95 43 0 0
April 2009............................ 17 6 0 0 0 100 86 38 0 0
April 2010............................ 15 5 0 0 0 100 78 31 0 0
April 2011............................ 13 4 0 0 0 100 71 25 0 0
April 2012............................ 12 3 0 0 0 100 65 21 0 0
April 2013............................ 10 2 0 0 0 100 60 17 0 0
April 2014............................ 9 2 0 0 0 100 55 13 0 0
April 2015............................ 8 1 0 0 0 100 51 11 0 0
April 2016............................ 7 1 0 0 0 91 48 9 0 0
April 2017............................ 5 * 0 0 0 83 45 7 0 0
April 2018............................ 4 * 0 0 0 75 42 5 0 0
April 2019............................ 4 0 0 0 0 68 35 4 0 0
April 2020............................ 3 0 0 0 0 62 28 3 0 0
April 2021............................ 2 0 0 0 0 56 22 2 0 0
April 2022............................ 1 0 0 0 0 51 17 2 0 0
April 2023............................ 1 0 0 0 0 46 12 1 0 0
April 2024............................ 0 0 0 0 0 40 8 1 0 0
April 2025............................ 0 0 0 0 0 25 5 * 0 0
April 2026............................ 0 0 0 0 0 12 2 * 0 0
April 2027............................ 0 0 0 0 0 0 0 0 0 0
Weighted Average Life (in years)**.... 6.6 4.3 2.9 2.3 2.0 24.6 18.8 11.2 5.8 4.6
</TABLE>
* Less than 0.5% but greater than 0%.
** The weighted average life of an Offered Certificate is determined by (i)
multiplying the amount of the reduction, if any, of the principal balance of
such Certificate from one Distribution Date to the next Distribution Date by
the number of years from the date of the issuance to the second such
Distribution Date, (ii) summing the results and (iii) dividing the sum by the
aggregate amount of the reductions in the principal balance of such
Certificate.
S-52
<PAGE>
PERCENTAGE OF INITIAL CLASS CERTIFICATE BALANCE OUTSTANDING FOR THE OFFERED
CERTIFICATES AT THE
RESPECTIVE PERCENTAGES OF THE PREPAYMENT ASSUMPTION SET FORTH BELOW:
<TABLE>
<CAPTION>
CLASS A-I-10 CLASS A-II
DISTRIBUTION DATE 50% 75% 100% 125% 150% 50% 75% 100% 125% 150%
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage................... 100% 100% 100 % 100 % 100 % 100% 100% 100 % 100 % 100 %
April 1998........................... 100 100 100 100 100 92 89 86 84 81
April 1999........................... 100 100 100 100 100 83 76 70 64 58
April 2000........................... 100 100 100 100 100 74 65 56 49 41
April 2001........................... 100 100 100 100 100 66 55 45 36 29
April 2002........................... 100 100 100 100 97 58 46 36 27 20
April 2003........................... 97 95 94 92 67 52 39 28 20 13
April 2004........................... 93 90 86 75 46 45 32 22 15 9
April 2005........................... 88 82 76 57 32 40 27 18 11 6
April 2006........................... 81 73 65 44 23 35 23 14 8 4
April 2007........................... 73 63 54 35 17 31 19 11 6 3
April 2008........................... 66 54 44 27 13 27 16 9 5 2
April 2009........................... 59 47 36 21 10 23 13 7 4 2
April 2010........................... 53 40 30 17 7 19 11 5 3 1
April 2011........................... 47 34 24 13 5 16 8 4 2 1
April 2012........................... 42 29 20 10 4 0 0 0 0 0
April 2013........................... 38 25 16 8 3 0 0 0 0 0
April 2014........................... 33 21 13 6 2 0 0 0 0 0
April 2015........................... 29 18 10 5 1 0 0 0 0 0
April 2016........................... 26 15 8 3 1 0 0 0 0 0
April 2017........................... 22 12 7 3 1 0 0 0 0 0
April 2018........................... 19 10 5 2 1 0 0 0 0 0
April 2019........................... 16 8 4 1 * 0 0 0 0 0
April 2020........................... 13 7 3 1 * 0 0 0 0 0
April 2021........................... 11 5 2 1 * 0 0 0 0 0
April 2022........................... 9 4 2 1 * 0 0 0 0 0
April 2023........................... 7 3 1 * * 0 0 0 0 0
April 2024........................... 5 2 1 * * 0 0 0 0 0
April 2025........................... 3 1 * * * 0 0 0 0 0
April 2026........................... 1 1 * * * 0 0 0 0 0
April 2027........................... 0 0 0 0 0 0 0 0 0 0
Weighted Average Life
(in years)**....................... 14.8 12.9 11.5 9.7 7.8 7.2 5.7 4.7 3.9 3.2
</TABLE>
* Less than 0.5% but greater than 0%.
** The weighted average life of an Offered Certificate is determined by (i)
multiplying the amount of the reduction, if any, of the principal balance of
such Certificate from one Distribution Date to the next Distribution Date by
the number of years from the date of the issuance to the second such
Distribution Date, (ii) summing the results and (iii) dividing the sum by the
aggregate amount of the reductions in the principal balance of such
Certificate.
S-53
<PAGE>
PERCENTAGE OF INITIAL CLASS CERTIFICATE BALANCE OUTSTANDING FOR THE OFFERED
CERTIFICATES AT THE
RESPECTIVE PERCENTAGES OF THE PREPAYMENT ASSUMPTION SET FORTH BELOW:
<TABLE>
<CAPTION>
CLASS PO
DISTRIBUTION DATE 50% 75% 100% 125% 150%
<S> <C> <C> <C> <C> <C>
Initial Percentage.......................................................... 100% 100% 100 % 100 % 100 %
April 1998.................................................................. 93 91 88 85 82
April 1999.................................................................. 85 79 73 67 62
April 2000.................................................................. 77 68 60 53 46
April 2001.................................................................. 69 59 50 42 34
April 2002.................................................................. 63 51 41 33 26
April 2003.................................................................. 56 44 34 26 19
April 2004.................................................................. 51 38 28 20 14
April 2005.................................................................. 46 32 23 16 11
April 2006.................................................................. 41 28 19 12 8
April 2007.................................................................. 36 24 15 9 6
April 2008.................................................................. 32 20 12 7 4
April 2009.................................................................. 29 17 10 6 3
April 2010.................................................................. 25 14 8 4 2
April 2011.................................................................. 22 12 6 3 2
April 2012.................................................................. 15 8 4 2 1
April 2013.................................................................. 13 6 3 1 1
April 2014.................................................................. 11 5 3 1 *
April 2015.................................................................. 10 5 2 1 *
April 2016.................................................................. 9 4 2 1 *
April 2017.................................................................. 8 3 1 * *
April 2018.................................................................. 6 3 1 * *
April 2019.................................................................. 5 2 1 * *
April 2020.................................................................. 5 2 1 * *
April 2021.................................................................. 4 1 * * *
April 2022.................................................................. 3 1 * * *
April 2023.................................................................. 2 1 * * *
April 2024.................................................................. 2 * * * *
April 2025.................................................................. 1 * * * *
April 2026.................................................................. * * * * *
April 2027.................................................................. 0 0 0 0 0
Weighted Average Life (in years)**.......................................... 8.7 6.7 5.4 4.4 3.7
</TABLE>
* Less than 0.5% but greater than 0%.
** The weighted average life of an Offered Certificate is determined by (i)
multiplying the amount of the reduction, if any, of the principal balance of
such Certificate from one Distribution Date to the next Distribution Date by
the number of years from the date of the issuance to the second such
Distribution Date, (ii) summing the results and (iii) dividing the sum by the
aggregate amount of the reductions in the principal balance of such
Certificate.
S-54
<PAGE>
PERCENTAGE OF INITIAL CLASS CERTIFICATE BALANCE OUTSTANDING FOR THE OFFERED
CERTIFICATES AT THE
RESPECTIVE PERCENTAGES OF THE PREPAYMENT ASSUMPTION SET FORTH BELOW:
<TABLE>
<CAPTION>
CLASS B-1, CLASS B-2 AND CLASS B-3 CLASS R-1 AND CLASS R-2
DISTRIBUTION DATE 50% 75% 100% 125% 150% 50% 75% 100% 125% 150%
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage.................... 100% 100% 100 % 100 % 100 % 100% 100% 100 % 100 % 100 %
April 1998............................ 99 99 99 99 99 0 0 0 0 0
April 1999............................ 98 98 98 98 98 0 0 0 0 0
April 2000............................ 97 97 97 97 97 0 0 0 0 0
April 2001............................ 96 96 96 96 96 0 0 0 0 0
April 2002............................ 95 95 95 95 95 0 0 0 0 0
April 2003............................ 91 90 88 87 86 0 0 0 0 0
April 2004............................ 87 84 81 79 76 0 0 0 0 0
April 2005............................ 81 76 72 67 63 0 0 0 0 0
April 2006............................ 74 68 61 55 50 0 0 0 0 0
April 2007............................ 67 58 50 43 37 0 0 0 0 0
April 2008............................ 60 50 41 34 27 0 0 0 0 0
April 2009............................ 54 43 34 26 20 0 0 0 0 0
April 2010............................ 48 36 27 20 15 0 0 0 0 0
April 2011............................ 42 31 22 16 11 0 0 0 0 0
April 2012............................ 34 24 16 11 7 0 0 0 0 0
April 2013............................ 30 20 13 8 5 0 0 0 0 0
April 2014............................ 27 17 11 6 4 0 0 0 0 0
April 2015............................ 23 14 9 5 3 0 0 0 0 0
April 2016............................ 20 12 7 4 2 0 0 0 0 0
April 2017............................ 18 10 5 3 1 0 0 0 0 0
April 2018............................ 15 8 4 2 1 0 0 0 0 0
April 2019............................ 13 7 3 2 1 0 0 0 0 0
April 2020............................ 11 5 2 1 * 0 0 0 0 0
April 2021............................ 9 4 2 1 * 0 0 0 0 0
April 2022............................ 7 3 1 1 * 0 0 0 0 0
April 2023............................ 5 2 1 * * 0 0 0 0 0
April 2024............................ 4 2 1 * * 0 0 0 0 0
April 2025............................ 2 1 * * * 0 0 0 0 0
April 2026............................ 1 * * * * 0 0 0 0 0
April 2027............................ 0 0 0 0 0 0 0 0 0 0
Weighted Average Life (in years)**.... 13.6 12.0 10.9 10.1 9.5 0.1 0.1 0.1 0.1 0.1
</TABLE>
* Less than 0.5% but greater than 0%.
** The weighted average life of an Offered Certificate is determined by (i)
multiplying the amount of the reduction, if any, of the principal balance of
such Certificate from one Distribution Date to the next Distribution Date by
the number of years from the date of the issuance to the second such
Distribution Date, (ii) summing the results and (iii) dividing the sum by the
aggregate amount of the reductions in the principal balance of such
Certificate.
S-55
<PAGE>
YIELD ON CLASS A-I-8 CERTIFICATES
The significance of the effects of prepayments and changes in LIBOR on the
Class A-I-8 Certificates is illustrated in the following table entitled
"Sensitivity of the Class A-I-8 Certificates to Prepayments and LIBOR," which
shows the pre-tax yield (on a corporate bond equivalent basis) to the holders of
such Certificates under different constant percentages of the Prepayment
Assumption and rates of LIBOR. The yields of such Certificates set forth in the
following table were calculated using the Structuring Assumptions and the
further assumptions that (i) on the LIBOR Determination Date in May 1997 and on
each LIBOR Determination Date thereafter, LIBOR will be as indicated, (ii) the
purchase price of the Class A-I-8 Certificates is approximately $3,362,814 for
100% of such Class of Certificates including accrued interest and (iii) such
Certificates are purchased on April 30, 1997.
The yield to investors in the Class A-I-8 Certificates will be highly
sensitive to the level of LIBOR and to the rate and timing of principal payments
(including prepayments) of the Mortgage Loans in Mortgage Loan Group I, which
generally can be prepaid at any time. In particular, a high rate of principal
payments (including prepayments) and/or increases in LIBOR will have a material
negative effect on the yield to investors in the Class A-I-8 Certificates. Under
certain circumstances, investors in the Class A-I-8 Certificates could fail to
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 A-I-8 Certificate
and there can be no assurance that the pre-tax yield to an investor in the Class
A-I-8 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 A-I-8
Certificate.
Changes in LIBOR may not correlate with changes in prevailing mortgage
interest rates. It is possible that lower prevailing mortgage interest rates,
which might be expected to result in faster prepayments, could occur
concurrently with an increase in LIBOR.
SENSITIVITY TO THE CLASS A-I-8 CERTIFICATES TO PREPAYMENTS AND LIBOR
(PRE-TAX YIELDS TO MATURITY)
<TABLE>
<CAPTION>
% OF PREPAYMENT ASSUMPTION
LIBOR 50% 75% 100% 125% 150%
<S> <C> <C> <C> <C> <C>
3.4375% 96.3% 88.0% 79.0% 69.4% 59.3%
5.4375% 48.4% 39.9% 30.3% 19.6% 8.8%
7.4375% 5.0% (4.0)% (19.4)% (34.8)% (47.9)%
8.4500% * * * * *
</TABLE>
* The Pre-Tax Yield to Maturity will be less than (99.9)%
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 A-I-8 Certificates, would cause the discounted
present value of such assumed stream of cash flows to equal the assumed purchase
price of the Class A-I-8 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 principal of and
interest on the Class A-I-8 Certificates and consequently does not purport to
reflect the return on any investment in the Class A-I-8 Certificates when such
reinvestment rates are considered.
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
S-56
<PAGE>
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 Structuring Assumptions
and the further assumptions that the purchase price of the Class X Certificates
is approximately $4,288,453 for 100% of such Class of Certificates including
accrued interest and such Certificates are purchased on April 30, 1997.
As indicated in the following table, the yield to investors in the Class X
Certificates will be highly sensitive to the rate of principal payments
(including prepayments) of the Mortgage Loans (especially those with high Net
Mortgage Rates) in both Mortgage Loan Groups, 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 174% 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.......................................... 22.4 % 18.1 % 13.7 % 9.2 % (5.1)%
</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.
YIELD ON CLASS PO CERTIFICATES
The Class PO Certificates will be "principal only" certificates, will not
bear interest and will be offered at a substantial discount to their original
principal amount. As indicated in the table below, a low rate of principal
payments (including prepayments) will have a material negative effect on the
yield to investors in the Class PO Certificates.
The significance of the effects of prepayments on the Class PO Certificates
is illustrated in the following table entitled "Sensitivity of the Class PO
Certificates to Prepayments," which shows the pre-tax yield (on a corporate bond
equivalent basis) to the 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 Structuring Assumptions,
and the further assumptions that the purchase price of the Class PO Certificates
is approximately 54.25% for 100% of such Class of Certificates and such
Certificates are purchased on April 30, 1997.
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
S-57
<PAGE>
rate. The timing of changes in the rate of prepayments may affect significantly
the yield realized by a holder of a Class PO Certificate and there can be no
assurance that the pre-tax yield to an investor in the Class PO 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 PO Certificate.
SENSITIVITY OF THE CLASS PO CERTIFICATES TO PREPAYMENTS
(PRE-TAX YIELDS TO MATURITY)
<TABLE>
<CAPTION>
% OF PREPAYMENT ASSUMPTION
50% 75% 100% 125% 150%
<S> <C> <C> <C> <C> <C>
Pre-Tax Yields to Maturity.......................................... 8.8 % 11.9 % 15.1 % 18.5 % 22.0 %
</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 PO Certificates, would cause the discounted
present value of such assumed stream of cash flows to equal the assumed purchase
price of the Class PO 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 principal on the Class
PO Certificates and consequently does not purport to reflect the return on any
investment in the Class PO Certificates when such reinvestment rates are
considered.
CREDIT SUPPORT
SUBORDINATION OF SUBORDINATE CERTIFICATES
The rights of the holders of the Subordinate Certificates to receive
distributions with respect to the Group I Mortgage Loans and the Group II
Mortgage Loans will be subordinated to such rights of the holders of the Senior
Certificates and the rights of the holders of each Class of Subordinate
Certificates (other than the Class B-1 Certificates) to receive such
distributions will be further subordinated to such rights of the Class or
Classes of Subordinate Certificates with lower numerical Class designations, in
each case only to the extent described herein. The subordination of the
Subordinate Certificates to the Senior Certificates and the subordination of the
Classes of Subordinate Certificates with higher numerical Class designations to
those with lower numerical Class designations is intended to increase the
likelihood of receipt, respectively, by the Senior Certificateholders and the
holders of Subordinate Certificates with lower numerical Class designations of
the maximum amount to which they are entitled on any Distribution Date and to
provide such holders protection against Realized Losses, other than Excess
Losses. In addition, the Subordinate Certificates will provide limited
protection against Special Hazard Losses, Bankruptcy Losses and Fraud Losses up
to the Special Hazard Loss Coverage Amount, Bankruptcy Loss Coverage Amount and
Fraud Loss Coverage Amount, respectively, as described below. The applicable
Non-PO Percentage of Realized Losses, other than Excess Losses, will be
allocated to the Class of Subordinate Certificates then outstanding with the
highest numerical Class designation. In addition, the Class Certificate Balance
of such Class of Subordinate Certificates will be reduced by the amount of
distributions on the Class PO Certificates in reimbursement for Class PO
Deferred Amounts.
In certain circumstances described in paragraph (D) above under
"Description of the Certificates -- Distributions -- Allocation of Available
Funds", Principal Prepayments otherwise distributable to the Subordinate
Certificates will in lieu thereof be distributed to certain Classes of Senior
Certificates.
The Subordinate Certificates will provide limited 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 $2,511,213 (the "Special
Hazard Loss Coverage Amount"), (ii) Bankruptcy Losses in an initial amount
expected to be up to approximately $100,000 (the "Bankruptcy Loss Coverage
Amount") and (iii) Fraud Losses in an initial amount expected to be up to
approximately $4,636,439 (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
S-58
<PAGE>
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, second, third and fourth anniversaries of the
Cut-off Date, to an amount equal to the lesser of (i) 1% of the then current
Pool Principal Balance and (ii) the excess of the Fraud Loss Coverage Amount as
of the preceding anniversary of the Cut-off Date over the cumulative amount of
Fraud Losses allocated to the Certificates since such preceding anniversary and
(b) 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 Subordinate 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 Certificates
against the purchase price of the Mortgage Loans.
FEDERAL INCOME TAX CONSEQUENCES
An election will be made to treat the Trust as two "real estate mortgage
investment conduits" (the "Master REMIC" and the "Subsidiary REMIC" and each, a
"REMIC") for federal income tax purposes under the Internal Revenue Code of
1986, as amended (the "Code"). The Regular Certificates will be designated as
"regular interests" in the Master REMIC and the Class R-1 Certificates and the
Class R-2 Certificates will be designated as the sole class of "residual
interests" in the Subsidiary REMIC and the Master REMIC, respectively. See
"Federal Income Tax Consequences -- REMIC Certificates" in the Prospectus.
REGULAR CERTIFICATES. The Regular Certificates generally will be treated as
debt instruments issued by the REMIC for federal income tax purposes. Income on
the Regular Certificates must be reported under an accrual method of accounting.
The Notional Amount and Principal Only Certificates will, and the other
Classes of Regular Certificates may, depending on their respective issue prices,
be treated for federal income tax purposes as having been issued
S-59
<PAGE>
with an amount of original issue discount equal to the difference between its
principal balance and its issue price. See "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 100%
Prepayment Assumption.
The Regular Certificates will be treated as regular interests in a REMIC
under section 860G of the Code. Accordingly, the Regular 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 Regular
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 Regular Certificates are treated as real estate assets. See
"Federal Income Tax Consequences" in the Prospectus.
RESIDUAL CERTIFICATES. The holders of the Residual Certificates must
include the taxable income of the applicable REMIC in their federal taxable
income. The resulting tax liability of the holders may exceed cash distributions
to such holders during certain periods. All or a portion of the taxable income
from a Residual Certificate recognized by a holder may be treated as "excess
inclusion" income, which with limited exceptions, is subject to U.S. federal
income tax.
Also, purchasers of a Residual Certificate should consider carefully the
tax consequences of any investment in Residual Certificates discussed in the
Prospectus and should consult their own tax advisors with respect to those
consequences. See "Federal Income Tax Consequences -- REMIC Certificates" and
" -- Residual Certificates" in the Prospectus. Specifically, prospective holders
of Residual Certificates should consult their tax advisors regarding whether, at
the time of acquisition, a Residual Certificate will be treated as a
"noneconomic" residual interest, and a "tax avoidance potential" residual
interest. See "Certain Federal Income Tax Consequences -- Tax-Related
Restrictions on Transfer -- NONECONOMIC RESIDUAL CERTIFICATES," " -- Residual
Certificates -- MARK TO MARKET RULE," and " -- EXCESS INCLUSIONS" and
" -- Tax-Related Restrictions on Transfers -- FOREIGN INVESTORS" in the
Prospectus. Additionally, for information regarding Prohibited Transactions, see
"Federal Income Tax Consequences -- Prohibited Transactions and Other Taxes" in
the Prospectus.
ERISA CONSIDERATIONS
A fiduciary of any employee benefit plan subject to the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"), or the Code, should carefully
review with its legal advisors whether the purchase or holding of an Offered
Certificate could give rise to a transaction prohibited or not otherwise
permissible under ERISA or the Code. See "ERISA Considerations" in the
Prospectus.
The U.S. Department of Labor has granted to Bear, Stearns & Co. Inc. and to
Lehman Brothers Inc., administrative exemptions (Prohibited Transaction
Exemption 90-30; Exemption Application No. D-8207, 55 Fed. Reg. 21461 (1990) and
Prohibited Transaction Exemption 91-14; Exemption Application No. D-7958, 56
Fed. Reg. 7413 (1991) (the "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 Exemptions. The Exemptions apply to mortgage loans such as
the Mortgage Loans in the Trust.
For a general description of the Exemptions and the conditions that must be
satisfied for the Exemptions to apply, see "ERISA Considerations" in the
Prospectus.
It is expected that the Exemptions will apply to the acquisition and
holding by Plans of the Senior Certificates (other than the Residual
Certificates) and that all conditions of the Exemptions 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 Trust by aggregate unamortized principal balance of the assets
of the Trust.
Because the characteristics of the Subordinate Certificates and the
Residual Certificates may not meet the requirements of Prohibited Transaction
Class Exemption 83-1 ("PTCE 83-1"), the Exemptions or any other
S-60
<PAGE>
issued exemption under ERISA, the purchase and holding of the Subordinate
Certificates and the Residual Certificates by a Plan or by individual retirement
accounts or other plans subject to Section 4975 of the Code may result in
prohibited transactions or the imposition of excise taxes or civil penalties.
Consequently, transfers of the Subordinate Certificates and the Residual
Certificates will not be registered by the Trustee unless the Trustee receives:
(i) a representation from the transferee of such Certificate, acceptable to and
inform and substance satisfactory to the Trustee, to the effect that such
transferee is not an employee benefit plan subject to Section 406 of ERISA or a
plan or arrangement subject to Section 4975 of the Code, nor a person acting on
behalf of any such plan or arrangement not using the assets of any such plan or
arrangement to effect such transfer; (ii) if the purchaser is an insurance
company, a representation that the purchaser is an insurance company which is
purchasing such Certificates with funds contained in an "insurance company
general account" (as such term is defined in Section V(e) of Prohibited
Transaction Class Exemption 95-60 ("PTCE 95-60")) and that the purchase and
holding of such Certificates are covered under PTCE 95-60; or (iii) an opinion
of counsel satisfactory to the Trustee that the purchase or holding of such
Certificate by a Plan, any person acting on behalf of a Plan or using such
Plan's assets, will not result in the assets of the Trust being deemed to be
"plan assets" and subject to the prohibited transaction requirements of ERISA
and the Code and will not subject the Trustee to any obligation in addition to
those undertaken in the Pooling Agreement. Such representation as described
above shall be deemed to have been made to the Trustee by the transferee's
acceptance of a Subordinate or Residual Certificate. In the event that such
representation is violated, or any attempt to transfer to a plan or person
acting on behalf of a Plan or using such Plan's assets is attempted without such
opinion of counsel, such attempted transfer or acquisition shall be void and of
no effect.
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 Offered
Certificates. Moreover, each Plan fiduciary should determine whether under the
general fiduciary standards of investment prudence and diversification, an
investment in any of the Offered 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 each Underwriting
Agreement between the Sponsor and an Underwriter, the Sponsor has agreed to sell
to the Underwriters, and each Underwriter has agreed to purchase from the
Sponsor, the respective Classes of Underwritten Certificates indicated on the
cover page hereof to be purchased by it. Distribution of the Underwritten
Certificates will be made by the respective 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 Underwritten Certificates, the
Underwriters may be deemed to have received compensation from the Sponsor in the
form of underwriting discounts.
The Sponsor has been advised by each Underwriter that it intends to make a
secondary market in the Underwritten Certificates being purchased by it but no
Underwriter has an 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 Underwriters against, or make
contributions to the Underwriters with respect to, certain liabilities,
including liabilities under the Securities Act of 1933, as amended.
The Class PO Certificates will be transferred by the Sponsor to the Seller
as partial consideration for the purchase of the Mortgage Loans from the Seller.
Such Certificates may be offered by the Seller from time to time directly or
through underwriters or agents in one or more negotiated transactions, or
otherwise, at varying prices to be determined at the time of sale, in one or
more separate transactions. Any underwriters or agents that participate in the
distribution of such Certificates may be deemed to be "underwriters" within the
meaning of the Securities Act of 1933, as amended, and any profit on the sale of
such Certificates, discounts, commissions, concessions or other compensation
received by any such underwriter or agent may be deemed to be underwriting
discounts and commissions under such Act.
S-61
<PAGE>
LEGAL MATTERS
The validity of the Certificates will be passed upon for the Sponsor by
Tobin & Tobin, a professional corporation, San Francisco, California. Certain
federal income tax consequences with respect to the Certificates will be passed
upon for the Sponsor by Brown & Wood LLP, New York, New York. Brown & Wood LLP,
New York, New York will act as counsel for the Underwriters.
CERTIFICATE RATING
It is a condition to the issuance of each Class of Offered Certificates
that it receives the rating(s) set forth below from S&P and Fitch.
<TABLE>
<CAPTION>
RATING
CLASS S&P FITCH
<S> <C> <C>
A (other than Class A-I-8) AAA AAA
A-I-8 AAAr AAA
PO AAAr AAA
X AAAr AAA
R-1 AAA AAA
R-2 AAA AAA
B-1 -- AA
B-2 -- A
B-3 -- BBB
</TABLE>
The ratings of S&P on mortgage pass-through certificates address the
likelihood of the receipt by certificateholders of timely payments of interest
and the ultimate return of principal. S&P's ratings take into consideration the
credit quality of the mortgage pool, including any credit support providers,
structural and legal aspects associated with the certificates, and the extent to
which the payment stream on the mortgage pool is adequate to make payments
required under the certificates. S&P's ratings on such certificates do not,
however, constitute a statement regarding frequency of prepayments on the
mortgage loans. S&P's rating does not address the possibility that investors may
suffer a lower than anticipated yield as a result of prepayments of the
underlying mortgages. In addition, it should be noted that in some structures a
default on a mortgage is treated as a prepayment and may have the same effect on
yield as a prepayment.
The ratings assigned by Fitch to mortgage pass-through certificates address
the likelihood of the receipt of all distributions on the mortgage loans by the
related certificateholders under the agreements pursuant to which such
certificates are issued. Fitch's ratings take into consideration the credit
quality of the related mortgage pool, including any credit support providers,
structural and legal aspects associated with such certificates, and the extent
to which the payment stream on the mortgage pool is adequate to make payments
required by such certificates. Fitch's ratings on such certificates do not,
however, constitute a statement regarding frequency of prepayments on the
mortgage loans.
The ratings of the Rating Agencies do not address the possibility that, as
a result of principal prepayments (i) Certificateholders might suffer a lower
than anticipated yield and (ii) if there is a rapid rate of principal payments
(including principal prepayments) on the Mortgage Loans investors in the
Notional Amount Certificates could fail to fully recover their initial
investments. The ratings on the Residual Certificates address only the return of
their respective principal balances and interest thereon.
The Sponsor has not requested a rating of any Class of Offered Certificates
by any rating agency other than the Rating Agencies. However, there can be no
assurance as to whether any other rating agency will rate the Offered
Certificates, or if it does, what rating would be assigned by such other rating
agency. The rating assigned by any such other rating agency to a Class of
Offered Certificates may be lower than the ratings assigned by the Rating
Agencies.
The ratings assigned to the Offered Certificates should be evaluated
independently from similar ratings on other types of securities. A security
rating is not a recommendation to buy, sell or hold securities and may be
subject to revision or withdrawal at any time by the assigning rating agency.
S-62
<PAGE>
INDEX TO DEFINED TERMS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Advances..................................................................................... S-7
Applicable Credit Support Percentage......................................................... S-41
Available Funds.............................................................................. S-32
ii,
S-3,
Balloon Loans................................................................................ S-12
Bankruptcy Loss Coverage Amount.............................................................. S-58
Bankruptcy Losses............................................................................ S-43
Bear Stearns................................................................................. Cover
Beneficial Owner............................................................................. S-29
Book-Entry Certificates...................................................................... S-29
S-29,
Business Day................................................................................. S-37
CEDE......................................................................................... S-29
Certificate Account.......................................................................... S-31
Certificate Account Advance.................................................................. S-28
Certificateholder............................................................................ S-30
Cover,
S-1,
Certificates................................................................................. S-28
Class A Certificates......................................................................... S-28
Class A-I Certificates....................................................................... S-28
Class A-II Certificates...................................................................... S-28
Cover,
Class A-I-8 Notional Amount.................................................................. S-1
Class A-I-10 Principal Distribution Amount................................................... S-38
Class A-I-10 Pro Rata Principal Distribution Amount.......................................... S-39
Class A-I Senior Percentage.................................................................. S-39
Class A-II Senior Percentage................................................................. S-39
Class B Group I Class Certificate Balance.................................................... S-36
Class B Group II Class Certificate Balance................................................... S-36
Class Notional Amounts....................................................................... S-1
S-33,
Class PO Cash Shortfall...................................................................... S-34
Class PO Deferred Amount..................................................................... S-5
Class PO Principal Distribution Amount....................................................... S-40
Cover,
Class X Notional Amount...................................................................... S-1
Clearing Agency.............................................................................. S-29
Clearing Corporation......................................................................... S-29
S-8,
Code......................................................................................... S-59
Compensating Interest Payments............................................................... S-27
CPR.......................................................................................... S-46
S-5,
Cross-Over Date.............................................................................. S-32
S-3,
Cut-off Date Pool Principal Balance.......................................................... S-12
Debt Service Reduction....................................................................... S-59
Decrement Tables............................................................................. S-47
Deficient Valuation.......................................................................... S-59
Definitive Certificate....................................................................... S-29
Deleted Mortgage Loan........................................................................ S-23
Depository................................................................................... S-29
Discount Mortgage Loan....................................................................... S-37
DTC.......................................................................................... S-29
S-12,
Due Date..................................................................................... S-42
S-8,
ERISA........................................................................................ S-60
Excess Losses................................................................................ S-43
Exemption.................................................................................... S-60
Expense Fees................................................................................. S-27
Expense Rate................................................................................. S-27
FHA.......................................................................................... S-24
FHLMC........................................................................................ S-13
FICO......................................................................................... S-25
Financial Intermediary....................................................................... S-29
Fitch........................................................................................ S-9
</TABLE>
S-63
<PAGE>
<TABLE>
<CAPTION>
PAGE
FNMA......................................................................................... S-13
<S> <C>
Fraud Loss Coverage Amount................................................................... S-58
Fraud Loss................................................................................... S-43
GNMA......................................................................................... S-24
Group I Available Funds...................................................................... S-31
Group II Available Funds..................................................................... S-31
Group I Class PO Principal Distribution Amount............................................... S-40
Group II Class PO Principal Distribution Amount.............................................. S-40
Group I Class X Interest Distribution Amount................................................. S-35
Group II Class X Interest Distribution Amount................................................ S-35
Group I Mortgage Loans....................................................................... ii
Group II Mortgage Loans...................................................................... ii
Group I Notional Amount...................................................................... S-1
Group II Notional Amount..................................................................... S-1
Group I Senior Principal Distribution Amount................................................. S-38
Group II Senior Principal Distribution Amount................................................ S-38
Headlands.................................................................................... S-23
Insurance Proceeds........................................................................... S-32
S-5,
Interest Accrual Period...................................................................... S-36
S-4,
Interest Distribution Amount................................................................. S-35
S-7,
Last Scheduled Distribution Date............................................................. S-43
Lehman Brothers.............................................................................. Cover
LIBOR........................................................................................ Cover
LIBOR Determination Date..................................................................... S-36
Liquidated Mortgage Loan..................................................................... S-43
Liquidation Proceeds......................................................................... S-32
Loan-to-Value Ratio.......................................................................... S-13
ii,
S-8,
Master REMIC................................................................................. S-59
Master Servicer.............................................................................. S-2
Master Servicing Fee......................................................................... S-27
Material Defect.............................................................................. S-22
Mortgage..................................................................................... S-22
Mortgage File................................................................................ S-22
Mortgage Loan Group.......................................................................... ii, S-3
Mortgage Loan Group I........................................................................ ii, S-3
Mortgage Loan Group II....................................................................... ii, S-3
Mortgage Loans............................................................................... ii, S-3
Mortgage Note................................................................................ S-22
Mortgage Pool................................................................................ ii
Mortgage Rate................................................................................ S-13
Mortgaged Properties......................................................................... S-3
Mortgagor.................................................................................... S-10
Net Interest Shortfall....................................................................... S-35
S-27,
Net Mortgage Rate............................................................................ S-38
S-27,
Net Prepayment Interest Shortfall(s)......................................................... S-36
Non-Discount Mortgage Loan................................................................... S-37
Non-Offered Certificates..................................................................... S-1
Non-PO Percentage............................................................................ S-37
Offered Certificates......................................................................... Cover
Original Applicable Credit Support Percentage................................................ S-41
Original Subordinate Principal Balance....................................................... S-39
PaineWebber.................................................................................. Cover
S-4,
Pass-Through Rate............................................................................ S-35
Pooling Agreement............................................................................ S-28
Pool Principal Balance....................................................................... S-42
PO Percentage................................................................................ S-37
Prepayment Assumption........................................................................ S-46
Prepayment Interest Shortfall................................................................ S-36
</TABLE>
S-64
<PAGE>
<TABLE>
<CAPTION>
PAGE
Prepayment Period............................................................................ S-32
<S> <C>
Principal Prepayment......................................................................... S-42
Pro Rata Share............................................................................... S-41
Prospectus................................................................................... ii
S-28,
Protected Account............................................................................ S-30
PTCE 83-1.................................................................................... S-60
PTCE 95-60................................................................................... S-61
Rating Agencies.............................................................................. S-9
Realized Loss................................................................................ S-43
Record Date.................................................................................. S-32
Reference Banks.............................................................................. S-37
Relevant Screen Page......................................................................... S-37
Relief Act................................................................................... S-28
Relief Act Reduction......................................................................... S-35
ii,
S-8,
REMIC........................................................................................ S-59
Replacement Mortgage Loan.................................................................... S-23
Repurchase Price............................................................................. S-23
Reserve Interest Rate........................................................................ S-37
Restricted Classes........................................................................... S-41
Scheduled Principal Balance.................................................................. S-42
Seller....................................................................................... ii, S-2
Senior Percentage............................................................................ S-39
Senior Prepayment Percentage................................................................. S-39
Senior Prepayment Percentage Stepdown Limitation............................................. S-39
SMMEA........................................................................................ S-8
S&P.......................................................................................... S-9
Special Hazard Loss.......................................................................... S-43
Special Hazard Loss Coverage Amount.......................................................... S-58
Sponsor...................................................................................... S-2
Structuring Assumptions...................................................................... S-47
Subordinate Prepayment Percentage............................................................ S-40
Subordinate Principal Distribution Amount.................................................... S-40
Subordination Percentage..................................................................... S-40
ii,
S-8,
Subsidiary REMIC............................................................................. S-59
Substitution Adjustment Amount............................................................... S-23
Super Jumbos................................................................................. S-24
Trust........................................................................................ ii
Trustee...................................................................................... S-2
Underwriters................................................................................. Cover
Underwritten Certificates.................................................................... S-2
Underwriting Standards....................................................................... S-24
S-4,
Unpaid Interest Shortfall.................................................................... S-35
VA........................................................................................... S-24
</TABLE>
S-65
<PAGE>
PROSPECTUS
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 in 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" COMMENCING ON PAGE 14 AND
IN THE PROSPECTUS SUPPLEMENT COMMENCING ON PAGE S-10.
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.
FEBRUARY 25, 1997
<PAGE>
PROSPECTUS SUPPLEMENT
The Supplement relating to a Series of Certificates to be offered hereunder
and thereunder will, among other things, set forth with respect to such Series:
(i) a description of the class or classes of Certificates to be offered; (ii)
the initial aggregate Certificate Balance of each class of Certificates included
in such Series and offered by such Supplement; (iii) the Pass-Through Rate (or
the method of determining such Pass-Through Rate) of each class of such
Certificates; (iv) the Last Scheduled Distribution Date of each class of such
Certificates, if applicable; (v) the method to be used to calculate the amount
to be distributed as principal on each Distribution Date; (vi) the application
of distributions of principal and interest to the classes of such Certificates
and the allocation of the amounts to be so applied; (vii) whether an election
will be made to treat the Trust as a REMIC; (viii) certain information
concerning the Mortgage Assets and any other assets included in the Trust for
such Series (including, in the case of Mortgage Loans: (a) the number of
Mortgage Loans; (b) the geographic distribution of the Mortgage Loans; (c) the
aggregate principal balance of the Mortgage Loans; (d) the types of dwelling
constituting the Mortgaged Properties; (e) the longest and shortest scheduled
terms to maturity of the Mortgage Loans; (f) the maximum principal balance of
the Mortgage Loans; (g) the maximum LTV of the Mortgage Loans at origination;
(h) the maximum and minimum Mortgage Rates borne by the Mortgage Loans; and (i)
the aggregate principal balance of non-owner-occupied properties); (ix) the
extent, nature and terms of any credit support applicable to such Series; (x)
the method of distribution of the Certificates; and (xi) other specific terms of
the offering.
ADDITIONAL INFORMATION
The Sponsor has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement under the Securities Act of 1933, as
amended (the "Securities Act"), with respect to the Certificates. This
Prospectus, which forms a part of the Registration Statement, and the Supplement
relating to each Series of Certificates contain information set forth in the
Registration Statement pursuant to the Rules and Regulations of the Commission.
For further information, reference is made to such Registration Statement and
the exhibits thereto, which may be inspected and copied at the facilities
maintained by the Commission at its Public Reference Section, 450 Fifth Street,
N.W., Washington, D.C. 20549, and at its Regional Offices located as follows:
Chicago Regional Office, 500 West Madison Street, Chicago, Illinois 60661; and
New York Regional Office, Seven World Trade Center, New York, New York 10048.
The Commission maintains a Web site at http://www.sec.gov. that contains
reports, proxy and information statements and other information regarding
registrants including the Sponsor, that file electronically with the Commission.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents filed by or on behalf of the Trust referred to in the
accompanying Supplement with the Commission pursuant to Section 13(a), 13(c), 14
or 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), on or after the date of such Supplement and prior to the termination of
any offering of the Certificates issued by such Trust shall be deemed to be
incorporated by reference in this Prospectus and to be a part of this Prospectus
from the date of the filing of such documents. Any statement contained in a
document incorporated or deemed to be incorporated by reference herein shall be
deemed to be modified or superseded for all purposes of this Prospectus to the
extent that a statement contained herein (or in the accompanying Supplement) or
in any other subsequently filed document which also is or is deemed to be
incorporated by reference modifies or replaces such statement. Any such
statement so modified or superseded shall not be deemed, except as modified or
superseded, to constitute a part of this Prospectus. 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.
2
<PAGE>
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.
3
<PAGE>
SUMMARY OF THE PROSPECTUS
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus and by reference to
information with respect to each Series of Certificates contained in the
Supplement to be prepared and delivered in connection with the offering of the
Certificates of such Series.
<TABLE>
<S> <C>
Title of Security..................................... Mortgage Pass-Through Certificates (the "Certificates"),
issuable in series (each a "Series"). Each Series will be
issued under a separate pooling agreement (each a
"Pooling Agreement").
Sponsor............................................... Headlands Mortgage Securities Inc., a Delaware
corporation (the "Sponsor").
Seller................................................ The seller or sellers (each, a "Seller") for a particular
Series will be named in the Supplement relating to such
Series (the "Supplement"). A Seller may be an affiliate
of the Sponsor.
Trustee............................................... The trustee (the "Trustee") for a particular Series will
be named in the related Supplement.
Master Servicer....................................... The entity or entities named as Master Servicer (the
"Master Servicer") in the related Supplement, which may
be an affiliate of the Sponsor. See "The Pooling and
Servicing Agreement -- Certain Matters Regarding the
Sponsor, the Seller and the Master Servicer."
Closing Date.......................................... The date (the "Closing Date") of the initial issuance of
a Series, as specified in the related Supplement.
The Trusts............................................ Each Trust will consist of Mortgage Loans and/or Mortgage
Certificates (collectively, the "Mortgage Assets"), any
real estate acquired through foreclosure or similar
proceeding, any applicable credit support, the assets in
the Certificate Account, any minimum prepayment,
reinvestment or similar agreement and any other assets
described in the related Supplement, all as described
herein and therein.
A. Mortgage Loans..................................... The mortgage loans included in a Trust (the "Mortgage
Loans") will be secured primarily by liens on residential
properties or shares in cooperative corporations
("Cooperatives") and the related proprietary leases. If
so specified in the related Supplement, the Mortgage
Assets of the related Trust may include mortgage
participation certificates or other beneficial interests
evidencing interests in mortgage loans. Such mortgage
loans may be conventional loans (i.e., loans that are not
insured by any governmental agency) or may be insured or
guaranteed by the Federal Housing Authority ("FHA"), or
the Veterans Administration ("VA"), as specified in the
related Supplement. All Mortgage Loans will have been
purchased by the Sponsor, either directly or through an
affiliate, from one or more Sellers.
</TABLE>
4
<PAGE>
<TABLE>
<S> <C>
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.
</TABLE>
5
<PAGE>
<TABLE>
<S> <C>
(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.
</TABLE>
6
<PAGE>
<TABLE>
<S> <C>
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.
</TABLE>
7
<PAGE>
<TABLE>
<S> <C>
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.
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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 Certificate-
holders") 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.
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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.
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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.
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Distributions on Regular Certificates to foreign
investors generally will not be subject to U.S.
withholding tax, provided applicable certification
procedures are complied with.
Subject to certain limitations that may be applicable to
Buydown Loans, REMIC Certificates will be treated as
"regular or residual interests in a REMIC" for domestic
building and loan associations and "real estate assets"
for real estate investment trusts. See "Certain Federal
Income Tax Consequences -- REMIC Certificates" herein.
Tax Status of Non-REMIC Certificates.................. For federal income tax purposes, the trust created to
hold the Mortgage Assets for each Series of Non-REMIC
Certificates will be classified as a grantor trust and
not as an association taxable as a corporation. Holders
of Non-REMIC Certificates of such Series which are not IO
Certificates will be treated as owners of undivided
interests in the trust and as equitable owners of
undivided interests in each of the Mortgage Assets held
by the trust, and such holders will be taxed on their pro
rata shares of the income from the related Mortgage
Assets and may be allowed to deduct their pro rata shares
of reasonable servicing fees, consistent with their
methods of accounting, subject to limitation in the case
of Non-REMIC Certificates held by individuals, estates,
or trusts (either directly or indirectly through certain
pass-through entities). If a Series of Non-REMIC
Certificates includes IO Certificates, holders of the
Certificates of such Series will be subject to the
"Stripped Bond Rules" of Section 1286 of the Code.
Subject to certain limitations that may be applicable to
Buydown Loans, to the extent the Mortgage Assets and the
related interests qualify for such treatment, interests
in the Mortgage Assets held by holders of applicable
Non-REMIC Certificates which are not IO Certificates will
be considered to represent "loans... secured by an
interest in real property" for domestic building and loan
associations and "real estate assets" for real estate
investment trusts.
It is not clear whether IO Certificates will be treated
as representing an ownership interest in qualifying
assets and income under Sections 7701(a)(19)(C)(v),
856(c)(5)(A) and 856(c)(3)(B) of the Code, although the
policy considerations underlying those Sections suggest
that such treatment should be available. It is also not
clear whether a reasonable prepayment assumption should
be applied in accruing original issue discount on the IO
Certificates.
See "Certain Federal Income Tax Consequences -- Non-REMIC
Certificates" herein.
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Legal Investment...................................... The Supplement for each Series of Certificates will
specify which, if any, of the classes of Certificates
offered thereby will constitute "mortgage-related
securities" for purposes of the Secondary Mortgage Market
Enhancement Act of 1984 ("SMMEA"). Classes of
Certificates that qualify as "mortgage related
securities" will be legal investments for certain types
of institutional investors to the extent provided in
SMMEA, subject, in any case, to any other regulations
that may govern investments by such institutional
investors. Institutions whose investment activities are
subject to review by federal or state authorities should
consult with their counsel or the applicable authorities
to determine whether an investment in a particular class
of Certificates (whether or not such class constitutes a
"mortgage related security") complies with applicable
guidelines, policy statements or restrictions.
ERISA Considerations.................................. A fiduciary of any employee benefit plan or other
retirement plan or arrangement subject to the Employee
Retirement Income Security Act of 1974, as amended
("ERISA") or the Code should carefully review with its
legal advisors whether the purchase or holding of
Certificates could give rise to a transaction prohibited
or not otherwise permissible under ERISA or the Code. See
"ERISA Considerations" herein. Certain classes of
Certificates may not be transferred unless the Trustee
and the Sponsor are furnished with a letter of
representation or an opinion of counsel to the effect
that such transfer will not result in violation of the
prohibited transaction provisions of ERISA and the Code
and will not subject the Trustee, the Sponsor or the
Master Servicer to additional obligations. See "ERISA
Considerations" herein.
Rating................................................ The Certificates of each class offered hereby and by a
Supplement will be rated in one of the four highest
rating categories by one or more nationally recognized
statistical rating organizations, as specified in such
Supplement (with respect to each Series of Certificates,
the "Rating Agency"). 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.
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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 the
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
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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 each 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 lender to realize upon its
security. For example, in a proceeding under the Bankruptcy Reform Act of 1978,
as amended (the "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 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 the Certificates and possible reductions in the aggregate amount of
such payments.
CERTAIN OTHER LEGAL CONSIDERATIONS REGARDING THE MORTGAGE LOANS
Applicable federal and state laws regulate interest rates and other charges
and require certain disclosures. In addition, other laws, public policy and
general principles of equity relating to the protection of consumers, unfair and
deceptive practices and debt collection practices may apply to the origination,
servicing and collection of the Mortgage Loans. For example, the federal
district court for the eastern district of Virginia recently announced a
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decision indicating that federal law prohibited lenders from paying independent
mortgage brokers a premium for loans with above-market interest rates. Depending
on the provisions of the applicable law and the specific facts and circumstances
involved, violations of these laws, policies and principles may limit the
ability to collect all or part of the principal of or interest on the Mortgage
Loans, may entitle the borrower to a refund of amounts previously paid and, in
addition, could subject the owner of the Mortgage Loans to damages and
administrative enforcement.
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
* Whenever the terms "Mortgage Pool" and "Certificates" are used in this
Prospectus, such terms will be deemed to apply, unless the context indicates
otherwise, to one specific Mortgage Pool and the Certificates representing
certain undivided interests, as described below, in a single trust fund (the
"Trust") consisting primarily of the Mortgage Assets in such Mortgage Pool.
Similarly, the term "Pass-Through Rate" will refer to the Pass-Through Rate
borne by the Certificates of one specific Series and the term "Trust" will
refer to one specific Trust.
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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.
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.
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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.
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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.
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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
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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
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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
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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
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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.
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PRINCIPAL. Unless otherwise specified in the related Supplement, the Class
Certificate Balance of any class of Certificates entitled to distributions of
principal will be the original Class Certificate Balance of such class of
Certificates specified in such Supplement, reduced by all distributions reported
to holders of such Certificates as allocable to principal and adjustments, if
any, in respect of losses and (i) in the case of Accrual Certificates, increased
by all interest accrued but not then distributable on such Accrual Certificates
and (ii) in the case of adjustable rate Certificates, subject to the effect of
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
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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
<S> <C>
PRINCIPAL TYPES
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.
</TABLE>
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<TABLE>
<CAPTION>
CATEGORIES OF CLASSES DEFINITION
<S> <C>
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.
INTEREST TYPES
Accrual......................................... A class that accretes the amount of accrued interest otherwise
distributable on such class, which amount will be added as
principal to the principal balance of such class on each
applicable Distribution Date. Such accretion may continue until
some specified event has occurred or until such class of
Accrual Certificates is retired.
Fixed Rate...................................... A class with a Pass-Through Rate that is fixed throughout the
life of the class.
Floating Rate................................... A class with a Pass-Through Rate that resets periodically based
upon a designated Index and that varies directly with changes
in such Index.
Inverse Floating Rate........................... A class with a Pass-Through Rate that resets periodically based
upon a designated Index and that varies inversely with changes
in such Index.
IO.............................................. Certificates that receive some or all of the interest payments
made on the Mortgage Assets and little or no principal. IO
Certificates have either a nominal principal balance or a
notional amount. A nominal principal balance represents actual
principal that will be paid on such Certificates. It is
referred to as nominal since it is extremely small compared to
other classes. A notional amount is the amount used as a
reference to calculate the amount of interest due on an IO
Certificate that is not entitled to any distributions in
respect of principal.
Partial Accrual................................. A class that accretes a portion of the amount of accrued
interest thereon, which amount will be added to the principal
balance of such class on each applicable Distribution Date,
with the remainder of such accrued interest to be distributed
currently as interest on such class. Such accretion may
continue until a specified event 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>
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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;
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(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
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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THE POOLING AND SERVICING AGREEMENT
Set forth below is a summary of certain provisions of the Pooling Agreement
which are not described elsewhere in this Prospectus.
ASSIGNMENT OF MORTGAGE LOANS
ASSIGNMENT OF MORTGAGE LOANS. At the time of issuance of each Series of
Certificates, the Sponsor will cause the Mortgage Loans comprising the related
Trust to be assigned to the Trustee together with all principal and interest on
the Mortgage Loans, except for principal and interest due on or before the
Cut-off Date. The Trustee will, concurrently with such assignment, authenticate
and deliver the Certificates to the Sponsor or its designated agent in exchange
for the Mortgage Loans and other assets, if any. Each Mortgage Loan will be
identified in a schedule appearing as an exhibit to the Pooling Agreement. Such
schedule will include information as to the outstanding principal balance of
each Mortgage Loan after application of payments due on the Cut-off Date, as
well as information regarding the Mortgage Rate, the current scheduled monthly
payment of principal and interest, the maturity of each Mortgage Note, the LTV
and certain other information.
In addition, the Sponsor will, as to each Mortgage Loan, deliver to the
Trustee (or a custodian) the Mortgage Note endorsed without recourse in blank or
to the order of the Trustee, an assignment to the Trustee of the Mortgage in
form for recording or filing as may be appropriate in the state of the Mortgaged
Property, the original recorded Mortgage with evidence of recording or filing
indicated thereon, or a copy of such Mortgage certified by the recording office
in those jurisdictions where the original is retained by the recording office, a
copy of the title insurance policy or other evidence of title, and evidence of
any Primary Mortgage Insurance Policy for such Mortgage Loan, if applicable. In
certain instances where documents respecting a Mortgage Loan may not be
available prior to execution of the Pooling Agreement, the Sponsor may deliver
copies thereof and deliver such documents to the Trustee promptly upon receipt.
With respect to any Mortgage Loans that are Cooperative Loans, the Sponsor
will cause to be delivered to the Trustee the related original cooperative note
endorsed without recourse in blank or to the order of the Trustee, the original
security agreement, the proprietary lease or occupancy agreement, the
recognition agreement, an executed financing agreement and the relevant stock
certificate, related blank stock powers and any other document specified in the
related Supplement. The Sponsor will cause to be filed in the appropriate office
an assignment and a financing statement evidencing the Trustee's security
interest in each Cooperative Loan.
The Trustee (or a custodian) will review the Mortgage Loan documents within
a specified number of days of receipt thereof in original form to ascertain that
all required documents have been properly executed and received. The Trustee
will hold such documents for each Series in trust for the benefit of holders of
the Certificates of such Series. Unless otherwise specified in the related
Supplement, if any document is found by the Trustee not to have been properly
executed or received or to be unrelated to the Mortgage Loans identified in the
Pooling Agreement, and such defect cannot be cured within the permitted time
period, the Seller will replace such Mortgage Loan with an eligible substitute
mortgage loan (as described in the related Supplement) or repurchase the related
Mortgage Loan from the Trustee within a specified number of days of receipt of
notice of the defect at a price generally equal to the outstanding principal
balance thereof, plus accrued and unpaid interest thereon at the applicable
Mortgage Rate to the first day of the month following the month of repurchase
(less any unreimbursed Advances or amounts payable as related servicing
compensation if the Seller is the Master Servicer with respect to such Mortgage
Loan). Upon receipt of the repurchase price, in the case of a repurchase, the
Trustee will reimburse any unreimbursed Advances of principal and interest by
the Master Servicer with respect to such Mortgage Loan or unreimbursed payments
under any form of credit enhancement. The remaining portion of such repurchase
price will then be passed through to holders of the Certificates as liquidation
proceeds in accordance with the procedures specified under "Description of
Certificates -- Distributions" herein. This substitution/repurchase obligation
constitutes the sole remedy available to Certificateholders or the Trustee for
such a defect in a constituent document.
Any restrictions on such substitution or repurchase with respect to a
Series of Certificates will be set forth in the related Supplement.
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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
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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):
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(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,
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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,
lightning, 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.
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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
Mortgaged 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
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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.
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CERTAIN MATTERS REGARDING THE SPONSOR, THE SELLER AND THE MASTER SERVICER
The Pooling Agreement for each Series of Certificates backed in whole or in
part by Mortgage Loans will provide that the Master Servicer may not resign from
its obligations and duties as Master Servicer thereunder, except upon (a)
appointment of a successor servicer and receipt by the Trustee of a letter from
the Rating Agency that such resignation and appointment will not result in the
downgrading of the Certificates or (b) determination that its duties thereunder
are no longer permissible under applicable law. No such resignation under (b)
above will become effective until the Trustee or a successor has assumed the
Master Servicer's obligations and duties under such Pooling Agreement.
The Pooling Agreement for each such Series will also provide that neither
the Sponsor, the Master Servicer nor the Seller, nor any directors, officers,
employees or agents of any of them (collectively, the "Indemnified Parties")
will be under any liability to the Trust or Certificateholders or the Trustee,
any subservicer or others for any action taken (or not taken) by any Indemnified
Party, any subservicer or the Trustee in good faith pursuant to the Pooling
Agreement, or for errors in judgment; PROVIDED, HOWEVER, that neither the
Sponsor, the Seller, the Master Servicer nor any such person will be protected
against any liability which would otherwise be imposed by reason of willful
misfeasance, bad faith or gross negligence in the performance of duties or by
reason of reckless disregard of obligations and duties thereunder. The Pooling
Agreement will further provide that each Indemnified Party is entitled to
indemnification by the Trust and will be held harmless against any loss,
liability or expense incurred in connection with any legal action relating to
the Pooling Agreement or the Certificates for such Series, other than any loss,
liability or expense related to any specific Mortgage Loan or Mortgage Loans
(except any such loss, liability or expense otherwise reimbursable pursuant to
the Pooling Agreement) and any loss, liability or expense incurred by reason of
willful misfeasance, bad faith or gross negligence in the performance of such
indemnified Party's duties thereunder or by reason of reckless disregard by such
indemnified Party of its obligations and duties thereunder. In addition, the
Pooling Agreement will provide that neither the Sponsor, the Seller nor the
Master Servicer is under any obligation to appear in, prosecute or defend any
legal action which is not incidental to, in the case of the Sponsor, the Seller
or the Master Servicer, its duties under the Pooling Agreement and which in its
opinion may involve it in any expense or liability. Each of the Sponsor, the
Seller and the Master Servicer may, however, in its discretion, undertake any
such action which it may deem necessary or desirable with respect to the Pooling
Agreement and the rights and duties of the parties thereto and the interests of
Certificateholders thereunder. In such event, the legal expenses and costs of
such action and any liability resulting therefrom will be expenses, costs and
liabilities of the Trust and the Sponsor, the Seller and the Master Servicer
will be entitled to be reimbursed therefor out of the Certificate Account.
EVENTS OF DEFAULT
Events of default by the Master Servicer under the Pooling Agreement for
each Series of Certificates evidencing an interest in Mortgage Loans will
consist of (i)(a) any failure by the Master Servicer to make an Advance which
continues unremedied for one business day or (b) any failure by the Master
Servicer to make or cause to be made any other required payment pursuant to the
Pooling Agreement which continues unremedied for five days; (ii) any failure by
the Master Servicer duly to observe or perform in any material respects any
other of its covenants or agreements in the Certificates or in such Pooling
Agreement which continues unremedied for 60 days after the giving of written
notice of such failure to the Master Servicer by the Trustee, or to the Master
Servicer and the Trustee by holders of Certificates evidencing not less than 25%
of the aggregate voting rights of the Certificates for such Series; and (iii)
certain events of insolvency, readjustment of debt, marshalling of assets and
liabilities or similar proceedings and certain actions by the Master Servicer
indicating insolvency, reorganization or inability to pay its obligations.
RIGHTS UPON EVENT OF DEFAULT
As long as an Event of Default under the Pooling Agreement for any Series
of Certificates evidencing an interest in Mortgage Loans remains unremedied, the
Trustee or holders of Certificates evidencing not less than a majority of the
aggregate voting rights of the Certificates for such Series may terminate all of
the rights and obligations of the Master Servicer under such Pooling Agreement,
whereupon the Trustee will succeed to all the responsibilities, duties and
liabilities of the Master Servicer under such Pooling Agreement, including, if
specified in the related Supplement, the obligation to make Advances and will be
entitled to similar compensation
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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 withdraw 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 66 2/3% 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 or any such Certificate without the consent of the
holder of such Certificate or (ii) with respect to any Series of Certificates,
reduce the aforesaid percentages of Certificates the holders of which are
required to consent to any such amendment without the consent of the holders of
all Certificates of such Series then outstanding.
LIST OF CERTIFICATEHOLDERS
In the event the Trustee is not the Certificate Registrar for a Series of
Certificates, upon written request of the Trustee, the Certificate Registrar
will provide to the Trustee within 30 days after the receipt of such request a
list of the names and addresses of all Certificateholders of record of a
particular Series as of the most recent Record Date for payment of distributions
to Certificateholders of that Series. Upon written request of three or more
Certificateholders of record of a Series of Certificates, for purposes of
communicating with other Certificateholders with respect to their rights under
the Pooling Agreement for such Series, the Trustee will afford such
Certificateholders access during business hours to the most recent list of
Certificateholders of that Series held by the Trustee.
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TERMINATION; OPTIONAL TERMINATION
The obligations of the Sponsor, the Seller, the Master Servicer and the
Trustee created by the Pooling Agreement will terminate upon the earlier of (i)
the maturity or other liquidation of the last Mortgage Loan or Mortgage
Certificate subject thereto and the disposition of all property acquired upon
foreclosure of any Mortgage Loan and (ii) the purchase by the Master Servicer
or, if REMIC treatment has been elected and if specified in the related
Supplement, by the holder of the residual interest in the REMIC, from the
related Trust of all of the remaining Mortgage Assets and all property acquired
in respect of such Mortgage Assets. In no event, however, will the Trust created
by any Pooling Agreement continue beyond the expiration of 21 years from the
death of the survivor of the persons named in such Pooling Agreement.
Unless otherwise specified in the related Supplement, any purchase of
Mortgage Assets and property acquired in respect of Mortgage Assets evidenced by
a Series of Certificates will be made at the option of the Master Servicer or,
if specified in the related Supplement for a Series of REMIC Certificates the
holders of the Residual Certificates of such Series, at a price, and in
accordance with the procedures, specified in the related Supplement. The
exercise of such right will effect early retirement of the Certificates of that
Series, but the right of the Master Servicer or, if applicable, such holder of
the Residual Certificates of such Series, to so purchase is subject to the
principal balance of the related Mortgage Assets being less than the percentage
specified in the related Supplement of the aggregate principal balance of the
Mortgage Assets at the Cut-off Date for the Series. The foregoing is subject to
the provision that if a REMIC election is made with respect to a Trust, any
repurchase pursuant to clause (ii) above will be made only in connection with a
"qualified liquidation" of the REMIC within the meaning of Section 860F(g)(4) of
the Code.
For each Series, the holder or holders of the Residual Certificates or the
Trustee, as the case may be, will give written notice of termination of the
Pooling Agreement to each Certificateholder, and the final distribution will be
made only upon surrender and cancellation of the Certificates at an office or
agency of the Trustee specified in the notice of termination.
THE TRUSTEE
The identity of the commercial bank, savings and loan association or trust
company named as Trustee for each Series of Certificates will be set forth in
the related Supplement. The Trustee may have normal banking relationships with
the Sponsor, the Seller, the Master Servicer and/or the subservicers.
CERTAIN LEGAL ASPECTS OF THE MORTGAGE LOANS
The following discussion contains summaries, which are general in nature,
of certain legal matters relating to the Mortgage Loans. Because such legal
aspects are governed primarily by applicable state law (which laws may differ
substantially), the summaries do not purport to be complete or to reflect the
laws of any particular state or to encompass the laws of all states in which the
security for the Mortgage Loans is situated. The summaries are qualified in
their entirety by reference to the appropriate laws of the states in which
Mortgage Loans may be originated.
GENERAL
The Mortgage Loans will be secured by deeds of trust, mortgages, security
deeds or deeds to secure debt, depending upon the prevailing practice in the
state in which the property subject to the loan is located. Deeds of trust are
used almost exclusively in California instead of mortgages. A mortgage creates a
lien upon the real property encumbered by the mortgage, which lien is generally
not prior to the lien for real estate taxes and assessments. Priority between
mortgages depends on their terms and generally on the order of recording with a
state or county office. There are two parties to a mortgage, the mortgagor, who
is the borrower and owner of the mortgaged property, and the mortgagee, who is
the lender. Under the mortgage instrument, the mortgagor delivers to the
mortgagee a note or bond and the mortgage. Although a deed of trust is similar
to a mortgage, a deed of trust formally has three parties, the borrower-property
owner called the trustor (similar to a mortgagor), a lender (similar to a
mortgagee) called the beneficiary, and a third-party grantee called the trustee.
Under a deed of trust, the borrower grants the property, irrevocably until the
debt is paid, in trust, generally with a power of sale, to the trustee to secure
payment of the obligation. A security deed and a deed to secure debt are special
types of deeds
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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
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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 on the real estate, may, during a statutorily prescribed
reinstatement period, cure a monetary default by paying the entire amount in
arrears plus other designated costs and expenses incurred in enforcing 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
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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.
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RIGHTS OF REDEMPTION
In some states after sale pursuant to a deed of trust or foreclosure of a
mortgage, the borrower and certain foreclosed junior lienors are given a
statutory period in which to redeem the property from the foreclosure sale. In
certain other states, including California, this right of redemption applies
only to sales following judicial foreclosure, and not to sales pursuant to a
non-judicial power of sale. In most states where the right of redemption is
available, statutory redemption may occur upon payment of the foreclosure
purchase price, accrued interest and taxes. In some states, the right to redeem
is an equitable right. The effect of a right of redemption is to diminish the
ability of the lender to sell the foreclosed property. The exercise of a right
of redemption would defeat the title of any purchaser at a foreclosure sale, or
of any purchaser from the lender subsequent to judicial foreclosure or sale
under a deed of trust. Consequently, the practical effect of the redemption
right is to force the lender to retain the property and pay the expenses of
ownership until the redemption period has run.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
Certain states have imposed statutory restrictions that limit the remedies
of a beneficiary under a deed of trust or a mortgagee under a mortgage. In some
states, including California, statutes limit the right of the beneficiary or
mortgagee to obtain a deficiency judgment against the borrower following
foreclosure or sale under a deed of trust. A deficiency judgment is a personal
judgment against the borrower equal in most cases to the difference between the
amount due to the lender and the current fair market value of the property at
the time of the foreclosure sale.
Some state statutes may require the beneficiary or mortgagee to exhaust the
security afforded under a deed of trust or mortgage by foreclosure in an attempt
to satisfy the full debt before bringing a personal action against the borrower.
In certain other states, the lender has the option of bringing a personal action
against the borrower on the debt without first exhausting such security;
however, in some of these states, the lender, following judgment on such
personal action, may be deemed to have elected a remedy and may be precluded
from exercising remedies with respect to the security. Consequently, the
practical effect of the election requirement, when applicable, is that lenders
will usually proceed first against the security rather than bringing a personal
action against the borrower.
In some states, exceptions to the anti-deficiency statutes are provided for
in certain instances where the value of the lender's security has been impaired
by acts or omissions of the borrower, for example, in the event of waste of the
property.
In addition to anti-deficiency and related legislation, numerous other
federal and state statutory provisions, including the federal bankruptcy laws,
the federal Soldiers' and Sailors' Civil Relief Act of 1940 and state laws
affording relief to debtors, may interfere with or affect the ability of the
secured mortgage lender to realize upon its security. For example, in a
proceeding under the federal Bankruptcy Code, a lender may not foreclose on a
mortgaged property without the permission of the bankruptcy court. The
rehabilitation plan proposed by the debtor may provide, if the mortgaged
property is not the debtor's principal residence and the court determines that
the value of the mortgaged property is less than the principal balance of the
mortgage loan, for the reduction of the secured indebtedness to the value of the
mortgaged property as of the date of the commencement of the bankruptcy,
rendering the lender a general unsecured creditor for the difference, and also
may reduce the monthly payments due under such mortgage loan, change the rate of
interest and alter the mortgage loan repayment schedule. The effect of any such
proceedings under the federal Bankruptcy Code, including but not limited to any
automatic stay, could result in delays in receiving payments on the Mortgage
Loans underlying a Series of Certificates and possible reductions in the
aggregate amount of such payments.
The federal tax laws provide priority to certain tax liens over the lien of
a mortgage or secured party. Numerous federal and state consumer protection laws
impose substantive requirements upon mortgage lenders in connection with the
origination, servicing and enforcement of mortgage loans. These laws include the
federal Truth-in-Lending Act, Real Estate Settlement Procedures Act, Equal
Credit Opportunity Act, Fair Credit Billing Act, Fair Credit Reporting Act and
related statutes and regulations. These federal and state laws impose specific
statutory liabilities upon lenders who fail to comply with the provisions of the
law. In some cases, this liability may affect assignees of the loans or
contracts.
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Generally, Article 9 of the UCC governs foreclosure on Cooperative shares
and the related proprietary lease or occupancy agreement. Some courts have
interpreted section 9-504 of the UCC to prohibit a deficiency award unless the
creditor establishes that the sale of the collateral (which, in the case of a
Cooperative Loan, would be the shares of the Cooperative and the related
proprietary lease or occupancy agreement) was conducted in a commercially
reasonable manner.
ENVIRONMENTAL RISKS
Real property pledged as security to a lender may be subject to unforeseen
environmental risks. Under the laws of certain states, contamination of a
property may give rise to a lien on the property to assure the payment of the
costs of clean-up. In several states such a lien has priority over the lien of
an existing mortgage against such property. In addition, under the federal
Comprehensive Environmental Response, Compensation and Liability Act of 1980
("CERCLA"), the United States Environmental Protection Agency ("EPA") may impose
a lien on property where the EPA has incurred clean-up costs. However, a CERCLA
lien is subordinate to pre-existing, perfected security interests.
Under the laws of some states, and under CERCLA, it is conceivable that a
secured lender may be held liable as an "owner" or "operator" for the costs of
addressing releases or threatened releases of hazardous substances at a
Mortgaged Property, even though the environmental damage or threat was caused by
a prior or current owner or operator. CERCLA imposes liability for such costs on
any and all "responsible parties," including owners or operators. However,
CERCLA excludes from the definition of "owner or operator" a secured creditor
who holds indicia of ownership primarily to protect its security interest (the
"secured creditor exclusion"). Thus, if a lender's activities begin to encroach
on the actual management of a contaminated facility or property, the lender may
incur liability as an "owner or operator" under CERCLA. Similarly, if a lender
forecloses and takes title to a contaminated facility or property, the lender
may incur CERCLA liability in various circumstances, including, but not limited
to, when it holds the facility or property as an investment (including leasing
the facility or property to a third party), or fails to market the property in a
timely fashion.
If a lender is or becomes liable, it can bring an action for contribution
against any other "responsible parties," including a previous owner or operator,
who created the environmental hazard, but those persons or entities may be
bankrupt or otherwise judgment proof. The costs associated with environmental
cleanup may be substantial. It is conceivable that such costs arising from the
circumstances set forth above would result in a loss to Certificateholders.
CERCLA does not apply to petroleum products, and the secured creditor
exclusion does not govern liability for cleanup costs under federal laws other
than CERCLA, in particular Subtitle I of the federal Resource Conservation and
Recovery Act ("RCRA"), which regulates underground petroleum storage tanks
(except heating oil tanks). The EPA has adopted a lender liability rule for
underground storage tanks under Subtitle I of RCRA. Under such rule, a holder of
a security interest in an underground storage tank or real property containing
an underground storage tank is not considered an operator of the underground
storage tank as long as petroleum is not added to, stored in or dispensed from
the tank. In addition, under the Asset Conservation, Lender Liability and
Deposit Insurance Protection Act of 1996, the protections accorded to lenders
under CERCLA are also accorded to holders of security interests in underground
tanks. It should be noted, however, that liability for cleanup of petroleum
contamination may be governed by state law, which may not provide for any
specific protection for secured creditors.
Except as otherwise specified in the applicable Supplement, at the time the
Mortgage Loans were originated, no environmental assessment or a very limited
environmental assessment of the Mortgage Properties was conducted.
Whether actions taken by a lender would constitute participation in the
management of a mortgaged property, or the business of a borrower, so as to
render the secured creditor exemption unavailable to a lender has been a matter
of judicial interpretation of the statutory language, and court decisions have
been inconsistent. In 1990, the Court of Appeals for the Eleventh Circuit
suggested that the mere capacity of the lender to influence a borrower's
decisions regarding disposal of hazardous substances was sufficient
participation in the management of the borrower's business to deny the
protection of the secured creditor exemption to the lender.
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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
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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.
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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 interests 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 that an
Underwriter's Exemption will apply.
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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 is 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
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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 mark)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 will be passed upon for the Sponsor by
Tobin & Tobin, a professional corporation, San Francisco, California. Certain
federal income tax consequences with respect to the Certificates will be passed
upon for the Sponsor by Brown & Wood LLP, New York, New York. Brown & Wood LLP,
New York, New York will act as counsel for the Underwriter.
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
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"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;
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(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.
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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
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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
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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 price 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
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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
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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.
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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.
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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.
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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
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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
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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
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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
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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
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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.
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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
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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.
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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
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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-
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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
76
<PAGE>
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.
77
<PAGE>
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.
78
<PAGE>
INDEX TO DEFINED TERMS
<TABLE>
<CAPTION>
PAGE
<S> <C>
1986 Act............................................................................................... 64
Accrual Certificates................................................................................... 24
Accrual Period......................................................................................... 65
Advance................................................................................................ 11
Appraised Value........................................................................................ 18
ARM.................................................................................................... 58
ARM Loans.............................................................................................. 61
Assumed Reinvestment Rate.............................................................................. 25
Balloon Payments....................................................................................... 5,17
Bankruptcy Bond........................................................................................ 10,32
Bankruptcy Code........................................................................................ 15
Buydown Fund........................................................................................... 17
Buydown Loans.......................................................................................... 17
CERCLA................................................................................................. 51
Certificates........................................................................................... 4,16
Certificate Account.................................................................................... 7,39
Certificate Balance.................................................................................... 8
Certificate Register................................................................................... 24
Certificateholders..................................................................................... 16,18
Class Certificate Balance.............................................................................. 24
Closing Date........................................................................................... 4
Code................................................................................................... 57
Commission............................................................................................. 2
Companion Classes...................................................................................... 27
Contingent Regulations................................................................................. 66
Cooperatives........................................................................................... 4
Cooperative Loans...................................................................................... 16
Cut-off Date........................................................................................... 10
D&P.................................................................................................... 54
Deferred Interest...................................................................................... 68
Distribution Date...................................................................................... 8
Eligible Account....................................................................................... 39
Eligible Investments................................................................................... 22,39
EPA.................................................................................................... 51
ERISA.................................................................................................. 13
Exchange Act........................................................................................... 2
FHA.................................................................................................... 19
FHA Insurance.......................................................................................... 11
FHA Loans.............................................................................................. 19
FHLMC.................................................................................................. 1
FHLMC Act.............................................................................................. 20
FHLMC Certificate Group................................................................................ 20
Fitch.................................................................................................. 54
FNMA................................................................................................... 1
FNMA Certificates...................................................................................... 21
Fraud Loss............................................................................................. 10,31
Garn-St Germain Act.................................................................................... 52
GNMA................................................................................................... 1
GNMA Certificates...................................................................................... 19
</TABLE>
79
<PAGE>
<TABLE>
<CAPTION>
PAGE
GNMA I Certificates.................................................................................... 19
<S> <C>
GNMA II Certificates................................................................................... 19
Housing Act............................................................................................ 19
HUD.................................................................................................... 19
Indemnified Parties.................................................................................... 44
Index.................................................................................................. 17
Interest Accrual Period................................................................................ 24
IO Certificates........................................................................................ 8
IRS.................................................................................................... 58
Issuer................................................................................................. 62,70
Labor Regulations...................................................................................... 53
Last Scheduled Distribution Date....................................................................... 25
Legislative History.................................................................................... 61
Lockout Periods........................................................................................ 6,17
LTV.................................................................................................... 18
Master REMIC........................................................................................... 63
Master Servicer........................................................................................ 4
Master Servicing Fee................................................................................... 43
Mezzanine Certificates................................................................................. 9,30
Moody's................................................................................................ 54
Mortgage............................................................................................... 16
Mortgage Assets........................................................................................ 1,4,16
Mortgage Certificates.................................................................................. 6
Mortgage Loans......................................................................................... 4
Mortgage Note(s)....................................................................................... 5,16
Mortgage Pool.......................................................................................... 16
Mortgage Pool Insurance Policy......................................................................... 10,30
Mortgage Rate.......................................................................................... 5
Mortgaged Properties................................................................................... 16
NCUA................................................................................................... 56
OID Regulations........................................................................................ 58,64
PACs................................................................................................... 26
Pass-Through Rate...................................................................................... 8,16
Payment Lag Certificates............................................................................... 68
Phantom Income......................................................................................... 70
Plan................................................................................................... 53
PO Certificates........................................................................................ 8
Policy Statement....................................................................................... 56
Pool Insurer........................................................................................... 30
Pooling Agreement...................................................................................... 4
Pre-Issuance Accrued Interest.......................................................................... 68
Prepayment Assumption.................................................................................. 61,75
Primary Insurer........................................................................................ 42
Primary Mortgage Insurance Policy...................................................................... 18
Principal Prepayments.................................................................................. 25
Proposed Mark-to-Market Regulations.................................................................... 73
PTE 83-1............................................................................................... 55
Rating Agency.......................................................................................... 13
RCRA................................................................................................... 51
Record Date............................................................................................ 24
Regular Certificates................................................................................... 63
Relief Act............................................................................................. 52
REMIC.................................................................................................. 1,57
</TABLE>
80
<PAGE>
<TABLE>
<CAPTION>
PAGE
REMIC Regulations...................................................................................... 57
<S> <C>
REO Property........................................................................................... 29
Reserve Fund........................................................................................... 9,33
Residual Certificates.................................................................................. 63
S&P.................................................................................................... 54
Securities Act......................................................................................... 2
Seller................................................................................................. 1,4,16
Senior Certificates.................................................................................... 7
Senior Certificateholders.............................................................................. 9
Series................................................................................................. 4
SMMEA.................................................................................................. 13
Special Hazard Insurer................................................................................. 32
Special Hazard Insurance Policy........................................................................ 10
Sponsor................................................................................................ 4,35
Stripped ARM Obligations............................................................................... 61
Stripped Bond Certificates............................................................................. 60
Stripped Coupon Certificates........................................................................... 60
Subordinate Certificates............................................................................... 7
Subordinate Certificateholders......................................................................... 9
Subsidiary REMIC....................................................................................... 63
Supplement............................................................................................. 1,4
TACs................................................................................................... 27
Thrift Institutions.................................................................................... 72
Title V................................................................................................ 52
Trust.................................................................................................. 1,16
Trustee................................................................................................ 4
UCC.................................................................................................... 49
Underwriter's Exemptions............................................................................... 53
U.S. Person............................................................................................ 62,75,76
VA..................................................................................................... 4,19
VA Guaranty............................................................................................ 11
Waiver Letter.......................................................................................... 10,31
</TABLE>
81
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS SUPPLEMENT OR THE
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON. THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS DO NOT CONSTITUTE
AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES
OFFERED HEREBY, NOR AN OFFER OF OFFERED CERTIFICATES IN ANY STATE OR
JURISDICTION IN WHICH, OR TO ANY PERSON TO WHOM, SUCH OFFER WOULD BE UNLAWFUL.
THE DELIVERY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS AT ANY TIME DOES
NOT IMPLY THAT THE INFORMATION CONTAINED HEREIN OR THEREIN IS CORRECT AS OF ANY
TIME SUBSEQUENT TO ITS DATE; HOWEVER, IF ANY MATERIAL CHANGE OCCURS WHILE THIS
PROSPECTUS SUPPLEMENT OR THE PROSPECTUS IS REQUIRED BY LAW TO BE DELIVERED, THIS
PROSPECTUS SUPPLEMENT OR THE PROSPECTUS WILL BE AMENDED OR SUPPLEMENTED
ACCORDINGLY.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
PROSPECTUS SUPPLEMENT
Summary of Terms.............................. S-1
Risk Factors.................................. S-10
The Mortgage Pool............................. S-12
Servicing of Mortgage Loans................... S-23
Description of the Certificates............... S-28
Prepayment and Yield Considerations........... S-44
Credit Support................................ S-58
Use of Proceeds............................... S-59
Federal Income Tax Consequences............... S-59
ERISA Considerations.......................... S-60
Method of Distribution........................ S-61
Legal Matters................................. S-61
Certificate Rating............................ S-62
Index to Defined Terms........................ S-63
PROSPECTUS
Prospectus Supplement......................... 2
Additional Information........................ 2
Incorporation of Certain Documents by
Reference................................... 2
Summary of the Prospectus..................... 4
Risk Factors.................................. 14
The Trusts.................................... 16
Description of Certificates................... 23
Credit Enhancement............................ 29
Yield and Prepayment Considerations........... 33
The Sponsor................................... 35
Use of Proceeds............................... 35
Mortgage Loan Program......................... 35
The Pooling and Servicing
Agreement................................... 37
Certain Legal Aspects of the Mortgage Loans... 46
ERISA Considerations.......................... 53
Legal Investment Considerations............... 55
Legal Matters................................. 56
Federal Income Tax Consequences............... 56
State Tax Considerations...................... 77
Plans of Distribution......................... 77
Financial Information......................... 77
Rating........................................ 78
Index to Defined Terms........................ 79
</TABLE>
$228,344,859
(APPROXIMATE)
(Headlands logo appears here)
SPONSOR
HEADLANDS MORTGAGE COMPANY
SELLER AND MASTER SERVICER
MORTGAGE PASS-THROUGH
CERTIFICATES,
SERIES 1997-2
PROSPECTUS SUPPLEMENT
BEAR, STEARNS & CO. INC.
PAINEWEBBER INCORPORATED
APRIL 24, 1997
