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FILE PURSUANT TO RULE 424(b)(5)
File number 333-46019
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED OCTOBER 26, 1998)
$289,522,961
(APPROXIMATE)
[LOGO]
HEADLANDS MORTGAGE SECURITIES
SPONSOR
PNC MORTGAGE SECURITIES CORP.
SELLER AND MASTER SERVICER
Mortgage Pass-Through Certificates, Series 1998-1
The certificates represent obligations of the trust only and do not represent an
interest in or obligation of Headlands Mortgage Securities Inc., PNC Mortgage
Securities Corp., State Street Bank and Trust Company or any of their
affiliates.
This prospectus supplement may be used to offer and sell the certificates only
if accompanied by the Prospectus.
THE TRUST WILL ISSUE:
o Three classes of senior Class A Certificates.
o One class of senior interest-only Class X-1 Certificates.
o One class of senior interest-only Class X-2 Certificates.
o One class of senior principal-only Class PO Certificates.
o One class of senior residual Class R Certificates.
o Six classes of Class B Certificates all of which are subordinate to, and
provide credit enhancement for the Class A, Class X-1, Class X-2, Class PO
and and Class R Certificates. Each class of Class B Certificates is also
subordinated to each class of Class B Certificates, if any, with a lower
numerical designation.
THE CERTIFICATES:
o Represent ownership interests in a trust consisting primarily of a pool of
fixed rate, first lien residential mortgage loans.
o Currently have no trading market.
o Receive distributions on the 25th day of each month, beginning on November
25, 1998.
o Offered pursuant to this prospectus and prospectus supplement are listed
under the heading "Offered Certificates" in the table on page S-3.
RISKS:
o There will be no distributions of principal to the Class A-3 Certificates
until November 2003.
o A rapid rate of principal payments on the mortgage loans could result in
failure of Class X-1 or Class X-2 certificateholders to recover their
initial investments.
o Net interest shortfalls from prepayments on mortgage loans and losses from
liquidation of defaulted mortgage loans will adversely affect the yield to
investors in the certificates, and the investors in the Class B
Certificates in particular.
o REVIEW THE INFORMATION IN "RISK FACTORS" ON PAGE S-7 IN THIS PROSPECTUS
SUPPLEMENT AND PAGE 13 IN THE PROSPECTUS.
Donaldson, Lufkin & Jenrette Securities Corporation, as Underwriter, will buy
the offered certificates from the Sponsor at a price equal to 101.99136% of
their face value. The Underwriter will sell the offered certificates from time
to time in negotiated transactions.
The trust will make a REMIC election for federal income tax purposes.
If the terms of your series of certificates vary between this prospectus
supplement and the prospectus, you should rely on the information in this
prospectus supplement.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS SUPPLEMENT OR THE PROSPECTUS IS ACCURATE OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
OCTOBER 28, 1998
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TABLE OF CONTENTS
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PROSPECTUS SUPPLEMENT
SUMMARY INFORMATION ..................... S-3
RISK FACTORS ............................ S-7
PNC MORTGAGE SECURITIES CORP. ........... S-9
THE MORTGAGE POOL ....................... S-10
SERVICING OF MORTGAGE LOANS ............. S-19
DESCRIPTION OF THE CERTIFICATES ......... S-22
PREPAYMENT AND YIELD
CONSIDERATIONS ....................... S-35
CREDIT SUPPORT .......................... S-43
USE OF PROCEEDS ......................... S-44
FEDERAL INCOME TAX
CONSEQUENCES ......................... S-44
ERISA CONSIDERATIONS .................... S-45
METHOD OF DISTRIBUTION .................. S-46
LEGAL MATTERS ........................... S-47
CERTIFICATE RATING ...................... S-47
INDEX TO DEFINED TERMS .................. S-48
</TABLE>
<TABLE>
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<S> <C>
PROSPECTUS
PROSPECTUS SUPPLEMENT ............... 2
ADDITIONAL INFORMATION .............. 2
INCORPORATION OF CERTAIN
DOCUMENTS BY REFERENCE ........... 2
SUMMARY OF THE PROSPECTUS ........... 4
RISK FACTORS ........................ 13
THE TRUSTS .......................... 15
DESCRIPTION OF CERTIFICATES ......... 22
CREDIT ENHANCEMENT .................. 29
YIELD AND PREPAYMENT
CONSIDERATIONS ................... 33
THE SPONSOR ......................... 34
USE OF PROCEEDS ..................... 34
MORTGAGE LOAN PROGRAM ............... 34
THE POOLING AND SERVICING
AGREEMENT ........................ 36
CERTAIN LEGAL ASPECTS OF THE
MORTGAGE LOANS ................... 45
ERISA CONSIDERATIONS ................ 52
LEGAL INVESTMENT
CONSIDERATIONS ................... 55
LEGAL MATTERS ....................... 55
FEDERAL INCOME TAX
CONSEQUENCES ..................... 56
STATE TAX CONSIDERATIONS ............ 76
PLANS OF DISTRIBUTION ............... 76
FINANCIAL INFORMATION ............... 76
RATING .............................. 77
INDEX TO DEFINED TERMS .............. 78
</TABLE>
S-2
<PAGE>
SUMMARY INFORMATION
THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS DOCUMENT AND DOES NOT
CONTAIN ALL OF THE INFORMATION TO MAKE YOUR INVESTMENT DECISION. PLEASE READ
THIS ENTIRE PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS CAREFULLY FOR
ADDITIONAL INFORMATION ABOUT THE OFFERED CERTIFICATES.
MORTGAGE PASS-THROUGH CERTIFICATES,
SERIES 1998-1
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<CAPTION>
INITIAL RATING
OF OFFERED
CERTIFICATES(3)
------------------
INITIAL CLASS PASS-THROUGH
CERTIFICATE RATE PRINCIPAL INTEREST S&P DCR
CLASS BALANCE(1) (PER ANNUM) TYPES(2) TYPES(2) RATING RATING
- ------------------------- ------------------ ------------- ------------------- ---------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
OFFERED CERTIFICATES
Class A-1 .............. $245,840,000 6.50% Senior/Sequential Fixed AAA AAA
Pay/Accretion
Directed
Class A-2 .............. $ 8,156,307 6.50% Senior/Sequential Accrual AAA AAA
Pay
Class A-3 .............. $20,379,800 6.50% Senior/Lockout Fixed AAA AAA
Class X-1 .............. (4) 6.50% Senior/Notional Fixed/IO AAAr AAA
Amount
Class X-2 .............. (4) 6.50% Senior/Notional Fixed/IO AAAr AAA
Amount
Class PO ............... $ 32,276 (5) Strip PO AAAr AAA
Class R ................ $ 100 6.50% Senior Fixed AAA AAA
Class B-1 .............. $ 8,364,323 6.50% Subordinate Fixed N/A AA
Class B-2 .............. $ 4,549,017 6.50% Subordinate Fixed N/A A
Class B-3 .............. $ 2,201,138 6.50% Subordinate Fixed N/A BBB
NON-OFFERED CERTIFICATES
Class B-4 .............. $ 1,614,168 6.50% Subordinate Fixed N/A N/A
Class B-5 .............. $ 880,455 6.50% Subordinate Fixed N/A N/A
Class B-6 .............. $ 1,467,425 6.50% Subordinate Fixed N/A N/A
</TABLE>
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1 This amount is subject to a variance of 10%.
2 See "Description of the Certificates -- Categories of Classes of
Certificates" in the prospectus for a description of the principal and
interest categories.
3 A description of the ratings of the Offered Certificates is set forth under
the heading "Certificate Rating" in this prospectus supplement.
4 The Class X-1 and Class X-2 Certificates are interest only certificates and
will bear interest on a notional balance, initially expected to be
$12,791,120 and $11,923,560, respectively. See "Description of the
Certificates -- Interest" in this prospectus supplement for the calculation
of the Class Notional Amount for the Class X-1 and Class X-2 Certificates
for any other Distribution Date.
5 The Class PO Certificates are principal only certificates and do not bear
interest.
The Trust will issue the Offered Certificates in book-entry form through the
facilities of The Depository Trust Company, except for the Class R Certificates
which will be physical certificates. We refer you to "Description of the
Certificates -- General" and " -- Book-Entry Certificates" for more detail.
S-3
<PAGE>
SPONSOR
o Headlands Mortgage Securities Inc.
o The Sponsor maintains its principal office at 700 Larkspur Landing
Circle, Suite 240, Larkspur, California 94939. Its telephone number is (415)
925-5442.
SELLER
o PNC Mortgage Securities Corp.
MASTER SERVICER
o PNC Mortgage Securities Corp.
TRUSTEE
o State Street Bank and Trust Company.
CUT-OFF DATE
o October 1, 1998.
CLOSING DATE
o October 29, 1998.
DETERMINATION DATE
o No later than the 10th day preceding a distribution date.
DISTRIBUTION DATE
o The 25th day of each month or if such day is not a business day, the
next business day. The first Distribution Date will be in November 1998.
RECORD DATE
o The last business day of the month preceding the month of a
Distribution Date.
DESIGNATIONS
o REGULAR CERTIFICATES -- All Classes of Certificates other than the Class R
Certificates.
o RESIDUAL CERTIFICATES -- Class R Certificates.
o CLASS A CERTIFICATES -- Class A-1, Class A-2 and Class A-3 Certificates.
o SENIOR CERTIFICATES -- Class A, Class R, Class PO, Class X-1 and Class X-2
Certificates.
o CLASS B OR SUBORDINATE CERTIFICATES -- Class B-1, Class B-2, Class B-3, Class
B-4, Class B-5 and Class B-6 Certificates.
o ACCRUAL CERTIFICATES -- Class A-2 Certificates.
o ACCRETION DIRECTED CERTIFICATES -- Class A-1 Certificates.
o PRINCIPAL ONLY CERTIFICATES -- Class PO Certificates.
o LOCKOUT CERTIFICATES -- Class A-3 Certificates.
o CLASS X OR NOTIONAL AMOUNT CERTIFICATES -- Class X-1 and Class X-2
Certificates.
o FIXED RATE CERTIFICATES -- All Classes of Certificates.
o PHYSICAL CERTIFICATES -- Class R, Class B-4, Class B-5 and Class B-6
Certificates.
o BOOK-ENTRY CERTIFICATES -- All Classes of Certificates other than the
Physical Certificates.
MORTGAGE LOANS
On the Closing Date the trust will acquire a pool of mortgage loans. As
of the Cut-off Date, the mortgage loans have the following characteristics:
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<S> <C>
Range of Remaining Term
to Stated Maturity: 351 to 360 months
Weighted Average
Remaining Term to
Stated Maturity(1): 358.7 months
Range of Original Principal
Balances(1) $227,500 to $1,000,000
Average Original Principal
Balance(1): $ 347,296.66
Range of Outstanding
Principal Balances(1):
$225,725.81 to
$ 999,276.23
Average Outstanding
Principal Balance(1): $ 346,908.99
Range of Mortgage Rates: 6.50% to 10.25%
Weighted Average
Mortgage Rate(1): 7.8287%
Weighted Average Net
Mortgage Rate(1): 7.0467%
Geographic Concentrations
in Excess of 5%(1):
California .......................................... . 68.69%
</TABLE>
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(1) Approximate
PRIORITY OF DISTRIBUTIONS
o Funds available from payments and other amounts received on the mortgage
loans on any Distribution Date will be distributed in the following order:
(i) (a) to interest on the interest-bearing Senior Certificates (except
that prior to the reduction of the principal balance of the Class A-1
Certificates to zero, interest accrued on the Class A-2 Certificates will be
added
S-4
<PAGE>
to its principal balance rather than distributed as current interest on the
Class A-2 Certificates) and (b) to principal of the Class A-1 Certificates, the
amount of interest accrued on the Class A-2 Certificates;
(ii) to principal of the Class A, Class PO and Class R Certificates in the
manner, order and priority described under "Description of the Certificates --
Distributions;"
(iii) to the payment of certain deferred amounts on the Class PO
Certificates; and
(iv) to interest on and principal of each class of Subordinate
Certificates, in order of their numerical class designations, beginning with
the Class B-1 Certificates.
WE REFER YOU TO "DESCRIPTION OF THE CERTIFICATES -- DISTRIBUTIONS" IN THIS
PROSPECTUS SUPPLEMENT FOR MORE DETAIL.
INTEREST DISTRIBUTIONS
Interest accrues on the interest-bearing Certificates during the calendar month
prior to a Distribution Date.
On each Distribution Date, you will be entitled to the following:
o interest at the related pass-through rate that accrued during the prior
calendar month period.
o interest due on a prior Distribution Date that was not paid.
Your interest entitlement may be reduced as a result of prepayments on the
mortgage loans and certain types of losses on the mortgage loans.
For holders of the Class A-2 Certificates, until the principal balance of the
Class A-1 Certificates equals zero, your interest entitlement will be added to
your principal balance.
WE REFER YOU TO "DESCRIPTION OF THE CERTIFICATES -- INTEREST" IN THIS
PROSPECTUS SUPPLEMENT FOR MORE INFORMATION.
PRINCIPAL DISTRIBUTIONS
Principal distributions are payable on each Distribution Date, however, there
will be no principal distributions to the Class A-3 Certificates until November
2003. There will be no principal distributions to the Class A-2 Certificates
until the Class A-1 Certificates are paid in full.
Shortfalls in available funds may result in a class receiving less than what is
due. The calculation of the amount a class is entitled to receive on each
Distribution Date and the priority of principal distributions among the
Certificates is described in this prospectus supplement under "Description of
the Certificates -- Principal."
The Class X Certificates are interest only certificates and are not entitled to
distributions of principal.
CREDIT ENHANCEMENT
Credit enhancement in the form of subordination should reduce delays in
distributions and losses on certain classes of certificates as a result of
shortfalls and losses on the mortgage loans. The subordination feature will
support the classes of certificates in varying degrees.
There are two types of subordination in this transaction:
1. The Senior Certificates will receive distributions of interest and principal
prior to distributions of interest and principal made to the Subordinate
Certificates. Also, on each Distribution Date each class of Subordinate
Certificates will receive its interest and principal distribution before
any other Class of Subordinate Certificate with a higher numerical class
designation.
2. Losses resulting from the liquidation of defaulted Mortgage Loans (other
than certain excess losses resulting from special hazards, mortgagor fraud
or mortgagor bankruptcy) will be allocated to the Subordinate Certificates
in reverse order of numerical class designation, until the respective
class balance has been reduced to zero.
WE REFER YOU TO "DESCRIPTION OF THE CERTIFICATES -- ALLOCATION OF LOSSES" AND
"CREDIT SUPPORT" IN THIS PROSPECTUS SUPPLEMENT FOR MORE DETAIL.
OPTIONAL TERMINATION
If the total pool principal balance declines below 5% of the total pool
principal balance as of the Cut-off Date, then the Seller may purchase all of
the mortgage loans and the related properties in the trust. If the Seller
purchases all of the mortgage loans, you will receive a final distribution and
the trust will be terminated.
WE REFER YOU TO "DESCRIPTION OF THE CERTIFICATES -- TERMINATION; OPTIONAL
TERMINATION" IN THIS PROSPECTUS SUPPLEMENT FOR MORE DETAIL.
ADVANCES
If the Master Servicer reasonably believes that cash advances can be recovered
from future payments or collections on the mortgage loan, the Master Servicer
will make cash advances to the trust to cover delinquent mortgage loan
payments. The Master Servicer
S-5
<PAGE>
will make advances only to maintain a regular flow of scheduled interest and
principal payments on the certificates, not to guarantee or insure against
losses.
WE REFER YOU TO "SERVICING OF MORTGAGE LOANS -- ADVANCES" IN THIS PROSPECTUS
SUPPLEMENT FOR MORE DETAIL.
LAST SCHEDULED DISTRIBUTION DATE
November 25, 2028, which is the Distribution Date in the month following the
latest scheduled maturity date of any Mortgage Loan. Because principal
prepayments on the Mortgage Loans will occur, the disposition of the last
remaining Mortgage Loan may be earlier than the Last Scheduled Distribution
Date.
FEDERAL INCOME TAX CONSEQUENCES
For federal income tax purposes:
o An election will be made to treat the trust as a "real estate mortgage
investment conduit," or REMIC.
o Each Class of Regular Certificates will be "regular interests" in a REMIC and
will be treated as debt instruments of the REMIC.
o The Class R Certificates will represent the beneficial ownership of the sole
class of "residual interest" in each REMIC. Certain types of investors may
not purchase the Class R Certificates.
WE REFER YOU TO "FEDERAL INCOME TAX CONSEQUENCES" IN THIS PROSPECTUS SUPPLEMENT
AND IN THE PROSPECTUS FOR MORE DETAIL.
ERISA CONSIDERATIONS
The fiduciary responsibility provisions of the Employee Retirement Income
Security Act of 1974 (ERISA) and Section 4975 of the Internal Revenue Code of
1986, as amended (the Code) can limit investments by certain pension and other
employee benefit plans. For example, the acquisition of certificates by certain
plans may be considered a "prohibited transaction" under ERISA; however,
certain exemptions from the prohibited transactions rules could apply. If you
are a fiduciary of a pension or other employee benefit plan which is subject to
ERISA or Section 4975 of the Code, you should consult with your counsel
regarding the applicability of the provisions of ERISA and the Code before
purchasing a certificate.
Subject to the considerations and conditions described under "ERISA
Considerations" in this prospectus supplement and the prospectus, it is
expected that pension or employee benefit plans subject to ERISA or Section
4975 of the Code may purchase the Senior Certificates (other than the Class R
Certificates).
WE REFER YOU TO "ERISA CONSIDERATIONS" IN THIS PROSPECTUS SUPPLEMENT AND IN THE
PROSPECTUS.
LEGAL INVESTMENT
The Senior Certificates and the Class B-1 Certificates will be "mortgage
related securities" for purposes of the Secondary Mortgage Market Enhancement
Act of 1984 (SMMEA), as long as they are rated in one of the two highest rating
categories by at least one nationally recognized statistical rating
organization. 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 be "mortgage related securities" for
purposes of SMMEA.
WE REFER YOU TO "LEGAL INVESTMENT" IN THIS PROSPECTUS SUPPLEMENT AND IN THE
PROSPECTUS FOR MORE DETAIL.
CERTIFICATE RATING
The Trust will not issue the Offered Certificates unless they have been
assigned the ratings designated on page S-3.
A rating is not a recommendation to buy, sell or hold securities and may be
subject to revision or withdrawal at any time by either rating agency.
WE REFER YOU TO "CERTIFICATE RATING" IN THIS PROSPECTUS SUPPLEMENT FOR MORE
DETAIL.
S-6
<PAGE>
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS PRIOR TO ANY
PURCHASE OF CERTIFICATES. YOU SHOULD ALSO CAREFULLY CONSIDER THE INFORMATION
SET FORTH UNDER "RISK FACTORS" IN THE PROSPECTUS.
PREPAYMENTS ON MORTGAGE LOANS MAY ADVERSELY AFFECT YIELD
The rate of principal distributions and yield to maturity on your
Certificates will be directly related to the rate of principal payments on the
Mortgage Loans. Mortgagors may prepay a Mortgage Loan at any time without
penalty. For example, the rate of principal payments on the Mortgage Loans will
be affected by the following:
o the amortization schedules of the Mortgage Loans;
o the rate of principal prepayments (including partial prepayments and
prepayments resulting from refinancing) by mortgagors;
o liquidations of defaulted Mortgage Loans by the Master Servicer;
o repurchases of Mortgage Loans by the Seller as a result of defective
documentation or breaches of representations and warranties; and
o the optional purchase by the Seller of all of the Mortgage Loans in
connection with the termination of the Trust.
The rate of principal payments on pools of mortgage loans is influenced by
a variety of economic, geographic, social and other factors. For example, if
mortgage 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 mortgage rates on similar mortgage loans rise above the mortgage
rates on the Mortgage Loans, the rate of prepayment would generally be expected
to decrease.
We cannot predict the rate at which borrowers will repay their mortgage
loans. Please consider the following:
o If you are purchasing a certificate at a discount in particular, a Class
PO Certificate, your yield may be lower than expected if principal payments
on the related Mortgage Loans occur at a slower rate than you expected.
o If you are purchasing a certificate at a premium, your yield may be lower
than expected if principal payments on the related Mortgage Loans occur at
a faster rate than you expected.
o If you are purchasing the Class X-1 or Class X-2 Certificates, you should
consider the risk that a rapid rate of principal payments on certain
Mortgage Loans could result in your failure to recover your initial
investment.
o The earlier a payment of principal occurs, the greater the impact on your
yield. For example, if you purchase a certificate at a premium although the
average rate of principal payments is consistent with your expectations, if
the rate of principal payments occurs initially at a rate higher than
expected, which would adversely impact your yield, a subsequent reduction
in the rate of principal payments will not offset any adverse yield effect.
WE REFER YOU TO "PREPAYMENT AND YIELD CONSIDERATIONS" IN THIS PROSPECTUS
SUPPLEMENT FOR MORE DETAIL.
RISKS OF HOLDING SUBORDINATE CERTIFICATES
The protections afforded the Senior Certificates in this transaction
create risks for the Subordinate Certificates. Before purchasing Subordinate
Certificates, you should consider the following factors that may negatively
impact your yield:
o Because the Subordinate Certificates receive distributions after the
Senior Certificates, there is a greater likelihood that one or more classes
of Subordinate Certificates will not receive the distributions to which
they are entitled on any Distribution Date.
S-7
<PAGE>
o If the Master Servicer determines not to advance a delinquent payment
because such amount is not recoverable from a mortgagor, there will be a
shortfall in distributions on the Certificates which will initially impact
the Subordinate Certificates.
o If principal payments on the Mortgage Loans are used to make interest
payments on the Certificates (because, for example, other Mortgage Loans
have defaulted) the aggregate of the class balances will exceed the pool
balance. The class of Subordinate Certificates outstanding at that time
with the highest numerical class designation will be reduced, without a
corresponding distribution, by the amount of the excess certificate
balance.
o The Subordinate Certificates are not entitled to a proportionate share of
principal prepayments on the Mortgage Loans until the beginning of the
ninth year after the Closing Date.
o Losses resulting from the liquidation of defaulted Mortgage Loans (other
than certain excess losses resulting from special hazards, mortgagor fraud
or mortgagor bankruptcy) will be allocated to the Subordinate Certificates
in reverse order of numerical class designation, until the respective class
balance has been reduced to zero. A loss allocation results in a reduction
in a class balance without a corresponding distribution of cash to the
holder. Also, the lower class balance will result in less interest accruing
on the certificate.
o The earlier in the transaction that a loss on a Mortgage Loan occurs, the
greater the impact on yield.
o The risks presented in this section are more severe for the classes of
Subordinate Certificates with higher numerical class designations. No class
of Subordinate Certificates will receive a distribution on any Distribution
Date prior to the class or classes of Subordinate Certificates with a lower
numerical class designation receiving its distribution. With limited
exceptions, losses on the Mortgage Loans are allocated to the class of
Subordinate Certificates then outstanding with the highest numerical
designation. In addition, if losses on the Mortgage Loans exceed certain
levels, certain classes of Subordinate Certificates with higher numerical
class designations will not receive a principal distribution. The amounts
that these classes would otherwise receive will be distributed to the
classes of Subordinate Certificates with lower numerical class
designations.
PLEASE REVIEW "DESCRIPTION OF THE CERTIFICATES" AND "PREPAYMENT AND YIELD
CONSIDERATIONS" IN THIS PROSPECTUS SUPPLEMENT FOR MORE DETAIL.
LIMITED SOURCE OF PAYMENTS -- NO RECOURSE TO SPONSOR, SELLER, MASTER SERVICER
OR TRUSTEE
The Mortgage Loans are the sole source of distributions for 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, if payments on the Mortgage
Loans are insufficient to make all payments required on the Certificates you
may incur a loss on your investment.
LIMITED LIQUIDITY
The Underwriter intends to make a market for the purchase and sale of the
Offered Certificates after their initial issuance but has no obligation to do
so. There is currently no secondary market for the Offered Certificates. We
cannot give you any assurance that such a secondary market will develop or, if
it develops, that it will continue. Consequently, you may not be able to sell
your certificates readily or at prices that will enable you to realize your
desired yield. The market values of the Certificates are likely to fluctuate;
these fluctuations may be significant and could result in significant losses to
you.
The secondary markets for mortgage backed securities have experienced
periods of illiquidity and can be expected to do so in the future. Illiquidity
can have a severely adverse effect on the prices of securities that are
especially sensitive to prepayment, credit or interest rate risk, or that have
been structured to meet the investment requirements of limited categories of
investors.
S-8
<PAGE>
GEOGRAPHIC CONCENTRATION
Approximately 68.69% of the Mortgage Loans, by initial pool balance, are
secured by property located in California. Property values of residential real
estate in California have declined in past years. If the California residential
real estate market should experience an overall decline in property values
after the dates of origination of the Mortgage Loans, the rates of delinquency,
foreclosure, bankruptcy and loss on the Mortgage Loans may increase, as
compared to such rates in a stable or improving real estate market. Also,
California is more susceptible to certain types of uninsurable hazards, such as
brush fires, floods, mudslides and other natural disasters. If any such
disaster occurs, then rates of delinquency, foreclosure, bankruptcy and loss on
the Mortgage Loans may increase.
CONSEQUENCES OF OWNING BOOK-ENTRY CERTIFICATES
LIMIT ON LIQUIDITY OF CERTIFICATES. Issuance of the Book-Entry
Certificates in book-entry form may reduce the liquidity of such certificates
in the secondary trading market since investors may be unwilling to purchase
certificates for which they cannot obtain physical certificates.
LIMIT ON ABILITY TO TRANSFER OR PLEDGE. Since transactions in the
Book-Entry Certificates can be effected only though DTC, participating
organizations, indirect participants and certain banks, your ability to
transfer or pledge a Book-Entry Certificate to persons or entities that do not
participate in the DTC system or otherwise to take actions in respect of such
certificates, may be limited due to lack of a physical certificate representing
the Book-Entry Certificates.
DELAYS IN DISTRIBUTIONS. You may experience some delay in the receipt of
distributions on the Book-Entry Certificates since the distributions will be
forwarded by the Trustee to DTC for DTC to credit the accounts of its
participants which will thereafter credit them to your account either directly
or indirectly through indirect participants, as applicable.
PLEASE REVIEW "DESCRIPTION OF THE CERTIFICATES -- BOOK-ENTRY CERTIFICATES"
IN THIS PROSPECTUS SUPPLEMENT FOR MORE DETAIL.
RISKS ASSOCIATED WITH COMPUTER PROGRAMS AND THE YEAR 2000
Some computer programs use two digits to define the applicable year. In
performing date calculations, a two-digit program could recognize a date ending
in "00" as the year 1900, rather than the year 2000. This could result in a
failure to properly calculate dates before and after December 31, 1999,
including dates such as February 29, 2000, and this could also cause the
computer running the program to stop operating properly. The Master Servicer is
testing for potential problems from two-digit programs, and it plans to correct
or replace its affected computer programs and systems on a timely basis. The
Master Servicer also requested that the Subservicers undertake similar testing,
correction and replacement.
If the Master Servicer, any Subservicer or any of their suppliers,
customers or agents do not timely implement effective procedures to deal with
computer programs that rely on two-digit year calculations, the Master
Servicer's performance of its obligations under the Pooling Agreement could be
adversely affected. This could result in delays in processing payments on the
mortgage loans, which could cause a delay in distributions to you.
PNC MORTGAGE SECURITIES CORP.
PNC Mortgage Securities Corp. has previously purchased the mortgage loans
("Mortgage Loans") pursuant to its mortgage purchase program described below
and will sell the Mortgage Loans (in such capacity, the "Seller") to the
Sponsor. The Seller, a Delaware corporation, is an indirect wholly-owned
subsidiary of PNC Bank Corp., a bank holding company. The Seller was organized
for the purpose of providing mortgage lending institutions, including
affiliated institutions, with greater financing and lending flexibility by
purchasing mortgage loans from such institutions and issuing mortgage-backed
securities. The Seller's principal executive offices are located at 75 North
Fairway Drive, Vernon Hills, Illinois 60061, telephone (847) 549-6500.
PNC Mortgage Securities Corp. will also master service the Mortgage Loans
(in such capacity, the "Master Servicer").
S-9
<PAGE>
THE MORTGAGE POOL
GENERAL
Certain information with respect to the Mortgage Loans 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 ("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 (as defined below) 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
(as defined herein) of the Mortgage Loans is approximately $293,485,009.43 (the
"Cut-off Date Pool Principal Balance"). The Mortgage Pool consists of 846
Mortgage Loans, all of which have original terms to stated maturity (based on
the date of origination or any later modification) of 30 years. The Mortgage
Loans provide for the amortization of the amount financed over a series of
substantially equal 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 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 ("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.
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 October 1, 2028. The
earliest stated maturity date of any Mortgage Loan is January 1, 2028.
None of the Mortgage Loans is assumable. None of the Mortgage Loans is 30
or more days delinquent in payment as of the Cut-off Date.
None of the Mortgage Loans is subject to a buydown agreement.
No Mortgage Loan will have a Loan-to-Value Ratio (as defined below) at
origination of more than 100.00%. As of the Cut-off Date, the weighted average
of the Loan-to-Value Ratios at origination of the Mortgage Loans was
approximately 74.47%. Except for 41 Mortgage Loans with aggregate Scheduled
Principal Balances as of the Cut-off Date of $11,623,047.26, each Mortgage Loan
with a Loan-to-Value Ratio at origination of greater than 80% is covered by a
primary mortgage 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 ("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.
S-10
<PAGE>
Approximately 68.69% (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 3.99% (by Cut-off Date Pool
Principal Balance) of the Mortgage Loans will be secured by Mortgaged
Properties located in any one state.
SUBGROUP 1 LOANS AND SUBGROUP 2 LOANS.
Solely for the purpose of calculating the Class X-1 Notional Amount and
the Class X-2 Notional Amount, the Non-Discount Mortgage Loans have been
divided into two subgroups (the "Subgroup 1 Loans" and the "Subgroup 2 Loans").
For a list of which Non-Discount Mortgage Loans are Subgroup 1 Loans and which
are Subgroup 2 Loans, see the Mortgage Loan Schedule in the Pooling Agreement.
THE SUBGROUP 1 LOANS. The Subgroup 1 Loans consist of 512 Non-Discount
Mortgage Loans with an aggregate Scheduled Principal Balance as of the Cut-off
Date of approximately $183,263,283.87. The principal balance at origination of
each Subgroup 1 Loan ranged from approximately $227,500.00 to approximately
$1,000,000.00, with an average principal balance at origination of
approximately $358,188.36. The Subgroup 1 Loans have a weighted average
remaining term to maturity (adjusted for principal prepayments in part) of
approximately 359.0 months as of the Cut-off Date. As of the Cut-off Date, the
weighted average Mortgage Interest Rates on such Mortgage Loans will be
approximately 7.7412% per annum and the weighted average of the Stripped
Interest Rates on such Mortgage Loans will be approximately 6.9537% per annum.
THE SUBGROUP 2 LOANS. The Subgroup 2 Loans consist of 327 Non-Discount
Mortgage Loans with an aggregate Scheduled Principal Balance as of the Cut-off
Date of approximately $107,884,540.43. The principal balance at origination of
each Subgroup 2 Loan ranged from approximately $227,500.00 to approximately
$995,950.00, with an average principal balance at origination of approximately
$330,521.97. The Subgroup 2 Loans have a weighted average remaining term to
maturity (adjusted for principal prepayments in part) of approximately 357.4
months as of the Cut-off Date. As of the Cut-off Date, the weighted average
Mortgage Interest Rates on such Mortgage Loans will be approximately 7.9995%
per annum and the weighted average of the Stripped Interest Rates on such
Mortgage Loans will be approximately 7.2184% per annum.
MORTGAGE LOAN STATISTICS
The following information sets forth in tabular format certain
information, as of the Cut-off Date, as to the 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%.
YEAR OF FIRST PAYMENT(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>
1998 .................. 846 $ 293,485,009.43 100.00%
--- ---------------- ------
Total ............... 846 $ 293,485,009.43 100.00%
=== ================ ======
</TABLE>
- ----------
(1) As of the Cut-off Date, the weighted average seasoning of the Mortgage
Loans is approximately 1 month.
S-11
<PAGE>
TYPES OF MORTGAGED PROPERTIES SECURING THE 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 .................... 660 $ 229,440,930.37 78.18%
Two- to Four-Family .............. 59 20,783,734.25 7.08
Condominium ...................... 29 9,581,588.81 3.26
Planned Unit Development ......... 98 33,678,756.00 11.48
--- ----------------- ------
Total .......................... 846 $ 293,485,009.43 100.00%
=== ================= ======
</TABLE>
OCCUPANCY OF MORTGAGED PROPERTIES SECURING THE 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 ...................... 809 $ 281,575,231.94 95.94%
Investment/Non-Owner ......... 30 9,054,113.50 3.09
Second Home .................. 7 2,855,663.99 0.97
--- ----------------- ------
Total ...................... 846 $ 293,485,009.43 100.00%
=== ================= ======
</TABLE>
- ----------
(1) Based on representations of the Mortgagor at the time of origination of the
related Mortgage Loan.
S-12
<PAGE>
GEOGRAPHICAL DISTRIBUTION OF THE MORTGAGED PROPERTIES SECURING THE 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>
California ............. 576 $ 201,591,344.34 68.69%
New Jersey ............. 33 11,709,955.58 3.99
New York ............... 26 9,911,802.64 3.37
Oregon ................. 31 9,667,022.19 3.28
Colorado ............... 20 7,706,038.32 2.63
Florida ................ 20 6,724,985.67 2.29
Illinois ............... 14 4,915,411.14 1.67
Washington ............. 16 4,737,931.89 1.61
Nevada ................. 11 4,081,147.72 1.39
Massachusetts .......... 10 3,740,599.13 1.27
Connecticut ............ 11 3,338,955.50 1.14
Arizona ................ 9 3,318,204.29 1.13
Utah ................... 8 2,872,658.65 0.98
Maryland ............... 5 1,825,027.58 0.62
Idaho .................. 4 1,782,194.96 0.61
Hawaii ................. 5 1,429,541.27 0.49
Virginia ............... 5 1,441,093.13 0.49
Pennsylvania ........... 5 1,397,622.29 0.48
Georgia ................ 4 1,262,324.98 0.43
Ohio ................... 4 1,140,067.18 0.39
Minnesota .............. 3 1,064,532.00 0.36
Michigan ............... 4 1,043,736.63 0.36
Texas .................. 4 1,062,608.12 0.36
Oklahoma ............... 2 765,554.21 0.26
South Carolina ......... 2 755,153.65 0.26
North Carolina ......... 2 694,481.49 0.24
Tennessee .............. 2 670,581.94 0.23
Missouri ............... 2 633,541.82 0.22
Mississippi ............ 1 335,580.86 0.11
New Hampshire .......... 1 324,551.19 0.11
New Mexico ............. 1 278,817.49 0.10
Indiana ................ 1 259,459.68 0.09
Kansas ................. 1 255,819.31 0.09
Kentucky ............... 1 251,051.33 0.09
Montana ................ 1 259,603.10 0.09
Alabama ................ 1 236,008.16 0.08
--- ----------------- ------
Total ................ 846 $ 293,485,009.43 100.00%
=== ================= ======
</TABLE>
- ----------
(1) As of the Cut-off Date, no more than approximately 0.93% of the Mortgage
Loans (by aggregate principal balance of the Mortgage Loans as of the
Cut-off Date) are secured by properties located in any one zip code.
LOAN PURPOSE
<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 ........................ 314 $ 105,779,627.76 36.04%
Cash-Out Refinance .............. 310 107,381,345.67 36.59
Rate and Term Refinance ......... 222 80,324,036.00 27.37
--- ----------------- ------
Total ......................... 846 $ 293,485,009.43 100.00%
=== ================= ======
</TABLE>
S-13
<PAGE>
DISTRIBUTION OF ORIGINAL PRINCIPAL BALANCES(1)
<TABLE>
<CAPTION>
AGGREGATE PRINCIPAL
NUMBER OF BALANCE % OF
MORTGAGE OUTSTANDING AS OF MORTGAGE
RANGE OF ORIGINAL PRINCIPAL BALANCES LOANS CUT-OFF DATE LOANS
- -------------------------------------- ----------- -------------------- -----------
<S> <C> <C> <C>
$200,000-$250,000..................... 130 $ 31,094,575.78 10.59%
$250,001-$300,000..................... 259 71,416,738.91 24.34
$300,001-$350,000..................... 179 58,117,167.69 19.80
$350,001-$400,000..................... 111 41,900,541.65 14.28
$400,001-$450,000..................... 36 15,465,309.50 5.27
$450,001-$500,000..................... 42 19,969,409.13 6.80
$500,001-$550,000..................... 30 15,769,242.34 5.37
$550,001-$600,000..................... 20 11,463,377.13 3.91
$600,001-$650,000..................... 21 13,383,587.86 4.56
$650,001-$700,000..................... 2 1,369,103.16 0.47
$700,001-$750,000..................... 4 2,884,468.41 0.98
$750,001-$800,000..................... 2 1,574,618.80 0.54
$800,001-$850,000..................... 3 2,506,312.34 0.85
$850,001-$900,000..................... 2 1,757,000.00 0.60
$900,001-$1,000,000................... 5 4,813,556.73 1.64
--- ---------------- ------
Total .............................. 846 $ 293,485,009.43 100.00%
=== ================ ======
</TABLE>
- ----------
(1) As of the Cut-off Date, the average outstanding principal balance of the
Mortgage Loans is approximately $346,908.99.
ORIGINAL LOAN-TO-VALUE RATIOS(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>
0.00%-50.00% ........................... 33 $ 14,938,507.21 5.09%
50.01% - 52.50% ........................ 2 617,468.34 0.21
52.51% - 55.00% ........................ 9 4,131,798.34 1.41
55.01% - 57.50% ........................ 8 3,559,000.74 1.21
57.51% - 60.00% ........................ 17 6,005,547.01 2.05
60.01% - 62.50% ........................ 12 5,174,700.06 1.76
62.51% - 65.00% ........................ 34 13,961,926.73 4.76
65.01% - 67.50% ........................ 17 6,001,175.33 2.04
67.51% - 70.00% ........................ 51 20,531,766.16 7.00
70.01% - 72.50% ........................ 39 13,354,617.32 4.55
72.51% - 75.00% ........................ 144 50,561,906.16 17.23
75.01% - 77.50% ........................ 36 11,887,098.68 4.05
77.51% - 80.00% ........................ 361 118,486,958.57 40.37
82.51% - 85.00% ........................ 3 926,490.75 0.32
85.01% - 87.50% ........................ 2 600,627.60 0.20
87.51% - 90.00% ........................ 49 14,209,619.43 4.84
92.51% - 95.00% ........................ 9 2,787,339.41 0.95
97.51% - 100.00% ....................... 20 5,748,461.59 1.96
--- ---------------- ------
Total ................................ 846 $ 293,485,009.43 100.00%
=== ================ ======
</TABLE>
- ----------
(1) As of the Cut-off Date, the weighted average Loan-to-Value Ratio at
origination of the Mortgage Loans is approximately 74.47%.
S-14
<PAGE>
MORTGAGE RATES(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>
6.375 to 6.500 ........... 2 $ 512,774.68 0.17%
6.625 to 6.750 ........... 4 1,460,952.42 0.50
6.751 to 6.875 ........... 7 2,293,918.32 0.78
6.876 to 7.000 ........... 12 3,742,407.92 1.28
7.001 to 7.125 ........... 20 7,581,322.68 2.58
7.126 to 7.250 ........... 38 13,317,172.71 4.54
7.251 to 7.375 ........... 50 17,555,921.57 5.98
7.376 to 7.500 ........... 111 39,953,436.24 13.61
7.501 to 7.625 ........... 98 34,949,409.70 11.91
7.626 to 7.750 ........... 113 37,415,870.36 12.75
7.751 to 7.875 ........... 119 40,943,378.26 13.95
7.876 to 8.000 ........... 51 19,028,955.83 6.48
8.001 to 8.125 ........... 40 14,680,365.51 5.00
8.126 to 8.250 ........... 61 20,935,960.59 7.13
8.251 to 8.375 ........... 37 13,148,896.15 4.48
8.376 to 8.500 ........... 21 6,718,422.08 2.29
8.501 to 8.625 ........... 16 5,120,229.79 1.74
8.626 to 8.750 ........... 12 3,511,406.84 1.20
8.751 to 8.875 ........... 9 2,640,450.37 0.90
8.876 to 9.000 ........... 7 1,901,363.62 0.65
9.001 to 9.125 ........... 3 815,875.98 0.28
9.126 to 9.250 ........... 6 2,248,321.36 0.77
9.251 to 9.375 ........... 3 905,201.20 0.31
9.376 to 9.500 ........... 3 1,338,680.61 0.46
9.626 to 9.750 ........... 2 512,526.90 0.17
10.126 to 10.250 ......... 1 251,787.74 0.09
--- ---------------- ------
Total .................... 846 $ 293,485,009.43 100.00%
=== ================ ======
</TABLE>
- ----------
(1) As of the Cut-off Date, the weighted average Mortgage Rate is approximately
7.8287% per annum.
ORIGINAL TERMS(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 Months ......... 846 $ 293,485,009.43 100.00%
--- ---------------- ------
Total ............ 846 $ 293,485,009.43 100.00%
=== ================ ======
</TABLE>
- ----------
(1) As of the Cut-off Date, the weighted average stated remaining term of the
Mortgage Loans is approximately 358.7 months.
S-15
<PAGE>
DOCUMENTATION TYPES
<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 ....................... 308 $ 106,696,877.87 36.36%
Limited .................... 418 144,573,101.75 49.26
Reduced/No Ratio ........... 92 31,495,564.85 10.73
No Income/No Asset ......... 28 10,719,464.96 3.65
--- ----------------- ------
Total .................... 846 $ 293,485,009.43 100.00%
=== ================= ======
</TABLE>
MORTGAGE PURCHASE PROGRAM
Set forth below is a description of the principal aspects of the Seller's
purchase program pursuant to which the Mortgage Loans were acquired by the
Seller. The Seller will represent and warrant to the Trustee in the Pooling and
Servicing Agreement, dated as of October 1, 1998 (the "Pooling Agreement"),
among the Sponsor, the Seller, the Master Servicer and the Trustee, that the
Mortgage Pool will consist of Mortgage Loans purchased by the Seller from one
or more institutions (the "Lenders"). The Seller has approved individual
institutions as eligible Lenders by applying certain criteria, including the
Lender's depth of mortgage origination experience, servicing experience and
financial stability. In general, each Lender must have experience in
originating and servicing conventional residential mortgages and must have a
net worth acceptable to the Seller. Each Lender is required to use the services
of qualified underwriters, appraisers and attorneys. Other factors evaluated by
the Seller in approving Lenders include delinquency and foreclosure ratio
performances.
CREDIT, APPRAISAL AND UNDERWRITING STANDARDS
The Mortgage Loans were underwritten either by the Seller or by one of the
Lenders. The Seller's credit, appraisal and underwriting standards with respect
to the Mortgage Loans generally conform to those published in the PNC Mortgage
Securities Corp. Selling Guide (together with the PNC Mortgage Securities Corp.
Servicing Guide, the "Guide", as modified from time to time). The credit,
appraisal and underwriting standards as set forth in the Guide are continuously
revised based on opportunities and prevailing conditions in the residential
mortgage market and the market for the Seller's mortgage pass-through
certificates.
In addition, certain of the Mortgage Loans do not conform to the
underwriting standards set forth in the Guide. Such Mortgage Loans were
purchased in negotiated transactions from Lenders who represented that such
Mortgage Loans have been originated in accordance with credit, appraisal and
underwriting standards agreed to by the Seller. The Seller generally reviewed
only a limited portion of such Mortgage Loans in any delivery of such Mortgage
Loans for conformity with the applicable credit, appraisal and underwriting
standards. Certain other Mortgage Loans were purchased from Lenders who
represented that such Mortgage Loans were originated pursuant to credit,
appraisal and underwriting standards determined by a mortgage insurance company
acceptable to the Seller. The Seller accepted a certification from such
insurance company as to a mortgage loan's insurability in a mortgage pool as of
the date of certification as evidence that such mortgage loan conforms to
applicable underwriting standards. Such certifications were issued before the
purchase of the Mortgage Loans by the Seller. The Seller performed only random
quality assurance reviews on Mortgage Loans delivered with such certifications.
The credit, appraisal and underwriting standards utilized in negotiated
transactions and the credit, appraisal and underwriting standards of insurance
companies issuing certificates may vary substantially from the credit,
appraisal and underwriting standards set forth in the Guide. All of the credit,
appraisal and underwriting standards provide an underwriter with sufficient
information to evaluate the borrower's repayment ability and the adequacy of
the mortgaged property as collateral. Due to the variety of underwriting
standards and review procedures that are applicable to the Seller's mortgage
loans, the Seller has not categorized its mortgage loans for purposes of the
information it has provided in connection with this Prospectus Supplement based
on the various credit, appraisal and underwriting standards pursuant to which
such mortgage loans are originated. Moreover, there can be no assurance that
every Mortgage Loan was originated in conformity with the applicable credit,
appraisal and underwriting standards in all material respects, or that the
quality or performance of Mortgage Loans underwritten pursuant to varying
standards as described above will be equivalent under all circumstances.
S-16
<PAGE>
The Seller's underwriting standards are intended to evaluate the
prospective mortgagor's credit standing and repayment ability, and the value
and adequacy of the proposed mortgaged property as collateral. In the loan
application process, prospective mortgagors will be required to provide
information regarding such factors as their assets, liabilities, income, credit
history, employment history and other related items. Each prospective mortgagor
will also provide an authorization to apply for a credit report which
summarizes the mortgagor's credit history. With respect to establishing the
prospective mortgagor's ability to make timely payments, the Seller will
require evidence regarding the mortgagor's employment and income, and of the
amount of deposits made to financial institutions where the mortgagor maintains
demand or savings accounts. In some instances, mortgage loans which were
originated under a limited or reduced documentation origination program may be
sold to the Seller. For a mortgage loan originated under a limited or reduced
documentation origination program to qualify for purchase by the Seller, the
prospective mortgagor must have a good credit history and be financially
capable of making a larger cash down payment, in a purchase, or be willing to
finance less of the appraised value, in a refinancing, than would otherwise be
required by the Seller. Currently, the Seller's underwriting standards provide
that only mortgage loans with certain loan-to-value ratios will qualify for
purchase under a limited or reduced documentation program. If the mortgage loan
qualifies under a limited or reduced documentation, the Seller waives some of
its documentation requirements and eliminates verification of income and
employment for the prospective mortgagor. If the mortgage loan qualifies under
a limited or reduced documentation program, the Seller does not apply certain
debt-to-income ratios with respect to the borrower in making its decision to
originate or purchase such mortgage loan.
The Seller's underwriting standards generally follow guidelines acceptable
to FNMA and FHLMC. In determining the adequacy of the property as collateral,
an independent appraisal is made of each property considered for financing. The
appraiser is required to inspect the property and verify that it is in good
condition and that construction, if new, has been completed. The appraisal is
based on the appraiser's judgment of values, giving appropriate weight to both
the market value of comparable homes and the cost of replacing the property.
Certain states where the mortgaged properties may be located are
"anti-deficiency" states where, in general, lenders providing credit on one- to
four-family properties must look solely to the property for repayment in the
event of foreclosure. The Seller's underwriting standards in all states
(including anti-deficiency states) require that the underwriting officers be
satisfied that the value of the property being financed, as indicated by the
independent appraisal, currently supports and is anticipated to support in the
future the outstanding loan balance, and provides sufficient value to mitigate
the effects of adverse shifts in real estate values.
REPRESENTATIONS AND WARRANTIES
The Seller will represent and warrant to the Trustee in the Pooling
Agreement with respect to all Mortgage Loans, among other things, that (i) the
information set forth in the schedule of Mortgage Loans (the "Mortgage Loan
Schedule") is true and correct in all material respects; (ii) a lender's 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; (iii) if a primary
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; (iv) as of
the Closing Date, the Seller had good title to the Mortgage Loans and the
Mortgage Notes are subject to no offsets, defenses or counterclaims; (v) 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, (c) exceptions set forth in the title insurance policy
covering such Mortgaged Property, such exceptions being acceptable to mortgage
lending institutions generally, and (d) 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); (vi) as of the Closing Date,
each Mortgaged Property is free of damage and is in good repair, except for
ordinary wear and tear; (vii) as of the time each Mortgage Loan was originated,
the Mortgage Loan complies with all applicable state and federal laws,
including usury, equal credit opportunity, disclosure and recording laws;
(viii) as of the Closing Date, there are no delinquent tax or assessment liens
against any Mortgaged Property; (ix) no Mortgage Loan will be more than 30 days
delinquent as of the Cut-off Date; and (x) each Mortgage Loan was originated
and will be serviced by (a) an institution which is a member of the Federal
Reserve System or the deposits of
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which are insured by the FDIC, (b) an institution which is a member of the
Federal Home Loan Bank System, (c) an institution which is a FHA-Approved
Mortgagee, (d) an institution which is a FNMA-Approved Mortgagee, or (e) an
institution which is a FHLMC-Approved Mortgagee.
In the event of the discovery by the Seller of a breach of any
representation or warranty which materially and adversely affects the interest
of the Certificateholders in the related Mortgage Loan, or the receipt of
notice of such a breach from the Trustee, the Seller will, with respect to a
breach of its representations or warranties under the Pooling Agreement and in
accordance with the provisions of the Pooling Agreement, either cure the
breach, substitute a substantially similar substitute mortgage loan for such
Mortgage Loan or repurchase the related Mortgage Loan, or any Mortgaged
Property acquired with respect thereto, on the terms set forth in the Pooling
Agreement, as described under " -- Assignment of the Mortgage Loans". The
proceeds of any such repurchase will be passed through to Certificateholders as
liquidation proceeds. This substitution or repurchase obligation constitutes
the sole remedy available to the Certificateholders or the Trustee for any such
breach. The Sponsor will not be obligated to purchase a Mortgage Loan if the
Seller defaults on its obligation to do so, and no assurance can be given that
the Seller will carry out its repurchase obligation with respect to the
Mortgage Loans.
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 (the "Trust"),
including all scheduled payments of principal and interest due after the Cut-off
Date and 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) and all principal prepayments received by
the Master Servicer after the Cut-off Date with respect to the Mortgage Loans.
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 Seller, 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. In instances where, due to a delay on the
part of the recording office where any such original documents have been
delivered for recordation, the original recorded Mortgage or any intervening
assignment certified by the applicable recording office cannot be delivered to
the Trustee within 270 days after the Closing Date, the Sponsor shall cause the
Seller to deliver to the Trustee within such time period an officer's
certificate stating the date by which the Seller expects to receive such
original documents from the applicable recording office.
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 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
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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 be delivered 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.
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 accrued and unpaid 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 the 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, equal to or 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 two years
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
Pursuant to the Pooling Agreement, the Master Servicer will be responsible
for servicing and administering the Mortgage Loans but will be permitted to
contract an eligible servicing institution (each, a "Subservicer") to perform
such functions under the supervision of the Master Servicer as more fully
described below.
In the contract pursuant to which the Subservicer will perform its
servicing duties, each Subservicer will agree, subject to the general
supervision of the Master Service or its agent, to perform diligently all
services and duties customary to the servicing of mortgage loans. The Master
Servicer or its agent will monitor each Subservicer's performance and the
Master Servicer will have the right to remove and substitute a replacement
Subservicer at any time if it considers such removal to be in the best
interests of Certificateholders. The duties performed by the Subservicers
include collection and remittance of principal and interest payments,
administration of mortgage escrow accounts, collection of insurance claims, and
if necessary, foreclosure. In the event a servicing contract is terminated by
the Master Servicer for any reason, the Master Servicer may procure a
substitute subservicer, which may be an affiliate of the Master Servicer.
During the period necessary to effect the execution and implementation of a
contract with any Subservicer, all duties and responsibilities of the
Subservicer under the terminated servicing contract will be performed by the
Master Servicer. In such event, the Master Servicer will be entitled to retain
the same servicing fee as was paid to the Subservicer under such terminated
servicing contract.
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 0.7821% 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) servicing compensation payable to the
Subservicers in respect of their subservicing activities (the "Subservicing
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Fee"). The Master Servicing Fee will be 0.0431% per annum of the Scheduled
Principal Balance of each Mortgage Loan. The Subservicing Fee will be 0.7390%
per annum of the Scheduled Principal Balance of each Mortgage Loan. The Master
Servicer will pay all expenses incurred in connection with its activities as
Master Servicer, including, without limitation, the fees of the Trustee and
certain other fees and expenses of the Trust, as prescribed by the Pooling
Agreement. The Master Servicer will be entitled to reimbursement for certain
expenses incurred by it in connection with the liquidation of defaulted
Mortgage Loans. In addition, the Master Servicer is entitled to reimbursement
of expenditures incurred by it in connection with the restoration of a damaged
Mortgaged Property. The amount of the Master Servicing Fee is subject to
adjustment with respect to prepaid Mortgage Loans, as described herein under "
- -- Adjustment to 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 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 sum of (i) the Master Servicing Fee in
connection with such Distribution Date, (ii) any reinvestment income realized
by the Master Servicer relating to principal prepayments in full made during
the related Prepayment Period and (iii) interest payments on principal
prepayments in full received during the period from the first day through the
14th day of the month of the related Distribution Date (such amount 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 Shortfall"). Any Net Prepayment Interest Shortfall 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 with respect to such Mortgage Loan, the Master Servicer
will deposit in the Certificate Account not later than the Distribution Date an
amount (any such amount, an "Advance") equal to such deficiency net of the
Master Servicing Fee and Subservicing 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 advance is made. Subject to the foregoing, such advances will be
made through the liquidation of the related Mortgaged Property. Advances are
reimbursable to the Master Servicer from cash in the Certificate Account prior
to payments to the Certificateholders if the Master Servicer determines that
such Advances previously made are not recoverable from Insurance Proceeds,
Liquidation Proceeds or other amounts recoverable with respect to the
applicable Mortgage Loan.
HAZARD INSURANCE
The Master Servicer will cause to be maintained for each Mortgage Loan a
hazard insurance policy providing for no less than the coverage of the standard
form of fire insurance policy with extended coverage customary in the state in
which the Mortgaged Property is located. Such coverage will be in an amount not
less than the maximum insurable value of the Mortgaged Property or the original
principal balance of such Mortgage Loan, whichever is less. All amounts
collected by or on behalf of 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 Protected Account. In the
event that the Master Servicer or the applicable Subservicer maintains a
blanket policy insuring
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against hazard losses on all of the Mortgage Loans, the obligation relating to
the maintenance of hazard insurance shall be conclusively deemed to have been
satisfied. Such blanket policy may contain a deductible clause, in which case
the Master Servicer will deposit in the Protected Account or the Certificate
Account all sums which would have been deposited therein but for such clause.
The Master Servicer and all Subservicers are each required to maintain a
fidelity bond and errors and omissions policy 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 such form and amount as specified in or pursuant to the Pooling
Agreement.
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 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.
When any improvement to a Mortgaged Property is located in a designated
flood area and in a community which participates in the National Flood
Insurance Program at the time of origination of the related Mortgage Loan, and
flood insurance is required and available, the Pooling Agreement requires the
Master Servicer to cause the Mortgagor to acquire and maintain such insurance.
REPORTS TO CERTIFICATEHOLDERS
With each distribution from the Certificate Account on a Distribution
Date, the Master Servicer shall prepare and forward to the Trustee and the
Sponsor, and the Trustee shall forward to each Certificateholder, a statement
setting forth, to the extent applicable, the amount of the distribution payable
to the applicable Class and the Class Certificate Balance after giving effect
to such distribution.
Upon request by any Certificateholder or the Trustee, the Master Servicer
shall forward to such Certificateholder, the Trustee and the Sponsor an
additional report which sets forth with respect to the Mortgage Loans:
(a) The number and aggregate Scheduled Principal Balance of the Mortgage
Loans delinquent one, two and three months or more;
(b) The (i) number and aggregate Scheduled Principal Balance of Mortgage
Loans with respect to which foreclosure proceedings have been initiated,
and (ii) the number and aggregate book value of Mortgaged Properties
acquired through foreclosure, deed in lieu of foreclosure or other exercise
of rights respecting the Trustee's security interest in the Mortgage Loans;
(c) The amount of the Special Hazard Loss Coverage Amount available to
the Senior Certificates remaining as of the close of business on the
applicable Determination Date;
(d) The amount of the Bankruptcy Coverage available to the Senior
Certificates remaining as of the close of business on the applicable
Determination Date;
(e) The amount of the Fraud Loss Coverage Amount available to the Senior
Certificates as of the close of business on the applicable Determination
Date;
(f) The amount of Realized Losses incurred allocable to the Certificates
on the related Distribution Date and the cumulative amount of Realized
Losses incurred allocated to such Certificates since the Cut-off Date.
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DESCRIPTION OF THE CERTIFICATES
GENERAL
The Certificates will be issued pursuant to the Pooling Agreement. The
form of Pooling Agreement has been filed as an exhibit to the Registration
Statement of which the prospectus supplement (the "Prospectus Supplement") and
the prospectus (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 1998-1 (the "Certificates")
will consist of the Class A-1, Class A-2, Class A-3 (collectively, the "Class A
Certificates"), Class R, Class X-1, Class X-2, Class PO, 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 (as set
forth on the table on page S-3) (A) 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 Subordinate Certificate
any amounts allocated to such Class in reduction of its Class Certificate
Balance in respect of payment of Class PO Deferred Amounts, as described below
under " -- Allocation of Losses" and (B) in the case of the Class A-2
Certificates, increased by all interest accrued and added to the Class
Certificate Balance thereof prior to such Distribution Date. In addition, the
Class Certificate Balance of the Class of Subordinate Certificates then
outstanding with the highest numerical Class designation will be reduced by the
amount, if any, equal to the excess of 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, over 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. The
Class R Certificates will be issued as a single Certificate in a denomination
of $100.
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, the Commonwealth of Massachusetts or Chicago,
Illinois 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, except in the case of the Class X Certificates, $1,000,000
initial notional amount and, in all cases, 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
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nominee will be Cede & Co. ("CEDE"). Accordingly, CEDE is expected to be the
holder of record of the Book-Entry Certificates. Except as described below, no
person acquiring a Book-Entry Certificate (each, a "beneficial owner") will be
entitled to receive a physical certificate representing such Certificate (a
"Definitive Certificate").
The beneficial owner's ownership of a Book-Entry Certificate will be
recorded on the records of the brokerage firm, bank, thrift institution or
other financial intermediary (each, a "Financial Intermediary") that maintains
the beneficial owner's account for such purpose. In turn, the Financial
Intermediary's ownership of such Book-Entry Certificate will be recorded on the
records of the Depository (or of a participating firm that acts as agent for
the Financial Intermediary, whose interests will in turn be recorded on the
records of the Depository, if the beneficial owner's Financial Intermediary is
not a Depository participant). Therefore, the beneficial owner must rely on the
foregoing procedures to evidence its beneficial ownership of a Book-Entry
Certificate. Beneficial ownership of a Book-Entry Certificate may only be
transferred by compliance with the procedures of such Financial Intermediaries
and Depository participants.
The Depository is a limited purpose trust company organized under the laws
of the State of New York, a member of the Federal Reserve System, a "Clearing
Corporation" within the meaning of the Uniform Commercial Code as in effect in
the State of New York and a "Clearing Agency" registered pursuant to Section
17A of the Securities Exchange Act of 1934, as amended. The Depository performs
services for its participants, some of which (and/or their representatives) own
the Depository. In accordance with its normal procedures, the Depository is
expected to record the positions held by each Depository participant in the
Book-Entry Certificates, whether held for its own account or as a nominee for
another person. In general, beneficial ownership of Book-Entry Certificates
will be subject to the rules, regulations and procedures governing the
Depository and Depository participants as in effect from time to time.
Distributions on the Book-Entry Certificates will be made on each
Distribution Date by the Trustee to the Depository. The Depository will be
responsible for crediting the amount of such payments to the accounts of the
applicable Depository participants in accordance with the Depository's normal
procedures. Each Depository participant will be responsible for disbursing such
payments to the beneficial owners of the Book-Entry Certificates that it
represents and to each Financial Intermediary for which it acts as agent. Each
such Financial Intermediary will be responsible for disbursing funds to the
beneficial owners of the Book-Entry Certificates that it represents.
Under a book-entry format, beneficial owners of the Book-Entry
Certificates may experience some delay in their receipt of payments, since such
payments will be forwarded by the Trustee to CEDE. Because the Depository can
only act on behalf of Financial Intermediaries, the ability of a beneficial
owner to pledge Book-Entry Certificates to persons or entities that do not
participate in the Depository system, or otherwise take actions in respect of
such Book-Entry Certificates, may be limited due to the lack of physical
certificates for such Book-Entry Certificates. In addition, issuance of the
Book-Entry Certificates in book-entry form may reduce the liquidity of such
Certificates in the secondary market since certain potential investors may be
unwilling to purchase Certificates for which they cannot obtain physical
certificates.
None of the Sponsor, the 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.
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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
Each Subservicer will establish and maintain an account for the Master
Servicer (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 will be any of: (a) a trust account in the corporate trust department
of the Trustee or another financial institution approved by the Master Servicer
so that the rights of the Master Servicer, the Trustee and the
Certificateholders will be fully protected against the claims of any creditors
of the Subservicer and of any creditors or depositors of the institution in
which such account is maintained, (b) an FDIC insured account (or other
accounts with comparable insurance coverage acceptable to the Rating Agencies)
created, maintained and monitored by a Subservicer or (c) a separate non-trust
account without FDIC or other insurance in an eligible institution (as such
term is defined in the Pooling Agreement). Each Protected Account held by a
Subservicer may contain funds relating to mortgage loans (other than the
Mortgage Loans) serviced by the Subservicer on behalf of the Master Servicer.
INVESTMENT ACCOUNT
All amounts withdrawn from the Protected Accounts shall be immediately
deposited into an account in the name of the Master Servicer (the "Investment
Account"), which shall be maintained at a bank or trust company designated from
time to time by the Master Servicer and acceptable to the Rating Agencies. The
Investment Account may be a commingled account with other similar accounts
maintained by the Master Servicer and invested for its own account; provided,
that the maintenance of such a commingled account has been approved by the
Rating Agencies. The investment of funds in the Investment Account shall be
limited to one or more Eligible Investments as set out in the Pooling
Agreement.
No later than the 20th day of each month (such day, the "Withdrawal
Date"), the Master Servicer shall withdraw or shall cause to be withdrawn from
the Protected Accounts and shall deposit or cause to be deposited in the
Investment Account amounts representing the following collections and payments
(other than with respect to principal of or interest on the Mortgage Loans due
on or before the Cut-off Date):
(i) Scheduled payments on the related Mortgage Loans received or
advanced by the Master Servicer or a Subservicer which were due on the
related Due Date, net of servicing fees due to the applicable Subservicer;
S-24
<PAGE>
(ii) Full principal prepayments and the proceeds of liquidations,
received by the applicable Subservicer 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 applicable Subservicer; and
(iii) Partial prepayments of principal received by the applicable
Subservicer for such Mortgage Loans in the related Prepayment Period.
CERTIFICATE ACCOUNT
The Trustee shall establish and maintain a trust account with the Trustee,
the institution at which the Investment Account is maintained or any other bank
or trust company acceptable to the Rating Agencies for the benefit of
Certificateholders (the "Certificate Account"). On or prior to each
Distribution Date, the Master Servicer will deposit in the Certificate Account
the Available Funds for the related Distribution Date.
The amount at any time credited to the Certificate Account will 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 (or on the Distribution Date if the Eligible
Investments are obligations of the Trustee) 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 borne by the Master Servicer.
On each Distribution Date, the Trustee or its paying agent will distribute
the funds in the Certificate Account to the Certificateholders, 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, the Investment Account or the Certificate Account the amount of any
servicing fees or advances which the Master Servicer or a Subservicer is
entitled to be paid.
AVAILABLE FUNDS
"Available Funds" for any Distribution Date will equal the sum of the
following amounts: (i) all scheduled installments of interest (net of related
Expense Fees) and principal due on the Due Date in the month in which such
Distribution Date occurs and received prior to the related Determination Date,
together with any Advances in respect thereof, (ii) all 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
(except, with respect to prepayments in full, interest accrued during the
calendar month of such Distribution Date) 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
Subservicer is entitled to be reimbursed from the Certificate Account pursuant
to the Pooling Agreement. See "The Mortgage Pool -- Assignment of Mortgage
Loans" herein.
With respect to any Mortgage Loan and any Distribution Date, the
"Prepayment Period" is the period (i) from the 15th day of the month preceding
such Distribution Date (or, in the case of the first Distribution Date, the
Cut-off Date) through the 14th 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
S-25
<PAGE>
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 or the agency designated for the purpose in New York City.
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 November
1998, in an aggregate amount equal to the Available Funds for such Distribution
Date to holders of record of such Certificates on the last business day of the
month preceding the month of such Distribution Date (the "Record Date") in the
following order of priority:
FIRST, concurrently, (a) to each Class of interest-bearing Senior
Certificates, the Interest Distribution Amount on each such Class for such
Distribution Date and (b) on or prior to the Accrual Termination Date, to
the Class A-1 Certificates, any Class A-2 Accrual Amount, 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;
SECOND, concurrently, (a) to the Class A and Class R Certificates in
reduction of the Class Certificate Balances thereof, the Senior Principal
Distribution Amount (as defined herein) for such Distribution Date, in the
following order of priority:
(i) to the Class A-3 Certificates, up to the Class A-3 Principal
Distribution Amount (as defined herein) for such Distribution Date,
until the Class Certificate Balance thereof has been reduced to zero;
(ii) to the Class R Certificates, until the Class Certificate Balance
thereof has been reduced to zero;
(iii) to the Class A-1 Certificates, until the Class Certificate
Balance thereof has been reduced to zero;
(iv) to the Class A-2 Certificates, until the Class Certificate
Balance thereof has been reduced to zero; and
(v) to the Class A-3 Certificates, until the Class Certificate
Balance thereof has been reduced to zero; and
(b) to the Class PO Certificates, the Class PO Principal Distribution
Amount for such Distribution Date, until the Class Certificate Balance
thereof is reduced to zero;
THIRD, to the Class PO Certificates, the Class PO Deferred Amount for
such Distribution Date, provided that (i) distributions pursuant to this
clause THIRD shall not exceed the excess, if any, of (x) the Available
Funds remaining after giving effect to distributions pursuant to clauses
FIRST and SECOND above over (y) the aggregate 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 Senior Credit Support
Depletion Date;
FOURTH, 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) of principal for such Class for such Distribution Date.
S-26
<PAGE>
FIFTH, to the Class R Certificates, any remaining amounts. It is not
anticipated that there will be any significant amounts remaining for such
distribution.
Notwithstanding the foregoing, on any Distribution Date on or after the
date on which the Class Certificate Balances of the Subordinate
Certificates are reduced to zero (the "Senior Credit Support Depletion
Date"), any distribution of principal to the Class A and Class R
Certificates described in clause SECOND (a) above shall be made on a PRO
RATA basis based on the Class Certificate Balances thereof immediately
prior to such Distribution Date.
Notwithstanding the foregoing, if after distributions have been made
pursuant to clause FIRST above on any Distribution Date, remaining
Available Funds are less that the sum of the Senior Principal Distribution
Amount and the Class PO Principal Distribution Amount for such Distribution
Date, such amounts will be proportionately reduced and remaining Available
Funds will be distributed on the Class A, Class R and the Class PO
Certificates in accordance with clause SECOND (a) and (b) above on the
basis of the 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 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.
INTEREST
The Pass-Through Rate for each Class of Offered Certificates for each
Distribution Date will be as described on page S-3.
With respect to any Distribution Date, the "Class X-1 Notional Amount"
will be equal to the product of (x) the aggregate Scheduled Principal Balance
of all Subgroup 1 Loans, as of the second preceding Due Date after giving
effect to payments of principal scheduled to be received as of such Due Date,
whether or not received, or with respect to the initial Distribution Date, as
of the Cut-off Date, and (y) a fraction, the numerator of which is the weighted
average of the Stripped Interest Rates for the Subgroup 1 Loans as of such Due
Date, and the denominator of which is 6.50%. The Class X-1 Notional Amount as
of the Cut-off Date will be approximately $12,791,120.
With respect to any Distribution Date, the "Class X-2 Notional Amount"
will be equal to the product of (x) the aggregate Scheduled Principal Balance
of all Subgroup 2 Loans, as of the second preceding Due Date after giving
effect to payments of principal scheduled to be received as of such Due Date,
whether or not received, or with respect to the initial Distribution Date, as
of the Cut-off Date, and (y) a fraction, the numerator of which is the weighted
average of the Stripped Interest Rates for the Subgroup 2 Loans as of such Due
Date, and the denominator or which is 6.50%. The Class X-2 Notional Amount as
of the Cut-off Date will be approximately $11,923,560.
On each Distribution Date, each Class of 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 (or, in
the case of the Class A-2 Certificates, have such interest added to its Class
Certificate Balance until the Accrual Termination Date) 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.
The interest entitlement described above for each Class of Certificates
will be reduced by "Net Interest Shortfalls" experienced by the Mortgage Loans
for such Distribution Date. With respect to any Distribution Date, the "Net
Interest Shortfall" is equal to the sum of (i) the amount of interest any Class
of Certificates would otherwise have been entitled to receive (or accrete) with
respect to any Mortgage Loan that was the subject of (a)
S-27
<PAGE>
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 reduction in the amount of monthly interest payment
on a Mortgage Loan pursuant to the Relief Act. See "Certain Legal Aspects of
Mortgage Loans -- Soldiers' and Sailors' Civil Relief Act" in the Prospectus.
"Net Prepayment Interest Shortfall" is the amount by which the aggregate of
Prepayment Interest Shortfalls experienced by the Mortgage Loans in respect of
a Distribution Date exceeds the aggregate amount of the Compensating Interest
Payments for such Distribution Date. With respect to any Distribution Date, the
"Prepayment Interest Shortfall" 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. Net Interest Shortfalls on
any Distribution Date will be allocated PRO RATA among all Classes of
Certificates, based on the amount of interest each such Class of Certificates
would otherwise be entitled to receive (or accrete) on such Distribution Date
before taking into account any reduction in such amounts resulting from such
Net Interest Shortfalls.
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 or addition to
principal, as the case may be, of interest to holders of the Offered
Certificates, interest will be distributed or added to principal, as the case
may be, 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 (or accrete) 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
(or accrete) 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 will be the calendar month
preceding the month in which the Distribution Date occurs.
The "Net Mortgage Rate" of a Mortgage Loan is the Mortgage Rate thereof
minus the Expense Rate with respect to such Mortgage Loan.
The "Stripped Interest Rate" for each Mortgage Loan is the excess, if any,
of the Net Mortgage Rate for such Mortgage Loan over 6.50% per annum.
ACCRUAL CERTIFICATES. The Class A-2 Certificates are "Accrual
Certificates." Interest will accrue on the Class A-2 Certificates during each
Interest Accrual Period at a per annum rate of 6.50%. However, such interest
will not be distributed on the Class A-2 Certificates until the earlier of (a)
the Senior Credit Support Depletion Date and (b) the Distribution Date on which
the Class Certificate Balance of the Class A-1 Certificates has been reduced to
zero (the "Accrual Termination Date"). Interest so accrued and unpaid will be
added to the Class Certificate Balance of the Class A-2 Certificates on the
related Distribution Date.
On each Distribution Date up to and including the Accrual Termination
Date, the amount of interest accrued on the Class A-2 Certificates and added to
the Class Certificate Balance thereof (the "Class A-2 Accrual Amount") will be
distributed as principal to the Class A-1 Certificates until the Class
Certificate Balance thereof is reduced to zero as described above under " --
Distributions." On any Distribution Date that the Class A-2 Accrual Amount is
in excess of the amount necessary to reduce the Class Certificate Balance of
the Class A-1 Certificates to zero, the Class A-2 Accrual Amount on such date
will equal the amount necessary to reduce such Class Certificate Balance to
zero.
PRINCIPAL
An amount equal to all amounts payable in respect of principal of the
Mortgage Loans will be allocated between (i) the Senior Certificates (other
than the Class PO 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.
S-28
<PAGE>
The "Non-PO Percentage" with respect to any Mortgage Loan with a Net
Mortgage Rate less than 6.50% per annum (each such Mortgage Loan, a "Discount
Mortgage Loan") will be equal to the Net Mortgage Rate thereof divided by
6.50%. The "Non-PO Percentage" with respect to any Mortgage Loan with a Net
Mortgage Rate equal to or greater than 6.50% per annum (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 6.50% minus the Net Mortgage Rate thereof divided by
6.50%. The "PO Percentage" with respect to any Non-Discount Mortgage Loan will
be 0%.
The amount to which the Senior Certificates (other than the Class PO and
Class X Certificates) are entitled to receive as principal on any Distribution
Date (the "Senior Principal Distribution Amount") will be an amount equal to
the sum of:
(i) the Senior Percentage (as defined below) of the applicable Non-PO
Percentage of all scheduled payments of principal due on each Mortgage Loan
on the first day of the month in which the Distribution Date occurs, as
specified in the amortization schedule at the time applicable thereto
(after adjustment for previous principal prepayments and the principal
portion of Debt Service Reductions after the Bankruptcy Coverage
Termination Date, but before any adjustment to such amortization schedule
by reason of other bankruptcy or similar proceeding or any moratorium or
similar waiver or grace period);
(ii) the Senior Prepayment Percentage (as defined below) of the
applicable Non-PO Percentage of the Scheduled Principal Balance of each
Mortgage Loan which was the subject of prepayment in full received by the
Master Servicer during the applicable Prepayment Period (as defined below);
(iii) the Senior Prepayment Percentage of the applicable Non-PO
Percentage of all partial prepayments of principal received on each
Mortgage Loan during the applicable Prepayment Period;
(iv) with respect to each Mortgage Loan that became a Liquidated
Mortgage Loan during the related Prepayment Period, the lesser of (x) the
Senior Percentage of the applicable Non-PO Percentage of the Scheduled
Principal Balance of such Mortgage Loan and (y) either (A) the Senior
Prepayment Percentage or (B) if an Excess Loss was sustained with respect
to such Liquidated Mortgage Loan during such preceding calendar month, the
Senior Percentage of the applicable Non-PO Percentage of the Liquidation
Proceeds and Insurance Proceeds allocable to principal received during such
Prepayment Period with respect to such Mortgage Loan; and
(v) the Senior Prepayment Percentage of the applicable Non-PO Percentage
of the sum of (a) the Scheduled Principal Balance of each Mortgage Loan
which was repurchased by the Seller in connection with such Distribution
Date, (b) the Substitution Adjustment Amount in connection with any
Mortgage Loan 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 received
during the applicable Prepayment Period not otherwise referred to in this
definition.
The "Class A-3 Principal Distribution Amount" for any Distribution Date
will equal the amount calculated above for the Senior Principal Distribution
Amount, except all references in such definition to the Senior Percentage shall
be replaced with the Class A-3 Percentage and all references in such definition
to the Senior Prepayment Percentage shall be replaced with the Class A-3
Prepayment Percentage. Notwithstanding the foregoing, if on any Distribution
Date the aggregate Class Certificate Balance of the Senior Certificates (other
than the Class A-3 Certificates) have been reduced to zero, the Class A-3
Principal Distribution Amount shall include any remaining Senior Principal
Distribution Amount.
With respect to any Distribution Date, the "Class A-3 Percentage" will
equal (1) for any Distribution Date prior to the Distribution Date in November
2003, 0% and (2) for any Distribution Date on or after November 2003, the
lesser of (a) 100% and (b) the percentage (carried to six places rounded up)
obtained by dividing the Class Certificate Balance of the Class A-3
Certificates immediately preceding such Distribution Date by the aggregate
Class Certificate Balance of all Certificates (other than the Class PO
Certificates) immediately preceding such Distribution Date.
The "Class A-3 Prepayment Percentage" for any Distribution Date will equal
the product of (a) the Class A-3 Percentage for such Distribution Date and (b)
the Step Down Percentage for such Distribution Date.
S-29
<PAGE>
The "Step Down Percentage" for any Distribution Date will be the percentage
indicated below:
<TABLE>
<CAPTION>
DISTRIBUTION DATE OCCURRING IN STEP DOWN PERCENTAGE
- ---------------------------------------------- ---------------------
<S> <C>
November 1998 - October 2003 .......... 0%
November 2003 - October 2004 .......... 30%
November 2004 - October 2005 .......... 40%
November 2005 - October 2006 .......... 60%
November 2006 - October 2007 .......... 80%
November 2007 and thereafter .......... 100%
</TABLE>
The "Senior Percentage" will initially equal approximately 93.50%. The
Senior Percentage will be recalculated with respect to each Distribution Date
to equal the percentage (carried to six places rounded up) obtained by dividing
the aggregate of the Class Certificate Balances of the Class A Certificates and
the Class R Certificates, immediately preceding such Distribution Date by the
aggregate Class Certificate Balance of all Certificates (other than the Class
PO Certificates) immediately preceding such Distribution Date.
The "Senior Prepayment Percentage" on any Distribution Date occurring
during the periods set forth below will be as follows:
<TABLE>
<CAPTION>
DISTRIBUTION DATE OCCURRING IN SENIOR PREPAYMENT PERCENTAGE
- ------------------------------------------ ------------------------------
<S> <C>
November 1998 - October 2003 .......... 100%
November 2003 - October 2004 .......... Senior Percentage plus 70% of
the Subordinate Percentage
November 2004 - October 2005 .......... Senior Percentage plus 60% of
the Subordinate Percentage
November 2005 - October 2006 .......... Senior Percentage plus 40% of
the Subordinate Percentage
November 2006 - October 2007 .......... Senior Percentage plus 20% of
the Subordinate Percentage
November 2007 and thereafter .......... Senior Percentage
</TABLE>
Notwithstanding the foregoing, if on any Distribution Date the Senior
Percentage exceeds the Senior Percentage as of the Cut-off Date, the Senior
Prepayment Percentage for such Distribution Date will equal 100%. Upon
reduction of the Class Certificate Balances of the Class A and Class R
Certificates to zero, the Senior Prepayment Percentage will equal 0%.
In addition, no reduction of the 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 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 on such Distribution Date,
does not exceed 50% or (B) the aggregate outstanding principal balance of the
Mortgage Loans 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 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 November 2003 and October 2004, (B) 35% of the
Original Subordinate Principal Balance if such Distribution Date occurs between
and including November 2004 and October 2005, (C) 40% of the Original
Subordinate Principal Balance if such Distribution Date occurs between and
including November 2005 and October 2006, (D) 45% of the Original Subordinate
Principal Balance if such Distribution Date occurs between and including
November 2006 and October 2007, (E) 50% of the Original Subordinate Principal
Balance if such Distribution Date occurs during or after November 2007 or (b)
(i) the outstanding principal balance of the Mortgage Loans 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 to
date for such Distribution Date are less than 10% of the Original Subordinate
Principal Balance.
S-30
<PAGE>
The "Class PO Principal Distribution Amount" with respect to each
Distribution Date will be an amount equal to the sum of:
(i) the applicable PO Percentage of all scheduled payments of principal
due on each Discount Mortgage Loan on the first day of the month in which
the Distribution Date occurs, as specified in the amortization schedule at
the time applicable thereto (after adjustment for previous principal
prepayments and the principal portion of Debt Service Reductions after the
Bankruptcy Coverage Termination Date, but before any adjustment to such
amortization schedule by reason for 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 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 received during the applicable
Prepayment Period;
(iv) with respect to each Discount Mortgage Loan 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 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 "Subordinate Percentage" which will initially equal approximately
6.50% will be recalculated for each Distribution Date to equal 100% minus the
Senior Percentage for such Distribution Date. The "Subordinate Prepayment
Percentage" on any Distribution Date will equal 100% minus the Senior
Prepayment Percentage, except that on any Distribution Date after the Class
Certificate Balances of the Senior Certificates 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 amounts
(but in no event greater than the aggregate Class Certificate Balances of the
Subordinate Certificates immediately prior to such Distribution Date);
(i) the Subordinate Percentage of the applicable Non-PO Percentage of
all scheduled payments of principal due on each Mortgage Loan on the first
day of the month in which the Distribution Date occurs, as specified in the
amortization schedule at the time applicable thereto (after adjustment for
previous principal prepayments and the principal portion of Debt Service
Reductions after the Bankruptcy Coverage Termination Date, but before any
adjustment to such amortization schedule by reason of any other bankruptcy
or similar proceeding or any moratorium or similar waiver or grace period);
(ii) the Subordinate Prepayment Percentage of the applicable Non-PO
Percentage of the Scheduled Principal Balance of each Mortgage Loan which
was the subject of a prepayment in full received by the Master Servicer
during the applicable Prepayment Period;
(iii) the Subordinate Prepayment Percentage of the applicable Non-PO
Percentage of all partial prepayments of principal received on each
Mortgage Loan during the applicable Prepayment Period (plus, on the
Distribution Date on which the Class Certificate Balances of the Senior
Certificates have all been reduced to zero, 100% of any Senior Principal
Distribution Amount remaining undistributed on such date);
(iv) with respect to each Mortgage Loan 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 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
S-31
<PAGE>
(v) the Subordinate Prepayment Percentage of the applicable Non-PO
Percentage of the sum of (a) the Scheduled Principal Balance of each
Mortgage Loan which was repurchased by the Seller in connection with such
Distribution Date, (b) the Substitution Adjustment Amount in connection
with any Mortgage Loan 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
received during the applicable Prepayment Period 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 the
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 designation.
The "Pro Rata Share" with respect to any Class of Subordinate Certificates
on any Distribution Date will generally equal such Class' 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 such Distribution Date.
With respect to each Class of Subordinate Certificates (other than such
Class then outstanding with the lowest numerical Class designation), 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 in respect of the 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 Subordinate 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.
The approximate Original Applicable Credit Support Percentages for the
Subordinate Certificates on the date of issuance of the Certificates are
expected to be as follows:
<TABLE>
<S> <C>
Class B-1 .............. 6.50%
Class B-2 .............. 3.65%
Class B-3 .............. 2.10%
Class B-4 .............. 1.35%
Class B-5 .............. 0.80%
Class B-6 .............. 0.50%
</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.
S-32
<PAGE>
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 Senior Credit Support Depletion Date plus
the amount of any Class PO Cash Shortfall will be treated as a "Class PO
Deferred Amount." To the extent funds are available therefor on such
Distribution Date or on any future Distribution Date on or prior to the Senior
Credit Support Depletion Date, 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 Senior Credit
Support Depletion Date, no new Class PO Deferred Amounts will be created.
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 (other than the Class PO
and Class X Certificates), PRO RATA, based upon their respective Class
Certificate Balances or, in the case of the Class A-2 Certificates, on the
basis of the lesser of their Class Certificate Balance and their initial Class
Certificate Balance.
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 Class X Certificates and the Class PO Certificates) and the
Subordinate Certificates based upon their respective Class Certificate Balances
or, in the case of the Class A-2 Certificates, on the basis of the lesser of
their Class Certificate Balance and their initial Class Certificate Balance.
In addition, on each Distribution Date, the Class Certificate Balance of
the Class of Subordinate Certificates then outstanding with the highest
numerical Class designation will be reduced by the amount, if any, by which the
aggregate of the Class Certificate Balances of all outstanding Classes of
Certificates (after giving effect to the distribution of principal and the
allocation of Realized Losses of such Distribution Date) exceeds the Pool
Principal Balance as of the Due Date in the month of such Distribution Date.
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.
S-33
<PAGE>
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 Seller 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 5% 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 each holder of a Certificate will be
entitled to receive is 100% of such holder's outstanding Certificate 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. However, proceeds
from such purchase 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) December 25,
2030. 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 is November 25, 2028. The Last Scheduled Distribution Date is the
Distribution Date in the month immediately following the latest scheduled
maturity date of any Mortgage Loan. 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 the Last Scheduled Distribution
Date. The rate of payments on the Mortgage Loans will depend on their
particular characteristics, as well as on prevailing interest rates from time
to time and other economic factors, and no assurance can be given as to the
actual payment experience of the Mortgage Loans. See "Maturity, Prepayment and
Weighted Average Life of Certificates" in the Prospectus.
VOTING RIGHTS
Voting rights of the Trust in general will be allocated 1% to the Class
X-1 Certificates, 1% to the Class X-2 Certificates and 98% to the other Classes
of Certificates based upon their respective Class Certificate Balances.
THE TRUSTEE
State Street Bank and Trust Company 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 or
at such other addresses as the Trustee may designate from time to time.
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.
S-34
<PAGE>
PREPAYMENT AND YIELD CONSIDERATIONS
GENERAL
The effective yield to the holders of the interest bearing 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 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. 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. Any Net Interest Shortfall allocated to the Class A-2
Certificates will reduce the Class A-2 Accrual Amount, thereby reducing the
amount of funds available for distribution of principal to the Classes of
Senior Certificates entitled to receive such distributions. 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 Class X 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.
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. 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
S-35
<PAGE>
X-1 and Class X-2 Certificates will be highly sensitive to the rate and timing
of prepayments on the Mortgage Loans having Net Mortgage Rates in excess of
6.50% per annum. A rapid rate of principal prepayments on such Mortgage Loans
may have a material negative effect on the yield of the Class X-1 and Class X-2
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 " -- Yield on Class X-1 and Class X-2 Certificates" and " --
Yield on Class PO Certificates" herein.
Although the Class A-3 Certificates are Senior Certificates, the Class A-3
Certificates are not expected to receive principal distributions until the
Distribution Date in November 2003.
As described herein under "Description of the Certificates -- Principal",
the 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 Senior Certificates 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."
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 5% 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
Subservicer, 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 Subservicer, 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 Subservicer 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 Donaldson, Lufkin & Jenrette Securities Corporation
(the "Underwriter") 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
S-36
<PAGE>
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. The Mortgage Loans may be
prepaid by the Mortgagors at any time without payment of any prepayment fee or
penalty.
In general, the weighted average lives of the Offered Certificates will be
shortened if the level of prepayments of principal of the Mortgage Loans
increases. However, the weighted average lives of the Offered Certificates will
depend upon a variety of other factors, including the timing of changes in such
rate of principal payments and the priority sequence of distributions of
principal of the Classes of Certificates. See "Description of the Certificates
- -- Principal" herein.
The interaction of the foregoing factors may have different effects on
various Classes of Offered Certificates and the effects on any Class may vary
at different times during the life of such Class. Accordingly, no assurance can
be given as to the weighted average life of any Class of Offered Certificates.
Further, to the extent the prices of the Offered Certificates represent
discounts or premiums to their respective original Class Certificate Balances,
variability in the weighted average lives of such Classes of Offered
Certificates will result in variability in the related yields to maturity. For
an example of how the weighted average lives of the Classes of Offered
Certificates may be affected at various CONSTANT percentages of the Prepayment
Assumption, see the Decrement Tables below.
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 6.0% 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 1.272727% (precisely 14/11%) per annum in each month thereafter
until the twelfth month. Beginning in the twelfth month and in each month
thereafter during the life of the mortgage loans, a 100% Prepayment Assumption
assumes a CPR of 20% 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 of each Class of Offered Certificates that would be outstanding after
each of the dates shown at various constant percentages of the Prepayment
Assumption and the corresponding weighted average lives of such Classes of
Offered Certificates.
S-37
<PAGE>
The following Decrement Tables have been prepared based on the assumptions
(the "Structuring Assumptions") that: (i) the Mortgage Pool consists of 3
Mortgage Loans with the following characteristics:
<TABLE>
<CAPTION>
REMAINING
AMORTIZATION
APPROXIMATE APPROXIMATE NET TERM TO MATURITY LOAN AGE
PRINCIPAL BALANCE MORTGAGE RATE MORTGAGE RATE (IN MONTHS) (IN MONTHS)
- ------------------- ------------------ ----------------- ------------------ ------------
<S> <C> <C> <C> <C>
$ 2,337,185.13 6.8117836605% 6.4102358225% 359 1
183,263,283.87 7.7411578626 6.9536767135 359 1
107,884,540.43 7.9995421488 7.2183897259 357 2
</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 November 1998 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 October 1998, (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 page S-3 hereof, (ix)
interest accrues on each Class of Certificates at the applicable interest rate
described herein, (x) distributions in respect of the Certificates are received
in cash on the 25th day of each month, commencing in November 1998, (xi) the
Offered Certificates are purchased on October 30, 1998, 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."
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.
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.
S-38
<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-1
---------------------------------------------
DISTRIBUTION DATE 0% 50% 100% 150% 200%
- -------------------------------------------- --------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Initial Percentage ......................... 100% 100% 100% 100% 100%
October 1999 ............................... 99 90 81 73 64
October 2000 ............................... 98 78 60 44 30
October 2001 ............................... 96 67 43 24 10
October 2002 ............................... 95 57 30 11 0
October 2003 ............................... 93 49 19 1 0
October 2004 ............................... 91 41 12 0 0
October 2005 ............................... 90 35 6 0 0
October 2006 ............................... 88 29 3 0 0
October 2007 ............................... 86 25 * 0 0
October 2008 ............................... 83 21 0 0 0
October 2009 ............................... 81 17 0 0 0
October 2010 ............................... 78 14 0 0 0
October 2011 ............................... 76 11 0 0 0
October 2012 ............................... 73 8 0 0 0
October 2013 ............................... 69 5 0 0 0
October 2014 ............................... 66 3 0 0 0
October 2015 ............................... 62 * 0 0 0
October 2016 ............................... 58 0 0 0 0
October 2017 ............................... 54 0 0 0 0
October 2018 ............................... 49 0 0 0 0
October 2019 ............................... 44 0 0 0 0
October 2020 ............................... 38 0 0 0 0
October 2021 ............................... 32 0 0 0 0
October 2022 ............................... 26 0 0 0 0
October 2023 ............................... 19 0 0 0 0
October 2024 ............................... 12 0 0 0 0
October 2025 ............................... 4 0 0 0 0
October 2026 ............................... 0 0 0 0 0
October 2027 ............................... 0 0 0 0 0
October 2028 ............................... 0 0 0 0 0
October 2029 ............................... 0 0 0 0 0
Weighted Average Life (in years)** ......... 18.1 6.0 3.1 2.0 1.5
<CAPTION>
CLASS A-2
-----------------------------------------------
DISTRIBUTION DATE 0% 50% 100% 150% 200%
- -------------------------------------------- --------- --------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
Initial Percentage ......................... 100% 100% 100% 100% 100%
October 1999 ............................... 107 107 107 107 107
October 2000 ............................... 114 114 114 114 114
October 2001 ............................... 121 121 121 121 121
October 2002 ............................... 130 130 130 130 51
October 2003 ............................... 138 138 138 138 0
October 2004 ............................... 148 148 148 22 0
October 2005 ............................... 157 157 157 0 0
October 2006 ............................... 168 168 168 0 0
October 2007 ............................... 179 179 179 0 0
October 2008 ............................... 191 191 142 0 0
October 2009 ............................... 204 204 111 0 0
October 2010 ............................... 218 218 87 0 0
October 2011 ............................... 232 232 68 0 0
October 2012 ............................... 248 248 52 0 0
October 2013 ............................... 264 264 41 0 0
October 2014 ............................... 282 282 31 0 0
October 2015 ............................... 301 301 24 0 0
October 2016 ............................... 321 269 18 0 0
October 2017 ............................... 343 229 14 0 0
October 2018 ............................... 366 193 10 0 0
October 2019 ............................... 390 162 8 0 0
October 2020 ............................... 416 134 6 0 0
October 2021 ............................... 444 109 4 0 0
October 2022 ............................... 474 87 3 0 0
October 2023 ............................... 506 67 2 0 0
October 2024 ............................... 539 50 1 0 0
October 2025 ............................... 576 34 1 0 0
October 2026 ............................... 463 21 * 0 0
October 2027 ............................... 221 9 * 0 0
October 2028 ............................... 0 0 0 0 0
October 2029 ............................... 0 0 0 0 0
Weighted Average Life (in years)** ......... 28.7 22.0 13.0 5.7 4.0
</TABLE>
- ----------
* Indicates a number between 0% and 0.5%.
** 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-39
<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-3 CLASS R
----------------------------------------------- --------------------------------------------
DISTRIBUTION DATE 0% 50% 100% 150% 200% 0% 50% 100% 150% 200%
- ---------------------------- --------- --------- --------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage ......... 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
October 1999 ............... 100 100 100 100 100 0 0 0 0 0
October 2000 ............... 100 100 100 100 100 0 0 0 0 0
October 2001 ............... 100 100 100 100 100 0 0 0 0 0
October 2002 ............... 100 100 100 100 100 0 0 0 0 0
October 2003 ............... 100 100 100 100 36 0 0 0 0 0
October 2004 ............... 99 96 92 89 0 0 0 0 0 0
October 2005 ............... 97 90 83 54 0 0 0 0 0 0
October 2006 ............... 96 83 72 30 0 0 0 0 0 0
October 2007 ............... 94 75 59 18 0 0 0 0 0 0
October 2008 ............... 92 66 46 12 0 0 0 0 0 0
October 2009 ............... 90 58 36 8 0 0 0 0 0 0
October 2010 ............... 88 51 28 6 0 0 0 0 0 0
October 2011 ............... 85 45 22 4 0 0 0 0 0 0
October 2012 ............... 83 39 17 3 0 0 0 0 0 0
October 2013 ............... 80 34 13 2 0 0 0 0 0 0
October 2014 ............... 77 30 10 1 0 0 0 0 0 0
October 2015 ............... 74 26 8 1 0 0 0 0 0 0
October 2016 ............... 70 22 6 1 0 0 0 0 0 0
October 2017 ............... 67 19 4 * 0 0 0 0 0 0
October 2018 ............... 63 16 3 * 0 0 0 0 0 0
October 2019 ............... 58 13 3 * 0 0 0 0 0 0
October 2020 ............... 54 11 2 * 0 0 0 0 0 0
October 2021 ............... 48 9 1 * 0 0 0 0 0 0
October 2022 ............... 43 7 1 * 0 0 0 0 0 0
October 2023 ............... 37 5 1 * 0 0 0 0 0 0
October 2024 ............... 30 4 * * 0 0 0 0 0 0
October 2025 ............... 23 3 * * 0 0 0 0 0 0
October 2026 ............... 16 2 * * 0 0 0 0 0 0
October 2027 ............... 8 1 * * 0 0 0 0 0 0
October 2028 ............... 0 0 0 0 0 0 0 0 0 0
October 2029 ............... 0 0 0 0 0 0 0 0 0 0
Weighted Average Life
(in years)** .............. 21.2 13.6 10.6 7.8 4.9 0.1 0.1 0.1 0.1 0.1
</TABLE>
- ----------
* Indicates a number between 0% and 0.5%.
** 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-40
<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 0% 50% 100% 150% 200%
- -------------------------------------------- --------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Initial Percentage ......................... 100% 100% 100% 100% 100%
October 1999 ............................... 99 92 85 78 70
October 2000 ............................... 98 82 67 54 42
October 2001 ............................... 97 73 53 37 25
October 2002 ............................... 95 65 42 26 15
October 2003 ............................... 94 57 33 18 9
October 2004 ............................... 92 51 26 12 5
October 2005 ............................... 91 45 20 8 3
October 2006 ............................... 89 40 16 6 2
October 2007 ............................... 87 35 13 4 1
October 2008 ............................... 85 31 10 3 1
October 2009 ............................... 83 27 8 2 *
October 2010 ............................... 81 24 6 1 *
October 2011 ............................... 79 21 5 1 *
October 2012 ............................... 76 18 4 1 *
October 2013 ............................... 73 16 3 * *
October 2014 ............................... 70 13 2 * *
October 2015 ............................... 67 12 2 * *
October 2016 ............................... 64 10 1 * *
October 2017 ............................... 60 8 1 * *
October 2018 ............................... 56 7 1 * *
October 2019 ............................... 52 6 1 * *
October 2020 ............................... 48 5 * * *
October 2021 ............................... 43 4 * * *
October 2022 ............................... 38 3 * * *
October 2023 ............................... 33 2 * * *
October 2024 ............................... 27 2 * * *
October 2025 ............................... 21 1 * * *
October 2026 ............................... 14 1 * * *
October 2027 ............................... 7 * * * *
October 2028 ............................... 0 0 0 0 0
October 2029 ............................... 0 0 0 0 0
Weighted Average Life (in years)** ......... 19.7 8.0 4.5 3.0 2.2
<CAPTION>
CLASS B-1, CLASS B-2 AND CLASS B-3
-----------------------------------------------
DISTRIBUTION DATE 0% 50% 100% 150% 200%
- -------------------------------------------- --------- --------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
Initial Percentage ......................... 100% 100% 100% 100% 100%
October 1999 ............................... 99 99 99 99 99
October 2000 ............................... 98 98 98 98 98
October 2001 ............................... 97 97 97 97 97
October 2002 ............................... 96 96 96 96 96
October 2003 ............................... 95 95 95 95 95
October 2004 ............................... 94 91 88 84 79
October 2005 ............................... 92 86 79 72 47
October 2006 ............................... 91 79 68 57 27
October 2007 ............................... 89 71 56 42 16
October 2008 ............................... 87 63 44 29 10
October 2009 ............................... 85 55 34 20 6
October 2010 ............................... 83 49 27 14 3
October 2011 ............................... 81 43 21 9 2
October 2012 ............................... 79 37 16 6 1
October 2013 ............................... 76 32 12 4 1
October 2014 ............................... 73 28 10 3 *
October 2015 ............................... 70 24 7 2 *
October 2016 ............................... 67 21 6 1 *
October 2017 ............................... 63 18 4 1 *
October 2018 ............................... 59 15 3 1 *
October 2019 ............................... 55 13 2 * *
October 2020 ............................... 51 10 2 * *
October 2021 ............................... 46 8 1 * *
October 2022 ............................... 41 7 1 * *
October 2023 ............................... 35 5 1 * *
October 2024 ............................... 29 4 * * *
October 2025 ............................... 22 3 * * *
October 2026 ............................... 15 2 * * *
October 2027 ............................... 7 1 * * *
October 2028 ............................... 0 0 0 0 0
October 2029 ............................... 0 0 0 0 0
Weighted Average Life (in years)** ......... 20.3 13.0 10.2 8.8 7.3
</TABLE>
- ----------
* Indicates a number between 0% and 0.5%.
** 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-41
<PAGE>
YIELD ON CLASS X-1 AND CLASS X-2 CERTIFICATES
The significance of the effects of prepayments on the Class X-1 and Class
X-2 Certificates is illustrated in the following table entitled "Sensitivity of
the Class X-1 and Class X-2 Certificates to Prepayments," which shows the
pre-tax yield (on a corporate bond equivalent basis) to holders of such
Certificates under different constant percentages of the Prepayment Assumption.
The yields of such Certificates set forth in the following table were
calculated using the Structuring Assumptions and the further assumptions that
the purchase price of the Class X-1 and Class X-2 Certificates is approximately
$1,937,677 and $1,523,069, respectively, for 100% of such Class of Certificates
including accrued interest and such Certificates are purchased on October 30,
1998.
As indicated in the following table, the yield to investors in the the
Class X-1 and Class X-2 Certificates will be highly sensitive to the rate of
principal payments (including prepayments) of the Mortgage Loans (especially
those with high Net Mortgage Rates), which generally can be prepaid at any
time.
On the basis of the assumptions described above, the yield to maturity on
the Class X-1 and Class X-2 Certificates would be 0% if prepayments were to
occur on the related Mortgage Loans at a constant rate of approximately 195%
and 223%, respectively, of the Prepayment Assumption. Using such assumptions,
if the actual prepayment rate of such 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 applicable Class of 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-1 and
Class X-2 Certificate and there can be no assurance that the pre-tax yield to
an investor in the Class X-1 and Class X-2 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-1 and Class X-2 Certificate.
SENSITIVITY OF THE CLASS X-1 AND CLASS X-2 CERTIFICATES TO PREPAYMENTS
(PRE-TAX YIELDS TO MATURITY)
<TABLE>
<CAPTION>
% OF PREPAYMENT ASSUMPTION
----------------------------------------------------------------
PRE-TAX YIELDS TO MATURITY 0% 50% 100% 150% 200%
- ---------------------------- ---------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Class X-1 ................ 45.9% 35.1% 23.6% 11.5% (1.4)%
Class X-2 ................ 55.8 44.5 32.6 20.0 6.5
</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-1 and Class X-2 Certificates, would cause the
discounted present value of such assumed stream of cash flows to equal the
assumed purchase price of the Class X-1 and Class X-2 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-1 and Class X-2 Certificates and
consequently does not purport to reflect the return on any investment in the
Class X-1 and Class X-2 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) on the Discount Mortgage Loans 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
S-42
<PAGE>
Structuring Assumptions, and the further assumptions that the purchase price of
the Class PO Certificates is approximately 60.5625% for 100% of such Class of
Certificates and such Certificates are purchased on October 30, 1998.
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 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
------------------------------------------------------------
0% 50% 100% 150% 200%
--------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Pre-Tax Yields to Maturity ......... 2.7% 7.7% 14.3% 21.3% 28.8%
</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 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.
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 $2,937,968 (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 $5,869,700 (the "Fraud Loss Coverage Amount").
S-43
<PAGE>
The Special Hazard Loss Coverage Amount will be reduced, from time to
time, to be an amount equal on any Distribution Date to the lesser of (a) the
greatest of (i) 1% of the aggregate of the principal balances of the Mortgage
Loans, (ii) twice the principal balance of the largest Mortgage Loan and (iii)
the aggregate principal balances of the Mortgage Loans secured by Mortgaged
Properties located in the single California postal zip code area having the
highest aggregate principal balance of any such zip code area or (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 a "real estate mortgage
investment conduit" (the "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 REMIC and the
Class R Certificates will be designated as the sole class of "residual
interests" in the REMIC. See "Federal Income Tax Consequences -- REMIC
Certificates" in the Prospectus.
S-44
<PAGE>
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 Class A-2, Class X-1, Class X-2 and Class PO 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
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% of
the Prepayment Assumption.
If the method for computing original issue discount ("OID") described in
the Prospectus results in a negative amount of OID for any period with respect
to a Certificateholder, the amount of original issue discount allocable to such
period would be zero and such Certificateholder will be permitted to offset
such negative amount only against future original issue discount (if any)
attributable to such Certificates.
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)(4)(A) 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 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 Donaldson, Lufkin & Jenrette
Securities Corporation an administrative exemption (Prohibited Transaction
Exemption 90-83, 55 Fed. Reg. 50250 (1990), as amended (the "Exemption")) from
certain of the prohibited transaction rules of ERISA and the related excise tax
provisions of Section 4975 of the Code with respect to the initial purchase,
the holding and the subsequent resale by Plans of certificates in pass-through
trusts that consist of certain receivables, loans and other obligations that
meet the conditions and requirements of the Exemption. The Exemption applies to
mortgage loans such as the Mortgage Loans in the Trust.
For a general description of the Exemption and the conditions that must be
satisfied for the Exemption to apply, see "ERISA Considerations" in the
Prospectus.
S-45
<PAGE>
It is expected that the Exemption will apply to the acquisition and
holding by Plans of the Senior Certificates (other than the Residual
Certificates) and that all conditions of the Exemption other than those within
the control of the investors will be met. In addition, as of the date hereof,
there is no single Mortgagor that is the obligor on 5% of the Mortgage Loans
included in the Trust by aggregate unamortized principal balance of the assets
of the Trust.
Because the characteristics of the Offered Certificates that are
Subordinate Certificates and the Residual Certificates may not meet the
requirements of Prohibited Transaction Class Exemption 83-1 ("PTCE 83-1"), the
Exemption or any other issued exemption under ERISA, the purchase and holding
of such Subordinate Certificates and the Residual Certificates by a Plan or by
individual retirement accounts or other plans subject to Section 4975 of the
Code or by persons acquiring such Certificates on behalf of or with assets of a
Plan may result in prohibited transactions or the imposition of excise taxes or
civil penalties. Consequently, transfers of the Offered Certificates that are
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 Certificates, acceptable to and in form 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 nor 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 Sections I and III of 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 constitute a prohibited transaction, 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 an Offered Certificate
that is a Subordinate 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 the Underwriting
Agreement between the Sponsor and the Underwriter, the Sponsor has agreed to
sell to the Underwriter, and the Underwriter has agreed to purchase from the
Sponsor, the Offered Certificates. Distribution of the Offered Certificates
will be made by the Underwriter from time to time in negotiated transactions or
otherwise at varying prices to be determined at the time of sale. In connection
with the sale of the Offered Certificates, the Underwriter may be deemed to
have received compensation from the Sponsor in the form of underwriting
discounts.
The Sponsor has been advised by the Underwriter that it intends to make a
secondary market in the Offered Certificates but has no obligation to do so.
There can be no assurance that a secondary market for the Offered Certificates
will develop or, if it does develop, that it will continue.
The Sponsor and the Seller have agreed to indemnify the Underwriter
against, or make contributions to the Underwriter with respect to, certain
liabilities, including liabilities under the Securities Act of 1933, as
amended.
S-46
<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 Underwriter.
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 Standard & Poor's Ratings
Group, a division of the McGraw-Hill Companies, Inc. ("S&P") and Duff & Phelps
Credit Rating Co. ("DCR" and together with S&P, the "Rating Agencies").
<TABLE>
<CAPTION>
RATING
-------------
CLASS S&P DCR
- ------------------ ------ ----
<S> <C> <C>
A-1 ............ AAA AAA
A-2 ............ AAA AAA
A-3 ............ AAA AAA
X-1 ............ AAAr AAA
X-2 ............ AAAr AAA
PO ............. AAAr AAA
R .............. AAA AAA
B-1 ............ N/A AA
B-2 ............ N/A A
B-3 ............ N/A BBB
</TABLE>
The ratings of S&P assigned to mortgage pass-through certificates address
the likelihood of receipt by Certificateholders of all distributions to which
such Certificateholders are entitled. S&P's rating process addresses structural
and legal aspects associated with the Certificates, including the nature of the
underlying mortgage loans. The ratings assigned by S&P to mortgage pass-through
certificates do not represent any assessment of the likelihood that principal
prepayments will be made by the mortgagors or the degree to which such
prepayments will differ from originally anticipated. The "r" symbol is appended
to the rating by S&P of those Certificates that S&P believes may experience
high volatility or high variability in expected returns due to non-credit
risks. The absence of an "r" symbol in the ratings of the other Offered
Certificates should not be taken as an indication that such Certificates will
exhibit no volatility or variability in total return.
The ratings assigned by DCR to mortgage pass-through certificates address
the likelihood of the receipt by certificateholders of all distributions to
which they are entitled under the transaction structure. DCR's ratings reflect
its analysis of the riskiness of the mortgage loans and its analysis of the
structure of the transaction as set forth in the operative documents. DCR's
ratings do not address the effect on the certificates' yield attributable to
prepayments or recoveries on the underlying mortgage loans. Further, the
ratings on the Class X-1 and Class X-2 Certificates do not address whether
investors will recoup their initial investments. The ratings assigned by DCR to
the Class PO Certificates only address the return of their Class Certificate
Balance. The ratings assigned by DCR to the Class R Certificates only address
the return of their Class Certificate Balances and interest thereon at the
Pass-Through Rate.
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 Class
X-1 and Class X-2 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-47
<PAGE>
INDEX TO DEFINED TERMS
<TABLE>
<CAPTION>
PAGE
-----------
<S> <C>
Accrual Certificates ............................. S-28
Accrual Termination Date ......................... S-28
Advance .......................................... S-20
Applicable Credit Support Percentage ............. S-32
Available Funds .................................. S-25
Bankruptcy Loss Coverage Amount .................. S-43
Bankruptcy Losses ................................ S-33
Beneficial Owner ................................. S-23
Book-Entry Certificates .......................... S-22
Business Day ..................................... S-22
CEDE ............................................. S-23
Certificate Account .............................. S-25
Certificateholder ................................ S-23
Certificates ..................................... S-22
Class A Certificates ............................. S-22
Class A-2 Accrual Amount ......................... S-28
Class A-3 Percentage ............................. S-29
Class A-3 Prepayment Percentage .................. S-29
Class A-3 Principal Distribution Amount .......... S-29
Class Certificate Balance ........................ S-22
Class PO Cash Shortfall .......................... S-27
Class PO Deferred Amount ......................... S-33
Class PO Principal Distribution Amount ........... S-31
Class Subordinate Percentage ..................... S-32
Class X-1 Notional Amount ........................ S-27
Class X-2 Notional Amount ........................ S-27
Clearing Agency .................................. S-23
Clearing Corporation ............................. S-23
Code ............................................. S-6, S-44
Compensating Interest Payments ................... S-20
CPR .............................................. S-37
Cut-off Date Pool Principal Balance .............. S-10
Debt Service Reduction ........................... S-44
Decrement Tables ................................. S-37
Deficient Valuation .............................. S-44
Definitive Certificate ........................... S-23
Deleted Mortgage Loan ............................ S-19
Depository ....................................... S-22
DCR .............................................. S-47
Discount Mortgage Loan ........................... S-29
DTC .............................................. S-22
Due Date ......................................... S-10, S-32
ERISA ............................................ S-6, S-45
Excess Losses .................................... S-33
Exemption ........................................ S-45
Expense Fees ..................................... S-19
Expense Rate ..................................... S-19
FHLMC ............................................ S-10
Financial Intermediary ........................... S-23
FNMA ............................................. S-10
Fraud Loss Coverage Amount ....................... S-43
</TABLE>
S-48
<PAGE>
<TABLE>
<CAPTION>
PAGE
-----------
<S> <C>
Fraud Loss ............................................ S-33
Guide ................................................. S-16
Insurance Proceeds .................................... S-25
Interest Accrual Period ............................... S-28
Interest Distribution Amount .......................... S-27
Investment Account .................................... S-24
Last Scheduled Distribution Date ...................... S-34
Lenders ............................................... S-16
Liquidated Mortgage Loan .............................. S-33
Liquidation Proceeds .................................. S-25
Loan-to-Value Ratio ................................... S-10
Master Servicer ....................................... S-9
Master Servicing Fee .................................. S-19
Material Defect ....................................... S-18
Mortgage .............................................. S-18
Mortgage File ......................................... S-18
Mortgage Loan Schedule ................................ S-17
Mortgage Loans ........................................ S-9
Mortgage Note ......................................... S-18
Mortgage Pool ......................................... S-10
Mortgage Rate ......................................... S-10
Mortgaged Properties .................................. S-10
Mortgagor ............................................. S-10
Net Interest Shortfall(s) ............................. S-27
Net Mortgage Rate ..................................... S-20, S-28
Net Prepayment Interest Shortfall(s) .................. S-20, S-28
Non-Discount Mortgage Loan ............................ S-29
Non-Offered Certificates .............................. S-3
Non-PO Percentage ..................................... S-29
Offered Certificates .................................. S-3
OID ................................................... S-45
Original Applicable Credit Support Percentage ......... S-32
Original Subordinate Principal Balance ................ S-30
Pass-Through Rate ..................................... S-3
Pooling Agreement ..................................... S-16
Pool Principal Balance ................................ S-32
PO Percentage ......................................... S-29
Prepayment Assumption ................................. S-37
Prepayment Interest Shortfall ......................... S-28
Prepayment Period ..................................... S-25
Principal Prepayment .................................. S-32, S-35
Pro Rata Share ........................................ S-32
Prospectus ............................................ S-22
Prospectus Supplement ................................. S-22
Protected Account ..................................... S-22, S-24
PTCE 83-1 ............................................. S-46
PTCE 95-60 ............................................ S-46
Rating Agencies ....................................... S-47
Realized Loss ......................................... S-33
Record Date ........................................... S-26
Relief Act Reduction .................................. S-28
REMIC ................................................. S-44
Replacement Mortgage Loan ............................. S-19
</TABLE>
S-49
<PAGE>
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Repurchase Price ......................................... S-19
Restricted Classes ....................................... S-32
S&P ...................................................... S-47
Scheduled Principal Balance .............................. S-32
Seller ................................................... S-9
Senior Credit Support Depletion Date ..................... S-27
Senior Percentage ........................................ S-30
Senior Prepayment Percentage ............................. S-30
Senior Prepayment Percentage Stepdown Limitation ......... S-30
Senior Principal Distribution Amount ..................... S-29
SMMEA .................................................... S-6
Special Hazard Loss ...................................... S-33
Special Hazard Loss Coverage Amount ...................... S-43
Step Down Percentage ..................................... S-30
Stripped Interest Rate ................................... S-28
Structuring Assumptions .................................. S-38
Subordinate Percentage ................................... S-31
Subordinate Prepayment Percentage ........................ S-31
Subordinate Principal Distribution Amount ................ S-31
Subgroup 1 Loans ......................................... S-11
Subgroup 2 Loans ......................................... S-11
Subordination Percentage ................................. S-31
Subservicer .............................................. S-19
Subservicing Fee ......................................... S-19
Substitution Adjustment Amount ........................... S-19
Trust .................................................... S-18
Trustee .................................................. S-4
Underwriter .............................................. S-36
Unpaid Interest Shortfall ................................ S-27
Withdrawal Date .......................................... S-24
</TABLE>
S-50
<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 13
AND IN THE PROSPECTUS SUPPLEMENT COMMENCING ON PAGE S-7.
----------------
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.
OCTOBER 26, 1998
<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
2
<PAGE>
reference unless such exhibits are specifically incorporated by reference into
the information that this Prospectus incorporates). Such requests should be
directed to the Corporate Trust Office of the Trustee specified in the
accompanying Supplement.
----------------
UNTIL 90 DAYS AFTER THE DATE OF EACH SUPPLEMENT, ALL DEALERS EFFECTING
TRANSACTIONS IN THE REGISTERED SECURITIES COVERED BY SUCH SUPPLEMENT, WHETHER
OR NOT PARTICIPATING IN THE DISTRIBUTION THEREOF, MAY BE REQUIRED TO DELIVER
SUCH SUPPLEMENT AND THIS PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF
DEALERS TO DELIVER A SUPPLEMENT AND PROSPECTUS WHEN ACTING AS UNDERWRITERS OF
THE SERIES OF CERTIFICATES COVERED BY SUCH SUPPLEMENT AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
NO PERSON HAS BEEN AUTHORIZED TO GIVE INFORMATION OR TO MAKE ANY
REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND ANY SUPPLEMENT
WITH RESPECT HERETO AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION
MUST NOT BE RELIED UPON. THIS PROSPECTUS AND ANY SUPPLEMENT WITH RESPECT HERETO
DO NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY
SECURITIES OTHER THAN THE CERTIFICATES OFFERED HEREBY AND THEREBY OR AN OFFER
OF THE CERTIFICATES TO ANY PERSON IN ANY STATE OR OTHER JURISDICTION IN WHICH
SUCH OFFER WOULD BE UNLAWFUL. THE DELIVERY OF THIS PROSPECTUS AT ANY TIME DOES
NOT IMPLY THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO ITS DATE.
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.
Title of Security.................. Mortgage Pass-Through Certificates (the
"Certificates"), issuable in series (each
a "Series"). Each Series will be issued
under a separate pooling agreement (each a
"Pooling Agreement").
Sponsor............................ Headlands Mortgage Securities Inc., a
Delaware corporation (the "Sponsor").
Seller............................. The seller or sellers (each, a "Seller")
for a particular Series will be named in
the Supplement relating to such Series
(the "Supplement"). A Seller may be an
affiliate of the Sponsor.
Trustee............................ The trustee (the "Trustee") for a
particular Series will be named in the
related Supplement.
Master Servicer.................... The entity or entities named as Master
Servicer (the "Master Servicer") in the
related Supplement, which may be an
affiliate of the Sponsor. See "The Pooling
and Servicing Agreement -- Certain Matters
Regarding the Sponsor, the Seller and the
Master Servicer."
Closing Date....................... The date (the "Closing Date") of the
initial issuance of a Series, as specified
in the related Supplement.
The Trusts......................... Each Trust will consist of Mortgage
Loans and/or Mortgage Certificates
(collectively, the "Mortgage Assets"), any
real estate acquired through foreclosure
or similar proceeding, any applicable
credit support, the assets in the
Certificate Account, any minimum
prepayment, reinvestment or similar
agreement and any other assets described
in the related Supplement, all as
described herein and therein.
A. Mortgage Loans.................. The mortgage loans included in a Trust
(the "Mortgage Loans") will be secured
primarily by liens on residential
properties or shares in cooperative
corporations ("Cooperatives") and the
related proprietary leases. If so
specified in the related Supplement, the
Mortgage Assets of the related Trust may
include mortgage participation
certificates or other beneficial interests
evidencing interests in mortgage loans.
Such mortgage loans may be conventional
loans (i.e., loans that are not insured by
any governmental agency) or may be insured
or guaranteed by the Federal Housing
Authority ("FHA"), or the Veterans
Administration ("VA"), as specified in the
related Supplement. All Mortgage Loans
will have been purchased by the Sponsor,
either directly or through an affiliate,
from one or more Sellers.
The payment terms of the Mortgage Loans
to be included in a Trust will be
described in the related Supplement and
may include any of the following features
or combinations thereof or other features
described in the related Supplement:
4
<PAGE>
(a) Interest may be payable at a fixed
rate, a rate adjustable from time to time
in relation to an index (which will be
specified in the related Supplement), a
rate that is fixed for a period of time
or under certain circumstances and is
followed by an adjustable rate, a rate
that otherwise varies from time to time,
or a rate that is convertible from an
adjustable rate to a fixed rate. Changes
to an adjustable rate may be subject to
periodic limitations, maximum rates,
minimum rates or a combination of such
limitations. Accrued interest may be
deferred and added to the principal of a
loan for such periods and under such
circumstances as may be specified in the
related Supplement. The loan agreement or
promissory note (the "Mortgage Note") in
respect of a Mortgage Loan may provide
for the payment of interest at a rate
lower than the interest rate (the
"Mortgage Rate") specified in such
Mortgage Note for a period of time or for
the life of the loan, and the amount of
any difference may be contributed from
funds supplied by a third party.
(b) Principal may be payable on a level
debt service basis to fully amortize the
loan over its term, may be calculated on
the basis of an assumed amortization
schedule that is longer than the original
term to maturity or on an interest rate
that is different from the interest rate
on the Mortgage Loan or may not be
amortized during all or a portion of the
original term. Payment of all or a
substantial portion of the principal may
be due on maturity ("balloon payments").
Principal may include interest that has
been deferred and added to the principal
balance of the Mortgage Loan.
(c) Monthly payments of principal and
interest may be fixed for the life of the
Mortgage Loan, may increase over a
specified period of time or may change
from period to period. Mortgage Loans may
include limits on periodic increases or
decreases in the amount of monthly
payments and may include maximum or
minimum amounts of monthly payments.
(d) The Mortgage Loans generally may be
prepaid at any time without payment of
any prepayment fee. If so specified in
the related Supplement, prepayments of
principal may be prohibited for the life
of any such Mortgage Loan or for certain
periods ("lockout periods"), or may be
subject to a prepayment fee, which may be
fixed for the life of any such Mortgage
Loan or may decline over time. Certain
Mortgage Loans may permit prepayments
after expiration of the applicable
lockout period and may require the
payment of a prepayment fee in connection
with any such subsequent prepayment. The
Mortgage Loans may include "due-on-sale"
clauses which permit the mortgagee to
demand payment of the entire Mortgage
Loan in connection with the sale or
certain transfers of the related
5
<PAGE>
Mortgaged Property. Other Mortgage Loans
may be assumable by persons meeting the
then applicable underwriting standards of
the Seller.
(e) The real property constituting
security for repayment of a Mortgage Loan
may be located in any one of the fifty
states, the District of Columbia, Guam,
Puerto Rico or any other territory of the
United States. The Mortgage Loans may be
covered by standard hazard insurance
policies insuring against losses due to
fire and various other causes. The
Mortgage Loans may be covered by primary
mortgage insurance policies to the extent
provided in the related Supplement.
B. Mortgage Certificates........... The Trust may include certain assets
(the "Mortgage Certificates") which are
limited to GNMA Certificates, FNMA
Certificates, FHLMC Certificates or a
combination thereof. Any GNMA Certificates
included in a Trust will be guaranteed as
to full and timely payment of principal
and interest by GNMA, which guaranty is
backed by the full faith and credit of the
United States. Any FHLMC Certificates
included in the Trust will be guaranteed
as to the timely payment of interest and
ultimate collection (and, if so specified
in the related Supplement, timely payment)
of principal by FHLMC. Any FNMA
Certificates included in a Trust will be
guaranteed as to timely payment of
scheduled payments of principal and
interest by FNMA. No FNMA or FHLMC
Certificates will be backed, directly or
indirectly, by the full faith and credit
of the United States.
Each Mortgage Certificate will evidence
an interest in a pool of mortgage loans
and/or cooperative loans, and/or in
principal distributions and interest
distributions thereon. The Supplement for
each Series will specify the aggregate
approximate principal balance of GNMA,
FNMA and FHLMC Certificates included in a
Trust and will describe the principal
characteristics of the underlying
mortgage loans or cooperative loans and
any insurance, guaranty or other credit
support applicable to such underlying
loans, the Mortgage Certificates or both.
In addition, the related Supplement will
describe the terms upon which
distributions will be made to the Trustee
as the holder of the Mortgage
Certificates. The Mortgage Certificates
included in any Trust will be registered
in the name of the Trustee or its nominee
or in the case of book-entry Mortgage
Certificates in the name of a financial
intermediary with a Federal Reserve Bank
or a clearing corporation and will be
held by the Trustee only for the benefit
of holders of the related Series of
Certificates.
C. Certificate Account............. All distributions on any Mortgage
Certificates and all payments (including
prepayments, liquidation proceeds and
insurance proceeds) received from the
Master Servicer on any Mortgage Loans
included in the Trust for a Series will be
remitted to an account (the "Certificate
Account"), and, together with any amounts
available pursuant to the terms of any
applicable credit support and any other
amounts
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described in the related Supplement, will
be available for distribution on the
Certificates of such Series as described
in the related Supplement. Such
Certificate Account shall be an Eligible
Account or Accounts established and
maintained by the Master Servicer for the
benefit of holders of a Series of
Certificates.
Description of Certificates........ Each Certificate will represent a
beneficial ownership interest in a Trust
to be formed by the Sponsor pursuant to a
Pooling Agreement. Each Series of
Certificates may contain one or more
classes of certificates (the "Senior
Certificates") which are senior in right
of distribution to one or more classes of
certificates (the "Subordinate
Certificates") and may also contain one or
more classes of the types described herein
under "Description of Certificates --
Categories of Classes of Certificates"
herein.
Distributions on the Certificates... Distributions on the Certificates
entitled thereto will be made monthly,
quarterly, semi-annually or at such other
intervals and on the dates specified in
the related Supplement (each, a
"Distribution Date") out of the payments
received in respect of the assets of the
related Trust. The amount allocable to
payments of principal and interest on any
Distribution Date will be determined as
specified in the related Supplement.
Unless otherwise specified in the related
Supplement, all distributions will be made
pro rata to Certificateholders of the
class entitled thereto. The aggregate
original balance of the Certificates (the
"Certificate Balance") will equal the
aggregate distributions allocable to
principal that such Certificates will be
entitled to receive.
A. Interest........................ Each class of Certificates of a Series
will accrue interest from the date and at
the fixed or adjustable rate set forth (or
determined as set forth) in the related
Supplement (the "Pass-Through Rate"),
except for certain classes of Certificates
that are only entitled to distributions of
principal ("PO Certificates").
Accrued interest will be distributed (to
the extent of funds available therefor),
at the times and in the manner specified
in such Supplement. Distributions of
interest on any class of Accrual
Certificates will commence at the time
specified in such Supplement; until then,
interest on the Accrual Certificates will
be added to the Certificate Balance
thereof.
B. Principal....................... Each class of Certificates of a Series
will receive distributions of principal in
the amounts, at the times and in the
manner specified in the related Supplement
until its initial aggregate Certificate
Balance has been fully amortized, except
for certain classes of Certificates that
are only entitled to distributions of
interest ("IO Certificates"). Allocations
of distributions of principal will be made
to the Certificates of each class during
the periods and in the order specified in
the related Supplement.
Credit Enhancement................. The assets in a Trust or the
Certificates of one or more classes in the
related Series may have the benefit of one
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or more types of credit support as
described in the related Supplement. The
protection against losses afforded by any
such credit support may be limited. The
type, characteristics and amount of
credit enhancement will be determined
based on the characteristics of the
Mortgage Loans underlying or comprising
the Mortgage Assets and other factors and
will be established on the basis of
requirements of each Rating Agency rating
the Certificates of such Series. See
"Credit Enhancement" herein.
A. Subordination................... A Series of Certificates may consist of
one or more classes of Senior Certificates
and one or more classes of Subordinate
Certificates. If so specified in the
related Supplement, certain classes of
Subordinate Certificates may be senior to
other Classes of Subordinate Certificates
and be rated investment grade ("Mezzanine
Certificates"). The rights of holders of
the Subordinate Certificates of a Series
("Subordinate Certificateholders") to
receive distributions with respect to the
assets in the related Trust will be
subordinated to such rights of holders of
the Senior Certificates of the same Series
("Senior Certificateholders") to the
extent described in the related
Supplement. This subordination is intended
to enhance the likelihood of regular
receipt by Senior Certificateholders of
the full amount of their scheduled monthly
payments of principal and interest. The
protection afforded to Senior
Certificateholders of a Series by means of
the subordination feature will be
accomplished by (i) the preferential right
of such holders to receive, prior to any
distribution being made in respect of the
related Subordinate Certificates, the
amounts of principal and interest due them
on each Distribution Date out of the funds
available for distribution on such date
and, to the extent described in the
related Supplement, by the right of such
holders to receive future distributions on
the assets in the related Trust that would
otherwise have been payable to Subordinate
Certificateholders; (ii) reducing the
ownership interest of the related
Subordinate Certificates; (iii) a
combination of clauses (i) and (ii) above;
or (iv) as otherwise described in the
related Supplement. If so specified in the
related Supplement, subordination may
apply only in the event of certain types
of losses not covered by other forms of
credit enhancement, such as hazard losses
not covered by standard hazard insurance
policies or losses due to the bankruptcy
or fraud of the mortgagor. The related
Supplement will set forth information
concerning, among other things, the amount
of subordination of a class or classes of
Subordinate Certificates in a Series, the
circumstances in which such subordination
will be applicable and the manner, if any,
in which the amount of subordination will
decrease over time.
B. Reserve Fund.................... One or more reserve funds (the "Reserve
Fund") may be established and maintained
for each Series. The related Supplement
will specify whether or not any such
Reserve Fund will be included in the
corpus of the Trust for such Series and
will also specify the manner of funding
the
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<PAGE>
related Reserve Fund and the conditions
under which the amounts in any such
Reserve Fund will be used to make
distributions to holders of Certificates
of a particular class or released from
the related Trust.
C. Surety Bond..................... A surety bond or bonds may be obtained
and maintained for a Series or certain
classes thereof, which will, subject to
certain conditions and limitations,
guaranty payments of all or limited
amounts of principal and interest due on
the classes of such Series or certain
classes thereof.
D. Mortgage Pool Insurance Policy... A mortgage pool insurance policy or
policies (the "Mortgage Pool Insurance
Policy"), may be obtained and maintained
for a Series, which shall be limited in
scope, covering defaults on the related
Mortgage Loans in an initial amount equal
to a specified percentage of the aggregate
principal balance of all Mortgage Loans
included in the Trust as of the first day
of the month of issuance of the related
Series or such other date as is specified
in the related Supplement (the "Cut-off
Date").
E. Fraud Waiver.................... If so specified in the related
Supplement, a letter may be obtained from
the issuer of a Mortgage Pool Insurance
Policy (the "Waiver Letter") waiving its
right to deny a claim or rescind coverage
under the related Mortgage Pool Insurance
Policy by reason of fraud, dishonesty or
misrepresentation in connection with the
origination of, or application for
insurance for, the related Mortgage Loan
or the denial or adjustment of coverage
under any related Primary Mortgage
Insurance Policy because of such fraud,
dishonesty or misrepresentation. In such
circumstances, the issuer of the Mortgage
Pool Insurance Policy will be indemnified
by the Seller for the amount of any loss
paid by the issuer of the Mortgage Pool
Insurance Policy (each such amount, a
"Fraud Loss") under the terms of the
Waiver Letter. The maximum aggregate
amount of Fraud Losses covered under the
Waiver Letter and the period of time
during which such coverage will be
provided will be specified in the related
Supplement.
F. Special Hazard
Insurance Policy................... A special hazard insurance policy or
policies (the "Special Hazard Insurance
Policy") may be obtained and maintained
for a Series, covering certain physical
risks that are not otherwise insured
against by standard hazard insurance
policies. Each Special Hazard Insurance
Policy will be limited in scope and will
cover losses pursuant to the provisions of
each such Special Hazard Insurance Policy
as described in the related Supplement.
G. Bankruptcy Bond................. A bankruptcy bond or bonds (the
"Bankruptcy Bond") may be obtained to
cover certain losses resulting from action
that may be taken by a bankruptcy court in
connection with a Mortgage Loan. The level
of coverage and the limitations in scope
of each Bankruptcy Bond will be specified
in the related Supplement.
H. Cross Support................... If specified in the related Supplement,
the beneficial ownership of separate
groups of assets included in a Trust may
be evidenced by separate classes of the
related Series of
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<PAGE>
Certificates. In such case, credit
support may be provided by a
cross-support feature which requires that
distributions be made with respect to
Certificates evidencing beneficial
ownership of one or more asset groups
prior to distributions to Subordinate
Certificates evidencing a beneficial
ownership interest in other asset groups
within the same Trust.
I. FHA Insurance and VA Guaranty... All or a portion of the Mortgage Loans
in a Trust may be insured by FHA insurance
("FHA Insurance") and may be partially
guaranteed by the VA (a "VA Guaranty").
J. Other Forms of Credit Support... Other forms of credit support to provide
coverage for certain risks of default or
various types of losses (such as a letter
of credit, limited guaranty or insurance
contract) may be applicable to a Series of
Certificates, to the Mortgage Assets
included in the related Trust and/or to
the mortgage loans underlying such
Mortgage Certificates, as described in the
related Supplement.
Advances........................... If so specified in the related
Supplement, the Master Servicer, directly
or through subservicers, will be obligated
or have the right at its option to make
certain advances (each an "Advance") with
respect to delinquent payments on such
Mortgage Loans. Any such advances will be
reimbursable to the extent described
herein and in the related Supplement.
Optional Termination............... The Master Servicer or, if specified in
the related Supplement for a Series of
REMIC Certificates, the holders of the
Residual Certificates of such Series may
have the option to repurchase the Mortgage
Assets included in the related Trust and
thereby effect early retirement of a
Series of Certificates. Any such option
will be exercisable at the times and upon
satisfaction of the conditions specified
in the related Supplement.
Tax Status of REMIC Certificates... Regular Certificates of a particular
Series will be treated as "regular
interests" in the REMIC and will be
treated as debt instruments for federal
income tax purposes, and the Residual
Certificates of such Series will be
treated as "residual interests" in the
REMIC. Holders of Residual Certificates
generally will include their pro rata
shares of the net income or loss of the
REMIC in determining their federal taxable
income.
Holders of Accrual Certificates and any
other classes of Regular Certificates
issued with original issue discount
generally will be required to include the
original issue discount (which for
federal income tax purposes includes
interest accrued on Accrual Certificates
as well as current interest paid thereon)
in gross income over the life of the
Regular Certificates.
Distributions on Regular Certificates to
foreign investors generally will not be
subject to U.S. withholding tax, provided
applicable certification procedures are
complied with.
Subject to certain limitations that may
be applicable to Buydown Loans, REMIC
Certificates will be treated as
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<PAGE>
"regular or residual interests in a
REMIC" for domestic building and loan
associations and "real estate assets" for
real estate investment trusts. See
"Certain Federal Income Tax Consequences
-- REMIC Certificates" herein.
Tax Status of
Non-REMIC Certificates............. For federal income tax purposes, the trust
created to hold the Mortgage Assets for
each Series of Non-REMIC Certificates will
be classified as a grantor trust and not
as an association taxable as a
corporation. Holders of Non-REMIC
Certificates of such Series which are not
IO Certificates will be treated as owners
of undivided interests in the trust and
as equitable owners of undivided
interests in each of the Mortgage Assets
held by the trust, and such holders will
be taxed on their pro rata shares of the
income from the related Mortgage Assets
and may be allowed to deduct their pro
rata shares of reasonable servicing fees,
consistent with their methods of
accounting, subject to limitation in the
case of Non-REMIC Certificates held by
individuals, estates, or trusts (either
directly or indirectly through certain
pass-through entities). If a Series of
Non-REMIC Certificates includes IO
Certificates, holders of the Certificates
of such Series will be subject to the
"Stripped Bond Rules" of Section 1286 of
the Code.
Subject to certain limitations that may
be applicable to Buydown Loans, to the
extent the Mortgage Assets and the
related interests qualify for such
treatment, interests in the Mortgage
Assets held by holders of applicable Non-
REMIC Certificates which are not IO
Certificates will be considered to
represent "loans... secured by an
interest in real property" for domestic
building and loan associations and "real
estate assets" for real estate investment
trusts.
It is not clear whether IO Certificates
will be treated as representing an
ownership interest in qualifying assets
and income under Sections
7701(a)(19)(C)(v), 856(c)(5)(A) and
856(c)(3)(B) of the Code, although the
policy considerations underlying those
Sections suggest that such treatment
should be available. It is also not clear
whether a reasonable prepayment
assumption should be applied in accruing
original issue discount on the IO
Certificates.
See "Certain Federal Income Tax
Consequences -- Non-REMIC Certificates"
herein.
Legal Investment................... The Supplement for each Series of
Certificates will specify which, if any,
of the classes of Certificates offered
thereby will constitute "mortgage-related
securities" for purposes of the Secondary
Mortgage Market Enhancement Act of 1984
("SMMEA"). Classes of Certificates that
qualify as "mortgage related securities"
will be legal investments for certain
types of institutional investors to the
extent provided in SMMEA, subject, in any
case, to any other regulations that may
govern investments by such institutional
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<PAGE>
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 Section 4975 of 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 Section 4975 of
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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<PAGE>
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
adversely affected. In the event losses exceed the amount of coverage provided
by any credit enhancement or
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<PAGE>
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 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
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<PAGE>
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 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
- ----------
* 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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<PAGE>
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.
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
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principal balance of the Mortgage Loan to the Appraised Value of the related
Mortgaged Property. If so specified in the related Supplement, the "Appraised
Value" is either (x) the lesser of (a) the appraised value determined in an
appraisal obtained by the originator at origination of such Mortgage Loan and
(b) the sales price for such property, except that, in the case of Mortgage
Loans the proceeds of which were used to refinance an existing mortgage loan,
the Appraised Value of the related Mortgaged Property is the appraised value
thereof determined in an appraisal obtained at the time of refinancing or (y)
the appraised value determined in an appraisal made at the request of a
Mortgagor subsequent to origination in order to eliminate the Mortgagor's
obligation to keep a Primary Mortgage Insurance Policy in force.
Each Supplement for a Series will contain information, as of the Cut-off
Date and to the extent known to the Sponsor, with respect to the Mortgage Loans
contained in such Trust, including: (i) the number of Mortgage Loans, (ii) the
geographic distribution of the Mortgage Loans; (iii) the aggregate outstanding
principal balance and the average outstanding principal balance of the Mortgage
Loans as of the applicable Cut-off Date; (iv) the types of dwelling
constituting the Mortgaged Properties; (v) the original terms to maturity of
the Mortgage Loans; (vi) the largest principal balance and the smallest
principal balance of the Mortgage Loans; (vii) the maximum LTV of the Mortgage
Loans at origination; (viii) the maximum and minimum Mortgage Rates; (ix) the
aggregate principal balance of nonowner-occupied Mortgaged Properties; (x) the
earliest origination date and latest maturity date of any of the Mortgage
Loans; and (xi) the aggregate principal balance of Mortgage Loans having LTVs
at origination exceeding 80%.
No assurance can be given that values of the Mortgaged Properties have
remained or will remain at their levels on the dates of origination of the
related Mortgage Loans. If the residential real estate market should experience
an overall decline in property values such that the outstanding principal
balances of the Mortgage Loans, and any secondary financing on the Mortgaged
Properties, in a particular Mortgage Pool become equal to or greater than the
value of the Mortgaged Properties, the actual rates of delinquencies,
foreclosures and losses could be higher than those now generally experienced in
the mortgage lending industry. In addition, adverse economic conditions (which
may or may not affect real property values) may affect the timely payment by
Mortgagors of scheduled payments of principal and interest on the Mortgage
Loans and, accordingly, the actual rates of delinquencies, foreclosures and
losses with respect to any Mortgage Pool. If losses on defaulted Mortgage Loans
exceed the coverage of any Primary Mortgage Insurance Policy or the amount of
any credit support arrangement described in the related Supplement, such losses
will be borne by holders of Certificates ("Certificateholders").
MORTGAGE CERTIFICATES
All of the Mortgage Certificates will be registered in the name of the
Trustee or its nominee or, in the case of Mortgage Certificates issued only in
book-entry form, a financial intermediary (which may be the Trustee) that is a
member of the Federal Reserve System or of a clearing corporation on the books
of which the security is held. Each Mortgage Certificate will evidence an
interest in a pool of mortgage loans and/or cooperative loans and/or in
principal distributions and interest distributions thereon.
The descriptions of GNMA, FHLMC and FNMA Certificates that are set forth
below are descriptions of certificates representing proportionate interests in
a pool of mortgage loans and in the payments of principal and interest thereon.
GNMA, FHLMC or FNMA may also issue mortgage-backed securities representing a
right to receive distributions of interest only or principal only or
disproportionate distributions of principal or interest or to receive
distributions of principal and/or interest prior or subsequent to distributions
on other certificates representing interests in the same pool of mortgage
loans. In addition, any of such issuers may issue certificates representing
interests in mortgage loans having characteristics that are different from the
types of mortgage loans described below. The terms of any such certificates to
be included in a Trust (and of the underlying mortgage loans) will be described
in the related Supplement, and the descriptions that follow are subject to
modification as appropriate to reflect the terms of any such certificates that
are actually included in a Trust.
GNMA. GNMA is a wholly owned corporate instrumentality of the United
States within the Department of Housing and Urban Development ("HUD"). Section
306(g) of Title III of the National Housing Act of 1934, as amended (the
"Housing Act"), authorizes GNMA to guarantee the timely payment of the
principal of and interest on certificates that are based on and backed by a
pool of loans ("FHA Loans") insured or guaranteed by the United States Federal
Housing Administration (the "FHA") under the Housing Act or Title V of the
Housing Act
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of 1949, or by the United States Department of Veteran Affairs (the "VA") under
the Servicemen's Readjustment Act of 1944, as amended, or Chapter 37 of Title
38, United States Code or by pools of other eligible mortgage loans.
Section 306(g) of the Housing Act provides that "the full faith and credit
of the United States is pledged to the payment of all amounts which may be
required to be paid under any guaranty under this subsection". To meet its
obligations under its guaranties, GNMA is authorized, under Section 306(d) of
the Housing Act, to borrow from the United States Treasury with no limitations
as to amount.
GNMA CERTIFICATES. All of the GNMA Certificates (the "GNMA Certificates")
will be mortgage-backed certificates issued and serviced by GNMA- or
FNMA-approved mortgage servicers. The mortgage loans underlying GNMA
Certificates may consist of FHA Loans secured by mortgages on one- to
four-family residential properties or multifamily residential properties, loans
secured by mortgages on one- to four-family residential properties or
multifamily residential properties, mortgage loans which are partially
guaranteed by the VA and other mortgage loans eligible for inclusion in
mortgage pools underlying GNMA Certificates. Unless otherwise specified in the
related Supplement, at least 90 percent by original principal amount of the
mortgage loans underlying a GNMA Certificate will be mortgage loans having
maturities of 20 years or more.
Each GNMA Certificate provides for the payment by or on behalf of the
issuer of the GNMA Certificate to the registered holder of such GNMA
Certificate of monthly payments of principal and interest equal to the
registered holder's proportionate interest in the aggregate amount of the
monthly scheduled principal and interest payments on each underlying eligible
mortgage loan, less servicing and guaranty fees aggregating the excess of the
interest on each such mortgage loan over the GNMA Certificate pass-through
rate. In addition, each payment to a GNMA Certificateholder will include
proportionate pass-through payments to such holder of any prepayments of
principal of the mortgage loan underlying the GNMA Certificate, and the
holder's proportionate interest in the remaining principal balance in the event
of a foreclosure or other disposition of any such mortgage loan.
The GNMA Certificates included in a Trust may be issued under either or
both of the GNMA I program ("GNMA I Certificates") and the GNMA II program
("GNMA II Certificates"). All mortgages underlying a particular GNMA I
Certificate must have the same annual interest rate (except for pools of
mortgages secured by mobile homes). The annual interest rate on each GNMA I
Certificate is one-half percentage point less than the annual interest rate on
the mortgage loans included in the pool of mortgages backing such GNMA I
Certificate. Mortgage Loans underlying a particular GNMA II Certificate may
have annual interest rates that vary from each other by up to one percentage
point. The annual interest rate on each GNMA II Certificate will be between
one-half percentage point and one and one-half percentage points less than the
highest annual interest rate on the mortgage loans included in the pool of
mortgages backing such GNMA II Certificate.
GNMA will have approved the issuance of each of the GNMA Certificates in
accordance with a guaranty agreement between GNMA and the servicer of the
mortgage loans underlying such GNMA Certificate. Pursuant to such agreement,
the servicer is required to advance its own funds in order to make timely
payments of all amounts due on the GNMA Certificate, even if the payments
received by such servicer on the mortgage loans backing the GNMA Certificate
are less than the amounts due on such GNMA Certificate. If a servicer is unable
to make payments on a GNMA Certificate as it becomes due, it must promptly
notify GNMA and request GNMA to make such payment. Upon such notification and
request, GNMA will make such payments directly to the registered holder of the
GNMA Certificate. In the event no payment is made by such servicer and such
servicer fails to notify and request GNMA to make such payment, the registered
holder of the GNMA Certificate has recourse only against GNMA to obtain such
payment. The registered holder of the GNMA Certificates included in a Trust is
entitled to proceed directly against GNMA under the terms of each GNMA
Certificate or the guaranty agreement or contract relating to such GNMA
Certificate for any amounts that are not paid when due under each GNMA
Certificate.
As described above, the GNMA Certificates included in a Trust, and the
related underlying mortgage loans, may have characteristics and terms different
from those described above. Any such different characteristics and terms will
be described in the related Supplement.
FHLMC. FHLMC is a corporate instrumentality of the United States created
pursuant to Title III of the Emergency Home Finance Act of 1970, as amended
(the "FHLMC Act"). FHLMC's common stock is owned by
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the Federal Home Loan Banks, and its preferred stock is owned by the
stockholders of such Federal Home Loan Banks. FHLMC was established primarily
for the purpose of increasing the availability of mortgage credit for the
financing of urgently needed housing. It seeks to provide an enhanced degree of
liquidity for residential mortgage investments primarily by assisting in the
development of secondary markets for conventional mortgages. The principal
activity of FHLMC currently consists of the purchase of first lien conventional
residential mortgage loans or participation interests in such mortgage loans
and the resale of the mortgage loans so purchased in the form of mortgage
securities. FHLMC is confined to purchasing, so far as practicable,
conventional mortgage loans and participation interests therein which it deems
to be of such quality, type and class as to meet generally the purchase
standards imposed by private institutional mortgage investors.
FHLMC CERTIFICATES. Each FHLMC Certificate represents an undivided
interest in a pool of mortgage loans that may consist of first lien
conventional loans, FHA Loans or VA Loans (a "FHLMC Certificate group"). FHLMC
Certificates are sold under the terms of a Mortgage Participation Certificate
Agreement. A FHLMC Certificate may be issued under either FHLMC's Cash Program
or Guarantor Program.
Mortgage loans underlying the FHLMC Certificates held by a Trust will
consist of mortgage loans with original terms to maturity of between 10 and 40
years. Each such mortgage loan must meet the applicable standards set forth in
the FHLMC Act. A FHLMC Certificate group may include whole loans, participation
interests in whole loans and undivided interests in whole loans and/or
participations comprising another FHLMC Certificate group. Under the Guarantor
Program, any such FHLMC Certificate group may include only whole loans or
participation interests in whole loans.
FHLMC guarantees to each registered holder of a FHLMC Certificate the
timely payment of interest on the underlying mortgage loans to the extent of
the applicable certificate interest rate on the registered holder's pro rata
share of the unpaid principal balance outstanding on the underlying mortgage
loans in the FHLMC Certificate group represented by such FHLMC Certificate,
whether or not received. FHLMC also guarantees to each registered holder of a
FHLMC Certificate collection by such holder of all principal on the underlying
mortgage loans, without any offset or deduction, to the extent of such holder's
pro rata share thereof, but does not, except if and to the extent specified in
the related Supplement for a Series of Certificates, guarantee the timely
payment of scheduled principal. Under FHLMC's Gold PC Program, FHLMC guarantees
the timely payment of principal based on the difference between the pool factor
published in the month preceding the month of distribution and the pool factor
published in such month of distribution. Pursuant to its guaranties, FHLMC
indemnifies holders of FHLMC Certificates against any diminution in principal
by reason of charges for property repairs, maintenance and foreclosure. FHLMC
may remit the amount due on account of its guaranty of collection of principal
at any time after default on an underlying mortgage loan, but not later than
(i) 30 days following foreclosure sale, (ii) 30 days following payment of the
claim by any mortgage insurer or (iii) 30 days following the expiration of any
right of redemption, whichever occurs later, but in any event no later than one
year after demand has been made upon the mortgagor for accelerated payment of
principal. In taking actions regarding the collection of principal after
default on the mortgage loans underlying FHLMC Certificates, including the
timing of demand for acceleration, FHLMC reserves the right to exercise its
judgment with respect to the mortgage loans in the same manner as for mortgage
loans that it has purchased but not sold. The length of time necessary for
FHLMC to determine that a mortgage loan should be accelerated varies with the
particular circumstances of each mortgagor, and FHLMC has not adopted standards
which require that the demand be made within any specified period.
FHLMC Certificates are not guaranteed by the United States or by any
Federal Home Loan Bank and do not constitute debts or obligations of the United
States or any Federal Home Loan Bank. The obligations of FHLMC under its
guaranty are obligations solely of FHLMC and are not backed by, or entitled to,
the full faith and credit of the United States. If FHLMC were unable to satisfy
such obligations, distributions to holders of FHLMC Certificates would consist
solely of payments and other recoveries on the underlying mortgage loans and,
accordingly, monthly distributions to holders of FHLMC Certificates would be
affected by delinquent payments and defaults on such mortgage loans.
Registered holders of FHLMC Certificates are entitled to receive their
monthly pro rata share of all principal payments on the underlying mortgage
loans received by FHLMC, including any scheduled principal payments, full and
partial prepayments of principal and principal received by FHLMC by virtue of
condemnation, insurance, liquidation or foreclosure, and repurchases of the
mortgage loans by FHLMC or the seller thereof.
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FHLMC is required to remit each registered FHLMC certificateholder's pro rata
share of principal payments on the underlying mortgage loans, interest at the
FHLMC pass-through rate and any other sums such as prepayment fees, within 60
days of the date on which such payments are deemed to have been received by
FHLMC.
Under FHLMC's Cash Program, there is no limitation on the amount by which
interest rates on the mortgage loans underlying a FHLMC Certificate may exceed
the pass-through rate on the FHLMC Certificate. Under such program, FHLMC
purchases groups of whole mortgage loans from sellers at specified percentages
of their unpaid principal balances, adjusted for accrued or prepaid interest,
which when applied to the interest rate of the mortgage loans and
participations purchased results in the yield (expressed as a percentage)
required by FHLMC. The required yield, which includes a minimum servicing fee
retained by the servicer, is calculated using the outstanding principal
balance. The range of interest rates on the mortgage loans and participations
in a FHLMC Certificate group under the Cash Program will vary since mortgage
loans and participations are purchased and assigned to a FHLMC Certificate
group based upon their yield to FHLMC rather than on the interest rate on the
underlying mortgage loans. Under FHLMC's Guarantor Program, the pass-through
rate on a FHLMC Certificate is established based upon the lowest interest rate
on the underlying mortgage loans, minus a minimum servicing fee and the amount
of FHLMC's management and guaranty income as agreed upon between the seller and
FHLMC.
FHLMC Certificates duly presented for registration of ownership on or
before the last business day of a month are registered effective as of the
first day of the month. The first remittance to a registered holder of a FHLMC
Certificate will be distributed so as to be received normally by the 15th day
of the second month following the month in which the purchaser became a
registered holder of such FHLMC Certificate. Thereafter, such remittance will
be distributed monthly to the registered holder so as to be received normally
by the 15th day of each month. The Federal Reserve Bank of New York maintains
book-entry accounts with respect to FHLMC Certificates sold by FHLMC on or
after January 2, 1985, and makes payments of principal and interest each month
to the registered holders thereof in accordance with such holders'
instructions.
FEDERAL NATIONAL MORTGAGE ASSOCIATION. FNMA is a federally chartered and
privately owned corporation organized and existing under the Federal National
Mortgage Association Charter Act, as amended. FNMA was originally established
in 1938 as a United States government agency to provide supplemental liquidity
to the mortgage market and was transformed into a stockholder-owned and
privately-managed corporation by legislation enacted in 1968.
FNMA provides funds to the mortgage market primarily by purchasing
mortgage loans from lenders, thereby replenishing their funds for additional
lending. FNMA acquires funds to purchase mortgage loans from many capital
market investors that may not ordinarily invest in mortgages, thereby expanding
the total amount of funds available for housing. Operating nationwide, FNMA
helps to redistribute mortgage funds from capital-surplus to capital-short
areas.
FNMA CERTIFICATES. FNMA Certificates are Guaranteed Mortgage Pass-Through
Certificates representing fractional undivided interests in a pool of mortgage
loans formed by FNMA ("FNMA Certificates"). Each mortgage loan must meet the
applicable standards of the FNMA purchase program. Mortgage loans comprising a
pool are either provided by FNMA from its own portfolio or purchased pursuant
to the criteria of the FNMA purchase program.
Mortgage loans underlying FNMA Certificates held by a Trust will consist
of conventional mortgage loans, FHA Loans or VA Loans. Original maturities of
substantially all of the conventional, level payment mortgage loans underlying
a FNMA Certificate are expected to be between either 8 to 15 years or 20 to 40
years. The original maturities of substantially all of the fixed rate, level
payment FHA Loans or VA Loans are expected to be 30 years.
Mortgage loans underlying a FNMA Certificate may have annual interest
rates that vary by as much as two percentage points from each other. The rate
of interest payable on a FNMA Certificate is equal to the lowest interest rate
of any mortgage loan in the related pool, less a specified minimum annual
percentage representing servicing compensation and FNMA's guaranty fee. Under a
regular servicing option (pursuant to which the mortgagee or each other
servicer assumes the entire risk of foreclosure losses), the annual interest
rates on the mortgage loans underlying a FNMA Certificate will be between 50
basis points and 250 basis points greater than is its annual pass-through rate
and under a special servicing option (pursuant to which FNMA assumes the entire
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risk for foreclosure losses), the annual interest rates on the mortgage loans
underlying a FNMA Certificate will generally be between 55 basis points and 255
basis points greater than the annual FNMA Certificate pass-through rate. If
specified in the related Supplement, FNMA Certificates may be backed by
adjustable rate mortgages.
FNMA guarantees to each registered holder of a FNMA Certificate that it
will distribute amounts representing scheduled principal and interest at the
applicable pass-through rate on the underlying mortgage loans, whether or not
received, and such holder's proportionate share of the full principal amount of
any foreclosed or other finally liquidated mortgage loan, whether or not such
principal amount is actually recovered. If FNMA were unable to perform such
obligations, distributions on FNMA Certificates would consist solely of
payments and other recoveries on the underlying mortgage loans and,
accordingly, delinquencies and defaults would affect monthly distributions to
holders of FNMA Certificates. The obligations of FNMA under its guarantees are
obligations solely of FNMA and are not backed by, nor entitled to, the full
faith and credit of the United States.
As described above, the FNMA Certificates included in a Trust, and the
related underlying mortgage loans, may have characteristics and terms different
from those described above. Any such different characteristics and terms will
be described in the related Supplement.
FNMA Certificates evidencing interests in pools of mortgage loans formed
on or after May 1, 1985 (other than FNMA Certificates backed by pools
containing graduated payment mortgage loans or mortgage loans secured by
multifamily projects) are available in book-entry form only. Distributions of
principal and interest on each FNMA Certificate will be made by FNMA on the
25th day of each month to the persons in whose name the FNMA Certificate is
entered in the books of the Federal Reserve Banks (or registered on the FNMA
Certificate register in the case of fully registered FNMA Certificates) as of
the close of business on the last day of the preceding month. With respect to
FNMA Certificates issued in book-entry form, distributions thereon will be made
by wire, and with respect to fully registered FNMA Certificates, distributions
thereon will be made by check.
STRIPPED MORTGAGE-BACKED SECURITIES. Mortgage Certificates may consist of
one or more stripped mortgage-backed securities, each as described herein and
in the related Supplement. Each such Mortgage Certificate will represent an
undivided interest in all or part of either the principal distributions (but
not the interest distributions) or the interest distributions (but not the
principal distributions), or in some specified portion of the principal and
interest distributions (but not all of such distributions) on certain FHLMC,
FNMA or GNMA Certificates. The underlying securities will be held under a trust
agreement by FHLMC, FNMA or GNMA, each as trustee, or by another trustee named
in the related Supplement. FHLMC, FNMA or GNMA will guarantee each stripped
Mortgage Certificate to the same extent as such entity guarantees the
underlying securities backing such stripped Mortgage Certificate, unless
otherwise specified in the related Supplement.
CERTIFICATE ACCOUNT
The Master Servicer or other entity identified in the related Supplement
will, as to each Series of Certificates, establish and maintain a Certificate
Account for the benefit of the Trustee and holders of the Certificates of such
Series for receipt of (i) each distribution or monthly payment, as the case may
be, made to the Trustee with respect to the Mortgage Assets, (ii) the amount of
cash, if any, specified in the related Pooling Agreement to be initially
deposited therein, (iii) the amount of cash, if any, withdrawn from any related
Reserve Fund or other fund, and (iv) the reinvestment income thereon, if any.
The Pooling Agreement for a Series may authorize the Trustee to invest the
funds in the Certificate Account in certain investments ("Eligible
Investments") that will qualify as "permitted investments" under Section
860G(a)(5) of the Code in the case of REMIC Certificates. The Eligible
Investments will generally mature not later than the business day immediately
preceding the next Distribution Date for such Series (or, in certain cases, on
such Distribution Date). Eligible Investments include, among other investments,
obligations of the United States and certain agencies thereof, federal funds,
certificates of deposit, commercial paper carrying the ratings specified in the
related Pooling Agreement of each Rating Agency rating the Certificates of such
Series that has rated such commercial paper, demand and time deposits and
banker's acceptances sold by eligible commercial and certain repurchase
agreements of United States government securities. Reinvestment earnings, if
any, on funds in the Certificate Account generally will belong to the Master
Servicer.
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SUBSTITUTION OF MORTGAGE ASSETS
Substitution of Mortgage Assets will be permitted in the event of breaches
of representations and warranties with respect to any original Mortgage Asset
or in the event the documentation with respect to any Mortgage Asset is
determined by the Trustee to be incomplete. The period during which such
substitution will be permitted generally will be indicated in the related
Supplement. See "The Pooling and Servicing Agreement -- Representations and
Warranties".
DESCRIPTION OF CERTIFICATES
GENERAL
Each Series of Certificates will be issued pursuant to a separate Pooling
Agreement among the Sponsor, the Seller, the Trustee and the Master Servicer,
if such Series relates to Mortgage Loans. A form of Pooling Agreement is filed
as an exhibit to the Registration Statement of which this Prospectus is a part.
The following summaries describe certain provisions that may appear in each
Pooling Agreement. The Supplement for a Series of Certificates will describe
any provision of the Agreement relating to such Series that materially differs
from the description thereof contained in this Prospectus. The summaries do not
purport to be complete and are subject to, and are qualified in their entirety
by reference to, all of the provisions of the Pooling Agreement and the
Supplement related to a particular Series of Certificates. References herein to
a Trustee or the Master Servicer include, unless otherwise specified, any
agents acting on behalf of such Trustee or any subcontractor of the Master
Servicer, any of which agents or subcontractors may be one of their affiliates.
The Certificates are issuable in Series, each evidencing the entire
ownership interest in a Trust of assets consisting primarily of Mortgage
Assets. The Certificates of each Series will be issued in fully registered form
or book-entry form and will be issued in the authorized denominations for each
class specified in the related Supplement, will evidence specified beneficial
ownership interests in the related Trust created pursuant to the related
Pooling Agreement and will not be entitled to payments in respect of the assets
included in any other Trust established by the Sponsor. The transfer of the
Certificates may be registered, and the Certificates may be exchanged, at the
office or agency of the Trustee specified in the related Supplement without the
payment of any service charge other than any tax or governmental charge payable
in connection with such registration of transfer or exchange. The transfer of
any class of a Series of Certificates may be subject to the satisfaction of
certain conditions set forth in the related Supplement. Any qualifications on
direct or indirect ownership of Residual Certificates, as well as restrictions
on the transfer of such Residual Certificates, will be set forth in the related
Supplement. The Certificates will not represent obligations of the Sponsor or
any affiliate of the Sponsor. The Mortgage Assets will not be insured or
guaranteed by any governmental entity or other person, unless otherwise
specified in the related Supplement.
Each Series of Certificates will be issued in one or more classes. Each
class of Certificates of a Series will evidence beneficial ownership of a
specified percentage (which may be 0%) or portion of future interest payments
and a specified percentage (which may be 0%) or portion of future principal
payments on the Mortgage Assets in the related Trust. A Series of Certificates
may include one or more classes that are senior in right to payment to one or
more other classes of Certificates of such Series. Certain Series or classes of
Certificates may be covered by insurance policies, surety bonds or other forms
of credit enhancement, in each case as described herein and in the related
Supplement. One or more classes of Certificates of a Series may be entitled to
receive distributions of principal, interest or any combination thereof.
Distributions on one or more classes of a Series of Certificates may be made
prior to one or more other classes, after the occurrence of specified events,
in accordance with a schedule or formula, on the basis of collections from
designated portions of the Mortgage Assets in the related Trust, or on a
different basis, in each case as specified in the related Supplement. The
timing and amounts of such distributions may vary among classes or over time as
specified in the related Supplement.
DISTRIBUTIONS
Distributions of principal and interest (or, where applicable, of
principal only or interest only) on the related Certificates will be made by
the Trustee on each Distribution Date (i.e., monthly, quarterly, semi-annually
or at such other intervals and on the dates as are specified in the Supplement)
in proportion to the percentages specified in the related Supplement.
Distributions will be made by wire transfer (in the case of Certificates which
are of a certain minimum denomination, as specified in the related Supplement)
or by check mailed to record holders of
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such Certificates as of the date or dates specified in the related Supplement
(each, a "Record Date") at their addresses appearing in the register maintained
for holders of Certificates (the "Certificate Register"), except that the final
distribution of principal will be made only upon presentation and surrender of
such Certificate at the office or agency of the Paying Agent for such
Certificate specified in the related Supplement. Notice will be mailed before
the Distribution Date on which the final distribution is expected to be made to
the holder of such Certificate. In the event the Certificates of a Series are
issued in book-entry form, distributions on such Certificates, including the
final distribution in retirement of such Certificates, will be made through the
facilities of a depository in accordance with its usual procedures in the
manner described in the related Supplement.
Distributions of principal of and interest on the Certificates will be
made by the Trustee out of the Certificate Account established under the
Pooling Agreement. All distributions on the Mortgage Certificates, if any,
included in the Trust for a Series, remittances on the Mortgage Loans by the
Master Servicer pursuant to the Pooling Agreement, together with any
reinvestment income (if so specified in the related Supplement) thereon and
amounts withdrawn from any Reserve Fund or other fund or payments in respect of
other credit enhancement and required to be so deposited, will be deposited
directly into the Certificate Account and thereafter will be available (except
for funds held for future distribution and for funds payable to the Master
Servicer) to make distributions on Certificates of such Series on the next
succeeding Distribution Date. See "The Trusts -- Certificate Account" and "The
Pooling and Servicing Agreement -- Payments on Mortgage Loans" herein.
INTEREST. Interest will accrue on the aggregate Certificate Balance (or,
in the case of IO Certificates, the aggregate notional amount) of each class of
Certificates (the "Class Certificate Balance") entitled to interest at the
Pass-Through Rate (which may be a fixed rate or a rate adjustable as specified
in such Supplement) during each Interest Accrual Period specified in such
Supplement. The "Interest Accrual Period" with respect to any Distribution Date
shall be the period from (and including) the first day of the month preceding
the month of such Distribution Date (or, in the case of the first Distribution
Date, from the Closing Date) through the last day of such preceding month, or
such other period as may be specified in the related Supplement. To the extent
funds are available therefor, interest accrued during each such Interest
Accrual Period on each class of Certificates entitled to interest (other than a
class of Certificates that provides for interest that accrues, but is not
currently payable, referred to hereafter as "Accrual Certificates") will be
distributable on the Distribution Dates specified in the related Supplement
until the Class Certificate Balance of such class is reduced to zero or, in the
case of Certificates entitled only to distributions allocable to interest,
until the aggregate notional amount of such Certificates is reduced to zero or
for the period of time designated in the related Supplement. Unless otherwise
specified in the related Supplement, distributions allocable to interest on
each Certificate that is not entitled to distributions allocable to principal
will be calculated based on the notional amount of such Certificate. The
notional amount of a Certificate will not evidence an interest in or
entitlement to distributions allocable to principal but will be used solely for
convenience in expressing the calculation of interest and for certain other
purposes. Unless otherwise specified in the related Supplement, interest on the
Certificates of each class will be calculated on the basis of a 360-day year
consisting of twelve 30-day months.
Distributions of interest on each class of Accrual Certificates will
commence only after the occurrence of the events specified in the related
Supplement and, prior to such time, such interest will be added to the Class
Certificate Balance of such class of Accrual Certificates. Any such class of
Accrual Certificates will thereafter accrue interest on its outstanding Class
Certificate Balance as so adjusted.
PRINCIPAL. Unless otherwise specified in the related Supplement, the Class
Certificate Balance of any class of Certificates entitled to distributions of
principal will be the original Class Certificate Balance of such class of
Certificates specified in such Supplement, reduced by all distributions
reported to holders of such Certificates as allocable to principal and
adjustments, if any, in respect of losses and (i) in the case of Accrual
Certificates, increased by all interest accrued but not then distributable on
such Accrual Certificates and (ii) in the case of adjustable rate Certificates,
subject to the effect of 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
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principal will be made to the Certificates of each class, during the periods
and in the order specified in the related Supplement. Unless otherwise
specified in the related Supplement, distributions will be made pro rata among
the Certificates of each class then entitled to receive such distributions.
If so provided in the related Supplement, one or more classes of Senior
Certificates will be entitled to receive all or a disproportionate percentage
of the payments of principal that are received from borrowers in advance of
their scheduled due dates and are not accompanied by amounts representing
scheduled interest due after the month of such payments ("Principal
Prepayments") in the percentages and under the circumstances or for the periods
specified in such Supplement. Any such allocation of Principal Prepayments to
such class or classes of Certificates will have the effect of accelerating the
amortization of such Senior Certificates while increasing the interests
evidenced by the Subordinate Certificates in the Trust. Increasing the
interests of the Subordinate Certificates relative to that of the Senior
Certificates is intended to preserve the availability of the subordination
provided by the Subordinate Certificates. See "Credit Enhancement --
Subordination" herein and "Credit Enhancement -- Subordination of the
Subordinated Certificates" in the related Supplement.
UNSCHEDULED DISTRIBUTIONS. If specified in the related Supplement, the
Certificates will be subject to receipt of distributions before the next
scheduled Distribution Date under the circumstances and in the manner described
below and in such Supplement. If applicable, the Trustee will be required to
make such unscheduled distributions on the day and in the amount specified in
the related Supplement if, due to substantial payments of principal (including
Principal Prepayments) on the Mortgage Assets, the Trustee or the Master
Servicer determines that the funds available or anticipated to be available
from the Certificate Account and, if applicable, any Reserve Fund, may be
insufficient to make required distributions on the Certificates on such
Distribution Date. Unless otherwise specified in the related Supplement, the
amount of any such unscheduled distribution that is allocable to principal will
not exceed the amount that would otherwise have been required to be distributed
as principal on the Certificates on the next Distribution Date. Unless
otherwise specified in the related Supplement, all unscheduled distributions
will include interest at the applicable Pass-Through Rate (if any) on the
amount of the unscheduled distribution allocable to principal for the period
and to the date specified in such Supplement.
Unless otherwise specified in the related Supplement, all distributions
allocable to principal in any unscheduled distribution will be made in the same
priority and manner as distributions of principal on the Certificates would
have been made on the next Distribution Date, and with respect to Certificates
of the same class, unscheduled distributions of principal will be made on a pro
rata basis. Notice of any unscheduled distribution will be given by the Trustee
prior to the date of such distribution.
The "Last Scheduled Distribution Date" for a class of Certificates is the
latest date as of which the Class Certificate Balance of the Certificates of
such class is expected to be fully amortized, either based on the assumptions
that all scheduled payments (with no prepayments) on the Mortgage Assets in the
related Trust are timely received and, if applicable, that all such scheduled
payments are reinvested on receipt at the rate or rates specified in the
related Supplement at which amounts in the Certificate Account are assumed to
earn interest (the "Assumed Reinvestment Rate"). (If an Assumed Reinvestment
Rate is specified for a Series of Certificates, reinvestment earnings on funds
in the Certificate Account will not belong to the Master Servicer as additional
servicing compensation. Such amounts will be part of the Trust and will be
available to make distributions on the related Certificates.) The "Last
Scheduled Distribution Date" for each class of Certificates will be specified
in the related Supplement.
CATEGORIES OF CLASSES OF CERTIFICATES
In general, the classes of certificates of each Series fall into different
categories. The following chart identifies and generally defines certain of the
more typical categories. The Supplement for a Series of Certificates may
identify the classes which comprise such Series by reference to the following
categories.
CATEGORIES OF CLASSES DEFINITION
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.
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CATEGORIES OF CLASSES DEFINITION
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.
Lockout Class...................... A senior Class that is designed not to
participate in or to participate to a
limited extent in (I.E., to be "locked
out" of), for a specified period, the
receipt of (1) principal prepayments on
the Mortgage Loans that are allocated
disproportionately to the senior Classes
of such Series as a group pursuant to a
"shifting interest" structure and/or (2)
scheduled principal payments on the
Mortgage Assets that are allocated to the
senior Classes as a group. A Lockout Class
will typically not be entitled to receive,
or will be entitled to receive only a
restricted portion of, distributions of
principal prepayments and/or scheduled
principal payments, as applicable, for a
period of several years, during which time
all or a portion of such principal
payments that it would otherwise be
entitled to receive in the absence of a
"lockout" structure will be distributed in
reduction of the Certificate Balances of
other Senior Classes. Lockout Classes are
designed to minimize weighted average life
volatility during the lockout period.
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.
Pass-Through....................... Classes which receive all or a specified
portion of the principal payments on the
Mortgage Assets (or designated portion
thereof) and are not designated as Strip
or Sequential Pay Classes.
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.
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Senior............................. Classes that are entitled to receive
payments of principal and interest on each
Distribution Date prior to the Classes of
Subordinate Certificates.
Sequential Pay..................... Classes that receive principal payments
in a prescribed sequence, that do not have
predetermined principal balance schedules
and that under all circumstances receive
payments of principal continuously from
the first Distribution Date on which they
receive principal until they are retired.
A single class that receives principal
payments before or after all other classes
in the same Series of Certificates may be
identified as a Sequential Pay Class.
Strip.............................. A class that receives a constant
proportion, or "strip," of the principal
payments on the Mortgage Assets. The
constant proportion of such principal
payments may or may not vary for each
Mortgage Asset included in the Trust and
will be calculated in the manner described
in the related Supplement. Such Classes
may also receive payments of interest.
CATEGORIES OF CLASSES DEFINITION
Subordinate........................ Classes that are entitled to receive
payments of principal and interest on each
Distribution Date only after the Senior
Certificates and certain Classes of
Subordinate Certificates with higher
priority of distributions have received
their full principal and interest
entitlements.
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
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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).
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
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the Certificate Account on such Distribution Date would be less than the amount
required to be available for distributions to Certificateholders on such date.
The Master Servicer may also be obligated to make advances, to the extent
recoverable out of insurance proceeds, liquidation proceeds or otherwise, in
respect of certain taxes and insurance premiums not paid by Mortgagors on a
timely basis. Funds so advanced are reimbursable to the Master Servicer to the
extent permitted by the Pooling Agreement. If specified in the related
Supplement, the obligations of the Master Servicer to make Advances may be
supported by a cash advance reserve fund, a surety bond or other arrangement,
in each case as described in such Supplement.
REPORTS TO CERTIFICATEHOLDERS
Prior to or concurrently with each distribution on a Distribution Date,
the Master Servicer or the Trustee will furnish to each Certificateholder of
record of the related Series a statement setting forth, to the extent
applicable to such Series of Certificates:
(i) the amount of such distribution allocable to principal, separately
identifying the aggregate amount of any Principal Prepayments and, if so
specified in the related Supplement, prepayment penalties included therein;
(ii) the amount of such distribution allocable to interest;
(iii) the amount of any Advance;
(iv) the aggregate amount withdrawn from the Reserve Fund, if any, that
is included in the amounts distributed to Certificateholders;
(v) the Class Certificate Balance or notional amount of each class of
the related Series after giving effect to the distribution of principal on
such Distribution Date;
(vi) the percentage of principal payments on the Mortgage Assets
(excluding prepayments), if any, which each such class will be entitled to
receive on the following Distribution Date;
(vii) the percentage of Principal Prepayments with respect to the
Mortgage Assets, if any, which each such class will be entitled to receive
on the following Distribution Date;
(viii) the related amount of the servicing compensation retained or
withdrawn from the Certificate Account by the Master Servicer, and the
amount of additional servicing compensation received by the Master Servicer
attributable to penalties, fees, excess Liquidation Proceeds and other
similar charges and items;
(ix) the number and aggregate principal balances of Mortgage Loans (A)
delinquent (exclusive of Mortgage Loans in foreclosure) (1) 1 to 30 days,
(2) 31 to 60 days, (3) 61 to 90 days and (4) 91 or more days and (B) in
foreclosure and delinquent, as of the close of business on the last day of
the calendar month preceding such Distribution Date;
(x) the book value of any real estate acquired through foreclosure or
grant of a deed in lieu of foreclosure ("REO Property");
(xi) the Pass-Through Rate, if adjusted from the date of the last
statement, of any such class expected to be applicable to the next
distribution to such class;
(xii) if applicable, the amount remaining in the Reserve Fund at the
close of business on the Distribution Date;
(xiii) the Pass-Through Rate as of the day prior to the immediately
preceding Distribution Date; and
(xiv) any amounts remaining under letters of credit, pool policies or
other forms of credit support.
Where applicable, any amount set forth above may be expressed as a dollar
amount per single Certificate of the relevant class specified in the related
Supplement. The report to Certificateholders for any Series of Certificates may
include additional or other information of a similar nature to that specified
above.
In addition, within a reasonable period of time after the end of each
calendar year, the Master Servicer or the Trustee will mail to each
Certificateholder of record at any time during such calendar year a report (a)
as to the aggregate of amounts reported pursuant to (i) and (ii) for such
calendar year or, in the event such person was
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a Certificateholder of record during a portion of such calendar year, for the
applicable portion of such year and (b) such other customary information as may
be deemed necessary or desirable for Certificateholders to prepare their tax
returns.
CREDIT ENHANCEMENT
GENERAL
Credit enhancement may be provided with respect to one or more classes of
a Series of Certificates or with respect to the Mortgage Assets in the related
Trust. Credit enhancement may be in the form of a limited financial guaranty
policy issued by an entity named in the related Supplement, the subordination
of one or more classes of the Certificates of such Series, the establishment of
one or more reserve funds, the use of a cross-support feature, the use of a
mortgage pool insurance policy, bankruptcy bond, special hazard insurance
policy, surety bond, letter of credit, guaranteed investment contract or other
method of credit enhancement described in the related Supplement, or any
combination of the foregoing. Unless otherwise specified in the related
Supplement, no credit support will provide protection against all risks of loss
or guarantee repayment of the entire principal balance of the Certificates and
interest thereon. If losses occur which exceed the amount covered by credit
enhancement or which are not covered by the credit enhancement,
Certificateholders will bear their allocable share of any deficiencies.
If specified in the related Supplement, the coverage provided by one or
more forms of credit enhancement may apply concurrently to two or more related
Trusts. If applicable, the related Supplement will identify the Trusts to which
such credit enhancement relates and the manner of determining the amount of the
coverage provided thereby and of the application of such coverage to the
identified Trusts.
SUBORDINATION
If so specified in the related Supplement, the rights of holders of one or
more classes of Subordinate Certificates will be subordinate to the rights of
holders of one or more classes of Senior Certificates of such Series to
distributions in respect of scheduled principal, Principal Prepayments,
interest or any combination thereof that otherwise would have been payable to
holders of Subordinate Certificates under the circumstances and to the extent
specified in the related Supplement. If so specified in the related Supplement,
certain classes of Subordinate Certificates may be senior to other classes of
Subordinate Certificates and be rated investment grade ("Mezzanine
Certificates"). If specified in the related Supplement, delays in receipt of
scheduled payments on the Mortgage Assets and certain losses with respect to
the Mortgage Assets will be borne first by the various classes of Subordinate
Certificates and thereafter by the various classes of Senior Certificates, in
each case under the circumstances and subject to the limitations specified in
such related Supplement. The aggregate distributions in respect of delinquent
payments on the Mortgage Assets over the lives of the Certificates or at any
time, the aggregate losses in respect of Mortgage Assets which must be borne by
the Subordinate Certificates by virtue of subordination and the amount of
distributions otherwise distributable to Subordinate Certificateholders that
will be distributable to Senior Certificateholders on any Distribution Date may
be limited as specified in the related Supplement. If aggregate distributions
in respect of delinquent payments on the Mortgage Assets or aggregate losses in
respect of such Mortgage Assets were to exceed the amount specified in the
related Supplement, Senior Certificateholders would experience losses on their
Certificates.
If specified in the related Supplement, various classes of Senior
Certificates and Subordinate Certificates may themselves be subordinate in
their right to receive certain distributions to other classes of Senior
Certificates and Subordinate Certificates, respectively, through a cross
support mechanism or otherwise.
As between classes of Senior Certificates and as between classes of
Subordinate Certificates, distributions may be allocated among such classes (i)
in the order of their scheduled final distribution dates, (ii) in accordance
with a schedule or formula, (iii) in relation to the occurrence of events or
(iv) otherwise, in each case as specified in the related Supplement.
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SURETY BONDS
A surety bond or bonds may be obtained and maintained for a Series or
certain classes thereof which will, subject to certain conditions and
limitations, guaranty payments of all or limited amounts of principal and
interest due on all or certain of the classes of such Series.
MORTGAGE POOL INSURANCE POLICIES
If specified in the related Supplement, a separate mortgage pool insurance
policy ("Mortgage Pool Insurance Policy") will be obtained for the Trust and
issued by the insurer (the "Pool Insurer") named in such Supplement. Each
Mortgage Pool Insurance Policy will, subject to the limitations described
below, cover loss by reason of default in payment on Mortgage Loans in the
Trust in an amount equal to a percentage specified in such Supplement of the
aggregate principal balance of such Mortgage Loans on the Cut-off Date. As more
fully described below, the Master Servicer will present claims thereunder to
the Pool Insurer on behalf of itself, the Trustee and Certificateholders. The
Mortgage Pool Insurance Policies, however, are not blanket policies against
loss, since claims thereunder may be made only respecting particular defaulted
Mortgage Loans and only upon satisfaction of certain conditions precedent
described below. Unless otherwise specified in the related Supplement, the
Mortgage Pool Insurance Policies will not cover losses due to a failure to pay
or denial of a claim under a Primary Mortgage Insurance Policy.
Unless otherwise specified in the related Supplement, each Mortgage Pool
Insurance Policy will provide that no claims may be validly presented unless
(i) any required Primary Mortgage Insurance Policy is in effect for the
defaulted Mortgage Loan and a claim thereunder has been submitted and settled;
(ii) hazard insurance on the related Mortgaged Property has been kept in force
and real estate taxes and other protection and preservation expenses have been
paid; (iii) if there has been physical loss or damage to the Mortgaged
Property, it has been restored to its physical condition (reasonable wear and
tear excepted) at the time of issuance of the policy; and (iv) the insured has
acquired good and merchantable title to the Mortgaged Property free and clear
of liens except certain permitted encumbrances. Upon satisfaction of these
conditions, the Pool Insurer will have the option either (a) to purchase the
Mortgaged Property at a price equal to the principal balance of the related
Mortgage Loan plus accrued and unpaid interest at the Mortgage Rate to the date
of such purchase and certain expenses incurred by the Master Servicer on behalf
of the Trustee and Certificateholders or (b) to pay the amount by which the sum
of the principal balance of the defaulted Mortgage Loan plus accrued and unpaid
interest at the Mortgage Rate to the date of payment of the claim and the
aforementioned expenses exceeds the proceeds received from an approved sale of
the Mortgaged Property, in either case net of certain amounts paid or assumed
to have been paid under the related Primary Mortgage Insurance Policy. If any
Mortgaged Property is damaged, and proceeds, if any, from the related hazard
insurance policy or the applicable Special Hazard Insurance Policy are
insufficient to restore the damaged property to a condition sufficient to
permit recovery under the Mortgage Pool Insurance Policy, the Master Servicer
will not be required to expend its own funds to restore the damaged property
unless it determines that (i) such restoration will increase the proceeds to
Certificateholders on liquidation of the Mortgage Loan after reimbursement of
the Master Servicer for its expenses and (ii) such expenses will be recoverable
by it through proceeds of the sale of the Mortgaged Property or proceeds of the
related Mortgage Pool Insurance Policy or any related Primary Mortgage
Insurance Policy.
No Mortgage Pool Insurance Policy will insure (and many Primary Mortgage
Insurance Policies do not insure) against loss sustained by reason of a default
arising from, among other things, (i) fraud or negligence in the origination or
servicing of a Mortgage Loan, including misrepresentation by the Mortgagor, the
originator or persons involved in the origination thereof, or (ii) failure to
construct a Mortgaged Property in accordance with plans and specifications. A
failure of coverage attributable to one of the foregoing events might result in
a breach of the related Seller's representations described herein and, in such
event, might give rise to an obligation on the part of such Seller to
repurchase the defaulted Mortgage Loan if the breach cannot be cured by such
Seller. No Mortgage Pool Insurance Policy will cover (and many Primary Mortgage
Insurance Policies do not cover) a claim in respect of a defaulted Mortgage
Loan occurring when the servicer of such Mortgage Loan, at the time of default
or thereafter, was not approved by the applicable insurer.
The original amount of coverage under each Mortgage Pool Insurance Policy
will be reduced over the life of the related Certificates by the aggregate
dollar amount of claims paid less the aggregate of the net amounts realized by
the Pool Insurer upon disposition of all foreclosed properties. The amount of
claims paid will include
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certain expenses incurred by the Master Servicer as well as accrued interest on
delinquent Mortgage Loans to the date of payment of the claim, unless otherwise
specified in the related Supplement. Accordingly, if aggregate net claims paid
under any Mortgage Pool Insurance Policy reach the original policy limit,
coverage under that Mortgage Pool Insurance Policy will be exhausted and any
further losses will be borne by Certificateholders.
FRAUD WAIVER
If so specified in the related Supplement, a letter may be obtained from
the issuer of a Mortgage Pool Insurance Policy (the "Waiver Letter") waiving
its right to deny a claim or rescind coverage under the related Mortgage Pool
Insurance Policy by reason of fraud, dishonesty or misrepresentation in
connection with the origination of, or application for insurance for, the
related Mortgage Loan or the denial or adjustment of coverage under any related
Primary Mortgage Insurance Policy because of such fraud, dishonesty or
misrepresentation. In such circumstances, the issuer of the Mortgage Pool
Insurance Policy will be indemnified by the Seller for the amount of any loss
paid by the issuer of the Mortgage Pool Insurance Policy (each such amount, a
"Fraud Loss") under the terms of the Waiver Letter. The maximum aggregate
amount of Fraud Losses covered under the Waiver Letter and the period of time
during which such coverage will be provided will be specified in the related
Supplement.
SPECIAL HAZARD INSURANCE POLICIES
If specified in the related Supplement, a separate Special Hazard
Insurance Policy will be obtained for the Trust and will be issued by the
insurer (the "Special Hazard Insurer") named in such Supplement. Each Special
Hazard Insurance Policy will, subject to limitations described below, protect
holders of the related Certificates from (i) loss by reason of damage to
Mortgaged Properties caused by certain hazards (including earthquakes and, to a
limited extent, tidal waves and related water damage and such other hazards as
are specified in the related Supplement) not insured against under the standard
form of hazard insurance policy for the respective states in which the
Mortgaged Properties are located or under a flood insurance policy if the
Mortgaged Property is located in a federally designated flood area and (ii)
loss caused by reason of the application of the coinsurance clause contained in
hazard insurance policies. See "Servicing of Mortgage Loans -- Hazard
Insurance" herein. No Special Hazard Insurance Policy will cover losses
occasioned by fraud or conversion by the Trustee or Master Servicer, war,
insurrection, civil war, certain governmental action, errors in design, faulty
workmanship or materials (except under certain circumstances), nuclear or
chemical reaction, flood (if the Mortgaged Property is located in a federally
designated flood area), nuclear or chemical contamination and certain other
risks. The amount of coverage under any Special Hazard Insurance Policy will be
specified in the related Supplement. Each Special Hazard Insurance Policy will
provide that no claim may be paid unless hazard and, if applicable, flood
insurance on the property securing the Mortgage Loan have been kept in force
and other protection and preservation expenses have been paid.
Subject to the foregoing limitations and unless otherwise specified in the
related Supplement, each Special Hazard Insurance Policy will provide that
where there has been damage to property securing a foreclosed Mortgage Loan
(title to which has been acquired by the insured) and to the extent such damage
is not covered by the hazard insurance policy or flood insurance policy, if
any, maintained by the Mortgagor or the Master Servicer, the Special Hazard
Insurer will pay the lesser of (i) the cost of repair or replacement of such
property or (ii) upon transfer of the property to the Special Hazard Insurer,
the unpaid principal balance of such Mortgage Loan at the time of acquisition
of such property by foreclosure or deed in lieu of foreclosure, plus accrued
interest to the date of claim settlement and certain expenses incurred by the
Master Servicer with respect to such property. If the unpaid principal balance
of a Mortgage Loan plus accrued interest and certain expenses is paid by the
Special Hazard Insurer, the amount of further coverage under the related
Special Hazard Insurance Policy will be reduced by such amount less any net
proceeds from the sale of the property. Any amount paid as the cost of repair
of such property will also reduce coverage by such amount. So long as a
Mortgage Pool Insurance Policy remains in effect, the payment by the Special
Hazard Insurer of the cost of repair or of the unpaid principal balance of the
related Mortgage Loan plus accrued interest and certain expenses will not
affect the total insurance proceeds paid to Certificateholders, but will affect
the relative amounts of coverage remaining under the related Special Hazard
Insurance Policy and Mortgage Pool Insurance Policy.
To the extent specified in the Supplement, the Master Servicer may deposit
cash, an irrevocable letter of credit or any other instrument acceptable to
each nationally recognized rating agency rating the Certificates of
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the related Series in a special trust account to provide protection in lieu of
or in addition to that provided by a Special Hazard Insurance Policy. The
amount of any Special Hazard Insurance Policy or of the deposit to the special
trust account in lieu thereof relating to such Certificates may be reduced so
long as any such reduction will not result in a downgrading of the rating of
such Certificates by any such rating agency.
BANKRUPTCY BONDS
If specified in the related Supplement, a bankruptcy bond (the "Bankruptcy
Bond") to cover losses resulting from proceedings under the Bankruptcy Code
with respect to a Mortgage Loan will be issued by an insurer named in such
Supplement. Each Bankruptcy Bond will cover, to the extent specified in the
related Supplement, certain losses resulting from a reduction by a bankruptcy
court of scheduled payments of principal and interest on a Mortgage Loan or a
reduction by such court of the principal amount of a Mortgage Loan and will
cover certain unpaid interest on the amount of such a principal reduction from
the date of the filing of a bankruptcy petition. The required amount of
coverage under each Bankruptcy Bond will be set forth in the related
Supplement. Coverage under a Bankruptcy Bond may be cancelled or reduced by the
Master Servicer if such cancellation or reduction would not adversely affect
the then current rating or ratings of the related Certificates. See "Certain
Legal Aspects of the Mortgage Loans -- Anti-Deficiency Legislation and Other
Limitations on Sellers" herein.
To the extent specified in the Supplement, the Master Servicer may deposit
cash, an irrevocable letter of credit or any other instrument acceptable to
each nationally recognized rating agency rating the Certificates of the related
Series in a special trust account to provide protection in lieu of or in
addition to that provided by a Bankruptcy Bond. The amount of any Bankruptcy
Bond or of the deposit to the special trust account in lieu thereof relating to
such Certificates may be reduced so long as any such reduction will not result
in a downgrading of the rating of such Certificates by any such rating agency.
RESERVE FUND
If so specified in the related Supplement, credit support with respect to
a Series of Certificates may be provided by the establishment and maintenance
with the Trustee for such Series of Certificates, in trust, of one or more
reserve funds (the "Reserve Fund") for such Series. The related Supplement will
specify whether or not a Reserve Fund will be included in the Trust for such
Series.
The Reserve Fund for a Series will be funded (i) by the deposit therein of
cash, U.S. Treasury securities or instruments evidencing ownership of principal
or interest payments thereon, letters of credit, demand notes, certificates of
deposit or a combination thereof in the aggregate amount specified in the
related Supplement, (ii) by the deposit therein from time to time of certain
amounts, as specified in the related Supplement, to which Subordinate
Certificateholders, if any, would otherwise be entitled or (iii) in such other
manner as may be specified in the related Supplement.
Any amounts on deposit in the Reserve Fund and the proceeds of any other
instrument deposited therein upon maturity will be held in cash or will be
invested in Eligible Investments. Any instrument deposited therein will name
the Trustee, in its capacity as trustee for Certificateholders, or such other
entity as is specified in the related Supplement, as beneficiary and will be
issued by an entity acceptable to each rating agency that rates the
Certificates. Additional information with respect to such instruments deposited
in the Reserve Funds will be set forth in the related Supplement.
Any amounts so deposited and payments on instruments so deposited will be
available for withdrawal from the Reserve Fund for distribution to
Certificateholders for the purposes, in the manner and at the times specified
in the related Supplement.
CROSS SUPPORT
If specified in the related Supplement, the beneficial ownership of
separate groups of assets included in a Trust may be evidenced by separate
classes of the related Series of Certificates. In such case, credit support may
be provided by a cross support feature which requires that distributions be
made with respect to Certificates evidencing a beneficial ownership interest in
other asset groups within the same Trust. The related Supplement for a Series
that includes a cross support feature will describe the manner and conditions
for applying such cross support feature.
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OTHER INSURANCE, GUARANTIES, LETTERS OF CREDIT AND SIMILAR INSTRUMENTS OR
AGREEMENTS
If specified in the related Supplement, a Trust may also include
insurance, guaranties, letters of credit or similar arrangements for the
purpose of (i) maintaining timely payments or providing additional protection
against losses on the assets included in such Trust, (ii) paying administrative
expenses or (iii) establishing a minimum reinvestment rate on the payments made
in respect of such assets or principal payment rate on such assets. Such
arrangements may include agreements under which Certificateholders are entitled
to receive amounts deposited in various accounts held by the Trustee upon the
terms specified in such Supplement.
YIELD AND PREPAYMENT CONSIDERATIONS
The weighted average life of a Series of Certificates and the yield to
investors depend in part on the rate and timing of principal payments received
on or in respect of the Mortgage Assets included in the related Trust.
Prepayments on mortgage loans are commonly measured relative to a prepayment
standard or model. The prepayment model, if any, used with respect to a
particular Series will be identified and described in the related Supplement.
The Supplement for a Series of Certificates may contain a table setting
forth percentages of the initial Certificate Balance of each class expected to
be outstanding after each of the dates shown in such table. Any such table will
be based upon a number of assumptions stated in such Supplement, including
assumptions that prepayments on the mortgage loans underlying the related
Mortgage Certificates or on the Mortgage Loans are made at rates corresponding
to various percentages of the prepayment model specified in the related
Supplement. It is unlikely, however, that the prepayment of the mortgage loans
underlying the Mortgage Certificates, or of the Mortgage Loans, underlying any
Series will conform to any of the percentages of the prepayment model described
in the table set forth in such Supplement.
The rate of principal prepayments on pools of mortgage loans underlying
the Mortgage Certificates and Mortgage Loans is influenced by a variety of
economic, geographic, social and other factors. In general, however, if
prevailing interest rates fall significantly below the interest rates on such
mortgage loans or on the Mortgage Loans included in a Trust, such mortgage
loans or Mortgage Loans are likely to be the subject of higher principal
prepayments than if prevailing rates remain at or above the rates borne by such
mortgage loans or Mortgage Loans. Conversely, if prevailing interest rates rise
appreciably above the interest rates on such mortgage loans or on the Mortgage
Rates borne by the Mortgage Loans included in a Trust, such mortgage loans or
Mortgage Loans are likely to experience a lower prepayment rate than if
prevailing rates remain at or below the rates borne by such mortgage loans or
Mortgage Rates. Other factors affecting prepayment of mortgage loans include
changes in mortgagors' housing needs, job transfers, unemployment, mortgagors'
net equity in the properties securing the mortgage loans and the availability
of mortgage funds.
Prepayments may also result from the enforcement of any "due-on-sale"
provisions contained in a Mortgage Note permitting the holder of the Mortgage
Note to demand immediate repayment of the outstanding balance of the Mortgage
Loan upon conveyance by the Mortgagor of the underlying Mortgaged Property. The
Master Servicer will agree that it will enforce any "due-on-sale" clause to the
extent it has knowledge of the conveyance or proposed conveyance of the
underlying Mortgaged Property and reasonably believes that it is entitled to do
so under applicable law; PROVIDED, HOWEVER, that the Master Servicer will not
take any action in relation to the enforcement of any "due-on-sale" provision
which would impair or threaten to impair any recovery under any related Primary
Mortgage Insurance Policy. Under current law, such exercise is permitted for
substantially all the mortgage loans which contain such clauses. Acceleration
is not permitted, however, for certain types of transfers, including transfers
upon the death of a joint tenant or tenant by the entirety and the granting of
a leasehold interest of three years or less not containing an option to
purchase.
Mortgage Loans insured by the FHA and Mortgage Loans partially guaranteed
by the VA are assumable with the consent of the FHA and the VA, respectively.
Thus, the rate of prepayments on such Mortgage Loans may be lower than that on
conventional Mortgage Loans bearing comparable interest rates.
When a full prepayment is made on a Mortgage Loan, the Mortgagor is
charged interest on the principal amount of the Mortgage Loan so prepaid only
for the number of days in the month actually elapsed up to the date of the
prepayment rather than for a full month. Unless otherwise specified in the
related Supplement, the effect of prepayments in full will be to reduce the
amount of interest passed through in the following month to
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Certificateholders because interest on the principal amount of any Mortgage
Loan so prepaid will be paid only to the date of prepayment. Partial
prepayments in a given month may be applied to the outstanding principal
balances of the Mortgage Loans so prepaid on the first day of the month of
receipt or the month following receipt. In the latter case, partial prepayments
will not reduce the amount of interest passed through in such month. Unless
otherwise specified in the related Supplement, both full and partial
prepayments will not be passed through until the month following receipt.
The effective yield to Certificateholders will be slightly lower than the
yield otherwise produced by the applicable Pass-Through Rate and purchase price
because while interest will accrue on each Mortgage Loan from the first day of
the month (unless otherwise provided in the related Supplement), the
distribution of such interest will not be made earlier than the month following
the month of accrual.
Under certain circumstances, the Master Servicer or, if specified in the
related Supplement for a Series of REMIC Certificates, the holders of the
Residual Certificates of such Series may have the option to purchase the assets
of a Trust thereby effecting early retirement of the related Series of
Certificates. See "The Pooling and Servicing Agreement -- Termination; Optional
Termination" herein.
Factors other than those identified herein and in the related Supplement
could significantly affect principal prepayments at any time and over the lives
of the Certificates. The relative contribution of the various factors affecting
prepayment may also vary from time to time. There can be no assurance as to the
rate of payment of principal of the Mortgage Assets at any time or over the
lives of the Certificates.
The Supplement relating to a Series of Certificates will discuss in
greater detail the effect of the rate and timing of principal payments
(including Principal Prepayments), delinquencies and losses on the yield,
weighted average lives and maturities of such Certificates.
THE SPONSOR
Headlands Mortgage Securities Inc., a Delaware corporation (the
"Sponsor"), was organized on November 18, 1996 for the limited purpose of
acquiring, owning and transferring Mortgage Assets and selling interests
therein or bonds secured thereby. The Sponsor is a subsidiary of Headlands
Mortgage Company, a California corporation engaged in the mortgage banking
business. The Sponsor maintains its principal office at 700 Larkspur Landing
Circle, Suite 240, 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
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insured by the FHA or partially guaranteed by the VA, the Seller will represent
that it has complied with underwriting policies of the FHA or the VA, as the
case may be.
Underwriting standards are applied by or on behalf of a lender to evaluate
the borrower's credit standing and repayment ability, and the value and
adequacy of the mortgaged property as collateral. In general, a prospective
borrower applying for a mortgage loan is required to fill out a detailed
application designed to provide to the underwriting officer pertinent credit
information. As part of the description of the borrower's financial condition,
the borrower generally is required to provide a current list of assets and
liabilities and a statement of income and expenses, as well as an authorization
to apply for a credit report which summarizes the borrower's credit history
with local merchants and lenders and any record of bankruptcy. In most cases,
an employment verification is obtained from an independent source (typically
the borrower's employer), which verification reports the length of employment
with that organization, the borrower's current salary and whether it is
expected that the borrower will continue such employment in the future. If a
prospective borrower is self-employed, the borrower may be required to submit
copies of signed tax returns. The borrower may also be required to authorize
verification of deposits at financial institutions where the borrower has
demand or savings accounts.
In determining the adequacy of the mortgaged property as collateral, an
appraisal is made of each property considered for financing. The appraiser is
required to inspect the property and verify that it is in good repair and that
construction, if new, has been completed. The appraisal is based on the market
value of comparable homes, the estimated rental income (if considered
applicable by the appraiser) and the cost of replacing the home.
Once all applicable employment, credit and property information is
received, a determination generally is made as to whether the prospective
borrower has sufficient monthly income available (i) to meet the borrower's
monthly obligations on the proposed mortgage loan (generally determined on the
basis of the monthly payments due in the year of origination) and other
expenses related to the mortgaged property (such as property taxes and hazard
insurance) and (ii) to meet monthly housing expenses and other financial
obligations and monthly living expenses. The underwriting standards applied by
a Seller, particularly with respect to the level of loan documentation and the
mortgagor's income and credit history, may be varied in appropriate cases where
factors such as low LTVs or other favorable credit exist.
If specified in the related Supplement, a portion of the Mortgage Loans in
a Mortgage Pool may have been originated under a limited documentation program.
Under a limited documentation program, more emphasis is placed on the value and
adequacy of the mortgaged property as collateral and other assets of the
borrower than on credit underwriting. Under a limited documentation program,
certain credit underwriting documentation concerning income or income
verification and/or employment verification is waived. The Supplement for each
Series of Certificates will indicate the types of limited documentation
programs pursuant to which the related Mortgage Loans were originated and the
underwriting standards applicable to such limited documentation programs.
In the case of a Mortgage Loan secured by a leasehold interest in real
property, the title to which is held by a third party lessor, the Seller will
represent and warrant, among other things, that the remaining term of the lease
and any sublease is at least five years longer than the remaining term on the
Mortgage Note.
Certain of the types of Mortgage Loans that may be included in a Trust may
involve additional uncertainties not present in traditional types of loans. For
example, certain of such Mortgage Loans may provide for escalating or variable
payments by the Mortgagor. These types of Mortgage Loans are underwritten on
the basis of a judgment that the Mortgagors have the ability to make the
monthly payments required initially. In some instances, however, a Mortgagor's
income may not be sufficient to permit continued loan payments as such payments
increase. These types of Mortgage Loans may also be underwritten primarily upon
the basis of LTVs or other favorable credit factors.
QUALIFICATIONS OF SELLERS
Each Seller must be an institution experienced in originating and
servicing mortgage loans of the type contained in the related Mortgage Pool in
accordance with accepted practices and prudent guidelines, and must maintain
satisfactory facilities to originate and service those mortgage loans. Each
Seller must be a seller/servicer approved by either FNMA or FHLMC. Each Seller
must be a mortgagee approved by the FHA or an institution the deposit accounts
in which are insured by the Federal Deposit Insurance Corporation.
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THE POOLING AND SERVICING AGREEMENT
Set forth below is a summary of certain provisions of the Pooling
Agreement which are not described elsewhere in this Prospectus.
ASSIGNMENT OF MORTGAGE LOANS
ASSIGNMENT OF MORTGAGE LOANS. At the time of issuance of each Series of
Certificates, the Sponsor will cause the Mortgage Loans comprising the related
Trust to be assigned to the Trustee together with all principal and interest on
the Mortgage Loans, except for principal and interest due on or before the
Cut-off Date. The Trustee will, concurrently with such assignment, authenticate
and deliver the Certificates to the Sponsor or its designated agent in exchange
for the Mortgage Loans and other assets, if any. Each Mortgage Loan will be
identified in a schedule appearing as an exhibit to the Pooling Agreement. Such
schedule will include information as to the outstanding principal balance of
each Mortgage Loan after application of payments due on the Cut-off Date, as
well as information regarding the Mortgage Rate, the current scheduled monthly
payment of principal and interest, the maturity of each Mortgage Note, the LTV
and certain other information.
In addition, the Sponsor will, as to each Mortgage Loan, deliver to the
Trustee (or a custodian) the Mortgage Note endorsed without recourse in blank
or to the order of the Trustee, an assignment to the Trustee of the Mortgage in
form for recording or filing as may be appropriate in the state of the
Mortgaged Property, the original recorded Mortgage with evidence of recording
or filing indicated thereon, or a copy of such Mortgage certified by the
recording office in those jurisdictions where the original is retained by the
recording office, a copy of the title insurance policy or other evidence of
title, and evidence of any Primary Mortgage Insurance Policy for such Mortgage
Loan, if applicable. In certain instances where documents respecting a Mortgage
Loan may not be available prior to execution of the Pooling Agreement, the
Sponsor may deliver copies thereof and deliver such documents to the Trustee
promptly upon receipt.
With respect to any Mortgage Loans that are Cooperative Loans, the Sponsor
will cause to be delivered to the Trustee the related original cooperative note
endorsed without recourse in blank or to the order of the Trustee, the original
security agreement, the proprietary lease or occupancy agreement, the
recognition agreement, an executed financing agreement and the relevant stock
certificate, related blank stock powers and any other document specified in the
related Supplement. The Sponsor will cause to be filed in the appropriate
office an assignment and a financing statement evidencing the Trustee's
security interest in each Cooperative Loan.
The Trustee (or a custodian) will review the Mortgage Loan documents
within a specified number of days of receipt thereof in original form to
ascertain that all required documents have been properly executed and received.
The Trustee will hold such documents for each Series in trust for the benefit
of holders of the Certificates of such Series. Unless otherwise specified in
the related Supplement, if any document is found by the Trustee not to have
been properly executed or received or to be unrelated to the Mortgage Loans
identified in the Pooling Agreement, and such defect cannot be cured within the
permitted time period, the Seller will replace such Mortgage Loan with an
eligible substitute mortgage loan (as described in the related Supplement) or
repurchase the related Mortgage Loan from the Trustee within a specified number
of days of receipt of notice of the defect at a price generally equal to the
outstanding principal balance thereof, plus accrued and unpaid interest thereon
at the applicable Mortgage Rate to the first day of the month following the
month of repurchase (less any unreimbursed Advances or amounts payable as
related servicing compensation if the Seller is the Master Servicer with
respect to such Mortgage Loan). Upon receipt of the repurchase price, in the
case of a repurchase, the Trustee will reimburse any unreimbursed Advances of
principal and interest by the Master Servicer with respect to such Mortgage
Loan or unreimbursed payments under any form of credit enhancement. The
remaining portion of such repurchase price will then be passed through to
holders of the Certificates as liquidation proceeds in accordance with the
procedures specified under "Description of Certificates -- Distributions"
herein. This substitution/repurchase obligation constitutes the sole remedy
available to Certificateholders or the Trustee for such a defect in a
constituent document.
Any restrictions on such substitution or repurchase with respect to a
Series of Certificates will be set forth in the related Supplement.
The Trustee will be authorized to appoint a custodian pursuant to a
custodial agreement to maintain possession of and, if applicable, to review the
documents relating to the Mortgage Loans as agent of the Trustee.
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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: the information set forth in the schedule of Mortgage Loans is
true and correct in all material respects; 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; as
of the Cut-off Date, no Mortgage Loan was more than 30 days delinquent; 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; 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; 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); as of the Closing Date, each
Mortgaged Property is free of damage and is in good repair; 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 as of the Closing Date, there are no delinquent tax or
assessment liens against any Mortgaged Property.
In the event of the discovery by the Seller of a breach of any of its
representations or warranties which materially and adversely affects the
interest of Certificateholders in the related Mortgage Loan, or the receipt of
notice thereof from the Trustee, the Seller will, with respect to a breach of
its representations or warranties, cure the breach within the time permitted by
the related Pooling Agreement or substitute a substantially similar substitute
mortgage loan for such Mortgage Loan or repurchase the related Mortgage Loan,
or any Mortgaged Property acquired in respect thereof, on the terms set forth
above under " -- Assignment of Mortgage Loans" and in the related Supplement.
The proceeds of any such repurchase will be passed through to
Certificateholders as liquidation proceeds. This substitution/repurchase
obligation constitutes the sole remedy available to Certificateholders and the
Trustee for any such breach. Neither the Sponsor nor the Master Servicer
(unless the Master Servicer is the Seller) will be obligated to purchase a
Mortgage Loan if a Seller defaults on its obligation to do so, and no assurance
can be given that the Seller will carry out their respective repurchase
obligations with respect to the Mortgage Loans.
Since the representations and warranties of a Seller do not address events
that may occur following the sale of a Mortgage Loan by such Seller, its
repurchase obligation described below will not arise if the relevant event
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that would otherwise have given rise to such an obligation with respect to a
Mortgage Loan occurs after the date of sale of such Mortgage Loan by such
Seller to the Sponsor or its affiliates.
SERVICING
The Master Servicer will be responsible for servicing and administering
the Mortgage Loans and will agree to perform diligently all services and duties
customary to the servicing by prudent mortgage lending institutions or
mortgages of the same type as the Mortgage Loans in those jurisdictions where
the related Mortgage Properties are located. The Master Servicer may enter into
a subservicing agreement with a subservicer to perform, as an independent
contractor, certain servicing functions for the Master Servicer subject to its
supervision. A subservicing agreement will not contain any terms or conditions
that are inconsistent with the related Pooling Agreement. The subservicer will
receive a fee for such services which will be paid by the Master Servicer out
of the Master Servicing Fee. The Master Servicer will have the right to remove
the subservicer of any Mortgage Loan at any time for cause and at any other
time upon the giving of the required notice. In such event, the Master Servicer
would continue to be responsible for servicing such Mortgage Loan and may
designate a replacement subservicer (which may include an affiliate of the
Sponsor or the Master Servicer).
The Master Servicer is required to maintain a fidelity bond and errors and
omissions policy or their equivalent with respect to officers and employees
which provide coverage against losses which may be sustained as a result of an
officer's or employee's misappropriation of funds or errors and omissions in
failing to maintain insurance, subject to certain limitations as to amount of
coverage, deductible amounts, conditions, exclusions and exceptions in the form
and amount specified in the Pooling Agreement.
PAYMENTS ON MORTGAGE LOANS
The Master Servicer will establish and maintain or cause to be established
and maintained with respect to the related Trust one or more accounts for the
collection of payments on the related Mortgage Assets (the "Certificate
Account") which must be an Eligible Account. An "Eligible Account" is an
account or accounts which is either (i) maintained with a depository
institution the short-term debt obligations of which (or, in the case of a
depository institution that is the principal subsidiary of a holding company,
the short-term debt obligations of such holding company) are rated in one of
the two highest short-term rating categories by the Rating Agency that rated
one or more classes of the related Series of Certificates, (ii) an account or
accounts the deposits in which are fully insured by the FDIC, (iii) an account
or accounts the deposits in which are insured by the FDIC to the limits
established by the FDIC and the uninsured deposits in which are otherwise
secured such that, as evidenced by an opinion of counsel, Certificateholders
have a claim with respect to the funds in such account or accounts, or a
perfected first-priority security interest against any collateral securing such
funds, that is superior to the claims of any other depositors or general
creditors of the depository institution with which such account or accounts are
maintained or (iv) an account or accounts otherwise acceptable to such Rating
Agency. The collateral eligible to secure amounts in the Certificate Account is
limited to investments consisting of United States government securities and
other high-quality investments ("Eligible Investments"). A Certificate Account
may be maintained as an interest-bearing account, or the funds held therein may
be invested pending each succeeding Distribution Date in Eligible Investments.
The Master Servicer or its designee will generally be entitled to receive any
such interest or other income earned on funds in the Certificate Account as
additional compensation and will be obligated to deposit in the Certificate
Account the amount of any loss immediately as realized. The Certificate Account
may be maintained with the Master Servicer or the Seller or with a depository
institution that is an affiliate of the Master Servicer or the Sponsor,
provided it is an Eligible Account.
Unless otherwise specified in the related Supplement, the Master Servicer
will deposit in the Certificate Account for each Trust on a daily basis, to the
extent applicable, the following payments and collections received by or on
behalf of it subsequent to the Cut-off Date (other than payments due on or
before the Cut-off Date):
(i) All payments on account of principal and interest (which, at its
option, may be net of the applicable servicing compensation), including
Principal Prepayments;
(ii) All amounts received by foreclosure or otherwise in connection with
the liquidation of defaulted Mortgage Loans, net of expenses incurred in
connection with such liquidation;
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(iii) All proceeds received under any Primary Mortgage Insurance Policy
or title, hazard or other insurance policy covering any Mortgage Loan,
other than proceeds to be applied to the restoration or repair of the
related Mortgaged Property;
(iv) All advances as described herein under "Advances";
(v) All proceeds of any Mortgage Loans or property acquired in respect
thereof repurchased as described herein under " -- Assignment of Mortgage
Loans" and " -- Representations and Warranties";
(vi) Any Buydown Funds (and, if applicable, investment earnings thereon)
required to be deposited in the Certificate Account as described below;
(vii) All payments required to be deposited in the Certificate Account
with respect to any deductible clause in any blanket insurance policy
described under " -- Hazard Insurance" herein;
(viii) Any amount required to be deposited by the Master Servicer in
connection with losses realized on investments for the benefit of the
Master Servicer of funds held in the Certificate Account; and
(ix) All other amounts required to be deposited in the Certificate
Account.
Under the Pooling Agreement for each Series, the Master Servicer will be
authorized to make the following withdrawals from the Certificate Account:
(i) To clear and terminate the Certificate Account upon liquidation of
all Mortgage Loans or other termination of the Trust;
(ii) To reimburse any provider of credit support for payments under such
credit support from amounts received as late payments on related Mortgage
Loans or from related insurance or liquidation proceeds;
(iii) To reimburse the Master Servicer for Advances from amounts
received as late payments on related Mortgage Loans, from related
insurance or liquidation proceeds or from other amounts received with
respect to such Mortgage Loans;
(iv) To reimburse the Master Servicer from related insurance or
liquidation proceeds for amounts expended by the Master Servicer in
connection with the restoration of property damaged by an uninsured cause
or the liquidation of a Mortgage Loan;
(v) To pay to the Master Servicer its Master Servicing Fee (and other
servicing compensation, if applicable) and to the Trustee its fee;
(vi) To reimburse the Master Servicer for Advances which the Master
Servicer has determined to be otherwise nonrecoverable;
(vii) To withdraw any amount deposited to the Certificate Account in
error; and
(viii) To pay any expenses which were incurred and are reimbursable
pursuant to the Pooling Agreement.
COLLECTION AND OTHER SERVICING PROCEDURES
The Master Servicer will agree to proceed diligently to collect all
payments called for under the Mortgage Loans. Consistent with the above, the
Master Servicer may, in its discretion, (i) waive any prepayment charge,
assumption fee, late payment charge or any other charge in connection with the
prepayment of a Mortgage Loan and (ii) to the extent not inconsistent with the
coverage of such Mortgage Loan by a Mortgage Pool Insurance Policy, Primary
Mortgage Insurance Policy, FHA Insurance, VA Guaranty or Bankruptcy Bond or
alternative arrangements, if applicable, suspend or reduce regular monthly
payments for a period of up to six months, or arrange with a Mortgagor a
schedule for the liquidation of delinquencies. In the event of any such
arrangement, but only to the extent of the amount of any credit support, the
provider of such credit support will honor requests for payment or otherwise
distribute funds with respect to such Mortgage Loan during the scheduled period
in accordance with the amortization schedule thereof and without regard to the
temporary modification thereof. In addition, in the event of any such
arrangement, the Master Servicer's obligation to make Advances on the related
Mortgage Loan shall continue during the scheduled period.
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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.
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
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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 not cancel or refuse to renew any Primary Mortgage Insurance Policy
required to be kept in force by the Pooling Agreement.
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CLAIMS UNDER INSURANCE POLICIES AND OTHER REALIZATION UPON DEFAULTED MORTGAGE
LOANS
The Master Servicer, on behalf of the Trustee and Certificateholders, will
present claims to the insurer under any applicable Primary Mortgage Insurance
Policy and will take such reasonable steps as are necessary to permit recovery
under such other insurance policies respecting defaulted Mortgage Loans. If any
Mortgaged Property securing a defaulted Mortgage Loan is damaged and proceeds,
if any, from the related hazard insurance Policy are insufficient to restore
the damaged property to a condition sufficient to permit recovery under any
applicable Primary Mortgage Insurance Policy, the Master Servicer will not be
required to expend its own funds to restore the damaged property unless the
Master Servicer determines (i) that such restoration will increase the proceeds
to Certificateholders upon liquidation of the Mortgage Loan after reimbursement
of the Master Servicer for its expenses and (ii) that such expenses will be
recoverable to it through liquidation proceeds.
Regardless of whether recovery under any Primary Mortgage Insurance Policy
is available or any further amount is payable under the credit enhancement for
a Series of Certificates, the Master Servicer is nevertheless obligated to
follow such normal practices and procedures as it deems necessary or advisable
to realize upon the defaulted Mortgage Loan. If at any time no further amount
is payable under the credit enhancement for a Series of Certificates, and if
the proceeds of any liquidation of the Mortgaged Property securing the
defaulted Mortgage Loan are less than the principal balance of the defaulted
Mortgage Loan plus interest accrued thereon, Certificateholders will realize a
loss in the amount of such difference plus the aggregate of unreimbursed
advances of the Master Servicer with respect to such Mortgage Loan and expenses
incurred by the Master Servicer in connection with such proceedings and which
are reimbursable under the Pooling Agreement.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
The Master Servicer's primary compensation for its activities as Master
Servicer will come from the payment to it, with respect to each interest
payment on a Mortgage Loan, of the amount specified in the related Supplement
(the "Master Servicing Fee"). As principal payments are made on the Mortgage
Loans, the portion of each monthly payment which represents interest will
decline, and thus servicing compensation to the Master Servicer will decrease
as the Mortgage Loans amortize. Prepayments and liquidations of Mortgage Loans
prior to maturity will also cause servicing compensation to the Master Servicer
to decrease.
In addition, the Master Servicer will be entitled to retain all prepayment
fees, assumption fees and late payment charges, to the extent collected from
Mortgagors and any benefit that may accrue as a result of the investment of
funds in the Certificate Account (unless otherwise specified in the related
Supplement).
The Master Servicer will pay all expenses incurred in connection with its
activities as Master Servicer (subject to limited reimbursement), including
payments of expenses incurred in connection with distributions and reports to
Certificateholders of each Series and, if so specified in the related
Supplement, payment of the fees and disbursements of the Trustee and payment of
any fees for providing credit enhancement. The Master Servicer will be entitled
to reimbursement for certain expenses incurred by it in connection with any
defaulted Mortgage Loan as to which it has determined that all recoverable
liquidation proceeds and insurance proceeds have been received, such right of
reimbursement being prior to the rights of Certificateholders to receive any
such proceeds.
EVIDENCE AS TO COMPLIANCE
Each Pooling Agreement will provide that the Master Servicer at its
expense shall cause a firm of independent public accountants to furnish a
report annually to the Trustee to the effect that such firm has performed
certain procedures specified in the Pooling Agreement and that such review has
disclosed no items of noncompliance with the provisions of such Pooling
Agreement which, in the opinion of such firm, are material, except for such
items of noncompliance as shall be set forth in such report.
Each Pooling Agreement will provide for delivery to the Trustee of an
annual statement signed by an officer of the Master Servicer to the effect that
the Master Servicer has fulfilled its obligations under the Pooling Agreement
throughout the preceding year.
CERTAIN MATTERS REGARDING THE SPONSOR, THE SELLER AND THE MASTER SERVICER
The Pooling Agreement for each Series of Certificates backed in whole or
in part by Mortgage Loans will provide that the Master Servicer (i) may not
pledge its rights thereunder except upon receipt by the Trustee of
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a letter from the Rating Agency that such pledge shall not result in a
downgrading of the Certificates and (ii) 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 (ii)(b)
above will become effective until the Trustee or a successor has assumed the
Master Servicer's obligations and duties under such Pooling Agreement.
The Pooling Agreement for each such Series will also provide that neither
the Sponsor, the Master Servicer nor the Seller, nor any directors, officers,
employees or agents of any of them (collectively, the "Indemnified Parties")
will be under any liability to the Trust or Certificateholders or the Trustee,
any subservicer or others for any action taken (or not taken) by any
Indemnified Party, any subservicer or the Trustee in good faith pursuant to the
Pooling Agreement, or for errors in judgment; PROVIDED, HOWEVER, that neither
the Sponsor, the Seller, the Master Servicer nor any such person will be
protected against any liability which would otherwise be imposed by reason of
willful misfeasance, bad faith or gross negligence in the performance of duties
or by reason of reckless disregard of obligations and duties thereunder. The
Pooling Agreement will further provide that each Indemnified Party is entitled
to indemnification by the Trust and will be held harmless against any loss,
liability or expense incurred in connection with any legal action relating to
the Pooling Agreement or the Certificates for such Series, other than any loss,
liability or expense related to any specific Mortgage Loan or Mortgage Loans
(except any such loss, liability or expense otherwise reimbursable pursuant to
the Pooling Agreement) and any loss, liability or expense incurred by reason of
willful misfeasance, bad faith or gross negligence in the performance of such
indemnified Party's duties thereunder or by reason of reckless disregard by
such indemnified Party of its obligations and duties thereunder. In addition,
the Pooling Agreement will provide that neither the Sponsor, the Seller nor the
Master Servicer is under any obligation to appear in, prosecute or defend any
legal action which is not incidental to, in the case of the Sponsor, the Seller
or the Master Servicer, its duties under the Pooling Agreement and which in its
opinion may involve it in any expense or liability. Each of the Sponsor, the
Seller and the Master Servicer may, however, in its discretion, undertake any
such action which it may deem necessary or desirable with respect to the
Pooling Agreement and the rights and duties of the parties thereto and the
interests of Certificateholders thereunder. In such event, the legal expenses
and costs of such action and any liability resulting therefrom will be
expenses, costs and liabilities of the Trust and the Sponsor, the Seller and
the Master Servicer will be entitled to be reimbursed therefor out of the
Certificate Account.
EVENTS OF DEFAULT
Events of default by the Master Servicer under the Pooling Agreement for
each Series of Certificates evidencing an interest in Mortgage Loans will
consist of (i)(a) any failure by the Master Servicer to make an Advance which
continues unremedied for one business day or (b) any failure by the Master
Servicer to make or cause to be made any other required payment pursuant to the
Pooling Agreement which continues unremedied for five days; (ii) any failure by
the Master Servicer duly to observe or perform in any material respects any
other of its covenants or agreements in the Certificates or in such Pooling
Agreement which continues unremedied for 60 days after the giving of written
notice of such failure to the Master Servicer by the Trustee, or to the Master
Servicer and the Trustee by holders of Certificates evidencing not less than
25% of the aggregate voting rights of the Certificates for such Series; and
(iii) certain events of insolvency, readjustment of debt, marshalling of assets
and liabilities or similar proceedings and certain actions by the Master
Servicer indicating insolvency, reorganization or inability to pay its
obligations.
RIGHTS UPON EVENT OF DEFAULT
As long as an Event of Default under the Pooling Agreement for any Series
of Certificates evidencing an interest in Mortgage Loans remains unremedied,
the Trustee or holders of Certificates evidencing not less than a majority of
the aggregate voting rights of the Certificates for such Series may terminate
all of the rights and obligations of the Master Servicer under such Pooling
Agreement, whereupon the Trustee will succeed to all the responsibilities,
duties and liabilities of the Master Servicer under such Pooling Agreement,
including, if specified in the related Supplement, the obligation to make
Advances and will be entitled to similar compensation arrangements and
limitations on liability. In the event that the Trustee is unwilling or unable
so to act, it may
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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 which indicate on their face that
they are granted to secure an underlying debt. By executing a
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security deed or deed to secure debt, the grantor conveys title to, as opposed
to merely creating a lien upon, the subject property to the grantee until such
time as the underlying debt is repaid. The trustee's authority under a deed of
trust, the mortgagee's authority under a mortgage and the grantee's authority
under a security deed or deed to secure debt are governed by law and, with
respect to some deeds of trust, the directions of the beneficiary.
COOPERATIVES. Certain of the Mortgage Loans may be Cooperative Loans. The
Cooperative owns all the real property that comprises the project, including
the land, separate dwelling units and all common areas. The Cooperative is
directly responsible for project management and, in most cases, payment of real
estate taxes and hazard and liability insurance. If there is a blanket mortgage
on the Cooperative and/or underlying land, as is generally the case, the
Cooperative, as project mortgagor, is also responsible for meeting these
mortgage obligations. A blanket mortgage is ordinarily incurred by the
Cooperative in connection with the construction or purchase of the
Cooperative's apartment building. The interest of the occupant under
proprietary leases or occupancy agreements to which that Cooperative is a party
are generally subordinate to the interest of the holder of the blanket mortgage
in that building. If the Cooperative is unable to meet the payment obligations
arising under its blanket mortgage, the mortgagee holding the blanket mortgage
could foreclose on that mortgage and terminate all subordinate proprietary
leases and occupancy agreements. In addition, the blanket mortgage on a
Cooperative may provide financing in the form of a mortgage that does not fully
amortize with a significant portion of principal being due in one lump sum at
final maturity. The inability of the Cooperative to refinance this mortgage and
its consequent inability to make such final payment could lead to foreclosure
by the mortgagee providing the financing. A foreclosure in either event by the
holder of the blanket mortgage could eliminate or significantly diminish the
value of any collateral held by the lender who financed the purchase by an
individual tenant-stockholder of Cooperative shares or, in the case of a Trust
including Cooperative Loans, the collateral securing the Cooperative Loans.
The Cooperative is owned by tenant-stockholders who, through ownership of
stock, shares or membership certificates in the corporation, receive
proprietary leases or occupancy agreements which confer exclusive rights to
occupy specific units. Generally, a tenant-stockholder of a Cooperative must
make a monthly payment to the Cooperative representing such
tenant-stockholder's pro rata share of the Cooperative's payments for its
blanket mortgage, real property taxes, maintenance expenses and other capital
or ordinary expenses. An ownership interest in a Cooperative and accompanying
rights is financed through a Cooperative share loan evidenced by a promissory
note and secured by a security interest in the occupancy agreement or
proprietary lease and in the related Cooperative shares. The lender takes
possession of the share certificate and a counterpart of the proprietary lease
or occupancy agreement, and a financing statement covering the proprietary
lease or occupancy agreement and the Cooperative shares is filed in the
appropriate state and local offices to perfect the lender's interest in its
collateral. Subject to the limitations discussed below, upon default of the
tenant-stockholder, the lender may sue for judgment on the promissory note,
dispose of the collateral at a public or private sale or otherwise proceed
against the collateral or tenant-stockholder as an individual as provided in
the security agreement covering the assignment of the proprietary lease or
occupancy agreement and the pledge of Cooperative shares.
LEASEHOLDS. Certain of the Mortgage Loans may be secured by a mortgage on
a ground lessee's interest in a ground lease. Leasehold mortgages are subject
to certain risks not associated with mortgage loans secured by the fee estate
of the mortgagor. The most significant of these risks is that the ground lease
creating the leasehold estate could terminate, leaving the leasehold mortgagee
without its security. The ground lease may terminate, if among other reasons,
the ground lessee breaches or defaults in its obligations under the ground
lease or there is a bankruptcy of the ground lessee or the ground lessor. The
terms of the ground lease may also terminate prior to the maturity date of the
indebtedness secured by the mortgage. This risk may be minimized if the ground
lease contains certain provisions protective of the mortgagee, but the ground
leases that secure mortgage loans may not contain some of these protective
provisions, and mortgages may not contain the other protection discussed in the
next paragraph. Protective ground lease provisions include the right of the
leasehold mortgagee to receive notices from the ground lessor of any defaults
by the mortgagor; the right to cure such defaults, with adequate cure periods;
if a default is not susceptible of cure by the leasehold mortgagee, the right
to acquire the leasehold estate through foreclosure or otherwise; the ability
of the ground lease to be assigned to and by the leasehold mortgagee or
purchaser at a foreclosure sale and for the concomitant release of the ground
lessee's liabilities thereunder; and the right of the leasehold mortgagee to
enter into a new ground lease with the ground lessor on the same terms and
conditions as the old ground lease in the event of a termination thereof.
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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 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
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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 as further specified in the Prospectus Supplement. 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,
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on the ability of the Master Servicer to collect full amounts of interest on
certain of the Mortgage Loans. Unless otherwise provided in the applicable
Supplement, any shortfall in interest collections resulting from the
application of the Relief Act could result in losses to the holders of the
Certificates. In addition, the Relief Act imposes limitations which would
impair the ability of the Master Servicer to foreclose on an affected Mortgage
Loan during the borrower's period of active duty status. Thus, in the event
that such a Mortgage Loan goes into default, there may be delays and losses
occasioned by the inability to realize upon the Mortgaged Property in a timely
fashion.
ERISA CONSIDERATIONS
ERISA and Section 4975 of the Code impose certain requirements on employee
benefit plans and arrangements to which either ERISA or the Code applies (each
a "Plan") and on 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", which include 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 IBCA, Inc. ("Fitch")
(each, a "Rating Agency");
(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 any 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.
On July 21, 1997, the U.S. Department of Labor published in the Federal
Register an amendment to the Underwriter's Exemptions, which extends exemptive
relief to certain mortgage-backed and asset-backed securities transactions
using pre-funding accounts for trusts issuing pass-through certificates. The
amendment generally allows mortgage loans or other secured receivables (the
"Obligations") supporting payments to certificateholders,
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and having a value equal to no more than twenty-five percent (25%) of the total
principal amount of the certificates being offered by the trust, to be
transferred to the trust within a 90-day or three-month period following the
closing date (the "Pre-Funding Period"), instead of requiring that all such
Obligations be either identified or transferred on or before the Closing Date.
The relief is available when the following conditions are met:
(1) The ratio of the amount allocated to the pre-funding account to the
total principal amount of the certificates being offered (the "Pre-Funding
Limit") must not exceed twenty-five percent (25%).
(2) All Obligations transferred after the Closing Date (the "Additional
Obligations") must meet the same terms and conditions for eligibility as
the original Obligations used to create the trust, which terms and
conditions have been approved by a Rating Agency.
(3) The transfer of such Additional Obligations to the trust during the
Pre-Funding Period must not result in the certificates to be covered by the
Exemption receiving a lower credit rating from a Rating Agency upon
termination of the Pre-Funding Period than the rating that was obtained at
the time of the initial issuance of the certificates by the trust.
(4) Solely as a result of the use of pre-funding, the weighted average
annual percentage interest rate for all of the Obligations in the trust at
the end of the Pre-Funding Period must not be more than 100 basis points
lower than the average interest rate for the Obligations transferred to the
trust on the Closing Date.
(5) In order to insure that the characteristics of the Additional
Obligations are substantially similar to the original Obligations which
were transferred to the Trust Fund:
(i) the characteristics of the Additional Obligations must be monitored
by an insurer or other credit support provider that is independent of the
depositor; or
(ii) an independent accountant retained by the depositor must provide
the depositor with a letter (with copies provided to each Rating Agency
rating the certificates, the related underwriter and the related trustee)
stating whether or not the characteristics of the Additional Obligations
conform to the characteristics described in the related prospectus or
prospectus supplement and/or pooling and service agreement. In preparing
such letter, the independent accountant must use the same type of
procedures as were applicable to the Obligations transferred to the trust
as of the Closing Date.
(6) The Pre-Funding Period must end no later than three months or 90 days
after the Closing Date or earlier in certain circumstances if the
pre-funding account falls below the minimum level specified in the pooling
and servicing agreement or an Event of Default occurs.
(7) Amounts transferred to any pre-funding account and/or capitalized
interest account used in connection with the pre-funding may be invested
only in certain permitted investments ("Permitted Investments").
(8) The related prospectus or prospectus supplement must describe:
(i) any pre-funding account and/or capitalized interest account used in
connection with a pre-funding account;
(ii) the duration of the Pre-Funding Period;
(iii) the percentage and/or dollar amount of the Pre-Funding Limit for
the trust; and
(iv) that the amounts remaining in the pre-funding account at the end of
the Pre-Funding Period will be remitted to certificateholders as
repayments of principal.
(9) The related pooling and servicing agreement must describe the
Permitted Investments for the pre-funding account and/or capitalized
interest account and, if not disclosed in the related prospectus or
prospectus supplement, the terms and conditions for eligibility of
Additional Obligations.
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 CONSIDERATIONS
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
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specifically limiting the legal investment authority of any such entities with
respect to "mortgage related securities," the Certificates will constitute
legal investments for entities subject to such legislation only to the extent
provided therein. Approximately twenty-one states adopted such legislation
prior to the October 4, 1991 deadline. SMMEA provides, however, that in no
event will the enactment of any such legislation affect the validity of any
contractual commitment to purchase, hold or invest in Certificates, or require
the sale or other disposition of Certificates, so long as such contractual
commitment was made or such Certificates acquired prior to the enactment of
such legislation.
SMMEA also amended the legal investment authority of federally-chartered
depository institutions as follows: federal savings and loan associations and
federal savings banks may invest in, sell or otherwise deal in Certificates
without limitations as to the percentage of their assets represented thereby,
federal credit unions may invest in mortgage related securities, and national
banks may purchase Certificates for their own account without regard to the
limitations generally applicable to investment securities set forth in 12
U.S.C. ss.24 (Seventh), subject in each case to such regulations as the
applicable federal authority may prescribe. In this connection, federal credit
unions should review the National Credit Union Administration ("NCUA") Letter
to Credit Unions No. 96, as modified by Letter to Credit Unions No. 108, which
includes guidelines to assist federal credit unions in making investment
decisions for mortgage related securities, and the NCUA's regulation
"Investment and Deposit Activities" (12 C.F.R. Part 703), (whether or not the
class of Certificates under consideration for purchase constitutes a "mortgage
related security").
All depository institutions considering an investment in the Certificates
(whether or not the class of Certificates under consideration for purchase
constitutes a "mortgage related security") should review the Federal Financial
Institutions Examination Council's Supervisory Policy Statement on Securities
Activities (to the extent adopted by their respective regulators) (the "Policy
Statement"), setting forth, in relevant part, certain securities trading and
sales practices deemed unsuitable for an institution's investment portfolio,
and guidelines for (and restrictions on) investing in mortgage derivative
products, including "mortgage related securities" that are "high-risk mortgage
securities" as defined in the Policy Statement. According to the Policy
Statement, such "high-risk mortgage securities" include securities such as
Certificates not entitled to distributions allocated to principal or interest,
or Subordinate Certificates. Under the Policy Statement, it is the
responsibility of each depository institution to determine, prior to purchase
(and at stated intervals thereafter), whether a particular mortgage derivative
product is a "high-risk mortgage security", and whether the purchase (or
retention) of such a product would be consistent with the Policy Statement.
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 (the "REMIC Regulations"), rulings and decisions now in effect or
(with respect to regulations) proposed, all of which are subject to change
either prospectively or retroactively. This summary does not address the
federal
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income tax consequences of an investment in Certificates applicable to all
categories of investors, some of which (for example, banks and insurance
companies) may be subject to special rules. Prospective investors should
consult their tax advisors regarding the federal, state, local and any other
tax consequences to them of the purchase, ownership and disposition of
Certificates.
GENERAL
The federal income tax consequences to Certificateholders will vary
depending on whether an election is made to treat the Trust relating to a
particular Series of Certificates as a real estate mortgage investment conduit
("REMIC") under the Internal Revenue Code of 1986, as amended (the "Code"). The
Supplement for each Series of Certificates will specify whether a REMIC
election will be made.
NON-REMIC CERTIFICATES
If a REMIC election is not made, Brown & Wood LLP will deliver its opinion
that the Trust will be classified as a grantor trust under subpart E, Part I of
subchapter J of the Code. In this case, owners of Certificates will be treated
for federal income tax purposes as owners of a portion of the Trust's assets as
described below.
SINGLE CLASS OF SENIOR CERTIFICATES
CHARACTERIZATION. The Trust may be created with one class of Senior
Certificates and one class of Subordinate Certificates. In this case, each
Senior Certificateholder will be treated as the owner of a pro rata undivided
interest in the interest and principal portions of the Trust represented by
that Senior Certificate and will be considered the equitable owner of a pro
rata undivided interest in each of the Mortgage Loans in the Trust. Any amounts
received by a Senior Certificateholder in lieu of amounts due with respect to
any Mortgage Loan because of a default or delinquency in payment will be
treated for federal income tax purposes as having the same character as the
payments they replace.
Each holder of a Senior Certificate will be required to report on its
federal income tax return its pro rata share of the entire income from the
Mortgage Loans in the Trust represented by that Senior Certificate, including
interest, original issue discount, if any, prepayment fees, assumption fees,
any gain recognized upon an assumption and late payment charges received by the
Master Servicer in accordance with such Senior Certificateholder's method of
accounting. Under Code Sections 162 or 212 each Senior Certificateholder will
be entitled to deduct its pro rata share of servicing fees, prepayment fees,
assumption fees, any loss recognized upon an assumption and late payment
charges retained by the Master Servicer, provided that such amounts are
reasonable compensation for services rendered to the Trust. Senior
Certificateholders that are individuals, estates or trusts will be entitled to
deduct their share of expenses only to the extent such expenses plus all other
Code Section 212 expenses exceed two percent of its adjusted gross income. A
Senior Certificateholder using the cash method of accounting must take into
account its pro rata share of income and deductions as and when collected by or
paid to the Master Servicer. A Senior Certificateholder using an accrual method
of accounting must take into account its pro rata share of income and
deductions as they become due or are paid to the Master Servicer, whichever is
earlier. If the Master Servicing Fees paid to the Master Servicer were deemed
to exceed reasonable servicing compensation, the amount of such excess could be
considered as a retained ownership interest by the Master Servicer (or any
person to whom the Master Servicer assigned for value all or a portion of the
Master Servicing Fees) in a portion of the interest payments on the Mortgage
Loans. The Mortgage Loans may then be subject to the "coupon stripping" rules
of the Code discussed below.
Unless otherwise specified in the related Supplement, as to each series of
Certificates Brown & Wood LLP will have advised the Sponsor that:
(i) a Senior Certificate owned by a "domestic building and loan
association" within the meaning of Code Section 7701(a)(19) representing
principal and interest payments on Mortgage Loans will be considered to
represent "loans . . . secured by an interest in real property which is
. . . residential property" within the meaning of Code Section
7701(a)(19)(C)(v); provided that the real property securing the Mortgage
Loans represented by that Senior Certificate is of a type described in such
Code section;
(ii) a Senior Certificate owned by a real estate investment trust
representing an interest in Mortgage Loans will be considered to represent
"real estate assets" within the meaning of Code Section 856(c)(4)(A),
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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. 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 that such Certificateholder
acquires during the year of the election or thereafter.
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.
Recently, the IRS issued finalized regulations (the "Amortizable Bond
Premium Regulations") dealing with amortizable bond premium. These regulations
specifically do not apply to prepayable debt instruments subject to Code
Section 1272(a)(6) such as the Securities. Absent further guidance from the
IRS, the Trustee intends to account for amortizable bond premium in the manner
described above. Prospective purchasers of the Securities should consult their
tax advisors regarding the possible application of the Amortizable Bond Premium
Regulations.
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
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created when the rate produced (on the issue date) by the index formula on an
adjustable rate mortgage ("ARM") is greater than the initial interest rate
payable on the ARM. Original issue discount generally must be reported as
ordinary gross income as it accrues under a constant interest method. See
"Accrual of Original Issue Discount" under "Multiple Classes of Senior
Certificates" below.
MARKET DISCOUNT. A Senior Certificateholder that acquires an undivided
interest in Mortgage Loans may be subject to the market discount rules of Code
Sections 1276 through 1278 to the extent an undivided interest in a Mortgage
Loan is considered to have been purchased at a "market discount". Generally,
market discount is the excess of the portion of the principal amount of such
Mortgage Loan allocable to such holder's undivided interest over such holder's
tax basis in such interest. Market discount with respect to a Senior
Certificate will be considered to be zero if the amount allocable to the Senior
Certificate is less than 0.25% of the Senior Certificate's stated redemption
price at maturity multiplied by the weighted average maturity remaining after
the date of purchase. Treasury regulations implementing the market discount
rules have not yet been issued; therefore, investors should consult their own
tax advisors regarding the application of these rules and the advisability of
making any of the elections allowed under Code Sections 1276 through 1278.
The Code provides that any principal payment (whether a scheduled payment
or a prepayment) or any gain on disposition of a market discount bond acquired
by the taxpayer after October 22, 1986 shall be treated as ordinary income to
the extent that it does not exceed the accrued market discount at the time of
such payment. The amount of accrued market discount for purposes of determining
the tax treatment of subsequent principal payments or dispositions of the
market discount bond is to be reduced by the amount so treated as ordinary
income. The Code also grants the Treasury Department authority to issue
regulations providing for the computation of accrued market discount on debt
instruments, the principal of which is payable in more than one installment.
While the Treasury Department has not yet issued regulations, rules described
in the relevant legislative history will control. Under those rules, the holder
of a market discount bond may elect to accrue market discount either on the
basis of a constant interest rate or according to one of the following methods.
If a Senior Certificate is issued with original issue discount, the amount of
market discount that accrues during any accrual period would be equal to the
product of (i) the total remaining market discount, multiplied by (ii) a
fraction, the numerator of which is the original issue discount accruing during
the period and the denominator of which is the total remaining original issue
discount at the beginning of the accrual period. For Senior Certificates issued
without original issue discount, the amount of market discount that accrues
during a period is equal to the product of (i) the total remaining market
discount, multiplied by (ii) a fraction, the numerator of which is the amount
of stated interest paid during the accrual period and the denominator of which
is the total amount of stated interest remaining to be paid at the beginning of
the accrual period. For purposes of calculating market discount under any of
the above methods in the case of instruments (such as the Senior Certificates)
which provide for payments which may be accelerated by reason of prepayments of
other obligations securing such instruments, the same prepayment assumption
applicable to calculating the accrual of original issue discount will apply.
Because the regulations described above have not been issued, it is impossible
to predict what effect those regulations might have on the tax treatment of a
Senior Certificate purchased at a discount or premium in the secondary market.
A holder who acquired a Senior Certificate at a market discount also may
be required to defer, until the maturity date of such Senior Certificate or its
earlier disposition in a taxable transaction, the deduction of a portion of the
amount of interest that the holder paid or accrued during the taxable year on
indebtedness incurred or maintained to purchase or carry the Senior Certificate
in excess of the aggregate amount of interest (including original issue
discount) includible in such holder's gross income for the taxable year with
respect to such Senior Certificate. The amount of such net interest expense
deferred in a taxable year may not exceed the amount of market discount accrued
on the Senior Certificate for the days during the taxable year on which the
holder held the Senior Certificate and, in general, would be deductible when
such market discount is includible in income. The amount of any remaining
deferred deduction is to be taken into account in the taxable year in which the
Senior Certificate matures or is disposed of in a taxable transaction. In the
case of a disposition in which gain or loss is not recognized in whole or in
part, any remaining deferred deduction will be allowed to the extent of gain
recognized on the disposition. This deferral rule does not apply, if the Senior
Certificateholder elects to include such market discount in income currently as
it accrues on all market discount obligations acquired by such Senior
Certificateholder in that taxable year or thereafter.
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MULTIPLE CLASSES OF SENIOR CERTIFICATES
STRIPPED BONDS AND STRIPPED COUPONS. Pursuant to Code Section 1286, the
separation of ownership of the right to receive some or all of the interest
payments on an obligation from ownership of the right to receive some or all of
the principal payments on such obligation results in the creation of "stripped
bonds" with respect to principal payments and "stripped coupons" with respect
to interest payments. For purposes of Code Sections 1271 through 1288, Code
Section 1286 treats a stripped bond or a stripped coupon as an obligation
issued on the date that such stripped interest is purchased. If a Trust is
created with two classes of Senior Certificates, one class of Senior
Certificates will represent the right to principal and interest, or principal
only, on all or a portion of the Loans (the "Stripped Bond Certificates"),
while the second class of Senior Certificates will represent the right to some
or all of the interest on such portion (the "Stripped Coupon Certificates").
The precise tax treatment of Stripped Coupon Certificates is substantially
uncertain. The Code could be read literally to require that original issue
discount computations be made on a Loan by Loan basis. However, based on the
recent IRS guidance, it appears that a Stripped Coupon Certificate should be
treated as a single installment obligation subject to the original issue
discount rules of the Code. As a result, all payments on a Stripped Coupon
Certificate would be included in the certificate's stated redemption price at
maturity for purposes of calculating income on such certificate under the
original issue discount rules of the Code.
It is unclear under what circumstances, if any, the prepayment of Mortgage
Loans will give rise to a loss to the holder of a Stripped Bond Certificate
purchased at a premium or a Stripped Coupon Certificate. If such Certificate is
treated as a single instrument (rather than an interest in discrete mortgage
loans) and the effect of prepayments is taken into account in computing yield
with respect to such Senior Certificate, it appears that no loss may be
available as a result of any particular prepayment unless prepayments occur at
a rate faster than the assumed prepayment rate. However, if such Certificate is
treated as an interest in discrete Mortgage Loans, or if no prepayment
assumption is used, then when a Mortgage Loan is prepaid, the holder of such
Certificate should be able to recognize a loss equal to the portion of the
adjusted issue price of such Certificate that is allocable to such Mortgage
Loan.
Holders of Stripped Bond Certificates and Stripped Coupon Certificates are
urged to consult with their own tax advisors regarding the proper treatment of
these Certificates for federal income tax purposes.
TREATMENT OF CERTAIN OWNERS. Several Code sections provide beneficial
treatment to certain taxpayers that invest in mortgage loans of the type that
make up the Trust. With respect to these Code sections, no specific legal
authority exists regarding whether the character of the Senior Certificates for
federal income tax purposes, will be the same as that of the underlying
Mortgage Loans. While Code Section 1286 treats a stripped obligation as a
separate obligation for purposes of the Code provisions addressing original
issue discount, it is not clear whether such characterization would apply with
regard to these other Code sections. Although the issue is not free from doubt,
based on policy considerations, each class of Senior Certificates should be
considered to represent "real estate assets" within the meaning of Code Section
856(c)(4)(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
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below under " -- Accrual of Original Issue Discount." Owners should be aware,
however, that the OID Regulations either do not address, or are subject to
varying interpretations with regard to, several issues relevant to obligations,
such as the Mortgage Loans, which are subject to prepayment.
Under the Code, the Mortgage Loans underlying the Senior Certificates will
be treated as having been issued on the date they were originated with an
amount of OID equal to the excess of such Mortgage Loan's stated redemption
price at maturity over its issue price. The issue price of a Mortgage Loan is
generally the amount lent to the mortgagee, which may be adjusted to take into
account certain loan origination fees. The stated redemption price at maturity
of a Mortgage Loan is the sum of all payments to be made on such Mortgage Loan
other than payments that are treated as qualified stated interest payments. The
accrual of this OID, as described below under " -- Accrual of Original Issue
Discount," will, unless otherwise specified in the related Supplement, utilize
the original yield to maturity of the Senior Certificates calculated based on a
reasonable assumed prepayment rate for the mortgage loans underlying the Senior
Certificates (the "Prepayment Assumption"), and will take into account events
that occur during the calculation period. The Prepayment Assumption will be
determined in the manner prescribed by regulations that have not yet been
issued. The legislative history of the 1986 Act (the "Legislative History")
provides, however, that the regulations will require that the Prepayment
Assumption be the prepayment assumption that is used in determining the
offering price of such Certificate. No representation is made that any Senior
Certificate will prepay at the Prepayment Assumption. The prepayment assumption
provision contained in the Code literally only applies to debt instruments
collateralized by other debt instruments that are subject to prepayment rather
than direct ownership interest in such debt instruments, such as the Senior
Certificates represent. However, no other legal authority provides guidance
with regard to the proper method for accruing OID on obligations that are
subject to prepayment, and, until further guidance is issued, the Master
Servicer intends to calculate and report OID under the method described below.
ACCRUAL OF ORIGINAL ISSUE DISCOUNT. Generally, the owner of a Senior
Certificate must include in gross income the sum of the "daily portions," as
defined below, of the OID on such Senior Certificate for each day on which it
owns such Senior Certificate, including the date of purchase but excluding the
date of disposition. In the case of an original owner, the daily portions of
OID with respect to each component generally will be determined as set forth
under the OID Regulations. A calculation will be made by the Master Servicer or
such other entity specified in the related Supplement of the portion of OID
that accrues during each successive monthly accrual period (or shorter period
from the date of original issue) that ends on the day in the calendar year
corresponding to each of the Distribution Dates on the Senior Certificates (or
the day prior to each such date). This will be done, in the case of each full
month accrual period, by adding (i) the present value at the end of the accrual
period (determined by using as a discount factor the original yield to maturity
of the respective component under the Prepayment Assumption) of all remaining
payments to be received under the Prepayment Assumption on the respective
component and (ii) any payments received during such accrual period, and
subtracting from that total the "adjusted issue price" of the respective
component at the beginning of such accrual period. The adjusted issue price of
a Senior Certificate at the beginning of the first accrual period is its issue
price; the adjusted issue price of a Senior Certificate at the beginning of a
subsequent accrual period is the adjusted issue 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.
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SENIOR CERTIFICATES REPRESENTING INTERESTS IN ARM LOANS. The OID
Regulations do not address the treatment of instruments, which represent
interests in Mortgage Loans with Mortgage Rates which adjust periodically ("ARM
Loans"). Additionally, the IRS has not issued guidance under the Code's coupon
stripping rules with respect to such instruments. In the absence of any
authority, the Master Servicer will report original issue discount on Senior
Certificates attributable to ARM Loans ("Stripped ARM Obligations") to holders
in a manner it believes is consistent with the rules described above under the
heading "Senior Certificates Representing Interests in Loans Other Than ARM
Loans" and with the OID Regulations. In general, application of these rules may
require inclusion of income on a Stripped ARM Obligation in advance of the
receipt of cash attributable to such income. Further, the addition of interest
deferred by reason of negative amortization to the principal balance of an ARM
Loan may require the inclusion of such amount in the income of the
Certificateholder when such amount accrues. Furthermore, the addition of
Deferred Interest to the Certificate's principal balance will result in
additional income (including possibly original issue discount income) to the
Certificateholder and the A-2 Certificateholder over the remaining life of such
Senior Certificates. Because the treatment of Stripped ARM Obligations is
uncertain, investors are urged to consult their tax advisors regarding how
income will be includible with respect to such Certificates.
SALE OR EXCHANGE OF A SENIOR CERTIFICATE
Sale or exchange of a Senior Certificate prior to its maturity will result
in gain or loss equal to the difference, if any, between the amount received,
and the owner's adjusted basis in the Senior Certificate. Such adjusted basis
generally will equal the seller's purchase price for the Senior Certificate,
increased by the original issue discount included in the seller's gross income
with respect to the Senior Certificate, and reduced by principal payments on
the Senior Certificate previously received by the seller. Such gain or loss
will be capital gain or loss to an owner for which a Senior Certificate is a
"capital asset" within the meaning of Code Section 1221, and will generally be
long-term if the Senior Certificate was held for more than one year.
Long-term capital gains of non-corporate taxpayers are subject to reduced
maximum tax rates while capital gains recognized by non-corporate taxpayers on
assets held less than 12 months are generally subject to ordinary income tax
rates. The deductibility of capital losses is subject to limitations.
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
(other than a partnership that is not treated as a United States person under
any applicable Treasury regulations), an estate whose income is subject to U.S.
federal income tax regardless of its source of income, or a trust if a court
within the United States is able to exercise primary supervision of the
administration of the trust and one
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or more United States persons have the authority to control all substantial
decisions of the trust. Notwithstanding the preceding sentence, to the extent
provided in regulations, certain trusts in existence on August 20, 1996 and
treated as United States persons prior to such date that elect to continue to
be treated as United States persons shall be considered U.S. Persons as well.
INFORMATION REPORTING AND BACKUP WITHHOLDING
The Master Servicer will furnish or make available, within a reasonable
time after the end of each calendar year, to each Certificateholder at any time
during such year, such information as may be deemed necessary or desirable to
assist Certificateholders in preparing their federal income tax returns, or to
enable holders to make such information available to owners or other financial
intermediaries of holders that hold such Certificates as nominees. If a holder,
owner or other recipient of a payment on behalf of an owner fails to supply a
certified taxpayer identification number or if the Secretary of the Treasury
determines that such person has not reported all interest and dividend income
required to be shown on its federal income tax return, 31% backup withholding
may be required with respect to any payments. Any amounts deducted and withheld
from a distribution to a recipient would be allowed as a credit against such
recipient's federal income tax liability.
NEW WITHHOLDING REGULATIONS
On October 6, 1997, the Treasury Department issued new regulations (the
"New Regulations") which make certain modifications to the withholding, backup
withholding and information reporting rules described above. The New
Regulations attempt to unify certification requirements and modify reliance
standards. The New Regulations will generally be effective for payments made
after December 31, 1999, subject to certain transition rules. Prospective
investors are urged to consult their own tax advisors regarding the New
Regulations.
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)(4)(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).
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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)(4)(A) of the Code, (ii) "loans
secured by an interest in real property" under Section 7701(a)(19)(C) of the
Code and (iii) whether the income on such Certificates is Interest described in
Section 856(c)(3)(B) of the Code.
REGULAR CERTIFICATES
GENERAL. Except as otherwise stated in this discussion, Regular
Certificates will be treated for federal income tax purposes as debt
instruments issued by the REMIC and not as ownership interests in the REMIC or
its assets. Moreover, holders of Regular Certificates that otherwise report
income under a cash method of accounting will be required to report income with
respect to Regular Certificates under an accrual method.
ORIGINAL ISSUE DISCOUNT AND PREMIUM. The Regular Certificates may be
issued with "original issue discount" within the meaning of Code Section
1273(a). Generally, such original issue discount, if any, will equal the
difference between the "stated redemption price at maturity" of a Regular
Certificate and its "issue price." Holders of any class of Certificates issued
with original issue discount will be required to include such original issue
discount in gross income for federal income tax purposes as it accrues, in
accordance with a constant interest method based on the compounding of
interest, as it accrues rather than in accordance with receipt of the interest
payments. The following discussion is based in part on Treasury regulations
issued on January 27, 1994, as amended on June 11, 1996, under Code Sections
1271 through 1273 and 1275 (the "OID Regulations") and in part on the
provisions of the Tax Reform Act of 1986 (the "1986 Act"). The holder of a
Regular Certificate should be aware, however, that the OID Regulations do not
adequately address certain issues relevant to prepayable securities, such as
the Regular Certificates.
Rules governing original issue discount are set forth in Code Sections
1271 through 1273 and 1275. These rules require that the amount and rate of
accrual of original issue discount be calculated based on a Prepayment
Assumption and prescribe a method for adjusting the amount and rate of accrual
of such discount where the actual prepayment rate differs from the Prepayment
Assumption. Under the Code, the Prepayment Assumption must be determined in the
manner prescribed by regulations which have not yet been issued. The
Legislative History provides, however, that Congress intended the regulations
to require that the Prepayment Assumption be the prepayment assumption that is
used in determining the initial offering price of such Regular Certificates.
The Supplement for each Series of Regular Certificates will specify the
Prepayment Assumption to be used for the purpose of determining the amount and
rate of accrual of original issue discount. No representation is made that the
Regular Certificates will prepay at the Prepayment Assumption or at any other
rate.
In general, each Regular Certificate will be treated as a single
installment obligation issued with an amount of original issue discount equal
to the excess of its "stated redemption price at maturity" over its "issue
price." The issue price of a Regular Certificate is the first price at which a
substantial amount of Regular Certificates of that class are sold to the public
(excluding bond houses, brokers, underwriters or wholesalers). The issue price
of a Regular Certificate also includes the amount paid by an initial Regular
Certificateholder for accrued interest that relates to a period prior to the
issue date of the Regular Certificate. The stated redemption price at maturity
of a Regular Certificate includes the original principal amount of the Regular
Certificate, but generally will not include distributions of interest if such
distributions constitute "qualified stated interest." Under the OID
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Regulations, qualified stated interest generally means interest payable at a
single fixed rate or qualified variable rate (as described below) provided that
such interest payments are unconditionally payable at intervals of one year or
less during the entire term of the Regular Certificate. Interest is payable at
a single fixed rate only if the rate appropriately takes into account the
length of the interval between payments. Distributions of interest on Regular
Certificates with respect to which deferred interest will accrue, will not
constitute qualified stated interest payments, in which case the stated
redemption price at maturity of such Regular Certificates includes all
distributions of interest as well as principal thereon.
Where the interval between the issue date and the first Distribution Date
on a Regular Certificate is longer than the interval between subsequent
Distribution Dates, the greater of any original issue discount disregarding the
rate in the first period and any interest foregone during the first period is
treated as the amount by which the stated redemption price of the Regular
Certificate exceeds its issue price for purposes of the DE MINIMIS rule
described below. The OID Regulations suggest that all interest on a long first
period Regular Certificate that is issued with non-DE MINIMIS OID will be
treated as OID. Where the interval between the issue date and the first
Distribution Date on a Regular Certificate is shorter than the interval between
subsequent Distribution Dates, interest due on the first Distribution Date in
excess of the amount that accrued during the first period would be added to the
Certificates stated redemption price at maturity. Regular Certificateholders
should consult their own tax advisors to determine the issue price and stated
redemption price at maturity of a Regular Certificate.
Under the DE MINIMIS rule, original issue discount on a Regular
Certificate will be considered to be zero if such original issue discount is
less than 0.25% of the stated redemption price at maturity of the Regular
Certificate multiplied by the weighted average maturity of the Regular
Certificate. For this purpose, the weighted average maturity of the Regular
Certificate is computed as the sum of the amounts determined by multiplying the
number of full years (I.E., rounding down partial years) from the issue date
until each distribution in reduction of stated redemption price at maturity is
scheduled to be made by a fraction, the numerator of which is the amount of
each distribution included in the stated redemption price at maturity of the
Regular Certificate and the denominator of which is the stated redemption price
at maturity of the Regular Certificate. Although currently unclear, it appears
that the schedule of such distributions should be determined in accordance with
the assumed rate of prepayment of the Mortgage Loans and the anticipated
reinvestment rate, if any, relating to the Regular Certificates (the
"Prepayment Assumption"). The Prepayment Assumption with respect to a Series of
Regular Certificates will be set forth in the related Supplement. Holders
generally must report DE MINIMIS OID pro rata as principal payments are
received, and such income will be capital gain if the Regular Certificate is
held as a capital asset.
Generally, a Regular Certificateholder must include in gross income the
"daily portions," as determined below, of the original issue discount that
accrues on a Regular Certificate for each day the Regular Certificateholder
holds the Regular Certificate, including the purchase date but excluding the
disposition date. In the case of an original holder of a Regular Certificate, a
calculation will be made of the portion of the original issue discount that
accrues during each successive period (an "accrual period") that ends on the
day in the calendar year corresponding to a Distribution Date (or if
Distribution Dates are on the first day or first business day of the
immediately preceding month, interest may be treated as payable on the last day
of the immediately preceding month) and begins on the day after the end of the
immediately preceding accrual period (or on the issue date in the case of the
first accrual period). This will be done, in the case of each full accrual
period, by (i) adding (a) the present value at the end of the accrual period
(determined by using as a discount factor the original yield to maturity of the
Regular Certificates as calculated under the Prepayment Assumption) of all
remaining payments to be received on the Regular Certificate under the
Prepayment Assumption, and (b) any payments included in the stated redemption
price at maturity received during such accrual period, and (ii) subtracting
from that total the "adjusted issue price" of the Regular Certificates at the
beginning of such accrual period. The "adjusted issue price" of a Regular
Certificate at the beginning of the first accrual period is its issue price;
the "adjusted issue price" of a Regular Certificate at the beginning of a
subsequent accrual period is the "adjusted issue price" at the beginning of the
immediately preceding accrual period plus the amount of original issue discount
allocable to that accrual period and reduced by the amount of any payment other
than a payment of qualified stated interest made at the end of or during that
accrual period. The original issue discount accrued during an accrual period
will then be divided by the number of days in the period to determine the daily
portion of original issue discount for each day in the accrual period. The
calculation of original issue discount under the method described above will
cause the accrual of original issue discount to either increase or decrease
(but never below zero) in a given accrual
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period to reflect the fact that prepayments are occurring faster or slower than
under the Prepayment Assumption. With respect to an initial accrual period
shorter than a full accrual period the daily portions of original issue
discount must be determined according to an appropriate allocation under any
reasonable method.
A subsequent purchaser of a Regular Certificate issued with original issue
discount who purchases the Regular Certificate at a cost less than the
remaining stated redemption price at maturity will also be required to include
in gross income the sum of the daily portions of original issue discount on
that Regular Certificate. In computing the daily portions of original issue
discount for such a purchaser (as well as an initial purchaser that purchases
at a price higher than the adjusted issue price but less than the stated
redemption price at maturity), however, the daily portion is reduced by the
amount that would be the daily portion for such day (computed in accordance
with the rules set forth above) multiplied by a fraction, the numerator of
which is the amount, if any, by which the price paid by such holder for that
Regular Certificate exceeds the following amount: (a) the sum of the issue
price plus the aggregate amount of original issue discount that would have been
includible in the gross income of an original Regular Certificateholder (who
purchased the Regular Certificate at its issue price), (b) less any prior
payments included in the stated redemption price at maturity, and the
denominator of which is the sum of the daily portions for that Regular
Certificate for all days beginning on the date after the purchase date and
ending on the maturity date computed under the Prepayment Assumption. A holder
who pays an acquisition premium instead may elect to accrue OID by treating the
purchase as a purchase of original issue.
The IRS has issued 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,
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based on a constant yield method for Certificates acquired on or after April 4,
1994. If such an election were to be made with respect to a Regular Certificate
with market discount, the Certificateholder would be deemed to have made an
election to include in income currently market discount with respect to all
other debt instruments having market discount that such Certificateholder
acquires during the year of the election or thereafter. Similarly, a
Certificateholder that makes this election for a Certificate that is acquired
at a premium will be deemed to have made an election to amortize bond premium
with respect to all debt instruments having amortizable bond premium with that
such Certificateholder owns or acquires. See " -- Regular Certificates --
Premium" herein. The election to accrue interest, discount and premium on a
constant yield method with respect to a Certificate cannot be revoked without
the consent of the IRS.
MARKET DISCOUNT. A purchaser of a Regular Certificate also may be subject
to the market discount provisions of Code Sections 1276 through 1278. Under
these provisions and the OID Regulations "market discount" equals the excess,
if any, of (i) the Regular Certificate's stated principal amount or, in the
case of a Regular Certificate with original issue discount, the adjusted issue
price (determined for this purpose as if the purchaser had purchased such
Regular Certificate from an original holder) over (ii) the price for such
Regular Certificate paid by the purchaser. A Certificateholder that purchases a
REMIC Regular Certificate at a market discount, will recognize gain upon
receipt of each distribution representing stated redemption price. In
particular, under Section 1276 of the Code such a holder generally will be
required to allocate each such principal distribution first to accrued market
discount not previously included in income, and to recognize ordinary income to
that extent. A Certificateholder may elect to include market discount in income
currently as it accrues rather than including it on a deferred basis in
accordance with the foregoing. If made, such election will apply to all market
discount bonds acquired by such Certificateholder on or after the first day of
the first taxable year to which such election applies. In addition, the OID
Regulations permit a Certificateholder using either the accrual or cash method
of accounting to elect to accrue all interest, discount (including DE MINIMIS
market or original issue discount) and premium in income as interest, based on
a constant yield method. If such an election were made with respect to a REMIC
Regular Certificate with market discount, the Certificateholder would be deemed
to have made an election to include in income currently market discount with
respect to all other debt instruments having market discount that such
Certificateholder acquires during the year of the election or thereafter.
Similarly, a Certificateholder that makes this election for a Certificate that
is acquired at a premium is deemed to have made an election to amortize bond
premium with respect to all debt instruments having amortizable bond premium
that such Certificateholder owns or acquires. See "Taxation of Regular
Certificates -- Premium". The election to accrue interest, discount and premium
on a constant yield method with respect to a Certificate is irrevocable.
Market discount with respect to a Regular Certificate will be considered
to be zero if the amount allocable to the Regular Certificate is less than
0.25% of the Regular Certificate's stated redemption price at maturity
multiplied by the Regular Certificate's weighted average maturity remaining
after the date of purchase. If market discount on a Regular Certificate is
considered to be zero under this rule, the actual amount of market discount
must be allocated to the remaining principal payments on the Regular
Certificate and gain equal to such allocated amount will be recognized when the
corresponding principal payment is made. Treasury regulations implementing the
market discount rules have not yet been issued; therefore, investors should
consult their own tax advisors regarding the application of these rules and the
advisability of making any of the elections allowed under Code Sections 1276
through 1278.
The Code provides that any principal payment (whether a scheduled payment
or a prepayment) or any gain on disposition of a market discount bond acquired
by the taxpayer after October 22, 1986, shall be treated as ordinary income to
the extent that it does not exceed the accrued market discount at the time of
such payment. The amount of accrued market discount for purposes of determining
the tax treatment of subsequent principal payments or dispositions of the
market discount bond is to be reduced by the amount so treated as ordinary
income.
The Code also grants authority to the Treasury Department to issue
regulations providing for the computation of accrued market discount on debt
instruments, the principal of which is payable in more than one installment.
Until such time as regulations are issued by the Treasury, rules described in
the Legislative History will apply. Under those rules, the holder of a market
discount bond may elect to accrue market discount either on the basis of a
constant interest rate or according to one of the following methods. For
Regular Certificates issued with original issue discount, the amount of market
discount that accrues during a period is equal to the product of (i) the total
remaining market discount, multiplied by (ii) a fraction, the numerator of
which is the original
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issue discount accruing during the period and the denominator of which is the
total remaining original issue discount at the beginning of the period. For
Regular Certificates issued without original issue discount, the amount of
market discount that accrues during a period is equal to the product of (i) the
total remaining market discount, multiplied by (ii) a fraction, the numerator
of which is the amount of stated interest paid during the accrual period and
the denominator of which is the total amount of stated interest remaining to be
paid at the beginning of the period. For purposes of calculating market
discount under any of the above methods in the case of instruments (such as the
Regular Certificates) which provide for payments which may be accelerated by
reason of prepayments of other obligations securing such instruments, the same
Prepayment Assumption applicable to calculating the accrual of original issue
discount will apply.
A holder of a Regular Certificate who acquires such Regular Certificate at
a market discount also may be required to defer, until the maturity date of
such Regular Certificate or its earlier disposition in a taxable transaction,
the deduction of a portion of the amount of interest that the holder paid or
accrued during the taxable year on indebtedness incurred or maintained to
purchase or carry the Regular Certificate in excess of the aggregate amount of
interest (including original issue discount) includible in such holder's gross
income for the taxable year with respect to such Regular Certificate. The
amount of such net interest expense deferred in a taxable year may not exceed
the amount of market discount accrued on the Regular Certificate for the days
during the taxable year on which the holder held the Regular Certificate and,
in general, would be deductible when such market discount is includible in
income. The amount of any remaining deferred deduction is to be taken into
account in the taxable year in which the Regular Certificate matures or is
disposed of in a taxable transaction. In the case of a disposition in which
gain or loss is not recognized in whole or in part any remaining deferred
deduction will be allowed to the extent of gain recognized on the disposition.
This deferral rule does not apply if the Regular Certificateholder elects to
include such market discount in income currently as it accrues on all market
discount obligations acquired by such Regular Certificateholder in that taxable
year or thereafter.
PREMIUM. A purchaser of a Regular Certificate who purchases the Regular
Certificate at a cost (not including accrued qualified stated interest) greater
than its remaining stated redemption price at maturity will be considered to
have purchased the Regular Certificate at a premium, and may elect to amortize
such premium under a constant yield method. It is not clear whether the
Prepayment Assumption would be taken into account in determining the life of
the Regular Certificate for this purpose. The Amortizable Bond Premium
Regulations described above specifically do not apply to prepayable debt
instruments subject to Code Section 1272(a)(6) such as the Regular
Certificates. Absent further guidance from the IRS, the Trustee intends to
account for amortizable bond premium in the manner described herein. However,
the Legislative History states that the same rules that apply to accrual of
market discount (which rules require use of a Prepayment Assumption in accruing
market discount with respect to Regular Certificates without regard to whether
such Certificates have original issue discount) will also apply in amortizing
bond premium under Code Section 171. The Code provides that amortizable bond
premium will be allocated among the interest payments on such Regular
Certificates and will be applied as an offset against such interest payment.
Prospective purchasers of the Regular Certificates should consult their tax
advisors regarding the possible application of the Amortizable Bond Premium
Regulations.
Recently, the IRS issued finalized regulations (the "Amortizable Bond
Premium Regulations") dealing with amortizable bond premium. These regulations
specifically do not apply to prepayable debt instruments subject to Code
Section 1272(a)(6) such as the Securities. Absent further guidance from the
IRS, the Trustee intends to account for amortizable bond premium in the manner
described above. Prospective purchasers of the Securities 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.
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ACCRUED INTEREST CERTIFICATES. Certain of the Regular Certificates
("Payment Lag Certificates") may provide for payments of interest based on a
period that corresponds to the interval between Distribution Dates but that
ends prior to each such Distribution Date. The period between the Closing Date
for Payment Lag Certificates and their first Distribution Date may or may not
exceed such interval. Purchasers of Payment Lag Certificates for which the
period between the Closing Date and the first Distribution Date does not exceed
such interval could pay upon purchase of the Regular Certificates accrued
interest in excess of the accrued interest that would be paid if the interest
paid on the Distribution Date were interest accrued from Distribution Date to
Distribution Date. If a portion of the initial purchase price of a Regular
Certificate is allocable to interest that has accrued prior to the issue date
("pre-issuance accrued interest") and the Regular Certificate provides for a
payment of stated interest on the first payment date, within one year of the
issue date, that equals or exceeds the amount of the pre-issuance accrued
interest, then the Regular Certificates issue price may be computed by
subtracting from the issue price the amount of pre-issuance accrued interest,
rather than as an amount payable on the Regular Certificate. However, it is
unclear under this method how the OID Regulations treat interest on Payment Lag
Certificates as described above. Therefore, in the case of a Payment Lag
Certificate, the REMIC intends to include accrued interest in the issue price
and report interest payments made on the first Distribution Date as interest to
the extent such payments represent interest for the number of days which the
Certificateholder has held such Payment Lag Certificate during the first
Accrual Period.
SALE, EXCHANGE OR REDEMPTION OF REGULAR CERTIFICATES. If a Regular
Certificate is sold, exchanged, redeemed or retired, the seller will recognize
gain or loss equal to the difference between the amount realized on the sale,
exchange or redemption and the seller's adjusted basis in the Regular
Certificate. Such adjusted basis generally will equal the cost of the Regular
Certificate to the seller, increased by any original issue discount and market
discount included in the seller's gross income with respect to the Regular
Certificate, and reduced (but not below zero) by payments included in the
stated redemption price at maturity previously received by the seller and by
any amortized premium. Similarly, a holder who receives a payment which is part
of the stated redemption price at maturity of a Regular Certificate will
recognize gain equal to the excess, if any, of the amount of the payment over
his adjusted basis in the Regular Certificate. A holder of a Regular
Certificate who receives a final payment which is less than his adjusted basis
in the Regular Certificate will generally recognize a loss. Except as provided
in the following paragraph and as provided under "Market Discount" below, any
such gain or loss will be capital gain or loss, provided that the Regular
Certificate is held as a "capital asset" (generally, property held for
investment) within the meaning of Code Section 1221 and will generally be
long-term capital if the Regular Certificate was held for more than one year.
Long-term capital gains of non-corporate taxpayers are subject to reduced
maximum tax rates while capital gains recognized by non-corporate taxpayers on
assets held less than 12 months are generally subject to ordinary income tax
rates. The deductibility of capital losses is subject to limitations.
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.
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Because exact computation of the accrual of market discount on a constant yield
method would require information relating to the holder's purchase price which
the REMIC may not have, it appears that this provision will only require
information pertaining to the appropriate proportionate method of accruing
market discount.
REMIC EXPENSES. As a general rule, all of the expenses of a REMIC will be
taken into account by holders of the Residual Interests. In the case of a
"single class REMIC", however, the expenses and a matching amount of additional
income will be allocated, under temporary Treasury regulations, among the
holders of the Regular Certificates and the holders of the Residual Interests
on a daily basis in proportion to the relative amounts of income accruing to
each Certificateholder on that day. In the case of individuals (or trusts,
estates, or other persons who compute their income in the same manner as
individuals) who own an interest in a Regular Certificate directly or through a
pass-through entity which is required to pass miscellaneous itemized deductions
through to its owners or beneficiaries (E.G. a partnership, an S corporation,
or a grantor trust), such expenses will be deductible only to the extent that
such expenses, plus other "miscellaneous itemized deductions" of the
individual, exceed 2% of such individual's adjusted gross income. In addition,
the personal exemptions and itemized deductions of individuals with adjusted
gross incomes above particular levels are subject to certain limitations which
reduce or eliminate the benefit of such items. The reduction or disallowance of
this deduction coupled with the allocation of additional income may have a
significant impact on the yield of the Regular Certificate to such a Holder.
Further, holders (other than corporations) subject to the alternative minimum
tax may not deduct miscellaneous itemized deductions in determining such
holders' alternative minimum taxable income. In general terms, a single class
REMIC is one that either (i) would qualify, under existing Treasury
regulations, as a grantor trust if it were not a REMIC (treating all interests
as ownership interests, even if they would be classified as debt for federal
income tax purposes) or (ii) is similar to such a trust and is structured with
the principal purpose of avoiding the single class REMIC rules. Unless
otherwise stated in the related Supplement, the expenses of the REMIC will be
allocated to holders of the related Residual Interests in their entirety and
not to holders of the related Regular Certificates.
NON-U.S. PERSONS. Generally, payments of interest (including any payment
with respect to accrued original issue discount) on the Regular Certificates to
a Regular Certificateholder who is a non-U.S. Person not engaged in a trade or
business within the United States, will not be subject to federal withholding
tax if (i) such Regular Certificateholder does not actually or constructively
own 10 percent or more of the combined voting power of all classes of equity in
the issuer (which for purposes of this discussion may be defined as the Trust
or the beneficial owners of the related Residual Certificates (the "Issuer"));
(ii) such Regular Certificateholder is not a controlled foreign corporation
(within the meaning of Code Section 957) related to the Issuer; and (iii) such
Regular Certificateholder complies with certain identification requirements
(including delivery of a statement, signed by the Regular Certificateholder
under penalties of perjury, certifying that such Regular Certificateholder is a
foreign person and providing the name and address of such Regular
Certificateholder). If a Regular Certificateholder is not exempt from
withholding, distributions of interest, including distributions in respect of
accrued original issue discount, such holder may be subject to a 30%
withholding tax, subject to reduction under any applicable tax treaty.
Regular Certificateholders who are non-U.S. Persons and persons related to
such holders should not acquire any Residual Certificates, and Residual
Certificateholders and persons related to Residual Certificateholders should
not acquire any Regular Certificates without consulting their tax advisors as
to the possible adverse tax consequences of such acquisition.
INFORMATION REPORTING AND BACKUP WITHHOLDING. The Master Servicer will
furnish or make available, within a reasonable time after the end of each
calendar year, to each Regular Certificateholder at any time during such year,
such information as may be deemed necessary or desirable to assist Regular
Certificateholders in preparing their federal income tax returns, or to enable
holders to make such information available to owners or other financial
intermediaries of holders that hold such Regular Certificates as nominees. If a
holder, owner or other recipient of a payment on behalf of an owner fails to
supply a certified taxpayer identification number or if the Secretary of the
Treasury determines that such person has not reported all interest and dividend
income required to be shown on its federal income tax return, 31% backup
withholding may be required with respect to any payments.
Any amounts deducted and withheld from a distribution to a recipient would
be allowed as a credit against such recipient's federal income tax liability.
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NEW WITHHOLDING REGULATIONS. On October 6, 1997, the Treasury Department
issued new regulations (the "New Regulations") which make certain modifications
to the withholding, backup withholding and information reporting rules
described above. The New Regulations attempt to unify certification
requirements and modify reliance standards. The New Regulations will generally
be effective for payments made after December 31, 1999, subject to certain
transition rules. Prospective investors are urged to consult their own tax
advisors regarding the New Regulations.
RESIDUAL CERTIFICATES
ALLOCATION OF THE INCOME OF THE REMIC TO THE RESIDUAL CERTIFICATES. The
REMIC will not be subject to federal income tax except with respect to income
from prohibited transactions and certain other transactions. See "Prohibited
Transactions and Other Taxes" herein. Instead, each original holder of a
Residual Certificate will report on its federal income tax return, as ordinary
income, its share of the taxable income of the REMIC for each day during the
taxable year on which such holder owns any Residual Certificates. The taxable
income of the REMIC for each day will be determined by allocating the taxable
income of the REMIC for each calendar quarter ratably to each day in the
quarter. Such a holder's share of the taxable income of the REMIC for each day,
will be based on the portion of the outstanding Residual Certificates that such
holder owns on that day. The taxable income of the REMIC will be determined
under an accrual method and will be taxable to the Residual Certificateholders
without regard to the timing or amounts of cash distributions by the REMIC.
Ordinary income derived from Residual Certificates will be "portfolio income"
for purposes of the taxation of taxpayers subject to the limitations on the
deductibility of "passive losses." As residual interests, the Residual
Certificates will be subject to tax rules, described below, that differ from
those that would apply if the Residual Certificates were treated for federal
income tax purposes as direct ownership interests in the Certificates, or as
debt instruments issued by the REMIC.
A Residual Certificateholder may be required to include taxable income
from the Residual Certificate in excess of the cash distributed. For example, a
structure where principal distributions are made serially on regular interests
(that is, a fast-pay, slow-pay structure) may generate such a mismatching of
income and cash distributions (that is, "phantom income"). This mismatching may
be caused by the use of certain required tax accounting methods by the REMIC,
variations in the prepayment rate of the underlying Mortgage Loans and certain
other factors. Depending upon the structure of a particular transaction, the
aforementioned factors may significantly reduce the after-tax yield of a
Residual Certificate to a Residual Certificateholder. Investors should consult
their own tax advisors concerning the federal income tax treatment of a
Residual Certificate and the impact of such tax treatment on the after-tax
yield of a Residual Certificate.
A subsequent Residual Certificateholder also will report on its federal
income tax return amounts representing a daily share of the taxable income of
the REMIC for each day that such Residual Certificateholder owns such Residual
Certificate. Those daily amounts generally would equal the amounts that would
have been reported for the same days by an original Residual Certificateholder,
as described above. The Legislative History indicates that certain adjustments
may be appropriate to reduce (or increase) the income of a subsequent holder of
a Residual Certificate that purchased such Residual Certificate at a price
greater than (or less than) the adjusted basis (see "Sales of Residual
Certificates" below) such Residual Certificate would have in the hands of an
original Residual Certificateholder. It is not clear, however, whether such
adjustments will in fact be permitted or required and, if so, how they would be
made.
TAXABLE INCOME OF THE REMIC ATTRIBUTABLE TO RESIDUAL INTERESTS. The
taxable income of the REMIC will reflect a netting of (i) the income from the
Mortgage Loans and the REMIC's other assets, and (ii) the deductions allowed to
the REMIC for interest and original issue discount on the Regular Certificates
and, except as described below under "Non-Interest Expenses of the REMIC,"
other expenses.
For purposes of determining its taxable income, the REMIC will have an
initial aggregate tax basis in its assets equal to the sum of the issue prices
of the Regular and Residual Certificates (or, if a class of Certificates is not
sold initially, their fair market values). Such aggregate basis will be
allocated among the Mortgage Loans and other assets of the REMIC in proportion
to their respective fair market values. A Mortgage Loan will be deemed to have
been acquired with discount or premium to the extent that the REMIC's basis
therein is less than or greater than its principal balance, respectively. Any
such discount (whether market discount or original issue discount) will be
includible in the income of the REMIC as it accrues, in advance of receipt of
the cash
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attributable to such income, under a method similar to the method described
above for accruing original issue discount on the Regular Certificates. The
REMIC expects to elect under Code Section 171 to amortize any premium on the
Mortgage Loans. Premium on any Mortgage Loan to which such election applies
would be amortized under a constant yield method. It is not clear whether the
yield of a Mortgage Loan would be calculated for this purpose based on
scheduled payments or taking account of the Prepayment Assumption.
Additionally, such an election would not apply to any Mortgage Loan originated
on or before September 27, 1985. Instead, premium on such a Mortgage Loan would
be allocated among the principal payments thereon and would be deductible by
the REMIC as those payments become due.
The REMIC will be allowed a deduction for interest and original issue
discount on the Regular Certificates. The amount and method of accrual of
original issue discount will be calculated for this purpose in the same manner
as described above with respect to Regular Certificates (except that the 0.25%
per annum DE MINIMIS rule and adjustments for subsequent holders described
therein will not apply).
A Residual Certificateholder will not be permitted to amortize the cost of
the Residual Certificate as an offset to its share of the REMIC's taxable
income. However, that taxable income will not include cash received by the
REMIC that represents a recovery of the REMIC's basis in its assets, and, as
described above, the issue price of the Residual Certificates will be added to
the issue price of the Regular Certificates in determining the REMIC's initial
basis in its assets. See "Sales of Residual Certificates" herein. For a
discussion of possible adjustments to income of a subsequent holder of a
Residual Certificate to reflect any difference between the actual cost of such
Residual Certificate to such holder and the adjusted basis such Residual
Certificate would have in the hands of an original Residual Certificateholder,
see "Allocation of the Income of the REMIC to the Residual Certificates" above.
NET LOSSES OF THE REMIC. The REMIC will have a net loss for any calendar
quarter in which its deductions exceed its gross income. Such net loss would be
allocated among the Residual Certificateholders in the same manner as the
REMIC's taxable income. The net loss allocable to any Residual Certificate will
not be deductible by the holder to the extent that such net loss exceeds such
holder's adjusted basis in such Residual Certificate. Any net loss that is not
currently deductible by reason of this limitation may be used by such Residual
Certificateholder to offset its share of the REMIC's taxable income in future
periods (but not otherwise). The ability of Residual Certificateholders that
are individuals or closely held corporations to deduct net losses may be
subject to additional limitations under the Code.
NON-INTEREST EXPENSES OF THE REMIC. As a general rule, the REMIC's taxable
income will be determined in the same manner as if the REMIC were an
individual. However, all or a portion of the REMIC's servicing, administrative
and other non-interest expenses will be allocated as a separate item to
Residual Certificateholders that are "pass-through interest holders." Such a
holder would be required to add its allocable share, if any, of such expenses
to its gross income and to treat the same amount as an item of investment
expense. An individual would generally be allowed a deduction for such an
expense item only as a miscellaneous itemized deduction subject to the
limitations under Code Section 67. That section allows such deduction only to
the extent that in the aggregate all such expenses exceed two percent of an
individual's adjusted gross income. The REMIC is required to report to each
pass-through interest holder and to the IRS such holder's allocable share, if
any, of the REMIC's non-interest expenses. The term "pass-through interest
holder" generally refers to individuals, entities taxed as individuals and
certain pass-through entities, but does not include real estate investment
trusts. Residual Certificateholders that are "pass-through interest holders"
should consult their own tax advisors about the impact of these rules on an
investment in the Residual Certificates. See "Non-Interest Expenses of the
REMIC" under "Regular Certificates" above.
DEFERRED INTEREST. Any Deferred Interest that accrues with respect to any
ARM Loans held by the REMIC will constitute income to the REMIC and will be
treated in a manner similar to the Deferred Interest that accrues with respect
to Regular Certificates as described above under "Regular Certificates --
Deferred Interest."
EXCESS INCLUSIONS. A portion of the income on a Residual Certificate
(referred to in the Code as an "excess inclusion") for any calendar quarter
will be subject to federal income tax in all events. Thus, for example, an
excess inclusion (i) may not be offset by any unrelated losses or loss
carryovers of a Residual Certificateholder; (ii) will be treated as "unrelated
business taxable income" within the meaning of Code Section 512 if the Residual
Certificateholder is a pension fund or any other organization that is subject
to tax only on its unrelated business taxable income (see "Tax-Exempt
Investors" below); and (iii) is not eligible for any reduction in the rate of
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withholding tax in the case of a Residual Certificateholder that is a foreign
investor. See "Non-U.S. Persons" below. The exception for thrift institutions
is available only to the institution holding the Residual Certificate, and not
to any affiliate of the institution, unless the affiliate is a subsidiary all
the stock of which, and substantially all the indebtedness of which, is held by
the institution, and which is organized and operated exclusively in connection
with the organization and operation of one or more REMICs.
With respect to any Residual Certificateholder, the excess inclusion for
any calendar quarter is the excess, if any, of (i) the income of such Residual
Certificateholder for that calendar quarter from its Residual Certificate over
(ii) the sum of the "daily accruals" (as defined below) for all days during the
calendar quarter on which the Residual Certificateholder holds such Residual
Certificate. For this purpose, the daily accruals with respect to a Residual
Certificate are determined by allocating to each day in the calendar quarter
its ratable portion of the product of the "adjusted issue price" (as defined
below) of the Residual Certificate at the beginning of the calendar quarter and
120 percent of the "Federal long-term rate" in effect at the time the Residual
Certificate is issued. For this purpose, the "adjusted issue price" of a
Residual Certificate at the beginning of any calendar quarter equals the issue
price of the Residual Certificate, increased by the amount of daily accruals
for all prior quarters, and decreased (but not below zero) by the aggregate
amount of payments made on the Residual Certificate before the beginning of
such quarter. The "Federal long-term rate" is an average of current yields on
Treasury securities with a remaining term of greater than nine years, computed
and published monthly by the IRS.
The Small Business Job Protection Act of 1996 has eliminated the special
rule permitting Section 593 institutions ("thrift institutions") to use net
operating losses and other allowable deductions to offset their excess
inclusion income from REMIC residual certificates that have "significant value"
within the meaning of the REMIC Regulations, effective for taxable years
beginning after December 31, 1995, except with respect to residual certificates
continuously held by a thrift institution since November 1, 1995.
In addition, the Small Business Job Protection Act of 1996 provides three
rules for determining the effect on excess inclusions on the alternative
minimum taxable income of a residual holder. First, alternative minimum taxable
income for such residual holder is determined without regard to the special
rule that taxable income cannot be less than excess inclusions. Second, a
residual holder's alternative minimum taxable income for a tax year cannot be
less than the excess inclusions for the year. Third, the amount of any
alternative minimum tax net operating loss deductions must be computed without
regard to any excess inclusions. These rules are effective for tax years
beginning after December 31, 1986, unless a residual holder elects to have such
rules apply only to tax years beginning after August 20, 1996.
In the case of any Residual Certificates held by a real estate investment
trust, the aggregate excess inclusions with respect to such Residual
Certificates, reduced (but not below zero) by the real estate investment trust
taxable income (within the meaning of Code Section 857(b)(2), excluding any net
capital gain), will be allocated among the shareholders of such trust in
proportion to the dividends received by such shareholders from such trust, and
any amount so allocated will be treated as an excess inclusion with respect to
a Residual Certificate as if held directly by such shareholder. Regulated
investment companies, common trust funds, and certain cooperatives are subject
to similar rules.
PAYMENTS. Any payment made on a Residual Certificate to a Residual
Certificateholder will be treated as a non-taxable return of capital to the
extent it does not exceed the Residual Certificateholder's adjusted basis in
such Residual Certificate. To the extent a distribution exceeds such adjusted
basis, it will be treated as gain from the sale of the Residual Certificate.
SALE OR EXCHANGE OF RESIDUAL CERTIFICATES. If a Residual Certificate is
sold or exchanged, the seller will generally recognize gain or loss equal to
the difference between the amount realized on the sale or exchange and its
adjusted basis in the Residual Certificate (except that the recognition of loss
may be limited under the "wash sale" rules described below). A holder's
adjusted basis in a Residual Certificate generally equals the cost of such
Residual Certificate to such Residual Certificateholder, increased by the
taxable income of the REMIC that was included in the income of such Residual
Certificateholder with respect to such Residual Certificate, and decreased (but
not below zero) by the net losses that have been allowed as deductions to such
Residual Certificateholder with respect to such Residual Certificate and by the
distributions received thereon by such Residual Certificateholder.
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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 final regulations under Code
Section 475 (the "Mark-to-Market Regulations") which provide that any REMIC
Residual Certificate acquired after January 3, 1995 cannot be marked to market.
PROHIBITED TRANSACTIONS AND OTHER TAXES
The REMIC is subject to a tax at a rate equal to 100 percent of the net
income derived from "prohibited transactions." In general, a prohibited
transaction means the disposition of a Mortgage Loan other than pursuant to
certain specified exceptions, the receipt of investment income from a source
other than a Mortgage Loan or certain other permitted investments, or the
disposition of an asset representing a temporary investment of payments on the
Mortgage Loans pending payment on the Residual Certificates or Regular
Certificates. In addition, the assumption of a Mortgage Loan by a subsequent
purchaser could cause the REMIC to recognize gain, which would also be subject
to the 100 percent tax on prohibited transactions.
In addition, certain contributions to a REMIC made after the Closing Date
could result in the imposition of a tax on the REMIC equal to 100% of the value
of the contributed property.
It is not anticipated that the REMIC will engage in any prohibited
transactions or receive any contributions subject to the contributions tax.
However, in the event that the REMIC is subject to any such tax, unless
otherwise disclosed in the related Supplement, such tax would be borne first by
the Trustee, the Master Servicer, the Sponsor or the Seller, as applicable, if
such tax results from a breach of such party's obligations under the Pooling
Agreement, and then by the Residual Certificateholders.
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
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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.
The Treasury Department has issued final regulations concerning certain
aspects of REMIC tax administration. Under those regulations, a Residual
Certificateholder must be designated as the REMIC "tax matters person." The tax
matters person, generally, has responsibility for overseeing and providing
notice to the other Residual Certificateholders of certain administrative and
judicial proceedings regarding the REMIC's tax affairs. Unless otherwise
indicated in the related Prospectus Supplement, the Sponsor will be designated
as tax matters person for each REMIC, and in conjunction with the Trustee will
act as the agent of the Residual Certificateholders in the preparation and
filing of the REMIC's federal and state income tax and other information
returns.
Each Residual Certificateholder is required to treat items on its return
consistently with their treatment on the REMIC's return, unless the Residual
Certificateholder either files a statement identifying the inconsistency or
establishes that the inconsistency resulted from incorrect information received
from the REMIC. The IRS may assert a deficiency resulting from a failure to
comply with the consistency requirement without instituting an administrative
proceeding at the REMIC level. The REMIC does not intend to register as a tax
shelter pursuant to Code Section 6111 because it is not anticipated that the
REMIC will have a net loss for any of the first five taxable years of its
existence. Any person that holds a Residual Certificate as a nominee for
another person may be required to furnish the REMIC, in a manner to be provided
in Treasury regulations, with the name and address of such person and other
information.
TAX-EXEMPT INVESTORS
Any Residual Certificateholder that is a pension fund or other entity that
is subject to federal income taxation only on its "unrelated business taxable
income" within the meaning of Code Section 512 will be subject to such tax on
that portion of the distributions received on a Residual Certificate that is
considered an "excess inclusion." See "Excess Inclusions" herein.
NON-U.S. PERSONS
NON-U.S. PERSONS. Amounts paid to Residual Certificateholders who are not
U.S. Persons (see "Regular Certificates -- Non-U.S. Persons") are treated as
interest for purposes of the 30% (or lower treaty rate) United States
withholding tax. Amounts distributed to Residual Holders should qualify as
"portfolio interest," subject to the conditions described in "Regular
Certificates" above, but only to the extent that the Mortgage Loans were
originated after July 18,1984. Furthermore, the rate of withholding on any
income on a Residual Certificate that is an excess inclusion will not be
subject to reduction under any applicable tax treaties. See "Residual
Certificates -- Excess Inclusions." If the portfolio interest exemption is
unavailable, such amount will be subject to United States withholding tax when
paid or otherwise distributed (or when the Residual Certificate is disposed of)
under rules similar to those for withholding upon disposition of debt
instruments that have original issue discount. The Code, however, grants the
Treasury Department authority to issue regulations requiring that those amounts
be taken into account earlier than otherwise provided where necessary to
prevent avoidance of tax (for example, where the Residual Certificates do not
have significant value). See "Residual Certificates -- Excess Inclusions." If
the amounts paid to Residual Certificateholders that are not U.S. persons are
effectively connected with their conduct of a trade or business within the
United States, the 30% (or lower treaty rate) withholding will not apply.
Instead, the amounts paid to such non-U.S. Person will be subject to U.S.
federal income taxation at regular graduated rates.
For this purpose, a "U.S. Person" includes a citizen or resident of the
United States, a corporation, partnership or other entity created or organized
under the laws of the United States or any political subdivision thereof (other
than a partnership that is not treated as a United States person under any
applicable Treasury regulations), 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 persons have the authority to control all substantial
decisions of the trust. Notwithstanding the preceding sentence, to the extent
provided in regulations, certain trusts in existence
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<PAGE>
on August 20, 1996 and treated as United States persons prior to such date that
elect to continue to be so treated also shall be considered U.S. Persons.
Regular Certificateholders and persons related to such holders should not
acquire any Residual Certificates, and Residual Certificateholders and persons
related to Residual Certificateholders should not acquire any Regular
Certificates without consulting their tax advisors as to the possible adverse
tax consequences of doing so.
TAX-RELATED RESTRICTIONS ON TRANSFER
An entity may not qualify as a REMIC unless there are reasonable
arrangements designed to ensure that residual interests in such entity are not
held by "disqualified organizations" (as defined below). Further, a tax is
imposed on the transfer of a residual interest in a REMIC to a "disqualified
organization." The amount of the tax equals the product of (A) an amount (as
determined under regulations) equal to the present value of the total
anticipated "excess inclusions" with respect to such interest for periods after
the transfer, and (B) the highest marginal federal income tax rate applicable
to corporations. The tax is imposed on the transferor unless the transfer is
through an agent (including a broker or other middlemen) for a disqualified
organization, in which event the tax is imposed on the agent. The person
otherwise liable for the tax shall be relieved of liability for the tax if the
transferee furnished to such person an affidavit that the transferee is not a
disqualified organization and, at the time of the transfer, such person does
not have actual knowledge that the affidavit is false. A "disqualified
organization" means (A) the United States, any State, possession, or political
subdivision thereof, any foreign government, any international organization, or
any agency or instrumentality of any of the foregoing (provided that such term
does not include an instrumentality if all its activities are subject to tax
and, except for FHLMC, a majority of its board of directors is not selected by
any such governmental agency), (B) any organization (other than certain
farmers' cooperatives) generally exempt from federal income taxes unless such
organization is subject to the tax on "unrelated business taxable income" and
(C) a rural electric or telephone cooperative.
A tax is imposed on a "pass-through entity" (as defined below) holding a
residual interest in a REMIC if at any time during the taxable year of the
pass-through entity a disqualified organization is the record holder of an
interest in such entity. The amount of the tax is equal to the product of (A)
the amount of excess inclusions for the taxable year allocable to the interest
held by the disqualified organization, and (B) the highest marginal federal
income tax rate applicable to corporations. The pass-through entity otherwise
liable for the tax, for any period during which the disqualified organization
is the record holder of an interest in such entity, will be relieved of
liability for the tax if such record holder furnishes to such entity an
affidavit that such record holder is not a disqualified organization and, for
such period, the pass-through entity does not have actual knowledge that the
affidavit is false. For this purpose, a "pass-through entity" means (i) a
regulated investment company, real estate investment trust or common trust
fund, (ii) a partnership, trust or estate and (iii) certain cooperatives.
Except as may be provided in Treasury regulations, any person holding an
interest in a pass-through entity as a nominee for another will, with respect
to such interest, be treated as a pass-through entity. The tax on pass-through
entities is generally effective for periods after March 31,1988, except that in
the case of regulated investment companies, real estate investment trusts,
common trust funds and publicly-traded partnerships the tax shall apply only to
taxable years of such entities beginning after December 31, 1988.
In order to comply with these rules, the Agreement will provide that no
record or beneficial ownership interest in a Residual Certificate may be,
directly or indirectly, purchased, transferred or sold without the express
written consent of the Master Servicer. The Master Servicer will grant such
consent to a proposed transfer only if it receives the following: (i) an
affidavit from the proposed transferee to the effect that it is not a
disqualified organization and is not acquiring the Residual Certificate as a
nominee or agent for a disqualified organization, and (ii) a covenant by the
proposed transferee to the effect that the proposed transferee agrees to be
bound by and to abide by the transfer restrictions applicable to the Residual
Certificate.
Any attempted transfer or pledge in violation of the transfer restrictions
shall be absolutely null and void and shall vest no rights in any purported
transferee. Investors in Residual Certificates are advised to consult their own
tax advisors with respect to transfers of the Residual Certificates and, in
addition, pass-through entities are advised to consult their own tax advisors
with respect to any tax which may be imposed on a pass-through entity.
NONECONOMIC RESIDUAL CERTIFICATES. The REMIC Regulations disregard, for
federal income tax purposes, any transfer of a Noneconomic Residual Certificate
to a "U.S. Person," as defined in the following section of
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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 (other than
a partnership that is not treated as a United States person under any
applicable Treasury regulations), or an estate whose income is subject to U.S.
federal income tax regardless of its source of income, 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 persons have the
authority to control all substantial decisions of the trust. Notwithstanding
the preceding sentence, to the extent provided in regulations, certain trusts
in existence on August 20, 1996 and treated as United States persons prior to
such date that elect to continue to be treated as United States persons shall
be considered U.S. Persons as well.
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:
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1. By negotiated firm commitment underwriting and public reoffering by
underwriters;
2. By agency placements through one or more placement agents primarily
with institutional investors and dealers; and
3. By placement directly by the Sponsor with institutional investors.
A Supplement will be prepared for each Series which will describe the
method of offering being used for that Series and will set forth the identity
of any underwriters thereof and either the price at which such Series is being
offered, the nature and amount of any underwriting discounts or additional
compensation to such underwriters and the proceeds of the offering to the
Sponsor, or the method by which the price at which the underwriters will sell
the Certificates will be determined. Each Supplement for an underwritten
offering will also contain information regarding the nature of the
underwriters' obligations, any material relationship between the Sponsor and
any underwriter and, where appropriate, information regarding any discounts or
concessions to be allowed or reallowed to dealers or others and any
arrangements to stabilize the market for the certificates so offered. In firm
commitment underwritten offerings, the underwriters will be obligated to
purchase all of the Certificates of such Series if any such Certificates are
purchased. Certificates may be acquired by the underwriters for their own
accounts and may be resold from time to time in one or more transactions,
including negotiated transactions, at a fixed public offering price or at
varying prices determined at the time of sale.
Underwriters and agents may be entitled under agreements entered into with
the Sponsor to indemnification by the Sponsor against certain civil
liabilities, including liabilities under the Securities Act of 1933, as
amended, or to contribution with respect to payments which such underwriters or
agents may be required to make in respect thereof.
If a Series is offered other than through underwriters, the Supplement
relating thereto will contain information regarding the nature of such offering
and any agreements to be entered into between Sponsor and purchasers of
Certificates of such Series.
FINANCIAL INFORMATION
A new Trust will be formed with respect to each Series of Certificates and
no Trust will engage in any business activities or have any assets or
obligations prior to the issuance of the related Series of Certificates.
Accordingly, no financial statements with respect to any Trust will be included
in this Prospectus or in the related Supplement.
RATING
It is a condition to the issuance of the Certificates of each Series
offered hereby and by the Supplement that they shall be rated in one of the
four highest rating categories by the nationally recognized statistical rating
agency or agencies specified in the related Supplement.
Ratings on mortgage pass-through certificates address the likelihood of
receipt by certificateholders of all distributions on the mortgage assets in
the related trust. These ratings address the structural, legal and issuer-
related aspects associated with such certificates, the nature of the mortgage
assets in the related trust and the credit quality of the credit enhancer or
guarantor, if any. Ratings on mortgage pass-through certificates do not
represent any assessment of the likelihood of principal prepayments by
mortgagors or of the degree by which such prepayments might differ from those
originally anticipated. As a result, certificateholders might suffer a lower
than anticipated yield, and, in addition, holders of stripped pass-through
certificates in extreme cases might fail to recoup their underlying
investments.
A security rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the assigning
rating organization. Further, such ratings do not address the effect of
prepayments on the yield anticipated by the investor. Each security rating
should be evaluated independently of any other security rating.
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INDEX TO DEFINED TERMS
<TABLE>
<CAPTION>
PAGE
-------
<S> <C>
1986 Act ...................................... 64
Accrual Certificates .......................... 23
Accrual Period ................................ 65
Additional Obligations ........................ 54
Adjusted Issue Price .......................... 73
Advance ....................................... 10
Amortizable Bond Premium Regulations .......... 58, 68
Appraised Value ............................... 17
ARM ........................................... 59
ARM Loans ..................................... 62
Assumed Reinvestment Rate ..................... 24
Balloon Payments .............................. 5,16
Bankruptcy Bond ............................... 9,32
Bankruptcy Code ............................... 14
Buydown Fund .................................. 16
Buydown Loans ................................. 16
CERCLA ........................................ 50
Certificates .................................. 4,15
Certificate Account ........................... 6, 38
Certificate Balance ........................... 7
Certificate Register .......................... 23
Certificateholders ............................ 15, 17
Class Certificate Balance ..................... 23
Closing Date .................................. 4
Code .......................................... 57
Commission .................................... 2
Companion Classes ............................. 26
Contingent Regulations ........................ 66
Cooperatives .................................. 4
Cooperative Loans ............................. 15
Cut-off Date .................................. 9
Daily Accruals ................................ 73
D&P ........................................... 53
Deferred Interest ............................. 68
Disqualified Organization ..................... 76
Distribution Date ............................. 7
Eligible Account .............................. 28
Eligible Investments .......................... 21, 28
EPA ........................................... 50
ERISA ......................................... 12
Exchange Act .................................. 2
Federal Long-Term Rate ........................ 73
FHA ........................................... 4, 17
FHA Insurance ................................. 10
FHA Loans ..................................... 17
FHLMC ......................................... 1
FHLMC Act ..................................... 18
FHLMC Certificate Group ....................... 19
Fitch ......................................... 53
FNMA .......................................... 1
FNMA Certificates ............................. 20
</TABLE>
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<TABLE>
<CAPTION>
PAGE
-------
<S> <C>
Fraud Loss ............................... 9, 31
Garn-St Germain Act ...................... 51
GNMA ..................................... 1
GNMA Certificates ........................ 18
GNMA I Certificates ...................... 18
GNMA II Certificates ..................... 18
Housing Act .............................. 17
HUD ...................................... 17
Indemnified Parties ...................... 43
Index .................................... 16
Interest Accrual Period .................. 23
IO Certificates .......................... 7
IRS ...................................... 58
Issuer ................................... 62, 70
Labor Regulations ........................ 52
Last Scheduled Distribution Date ......... 24
Legislative History ...................... 61
Lockout Periods .......................... 5, 16
LTV ...................................... 16
Mark-to-Market Regulations ............... 74
Master REMIC ............................. 64
Master Servicer .......................... 4
Master Servicing Fee ..................... 42
Mezzanine Certificates ................... 8, 29
Moody's .................................. 53
Mortgage ................................. 15
Mortgage Assets .......................... 1,4,15
Mortgage Certificates .................... 6
Mortgage Loans ........................... 4
Mortgage Note(s) ......................... 5,15
Mortgage Pool ............................ 15
Mortgage Pool Insurance Policy ........... 9, 30
Mortgage Rate ............................ 5
Mortgaged Properties ..................... 15
NCUA ..................................... 56
New Regulations .......................... 63, 71
Obligations .............................. 53
OID Regulations .......................... 58, 64
PACs ..................................... 25
Pass-Through Entity ...................... 76
Pass-Through Rate ........................ 7, 15
Payment Lag Certificates ................. 69
Permitted Investments .................... 54
Phantom Income ........................... 71
Plan ..................................... 52
PO Certificates .......................... 7
Policy Statement ......................... 56
Pool Insurer ............................. 30
Pooling Agreement ........................ 4
Pre-Funding Limit ........................ 54
Prefunding Period ........................ 54
Pre-Issuance Accrued Interest ............ 69
Prepayment Assumption .................... 61, 65
</TABLE>
80
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<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Primary Insurer ........................... 41
Primary Mortgage Insurance Policy ......... 16
Principal Prepayments ..................... 24
PTE 83-1 .................................. 55
Rating Agency ............................. 12, 53
RCRA ...................................... 50
Record Date ............................... 23
Regular Certificates ...................... 63
Relief Act ................................ 51
REMIC ..................................... 1,57
REMIC Regulations ......................... 56
REO Property .............................. 28
Reserve Fund .............................. 8, 32
Residual Certificates ..................... 63
S&P ....................................... 53
Securities Act ............................ 2
Seller .................................... 1,4,15
Senior Certificates ....................... 7
Senior Certificateholders ................. 8
Series .................................... 4
SMMEA ..................................... 11
Special Hazard Insurer .................... 31
Special Hazard Insurance Policy ........... 9
Sponsor ................................... 4,34
Stripped ARM Obligations .................. 62
Stripped Bond Certificates ................ 60
Stripped Coupon Certificates .............. 60
Subordinate Certificates .................. 7
Subordinate Certificateholders ............ 8
Subsidiary REMIC .......................... 64
Supplement ................................ 1,4
TACs ...................................... 26
Thrift Institutions ....................... 73
Title V ................................... 51
Trust ..................................... 1,15
Trustee ................................... 4
UCC ....................................... 48
Underwriter's Exemptions .................. 52
U.S. Person ............................... 62,75,77
VA ........................................ 4,18
VA Guaranty ............................... 10
Waiver Letter ............................. 9, 31
</TABLE>
81
<PAGE>
$289,522,961
(APPROXIMATE)
[LOGO, HEADLANDS MORTGAGE SECURITIES INC. INC.]
SPONSOR
PNC MORTGAGE SECURITIES CORP.
SELLER AND MASTER SERVICER
MORTGAGE PASS-THROUGH CERTIFICATES, SERIES 1998-1
-------------------------
PROSPECTUS SUPPLEMENT
-------------------------
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
You should rely only on the information contained or incorporated by
reference in this prospectus supplement and the accompanying prospectus. We
have not authorized anyone to provide you with different information.
We are not offering the Series 1998-1 Mortgage Pass-Through Certificates
in any state where the offer is not permitted.
We do not claim that the information in this prospectus supplement and
prospectus is accurate as of any date other than the dates stated on the
respective covers.
Dealers will deliver a prospectus supplement and prospectus when acting as
underwriters of the Series 1998-1 Mortgage Pass-Through Certificates and with
respect to their unsold allotments or subscriptions. In addition, all dealers
selling the Series 1998-1 Mortgage Pass-Through Certificates will be required
to deliver a prospectus supplement and prospectus for ninety days following the
date of this prospectus supplement.
October 28, 1998
