As filed with the Securities and Exchange Commission on July 23, 1999
Registration No. 333-
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-3
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
HEADLANDS MORTGAGE SECURITIES INC.
(Exact name of registrant as specified in its Charter)
Delaware 68-0397342
(State of Incorporation) (I.R.S. Employer Identification No.)
700 Larkspur Landing Circle, Suite 240
Larkspur, California 94939
(415) 925-5442
(Address, including zip code, and telephone number, including area code,
of principal executive offices)
Peter T. Paul
Headlands Mortgage Securities Inc.
700 Larkspur Landing Circle, Suite 240
Larkspur, California 94939
(415) 461-6790
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
With a copy to:
Phillip R. Pollock, Esq. Michael P. Braun, Esq.
Tobin & Tobin Brown & Wood LLP
500 Sansome Street, 8th Floor One World Trade Center
San Francisco, California 94111 New York, New York 10048
Approximate date of commencement of proposed sale to the public:
From time to time on or after the effective date of the registration
statement, as determined by market conditions.
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the
following box. |_|
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, other than securities offered only in connection with dividend or
interest reinvestment plans, please check the following box. |X|
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b), under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, please check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. |_|
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
Title of Each Class of Amount to be Proposed Maximum Proposed Maximum Amount of
Securities to Be Registered Registered Offering Price Aggregate Registration
Per Unit(1) Offering Price(1) Fee(2)
<S> <C> <C> <C> <C>
Certificates .............. $1,088,796,968 100% $1,088,796,968 $312,695.11
</TABLE>
(1) Estimated for the purpose of calculating the registration fee.
(2) $588,796,968 in securities are being carried forward and
$173,695.11 of the filing fee is associated with the securities
being carried forward and was previously paid with the earlier
registration statement.
Pursuant to Rule 429 of the Securities and Exchange Commission's Rules
and Regulations under the Securities Act of 1933, as amended, the Prospectus
and Prospectus Supplement contained in this Registration Statement also relate
to the Registrant's registration statement No. 333-46019, as previously filed
by the Registrant on Form S-3.
The Registrant hereby amends this Registration Statement on
such date or dates as may be necessary to delay its effective date
until the Registrant shall file a further amendment which
specifically states that this Registration Statement shall thereafter
become effective in accordance with Section 8(a) of the Securities
Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
The information in this prospectus supplement is not complete and may be
changed. We may not sell these securities until the registration statement
filed with the SEC is effective. This prospectus is not an offer to sell these
securities and it is not soliciting an offer to buy these securities in any
state where the offer or sale is not permitted. The information in this
prospectus supplement is not complete and may be changed. We may not sell
these securities until the registration statement filed with the SEC is
effective. This prospectus is not an offer to sell these securities and it is
not soliciting an offer to buy these securities in any state where the offer
or sale is not permitted.
Subject to completion, dated July 23, 1999
Prospectus Supplement
(To prospectus dated _________, ____)
$___________ (approximate)
Headlands Mortgage Securities Inc.
sponsor
[Headlands Mortgage Company]
seller and master servicer
The certificates represent obligations of the trust only and do not
represent an interest in or obligation of the sponsor, the trustee 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 one class of senior certificates
o one class of residual certificates
o six classes of subordinate certificates
The certificates
o represent the entire beneficial interest
in a trust, whose assets consist of a pool
of fixed rate first lien residential
mortgage loans
o currently have no trading market
o are obligations of the trust only and are not obligations of the seller
and servicer or its affiliates
Credit enhancement
o will be provided to the senior certificates in the form of subordination
of the subordinate certificates to the senior certificates
Review the information in "Risk Factors" on page S-__ herein and on page __ in
the prospectus.
o For complete information about the certificates, read both this
prospectus supplement and the prospectus.
o __________________, the underwriter, will buy the offered certificates
from Headlands Mortgage Securities Inc. at a price equal to ________ of
their face value. The underwriter will sell the offered certificates from
time to time in negotiated transactions.
Neither the SEC nor any state securities commission has approved or
disapproved of these securities or passed upon the adequacy or accuracy of
this prospectus. Any representation to the contrary is a criminal offense.
[Underwriter]
_____________, 199_
TABLE OF CONTINENTS
SUMMARY INFORMATION.....................................................S-3
RISK FACTORS............................................................S-4
THE MORTGAGE POOL.......................................................S-3
SERVICING OF MORTGAGE LOANS.............................................S-9
DESCRIPTION OF THE CERTIFICATES........................................S-15
PREPAYMENT AND YIELD CONSIDERATIONS....................................S-26
CREDIT SUPPORT.........................................................S-31
USE OF PROCEEDS........................................................S-32
FEDERAL INCOME TAX CONSEQUENCES........................................S-32
ERISA CONSIDERATIONS...................................................S-34
METHOD OF DISTRIBUTION.................................................S-35
LEGAL MATTERS..........................................................S-35
INDEX TO DEFINED TERMS.................................................S-37
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.
<TABLE>
<CAPTION>
MORTGAGE PASS-THROUGH CERTIFICATES,
SERIES [ ]
Initial Rating
Of Offered
Certificates(3)
CLASS Initial Class Pass-Through Principal Interest [ ] [ ]
Certificate Rate Types(2) Types(2) Rating Rating
Balance(1) (per annum)
OFFERED CERTIFICATES
<S> <C> <C> <C> <C> <C> <C>
Class A % Senior/Pass-Through Fixed Rate
Class R % Senior Fixed Rate
Class B-1 % Subordinate Fixed Rate
Class B-2 % Subordinate Fixed Rate
Class B-3 % Subordinate Fixed Rate
NON-OFFERED
CERTIFICATES
Class B-4 % Subordinate Fixed Rate N/A N/A
Class B-5 % Subordinate Fixed Rate N/A N/A
Class B-6 % Subordinate Fixed Rate N/A N/A
</TABLE>
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.
The trust will issue the Class A, Class B-1, Class B-2 and Class B-3
certificates in book-entry form through the facilities of The Depository Trust
Company. The Class R certificates will be physical certificates. We refer you
to "Description of the Certificates -- General" and " -- Book-Entry
Certificates" for more detail.
The Sponsor
o Headlands Mortgage Securities Inc..
o Headlands Mortgage Securities Inc. maintains its principal office at
700 Larkspur Landing Circle, Suite 240, Larkspur, California
94939. Its telephone number is (415) 925-5442.
We refer you to "The Sponsor" in this prospectus supplement for
additional information.
The Seller and Master Servicer
o [Headlands Mortgage Company].
o [Headlands Mortgage Company] maintains its principal office at 1100
Larkspur Landing Circle, Suite 101, Larkspur, California 94939].
Its telephone number is [(415) 925-5442].
o The servicer will receive a monthly fee from the interest payments on
the mortgage loans equal to __% per annum on the principal balance of
each mortgage loan.
We refer you to "The Seller" in this prospectus supplement for additional
information.
Trustee
o [----------------------------]
Cut-Off Date
o ____________, 199_.
Closing Date
o ________________, 199_.
Distribution Date
o The [25th] day of each month, or if that day is not a business day,
the next business day. The first distribution date is ___________ 199_.
Determination Date
o The [15]th day of each month or if such day is not a business day, the
next business day.
Registration of Offered Certificates
We will issue the offered certificates in book-entry form. You will hold
your interests either through a depository in the United States or
through one of two depositories in Europe. While the certificates are
book-entry, they will be registered in the name of a depository, or in
the name of a depository's nominee.
We refer you to "Risk Factors--Consequences on Liquidity and Payment
Delay Because of Owning Book-Entry Certificates" and "Description Of The
Certificates--Book-Entry Certificates" in this prospectus supplement for
additional information.
Trust Property
The trust property is held by the trustee for the benefit of the
certificateholders. The trust property includes:
o a pool of fixed rate mortgage loans, secured by first mortgages on
one- to four-family residential properties;
o payments on the mortgage loans received on and after the cut-off
date;
o property that secured a mortgage loan which has been acquired by
foreclosure or deed in lieu of foreclosure;
o rights under any hazard insurance policies covering the mortgaged
properties; and
o amounts on deposit in accounts described in this prospectus
supplement.
The Mortgage Loans
On the closing date, the trust will acquire a pool of mortgage loans with
an aggregate principal balance, or pool balance, as of the cut-off date of
$____________.
The mortgage loans will have the following characteristics as of the
cut-off date:
Range of Remaining Term to Stated
Maturity:
Weighted Average Remaining Term to
Stated Maturity(1):
Range of Original Principal
Balances(1):
Average Original Principal Balance(1):
Range of Outstanding Principal
Balances(1):
Average Outstanding Principal
Balance(1):
Range of Mortgage Rates:
Weighted Average Mortgage Rate(1):
Weighted Average Net Mortgage Rate(1):
Geographic Concentrations in Excess
of 5%(1):
California
(1) Approximate
We refer you to "Description of the Mortgage Loans" in this prospectus
supplement for additional information.
Monthly Advances
If the master servicer reasonably believes that cash advances can be
recovered from future payments or collections on the mortgage loans, the
master servicer will make cash advances to the trust to cover delinquent
mortgage loan payments. The master servicer 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 "Description of the Certificates--Advances" in this
prospectus supplement for additional information.
The Certificates
1. General
o Each month the trustee will calculate the amount you are owed.
o If you hold a certificate on the last day of a calendar month, you
will be entitled to receive payments on the distribution date in the
next month.
We refer you to "Description of the Certificates" in this prospectus
supplement for additional information.
2. Interest Distributions
o Interest accrues on the certificates from the first day of a
calendar month through the last day of that calendar month.
On each distribution date, you will be entitled to the following:
o interest that accrued at the pass-through rate during the interest
accrual period; and
o any interest that was due on a prior distribution date and not paid.
We refer you to "Description of the Certificates--Interest" in this
prospectus supplement for additional information.
3. Principal Distributions
o Principal distributions are payable on each distribution date.
However, no class of certificates will receive a principal
distribution until the other classes with higher payment priorities
are paid in full.
o Shortfalls in available funds may result in a class receiving less
than what is due.
o 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."
We refer you to "Description of the Certificates--Principal" in this
prospectus supplement for additional information.
Credit Enhancements
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; and
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 pool balance declines below __% of the pool balance as of the
cut-off date, then the master servicer may purchase all of the trust
assets and terminate the trust. In this event, 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.
Last Scheduled Distribution Date
[Date] 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 Tax Considerations
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
the 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 the REMIC.
We refer you to "Federal Income Tax Considerations" in this prospectus
supplement and in the prospectus for additional information.
ERISA Considerations
The fiduciary responsibility provisions of ERISA, can limit investments
by certain pension and other employee benefit plans. If you are a
fiduciary of a pension or other employee benefit plan which is subject to
ERISA, you should consult with your counsel regarding the applicability
of the provisions of ERISA and the tax code before purchasing a
certificate.
We refer you to "ERISA Considerations" in this prospectus supplement and
the prospectus for additional information.
Legal Investment Considerations
The Class A certificates and the Class B-1 certificates will be mortgage
related securities for purposes of the Secondary Mortgage Market Enhancement
Act of 1984, 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 are not eligible under
the Secondary Mortgage Market Enhancement Act of 1984.
We refer you to "Legal Investment Considerations" in this prospectus
supplement and "Legal Investment" in the prospectus for additional
information.
Certificate Rating
The trust will not issue the offered certificates unless they receive the
following ratings:
___ by _________________
___ by _________________
A rating is not a recommendation to buy, sell or hold securities and may
be subject to revision or withdrawal by either rating agency.
We refer you to "Rating" and "Risk Factors--Rating of the Securities Does Not
Assure Payment" in the prospectus for additional information.
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 Affect Timing and Rate of Return on Your Investment
The yield to maturity on your certificates will be directly related
to the rate of principal payments on the mortgage loans. Please consider the
following:
o Mortgagors may fully or partially prepay their mortgage loan at any
time. [However, all mortgage loans require that the mortgagor pay a
fee with any prepayments in full within five years of origination,
except that generally no fee is required for any prepayment in full
made within twelve months of a loan's maturity date. This may result
in the rate of prepayments being slower than would otherwise be the
case.]
o All the mortgage loans contain due-on-sale provisions. Due-on-sale
provisions allow the Servicer to require the mortgagor to fully pay
the mortgage loan when the mortgaged property is sold. Generally,
the servicer will enforce the due-on-sale provision unless
prohibited by applicable law.
We refer you to "RISK FACTORS - Prepayments are Unpredictable and
Affect Yield" in the prospectus.
Subordinate Certificates Present a Greater Risk of Loss and Lower Yields
Than Anticipated
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 subordinate certificates receive distributions after more
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.
o If the master servicer does not advance a delinquent payment because
it determines that 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. In such case, the most junior class of
certificates outstanding at that time 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 class
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.
Risk of Losses as a Result of Geographic Concentration
The mortgaged properties are located in __ states. However, __% of
the mortgaged properties (by principal balance as of the cut-off date) are
located in ______. If [this] state[s] experiences weaker economic conditions
or greater rates of decline in real estate values than the United States
generally, then the pool of mortgage loans may experience higher rates of
delinquencies, defaults and foreclosures than if the pool were more
diversified.
Risks Associated With Year 2000 Compliance
The master servicer is faced with the task of completing its goals
for compliance in connection with the year 2000 issue. The year 2000 issue is
the result of prior computer programs being written using two digits to define
the applicable year. Any computer programs that have time-sensitive software
may recognize a date using "00" as the year 1900 rather than the year 2000.
Any such occurrence could result in a major computer system failure or
miscalculations. Although the master servicer has been assured by its third
party computer systems provider that such systems will be year 2000 compliant
prior to the year 2000, it is presently engaged in various procedures to
determine if the computer systems and software of this and other suppliers,
customers, brokers and agents will be year 2000 compliant.
In the event that the master servicer, any subservicer or any of
their suppliers, customers, brokers or agents do not successfully and timely
achieve year 2000 compliance, the master servicer's performance of its
obligations under the pooling and servicing agreement could be adversely
affected. This could result in delays in processing payments on the mortgage
loans and could cause a delay in distributions to you.
THE MORTGAGE POOL
GENERAL
Certain information with respect to the mortgage loans included in
the mortgage pool is set forth below. Prior to the closing date, mortgage
loans may be removed from the mortgage pool and other mortgage loans may be
substituted therefor. The sponsor believes that the information set forth
herein with respect to the mortgage pool as presently constituted is
representative of the characteristics of the mortgage pool as it will be
constituted at the closing date, although the range of the mortgage rates and
the maturities and certain other characteristics of the mortgage loans in the
mortgage pool may vary. In no event will more than 5% of the cut-off date pool
balance of the mortgage pool deviate from the characteristics of the mortgage
loans described herein.
As of the cut-off date, the aggregate of the Scheduled Principal
Balances of the mortgage loans, or the "pool balance," is approximately $[ ].
The mortgage pool consists of [ ] mortgage loans having original terms to
stated maturity (based on the date of origination or any later modification)
of 30 years, except for [ ] mortgage loans which have original terms to stated
maturity of 15 years (based on the date of origination or any later
modification). The mortgage loans provide for the amortization of the amount
financed over a series of monthly payments. All of the mortgage loans provide
that the due date for payments is the first day of each month. The mortgage
loans included in the mortgage pool were originated or acquired by the seller
in the normal course of its mortgage banking business substantially in
accordance with the underwriting criteria specified herein. Monthly payments
made by the mortgagors on the mortgage loans either earlier or later than the
related due date will not affect the amortization schedule or the relative
application of such payments to principal and interest. The mortgage loans may
be prepaid at any time. [All of the mortgage loans are subject to a prepayment
penalty. Generally, if during the first five years after origination, a
mortgagor makes prepayments in any twelve-month period which in the aggregate
exceeds 20% of the original principal amount (other than as a result of a sale
of the mortgaged property), the borrower will be subject to a prepayment
penalty equal to six months of interest, calculated at the applicable mortgage
rate, on the aggregate amount of such prepayment.]
Each mortgage loan accrues interest at the mortgage rate specified in
the related mortgage note.
The latest date on which any mortgage loan matures is [ ]. The
earliest stated maturity date of any mortgage loan is [ ].
None of the mortgage loans are assumable. None of the mortgage loans
are 30 or more days delinquent in payment as of the closing date.
None of the mortgage loans are subject to a buydown agreement.
None of the mortgage loans have a loan-to-value ratio at origination
of more than 95.00%. As of the cut-off date, the weighted average of the
loan-to-value ratios at origination of the mortgage loans was approximately [
]%. All of the mortgage loans with loan-to-value ratios at origination of
greater than 80% are covered by a primary mortgage insurance policy issued by
a mortgage insurance company approved by Fannie Mae or Freddie Mac, which
policy provides coverage in an amount equal at least to the excess of the
original principal balance of the related mortgage loan plus accrued interest
thereon and related foreclosure expenses over 75% of the value of the related
mortgaged property. No such primary mortgage insurance policy will be required
with respect to any such mortgage loan after the date on which the related
loan-to-value ratio is less than 80%.
The loan-to-value ratio of a mortgage loan at any given time is a
fraction, expressed as a percentage, the numerator of which is the principal
balance of the related mortgage loan at the date of determination and the
denominator of which is the lesser of the selling price of the related
mortgaged property and its appraised value determined in an appraisal at
origination, or in the case of refinancings, the value set forth in an
appraisal at the time of such refinancing. No assurance can be given that the
value of any mortgaged property has remained or will remain at the level that
existed on the appraisal or sale date. If residential real estate values
generally or in a particular geographic area decline, the loan-to-value ratios
might not be a reliable indicator of the rates of delinquencies, foreclosures
and losses that could occur with respect to such mortgage loans.
Approximately [ ]% (by cut-off date pool balance) will be secured by
mortgaged properties located in California. Except as indicated in the
preceding sentence no more than approximately [ ]% (by cut-off date pool
balance) of the mortgage loans will be secured by mortgaged properties located
in any one state.
MORTGAGE LOAN STATISTICS
The following information sets forth in tabular format certain
information, as of the cut-off date, as to the mortgage loans. Percentages
(approximate) are stated by aggregate Scheduled Principal Balance of the
mortgage loans as of the cut-off date. The sum of the amounts and percentages
in the tables below may not equal the totals due to rounding.
YEAR OF FIRST PAYMENT(1)
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE PRINCIPAL % OF
MORTGAGE BALANCE MORTGAGE
LOANS OUTSTANDING AS OF LOANS
YEAR OF FIRST PAYMENT CUT-OFF DATE
<S> <C>
Total............................
</TABLE>
(1) As of the cut-off date, the weighted average seasoning of the
mortgage loans is approximately [ ] month.
TYPES OF MORTGAGED PROPERTIES SECURING THE MORTGAGE LOANS
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE PRINCIPAL % OF
MORTGAGE BALANCE MORTGAGE
LOANS OUTSTANDING AS OF LOANS
PROPERTY TYPE CUT-OFF DATE
<S> <C>
Total
OCCUPANCY OF MORTGAGED PROPERTIES SECURING THE MORTGAGE LOANS(1)
NUMBER OF AGGREGATE PRINCIPAL % OF
MORTGAGE BALANCE MORTGAGE
LOANS OUTSTANDING AS OF LOANS
OCCUPANCY STATUS CUT-OFF DATE
<S>
Total
</TABLE>
(1) Based on representations of the mortgagor at the time of origination
of the related mortgage loan.
<TABLE>
<CAPTION>
GEOGRAPHICAL DISTRIBUTION OF THE MORTGAGED PROPERTIES SECURING THE MORTGAGE LOANS(1)
NUMBER OF AGGREGATE PRINCIPAL % OF
MORTGAGE BALANCE MORTGAGE
LOANS OUTSTANDING AS OF LOANS
STATE CUT-OFF DATE
<S> <C>
Total......................
</TABLE>
(1) As of the cut-off date, no more than approximately [ ]% 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.
<TABLE>
<CAPTION>
LOAN PURPOSE
NUMBER OF AGGREGATE PRINCIPAL % OF
MORTGAGE OUTSTANDING AS OF MORTGAGE
LOAN PURPOSE LOANS CUT-OFF DATE LOANS
<S> <C>
Purchase
Rate and Term Refinance
Cash-Out Refinance
</TABLE>
Total
DISTRIBUTION OF ORIGINAL PRINCIPAL BALANCES(1)
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE PRINCIPAL % OF
MORTGAGE BALANCE MORTGAGE
LOANS OUTSTANDING AS OF LOANS
RANGE OF ORIGINAL MORTGAGE LOAN PRINCIPAL BALANCES CUT-OFF DATE
<S> <C>
Total
</TABLE>
(1) As of the cut-off date, the average outstanding principal balance of
the mortgage loans is approximately $[ ].
<TABLE>
<CAPTION>
ORIGINAL LOAN-TO-VALUE RATIONS(1)
NUMBER OF AGGREGATE PRINCIPAL % OF
MORTGAGE BALANCE MORTGAGE
RANGE OF ORIGINAL LOAN-TO-VALUE RATIOS LOANS OUTSTANDING AS OF LOANS
CUT-OFF DATE
<S> <C>
Total...........................................
</TABLE>
(1) As of the cut-off date, the weighted average loan-to-value ratio at
origination of the mortgage loans is approximately [ ]%.
MORTGAGE RATES(1)
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE PRINCIPAL % OF
MORTGAGE BALANCE MORTGAGE
LOANS OUTSTANDING AS OF LOANS
MORTGAGE RATE (%) CUT-OFF DATE
<S> <C>
Total
</TABLE>
(1) As of the cut-off date, the weighted average mortgage rate of
the mortgage loans is approximately [ ]% per annum.
ORIGINAL TERMS(1)
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE PRINCIPAL % OF
MORTGAGE BALANCE MORTGAGE
LOANS OUTSTANDING AS OF LOANS
ORIGINAL TERM CUT-OFF DATE
<S> <C>
Total
</TABLE>
(1) As of the cut-off date, the weighted average stated remaining term of the
mortgage loans is approximately [ ] months.
DOCUMENTATION TYPES
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE PRINCIPAL % OF
MORTGAGE BALANCE MORTGAGE
LOANS OUTSTANDING AS OF LOANS
DOCUMENTATION TYPE CUT-OFF DATE
<S> <C>
Total
</TABLE>
DISTRIBUTION OF CREDIT SCORES(1)
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE PRINCIPAL % OF
MORTGAGE BALANCE MORTGAGE
LOANS OUTSTANDING AS OF LOANS
RANGE OF CREDIT SCORES CUT-OFF DATE
<S> <C>
Total........................
</TABLE>
(1) As of the cut-off date, the weighted average credit score of the
mortgage loans is approximately [ ] for mortgage loans with credit
scores. For a description of credit scores see "Servicing of
Mortgage Loans -- Underwriting Standards."
ASSIGNMENT OF THE MORTGAGE LOANS
Pursuant to a pooling and servicing agreement among the sponsor, the
seller, the master servicer and the trustee, the sponsor on the closing date
will sell, transfer, assign, set over and otherwise convey without recourse to
the trustee in trust for the benefit of certificateholders all right, title
and interest of the sponsor in and to each mortgage loan and all right, title
and interest in and to all other assets included in the trust, including all
principal and interest received by the master servicer on or with respect to
the mortgage loans after the cut-off date, exclusive of interest accruing
thereon prior to the cut-off date.
In connection with such transfer and assignment, the sponsor will
deliver or cause to be delivered, with respect to each mortgage loan, to the
trustee, or a custodian for the trustee, a mortgage file containing, among
other things:
o the original loan agreement or promissory note, i.e., 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,
o the original agreement or instrument creating a first lien on the
related mortgaged property, i.e., the mortgage, with evidence of
recording indicated thereon,
o the assignment, which may be in the form of a blanket assignment if
permitted, to the trustee with evidence of recording in the name of
the trustee thereon, and,
o if applicable, any riders or modifications to the mortgage note and
mortgage.
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.
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 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
Repurchase Price; provided, however, that if such Material Defect relates
solely to the inability of the sponsor to deliver or cause to deliver the
original mortgage or intervening assignments, or a certified copy because such
documents have not been returned from the applicable recording office, the
seller shall not be required to repurchase or substitute for such mortgage
loan if the sponsor delivers or causes such documents to be delivered promptly
upon receipt thereof, but in no event later than 270 days after the closing
date.
The trustee also will review the mortgage files within 180 days of
the closing date. If the trustee discovers a Material Defect, the trustee
shall notify the seller of such Material Defect. The seller shall correct or
cure any such Material Defect within 60 days from the date of notice from the
trustee of the Material Defect and if the seller does not correct or cure such
Material Defect within such period and such defect materially and adversely
affects the interests of the certificateholders in the related mortgage loan,
the seller will, within 90 days of the date of notice, provide the trustee
with a substitute mortgage loan (if within two years of the closing date) or
purchase the related mortgage loan at the applicable Repurchase Price.
The "Repurchase Price" means, with respect to any mortgage loan
required to be repurchased, an amount equal to 100% of the unpaid principal
balance of such mortgage loan plus accrued and unpaid interest on such
principal balance at the related mortgage rate through and including the last
day of the month of repurchase less any portion of the master servicing fee
and unreimbursed advances made with respect thereto and payable to the
purchaser of the mortgage loan.
Rather than repurchase the mortgage loan as provided above, the
seller may delete such mortgage loan from the trust and substitute in its
place another 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 and
servicing agreement,
o have a principal balance, after deduction of all scheduled payments
due in the month of substitution, not in excess of, and not more
than 10% less than, the scheduled principal balance of the deleted
mortgage loan (the amount of any shortfall to be deposited by the
seller in the Certificate Account and held for distribution to the
certificateholders on the related distribution date (a "Substitution
Adjustment Amount"),
o have a mortgage rate not lower than, and not more than 1% per annum
higher than, that of the deleted mortgage loan,
o have a loan-to-value ratio not higher than that of the deleted
mortgage loan,
o have a remaining term to maturity not greater than and not more than
one year less than that of the deleted mortgage loan, and
o comply with all of the representations and warranties set forth in
the pooling and servicing agreement as of the date of substitution.
The repurchase or substitution obligation constitutes the sole remedy
available to certificateholders or the trustee for omission of, or a Material
Defect in, a mortgage loan document.
SERVICING OF MORTGAGE LOANS
Headlands Mortgage Company
Headlands Mortgage Company, the seller and servicer, is California
corporation which was organized in 1981. Headlands is a wholly owned
subsidiary of Greenpoint Financial Corp. Greenpoint Financial Corp. is listed
on the New York Stock Exchange under the symbol "GPT". Headlands is engaged in
the mortgage banking business, which consists of the origination, acquisition,
sale and servicing of residential mortgage loans secured by one- to four-unit
family residences, and the purchase and sale of mortgage servicing rights.
Headlands is headquartered in northern California, and has production
branches in California, Washington, Oregon, New Mexico, Virginia,
Pennsylvania, Idaho, Florida, New Jersey and Arizona. Loans are originated
primarily on a wholesale basis, through a network of independent mortgage loan
brokers approved by Headlands.
Headland's executive offices are located at 1100 Larkspur Landing
Circle, Suite 101, Larkspur, CA 94939.
Underwriting Standards
All of the mortgage loans were originated or acquired by Headlands.
Headlands originates and purchases "conventional non-conforming mortgage
loans" (i.e., loans which are not insured by the FHA or partially guaranteed
by the VA or which do not qualify for sale to Fannie Mae or Freddie Mac)
secured by first liens on one- to four-family residential properties. These
loans typically differ from those underwritten to the guidelines established
by Fannie Mae, Freddie Mac and Ginnie Mae primarily with respect to original
principal balances, loan-to-value ratios, borrower income, required
documentation, interest rates, borrower occupancy of the mortgaged property
and/or property types. To the extent that these programs reflect underwriting
standards different from those of Fannie Mae, Freddie Mac and Ginnie Mae, the
performance of loans made thereunder may reflect higher delinquency rates
and/or credit losses.
All mortgage loans originated or acquired by Headlands are generally
underwritten by Headlands according to its credit, appraisal and underwriting
standards. Such underwriting standards are applied to evaluate the prospective
borrower's credit standing and repayment ability and the value and adequacy of
the mortgaged property as collateral. These standards are applied in
accordance with applicable federal and state laws and regulations. Exceptions
to the underwriting standards are permitted where compensating factors are
present.
Headlands' underwriting standards for purchase money or rate/term
refinance loans secured by one- to two-family primary residences generally
allow loan-to-value ratios at origination of up to 95% for mortgage loans with
original principal balances of up to $300,000, up to 90% for mortgage loans
secured by one- to four-family, primary residences with original principal
balances of up to $400,000, up to 85% for mortgage loans with original
principal balances of up to $500,000 and up to 80% for mortgage loans with
original principal balances up to $650,000. Headlands may acquire mortgage
loans with principal balances up to $3,000,000 if the loan is secured by the
borrower's primary residence. The loan-to-value ratio for these super jumbo
loans generally may not exceed 60%. For cash-out refinance loans, the maximum
loan-to-value ratio generally is 80%, and the maximum cash out amount
permitted is based in part on the original amount of the related mortgage
loan.
Headlands' underwriting standards for mortgage loans secured by
investment properties generally allow loan-to-value ratios at origination of
up to 90% for mortgage loans with original principal balances up to $250,000.
Headlands' underwriting standards permit mortgage loans secured by investment
properties to have higher original principal balances if they have lower
loan-to-value ratios at origination.
For each mortgage loan with a loan-to-value ratio at origination
exceeding 80%, Headlands generally requires a primary mortgage insurance
policy insuring a portion of the balance of the mortgage loan at least equal
to the product of the original principal balance of such mortgage loan and a
fraction, the numerator of which is the excess of the original principal
balance of such mortgage loan over 75% of the lesser of the appraised value
and selling price of the related mortgage property and the denominator of
which is the original principal balance of the related mortgage loan plus
accrued interest thereon and related foreclosure expenses. No such primary
mortgage insurance policy will be required with respect to any such mortgage
loan after the date on which the related loan-to-value ratio decreases to 80%
or less or, based upon a new appraisal, the principal balance of such mortgage
loan represents 80% or less of the new appraised value. All of the insurers
which have issued primary mortgage insurance policies with respect to the
mortgage loans meet Fannie Mae's or Freddie Mac's standards or are acceptable
to the rating agencies. In certain circumstances, however, Headlands does not
require primary mortgage insurance on mortgage loans with principal balances
up to $250,000 that have loan-to-value ratios exceeding 80% but less than or
equal to 90%. All residences except cooperatives and certain high-rise
condominium dwellings are eligible for this program. Each qualifying mortgage
loan will be made at an interest rate that is higher than the rate would be if
the loan-to-value ratio was 80% or less or if primary mortgage insurance was
obtained. Under such circumstances, the certificateholders will not have the
benefit of primary mortgage insurance coverage.
In determining whether a prospective borrower has sufficient monthly
income available to meet the borrower's monthly obligation on the proposed
mortgage loan and to meet monthly housing expenses and other financial
obligations including the borrower's monthly obligations on the proposed
mortgage loan, Headlands generally considers, when required by the applicable
documentation program, the ratio of such amounts to the proposed borrower's
acceptable stable monthly gross income. Acceptability of such ratios vary
depending on a number of underwriting criteria, including loan-to-value
ratios, and are determined on a loan-by-loan basis.
Headlands also examines a prospective borrower's credit report.
Generally, each credit report provides a credit score for the borrower. Credit
scores generally range from 350 to 850 and are available from three major
credit bureaus: Experian (formerly TRW Information Systems and Services),
Equifax and Trans Union. Headlands attempts to obtain for each borrower a
credit score from each credit bureau. If three credit scores are obtained,
Headlands applies the middle score of the primary wage earner. If two scores
are obtained, Headlands applies the lower score of the primary wage earner.
These scores estimate, on a relative basis, which loans are most likely to
default in the future. Lower scores imply higher default risk relative to a
higher score. Credit scores are empirically derived from historical credit
bureau data and represent a numerical weighing of a borrower's credit
characteristics over a two-year period. A credit score is generated through
the statistical analysis of a number of credit-related characteristics or
variables. Common characteristics include number of credit lines, payment
history, past delinquencies, severity of delinquencies, current levels of
indebtedness, types of credit and length of credit history. Attributes are the
specific values of each characteristic. A scorecard is created with weights or
points assigned to each attribute. An individual loan applicant's credit score
is derived by summing together the attribute weights for that applicant.
Headlands originates and acquires loans which have been underwritten
under one of five documentation programs: full documentation, alternative
documentation, limited documentation, no ratio loan documentation and no
income/no asset verification.
Under full documentation, the prospective borrower's employment,
income and assets are verified through written and telephonic communications.
Alternative documentation provides for alternative methods of employment
verification generally using W-2 forms or pay stubs. Generally, under the full
documentation program, a prospective borrower is required to have a minimum
credit score of 620 and under the alternative documentation program, a minimum
credit score of 640.
Under the limited documentation program, more emphasis is placed on
the value and adequacy of the mortgaged property as collateral, credit history
and other assets of the borrower than on verified income of the borrower.
Mortgage loans underwritten using the limited documentation program are
limited to borrowers with credit histories that demonstrate an established
ability to repay indebtedness in a timely fashion. Under the limited
documentation program, a prospective borrower is required to have a minimum
credit score of 640. Under the limited documentation program, certain credit
underwriting documentation concerning income or income verification and/or
employment verification is waived. Loans originated and acquired with limited
documentation include cash-out refinance loans, super jumbos and mortgage
loans secured by investor-owned properties. Permitted maximum loan-to-value
ratios (including secondary financing) under the limited documentation
program, which range up to 80%, are more restrictive than mortgage loans
originated with full documentation or alternative documentation.
Under the no ratio loan documentation program, income ratios for the
prospective borrower are not calculated. Mortgage loans underwritten using the
no ratio loan documentation program have loan-to-value ratios less than or
equal to 80% and meet the standards for the limited documentation program. A
minimum credit score of 680 is required for this program.
Servicing Overview
Headlands (in its capacity as master servicer) will act as master
servicer for the mortgage loans pursuant to the pooling and servicing
agreement. As of [ ], Headlands' mortgage loan servicing portfolio consisted
of [ ]one- to four-family residential mortgage loans with an aggregate
principal balance of $[ ] billion. Headlands' primary source of mortgage
servicing rights is from mortgage loans originated through mortgage brokers.
Headlands' Servicing Center was established in January 1994. As of [
], it had a staff of [ ] employees. Prior to January 1994, Headlands'
servicing portfolio was subserviced by a third party.
Mortgage loan servicing includes collecting payments from borrowers
and remitting those funds to investors, accounting for mortgage loan principal
and interest, reporting to investors, holding custodial funds for payment of
mortgage and mortgage related expenses such as taxes and insurance, advancing
funds to cover delinquent payments, inspecting foreclosures and property
disposition in the event of unremedied defaults, and otherwise administering
the mortgages.
The following table summarizes the delinquency experience including
pending foreclosures on all residential mortgage loans (including home equity
loans) originated or acquired as part of Headlands' mortgage banking
operations and included in Headlands' servicing portfolio at the dates
indicated. As of [ ], [ ] and [ ] and [ ], the total principal balance of
loans serviced by Headlands was (in billions) $[ ], $[ ], $[ ]and $[ ],
respectively.
HEADLANDS MORTGAGE COMPANY
OVERALL MORTGAGE PORTFOLIO
DELINQUENCY AND FORECLOSURE
EXPERIENCE
<TABLE>
<CAPTION>
NUMBER PERCENT NUMBER PERCENT NUMBER PERCENT OF NUMBER PERCENT OF
OF LOANS OF OF OF OF LOANS SERVICING OF LOANS SERVICING
SERVICING LOANS SERVICING PORTFOLIO PORTFOLIO
PORTFOLIO PORTFOLIO
<S> <C>
Total Portfolio*...
Period of
Delinquency........
30-59 days.......
60-89 days.......
90 days or more.
</TABLE>
Total Delinquencies (excluding Foreclosures)**..
Foreclosures Pending
* The total number of loans in the portfolio has been reduced by the number of
loans for which a servicing released sale is pending or loans which have been
foreclosed. ** Percentages may not total properly due to rounding.
The following table summarizes the delinquency, foreclosure and loss
experience on Headlands' portfolio of securitized mortgage loans. This
portfolio consists of residential mortgage loans (excluding home equity loans)
originated or acquired by Headlands and included in a securitization
transaction (either pursuant to the Sponsor's securitization program or one
sponsored by a third-party conduit).
HEADLANDS MORTGAGE COMPANY
SECURITIZED MORTGAGE LOAN PORTFOLIO
DELINQUENCY, FORECLOSURE AND LOSS
EXPERIENCE
<TABLE>
<CAPTION>
NUMBER PERCENT NUMBER PERCENT NUMBER PERCENT OF NUMBER PERCENT OF
OF LOANS OF OF OF OF LOANS SERVICING OF LOANS SERVICING
SERVICING LOANS SERVICING PORTFOLIO PORTFOLIO
PORTFOLIO PORTFOLIO
<S> <C>
Total Portfolio*...
Period of
Delinquency........
30-59 days.......
60-89 days.......
90 days or more.
</TABLE>
Total Delinquencies (excluding Foreclosures)**..
Foreclosures Pending
Losses Sustained...
* Percentages may not total properly due to rounding.
Delinquencies, foreclosures and losses generally are expected to
occur more frequently after the first full year of the life of mortgage loans.
Accordingly, because a large number of mortgage loans serviced by Headlands
have been recently originated, the current level of delinquencies,
foreclosures and losses may not be representative of the levels which may be
experienced over the lives of such mortgage loans. If the volume of Headlands'
new loan originations and acquisitions does not continue to grow at the rate
experienced in recent years, the levels of delinquencies, foreclosures and
losses as percentages of the portfolio could rise significantly above the
rates indicated in the above tables.
There can be no assurance that the delinquency, foreclosure and loss
experience of the mortgage loans will correspond to the delinquency,
foreclosure and loss experience of the servicing portfolios of Headlands set
forth in the foregoing tables. The statistics shown above represent the
respective delinquency, foreclosure and loss experience only at the dates
presented, whereas the aggregate delinquency, foreclosure and loss experience
on the mortgage loans will depend on the results obtained over the life of the
trust. The above servicing portfolios include mortgage loans with a variety of
payment and other characteristics which are not necessarily representative of
the payment and other characteristics of the mortgage loans. The above
servicing portfolios include mortgage loans underwritten pursuant to
guidelines not necessarily representative of those applicable to the mortgage
loans. It should be noted that if the residential real estate market should
experience an overall decline in property values, the actual rates of
delinquencies, foreclosures and losses could be higher than those previously
experienced by Headlands. In addition, adverse economic conditions may affect
the timely payment by mortgagors of scheduled payments of principal and
interest on the mortgage loans and, accordingly, the actual rates of
delinquencies, foreclosures and losses with respect to the mortgage loans.
Servicing Compensation And Payment Of Expenses
The expense fees with respect to the mortgage pool are payable out of
the interest payments on each mortgage loan. The expense rate in respect of
each mortgage loan will be [ ]% per annum of the scheduled principal balance
of such mortgage loan. The expense fees consist of servicing compensation
payable to the master servicer in respect of its master servicing activities
and fees payable to the trustee in respect of its activities as trustee under
the pooling and servicing agreement. The master servicing fee will be [ ]% per
annum of the scheduled principal balance of each mortgage loan.
The master servicer is obligated to pay certain ongoing expenses
associated with the trust and incurred by the master servicer, including,
without limitation, sub-servicing and other related compensation payable to a
sub-servicer, in connection with its responsibilities under the pooling and
servicing agreement and such amounts will be paid by the master servicer out
of the master servicing fee. The amount of the master servicing fee is subject
to adjustment with respect to prepaid mortgage loans, as described herein
under " -- Adjustment to the Master Servicing Fee in Connection with Prepaid
Mortgage Loans." The master servicer is also entitled to receive all late
payment fees, assumption fees, prepayment penalties 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 minus the expense rate with respect to such mortgage
loan.
Adjustment To Master Servicing Fee In Connection With Prepaid Mortgage Loans
Prepayment interest shortfalls will result because:
o mortgagors are obligated to pay interest on prepayments in full only
to the date of prepayment by the mortgagor,
o partial prepayments are generally not required to be accompanied by
interest on the amount of such partial prepayment and
o 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 and servicing agreement, prepayment interest
shortfalls resulting from prepayments in full or in part in any calendar month
will be offset by the master servicer on the distribution date in the
following calendar month to the extent such prepayment interest shortfalls do
not exceed 1/12 of 0.125% of the aggregate scheduled principal balances of the
mortgage loans for such distribution date (the amount of the master servicing
fee used to offset prepayment interest shortfalls is referred to as
"compensating interest payments" and the remaining amount of prepayment
interest shortfalls after applying compensating interest payments is referred
to as "net prepayment interest shortfalls"). Any net prepayment interest
shortfalls for a month will reduce the amount of interest available to be
distributed to certificateholders. See "Description of the Certificates --
Interest" herein.
Advances
If the scheduled payment on a mortgage loan which was due on the due
date in the month of a distribution date is delinquent other than as a result
of application of the Relief Act and such payment exceeds the amount deposited
in the Certificate Account as a Certificate Account Advance with respect to
such mortgage loan, the master servicer will deposit in the Certificate
Account not later than the fourth business day immediately preceding the
distribution date an amount equal to such deficiency net of the related master
servicing fee except to the extent the master servicer determines any such
advance to be nonrecoverable from liquidation proceeds, insurance proceeds or
from future payments on the mortgage loan for which such advance is made.
Subject to the foregoing, such advances will be made through liquidation of
the related mortgaged property. Any amount used as a Certificate Account
Advance shall be replaced by the master servicer by deposit in the Certificate
Account on or before any future date to the extent that funds in the
Certificate Account on such date are less than the amount required to be
transferred to the Certificate Account. If applicable, on the fifth business
day preceding each distribution date, the master servicer shall present an
officer's certificate to the trustee stating that the master servicer elects
not to make an advance in a stated amount and detailing the reason it deems
the advance to be nonrecoverable.
As of any determination date, a "Certificate Account Advance" is the
amount on deposit in a Protected Account or another permitted account which is
not required to be transferred to the Certificate Account for distribution
during the calendar month in which such determination date occurs but which is
used to make a distribution to certificateholders during such calendar month
on account of scheduled payments on the mortgage loans due on the due date for
such month not being paid on or before the determination date except insofar
as such unpaid amounts are the result of application of the Soldiers' and
Sailors' Civil Relief Act of 1940, as amended (the "Relief Act").
DESCRIPTION OF THE CERTIFICATES
General
The certificates will be issued pursuant to the pooling and servicing
agreement. The form of pooling and servicing agreement has been filed as an
exhibit to the registration statement of which the prospectus supplement and
the prospectus are a part. The following is a summary of the material terms of
the offered certificates. Reference is made to the prospectus for important
additional information regarding the terms and conditions of the pooling and
servicing agreement and the offered certificates. When particular provisions
or terms used in the pooling and servicing agreement are referred to, the
actual provisions (including definitions of terms) are hereby incorporated by
reference.
The certificates will evidence in the aggregate the entire beneficial
ownership interest in the trust. The trust will consist of:
o a pool of mortgage loans;
o such assets as from time to time are identified as deposited in
respect of the mortgage loans in the Protected Account and in the
Certificate Account and belonging to the trust;
o property acquired by foreclosure of such mortgage loans or by deed
in lieu of foreclosure;
o any applicable primary insurance policies and standard hazard
insurance policies; and
o 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) reduced by the sum of:
o all amounts previously distributed to holders of certificates of
such class as payments of principal; and
o the amount of realized losses and Excess Losses allocated to such
class.
In addition, the Class Certificate Balance of the class of
subordinate certificates then outstanding with the highest numerical class
designation will be reduced if and to the extent that the aggregate of the
Class Certificate Balances of all classes of certificates, following all
distributions and the allocation of realized losses on a distribution date,
exceeds the pool balance as of the due date occurring in the month of such
distribution date.
The offered certificates, other than the Class R certificates, will
be issuable in book-entry form only. The Class R certificates will be issued
as a two certificates; one representing a de minimis interest to be held by
the tax matters person and the other representing an approximate 100%
interest.
A "business day" is generally any day other than a Saturday, a Sunday
or a day on which the New York Stock Exchange is closed or on which banking
institutions in New York City or California are authorized or obligated by law
or executive order to be closed.
Book-Entry Certificates
The Class A, Class B-1, Class B-2 and Class B-3 certificates will be
issued in book-entry form. The book-entry certificates will be held by a
nominee of The Depository Trust Company, or DTC. Beneficial interests in the
book-entry certificates will be indirectly held by investors through the
book-entry facilities of DTC. Investors may hold beneficial interests in the
book-entry certificates in minimum denominations of $25,000 initial principal
balance and in integral multiples of $1 in excess thereof. The sponsor has
been informed by DTC that its nominee will be Cede & Co. Accordingly, Cede &
Co. is expected to be the holder of record of the book-entry certificates.
Except as described below, no beneficial owner of a book-entry certificate
will be entitled to receive a physical certificate representing such
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 that maintains the beneficial owner's account. In
turn, the financial intermediary's ownership of the book-entry certificate
will be recorded on the records of DTC, either directly or through agents.
Beneficial ownership of a book-entry certificate may only be transferred in
compliance with the procedures of the applicable financial intermediaries and
DTC.
DTC 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. DTC performs services for
its participants, some of which (and/or their representatives) own DTC. In
accordance with its normal procedures, DTC is expected to record the positions
held by each of its participants 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 DTC and its participants.
Distributions on the book-entry certificates will be made on each
distribution date by the trustee to DTC. DTC will be responsible for crediting
the amount of such payments to the accounts of the applicable participants in
accordance with DTC's normal procedures. Each participant will be responsible
for disbursing such payments to the beneficial owners that it represents and
to each financial intermediary for which it acts as agent. Each financial
intermediary will be responsible for disbursing funds to the beneficial owners
that it represents.
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 certificates
held by Cede & Co., or for maintaining, supervising or reviewing any records
relating to such beneficial interests. In the event of the insolvency of DTC,
a participant or an indirect participant in whose name book-entry certificates
are registered, the ability of the beneficial owners to obtain timely payment
may be impaired.
Unless and until physical certificates are issued, it is anticipated
that the only certificateholder of the book-entry certificates will be Cede &
Co. Beneficial owners of the certificates will not be certificateholders, as
that term is used in the pooling and servicing agreement. Beneficial owners
are only permitted to exercise the rights of certificateholders indirectly
through financial intermediaries and DTC. Monthly and annual reports on the
trust provided by the master servicer to Cede & Co., may be made available to
beneficial owners upon request, in accordance with the rules, regulations and
procedures creating and affecting DTC, and to the financial intermediaries to
whose accounts the book-entry certificates of such beneficial owners are
credited.
DTC has advised the sponsor and the trustee that, unless and until
physical certificates are issued, DTC will take any action permitted to be
taken by the holders of the certificates under the pooling and servicing
agreement only at the direction of one or more financial intermediaries to
whose 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.
Physical certificates will be issued to beneficial owners of the
book-entry certificates, or their nominees, rather than to DTC, only if:
o DTC or the sponsor advises the trustee in writing that DTC 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;
o the sponsor, at its sole option, elects to terminate a book-entry
system through DTC; or
o 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 DTC
through the financial intermediaries in writing that the
continuation of a book-entry system through DTC (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 DTC of
physical certificates. Upon surrender by DTC of the certificates representing
the book-entry certificates and instructions for re-registration, the trustee
will issue the physical certificates, and thereafter the trustee will
recognize the holders of such physical certificates as certificateholders
under the pooling and servicing agreement.
Protected Account
The master servicer and each permitted sub-servicer will establish
and maintain an account (each, a "Protected Account") into which it will
deposit daily all collections of principal and interest on any mortgage loan,
including principal prepayments, insurance proceeds and liquidation proceeds.
All Protected Accounts shall be held in a depository institution, the accounts
of which are insured by the FDIC to the maximum extent permitted by law,
segregated on the books of such institution and held in trust. The amount at
any time credited to a Protected Account shall be fully insured by the FDIC to
the maximum extent permitted by law or, to the extent that such balance
exceeds the limits of such insurance, such excess must be transferred either
to another account or to the Certificate Account or invested in Eligible
Investments meeting the requirements of the rating agencies.
Prior to each distribution date, the master servicer shall withdraw
or shall cause to be withdrawn from the Protected Accounts and any other
permitted accounts and shall deposit or cause to be deposited in the
Certificate Account amounts representing the following collections and
payments, other than with respect to principal of or interest on the mortgage
loans due on or before the cut-off date:
o scheduled payments on the related mortgage loans received or
advanced by the master servicer which were due on the related due
date, net of servicing fees due the master servicer;
o full principal prepayments, insurance proceeds and any liquidation
proceeds received by the master servicer with respect to such
mortgage loans in the related prepayment period, with interest to
the date of prepayment or liquidation, net of servicing fees due the
master servicer; and
o partial prepayments of principal received by the master servicer for
such mortgage loans in the related prepayment period.
Certificate Account
The trustee shall establish and maintain in the name of the trustee,
for the benefit of certificateholders, an account (the "Certificate Account")
as a non-interest bearing trust account. The trustee will deposit in the
Certificate Account, as received, the following amounts:
o any amounts withdrawn from a Protected Account or other permitted
account;
o any advance and compensating interest payments;
o any insurance proceeds or liquidation proceeds received by the
master servicer which were not deposited in a Protected Account or
other permitted account;
o the repurchase price with respect to any mortgage loans repurchased,
any Substitution Adjustment Amounts and all proceeds of any mortgage
loans or property acquired in connection with the optional
termination of the trust;
o any amounts required to be deposited with respect to losses on
Eligible Investments; and
o any other amounts received by the master servicer or the trustee and
required to be deposited in the Certificate Account pursuant to the
pooling and servicing agreement.
All amounts deposited to the Certificate Account shall be held by the
trustee in the name of the trustee in trust for the benefit of the
certificateholders in accordance with the terms and provisions of the pooling
and servicing agreement, subject to the right of the master servicer to
require the trustee to make withdrawals therefrom as provided in the pooling
and servicing agreement. The amount at any time credited to the Certificate
Account shall at the written direction of the master servicer be invested, in
the name of the trustee, in such Eligible Investments as the master servicer
may direct. As provided in the pooling and servicing agreement, all such
Eligible Investments will mature before the next distribution date and all
investment earnings will be paid to the master servicer, as additional
servicing compensation. The amount of any loss on an Eligible Investment will
be remitted to the Certificate Account by the master servicer.
On each distribution date, the trustee shall make the following
payments from the funds in the Certificate Account:
o first, the trustee's fees shall be paid to the trustee; and
o second, the amount distributable to the certificateholders shall be
paid, to the extent of the Available Funds in respect of such
distribution date, in accordance with the provisions set forth under
"Description of the Certificates--Distributions."
To the extent provided in the pooling and servicing agreement, the
master servicer is not required to deposit in, and may cause the withdrawal
from, the Protected Account or the Certificate Account the amount of any
servicing fees or advances which the master servicer is entitled to be paid.
Available Funds
"Available Funds" for any distribution date will equal the sum of the
following amounts:
o 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,
o all proceeds of any primary mortgage 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,
o all partial and full prepayments received during the related
prepayment period and
o the amounts received in respect of a mortgage loan that became
required to be repurchased or substituted during the month preceding
such distribution date, including any Substitution Adjustment
Amounts, reduced by amounts in reimbursement for advances previously
made and other amounts as to which the master servicer or a
sub-servicer is entitled to be reimbursed from the Certificate
Account pursuant to the pooling and servicing 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 prior calendar month.
Distributions
General. Distributions on each distribution date will be made by
check mailed to the address of the person entitled thereto as it appears on
the applicable certificate register or, in the case of a certificateholder who
holds 100% of a class of certificates or who holds certificates of a class
with an aggregate initial certificate balance of at least $5,000,000 and who
has so notified the trustee in writing in accordance with the pooling and
servicing agreement, by wire transfer in immediately available funds to the
account of such certificateholder at a bank or other depository institution
having appropriate wire transfer facilities; provided, however, that the final
distribution in retirement of the certificates will be made only upon
presentment and surrender of such certificates at the corporate trust office
of the trustee.
The trustee will forward with each distribution on a distribution
date to each certificateholder and the master servicer a statement or
statements setting forth, among other things, the amount of such distribution
allocable to principal and the amount of such distribution allocable to
interest. Such amounts will be expressed as a dollar amount per $1,000 of
Class Certificate Balance. See "Description of the Certificates -- Reports to
Certificateholders" in the prospectus for a detailed description of the
information to be included in such statements.
Allocation of Available Funds. Interest and principal on the
certificates will be distributed monthly on each distribution date, commencing
in [ ], 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.
On each distribution date, an amount equal to the Available Funds
will be distributed in the following order of priority among the following
classes of certificates:
o first, to the senior certificates, the Interest Distribution Amount
for such classes for such distribution date;
o second, to the senior 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 R certificates, until the Class Certificate Balance
thereof has been reduced to zero; and
(ii) to the Class A certificates, until the Class Certificate Balance
thereof has been reduced to zero.
o third, sequentially, to the Class B-1, Class B-2, Class B-3, Class
B-4, Class B-5 and Class B-6 certificates, in that order, up to an
amount equal to and in the following order: (a) the related Interest
Distribution Amount thereon for such distribution date and (b) the
Pro Rata Share (as defined herein) for such class for such
distribution date.
o fourth, any Available Funds remaining after payment of interest and
principal as described above will be distributed to the Class R
certificates. It is not anticipated that there will be any
significant amounts remaining for such distribution.
INTEREST
The pass-through rate for each class of offered certificates for each
distribution date will be as described on page S-3 hereof.
On each distribution date, each class of interest bearing offered
certificates, to the extent of funds available therefore on such distribution
date as described above under " -- Distributions", will be entitled to receive
an amount allocable to interest (as to each such class, the "Interest
Distribution Amount") equal to the sum of (A) the interest accrued during the
applicable interest accrual period at the applicable pass-through rate on the
related Class Certificate Balance and (B) the sum of the amounts, if any, by
which the amount described in clause (A) 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" 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 that would
otherwise have been received with respect to any mortgage loan that was the
subject of (a) a Relief Act Reduction or (b) after the coverage provided by
the subordinate certificates is exhausted for such type of loss, a Special
Hazard Loss, Fraud Loss or a Bankruptcy Loss, and (ii) 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 Soldiers' and
Sailors' Civil Relief Act of 1940. See "Certain Legal Aspects of mortgage
loans -- Soldiers' and Sailors' Civil Relief Act" in the prospectus. "Net
Prepayment Interest Shortfall" is the amount by which the aggregate of
Prepayment Interest Shortfalls 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 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 interest-bearing classes based on the amount of
interest each such class of certificates would otherwise be entitled to
receive 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
applied in the order described above under " -- Distributions," are not
sufficient to make a full distribution of interest to holders of the offered
certificates, interest will be distributed to each class of equal priority in
proportion to the amount of interest each class would otherwise have been
entitled to receive in the absence of such shortfall. Any Unpaid Interest
Shortfall will be carried forward and added to the amount holders of each such
class of offered certificates will be entitled to receive on the next
distribution date. Such a shortfall could occur, for example, if losses
realized on the mortgage loans were exceptionally high or were concentrated in
a particular month. Any such amount so carried forward will not bear interest.
With respect to each distribution date, the "Interest Accrual Period"
for each class of interest-bearing certificates 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.
Principal
The amount to which the senior certificates are entitled as principal
on any distribution date (the "Senior Principal Distribution Amount") will be
an amount equal to the sum of:
(1) the Senior 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;
(2) the Senior Prepayment 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;
(3) the Senior Prepayment Percentage of all partial
prepayments of principal received on each mortgage loan during the
applicable Prepayment Period;
(4) with respect to each mortgage loan that became a
liquidated mortgage loan during the related Prepayment Period, the
lesser of (x) the applicable Senior Percentage of the Scheduled
Principal Balance of such mortgage loan and (y) either (A) the
applicable Senior Prepayment Percentage or (B) if an Excess Loss was
sustained with respect to such liquidated mortgage loan during such
preceding calendar month, the applicable Senior Percentage of the
Liquidation Proceeds and Insurance Proceeds allocable to principal
received with respect to such mortgage loan; and
(5) the Senior Prepayment 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 and servicing agreement in
connection with such distribution date and (c) other unscheduled
payments of principal not otherwise referred to in this definition.
The "Senior Percentage" will initially equal approximately [ ]%. 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 residual certificates immediately preceding such
distribution date by the aggregate Class Certificate Balance of all the
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:
PERIOD (DATES INCLUSIVE SENIOR PREPAYMENT PERCENTAGE
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 certificates and
the residual certificates to zero, the related 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, [describe stepdown test].
The "Subordination Percentage", which will initially equal
approximately [ ]% will be recalculated for each distribution date to equal
100% minus the Senior Percentage for such distribution date. The "Subordinate
Prepayment Percentage" will equal 100% minus the related 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):
(1) the Subordinate 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;
(2) the Subordinate Prepayment 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;
(3) the Subordinate Prepayment 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;
(4) with respect to each mortgage loan that became a
liquidated mortgage loan during the related Prepayment Period, 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 (4) of the
definition of the applicable Senior Principal Distribution Amount, up
to the Subordinate Percentage of the Scheduled Principal Balance of
such mortgage loan; and
(5) the Subordinate Prepayment 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 and servicing agreement in
connection with such distribution date and (c) other unscheduled
payments of principal not otherwise referred to in this definition.
The "Pro Rata Share" with respect to any class of subordinate
certificates on any distribution date will generally equal such class's pro
rata share, based on the Class Certificate Balances of each class, 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 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 designations than such class (the "Applicable Credit Support
Percentage"), is less than the Applicable Credit Support Percentage for such
class on the date of issuance of the certificates (the "Original Applicable
Credit Support Percentage"), no distribution of the amount calculated pursuant
to clauses (2), (3) and (5) of the definitions of Subordinate Principal
Distribution Amount will be made to any such classes (the "Restricted
Classes") and the amount otherwise distributable to the Restricted Classes in
respect thereof will be allocated among the remaining classes of subordinate
certificates, pro rata, based upon their respective Class Certificate
Balances, and distributed in the order described above.
The "Class Subordination Percentage" with respect to any distribution
date and each class of subordinate certificates will equal the fraction,
expressed as a percentage, the numerator of which is the Class Certificate
Balance of such class of subordinate certificates, immediately prior to such
distribution date and the denominator of which is the aggregate of the Class
Certificate Balances of all classes of certificates immediately prior to such
distribution date.
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:
Class B-1....................................
Class B-2....................................
Class B-3....................................
Class B-4....................................
Class B-5....................................
Class B-6....................................
"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.
"Principal prepayment" is any payment or other recovery of principal
on a mortgage loan which is received in advance of its scheduled due date to
the extent that it is not accompanied by an amount as to interest representing
scheduled interest due on any date or dates in any month or months subsequent
to the month of prepayment, including insurance proceeds and amounts received
in connection with the repurchase or substitution of a mortgage loan, but
excluding liquidation proceeds and insurance proceeds received at the time a
mortgage loan becomes a liquidated mortgage loan.
Allocation of Losses
On each distribution date, 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, pro rata, based upon their respective Class Certificate
Balances.
On each distribution date, Excess Losses will be allocated pro rata
among the classes of senior certificates and the subordinate certificates
based upon their respective Class Certificate Balances.
In general, a "realized loss" with respect to a mortgage loan is a
Bankruptcy Loss or 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:
o Special Hazard Losses in excess of the Special Hazard Loss Coverage
Amount,
o Bankruptcy Losses in excess of the Bankruptcy Loss Coverage Amount
and
o 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 and servicing agreement or any loss due to normal wear and tear or
certain other causes.
A "liquidated mortgage loan" is a defaulted mortgage loan as to which
the master servicer has determined that all recoverable liquidation and
insurance proceeds have been received.
Termination; Optional Termination
The circumstances under which the obligations created by the pooling
and servicing agreement will terminate in respect of the certificates are
described in "General Provisions of Pooling and Servicing Agreements --
Termination; Repurchase of Mortgage Loans and Mortgage Certificates" in the
prospectus. The master servicer will have the option to purchase all remaining
mortgage loans and other assets in the trust, thereby effecting early
retirement of the certificates and causing the termination of the REMIC status
of the trust, but such option will not be exercisable until such time as the
pool balance as of the distribution date on which the purchase proceeds are to
be distributed to certificateholders is less than 10% of the cut-off date pool
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 and, in the case of any interest bearing certificate, any
unpaid accrued interest thereon at the applicable pass-through rate. However,
the proceeds from such purchase may not be sufficient to distribute the full
amount to which each holder 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:
o the repurchase described above,
o the expiration of 21 years from the death of the survivor of the
person named in the pooling and servicing agreement and
o [date].
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 [date]. 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 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 among the
classes of certificates based upon their respective Class Certificate
Balances.
The Trustee
[ ]will be the trustee under the pooling and servicing agreement. The
sponsor and the master servicer may maintain other banking relationships in
the ordinary course of business with the trustee. Offered certificates may be
surrendered at the corporate trust office of the trustee located at [ ]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 and servicing
agreement provides that the residual certificates (in addition to certain
other classes of certificates) may not be acquired by an ERISA Plan. See
"ERISA Considerations" herein. The residual certificates will contain a legend
describing the foregoing restrictions.
PREPAYMENT AND YIELD CONSIDERATIONS
General
The effective yield to the holders of the interest bearing
certificates 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 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 balance, the Class Certificate Balance of the
class of subordinate certificates then outstanding with the highest numerical
class designation will be reduced by the amount of such excess.
Net Interest Shortfalls will adversely affect the yields on the
related classes of certificates. In addition, although all losses initially
will be borne by the subordinate certificates, in the reverse order of their
numerical class designations, Excess Losses will be borne by all classes of
certificates on a pro rata basis. 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. Investors must make their
own decisions as to the appropriate prepayment assumptions to be used in
deciding whether to purchase the offered certificates.
As described herein under "Description of the Certificates --
Principal", the Senior Prepayment Percentage of all principal prepayments and
certain other unscheduled payments of principal will be initially distributed
to the classes 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 the 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. All of the mortgage loans are subject to prepayment
penalties following origination on certain prepayments. Such penalties may
impact a mortgagor's decision to prepay a mortgage loan. The rate of payment
of principal may also be affected by any repurchase of the mortgage loans
required by the pooling and servicing 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 balance is less than 10% of the cut-off date pool balance.
Any such purchase will shorten the weighted average lives of the classes of
offered certificates.
Substantially all of the mortgage loans will include due-on-sale
clauses which allow the holder of a mortgage loan to demand payment in full of
the remaining principal balance upon sale or certain transfers of the property
securing such mortgage loan. The master servicer, or the applicable servicer,
will enforce "due-on-sale" clauses to the extent permitted by applicable law.
Each mortgage note which contains "due-on-sale" provisions permits the holder
of the mortgage note to accelerate the maturity of the mortgage loan upon
conveyance by the mortgagor of the underlying mortgaged property. The master
servicer, or the applicable servicer, will enforce any "due-on-sale" clause to
the extent it has knowledge of the conveyance or proposed conveyance of the
underlying mortgaged property and reasonably believes that it is entitled to
do so under applicable law; provided, however, that the master servicer or any
such servicer will not take any action in relation to the enforcement of any
"due-on-sale" provisions which would impair or threaten to impair any recovery
under any related primary mortgage insurance policy. See "Maturity, Prepayment
Considerations and Weighted Average Life of Certificates" in the prospectus.
Acceleration of mortgage loans as a result of enforcement of such
"due-on-sale" provisions in connection with transfers of the related mortgaged
properties or the occurrence of certain other events resulting in acceleration
would affect the level of prepayments on the mortgage loans, thereby affecting
the weighted average lives of the classes of the offered certificates.
Additional Information
The sponsor intends to file certain additional yield tables and other
computational materials with respect to one or more classes of offered
certificates with the SEC in a report on Form 8-K. Such tables and materials
were prepared by 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 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 and servicing
agreement. In general, the mortgage loans may be prepaid by the mortgagors at
any time.
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 prepayment rates of 0.2% per annum
of the then outstanding principal balance of such mortgage loans in the first
month of the life of the mortgage loans and increasing by 0.2% per annum in
each month thereafter until the thirtieth month. Beginning in the thirtieth
month and in each month thereafter during the life of the mortgage loan, 100%
of the Prepayment Assumption assumes a constant prepayment rate of 6.0% per
annum. 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 225%
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.
The following decrement tables have been prepared based on the
assumptions (the "Structuring Assumptions") that:
o the mortgage pool consists of [ ] mortgage loans with the following
characteristics:
<TABLE>
<CAPTION>
PRINCIPAL APPROXIMATE APPROXIMATE NET ORIGINAL REMAINING
BALANCE MORTGAGE RATE MORTGAGE RATE AMORTIZATION AMORTIZATION
TERM TO MATURITY TERM TO
(IN MONTHS) MATURITY
(IN MONTHS)
<S> <C>
</TABLE>
o the mortgage loans prepay at the specified constant percentages of
the Prepayment Assumption
o no defaults in the payment by mortgagors of principal of and
interest on the mortgage loans are experienced,
o scheduled payments on the mortgage loans are received on the first
day of each month commencing in [ ] and are computed prior to giving
effect to prepayments received on the last day of the prior month,
o prepayments are allocated as described herein without giving effect
to loss and delinquency tests,
o 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 [ ],
o 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,
o the initial principal amounts of the certificates are as set forth
on page S-3,
o interest accrues on each class of certificates at the applicable
interest rate described herein,
o distributions in respect of the certificates are received in cash on
the 25th day of each month, commencing in [ ],
o the offered certificates are purchased on [ ] and
o 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 all of the mortgage loans will have the
mortgage rates or remaining terms to maturity assumed or 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 could produce slower or faster distributions in reduction of Class
Certificate Balances than indicated in the decrement tables 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.
The weighted average lives of the offered certificates shown in the
decrement tables are determined by:
o 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,
o summing the results and
o dividing the sum by the aggregate amount of the reductions in the
principal balance of such certificate.
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 CLASS R
DISTRIBUTION DATE % % % % % % % % % %
- - - - - - - - - -
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
Weighted Average Life
(in years)...................
</TABLE>
*Less than 0.5% but greater than 0%.
PERCENTAGE OF INITIAL CLASS CERTIFICATE BALANCE OUTSTANDING FOR THE OFFERED
CERTIFICATES
AT THE RESPECTIVE PERCENTAGES OF THE PREPAYMENT ASSUMPTION SET FORTH BELOW:
CLASS B-1, CLASS B-2 AND CLASS B-3
DISTRIBUTION DATE % % % % %
Initial Percentage 100% 100% 100% 100% 100%
Weighted Average Life
(in years)................................
* Less than 0.5% but greater than 0%.
CREDIT SUPPORT
SUBORDINATION OF SUBORDINATE CERTIFICATES
The rights of the holders of a subordinate certificate to receive
distributions with respect to the mortgage loans will be subordinated to such
rights of the holders of more senior certificateholders, in each case only to
the extent described herein. This is intended to increase the likelihood of
receipt by more senior certificateholders of the maximum amount to which they
are entitled on any distribution date and to provide the more senior
certificateholders protection against Realized Losses, other than Excess
Losses. In addition, 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. Realized Losses, other
than Excess Losses, will be allocated to the most junior class of certificates
then outstanding.
The subordinate certificates will provide limited protection to the
certificates of higher relative priority against (i) Special Hazard Losses in
an initial amount expected to be up to approximately $[ ] (the "Special Hazard
Loss Coverage Amount"), (ii) Bankruptcy Losses in an initial amount expected
to be up to approximately $[ ] (the "Bankruptcy Loss Coverage Amount") and
(iii) Fraud Losses in an initial amount expected to be up to approximately $[
] (the "Fraud Loss Coverage Amount").
The Special Hazard Loss Coverage Amount will be reduced, from time to
time, to be an amount equal on any distribution date to the [step-down test].
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,
[step-down tests].
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 such mortgage loan is not in default
with respect to payment due thereunder or 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 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.
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 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
stated redemption price at maturity 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 [ ]% Prepayment Assumption.
If the method for computing original issue discount 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 the
REMIC under section 860G of the Code. Accordingly, the regular certificates
will be treated as (a) assets described in section 7701(a)(19)(C) of the Code,
and (b) 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 holder of the residual certificate 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 the residual certificate should consider
carefully the tax consequences of any investment in the residual certificate
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 the residual certificate should consult their tax
advisors regarding whether, at the time of acquisition, the 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.
Under the REMIC regulations promulgated by the Treasury Department, a
transfer to a United States person of a noneconomic residual interest will be
disregarded for all federal income tax purposes, and the purported transferor
of a noneconomic residual interest will continue to remain liable for any
taxes due with respect to the income on such residual interest, unless no
significant purpose of the transfer was to impede the assessment or collection
of tax. Based on the REMIC regulations, the residual certificates may
constitute noneconomic residual interests during some or all of their terms
for purposes of the REMIC regulations and, accordingly, unless no significant
purpose of a transfer of such residual certificates is to impede the
assessment or collection of tax, transfers of the residual certificates may be
disregarded and purported transferors may remain liable for any taxes due with
respect to the income on the residual certificates. All transfers of the
residual certificates will be subject to certain restrictions under the terms
of the pooling and servicing agreement that are intended to reduce the
possibility of any such transfer being disregarded to the extent that the
residual certificates constitute noneconomic residual interests. See "Certain
Federal Income Tax Consequences -- Tax-Related Restrictions on Transfer --
Noneconomic Residual Certificates."
Finally, 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 the underwriter, an
administrative exemption (Prohibited Transaction Exemption [ ], [ ] Fed. Reg.
[ ] ([ ]) 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.
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:
o a representation from the transferee of such certificate, 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;
o 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
o 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 and servicing agreement.
The representation 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 classes of 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 has agreed to indemnify the underwriter against, or make
contributions to the underwriter with respect to, certain liabilities,
including liabilities under the Securities Act of 1933, as amended.
LEGAL MATTERS
The validity of the certificates 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 [ ] and [ ].
RATING
CLASS [ ] [ ]
A..........................
R..........................
B-1........................
B-2........................
B-3........................
[Discussion of specific rating agency criteria and limitations.]
The ratings of the rating agencies do not address the possibility
that, as a result of principal prepayments certificateholders might suffer a
lower than anticipated yield. 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 other rating agencies. However, there can be no assurance
as to whether any other rating agency will rate the offered certificates, or
if one 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 received on the closing date.
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.
INDEX TO DEFINED TERMS
Advance...............................................................S-20
Applicable Credit Support Percentage..................................S-29
Bankruptcy Loss Coverage Amount.......................................S-37
beneficial owner......................................................S-21
Book-Entry Certificates...............................................S-21
CEDE..................................................................S-21
Certificate Account...................................................S-23
Certificates..........................................................S-21
Class A Certificates..................................................S-21
Class PO Cash Shortfall...............................................S-25
Code..................................................................S-38
Cross-Over Date.......................................................S-25
Cut-off Date Pool Principal Balance...................................S-10
Debt Service Reduction................................................S-37
Definitive Certificate................................................S-21
Deleted Mortgage Loan.................................................S-15
Depository............................................................S-21
Discount Mortgage Loan................................................S-26
DTC Services..........................................................S-23
Due Date..............................................................S-10
ERISA.................................................................S-39
Exemption.............................................................S-39
FHA...................................................................S-16
FHLMC.................................................................S-10
Financial Intermediary................................................S-22
FNMA..................................................................S-10
Fraud Loss Coverage Amount............................................S-37
GNMA..................................................................S-16
Greenpoint Financial..................................................S-15
Headlands.............................................................S-15
Industry..............................................................S-23
Insurance Proceeds....................................................S-24
Interest Distribution Amount..........................................S-26
Liquidation Proceeds..................................................S-24
Master Servicing Fee..................................................S-20
Material Defect.......................................................S-15
Mortgage..............................................................S-14
Mortgage File.........................................................S-15
Mortgage Loans..................................................S-10, S-21
Mortgage Note.........................................................S-14
Mortgage Pool...................................................S-10, S-21
Mortgage Rate.........................................................S-10
Mortgaged Property....................................................S-10
Mortgagors............................................................S-10
Net Prepayment Interest Shortfalls....................................S-20
Non-Discount Mortgage Loan............................................S-26
Offered Certificates..................................................S-21
Original Applicable Credit Support Percentage.........................S-29
Original Subordinate Principal Balance................................S-27
Pass-Through Rate.....................................................S-25
Pooling Agreement.....................................................S-14
Prepayment Assumption.................................................S-33
Prospectus............................................................S-21
Prospectus Supplement.................................................S-21
Protected Account...............................................S-21, S-23
PTCE 83-1.............................................................S-39
PTCE 95-60............................................................S-39
Rating Agencies.......................................................S-40
Record Date...........................................................S-25
Relief Act............................................................S-21
REMIC.................................................................S-38
REMIC Regulations.....................................................S-38
Replacement Mortgage Loan.............................................S-15
Restricted Classes....................................................S-29
S&P...................................................................S-40
Senior Prepayment Percentage Stepdown Limitation......................S-27
Senior Principal Distribution Amount..................................S-26
Special Hazard Loss Coverage Amount...................................S-37
Structuring Assumptions...............................................S-33
Substitution Adjustment Amount........................................S-15
super jumbos..........................................................S-16
Systems...............................................................S-23
Trust.................................................................S-14
Underwriter...........................................................S-39
Underwriting Standards................................................S-16
Unpaid Interest Shortfall.............................................S-26
VA S-16
$[ ]
(APPROXIMATE)
HEADLANDS MORTGAGE SECURITIES INC.
SPONSOR
[HEADLANDS MORTGAGE COMPANY]
SELLER AND MASTER SERVICER
MORTGAGE PASS-THROUGH CERTIFICATES, SERIES [ ]
PROSPECTUS SUPPLEMENT
[UNDERWRITER]
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 offered 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 offered certificates and with respect to their
unsold allotments or subscriptions. In addition, all dealers selling the
offered certificates will be required to deliver a prospectus supplement and
prospectus for ninety days following the date of this prospectus supplement.
[Date]
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an
offer to sell these securities and we are not soliciting offers to buy these
securities in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED JULY 23, 1999
PROSPECTUS
HEADLANDS MORTGAGE SECURITIES INC.
(Sponsor)
Mortgage Pass-Through Certificates
(Issuable in Series)
Please carefully consider our discussion of some of the risks of investing in
the certificates under "Risk Factors" beginning on page 4.
The Trusts
Each trust will be established to hold the assets transferred to it by
Headlands Mortgage Securities Inc. The assets of each trust will be specified
in the prospectus supplement and will generally consist of:
o first lien mortgage loans secured by one- to four-family residential
properties or participations in that type of loan, and
o mortgage pass-through securities issued
or guaranteed by Ginnie Mae, Fannie Mae or Freddie Mac.
The Certificates
Headlands Mortgage Securities Inc. will sell the certificates pursuant to a
prospectus supplement. The certificates will be grouped into one or more
series, each having its own distinct designation. Each series will be issued
in one or more classes and each class will evidence beneficial ownership of a
specified portion of future payments on the assets in the trust fund to which
the series relates. A prospectus supplement for a series will specify all of
the terms of the series and of each of the classes in the series.
Offers of Certificates
The certificates may be offered through several different methods, including
offerings through underwriters.
----------------
The SEC and state securities regulators have not approved or disapproved these
securities or determined if this prospectus is truthful or complete. Any
representation to the contrary is a criminal offense.
______________ _____, 199[ ]
Table of Contents
RISK FACTORS...................................................................1
THE TRUSTS.....................................................................3
DESCRIPTION OF CERTIFICATES....................................................9
CREDIT ENHANCEMENT............................................................16
YIELD AND PREPAYMENT CONSIDERATIONS...........................................21
THE SPONSOR...................................................................22
USE OF PROCEEDS...............................................................23
MORTGAGE LOAN PROGRAM.........................................................23
THE POOLING AND SERVICING AGREEMENT...........................................24
CERTAIN LEGAL ASPECTS OF THE MORTGAGE LOANS...................................35
ERISA CONSIDERATIONS..........................................................42
LEGAL INVESTMENT CONSIDERATIONS...............................................45
LEGAL MATTERS.................................................................46
FEDERAL INCOME TAX CONSEQUENCES...............................................46
STATE TAX CONSIDERATIONS......................................................69
PLANS OF DISTRIBUTION.........................................................69
FINANCIAL INFORMATION.........................................................70
AVAILABLE INFORMATION.........................................................70
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE...............................70
RATING........................................................................71
Important Notice About Information In This Prospectus and Each
Accompanying Prospectus Supplement
Information about each series of certificates is contained in two
separate documents:
o this prospectus, which provides general information, some of which
may not apply to a particular series; and
o the accompanying prospectus supplement for a particular series,
which describes the specific terms of the certificates of that
series.
The prospectus supplement will contain information about a particular series
that supplements the information contained in this prospectus, and you should
rely on that supplementary information in the prospectus supplement.
You should rely on the information in this prospectus and the accompanying
prospectus supplement. We have not authorized anyone to provide you with
information that is different from that contained in this prospectus and the
accompanying prospectus supplement.
RISK FACTORS
Investors should consider the following factors in connection with the
purchase of certificates. You should also consider the risk factors described
in your prospectus supplement.
Ability to Resell Securities May Be Limited
No market for the certificates will exist before they are issued. We
cannot assure you that a secondary market will develop, or if it does develop,
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 market 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 certificates 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.
Decline in Property Values May Increase Loan Losses.
Because your certificates represent an interest in mortgage loans or are
secured by mortgage loans, your investment may be affected by a decline in
property values. If the outstanding balance of a mortgage loan and any
secondary financing on the underlying property is greater than the value of
the property, there is an increased risk of delinquency, default, foreclosure
and loss. A decline in property values could extinguish the value of a junior
mortgagee's interest in a property.
Delays in Liquidation May Adversely Affect You.
Substantial delays may occur before defaulted loans are liquidated and
the proceeds forwarded to investors. Property foreclosure actions are
regulated by state statutes and rules and are subject to many of the delays
and expenses that characterize lawsuits if defenses or counterclaims are
raised. As a result, foreclosure actions can sometimes take several years to
complete and the liquidation proceeds may not cover the defaulted loan amount.
In particular, because the costs of liquidation do not vary based on the loan
amount, the risk of insufficient liquidation proceeds is greater with small
loans. Some states prohibit a mortgage lender from obtaining a judgment
against the borrower for amounts not covered by property proceeds.
Credit Enhancement May Not Be Sufficient to Protect You From Losses
Credit enhancement is intended to reduce the effect of delinquent
payments or loan losses on those classes of certificates that have the benefit
of the credit enhancement. However, the amount of any credit enhancement may
decline or be depleted before the certificates are paid in full. As a result,
certificateholders may suffer losses. In addition, credit enhancement may not
cover all potential sources of loss, such as a loss resulting from fraud or
negligence by a loan originator or other party.
We refer you to "Credit Enhancement" in this prospectus for more detail.
Bankruptcy and Insolvency May Delay and Reduce Payments on the Certificates
The mortgage loans will be sold by the seller to the sponsor and by the
sponsor to the trust. If the seller or the sponsor should go into bankruptcy,
the bankruptcy trustee or a creditor could attempt to regain control over the
loans. Any such attempt would prevent timely payments on the certificates and
result in a reduction of payment 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 appointing a
successor servicer. In addition, if collections on the loans are commingled
with the master servicer's own funds for at least ten days, the trust fund may
not have a perfected interest in such collections under applicable laws
governing secured transactions. The inclusion of the collections 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. The effect of any such laws could result in delays in
receiving payments on the loans and possible reductions in the aggregate
amount of such payments.
State and Federal Laws May Limit Ability to Collect on 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.
Depending on the provisions of the applicable law and the specific facts
involved, violations may limit the ability to collect all or part of the
principal of or interest on the mortgage loans. In some cases, the borrower
may be entitled to a refund of amounts previously paid and, could subject the
trust to damages and administrative enforcement.
Prepayments on Mortgage Loans May Adversely Affect Yield
The rate of principal distributions will be, and the rate of return to
investors on their certificates may be, directly related to the rate of
principal payments on the mortgage loans. 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 liquidation of defaulted mortgage loans by the master servicer;
o repurchase 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 master servicer 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
principal-only certificate, your yield may be lower than expected if
principal payments on the mortgage loans occur at a slower rate than
you expected;
o If you are purchasing a certificate at a premium, in particular, an
interest-only certificate, your yield may be lower than expected if
principal payments on the mortgage loans occur at a faster rate than
you expected and you may lose your initial investment; and
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.
Trust Assets May Not Be Sufficient to Pay Securities
The assets of the trust 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, unless so specified in the prospectus
supplement. 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.
Consequences of Owning Book-Entry Certificates
Limit on Liquidity of Certificates. Issuance of the certificates in
book-entry form may reduce their liquidity in the secondary trading market
because 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 the 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.
Delays in Distributions. You may experience some delay in the receipt of
distributions on book-entry certificates because 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.
THE TRUSTS
General
Headlands Mortgage Securities Inc., the sponsor, will establish a trust
for each series of mortgage pass-through certificates and convey to the
related trustee certain mortgage-related assets (the "Mortgage Assets")
consisting of a pool of mortgage loans or mortgage certificates, together with
payments in respect of such Mortgage Assets and certain other accounts,
obligations or agreements. The trustee will hold the Mortgage Assets for the
benefit of the certificateholders.
All references in this prospectus to "pool", "certificates" or
"certificateholders", should be deemed to apply to one specific series, trust
and prospectus supplement, unless otherwise noted.
The certificates will be entitled to payment from the assets of the
related trust or other assets pledged for the benefit of certificateholders
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 from
originators or sellers that may be affiliates of the sponsor. Mortgage loans
acquired by the sponsor will have been originated in accordance with the
underwriting criteria specified below under "Mortgage Loan Program --
Underwriting Standards".
The following is a brief description of the Mortgage Assets that may be
included in the trusts. A schedule of the Mortgage Assets relating to a trust
will be attached to the related pooling and servicing agreement and delivered
to the trustee upon delivery of the certificates.
The Mortgage Loans
The term "mortgage loan" as used in this prospectus includes the
following:
o fixed- or adjustable-rate mortgage loans;
o participations or other beneficial interests in mortgage loans; and
o cooperative apartment 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.
The mortgage loans will be evidenced by mortgage notes or other evidence
of indebtedness secured primarily by first liens on the mortgaged properties.
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.
The term "mortgage" as used in this prospectus encompasses a mortgage,
deed of trust or similar instrument with respect to a mortgaged property. The
"mortgaged properties" securing the mortgage notes will be located in any one
of the fifty states, the District of Columbia, Guam, Puerto Rico or any other
territory of the United States and will include:
o 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;
o vacation and second homes;
o investment properties, which are mortgaged properties owned in fee
simple by the borrower;
o 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 mortgage loans generally 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 specified in the prospectus supplement and may include any of
the following:
o Interest may be payable at a fixed rate, a rate adjustable from time
to time in relation to an 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 prospectus supplement. The
mortgage note in respect of a mortgage loan may provide for the
payment of interest at a rate lower than the interest 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.
o 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 (a
"balloon payment"). Principal may include interest that has been
deferred and added to the principal balance of the mortgage loan.
o 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.
o The mortgage loans generally may be prepaid at any time without the
payment of any prepayment fee. If so specified in the prospectus
supplement, some prepayments of principal may be subject to a
prepayment fee, which may be fixed for the life of any such mortgage
loans or may decline over time. Certain mortgage loans may not
permit prepayments until after a certain period of time has passed
and then 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.
o 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.
A trust may contain mortgage loans known as buydown loans, which have
provisions whereby a third party partially subsidizes the monthly payments of
the mortgagor during the early years of the mortgage loans, the difference to
be made up from a buydown fund contributed by such third party at the time of
origination of the mortgage loans. The 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 loans 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.
Mortgage loans with certain loan-to-value ratios, or LTVs, and/or certain
principal balances may be covered wholly or partially by primary mortgage
guaranty insurance. The existence, extent and duration of any such coverage
will be described in the prospectus supplement. The LTV of a mortgage loan at
any given time is the ratio, expressed as a percentage, of the
then-outstanding principal balance of the mortgage loan to the appraised value
of the related mortgaged property. Generally, the appraised value used is
either:
o the lesser of
o the appraised value determined in an appraisal obtained by the
originator at origination of the mortgage loan and
o the sales price for such property, except that, in the case of
a mortgage loan the proceeds of which were used to refinance an
existing mortgage loan, the appraised value of the related
mortgaged property is the appraised value obtained at the time
of refinancing;
o or 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 prospectus supplement for a series will contain specific information
regarding the mortgage loans, including:
o the number of mortgage loans;
o the geographic distribution of the mortgage loans;
o the aggregate outstanding principal balance and the average
outstanding principal balance of the mortgage loans;
o the types of dwelling constituting the mortgaged properties;
o the original terms to maturity of the mortgage loans;
o the largest principal balance and the smallest principal balance of
the mortgage loans;
o the maximum LTV of the mortgage loans at origination;
o the maximum and minimum mortgage rates;
o the aggregate principal balance of nonowner-occupied mortgaged
properties;
o the earliest origination date and latest maturity date of any of the
mortgage loans; and
o 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
prospectus supplement, such losses will be borne by the 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 Ginnie Mae, Freddie Mac and Fannie Mae 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. Ginnie Mae, Freddie Mac or Fannie Mae 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 they may issue
certificates representing interests in mortgage loans having characteristics
that are different from the types of mortgage loans described below. The terms
of the mortgage certificates (and of the underlying mortgage loans) will be
described in the prospectus 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.
Government National Mortgage Association. Ginnie Mae is a wholly owned
corporate instrumentality of the United States within the Department of
Housing and Urban Development. Section 306(g) of Title III of the National
Housing Act of 1934, as amended (the "Housing Act"), authorizes Ginnie Mae to
guarantee the timely payment of the principal of and interest on certificates
that are based on and backed by a pool of loans insured or guaranteed by the
FHA under the Housing Act or Title V of the Housing Act of 1949, or by 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, Ginnie Mae is authorized, under Section
306(d) of the Housing Act, to borrow from the United States Treasury with no
limitations as to amount.
All of the Ginnie Mae certificates will be mortgage-backed certificates
issued and serviced by Ginnie Mae- or Fannie Mae-approved mortgage servicers.
Each Ginnie Mae certificate provides for the payment by or on behalf of the
issuer of the Ginnie Mae certificate to the registered holder of such Ginnie
Mae 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 Ginnie Mae certificate
pass-through rate. In addition, each payment to a Ginnie Mae certificateholder
will include proportionate pass-through payments to such holder of any
prepayments of principal of the mortgage loan underlying the Ginnie Mae
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.
Federal Home Loan Mortgage Corporation. Freddie Mac is a corporate
instrumentality of the United States created pursuant to Title III of the
Emergency Home Finance Act of 1970, as amended. Freddie Mac's common stock is
owned by the Federal Home Loan Banks, and its preferred stock is owned by the
stockholders of such Federal Home Loan Banks. Freddie Mac 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 Freddie Mac 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. Freddie Mac 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.
Freddie Mac 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 Freddie Mac
under its guaranty are obligations solely of Freddie Mac and are not backed
by, or entitled to, the full faith and credit of the United States. If Freddie
Mac were unable to satisfy such obligations, distributions to holders of
Freddie Mac certificates would consist solely of payments and other recoveries
on the underlying mortgage loans and, accordingly, monthly distributions to
holders of Freddie Mac certificates would be affected by delinquent payments
and defaults on such mortgage loans.
Registered holders of Freddie Mac certificates are entitled to receive
their monthly pro rata share of all principal payments on the underlying
mortgage loans received by Freddie Mac, including any scheduled principal
payments, full and partial prepayments of principal and principal received by
Freddie Mac by virtue of condemnation, insurance, liquidation or foreclosure,
and repurchases of the mortgage loans by Freddie Mac or the seller thereof.
Freddie Mac is required to remit each registered Freddie Mac
certificateholder's pro rata share of principal payments on the underlying
mortgage loans, interest at the Freddie Mac 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 Freddie Mac.
Freddie Mac 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
Freddie Mac 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 Freddie Mac 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 Freddie Mac
certificates sold by Freddie Mac 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. Fannie Mae is a federally
chartered and privately owned corporation organized and existing under the
Federal National Mortgage Association Charter Act, as amended. Fannie Mae 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.
Fannie Mae provides funds to the mortgage market primarily by purchasing
mortgage loans from lenders, thereby replenishing their funds for additional
lending. Fannie Mae 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, Fannie Mae helps to redistribute mortgage funds from
capital-surplus to capital-short areas.
Fannie Mae guarantees to each registered holder of a Fannie Mae
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 Fannie
Mae were unable to perform such obligations, distributions on Fannie Mae
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 Fannie Mae certificates. The
obligations of Fannie Mae under its guarantees are obligations solely of
Fannie Mae and are not backed by, nor entitled to, the full faith and credit
of the United States.
Fannie Mae certificates evidencing interests in pools of mortgage loans
formed on or after May 1, 1985 (other than Fannie Mae 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 Fannie Mae certificate will be made by Fannie
Mae on the 25th day of each month to the persons in whose name the Fannie Mae
certificate is entered in the books of the Federal Reserve Banks (or
registered on the Fannie Mae certificate register in the case of fully
registered Fannie Mae certificates) as of the close of business on the last
day of the preceding month. With respect to Fannie Mae certificates issued in
book-entry form, distributions thereon will be made by wire, and with respect
to fully registered Fannie Mae 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 prospectus 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 Freddie
Mac, Fannie Mae or Ginnie Mae certificates. The underlying securities will be
held under a trust agreement by Freddie Mac, Fannie Mae or Ginnie Mae, each as
trustee, or by another trustee named in the prospectus supplement. Freddie
Mac, Fannie Mae or Ginnie Mae 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 prospectus supplement.
Certificate Account
For the benefit of the trustee and the certificateholders, the master
servicer will establish and maintain certificate accounts to hold collections
and funds received on the mortgage loans. See "The Pooling and Servicing
Agreement--Payments on Mortgage Loans."
The pooling and servicing agreement may authorize the trustee to invest
the funds in the certificate account in certain investments that will qualify
as permitted investments under Section 860G(a)(5) of the Code in the case of
REMIC certificates. These "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 pooling and servicing
agreement of each rating agency rating the certificates of such series that
has rated such commercial paper, demand and time deposits and banker's
acceptances sold by eligible commercial and certain repurchase agreements of
United States government securities. Reinvestment earnings, if any, on funds
in the certificate account generally will belong to the master servicer.
Substitution of Mortgage Assets
Substitution of Mortgage Assets will be permitted in the event of
breaches of representations and warranties with respect to any original
Mortgage Asset or in the event the documentation with respect to any Mortgage
Asset is determined by the trustee to be incomplete. The period during which
such substitution will be permitted generally will be indicated in the
prospectus 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
and servicing agreement among the sponsor, the seller, the trustee and the
master servicer, if such series relates to mortgage loans. A form of pooling
and servicing 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 and servicing agreement. 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 and
servicing agreement and the prospectus 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 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 prospectus supplement, will evidence specified
beneficial ownership interests in the trust created pursuant to the related
pooling and servicing 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
prospectus 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
prospectus 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 prospectus 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 of senior certificates and one or more classes
of subordinate certificates. 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 prospectus
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 prospectus supplement. The
timing and amounts of such distributions may vary among classes or over time
as specified in the prospectus supplement.
Distributions
Distributions of principal and interest on the certificates will be made
by the trustee monthly, quarterly, semi-annually or at such other intervals
and on the distribution dates as are specified in the prospectus supplement.
Distributions will be made by wire transfer or by check mailed to record
holders of such certificates as of the record date specified in the prospectus
supplement at their addresses appearing in the certificate register maintained
for holders of certificates, 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. 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 prospectus
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 and servicing 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 and servicing
agreement, together with any reinvestment income (if so specified in the
prospectus 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. Unless otherwise specified in the
prospectus supplement, all distributions will be made pro rata to
certificateholders of the class entitled thereto. The aggregate original
principal balance of the certificates (the "Certificate Balance") will equal
the aggregate distributions allocable to principal that such certificates will
be entitled to receive.
Interest. Interest will accrue on the each interest-bearing class of
certificates based on its outstanding principal balance (the "Class
Certificate Balance"), or in the case of interest only certificates, the
notional amount, at the pass-through rate and during each interest accrual
period as specified in the prospectus supplement. Some classes of certificates
will only be entitled to distributions of principal. 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 date of the
initial issuance of a series, as specified in the prospectus supplement)
through the last day of such preceding month, or such other period as may be
specified in the prospectus supplement. To the extent funds are available
therefor, interest accrued during each 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 prospectus 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 prospectus supplement. Unless otherwise specified in
the prospectus 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 prospectus 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 Accrual Certificates will commence only
after the occurrence of the events specified in the prospectus supplement and,
prior to such time, interest will be added to the Class Certificate Balance of
the Accrual Certificates. Afterwards, the Accrual Certificates will accrue
interest on adjusted Class Certificate Balance.
Principal. Unless otherwise specified in the prospectus 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 prospectus supplement, reduced by
all distributions reported to holders of such certificates as allocable to
principal and adjustments, if any, in respect of losses and (1) in the case of
Accrual Certificates, increased by all interest accrued but not then
distributable on such Accrual Certificates and (2) in the case of adjustable
rate certificates, subject to the effect of negative amortization. The
prospectus 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 certain classes of
certificates that are only entitled to distributions of interest, 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 prospectus supplement
until its initial Class Certificate Balance has been fully amortized.
Allocations of distributions of principal will be made to the certificates of
each class of certificates, during the periods and in the order specified in
the prospectus supplement. Unless otherwise specified in the prospectus
supplement, distributions will be made pro rata among the certificates of each
class then entitled to receive such distributions.
If so provided in the prospectus supplement, one or more classes of
senior certificates will be entitled to receive all or a disproportionate
percentage of the principal prepayments 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 in the
percentages and under the circumstances or for the periods specified in such
prospectus supplement. Any increase in the allocation of principal prepayments
will have the effect of accelerating the amortization of the 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".
Unscheduled Distributions. If specified in the prospectus 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 the prospectus supplement. If applicable, the trustee
will be required to make such unscheduled distributions on the day and in the
amount specified in the prospectus supplement if, due to substantial payments
of principal 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 prospectus 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 prospectus supplement, all unscheduled distributions will
include interest at the applicable pass-through rate on the amount of the
unscheduled distribution allocable to principal for the period and to the date
specified in such prospectus supplement.
Unless otherwise specified in the prospectus 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 their Class Certificate Balance 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 scheduled payments are reinvested on
receipt at the rate or rates specified in the prospectus 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 certificates.) The last scheduled distribution date
for each class of certificates will be specified in the prospectus 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 prospectus 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.
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.
Categories of Classes Definition
Planned Principal Class or 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.
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
prospectus 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 ........................ 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.
Interest Only or IO.............................. Certificates that receive
some or all of the
interest payments made on
the Mortgage Assets and
little or no principal.
Interest only
certificates have either
a nominal principal
balance or a notional
amount. A nominal
principal balance
represents actual
principal that will be
paid on such
certificates. It is
referred to as nominal
since it is extremely
small compared to other
classes. A notional
amount is the amount used
as a reference to
calculate the amount of
interest due on an
interest only 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.
Principal Only or 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 prospectus supplement, the excess of
the sum of distributions, payments and other amounts received over the sum of
(A) the amount required to be distributed to certificateholders on such
distribution date and (B) certain expenses, all as more specifically described
in the prospectus supplement. In addition, after the aggregate Class
Certificate Balances of all classes of regular certificates have 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 prospectus
supplement; if so, the terms of such residual certificates will be described
in the prospectus supplement. Any qualifications on direct or indirect
ownership of offered residual certificates, as well as restrictions on the
transfer of such residual certificates, will be set forth in the prospectus
supplement. If residual certificates are not 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 of 1933, as amended (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 option under the pooling
and servicing agreement to make certain advances, 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 prospectus supplement, in the case of cooperative loans, the master
servicer will be required to advance any unpaid maintenance fees and other
charges under the related proprietary leases. The master servicer may be
obligated to make such advances only to the extent any such advance, in the
judgment of the master servicer made on the determination date, will be
reimbursable from late payments made by mortgagors, payments under any primary
mortgage insurance policy or other form of credit support or proceeds of
liquidation. Any master servicer funds thus advanced are reimbursable to the
master servicer from cash in the certificate account to the extent that the
master servicer shall determine that any such advances previously made are not
ultimately recoverable from the sources described above.
In making advances, the master servicer will endeavor to maintain a
regular flow of scheduled interest and principal payments to holders of the
related classes of certificates, rather than to guarantee or insure against
losses. If advances are made by the master servicer from funds being held for
future distribution to certificateholders, the master servicer will replace
such funds on or before any future distribution date to the extent that funds
in the certificate account on such distribution date would be less than the
amount required to be available for distributions to certificateholders on
such date.
The master servicer may also be obligated to make advances, to the extent
recoverable out of insurance proceeds, liquidation proceeds or otherwise, in
respect of certain taxes and insurance premiums not paid by mortgagors on a
timely basis. Funds so advanced are reimbursable to the master servicer to the
extent permitted by the pooling and servicing agreement. If specified in the
prospectus 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 prospectus 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 a statement setting forth, to the extent applicable to such series of
certificates:
o the amount of such distribution allocable to principal, separately
identifying the aggregate amount of any principal prepayments and,
if so specified in the prospectus supplement, prepayment penalties
included therein;
o the amount of such distribution allocable to interest;
o the amount of any advance;
o the aggregate amount withdrawn from the reserve fund, if any, that
is included in the amounts distributed to certificateholders;
o the Class Certificate Balance or notional amount of each class after
giving effect to the distribution of principal on such distribution
date;
o the percentage of principal payments on the Mortgage Assets
(excluding prepayments), if any, which each class will be entitled
to receive on the following distribution date;
o the percentage of principal prepayments with respect to the Mortgage
Assets, if any, which each class will be entitled to receive on the
following distribution date;
o the amount of 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;
o the number and aggregate principal balances of mortgage loans
o 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
o in foreclosure as of the close of business on the last day of
the calendar month preceding such distribution date;
o the book value of any real estate acquired through foreclosure or
grant of a deed in lieu of foreclosure ("REO Property");
o 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;
o if applicable, the amount remaining in the reserve fund at the close
of business on the distribution date;
o the pass-through rate as of the day prior to the immediately
preceding distribution date; and
o 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
prospectus 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 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 trust.
Credit enhancement may be in the form of:
o a limited financial guaranty policy issued by an entity named in the
prospectus supplement,
o the subordination of one or more classes of the certificates,
o the establishment of one or more reserve funds,
o the use of a cross-support feature,
o 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 prospectus supplement, or
o any combination of the foregoing.
Unless otherwise specified in the prospectus 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 prospectus supplement, the coverage provided by one
or more forms of credit enhancement may apply concurrently to two or more
related trusts. If applicable, the prospectus 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 coverage
to the identified trusts.
Subordination
If so specified in the prospectus supplement, the rights of holders of
one or more classes of certificates will be subordinated to the rights of
holders of one or more classes of senior certificates with respect to
distributions of scheduled principal, principal prepayments, interest or any
combination thereof that otherwise would have been payable to holders of the
subordinate certificates as specified in the prospectus supplement. Certain
classes of subordinate certificates may be senior to other classes of
subordinate certificates and be rated investment grade. 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 subordinate certificates and
thereafter by the senior certificates, in each case under the circumstances
and subject to the limitations specified in the prospectus 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 prospectus 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
prospectus supplement, senior certificateholders would experience losses on
their certificates.
If specified in the prospectus 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:
o in the order of their scheduled final distribution dates;
o in accordance with a schedule or formula;
o in relation to the occurrence of events or;
o otherwise as specified in the prospectus supplement.
Surety Bonds
A surety bond or bonds may be obtained and maintained for a series or
certain classes thereof which will, subject to certain conditions and
limitations, guaranty payments of all or limited amounts of principal and
interest due on all or certain of the classes of such series.
Mortgage Pool Insurance Policies
If specified in the prospectus supplement, a separate mortgage pool
insurance policy will be obtained for the trust and issued by the insurer
named in the prospectus 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 prospectus supplement 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
prospectus supplement (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 prospectus 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 prospectus supplement, each mortgage
pool insurance policy will provide that no claims may be validly presented
unless:
o any required primary mortgage insurance policy is in effect for the
defaulted mortgage loans and a claim thereunder has been submitted
and settled;
o 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;
o 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
o 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 (1) such restoration will increase the proceeds to
certificateholders on liquidation of the mortgage loan after reimbursement of
the master servicer for its expenses and (2) such expenses will be recoverable
by it through proceeds of the sale of the mortgaged property or proceeds of
the mortgage pool insurance policy or any 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, (A) 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 (B) 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 pool
insurer.
The original amount of coverage under each mortgage pool insurance policy
will be reduced over the life of the certificates by the aggregate dollar
amount of claims paid less the aggregate of the net amounts realized by the
pool insurer upon disposition of all foreclosed properties. The amount of
claims paid will include certain expenses incurred by the master servicer as
well as accrued interest on delinquent mortgage loans to the date of payment
of the claim, unless otherwise specified in the prospectus 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 prospectus supplement, a waiver letter may be
obtained from the pool insurer waiving its right to deny a claim or rescind
coverage under the 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 loans or the denial or
adjustment of coverage under any primary mortgage insurance policy because of
such fraud, dishonesty or misrepresentation. In such circumstances, the pool
insurer will be indemnified by the seller for the amount of any loss paid by
the pool insurer under the terms of the waiver letter. The maximum aggregate
amount of such losses covered under the waiver letter and the period of time
during which such coverage will be provided will be specified in the
prospectus supplement.
Special Hazard Insurance Policies
If specified in the prospectus supplement, a separate special hazard
insurance policy will be obtained for the trust. Each special hazard insurance
policy will, subject to limitations described below, protect
certificateholders from:
(1) 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
prospectus supplement, not insured 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
(2) 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,
nuclear or chemical reaction, flood, nuclear or chemical contamination and
certain other risks. The amount of coverage under any special hazard insurance
policy will be specified in the prospectus 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 has
been kept in force and other protection and preservation expenses have been
paid.
Subject to the foregoing limitations and unless otherwise specified in
the prospectus 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:
o the cost of repair or replacement of such property and
o 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 special hazard insurance policy and mortgage pool insurance policy.
To the extent specified in the prospectus 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
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 prospectus supplement, a 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 prospectus
supplement. Generally, each bankruptcy bond will cover 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 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 prospectus 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
certificates. See "Certain Legal Aspects of the Mortgage Loans --
Anti-Deficiency Legislation and Other Limitations on sellers" herein.
To the extent specified in the prospectus 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
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 the
certificates may be reduced so long as any such reduction will not result in a
downgrading of the rating of such certificates by the rating agencies.
Reserve Fund
If so specified in the prospectus supplement, credit support with respect
to the certificates may be provided by the establishment and maintenance with
the trustee of one or more reserve funds. The prospectus supplement will
specify whether or not a reserve fund will be included in the trust.
A reserve fund will be funded:
o 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
prospectus supplement;
o by the deposit therein from time to time of certain amounts, as
specified in the prospectus supplement, to which subordinate
certificateholders, if any, would otherwise be entitled; or
o in such other manner as may be specified in the prospectus
supplement.
Any amounts on deposit in a 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 specified in the prospectus supplement, as beneficiary and will be
issued by an entity acceptable to each rating agency that rates the
certificates.
Additional information with respect to the reserve fund assets will be set
forth in the prospectus 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 prospectus supplement.
Cross Support
If specified in the prospectus supplement, the beneficial ownership of
separate groups of assets included in a trust may be evidenced by separate
classes 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 prospectus supplement will describe the
manner and conditions for applying the cross support feature.
Other Insurance, Guaranties, Letters of Credit and Similar Instruments or
Agreements
If specified in the prospectus supplement, a trust may also include
insurance, guaranties, letters of credit or similar arrangements for the
purposes of:
o maintaining timely payments or providing additional protection
against losses on the trust assets,
o paying administrative expenses; or
o establishing a minimum reinvestment rate on the payments made in
respect of trust assets or principal payment rate on such trust
assets.
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 the prospectus 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 a 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 prospectus supplement.
The prospectus supplement 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 the prospectus 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 prospectus
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 prospectus 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 the
mortgage loans included in a trust, the mortgage loans are likely to be the
subject of higher principal prepayments than if prevailing rates remain at or
above the rates borne by the mortgage loans. Conversely, if prevailing
interest rates rise appreciably above the interest rates borne by the mortgage
loans included in a trust, the 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. 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
loans 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
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.
The FHA loans and VA loans 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 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
prospectus supplement, the effect of prepayments in full will be to reduce the
amount of interest passed through in the following month to certificateholders
because interest on the principal amount of any prepaid mortgage loan 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
prospectus 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 prospectus 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 prospectus 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 prospectus
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 prospectus supplement 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, 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 prospectus
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 the sponsor's 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 FHA loans or VA loans, 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:
o to meet the borrower's monthly obligations on the proposed mortgage
loan and other expenses related to the mortgaged property, such as
property taxes and hazard insurance; and
o 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 prospectus 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
prospectus supplement for each series of certificates will indicate the types
of limited documentation programs pursuant to which the 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 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 Fannie Mae or Freddie Mac.
Each seller must be a mortgagee approved by the FHA or an institution the
deposit accounts in which are insured by the Federal Deposit Insurance
Corporation.
THE POOLING AND SERVICING AGREEMENT
Set forth below is a summary of certain provisions of the pooling and
servicing 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 and servicing 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 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 and
servicing 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 prospectus 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 in
original form to ascertain that all required documents have been properly
executed and received. The trustee will hold such documents in trust for the
benefit of holders of the certificates. Unless otherwise specified in the
prospectus 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 and servicing agreement, and such defect cannot be
cured within the permitted time period, the seller will replace the mortgage
loan with a substitute mortgage loan or repurchase the mortgage loan from the
trustee at a price generally equal to its outstanding principal balance, plus
accrued and unpaid interest at the applicable mortgage rate to the first day
of the month following the month of repurchase and net of any unreimbursed
advances or amounts payable as servicing compensation if the seller is the
master servicer with respect to such mortgage loan. Upon receipt of the
repurchase price the trustee will reimburse any unreimbursed advances of
principal and interest by the master servicer with respect to the mortgage
loan or unreimbursed payments under any form of credit enhancement. Any
remaining portion of the repurchase price will be passed through to
certificateholders 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 a defect in a constituent document.
Any restrictions on substitution or repurchase will be set forth in the
prospectus supplement.
The trustee will be authorized to appoint a custodian pursuant to a
custodial agreement to maintain possession of and, if applicable, to review
the documents relating to the mortgage loans as agent of the trustee.
Unless otherwise specified in the prospectus 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 prospectus supplement. Each mortgage certificate will be
identified in a schedule appearing as an exhibit to the pooling and servicing
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 prospectus 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 pooling and servicing
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 and servicing 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 prospectus
supplement, among other things, that:
o the information set forth in the schedule of mortgage loans is true
and correct in all material respects;
o 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;
o as of the Cut-off Date, no mortgage loan was more than 30 days
delinquent;
o as of the Cut-off Date, all manufactured homes comply with Code
Section 25(e)(10);
o 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;
o if a primary mortgage insurance policy is required with respect to
the mortgage loan, the policy is valid and remains in full force and
effect as of the closing date;
o 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;
o as of the closing date, each mortgaged property is free of damage
and is in good repair;
o 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
o 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 mortgage loan, or the receipt of notice
thereof from the trustee, the seller will, with respect to a breach of its
representations or warranties:
o cure the breach within the time permitted by the pooling and
servicing agreement;
o substitute a substantially similar mortgage loan for such mortgage
loan; or
o repurchase the mortgage loan, or any mortgaged property acquired in
respect thereof, on the terms set forth above under " -- Assignment
of Mortgage Loans" and in the prospectus supplement.
The proceeds of any such repurchase will be passed through to
certificateholders as liquidation proceeds. This substitution/repurchase
obligation constitutes the sole remedy available to certificateholders and the
trustee for any such breach. Neither the sponsor nor the master servicer
(unless the master servicer is the seller) will be obligated to purchase a
mortgage loan if a seller defaults on its obligation to do so, and no
assurance can be given that the seller will carry out their respective
repurchase obligations with respect to the mortgage loans.
Since the representations and warranties of a seller do not address
events that may occur following the sale of a mortgage loan by such seller,
its repurchase obligation described below will not arise if the relevant event
that would otherwise have given rise to such an obligation with respect to a
mortgage loan occurs after the date of sale of such mortgage loan by such
seller to the sponsor or its affiliates.
Servicing
The master servicer will be responsible for servicing and administering
the mortgage loans and will agree to perform diligently all services and
duties customary to the servicing by prudent mortgage lending institutions or
mortgages of the same type as the mortgage loans in those jurisdictions where
the 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 pooling and servicing 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 the 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 and servicing agreement.
Payments on Mortgage Loans
The master servicer will establish and maintain or cause to be
established and maintained one or more certificate accounts for the collection
of payments on the Mortgage Assets which must be:
o 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 a rating
agency that rated one or more classes of the certificates;
o an account or accounts the deposits in which are fully insured by
the FDIC;
o 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
o an account or accounts otherwise acceptable to the rating agency.
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 that it meets the above requirements.
The collateral which may secure amounts in the certificate accounts is
limited to 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.
Unless otherwise specified in the prospectus 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):
o all payments on account of principal and interest (which, at its
option, may be net of the applicable servicing compensation),
including principal prepayments;
o 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;
o 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;
o all advances as described herein under "Advances";
o 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";
o any buydown funds (and, if applicable, investment earnings thereon)
required to be deposited in the certificate account as described
below;
o 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;
o 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
o all other amounts required to be deposited in the certificate
account.
Under the pooling and servicing agreement, the master servicer will be
authorized to make the following withdrawals from the certificate account:
o to clear and terminate the certificate account upon liquidation of
all mortgage loans or other termination of the trust;
o to reimburse any provider of credit support for payments under such
credit support from amounts received as late payments on the
mortgage loans or from insurance or liquidation proceeds;
o to reimburse the master servicer for advances from amounts received
as late payments on the mortgage loans, from insurance or
liquidation proceeds or from other amounts received with respect to
the mortgage loans;
o to reimburse the master servicer from 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;
o to pay to the master servicer its master servicing fee (and other
servicing compensation, if applicable) and to the trustee its fee;
o to reimburse the master servicer for advances which the master
servicer has determined to be otherwise nonrecoverable;
o to withdraw any amount deposited to the certificate account in
error; and
o to pay any expenses which were incurred and are reimbursable
pursuant to the pooling and servicing 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:
o waive any prepayment charge, assumption fee, late payment charge or
any other charge in connection with the prepayment of a mortgage
loan; and
o 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 the 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 mortgage loan shall continue during the scheduled period.
Under the pooling and servicing 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 the mortgage loan will not be
affected, the master servicer may permit the assumption of the mortgage loan,
pursuant to which the mortgagor would remain liable on the mortgage note, or a
substitution of liability with respect to the 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 mortgage note may
not be changed.
The pooling and servicing 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:
o to effect timely payment of taxes, assessments and hazard insurance
premiums or comparable items;
o to reimburse the master servicer out of related assessments for
maintaining hazard insurance;
o to refund to mortgagors amounts determined to be overages;
o to remit to mortgagors, if required, interest earned, if any, on
balances in any of the escrow accounts;
o to repair or otherwise protect the mortgaged property; and
o 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 prospectus supplement, under the
pooling and servicing 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
(A) the maximum insurable value of the improvements securing such mortgage
loan or (B) the greater of (1) the outstanding principal balance of the
mortgage loan and (2) 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. 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 the principal
balance of the mortgage loan and 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 prospectus
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 and servicing 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:
o 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;
o 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;
o amounts expended but not approved by the insurer of the primary
mortgage insurance policy;
o claim payments previously made by the insurer; and
o unpaid premiums.
Primary mortgage insurance policies reimburse certain losses sustained by
reason of default in payments by borrowers. Primary mortgage insurance
policies exclude losses sustained by reason of a default arising from or
involving certain matters, including:
o 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;
o failure to construct the mortgaged property subject to the mortgage
loan in accordance with specified plans;
o physical damage to the mortgaged property; and
o the related sub-servicer not being approved as a servicer by the
insurer.
Evidence of each primary mortgage insurance policy will be provided to
the trustee simultaneously with the transfer to the trustee of the 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 and servicing agreement.
Claims Under Insurance Policies and Other Realization Upon Defaulted Mortgage
Loans
The master servicer, on behalf of the trustee and certificateholders,
will present claims to the insurer under any applicable primary mortgage
insurance policy and will take such reasonable steps as are necessary to
permit recovery under such other insurance policies respecting defaulted
mortgage loans. If any mortgaged property securing a defaulted mortgage loan
is damaged and proceeds, if any, from the 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 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
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, 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 the mortgage loan and expenses incurred by the master
servicer in connection with such proceedings and which are reimbursable under
the pooling and servicing 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 pooling and
servicing agreement. 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 generally 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.
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 specified in the prospectus
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 and servicing 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 and servicing agreement
and that such review has disclosed no items of noncompliance with the
provisions of such pooling and servicing 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 and servicing 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 and servicing agreement throughout the preceding year.
Certain Matters Regarding the Sponsor, the Seller and the Master Servicer
The pooling and servicing agreement for each series of certificates
backed in whole or in part by mortgage loans will provide that the master
servicer:
o may not pledge its rights thereunder except upon receipt by the
trustee of a letter from the rating agency that such pledge shall
not result in a downgrading of the certificates and
o may not resign from its obligations and duties as master servicer
thereunder, except upon
o 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
o determination that its duties thereunder are no longer
permissible under applicable law. No resignation under this
clause will become effective until the trustee or a successor
has assumed the master servicer's obligations and duties under
the pooling and servicing agreement.
The pooling and servicing agreement 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
and servicing agreement, or for errors in judgment; provided, however, that
none of the sponsor, the seller, the master servicer or 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 and servicing 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 and servicing 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 and
servicing 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 and servicing 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 and
servicing 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 and servicing 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 and servicing
agreement for each series of certificates evidencing an interest in mortgage
loans will consist of:
o any failure by the master servicer to make an advance which
continues unremedied for one business day;
o any failure by the master servicer to make or cause to be made any
other required payment pursuant to the pooling and servicing
agreement which continues unremedied for five days;
o 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 and servicing 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
o 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 and servicing 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 and servicing agreement, whereupon the trustee will succeed
to all the responsibilities, duties and liabilities of the master servicer
under such pooling and servicing agreement, including, if specified in the
prospectus supplement, the obligation to make advances and will be entitled to
similar compensation arrangements and limitations on liability. In the event
that the trustee is unwilling or unable so to act, it may appoint or petition
a court of competent jurisdiction for the appointment of a housing and home
finance institution which is a Fannie Mae or Freddie Mac approved servicer
with a net worth of at least $10,000,000 to act as successor master servicer
under such pooling and servicing 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 the pooling and
servicing agreement.
Enforcement
No certificateholder will have any right under the pooling and servicing
agreement to institute any proceeding with respect to the pooling and
servicing agreement unless the 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 and servicing 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 and servicing 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:
(a) to cure any ambiguity;
(b) to correct a defective provision or correct or prospectus
supplement any provision therein that may be inconsistent with any other
provision therein;
(c) to make any other revisions with respect to matters or questions
arising under such pooling and servicing agreement which are not inconsistent
with the provisions of such pooling and servicing agreement; or
(d) to comply with any requirements imposed by the Code or any
regulation thereunder;
provided, however, that no such amendments except those pursuant to clause (d)
will adversely affect in any material respect the interests of any
certificateholder of that series. Any such amendment except pursuant to clause
(d) 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 and servicing agreement 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 the pooling and servicing agreement or
of modifying in any manner the rights of holders of certificates of that
series; provided, however, that no such amendment may
o 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
o 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 and servicing agreement for such series, the trustee
will afford such certificateholders access during business hours to the most
recent list of certificateholders of that series held by the trustee.
Termination; Optional Termination
The obligations of the sponsor, the seller, the master servicer and the
trustee created by the pooling and servicing agreement will terminate upon the
earlier of
o 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
o the purchase by the master servicer or, if REMIC treatment has been
elected and if specified in the prospectus 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 and servicing
agreement continue beyond the expiration of 21 years from the death of the
survivor of the persons named in the pooling and servicing agreement.
Unless otherwise specified in the prospectus supplement, any purchase of
Mortgage Assets and property acquired in respect of Mortgage Assets evidenced
by the certificates will be made at the option of the master servicer or, if
specified in the prospectus 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 prospectus supplement. The
exercise of such right will effect early retirement of the certificates, but
the right of the master servicer or, if applicable, such holder of the
residual certificates, to so purchase is subject to the principal balance of
the related Mortgage Assets being less than the percentage specified in the
prospectus supplement of the aggregate principal balance of the Mortgage
Assets at the Cut-off Date. The foregoing is subject to the provision that if
a REMIC election is made with respect to a trust, any purchase 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 and servicing 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 prospectus 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, a lender
called the beneficiary, and a third-party grantee called the trustee. Under a
deed of trust, the borrower grants the property, irrevocably until the debt is
paid, in trust, generally with a power of sale, to the trustee to secure
payment of the obligation. A security deed and a deed to secure debt are
special types of deeds which indicate on their face that they are granted to
secure an underlying debt. By executing a security deed or deed to secure
debt, the grantor conveys title to, as opposed to merely creating a lien upon,
the subject property to the grantee until such time as the underlying debt is
repaid. The trustee's authority under a deed of trust, the mortgagee's
authority under a mortgage and the grantee's authority under a security deed
or deed to secure debt are governed by law and, with respect to some deeds of
trust, the directions of the beneficiary.
Cooperatives. Certain of the mortgage loans may be cooperative loans. The
cooperative owns all the real property that comprises the project, including
the land, separate dwelling units and all common areas. The cooperative is
directly responsible for project management and, in most cases, payment of
real estate taxes and hazard and liability insurance. If there is a blanket
mortgage on the cooperative and/or underlying land, as is generally the case,
the cooperative, as project mortgagor, is also responsible for meeting these
mortgage obligations. A blanket mortgage is ordinarily incurred by the
cooperative in connection with the construction or purchase of the
cooperative's apartment building. The interest of the occupant under
proprietary leases or occupancy agreements to which that cooperative is a
party are generally subordinate to the interest of the holder of the blanket
mortgage in that building. If the cooperative is unable to meet the payment
obligations arising under its blanket mortgage, the mortgagee holding the
blanket mortgage could foreclose on that mortgage and terminate all
subordinate proprietary leases and occupancy agreements. In addition, the
blanket mortgage on a cooperative may provide financing in the form of a
mortgage that does not fully amortize with a significant portion of principal
being due in one lump sum at final maturity. The inability of the cooperative
to refinance this mortgage and its consequent inability to make such final
payment could lead to foreclosure by the mortgagee providing the financing. A
foreclosure in either event by the holder of the blanket mortgage could
eliminate or significantly diminish the value of any collateral held by the
lender who financed the purchase by an individual tenant-stockholder of
cooperative shares or, in the case of a trust including cooperative loans, the
collateral securing the cooperative loans.
The cooperative is owned by tenant-stockholders who, through ownership of
stock, shares or membership certificates in the corporation, receive
proprietary leases or occupancy agreements which confer exclusive rights to
occupy specific units. Generally, a tenant-stockholder of a cooperative must
make a monthly payment to the cooperative representing such
tenant-stockholder's pro rata share of the cooperative's payments for its
blanket mortgage, real property taxes, maintenance expenses and other capital
or ordinary expenses. An ownership interest in a cooperative and accompanying
rights is financed through a cooperative share loan evidenced by a promissory
note and secured by a security interest in the occupancy agreement or
proprietary lease and in the related cooperative shares. The lender takes
possession of the share certificate and a counterpart of the proprietary lease
or occupancy agreement, and a financing statement covering the proprietary
lease or occupancy agreement and the cooperative shares is filed in the
appropriate state and local offices to perfect the lender's interest in its
collateral. Subject to the limitations discussed below, upon default of the
tenant-stockholder, the lender may sue for judgment on the promissory note,
dispose of the collateral at a public or private sale or otherwise proceed
against the collateral or tenant-stockholder as an individual as provided in
the security agreement covering the assignment of the proprietary lease or
occupancy agreement and the pledge of cooperative shares.
Leaseholds. Certain of the mortgage loans may be secured by a mortgage on
a ground lessee's interest in a ground lease. Leasehold mortgages are subject
to certain risks not associated with mortgage loans secured by the fee estate
of the mortgagor. The most significant of these risks is that the ground lease
creating the leasehold estate could terminate, leaving the leasehold mortgagee
without its security. The ground lease may terminate, if among other reasons,
the ground lessee breaches or defaults in its obligations under the ground
lease or there is a bankruptcy of the ground lessee or the ground lessor. The
terms of the ground lease may also terminate prior to the maturity date of the
indebtedness secured by the mortgage. This risk may be minimized if the ground
lease contains certain provisions protective of the mortgagee, but the ground
leases that secure mortgage loans may not contain some of these protective
provisions, and mortgages may not contain the other protection discussed in
the next paragraph. Protective ground lease provisions include:
o the right of the leasehold mortgagee to receive notices from the
ground lessor of any defaults by the mortgagor;
o the right to cure such defaults, with adequate cure periods; if a
default is not susceptible of cure by the leasehold mortgagee;
o the right to acquire the leasehold estate through foreclosure or
otherwise;
o 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
o the right of the leasehold mortgagee to enter into a new ground
lease with the ground lessor on the same terms and conditions as the
old ground lease in the event of a termination thereof.
In addition to the foregoing protections, a leasehold mortgagee may
require that the ground lease or leasehold mortgage prohibit the ground lessee
from treating the ground lease as terminated in the event of the ground
lessor's bankruptcy and rejection of the ground lease by the trustee for the
debtor-ground lessor. As further protection, a leasehold mortgage may provide
for the assignment of the debtor-ground lessee's right to reject a lease
pursuant to Section 365 of the Bankruptcy Code, although the enforceability of
such clause has not been established. Without the protections described in the
foregoing paragraph, a leasehold mortgagee may lose the collateral securing
its leasehold mortgage. In addition, terms and conditions of a leasehold
mortgage are subject to the terms and conditions of the ground lease. Although
certain rights given to a ground lessee can be limited by the terms of a
leasehold mortgage, the rights of a ground lessee or a leasehold mortgagee
with respect to, among other things, insurance, casualty and condemnation will
be governed by the provisions of the ground lease.
Foreclosure/Repossession
Deed of Trust. Foreclosure of a deed of trust is generally accomplished
by a non-judicial sale under a specific provision in the deed of trust which
authorizes the trustee to sell the property at public auction upon any default
by the borrower under the terms of the note or deed of trust. In certain
states, such foreclosure also may be accomplished by judicial action in the
manner provided for foreclosure of mortgages. In some states, such as
California, the trustee must record a notice of default and send a copy to the
borrower-trustor and to any person who has recorded a request for a copy of
any notice of default and notice of sale. In addition, the trustee must
provide notice in some states, including California, to any other individual
having an interest of record in the real property, including any junior
lienholders. If the deed of trust is not reinstated within any applicable cure
period, a notice of sale must be posted in a public place and, in most states,
including California, published for a specified period of time in one or more
newspapers. In addition, these notice provisions require that a copy of the
notice of sale be posted on the property and sent to all parties having an
interest of record in the property. In California, the entire process from
recording a notice of default to a non-judicial sale usually takes four to
five months.
In some states, including California, the borrower-trustor has the right
to reinstate the loan at any time following default until shortly before the
trustee's sale. In general, the borrower, or any other person having a junior
encumbrance on the real estate, may, during a reinstatement period, cure the
default by paying the entire amount in arrears plus the costs and expenses
incurred in enforcing the obligation. Certain state laws control the amount of
foreclosure expenses and costs, including attorney's fees, which may be
recoverable by a lender.
Mortgages. Foreclosure of a mortgage is generally accomplished by
judicial action. The action is initiated by the service of legal pleadings
upon all parties having an interest in the real property. Delays in completion
of the foreclosure may occasionally result from difficulties in locating
necessary parties. Judicial foreclosure proceedings are often not contested by
any of the parties. When the mortgagee's right to foreclosure is contested,
the legal proceedings necessary to resolve the issue can be time consuming.
After the completion of a judicial foreclosure proceeding, the court generally
issues a judgment of foreclosure and appoints a referee or other court officer
to conduct the sale of the property. In general, the borrower, or any other
person having a junior encumbrance on the real estate, may, during a
statutorily prescribed reinstatement period, cure a monetary default by paying
the entire amount in arrears plus other designated costs and expenses incurred
in enforcing the obligation. Generally, state law controls the amount of
foreclosure expenses and costs, including attorney's fees, which may be
recovered by a lender. After the reinstatement period has expired without the
default having been cured, the borrower or junior lienholder no longer has the
right to reinstate the loan and must pay the loan in full to prevent the
scheduled foreclosure sale. If the deed of trust is not reinstated, a notice
of sale must be posted in a public place and, in most states, published for a
specific period of time in one or more newspapers. In addition, some state
laws require that a copy of the notice of sale be posted on the property and
sent to all parties having an interest in the real property.
Although foreclosure sales are typically public sales, frequently no
third party purchaser bids in excess of the lender's lien because of the
difficulty of determining the exact status of title to the property, the
possible deterioration of the property during the foreclosure proceedings and
a requirement that the purchaser pay for the property in cash or by cashier's
check. Thus the foreclosing lender often purchases the property from the
trustee or referee for an amount equal to the principal amount outstanding
under the loan, accrued and unpaid interest and the expenses of foreclosure.
Thereafter, the lender will assume the burden of ownership, including
obtaining hazard insurance and making such repairs at its own expense as are
necessary to render the property suitable for sale. The lender will commonly
obtain the services of a real estate broker and pay the broker's commission in
connection with the sale of the property. Depending upon market conditions,
the ultimate proceeds of the sale of the property may not equal the lender's
investment in the property.
Courts have imposed general equitable principles upon foreclosure, which
are generally designed to mitigate the legal consequences to the borrower of
the borrower's defaults under the loan documents. Some courts have been faced
with the issue of whether federal or state constitutional provisions
reflecting due process concerns for fair notice require that borrowers under
deeds of trust receive notice longer than that prescribed by statute. For the
most part, these cases have upheld the notice provisions as being reasonable
or have found that the sale by a trustee under a deed of trust does not
involve sufficient state action to afford constitutional protection to the
borrower.
Cooperative Loans. The cooperative shares owned by the tenant-stockholder
and pledged to the lender are, in almost all cases, subject to restrictions on
transfer as set forth in the cooperative's certificate of incorporation and
bylaws, as well as the proprietary lease or occupancy agreement, and may be
cancelled by the cooperative for failure by the tenant-stockholder to pay rent
or other obligations or charges owed by such tenant-stockholder, including
mechanics' liens against the cooperative apartment building incurred by such
tenant-stockholder. The proprietary lease or occupancy agreement generally
permits the cooperative to terminate such lease or agreement in the event an
obligor fails to make payments or defaults in the performance of covenants
required thereunder. Typically, the lender and the cooperative enter into a
recognition agreement which establishes the rights and obligations of both
parties in the event of a default by the tenant-stockholder on its obligations
under the proprietary lease or occupancy agreement. A default by the
tenant-stockholder under the proprietary lease or occupancy agreement will
usually constitute a default under the security agreement between the lender
and the tenant-stockholder.
The recognition agreement generally provides that, in the event that the
tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the cooperative will take no action to terminate such lease or
agreement until the lender has been provided with an opportunity to cure the
default. The recognition agreement typically provides that if the proprietary
lease or occupancy agreement is terminated, the cooperative will recognize the
lender's lien against proceeds from the sale of the cooperative apartment,
subject, however, to the cooperative's right to sums due under such
proprietary lease or occupancy agreement. The total amount owed to the
cooperative by the tenant-stockholder, which the lender generally cannot
restrict and does not monitor, could reduce the value of the collateral below
the outstanding principal balance of the cooperative loan and accrued and
unpaid interest thereon.
Recognition agreements also provide that in the event of a foreclosure on
a cooperative loan, the lender must obtain the approval or consent of the
cooperative as required by the proprietary lease before transferring the
cooperative shares or assigning the proprietary lease. Generally, the lender
is not limited in any rights it may have to dispossess the
tenant-stockholders.
In some states, foreclosure on the cooperative shares is accomplished by
a sale in accordance with the provisions of Article 9 of the UCC and the
security agreement relating to those shares. Article 9 of the UCC requires
that a sale be conducted in a commercially reasonable manner. Whether a
foreclosure sale has been conducted in a commercially reasonable manner will
depend on the facts in each case. In determining commercial reasonableness, a
court will look to the notice given the debtor and the method, manner, time,
place and terms of the foreclosure. Generally, a sale conducted according to
the usual practice of banks selling similar collateral will be considered
reasonably conducted.
Article 9 of the UCC provides that the proceeds of the sale will be
applied first to pay the costs and expenses of the sale and then to satisfy
the indebtedness secured by the lender's security interest. The recognition
agreement, however, generally provides that the lender's right to
reimbursement is subject to the right of the cooperative to receive sums due
under the proprietary lease or occupancy agreement. If there are proceeds
remaining, the lender must account to the tenant-stockholder for the surplus.
Conversely, if a portion of the indebtedness remains unpaid, the
tenant-stockholder is generally responsible for the deficiency. See
"Anti-Deficiency Legislation and Other Limitations on Lenders" below.
Rights of Redemption
In some states after sale pursuant to a deed of trust or foreclosure of a
mortgage, the borrower and certain foreclosed junior lienors are given a
statutory period in which to redeem the property from the foreclosure sale. In
certain other states, including California, this right of redemption applies
only to sales following judicial foreclosure, and not to sales pursuant to a
non-judicial power of sale. In most states where the right of redemption is
available, statutory redemption may occur upon payment of the foreclosure
purchase price, accrued interest and taxes. In some states, the right to
redeem is an equitable right. The effect of a right of redemption is to
diminish the ability of the lender to sell the foreclosed property. The
exercise of a right of redemption would defeat the title of any purchaser at a
foreclosure sale, or of any purchaser from the lender subsequent to judicial
foreclosure or sale under a deed of trust. Consequently, the practical effect
of the redemption right is to force the lender to retain the property and pay
the expenses of ownership until the redemption period has run.
Anti-Deficiency Legislation and Other Limitations on Lenders
Certain states have imposed statutory restrictions that limit the
remedies of a beneficiary under a deed of trust or a mortgagee under a
mortgage. In some states, including California, statutes limit the right of
the beneficiary or mortgagee to obtain a deficiency judgment against the
borrower following foreclosure or sale under a deed of trust. A deficiency
judgment is a personal judgment against the borrower equal in most cases to
the difference between the amount due to the lender and the current fair
market value of the property at the time of the foreclosure sale.
Some state statutes may require the beneficiary or mortgagee to exhaust
the security afforded under a deed of trust or mortgage by foreclosure in an
attempt to satisfy the full debt before bringing a personal action against the
borrower. In certain other states, the lender has the option of bringing a
personal action against the borrower on the debt without first exhausting such
security; however, in some of these states, the lender, following judgment on
such personal action, may be deemed to have elected a remedy and may be
precluded from exercising remedies with respect to the security. Consequently,
the practical effect of the election requirement, when applicable, is that
lenders will usually proceed first against the security rather than bringing a
personal action against the borrower.
In some states, exceptions to the anti-deficiency statutes are provided
for in certain instances where the value of the lender's security has been
impaired by acts or omissions of the borrower, for example, in the event of
waste of the property.
In addition to anti-deficiency and related legislation, numerous other
federal and state statutory provisions, including the federal bankruptcy laws,
the federal Soldiers' and Sailors' Civil Relief Act of 1940 and state laws
affording relief to debtors, may interfere with or affect the ability of the
secured mortgage lender to realize upon its security. For example, in a
proceeding under the federal Bankruptcy Code, a lender may not foreclose on a
mortgaged property without the permission of the bankruptcy court. The
rehabilitation plan proposed by the debtor may provide, if the mortgaged
property is not the debtor's principal residence and the court determines that
the value of the mortgaged property is less than the principal balance of the
mortgage loan, for the reduction of the secured indebtedness to the value of
the mortgaged property as of the date of the commencement of the bankruptcy,
rendering the lender a general unsecured creditor for the difference, and also
may reduce the monthly payments due under such mortgage loan, change the rate
of interest and alter the mortgage loan repayment schedule. The effect of any
such proceedings under the federal Bankruptcy Code, including but not limited
to any automatic stay, could result in delays in receiving payments on the
mortgage loans underlying a series of certificates and possible reductions in
the aggregate amount of such payments.
The federal tax laws provide priority to certain tax liens over the lien
of a mortgage or secured party. Numerous federal and state consumer protection
laws impose substantive requirements upon mortgage lenders in connection with
the origination, servicing and enforcement of mortgage loans. These laws
include the federal Truth-in-Lending Act, Real Estate Settlement Procedures
Act, Equal Credit Opportunity Act, Fair Credit Billing Act, Fair Credit
Reporting Act and related statutes and regulations. These federal and state
laws impose specific statutory liabilities upon lenders who fail to comply
with the provisions of the law. In some cases, this liability may affect
assignees of the loans or contracts.
Generally, Article 9 of the UCC governs foreclosure on cooperative shares
and the related proprietary lease or occupancy agreement. Some courts have
interpreted section 9-504 of the UCC to prohibit a deficiency award unless the
creditor establishes that the sale of the collateral (which, in the case of a
cooperative loan, would be the shares of the cooperative and the related
proprietary lease or occupancy agreement) was conducted in a commercially
reasonable manner.
Environmental Risks
Real property pledged as security to a lender may be subject to
unforeseen environmental risks. Under the laws of certain states,
contamination of a property may give rise to a lien on the property to assure
the payment of the costs of clean-up. In several states such a lien has
priority over the lien of an existing mortgage against such property. In
addition, under the federal Comprehensive Environmental Response, Compensation
and Liability Act of 1980 ("CERCLA"), the United States Environmental
Protection Agency ("EPA") may impose a lien on property where the EPA has
incurred clean-up costs. However, a CERCLA lien is subordinate to
pre-existing, perfected security interests.
Under the laws of some states, and under CERCLA, it is conceivable that a
secured lender may be held liable as an owner or operator for the costs of
addressing releases or threatened releases of hazardous substances at a
mortgaged property, even though the environmental damage or threat was caused
by a prior or current owner or operator. CERCLA imposes liability for such
costs on any and all responsible parties, including owners or operators.
However, CERCLA excludes from the definition of "owner or operator" a secured
creditor who holds indicia of ownership primarily to protect its security
interest (the "secured creditor exclusion"). Thus, if a lender's activities
begin to encroach on the actual management of a contaminated facility or
property, the lender may incur liability as an owner or operator under CERCLA.
Similarly, if a lender forecloses and takes title to a contaminated facility
or property, the lender may incur CERCLA liability in various circumstances,
including, but not limited to, when it holds the facility or property as an
investment (including leasing the facility or property to a third party), or
fails to market the property in a timely fashion.
If a lender is or becomes liable, it can bring an action for contribution
against any other responsible parties, including a previous owner or operator,
who created the environmental hazard, but those persons or entities may be
bankrupt or otherwise judgment proof. The costs associated with environmental
cleanup may be substantial. It is conceivable that such costs arising from the
circumstances set forth above would result in a loss to certificateholders.
CERCLA does not apply to petroleum products, and the secured creditor
exclusion does not govern liability for cleanup costs under federal laws other
than CERCLA, in particular Subtitle I of the federal Resource Conservation and
Recovery Act ("RCRA"), which regulates underground petroleum storage tanks
(except heating oil tanks). The EPA has adopted a lender liability rule for
underground storage tanks under Subtitle I of RCRA. Under such rule, a holder
of a security interest in an underground storage tank or real property
containing an underground storage tank is not considered an operator of the
underground storage tank as long as petroleum is not added to, stored in or
dispensed from the tank. In addition, under the Asset Conservation, Lender
Liability and Deposit Insurance Protection Act of 1996, the protections
accorded to lenders under CERCLA are also accorded to holders of security
interests in underground tanks. It should be noted, however, that liability
for cleanup of petroleum contamination may be governed by state law, which may
not provide for any specific protection for secured creditors.
Except as otherwise specified in the applicable prospectus supplement, at
the time the mortgage loans were originated, no environmental assessment or a
very limited environmental assessment of the mortgaged properties was
conducted.
Whether actions taken by a lender would constitute participation in the
management of a mortgaged property, or the business of a borrower, so as to
render the secured creditor exemption unavailable to a lender has been a
matter of judicial interpretation of the statutory language, and court
decisions have been inconsistent. In 1990, the Court of Appeals for the
Eleventh Circuit suggested that the mere capacity of the lender to influence a
borrower's decisions regarding disposal of hazardous substances was sufficient
participation in the management of the borrower's business to deny the
protection of the secured creditor exemption to the lender.
This ambiguity appears to have been resolved by the enactment of the
Asset Conservation, Lender Liability and Deposit Insurance Protection Act of
1996, which was signed into law by President Clinton on September 30, 1996.
The new legislation provides that in order to be deemed to have participated
in the management of a mortgaged property, a lender must actually participate
in the operational affairs of the property or the borrower. The legislation
also provides that participation in the management of the property does not
include "merely having the capacity to influence, or unexercised right to
control" operations. Rather, a lender will lose the protection of the secured
creditor exemption only if it exercises decision-making control over the
borrower's environmental compliance and hazardous substance handling and
disposal practices, or assumes day-to-day management of all operational
functions of the mortgaged property.
Due-On-Sale Clauses
Unless otherwise provided in the prospectus 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 or who is a member of
the National Guard or is in reserve status at the time of the origination of
the mortgage loan and is later called to active duty may not be charged
interest above an annual rate of 6% during the period of such borrower's
active duty status, unless a court orders otherwise upon application of the
lender. It is possible that such interest rate limitation could have an
effect, for an indeterminate period of time, on the ability of the master
servicer to collect full amounts of interest on certain of the mortgage loans.
Unless otherwise provided in the applicable prospectus 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
The Employee Retirement Income Security Act of 1974, as amended, or
ERISA, and Section 4975 of the Code impose certain requirements on employee
benefit plans and similar arrangements to which either ERISA or the Code
applies (each a "Plan") and on persons who are fiduciaries with respect to or
bear certain other relationships 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 the term "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. 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 Plans, individual retirement accounts,
other employee benefit plans not subject to ERISA (for example, governmental
plans) and other entities whose underlying assets include Plan assets by
reason of a Plan's investment in the entity. 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 Freddie Mac certificates, Ginnie Mae
certificates and Fannie Mae 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 prospectus supplement before purchasing any such
certificates.
Underwriter's Exemptions
The U.S. Department of Labor has granted to certain underwriters
individual administrative exemptions (the "Underwriter's Exemptions") from
certain of the prohibited transaction rules of ERISA and the related excise
tax provisions of Section 4975 of the Code with respect to the initial
purchase, the holding and the subsequent resale by Plans of certificates in
pass-through trusts that consist of certain receivables, loans and other
obligations that meet the conditions and requirements of the Underwriter's
Exemptions.
While each Underwriter's Exemption is an individual exemption separately
granted to a specific underwriter, the terms and conditions which generally
apply to the Underwriter's Exemptions are substantially identical, and include
the following:
(1) the acquisition of the certificates by a Plan is on terms
(including the price for the certificates) that are at least as favorable
to the Plan as they would be in an arm's-length transaction with an
unrelated party;
(2) the rights and 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 in one of the three highest generic
rating categories from Standard & Poor's, Moody's Investors Service,
Inc., Duff & Phelps Credit Rating Co. or Fitch IBCA, Inc.;
(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
Act.
The trust fund must also meet the following requirements:
(a) the corpus of the trust fund must consist solely of assets of the
type that have been included in other investment pools;
(b) 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
DCR for at least one year prior to the Plan's acquisition of
certificates; and
(c) 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
holding receivables as to which the fiduciary (or its affiliate) is an obligor
provided that, among other requirements:
o 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;
o 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;
o a 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
o 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 other servicer,
any insurer with respect to the trust, any obligor with respect to mortgage
loans included in the trust constituting more than five percent (5%) of the
aggregate unamortized principal balance of the assets in the trust, or any
affiliate of such parties (the "Restricted Group").
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
supporting payments to certificateholders, and having a value equal to no more
than twenty-five percent 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 pre-funding period following the closing date, instead of
requiring that all such obligations be either identified or transferred on or
before the closing date. The relief is available when certain conditions are
met.
The prospectus 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.
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 Pool 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, to 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 prospectus 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
transaction 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, any Plan fiduciary that proposes
to cause a Plan to purchase certificates is encouraged to consult with its
counsel concerning the impact of ERISA and the Code, the applicability of PTE
83-1, the availability and applicability of any Underwriter's Exemption or any
other exemptions from the prohibited transaction provisions of ERISA and the
Code and the potential consequences in their specific circumstances, before
making the investment. Moreover, each Plan fiduciary should determine whether
under the general fiduciary standards of investment prudence and
diversification an investment in the certificates is appropriate for the Plan,
taking into account the overall investment policy of the Plan and composition
of the Plan's investment portfolio.
LEGAL INVESTMENT CONSIDERATIONS
The prospectus supplement 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, as amended
("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, any state, including the
District of Columbia and Puerto Rico whose authorized investments are subject
to state regulation to the same extent as, under applicable law, obligations
issued by or guaranteed as to principal and interest by the United States or
any such entities. Under SMMEA, if a state enacts legislation prior to October
4, 1991 specifically limiting the legal investment authority of any such
entities with respect to mortgage related securities, the certificates will
constitute legal investments for entities subject to such legislation only to
the extent provided therein. Approximately twenty-one states adopted such
legislation prior to the October 4, 1991 deadline. SMMEA provides, however,
that in no event will the enactment of any such legislation affect the
validity of any contractual commitment to purchase, hold or invest in
certificates, or require the sale or other disposition of certificates, so
long as such contractual commitment was made or such certificates acquired
prior to the enactment of such legislation.
SMMEA also amended the legal investment authority of federally-chartered
depository institutions as follows: federal savings and loan associations and
federal savings banks may invest in, sell or otherwise deal in certificates
without limitations as to the percentage of their assets represented thereby,
federal credit unions may invest in mortgage related securities, and national
banks may purchase certificates for their own account without regard to the
limitations generally applicable to investment securities set forth in 12
U.S.C. ss.24 (Seventh), subject in each case to such regulations as the
applicable federal authority may prescribe. In this connection, federal credit
unions should review the National Credit Union Administration ("NCUA") Letter
to Credit Unions No. 96, as modified by Letter to Credit Unions No. 108, which
includes guidelines to assist federal credit unions in making investment
decisions for mortgage related securities, and the NCUA's regulation
"Investment and Deposit Activities" (12 C.F.R. Part 703).
All depository institutions considering an investment in the certificates
should review the Federal Financial Institutions Examination Council's
Supervisory Policy Statement on Securities Activities (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 not entitled
to distributions allocated to principal or interest and 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 or proposed by the
Treasury Department, rulings and decisions now in effect or proposed, all of
which are subject to change either prospectively or retroactively. This
summary does not address the federal income tax consequences of an investment
in certificates applicable to all categories of investors, some of which 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 REMIC under the Internal Revenue Code
of 1986, as amended (the "Code"). The prospectus supplement 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 prospectus supplement, as to
each series of certificates Brown & Wood LLP will have advised the sponsor
that:
o 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;
o 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), 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
o 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 held at the beginning of the first taxable year to which the
election applies and to all debt instruments acquired on or after such date.
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.
The IRS has issued final amortizable bond premium regulations. These
regulations specifically do not apply to prepayable debt instruments subject
to Code Section 1272(a)(6) such as the certificates. Absent further guidance
from the IRS, the trustee intends to account for amortizable bond premium in
the manner described above. Prospective purchasers of the certificates should
consult their tax advisors regarding the possible application of the
amortizable bond premium regulations.
Original Issue Discount. The IRS has stated in published rulings that, in
circumstances similar to those described herein, the special rules of the Code
relating to "original issue discount" (currently Code Sections 1271 through
1273 and 1275) will be applicable to a senior certificateholder's interest in
those mortgage loans meeting the conditions necessary for these sections to
apply. Rules regarding periodic inclusion of original issue discount income
are applicable to mortgages of corporations originated after May 27, 1969,
mortgages of noncorporate mortgagors (other than individuals) originated after
July 1, 1982, and mortgages of individuals originated after March 2, 1984.
Such original issue discount could arise by the financing of points or other
charges by the originator of the mortgages in an amount greater than a
statutory de minimis exception to the extent that the points are not currently
deductible under applicable Code provisions or are not for services provided
by the lender. Additionally, under regulations issued on January 27, 1994, as
amended on June 11, 1996, with respect to original issue discount (the "OID
Regulations"), original issue discount may be created when the rate produced
(on the issue date) by the index formula on an adjustable rate mortgage
("ARM") is greater than the initial interest rate payable on the ARM. Original
issue discount generally must be reported as ordinary gross income as it
accrues under a constant interest method. See "Accrual of Original Issue
Discount" under "Multiple Classes of Senior Certificates" below.
Market Discount. A senior certificateholder that acquires an undivided
interest in mortgage loans may be subject to the market discount rules of Code
Sections 1276 through 1278 to the extent an undivided interest in a mortgage
loan is considered to have been purchased at a "market discount". Generally,
market discount is the excess of the portion of the principal amount of the
mortgage loan allocable to the holder's undivided interest over the 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 (A) the total remaining market
discount and (B) 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 (A)
the total remaining market discount and (B) 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,
like 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 the 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 the holder's gross income for the taxable year
with respect to the 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 the 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 the
market discount in income currently as it accrues on all market discount
obligations acquired by the senior certificateholder in that taxable year or
thereafter.
Multiple Classes of Senior Certificates
Stripped Bonds And Stripped Coupons. Pursuant to Code Section 1286, the
separation of ownership of the right to receive some or all of the interest
payments on an obligation from ownership of the right to receive some or all
of the principal payments on the 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 the 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 that 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 the
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 a
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 the 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 the 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 the certificate that is allocable to
the 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 that 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 the mortgage loans qualify, for that treatment. Prospective
purchasers to which that 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
that income. Based in part on the OID Regulations, the amount of original
issue discount required to be included in an owner's income in any taxable
year with respect to a senior certificate representing an interest in mortgage
loans other than ARMs likely will be computed as described below under " --
Accrual of Original Issue Discount." Owners should be aware, however, that the
OID Regulations either do not address, or are subject to varying
interpretations with regard to, several issues relevant to obligations, such
as the mortgage loans, which are subject to prepayment.
Under the Code, the mortgage loans underlying the senior certificates
will be treated as having been issued on the date they were originated with an
amount of OID equal to the excess of such mortgage loan's stated redemption
price at maturity over its issue price. The issue price of a mortgage loan is
generally the amount lent to the mortgagee, which may be adjusted to take into
account certain loan origination fees. The stated redemption price at maturity
of a mortgage loan is the sum of all payments to be made on the 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 prospectus
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 Tax
Reform Act of 1986 provides, however, that the regulations will require that
the Prepayment Assumption be the prepayment assumption that is used in
determining the offering price of the 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 the 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 the senior certificate for each day on which it
owns the 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 another entity specified in the prospectus 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:
o 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
o any payments received during that accrual period, and subtracting
from that total the "adjusted issue price" of the respective
component at the beginning of that 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 that 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 the mortgage loans acquired by a certificateholder are
purchased at a price equal to the then unpaid principal amount of the mortgage
loan, no original issue discount attributable to the difference between the
issue price and the original principal amount of that mortgage loan, i.e.
points, will be includible by the holder. Other original issue discount on the
mortgage loans, e.g., that arising from a teaser rate, would still need to be
accrued.
Senior Certificates Representing Interests in ARMs. The OID Regulations
do not address the treatment of instruments, which represent interests in
ARMs. 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 ARMs ("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
ARMs" 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
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 over the remaining life of the 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 those 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. The 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 this 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:
o an owner that is not a U.S. Person (as defined below), or
o 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, those 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:
o the senior certificateholder does not actually or constructively own
10 percent or more of the combined voting power of all classes of
equity in the trust;
o the senior certificateholder is not a controlled foreign corporation
within the meaning of Code Section 957 related to the trust; and
o the senior certificateholder complies with certain identification
requirements, including delivery of a statement, signed by the
senior certificateholder under penalties of perjury, certifying that
the 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:
o a citizen or resident of the United States,
o a corporation, partnership or other entity (treated as a corporation
or a partnership for federal income tax purposes) created or
organized in or under the laws of the United States, any state
thereof or the District of Columbia (other than a partnership that
is not treated as a United States person under any applicable
Treasury regulations),
o an estate whose income is subject to U.S. federal income tax
regardless of its source of income, or
o 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. In addition, the term
"U.S. Person" includes any holder of a certificate whose income or gain in
respect of its investment in a certificate is effectively connected with the
conduct of a U.S. trade or business. The term "non-U.S. Person" means a
beneficial owner of a certificate that is not a U.S. Person.
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 that 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 the 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 the 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 the recipient's federal income tax liability.
New Withholding Regulations
On October 6, 1997, the Treasury Department issued new regulations which
make 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, 2000, subject
to 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 that year and thereafter. In that event, the 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, those regulations have not yet been issued. Any relief 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
the REMIC status are not satisfied. With respect to each 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, the trust will qualify as a REMIC and the
related certificates will be considered to be regular interests or residual
interests in the REMIC.
The prospectus 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:
o 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);
o certificates held by a real estate investment trust will constitute
real estate assets within the meaning of Code Section 856(c)(4)(A);
and
o interest on certificates will be considered interest on obligations
secured by mortgages on real property within the meaning of Code
Section 856(c)(3)(B).
If less than 95% of the REMIC's assets are assets qualifying under any of the
foregoing Code sections, the certificates will be qualifying assets only to
the extent that the REMIC's assets are qualifying assets. In addition,
payments on mortgage loans held pending distribution on the REMIC certificates
will be treated as real estate assets for purposes of Code Section 856(c).
The Small Business Job Protection Act of 1996, as part of the repeal of
the bad debt reserve method for thrift institutions, repealed the application
of Code Section 593(d) to any taxable year beginning after December 31, 1995.
Tiered REMIC Structures. For certain series of certificates, two separate
elections may be made to treat designated portions of the related trust as
REMICs (respectively, the "Subsidiary REMIC" and the "Master REMIC") for
federal income tax purposes. Upon the issuance of any 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, 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 interests 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:
o real estate assets within the meaning of Section 856(c)(4)(A) of the
Code,
o "loans secured by an interest in real property" under Section
7701(a)(19)(C) of the Code and
o 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, or OID within the meaning of Code Section
1273(a). Generally, the 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 OID 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 holder of a regular certificate should be aware, however,
that the OID Regulations do not adequately address certain issues relevant to
prepayable securities, like 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 the 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 of the Tax Reform Act of 1986 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 the
regular certificates. The prospectus 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 distributions constitute qualified stated
interest. Under the OID Regulations, qualified stated interest generally means
interest payable at a single fixed rate or qualified variable rate provided
that the 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 the 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 the 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 those distributions should be the
Prepayment Assumption. The Prepayment Assumption with respect to a series of
regular certificates will be set forth in the related prospectus supplement.
Holders generally must report de minimis OID pro rata as principal payments
are received, and that 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 an "accrual period" or of the portion of the
original issue discount that accrues during each successive 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:
o 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 that accrual period, and
o subtracting from that total the adjusted issue price of the regular
certificates at the beginning of that accrual period.
The "adjusted issue price" of a regular certificate at the beginning of the
first accrual period is its issue price; the "adjusted issue price" of a
regular certificate at the beginning of a subsequent accrual period is the
"adjusted issue price" at the beginning of the immediately preceding accrual
period plus the amount of original issue discount allocable to that accrual
period and reduced by the amount of any payment other than a payment of
qualified stated interest made at the end of or during that accrual period.
The original issue discount accrued during an accrual period will then be
divided by the number of days in the period to determine the daily portion of
original issue discount for each day in the accrual period. The calculation of
original issue discount under the method described above will cause the
accrual of original issue discount to either increase or decrease (but never
below zero) in a given accrual period to reflect the fact that prepayments are
occurring faster or slower than under the Prepayment Assumption. With respect
to an initial accrual period shorter than a full accrual period the daily
portions of original issue discount must be determined according to an
appropriate allocation under any reasonable method.
A subsequent purchaser of a regular certificate issued with original
issue discount who purchases the regular certificate at a cost less than the
remaining stated redemption price at maturity will also be required to include
in gross income the sum of the daily portions of original issue discount on
that regular certificate. In computing the daily portions of original issue
discount for a subsequent purchaser and for 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 the 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 that 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 governing the calculation of OID on
instruments having contingent interest payments. These 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), like 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 this 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, the issue price
does not exceed the original principal balance by more than a specified
amount, and the interest 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 that 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. That treatment may effect the timing of income accruals
on the 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 the certificates may not
have been issued with "true" non-de minimis original issue discount.
Election To Treat All Interest As OID. The OID Regulations permit a
certificateholder to elect to accrue all interest, discount (including de
minimis market or original issue discount) and premium in income as interest,
based on a constant yield method for certificates acquired on or after April
4, 1994. If 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 the 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 which the
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:
o 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 the regular certificate from an original holder- over
o the price for the 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 the
holder generally will be required to allocate each 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,
the election will apply to all market discount bonds acquired by the
certificateholder on or after the first day of the first taxable year to which
the 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 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 the
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 the 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 the 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
the 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 the regulations are issued by the Treasury, rules described in the
legislative history of the Tax Reform Act of 1986 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 (A) the total remaining market discount and (B) a fraction,
the numerator of which is the original issue discount accruing during the
period and the denominator of which is the total remaining original issue
discount at the beginning of the period. For regular certificates issued
without original issue discount, the amount of market discount that accrues
during a period is equal to the product of (A) the total remaining market
discount and (B) 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 the instruments, the same Prepayment Assumption
applicable to calculating the accrual of original issue discount will apply.
A holder of a regular certificate who acquires the regular certificate at
a market discount also may be required to defer, until the maturity date of
the 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 the holder's gross
income for the taxable year with respect to the regular certificate. The
amount of 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 the 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 the market discount in income currently as it accrues on all market
discount obligations acquired by the 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 the 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) like 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 the
regular certificates and will be applied as an offset against the interest
payment. Prospective purchasers of the regular certificates should consult
their tax advisors regarding the possible application of the amortizable bond
premium regulations.
The IRS has issued final amortizable bond premium regulations. 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, or "deferred interest", when one or more ARMs are
adding interest to their principal balance by reason of negative amortization.
Any deferred interest that accrues with respect to a class of regular
certificates will constitute income to the holders of the certificates prior
to the time distributions of cash with respect to the 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 the inclusion. Interest on
regular certificates must in any event be accounted for under an accrual
method by the holders of the 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 the regular certificates.
Accrued Interest Certificates. Certain of the regular certificates,
referred to as "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 distribution date. The period
between the closing date for payment lag certificates and their first
distribution date may or may not exceed the 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 that payment lag
certificate during the first interest 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. The 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 gain or loss will be capital gain or loss, provided that the regular
certificate is held as a capital asset which generally is 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 the gain does not exceed the excess, if any, of:
o the amount that would have been includible in the 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 the regular
certificate, over
o the amount actually includible in the 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 that intention, and the seller does not believe such intent
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 this section
applies will be ordinary income or loss.
Because the regulations described above have not been issued, it is
impossible to predict what effect those regulations might have on the tax
treatment of a regular certificate purchased at a discount or premium in the
secondary market.
The regular certificate information reports will include a statement of
the adjusted issue price of the regular certificate at the beginning of each
accrual period. In addition, the reports will include information necessary to
compute the accrual of any market discount that may arise upon secondary
trading of regular certificates. Because exact computation of the accrual of
market discount on a constant yield method would require information relating
to the holder's purchase price which the REMIC may not have, it appears that
this provision will only require information pertaining to the appropriate
proportionate method of accruing market discount.
REMIC Expenses. As a general rule, all of the expenses of a REMIC will be
taken into account by holders of the Residual Interests. In the case of a
single class REMIC, however, the expenses and a matching amount of additional
income will be allocated, under temporary Treasury regulations, among the
holders of the regular certificates and the holders of the Residual Interests
on a daily basis in proportion to the relative amounts of income accruing to
each certificateholder on that day. In the case of individuals, or trusts,
estates, or other persons who compute their income in the same manner as
individuals, who own an interest in a regular certificate directly or through
a pass-through entity which is required to pass miscellaneous itemized
deductions through to its owners or beneficiaries (e.g. a partnership, an S
corporation, or a grantor trust), these expenses will be deductible only to
the extent that such expenses, plus other "miscellaneous itemized deductions"
of the individual, exceed 2% of the 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 those 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 the 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 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 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 prospectus 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:
o the 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;
o the regular certificateholder is not a controlled foreign
corporation (within the meaning of Code Section 957) related to the
trust; and
o the regular certificateholder complies with certain identification
requirements, including delivery of a statement, signed by the
regular certificateholder under penalties of perjury, certifying
that the regular certificateholder is a foreign person and providing
the name and address of the regular certificateholder.
If a regular certificateholder is not exempt from withholding, distributions
of interest, including distributions in respect of accrued original issue
discount, the 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 the 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 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 that year,
the 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 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 the recipient's federal income tax
liability.
New Withholding Regulations. On October 6, 1997, the Treasury Department
issued 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, 2000, 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 the 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. The 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 the
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, i.e., a fast-pay, slow-pay structure, may generate a mismatching of
income and cash distributions, i.e., 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 the residual certificateholder owns the 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 of the Tax
Reform Act of 1986 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 such residual certificate would have in the
hands of an original residual certificateholder. It is not clear, however,
whether the 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 the income from the
mortgage loans and the REMIC's other assets, and 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. The 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
discount, whether market discount or original issue discount, will be
includible in the income of the REMIC as it accrues, in advance of receipt of
the cash attributable to the 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 the
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, the election would not apply to any mortgage loan
originated on or before September 27, 1985. Instead, premium on the 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 the
residual certificate to the holder and the adjusted basis the 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. The 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 the net loss exceeds
the holder's adjusted basis in the residual certificate. Any net loss that is
not currently deductible by reason of this limitation may be used by the
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." The
holder would be required to add its allocable share, if any, of the 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 the expense
item only as a miscellaneous itemized deduction subject to the limitations
under Code Section 67. That section allows the 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 the 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 "--Regular
Certificates--Non-Interest Expenses of the REMIC" above.
Deferred Interest. Any Deferred Interest that accrues with respect to any
ARM 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:
o may not be offset by any unrelated losses or loss carryovers of a
residual certificateholder;
o 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
o is not eligible for any reduction in the rate of withholding tax in
the case of a residual certificateholder that is a foreign investor
- see "Non-U.S. Persons" below.
The exception for thrift institutions is available only to the institution
holding the residual certificate, and not to any affiliate of the institution,
unless the affiliate is a subsidiary all the stock of which, and substantially
all the indebtedness of which, is held by the institution, and which is
organized and operated exclusively in connection with the organization and
operation of one or more REMICs.
With respect to any residual certificateholder, the excess inclusion for
any calendar quarter is the excess, if any, of the income of the residual
certificateholder for that calendar quarter from its residual certificate over
the sum of the "daily accruals", as defined below, for all days during the
calendar quarter on which the residual certificateholder holds the 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 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, i.e., 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 the 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 the 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 the 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 the trust in
proportion to the dividends received by the shareholders from the trust, and
any amount so allocated will be treated as an excess inclusion with respect to
a residual certificate as if held directly by the 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
the residual certificate. To the extent a distribution exceeds the 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 the
residual certificate to the residual certificateholder, increased by the
taxable income of the REMIC that was included in the income of the residual
certificateholder with respect to the residual certificate, and decreased (but
not below zero) by the net losses that have been allowed as deductions to the
residual certificateholder with respect to the residual certificate and by the
distributions received thereon by the residual certificateholder.
In general, any 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 this section applies
would be ordinary income or loss.
Except as provided in Treasury regulations, if the seller of a residual
certificate reacquires the residual certificate, or acquires any other
residual certificate, any residual interest in another REMIC or similar
interest in a taxable mortgage" as defined in Code Section 7701(i) during the
period beginning six months before, and ending six months after, the date of
the sale, the 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 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, some 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 prospectus supplement, the tax would be
borne first by the trustee, the master servicer, the sponsor or the seller, as
applicable, if the tax results from a breach of such party's obligations under
the pooling and servicing 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 the adoption is deemed to occur, and
sells all of its assets (other than cash) within a 90-day period beginning on
that 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 meet 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 the 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 the
excess. It is unclear whether the loss, if allowed, will be a capital loss or
an ordinary loss.
Administrative Matters
Solely for the purpose of the administrative provisions of the Code, the
REMIC will be treated as a partnership and the residual certificateholders
will be treated as the partners thereof; however, under Temporary Regulations
if there is at no time during the taxable year more than one residual
certificateholder, a REMIC shall not be subject to the rules of Subchapter C
of chapter 63 of the Code, relating to the treatment of Partnership items for
a taxable year. Accordingly, the REMIC will file an annual tax return on Form
1066, U.S. Real Estate Mortgage Investment Conduit Income Tax Return. In
addition, certain other information will be furnished quarterly to each
residual certificateholder who held the 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 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
the 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 the
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, that 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 the 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:
o a citizen or resident of the United States,
o a corporation or partnership (including an entity treated as a
corporation or partnership for United States federal income tax
purposes) created or organized under the laws of the United States,
any state thereof or the District of Columbia other than a
partnership that is not treated as a United States person under any
applicable Treasury regulations,
o 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
o 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,
some trusts in existence 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. In addition, the term "U.S. Person" includes any
holder of a certificate whose income or gain in respect of its investment in a
certificate is effectively connected with the conduct of a U.S. trade or
business. The term "non-U.S. Person" means a beneficial owner of a certificate
that is not a U.S. Person.
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 the entity are not
held by disqualified organizations. 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 that person
an affidavit that the transferee is not a disqualified organization and, at
the time of the transfer, that person does not have actual knowledge that the
affidavit is false. A "disqualified organization" means:
o 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
the term does not include an instrumentality if all its activities
are subject to tax and, except for Freddie Mac, a majority of its
board of directors is not selected by any governmental agency,
o any organization other than certain farmers' cooperatives generally
exempt from federal income taxes unless the organization is subject
to the tax on unrelated business taxable income and
o a rural electric or telephone cooperative.
A tax is imposed on a pass-through entity 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 the entity, will be relieved of liability for
the tax if the record holder furnishes to the entity an affidavit that the
record holder is not a disqualified organization and, for that period, the
pass-through entity does not have actual knowledge that the affidavit is
false. For this purpose, a "pass-through entity" means:
o a regulated investment company, real estate investment trust or
common trust fund,
o a partnership, trust or estate and
o 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 the 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 the entities beginning after December 31, 1988.
In order to comply with these rules, the Pooling and Servicing 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:
o 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
o a covenant by the proposed transferee to the effect that the
proposed transferee agrees to be bound by and to abide by the
transfer restrictions applicable to the residual certificate.
Any attempted transfer or pledge in violation of the transfer
restrictions shall be absolutely null and void and shall vest no rights in any
purported transferee. Investors in residual certificates are advised to
consult their own tax advisors with respect to transfers of the residual
certificates and, in addition, pass-through entities are advised to consult
their own tax advisors with respect to any tax which may be imposed on a
pass-through entity.
Noneconomic Residual Certificates. The REMIC regulations disregard, for
federal income tax purposes, any transfer of a noneconomic residual
certificate to a "U.S. Person," as defined in the following section of this
discussion, unless no significant purpose of the transfer is to enable the
transferor to impede the assessment or collection of tax. A noneconomic
residual certificate is any residual certificate (including a residual
certificate with a positive value at issuance) unless, at the time of
transfer, taking into account the Prepayment Assumption:
o 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
o 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 the transferor conducted a reasonable investigation of the
transferee and 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 the 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, 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
the 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 the person provides the
trustee with a duly completed I.R.S. Form 4224 and the trustee consents to the
transfer in writing.
For purposes of this discussion, a "U.S. Person" means:
o a citizen or resident of the United States,
o a corporation or partnership (including an entity treated as a
corporation or partnership for United States federal income tax
purposes) created or organized under the laws of the United States,
any state thereof or the District of Columbia other than a
partnership that is not treated as a United States person under any
applicable Treasury regulations,
o an estate whose income is subject to U.S. federal income tax
regardless of its source of income,
o 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. In addition, the term
"U.S. Person" includes any holder of a certificate whose income or gain in
respect of its investment in a certificate is effectively connected with the
conduct of a U.S. trade or business. The term "non-U.S. Person" means a
beneficial owner of a certificate that is not a U.S. Person.
STATE TAX CONSIDERATIONS
In addition to the federal income tax consequences described in "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
The certificates will be offered hereby in series from time to time
through any of the following methods:
1. By negotiated firm commitment underwriting and public reoffering
by underwriters;
2. By agency placements through one or more placement agents
primarily with institutional investors and dealers; and
3. By placement directly by the sponsor with institutional investors.
A prospectus 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 prospectus
supplement 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 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 prospectus
supplement 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 prospectus supplement.
AVAILABLE INFORMATION
The sponsor has filed with the SEC a registration statement under the
Securities Act with respect to the certificates. This prospectus, which forms
a part of the registration statement, and the prospectus supplement relating
to each series of certificates contain information set forth in the
registration statement pursuant to the rules and regulations of the SEC. 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 SEC 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, New York Regional Office
500 West Madison Street, Seven World Trade Center
Chicago, IL 60661 New York, NY 10048
The SEC maintains a website 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 SEC.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The SEC allows us to incorporate by reference some of the information we
file with it, which means that we can disclose important information to you by
referring you to those 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 prospectus
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 SEC
periodic reports with respect to the related trust following completion of the
reporting period required by Rule 15d-1 or Regulation 15D under the Securities
Exchange Act of 1934, as amended (the "Exchange Act").
All documents filed by or on behalf of the trust referred to in the
accompanying prospectus supplement with the SEC pursuant to Section 13(a),
13(c), 14 or 15(d) of the Exchange Act on or after the date of such prospectus
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.
The trust will provide without charge to each person to whom this
prospectus is delivered, on the written or oral request of such person, a copy
of any or all of the documents referred to above that have been or may be
incorporated by reference in this prospectus (not including exhibits to the
information that is incorporated by reference unless such exhibits are
specifically incorporated by reference into the information that this
prospectus incorporates). Such requests should be directed to the corporate
trust office of the trustee specified in the accompanying prospectus
supplement.
RATING
It is a condition to the issuance of the certificates of each series
offered hereby and by the prospectus 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 prospectus
supplement.
Ratings on mortgage pass-through certificates address the likelihood of
receipt by certificateholders of all distributions on the Mortgage Assets in
the related trust. These ratings address the structural, legal and issuer-
related aspects associated with such certificates, the nature of the mortgage
assets in the related trust and the credit quality of the credit enhancer or
guarantor, if any. Ratings on mortgage pass-through certificates do not
represent any assessment of the likelihood of principal prepayments by
mortgagors or of the degree by which such prepayments might differ from those
originally anticipated. As a result, certificateholders might suffer a lower
than anticipated yield, and, in addition, holders of stripped pass-through
certificates in extreme cases might fail to recoup their underlying
investments.
A security rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the assigning
rating organization. Further, such ratings do not address the effect of
prepayments on the yield anticipated by the investor. Each security rating
should be evaluated independently of any other security rating.
INDEX TO DEFINED TERMS
PAGE
1986 Act......................................................... 56
Accrual Certificates............................................. 11
Accrual Period................................................... 57
Additional Obligations........................................... 45
Adjusted Issue Price............................................. 53
Advance.......................................................... 17
Amortizable Bond Premium Regulations............................. 50, 60
Appraised Value.................................................. 5
ARM.............................................................. 50
ARM Loans........................................................ 53
Assumed Reinvestment Rate........................................ 13
Balloon Payments................................................. 4
Bankruptcy Bond.................................................. 21
Bankruptcy Code.................................................. 2
Buydown Fund..................................................... 4
Buydown Loans.................................................... 4
CERCLA........................................................... 41
Certificates..................................................... 3
Certificate Account.............................................. 9, 29
Certificate Balance.............................................. 11
Certificate Register............................................. 11
Certificateholders............................................... 3
Class Certificate Balance........................................ 11
Closing Date..................................................... 11
Code............................................................. 48
Commission....................................................... ii
Companion Classes................................................ 15
Contingent Regulations........................................... 57
Cooperatives..................................................... 4
Cooperative Loans................................................ 4
Cut-off Date..................................................... 20
Daily Accrual.................................................... 64
D&P.............................................................. 44
Deferred Interest................................................ 60
Disqualified Organization........................................ 67
Distribution Date................................................ 11
Eligible Account................................................. 29
Eligible Investments............................................. 10, 29
EPA.............................................................. 41
ERISA............................................................ 43
Exchange Act..................................................... iii
Federal Long-Term Rate........................................... 64
FHA.............................................................. 3
FHA Insurance.................................................... 3
FHA Loans........................................................ 6
Freddie Mac...................................................... 5
Freddie Mac Act.................................................. 7
Freddie Mac Certificate Group.................................... 7
Fitch............................................................ 44
Fannie Mae....................................................... 5
Fannie Mae Certificates.......................................... 8
PAGE
Fraud Loss....................................................... 21
Garn-St Germain Act.............................................. 42
Ginnie Mae....................................................... 5
Ginnie Mae Certificates.......................................... 6
Ginnie Mae I Certificates........................................ 6
Ginnie Mae II Certificates....................................... 6
Housing Act...................................................... 6
HUD.............................................................. 6
Indemnified Parties.............................................. 34
Index............................................................ 4
Interest Accrual Period.......................................... 11
IO Certificates.................................................. 12
IRS.............................................................. 50
Issuer........................................................... 62
Labor Regulations................................................ 43
Last Scheduled Distribution Date................................. 13
Legislative History.............................................. 52
Lockout Periods.................................................. 4
LTV.............................................................. 5
Mark-to-Market Regulations....................................... 65
Master REMIC..................................................... 55
Master Servicer.................................................. 9
Master Servicing Fee............................................. 33
Mezzanine Certificates........................................... 19
Moody's.......................................................... 44
Mortgage......................................................... 4
Mortgage Assets.................................................. 3
Mortgage Certificates............................................ 3
Mortgage Loans................................................... 3
Mortgage Note(s)................................................. 3
Mortgage Pool.................................................... 3
Mortgage Pool Insurance Policy................................... 19
Mortgage Rate.................................................... 4
Mortgaged Properties............................................. 4
NCUA............................................................. 47
New Regulations.................................................. 54, 62
Obligations...................................................... 45
OID Regulations.................................................. 56
PACs............................................................. 15
Pass-Through Entity.............................................. 68
Pass-Through Rate................................................ 11
Payment Lag Certificates......................................... 60
Permitted Investments............................................ 45
Phantom Income................................................... 62
Plan............................................................. 43
PO Certificates.................................................. 11
Policy Statement................................................. 47
Pool Insurer..................................................... 19
Pooling and Servicing Agreement.................................. 3
Pre-Funding Limit................................................ 45
Prefunding Period................................................ 45
Pre-Issuance Accrued Interest.................................... 60
Prepayment Assumption............................................ 52
PAGE
Primary Insurer.................................................. 32
Primary Mortgage Insurance Policy................................ 5
Principal Prepayments............................................ 12
PTE 83-1......................................................... 46
Rating Agency.................................................... 44
RCRA............................................................. 41
Record Date...................................................... 11
Regular Certificates............................................. 55
Relief Act....................................................... 43
REMIC............................................................ 48
REMIC Regulations................................................ 48
REO Property..................................................... 18
Reserve Fund..................................................... 22
Residual Certificates............................................ 55
S&P.............................................................. 44
Securities Act................................................... 17
Seller........................................................... 3
Senior Certificates.............................................. 10
Senior Certificateholders........................................ 19
Series........................................................... 3
SMMEA............................................................ 47
Special Hazard Insurer........................................... 21
Special Hazard Insurance Policy.................................. 21
Sponsor.......................................................... 3, 24
Stripped ARM Obligations......................................... 53
Stripped Bond Certificates....................................... 51
Stripped Coupon Certificates..................................... 51
Subordinate Certificates......................................... 10
Subordinate Certificateholders................................... 19
Subsidiary REMIC................................................. 55
Supplement....................................................... 3
TACs............................................................. 16
Thrift Institutions.............................................. 64
Title V.......................................................... 42
Trust............................................................ 3
Trustee.......................................................... 3
UCC.............................................................. 39
Underwriter's Exemptions......................................... 44
U.S. Person...................................................... 54, 67, 68
VA............................................................... 3
VA Guaranty...................................................... 3
Waiver Letter.................................................... 20
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution
The following table sets forth the estimated expenses in connection
with the issuance and distribution of the Certificates being registered under
this Registration Statement, other than underwriting discounts and
commissions:
SEC Registration Fee........................................ .. $ 312,695.11
Printing and Engraving......................................... $ 75,000.00
Legal Fees and Expenses........................................ $ 150,000.00
Trustee Fees and Expenses...................................... $ 25,000.00
Rating Agency Fees............................................. $ 120,000.00
Miscellaneous.................................................. $ 15,000.00
===============
Total.......................................................... $ 697,695.11
===============
- --------------------
Item 15. Indemnification of Directors and Officers.
The Registrant's Certificate of Incorporation and By-Laws provide for
indemnification of directors and officers of the Registrant to the fullest
extent permitted by Delaware law.
Section 145 of the Delaware General Corporation Law, provides, in
substance, that Delaware corporations shall have the power, under specified
circumstances, to indemnify their directors, officers, employees and agents in
connection with actions, suits or proceedings brought against them by a third
party or in the right of the corporation, by reason of the fact that they were
or are such directors, officers, employees or agents, against expenses
incurred in any such action, suit or proceeding. The Delaware General
Corporation Law also provides that the Registrant may purchase insurance on
behalf of any such director, officer, employee or agent.
Item 16. Financial Statement and Exhibits.
1.1 Form of Underwriting Agreement. *
3.1 Certificate of Incorporation of the Registrant. *
3.2 Bylaws of the Registrant. *
4.1 Form of Pooling and Servicing Agreement. *
5.1 Opinion of Tobin & Tobin as to legality of the Certificates
(including consent of such firm).
8.1 Opinion of Brown & Wood LLP as to certain tax matters (including
consent of such firm).
23.1 Consent of Brown & Wood LLP (included in Exhibit 8.1 hereof).
23.2 Consent of Tobin & Tobin (included in Exhibit 5.1 hereof).
24.1 Power of Attorney (included at page II-3).
- -------------
*Filed previously with the Commission as an exhibit to the Registration
Statement on Form S-3 (No. 333-46019).
Item 17. Undertakings.
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this registration
statement:
(i) To include any prospectus required by Section 10(a)(3)
of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or
events arising after the effective date of the registration
statement (or the most recent post-effective amendment
thereof) which, individually or in the aggregate, represent
a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed
that which was registered) and any deviation from the low or
high and of the estimated maximum offering range may be
reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20
percent change in the maximum aggregate offering price set
forth in the "Calculation of Registration Fee" table in the
effective registration statement; and
(iii) To include any material information with
respect to the plan of distribution not previously disclosed
in the registration statement or any material change of such
information in the registration statement.
(2) That, for the purpose of determining any liability under
the Securities Act of 1933, each such post-effective amendment shall
be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering
thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold
at the termination of the offering.
(b) The undersigned registrant hereby undertakes that, for
purposes of determining any liability under the Securities Act of 1933, each
filing of the registrant's annual report pursuant to Section 13(a) or 15(d) of
the Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(f) The undersigned registrant hereby undertakes to provide to
the underwriter at the closing specified in the underwriting agreements,
certificates in such denominations and registered in such names as required by
the underwriter to permit prompt delivery to each purchaser.
(h) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question of
whether such indemnification by it is against public policy as expressed in
the Act and will be governed by the final adjudication of such issue.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form S-3 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Larkspur, State of California, on
this 30th day of June, 1999.
HEADLANDS MORTGAGE SECURITIES INC.
By: /s/ Gilbert J. MacQuarrie
--------------------------
Name: Gilbert J. MacQuarrie
Title: Vice President
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned Directors and
Officers of Headlands Mortgage Securities Inc., a Delaware corporation, hereby
constitute and appoint Peter T. Paul and Gilbert J. MacQuarrie, each with full
power of substitution and resubstitution, their true and lawful attorneys and
agents to sign the names of the undersigned Directors and Officers in the
capacities indicated below to the registration statement to which this Power
of Attorney is attached as an exhibit, and all amendments (including
post-effective amendments) and supplements thereto, and all instruments or
documents filed as a part thereof or in connection therewith, and to file the
same, with all exhibits thereto, and all other instruments or documents in
connection therewith, with the Securities and Exchange Commission; and each of
the undersigned hereby ratifies and confirms all that said attorneys, agents
or any of them shall do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
Signature Title Date
/s/ Peter T. Paul President and Director June 30, 1999
- -------------------------- (Principal Executive Officer)
Peter T. Paul
/s/ Gilbert J. Mac Quarrie Vice President, Secretary, June 30, 1999
- -------------------------- Treasurer and Director
Gilbert J. MacQuarrie (Principal Financial
Officer and Principal
Accounting Officer)
/s/ Becky Poisson Director June 30, 1999
- --------------------------
Becky S. Poisson
/s/ Steve Abreu Director June 30, 1999
- --------------------------
Steve Abreu
/s/ Kenneth Siprelle Director June 30, 1999
- --------------------------
Kenneth Siprelle
/s/ John Edmonds Director June 30, 1999
- --------------------------
John Edmonds
EXHIBIT INDEX
Exhibit No. Description of Exhibit
1.1 Form of Underwriting Agreement. *
3.1 Certificate of Incorporation of the Registrant. *
3.2 Bylaws of the Registrant. *
4.1 Form of Pooling and Servicing Agreement. *
5.1 Opinion of Tobin & Tobin as to legality of the Certificates
(including consent of such firm).
8.1 Opinion of Brown & Wood LLP as to certain tax matters (including
consent of such firm).
23.1 Consent of Brown & Wood LLP (included in Exhibit 8.1 hereof).
23.2 Consent of Tobin & Tobin (included in Exhibit 5.1 hereof).
24.1 Power of Attorney (included at page II-3).
- -------------------
* Filed previously with the Commission as an exhibit to the Registration
Statement on Form S-3 (No. 333-46019).
Exhibit 5.1
TOBIN & TOBIN
A PROFESSIONAL CORPORATION
500 SANSOME STREET
EIGHTH FLOOR
SAN FRANCISCO, CALIFORNIA 94111 RICHARD TOBIN (1852-1887)
PHILLIP R. POLLOCK FACSIMILE (415) 433-3883 ROBERT TOBIN (1875-1889)
(415) 433-1400 CYRIL R. TOBIN (1905-1977)
July 22, 1999
Headlands Mortgage Securities Inc.
700 Larkspur Landing Circle
Suite 250
Larkspur, CA 94939
Re: Headlands Mortgage Securities Inc.
Registration Statement on Form S-3
Ladies and Gentlemen:
We have acted as counsel to Headlands Mortgage Securities Inc., a
Delaware corporation (the "Company"), in connection with the preparation of a
registration statement on Form S-3 (the "Registration Statement") for the
registration with the Securities and Exchange Commission under the Securities
Act of 1933, as amended (the "Act"), of mortgage pass-through certificates
(the "Certificates") in an aggregate principal amount of up to $1,088,796,968.
As described in the Registration Statement, the Certificates will be issued
from time to time in series. Each series of Certificates will be issued by a
trust (each, a "Trust") formed by the Company pursuant to a pooling and
servicing agreement (each, a "Pooling and Servicing Agreement") among the
Company, a master servicer (the "Master Servicer"), a seller (the "Seller")
and a trustee (the "Trustee"). Each series of Certificates issued by a Trust
may include one or more classes of Certificates. The Certificates will be sold
from time to time pursuant to certain underwriting agreements (each, an
"Underwriting Agreement") among the Company and the underwriter or
underwriters named therein.
We have examined and relied upon copies of the Company's Bylaws, the
Registration Statement, the form of Pooling and Servicing Agreement and the
form of Certificates included as exhibits thereto, the form of Underwriting
Agreement and such other records, documents and statutes as we have deemed
necessary for purposes of this opinion.
In our examination we have assumed the genuineness of all signatures,
the authenticity of all documents submitted to us as originals, the conformity
to original documents of all documents submitted to us as certified or
photostatic copies and the authenticity of the originals of such documents. As
to any facts material to the opinions expressed herein that were not
independently established or verified, we have relied upon statements and
representations of officers and other representatives of the Company and
others.
Based upon the foregoing, we are of the opinion that:
1. When any Pooling and Servicing Agreement relating to a
series of Certificates has been duly and validly authorized by all necessary
action on the part of the Company and has been duly executed and delivered by
the Company, the Master Servicer, the Seller, the Trustee and any other party
thereto, such Pooling and Servicing Agreement will constitute a legal, valid
and binding agreement of the Company, enforceable against the Company in
accordance with its terms, except as enforcement thereof may be limited by
bankruptcy, insolvency or other laws relating to or affecting creditors'
rights generally or by general equity principles.
2. When a series of Certificates has been duly authorized by
all necessary action on the part of the Company (subject to the terms thereof
being otherwise in compliance with applicable law at such time), duly executed
and authenticated by the Trustee for such series in accordance with the terms
of the related Pooling and Servicing Agreement and issued and delivered
against payment therefor as described in the Registration Statement, such
series of Certificates will be legally and validly issued, fully paid and
nonassessable, and the holders thereof will be entitled to the benefits of the
related Pooling and Servicing Agreement.
In rendering the foregoing opinions, we express no opinion as to the
laws of any jurisdiction other than the laws of the State of New York
(excluding choice of law principles therein), the corporation laws of the
State of Delaware and the federal laws of the United States of America.
We hereby consent to the filing of this letter as an exhibit to the
Registration Statement and to the references to this firm under the heading
"Legal Matters" in the base prospectus and prospectus supplement forming a
part of the Registration Statement, without admitting that we are "experts"
within the meaning of the Act or the Rules and Regulations of the Commission
issued thereunder, with respect to any part of the Registration Statement,
including this exhibit.
Very truly yours,
/s/ Tobin & Tobin
Exhibit 8.1
Brown & Wood LLP
One World Trade Center
New York, New York 10048-0557
Telephone: 212-839-5300
Facsimile: 212-839-5599
July 23, 1999
Headlands Mortgage Securities Inc.
700 Larkspur Landing Circle, Suite 240
Larkspur, California 94939
Re: Headlands Mortgage Securities Inc.
Registration Statement on Form S-3
----------------------------------
Ladies and Gentlemen:
We have acted as special tax counsel to Headlands Mortgage Securities
Inc., a Delaware corporation (the "Company"), in connection with the
preparation of a registration statement on Form S-3 (the "Registration
Statement") for the registration with the Securities and Exchange Commission
(the "Commission") under the Securities Act of 1933, as amended (the "Act"),
of mortgage pass-through certificates (the "Certificates") in an aggregate
principal amount of up to $1,088,796,968. As described in the Registration
Statement, the Certificates will be issued from time to time in series. Each
series of Certificates will be issued by a trust (each, a "Trust") formed by
the Company pursuant to a pooling and servicing agreement (each, a "Pooling
and Servicing Agreement") among the Company, a master servicer (the "Master
Servicer"), a seller (the "Seller") and a trustee (the "Trustee"). Each series
of Certificates issued by a Trust may include one or more classes of
Certificates. The Certificates will be sold from time to time pursuant to
certain underwriting agreements (each, an "Underwriting Agreement") among the
Company and the underwriter or underwriters named therein.
In arriving at the opinion expressed below, we have assumed that each
Pooling and Servicing Agreement will be duly authorized by all necessary
corporate action on the part of the Company, the Seller, the Trustee and the
Master Servicer for such series of Certificates and will be duly executed and
delivered by the Company, the Seller, the Trustee and the Master Servicer
substantially in the applicable form filed or incorporated by reference as an
exhibit to the Registration Statement, that each series of Certificates will
be duly executed and delivered in substantially the forms set forth in the
related Pooling and Servicing Agreement filed or incorporated by reference as
an exhibit to the Registration Statement, and that Certificates will be sold
as described in the Registration Statement.
We have advised the Registrant with respect to certain federal income
tax consequences of the proposed issuance of the Certificates. This advice is
summarized under the headings "Summary of The Prospectus -- Tax Status of
REMIC Certificates", "-- Tax Status of Non-REMIC Certificates" and "Federal
Income Tax Consequences" in the prospectus relating to the Certificates (the
"Prospectus"), all a part of the Registration Statement. Such description does
not purport to discuss all possible federal income tax ramifications of the
proposed issuance of the Certificates, but with respect to those tax
consequences that are discussed, in our opinion, the description is accurate
in all material respects.
This opinion is based on the facts and circumstances set forth in the
Registration Statement and in the other documents reviewed by us. Our opinion
as to the matters set forth herein could change with respect to a particular
series of Certificates as a result of changes in facts or circumstances,
changes in the terms of the documents reviewed by us, or changes in the law
subsequent to the date hereof. Because the Prospectus contemplates series of
Certificates with numerous different characteristics, you should be aware that
the particular characteristics of each series of Certificates must be
considered in determining the applicability of this opinion to a particular
series of Certificates.
We hereby consent to the filing of this letter as an exhibit to the
Registration Statement and to a reference to this firm (as counsel to the
Registrant) under the heading "Federal Income Tax Consequences" in the
Prospectus forming a part of the Registration Statement, without implying or
admitting that we are "experts" within the meaning of the Act or the rules and
regulations of the Commission issued thereunder, with respect to any part of
the Registration Statement, including this exhibit.
Very truly yours,
/s/ Brown & Wood LLP
----------------------
