<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 17, 1997
REGISTRATION NO. 333-17801
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- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
PRE-EFFECTIVE AMENDMENT NO. 2
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------
NORWEST INTEGRATED STRUCTURED ASSETS, INC.
(Exact name of registrant as specified in governing instruments)
7485 NEW HORIZON WAY
FREDERICK, MARYLAND 21703
(301) 846-8200
(Address of principal executive offices)
LAWRENCE D. RUBENSTEIN, ESQ.
VICE PRESIDENT AND GENERAL COUNSEL
NORWEST INTEGRATED STRUCTURED ASSETS, INC.
C/O NORWEST MORTGAGE, INC.
343 THORNALL STREET, 5TH FLOOR
EDISON, NEW JERSEY 08837
(908) 906-3909
(Name and address of agent for service)
------------------
COPIES TO:
JORDAN M. SCHWARTZ, ESQ.
CADWALADER, WICKERSHAM & TAFT
100 MAIDEN LANE
NEW YORK, NEW YORK 10038
(212) 504-6000
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
FROM TIME TO TIME AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
------------------
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, please check the following box. [X]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, please check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
------------------
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF SECURITIES AMOUNT OFFERING PRICE AGGREGATE REGISTRATION
BEING REGISTERED BEING REGISTERED PER UNIT OFFERING PRICE FEE
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<S> <C> <C> <C> <C>
Mortgage Asset-Backed Pass-Through
Certificates........................ $1,000,000 100%(1) $1,000,000 $303.03(/2/)
</TABLE>
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(1) Estimated solely for purposes of calculating the registration fee.
(2) Previously paid.
------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THE 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.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. THESE +
+SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE +
+TIME A FINAL PROSPECTUS SUPPLEMENT IS DELIVERED. THIS PROSPECTUS SUPPLEMENT +
+SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY +
+NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH +
+OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR +
+QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS SUPPLEMENT, SUBJECT TO COMPLETION, DATED MARCH 17, 1997
(TO PROSPECTUS DATED , 199 )
$ [LOGO]
(APPROXIMATE)
NORWEST INTEGRATED STRUCTURED ASSETS, INC.
SELLER
MORTGAGE ASSET-BACKED PASS-THROUGH CERTIFICATES, SERIES 199 -
PRINCIPAL AND INTEREST PAYABLE MONTHLY, COMMENCING IN , 199
-------------
The Series 199 - Mortgage Asset-Backed Pass-Through Certificates (the "Series
199 - Certificates") will consist of one class of senior certificates (the
"Class A Certificates") and two classes of subordinated certificates (the
"Class M Certificates" and the "Class B Certificates," respectively, and
together, the "Subordinated Certificates"). THE CLASS A CERTIFICATES ARE
ENTITLED TO A CERTAIN PRIORITY, RELATIVE TO THE CLASS M AND CLASS B
CERTIFICATES, IN RIGHT OF DISTRIBUTIONS ON THE MORTGAGE LOANS. AS BETWEEN THE
CLASS M CERTIFICATES AND THE CLASS B CERTIFICATES, THE CLASS M CERTIFICATES ARE
ENTITLED TO A CERTAIN PRIORITY IN RIGHT OF DISTRIBUTIONS ON THE MORTGAGE LOANS.
The Class A Certificates will consist of twelve subclasses of Certificates
designated as the Class A-1, Class A-2, Class A-3, Class A-4, Class A-5, Class
A-6, Class A-7, Class A-8, Class A-9, Class A-10, Class A-PO and Class A-R
Certificates. The Class M Certificates will not be divided into subclasses. The
Class B Certificates will consist of five subclasses of Certificates designated
as the Class B-1, Class B-2, Class B-3, Class B-4 and Class B-5 Certificates.
Each subclass of Class A and Class B Certificates is referred to herein as a
"Subclass." The Class A Certificates, the Class M Certificates and the Class B-
1 and Class B-2 Certificates are the only Series 199 - Certificates being
offered hereby and are referred to herein collectively as the "Offered
Certificates." The Class B-1 and Class B-2 Certificates are referred to herein
collectively as the "Offered Class B Certificates."
(Continued on next page)
-------------
Capitalized terms used in this Prospectus Supplement and not otherwise
defined herein have the meanings assigned in the Prospectus. See the "Index of
Significant Prospectus Supplement Definitions," beginning on page S-86, and the
"Index of Significant Definitions" in the Prospectus.
-------------
THESE SECURITIES DO NOT REPRESENT INTERESTS IN OR OBLIGATIONS OF NORWEST
INTEGRATED STRUCTURED ASSETS, INC. OR ANY AFFILIATE THEREOF. NEITHER THESE
SECURITIES NOR THE UNDERLYING MORTGAGE LOANS WILL BE INSURED OR GUARANTEED BY
ANY GOVERNMENTAL AGENCY OR INSTRUMENTALITY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
================================================================================
Subclass or Initial Subclass or Class Pass-Through
Class Designation Principal Balance(1) Rate
- --------------------------------------------------------------------------------
<S> <C> <C>
Class A-1....... $ %
Class A-2....... $ %
Class A-3....... $ %
Class A-4....... $ %
Class A-5....... $ %
Class A-6....... $ %
Class A-7....... $ %
Class A-8....... $ %
Class A-9....... $ %
Class A-10...... $ %
Class A-PO...... $ (2)
Class A-R....... $ %
Class M......... $ %
Class B-1....... $ %
Class B-2....... $ %
</TABLE>
================================================================================
(1) Approximate. The initial Subclass or Class Principal Balances are subject
to adjustment as described herein.
(2) The Class A-PO Certificates are principal-only certificates and will not be
entitled to distributions in respect of interest.
-------------
PROSPECTIVE INVESTORS IN THE OFFERED CERTIFICATES SHOULD CONSIDER THE FACTORS
DISCUSSED UNDER "RISK FACTORS" IN THIS PROSPECTUS SUPPLEMENT ON PAGE S-29 AND
IN THE PROSPECTUS ON PAGE .
The Offered Certificates will be purchased by [Underwriter] (the
"Underwriter") from the Seller and will be offered by the Underwriter from time
to time to the public in negotiated transactions or otherwise at varying prices
to be determined, in each case, at the time of sale. Proceeds to the Seller
from the sale of the Offered Certificates will be approximately % of the
aggregate initial principal balance of the Class A Certificates (other than the
Class A-PO Certificates), approximately % of the aggregate initial principal
balance of the Class A-PO Certificates, approximately % of the aggregate
initial principal balance of the Class M Certificates, approximately % of
the aggregate initial principal balance of the Class B-1 Certificates and
approximately % of the aggregate initial principal balance of the Class B-2
Certificates, plus, in each case, accrued interest thereon, other than on an
amount equal to the aggregate initial principal balance of the Class A-PO
Certificates, from 199 - to (but not including) 199 , before deducting
expenses payable by the Seller estimated to be $ . The price to be paid to
the Seller for the Class A Certificates (other than the Class A-PO
Certificates) has not been allocated among such Subclasses of Class A
Certificates. See "Underwriting" herein.
The Offered Certificates are offered subject to receipt and acceptance by the
Underwriter, to prior sale and to the Underwriter's right to reject any order
in whole or in part and to withdraw, cancel or modify the offer without notice.
It is expected that delivery of the Offered Certificates (other than the Class
A-PO, Class A-R, Class M, Class B-1 and Class B-2 Certificates) will be made in
book-entry form through the Same Day Funds Settlement System of The Depository
Trust Company, and that delivery of the Class A-PO, Class A-R, Class M, Class
B-1 and Class B-2 Certificates will be made at the office of , , New York,
New York , in each case, on or about , 199 .
-------------
[UNDERWRITER]
-------------
THE DATE OF THIS PROSPECTUS SUPPLEMENT IS , 199 .
<PAGE>
(Continued from previous page)
The Class A-5, Class A-6 and Class A-7 Certificates are planned amortization
class certificates and are referred to herein collectively as the "PAC
Certificates." The Class A-8 Certificates are companion certificates and are
referred to herein as the "Companion Certificates."
The credit enhancement for the Series 199 - Certificates is provided through
the use of a "shifting interest" type subordination, which has the effect of
allocating all or a disproportionate amount of principal prepayments and other
unscheduled receipts of principal to the Class A Certificates (other than the
Class A-PO Certificates) in the aggregate for at least nine years beginning on
the first Distribution Date. See "Summary Information--Credit Enhancement" and
"--Effects of Prepayments on Investment Expectations," "Description of the
Certificates" and "Prepayment and Yield Considerations" herein.
The Series 199 - Certificates will evidence in the aggregate the entire
beneficial ownership interest in a trust fund (the "Trust Estate") established
by Norwest Integrated Structured Assets, Inc. (the "Seller") and consisting of
a pool of fixed interest rate, conventional, monthly pay, fully amortizing,
one- to four-family, residential first mortgage loans having original terms to
stated maturity ranging from approximately to approximately years (the
"Mortgage Loans"), other than the Fixed Retained Yield described herein under
"Servicing of the Mortgage Loans--Fixed Retained Yield; Servicing Compensation
and Payment of Expenses," together with certain related property. Certain of
the Mortgage Loans may be secured primarily by shares issued by cooperative
housing corporations. The servicing of the Mortgage Loans will be performed by
various servicers identified herein (each, a "Servicer"), including Norwest
Mortgage, Inc. ("Norwest Mortgage"), an affiliate of both the Seller and
Norwest Bank Minnesota, National Association ("Norwest Bank"), and will be
supervised by Norwest Bank (in such capacity, the "Master Servicer"). The
Mortgage Loans will be acquired by the Seller on the date of issuance of the
Series 199 - Certificates from Norwest Mortgage, and will have been originated
by Norwest Mortgage or acquired by Norwest Mortgage from various other
entities (each such other entity, a "Norwest Mortgage Correspondent"). Certain
of the Mortgage Loans will have been originated using underwriting standards
that are different from and less stringent than the general underwriting
policies of Norwest Mortgage. See "Risk Factors--Underwriting Standards"
herein and in the Prospectus and "The Mortgage Loan Programs--Mortgage Loan
Underwriting--Modified Standards" in the Prospectus. The Mortgage Loans not
originated by Norwest Mortgage were originated by the Norwest Mortgage
Correspondents or acquired by the Norwest Mortgage Correspondents pursuant to
mortgage loan purchase programs operated by such Norwest Mortgage
Correspondents. See "Description of the Mortgage Loans" herein. The Class A
Certificates will initially evidence in the aggregate an approximate %
undivided interest in the principal balance of the Mortgage Loans. The Class M
Certificates will initially evidence in the aggregate an approximate %
undivided interest in the principal balance of the Mortgage Loans. The Class
B-1 Certificates will initially evidence in the aggregate an approximate %
undivided interest in the principal balance of the Mortgage Loans. The Class
B-2 Certificates will initially evidence in the aggregate an approximate %
undivided interest in the principal balance of the Mortgage Loans. The
remaining approximate % undivided interest in the principal balance of the
Mortgage Loans will be evidenced by the Class B-3, Class B-4 and Class B-5
Certificates.
Distributions in respect of interest and of principal will be made on the
25th day of each month or, if such day is not a business day, on the
succeeding business day (each a "Distribution Date"), commencing in
199 , to the holders of Offered Certificates, as described herein under
"Description of the Certificates--Distributions." The amount of interest
accrued on any Subclass or Class of Offered Certificates (other than the Class
A-PO Certificates) will be reduced by any prepayment interest shortfalls and
certain other shortfalls in the collection of interest from mortgagors, as
well as certain losses, as described herein under "Description of the
Certificates--Interest." The Class A-PO Certificates are principal-only
certificates and will not be entitled to distributions of interest. On any
Distribution Date, the holders of the Class M Certificates will receive
distributions of interest only if the holders of the Class A Certificates have
received all amounts due them (other than the Class A-PO Deferred Amount) on
such date. Distributions of principal to holders of the Class M Certificates
will be made only after the holders of the Class A Certificates have received
all distributions to which they are entitled (including, in the case of the
Class A-PO Certificates, the Class A-PO Deferred Amount) and the holders of
the Class M Certificates have received the amount of interest due them with
respect to such Distribution Date. On any Distribution Date, the holders of a
Subclass of Class B Certificates will receive
S-2
<PAGE>
(Continued from previous page)
distributions of interest only if the holders of the Class A Certificates and
Class M Certificates and each Subclass of Class B Certificates with a lower
numerical designation have received all amounts of interest and of principal
(other than the Class A-PO Deferred Amount) to which they are entitled on such
date. Distributions of principal to holders of a Subclass of Class B
Certificates will be made only after the Class A Certificates, the Class M
Certificates and each Subclass of Class B Certificates with a lower numerical
designation have received all distributions to which they are entitled
(including, in the case of the Class A-PO Certificates, the Class A-PO
Deferred Amount) and such Subclass has received the amount of interest due
with respect to such Distribution Date. Distributions in reduction of the
principal balance of the Class A Certificates on any Distribution Date will be
allocated among the Subclasses of the Class A Certificates in the manner
described herein under "Description of the Certificates--Principal (Including
Prepayments)." Distributions to each Subclass or undivided Class of Offered
Certificates will be made pro rata among Certificateholders of such Subclass
or Class.
The Offered Certificates may not be an appropriate investment for individual
investors who do not have sufficient resources or expertise to evaluate the
particular characteristics of the applicable Subclass or Class of Offered
Certificates. This may be the case because:
. The yield to maturity of Offered Certificates purchased at a price other
than par will be sensitive to the uncertain rate and timing of principal
prepayments on the Mortgage Loans;
. The rate of principal distributions on, and the weighted average life of,
the Offered Certificates will be sensitive to the uncertain rate and
timing of principal prepayments on the Mortgage Loans and as such, the
Offered Certificates may be inappropriate investments for an investor
requiring a distribution of a particular amount of principal on a
specific date or an otherwise predictable stream of distributions;
. There can be no assurance that an investor will be able to reinvest
amounts distributed in respect of principal on an Offered Certificate
(which, in general, are expected to be greater during periods of
relatively low interest rates) at a rate at least as high as the Pass-
Through Rate applicable thereto;
. As discussed below, there can be no assurance that a secondary market for
the Offered Certificates will develop or provide Certificateholders with
liquidity of investment; and
. The Offered Certificates are subject to the further risks and other
special considerations discussed herein and in the Prospectus under the
heading "Risk Factors."
THE YIELD TO MATURITY OF THE OFFERED CERTIFICATES WILL BE SENSITIVE IN
VARYING DEGREES TO THE RATE AND TIMING OF PRINCIPAL PAYMENTS (INCLUDING
PREPAYMENTS, WHICH MAY BE MADE AT ANY TIME WITHOUT PENALTY) ON THE MORTGAGE
LOANS. INVESTORS IN THE OFFERED CERTIFICATES SHOULD CONSIDER THE ASSOCIATED
RISKS, INCLUDING, IN THE CASE OF OFFERED CERTIFICATES PURCHASED AT A DISCOUNT,
PARTICULARLY THE CLASS A-PO CERTIFICATES, THE RISK THAT A SLOWER THAN
ANTICIPATED RATE OF PAYMENTS IN RESPECT OF PRINCIPAL (INCLUDING PREPAYMENTS)
ON THE MORTGAGE LOANS OR, IN THE CASE OF THE CLASS A-PO CERTIFICATES, ON THE
DISCOUNT MORTGAGE LOANS, COULD RESULT IN AN ACTUAL YIELD THAT IS LOWER THAN
ANTICIPATED. A FASTER THAN ANTICIPATED RATE OF PAYMENTS IN RESPECT OF
PRINCIPAL (INCLUDING PREPAYMENTS) ON THE MORTGAGE LOANS COULD RESULT IN AN
ACTUAL YIELD THAT IS LOWER THAN ANTICIPATED FOR INVESTORS PURCHASING OFFERED
CERTIFICATES AT A PREMIUM. INVESTORS PURCHASING OFFERED CERTIFICATES AT A
PREMIUM SHOULD ALSO CONSIDER THE RISK THAT A RAPID RATE OF PAYMENTS IN RESPECT
OF PRINCIPAL (INCLUDING PREPAYMENTS) ON THE MORTGAGE LOANS COULD RESULT IN THE
FAILURE OF SUCH INVESTORS TO FULLY RECOVER THEIR INITIAL INVESTMENTS. THE
YIELD TO INVESTORS IN THE CLASS A-PO CERTIFICATES WILL BE SENSITIVE TO THE
RATE OF PRINCIPAL PAYMENTS OF THOSE MORTGAGE LOANS WITH NET MORTGAGE INTEREST
RATES LESS THAN % (THE "DISCOUNT MORTGAGE LOANS"). THE YIELD TO MATURITY OF
THE CLASS M CERTIFICATES WILL BE MORE SENSITIVE THAN THAT OF THE CLASS A
CERTIFICATES TO THE AMOUNT AND TIMING OF LOSSES DUE TO LIQUIDATIONS OF THE
MORTGAGE LOANS IN THE EVENT THAT THE CLASS B PRINCIPAL BALANCE HAS BEEN
REDUCED TO ZERO. THE YIELD TO MATURITY OF EACH SUBCLASS OF OFFERED CLASS B
CERTIFICATES WILL BE MORE SENSITIVE THAN THE CLASS A CERTIFICATES, THE CLASS M
CERTIFICATES AND, IN THE CASE OF THE CLASS B-2 CERTIFICATES, THE CLASS B-1
CERTIFICATES, TO THE AMOUNT AND TIMING OF LOSSES DUE TO LIQUIDATIONS OF THE
MORTGAGE LOANS IN THE EVENT THAT THE PRINCIPAL BALANCES OF THE SUBCLASSES OF
CLASS B CERTIFICATES WITH HIGHER NUMERICAL DESIGNATIONS HAVE BEEN REDUCED TO
ZERO. SEE "DESCRIPTION OF THE CERTIFICATES--INTEREST," "--PRINCIPAL (INCLUDING
PREPAYMENTS)" AND "--SUBORDINATION OF CLASS M AND CLASS B CERTIFICATES" HEREIN
AND "PREPAYMENT AND YIELD CONSIDERATIONS" HEREIN AND IN THE PROSPECTUS.
S-3
<PAGE>
(Continued from previous page)
THE WEIGHTED AVERAGE LIFE OF THE COMPANION CERTIFICATES WILL BE MORE
SENSITIVE THAN THE OTHER SUBCLASSES OF CLASS A CERTIFICATES TO THE RATE OF
PREPAYMENTS ON THE MORTGAGE LOANS. AT RATES AT OR ABOVE CERTAIN PREPAYMENT
LEVELS, PAYMENTS OF PRINCIPAL ALLOCATED TO THE CLASS A CERTIFICATES (OTHER
THAN THE CLASS A-PO CERTIFICATES) IN EXCESS OF AMOUNTS RESULTING FROM SUCH
PREPAYMENT LEVELS WILL BE PAID TO THE HOLDERS OF THE COMPANION CERTIFICATES
PRIOR TO BEING PAID TO THE HOLDERS OF THE PAC CERTIFICATES, RESULTING IN A
REDUCTION IN THE WEIGHTED AVERAGE LIFE OF THE COMPANION CERTIFICATES. AT OR
BELOW CERTAIN PREPAYMENT LEVELS, THE COMPANION CERTIFICATES MAY RECEIVE NO
PRINCIPAL PAYMENTS FOR EXTENDED PERIODS OF TIME, RESULTING IN AN EXTENSION OF
THE WEIGHTED AVERAGE LIFE THEREOF. SEE "PREPAYMENT AND YIELD CONSIDERATIONS"
HEREIN.
The Offered Certificates, other than the Class A-PO, Class A-R, Class M and
Offered Class B Certificates, will be issued only in book-entry form (the
"Book-Entry Certificates"), and purchasers thereof will not be entitled to
receive definitive certificates except in the limited circumstances set forth
under "Description of the Certificates--Book-Entry Form" in the Prospectus.
The Book-Entry Certificates will be registered in the name of Cede & Co., as
nominee of The Depository Trust Company, which will be the "holder" or
"Certificateholder" of such Certificates, as such terms are used herein. See
"Description of the Certificates" herein.
Each Subclass and Class of Offered Certificates is offered in the minimum
denominations described herein under "Summary Information--Forms of
Certificates; Denominations." It is intended that the Offered Certificates not
be directly or indirectly held or beneficially owned in amounts lower than
such minimum denominations.
There is currently no secondary market for the Offered Certificates and
there can be no assurance that a secondary market will develop or, if such a
market does develop, that it will provide Certificateholders with liquidity of
investment at any particular time or for the life of the Offered Certificates.
The Underwriter intends to act as a market maker in the Offered Certificates,
subject to applicable provisions of federal and state securities laws and
other regulatory requirements, but is under no obligation to do so and any
such market making may be discontinued at any time. There can be no assurance
that any investor will be able to sell an Offered Certificate at a price equal
to or greater than the price at which such Certificate was purchased. THE
CLASS M AND OFFERED CLASS B CERTIFICATES MAY NOT BE TRANSFERRED UNLESS THE
TRANSFEREE HAS DELIVERED (I) A REPRESENTATION LETTER TO THE TRUSTEE AND THE
SELLER STATING EITHER (A) THAT THE TRANSFEREE IS NOT A PLAN AND IS NOT ACTING
ON BEHALF OF A PLAN OR USING THE ASSETS OF A PLAN TO EFFECT SUCH PURCHASE OR
(B) SUBJECT TO CERTAIN CONDITIONS DESCRIBED HEREIN, THAT THE SOURCE OF FUNDS
USED TO PURCHASE THE CLASS M OR OFFERED CLASS B CERTIFICATES IS AN "INSURANCE
COMPANY GENERAL ACCOUNT" OR (II) AN OPINION OF COUNSEL AND SUCH OTHER
DOCUMENTATION AS PROVIDED IN THIS PROSPECTUS SUPPLEMENT. IN ADDITION, THE
CLASS A-R CERTIFICATE MAY NOT BE PURCHASED BY OR TRANSFERRED TO (I) A
"DISQUALIFIED ORGANIZATION," (II) EXCEPT UNDER CERTAIN LIMITED CIRCUMSTANCES,
A PERSON WHO IS NOT A "U.S. PERSON," (III) A PLAN OR (IV) ANY PERSON OR ENTITY
WHO THE TRANSFEROR KNOWS OR HAS REASON TO KNOW WILL BE UNWILLING OR UNABLE TO
PAY WHEN DUE FEDERAL, STATE OR LOCAL TAXES WITH RESPECT THERETO. See "ERISA
Considerations" and "Description of the Certificates--Restrictions on Transfer
of the Class A-R, Class M and Offered Class B Certificates" herein and
"Material Federal Income Tax Consequences--Federal Income Tax Consequences for
REMIC Certificates--Tax-Related Restrictions on Transfer of Residual
Certificates" in the Prospectus.
An election will be made to treat the Trust Estate as a real estate mortgage
investment conduit (the "REMIC") for federal income tax purposes. As described
more fully herein and in the Prospectus, the Class A-1, Class A-2, Class A-3,
Class A-4, Class A-5, Class A-6, Class A-7, Class A-8, Class A-9, Class A-10
and Class A-PO Certificates, the Class M Certificates and the Class B-1, Class
B-2, Class B-3, Class B-4 and Class B-5 Certificates will constitute "regular
interests" in the REMIC and the Class A-R Certificate will constitute the
"residual interest" in the REMIC. PROSPECTIVE INVESTORS ARE CAUTIONED THAT THE
CLASS A-R CERTIFICATEHOLDER'S REMIC TAXABLE INCOME AND THE TAX LIABILITY
THEREON MAY EXCEED, AND MAY SUBSTANTIALLY EXCEED, CASH DISTRIBUTIONS TO SUCH
HOLDERS DURING CERTAIN PERIODS, IN WHICH EVENT SUCH HOLDER
S-4
<PAGE>
(Continued from previous page)
MUST HAVE SUFFICIENT ALTERNATIVE SOURCES OF FUNDS TO PAY SUCH TAX LIABILITY.
See "Summary Information --Federal Income Tax Status" and "Material Federal
Income Tax Consequences" herein and "Material Federal Income Tax
Consequences -- Federal Income Tax Consequences for REMIC Certificates" in the
Prospectus.
The Class A Certificates represent twelve Subclasses of a Class, the Class M
Certificates represent a Class and the Offered Class B Certificates represent
two Subclasses of a Class, all of which are part of a separate Series of
Certificates being offered by the Seller pursuant to the Prospectus dated
, 199 accompanying this Prospectus Supplement. Any prospective
investor should not purchase any Offered Certificates described herein unless
it has received the Prospectus and this Prospectus Supplement. The Prospectus
shall not be considered complete without this Prospectus Supplement. The
Prospectus contains important information regarding this offering which is not
contained herein, and prospective investors are urged to read, in full, the
Prospectus and this Prospectus Supplement.
---------------------
UNTIL , 199 , ALL DEALERS EFFECTING TRANSACTIONS IN THE OFFERED
CERTIFICATES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE
REQUIRED TO DELIVER A PROSPECTUS SUPPLEMENT AND PROSPECTUS. THIS IS IN
ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS SUPPLEMENT AND
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
S-5
<PAGE>
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SUMMARY INFORMATION....................................................... S-7
RISK FACTORS.............................................................. S-29
General.................................................................. S-29
Subordination............................................................ S-29
Underwriting Standards................................................... S-29
Book-Entry System for Certain Subclasses of Class A Certificates......... S-30
DESCRIPTION OF THE CERTIFICATES........................................... S-30
Denominations............................................................ S-30
Definitive Form.......................................................... S-30
Book-Entry Form.......................................................... S-30
Distributions............................................................ S-30
Interest................................................................. S-34
Principal (Including Prepayments)........................................ S-39
Calculation of Amount to be Distributed to the Class A Certificates
(other than the Class A-PO Certificates)............................... S-39
Calculation of Amount to be Distributed to the Class A-PO Certificates.. S-42
Calculation of Amount to be Distributed to the Class M and Class B
Certificates........................................................... S-43
Allocation of Amount to be Distributed.................................. S-46
Principal Payment Characteristics of the PAC Certificates and the
Companion Certificates................................................. S-47
Additional Rights of the Class A-R Certificateholder..................... S-48
Periodic Advances........................................................ S-49
Financial Security Assurance Inc. ....................................... S-49
Restrictions on Transfer of the Class A-R, Class M and Offered Class B
Certificates............................................................ S-51
Reports.................................................................. S-52
Subordination of Class M and Class B Certificates........................ S-53
Allocation of Losses.................................................... S-53
DESCRIPTION OF THE MORTGAGE LOANS......................................... S-57
Mortgage Loan Characteristics............................................ S-57
Mortgage Loan Origination and Underwriting............................... S-58
Mortgage Loan Data....................................................... S-60
</TABLE>
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Mandatory Repurchase or Substitution of Mortgage Loans................... S-62
Optional Repurchase of Defaulted Mortgage Loans.......................... S-62
PREPAYMENT AND YIELD CONSIDERATIONS....................................... S-62
Sensitivity of the Class A-PO Certificates............................... S-71
Yield Considerations with Respect to the Class B-1 and Class B-2
Certificates............................................................ S-71
POOLING AND SERVICING AGREEMENT........................................... S-74
General.................................................................. S-74
Distributions............................................................ S-74
Voting................................................................... S-74
Trustee.................................................................. S-75
Master Servicer.......................................................... S-75
Special Servicing Agreements............................................. S-75
Optional Termination..................................................... S-76
SERVICING OF THE MORTGAGE LOANS........................................... S-76
The Servicers............................................................ S-76
Servicer Custodial Accounts.............................................. S-77
Unscheduled Principal Receipts........................................... S-77
Anticipated Changes in Servicing......................................... S-78
Fixed Retained Yield; Servicing Compensation and Payment of Expenses..... S-79
Servicer Defaults........................................................ S-79
MATERIAL FEDERAL INCOME TAX CONSEQUENCES.................................. S-79
Regular Certificates..................................................... S-80
Residual Certificate..................................................... S-80
ERISA CONSIDERATIONS...................................................... S-81
LEGAL INVESTMENT.......................................................... S-82
SECONDARY MARKET.......................................................... S-83
UNDERWRITING.............................................................. S-83
LEGAL MATTERS............................................................. S-84
EXPERTS................................................................... S-84
USE OF PROCEEDS........................................................... S-84
RATINGS................................................................... S-84
INDEX OF SIGNIFICANT PROSPECTUS SUPPLEMENT DEFINITIONS.................... S-86
</TABLE>
S-6
<PAGE>
SUMMARY INFORMATION
The following is qualified in its entirety by reference to the detailed
information appearing elsewhere in this Prospectus Supplement and in the
accompanying prospectus (the "Prospectus"). Capitalized terms used in this
Prospectus Supplement and not otherwise defined herein have the meanings
assigned in the Prospectus. See the "Index of Significant Prospectus Supplement
Definitions" beginning on page S-86 and the "Index of Significant Definitions"
in the Prospectus.
Title of Securities....... Mortgage Asset-Backed Pass-Through Certificates,
Series 199 - Certificates (the "Series 199 - Cer-
tificates" or the "Certificates").
Seller.................... Norwest Integrated Structured Assets, Inc. (the
"Seller"). The Mortgage Loans will have been ac-
quired by the Seller from Norwest Mortgage, Inc.
("Norwest Mortgage"), an affiliate of the Seller
and the Master Servicer. The Mortgage Loans that
the Seller acquires from Norwest Mortgage will ei-
ther have been originated by Norwest Mortgage or
acquired by Norwest Mortgage, or an affiliate of
Norwest Mortgage, from various other entities (each
other such entity, a "Norwest Mortgage Correspon-
dent"), which either originated the Mortgage Loans
or acquired the Mortgage Loans pursuant to mortgage
loan purchase programs operated by the Norwest
Mortgage Correspondents. None of the Norwest Mort-
gage Correspondents is an affiliate of Norwest
Mortgage.
Servicing/Servicers....... Norwest Mortgage and one or more other Servicers
(which will be Norwest Mortgage Correspondents) ap-
proved by the Master Servicer will provide custom-
ary servicing functions with respect to the Mort-
gage Loans pursuant to servicing agreements (each,
an "Underlying Servicing Agreement") assigned to
the Trust Estate. Among other things, the Servicers
are obligated under certain circumstances to ad-
vance delinquent payments of principal and interest
with respect to the Mortgage Loans. Each of the
Servicers will be entitled to (i) a monthly Servic-
ing Fee with respect to each Mortgage Loan it serv-
ices payable on each Distribution Date that is ex-
pressed as one-twelfth of [a fixed percentage per
annum] multiplied by the scheduled principal bal-
ance of such Mortgage Loan on the first day of the
month and (ii) other additional servicing compensa-
tion described herein. See "Servicing of the Mort-
gage Loans" herein and in the Prospectus.
Master Servicer........... Norwest Bank Minnesota, National Association
("Norwest Bank" and, in its capacity as master
servicer, the "Master Servicer"). Norwest Bank is a
direct, wholly owned subsidiary of Norwest Corpora-
tion and is an affiliate of the Seller and Norwest
Mortgage. The Master Servicer will (a) monitor cer-
tain aspects of the servicing of the Mortgage
Loans, (b) cause the Mortgage Loans to be serviced
in the event that a Servicer is terminated and a
successor Servicer is not appointed, (c) provide
administrative services with respect to the Certif-
icates, (d) provide certain reports to the Trustee
regarding the Mortgage Loans and the Certificates,
(e) make advances, to the extent described herein
under "Description of the Certificates--Periodic
Advances," with respect to the Mortgage Loans if a
Servicer (other than Norwest Mortgage) fails to
make a required advance and (f) make payments to
cover certain
S-7
<PAGE>
prepayment interest shortfalls. The Master Servicer
will be entitled to (i) a monthly Master Servicing
Fee with respect to each Mortgage Loan, payable on
each Distribution Date, in an amount equal to one-
twelfth of [a fixed percentage per annum] multi-
plied by the scheduled principal balance of such
Mortgage Loan on the first day of the preceding
month and (ii) any interest earned on funds in the
Certificate Account. See "Description of the Cer-
tificates--Interest" and "The Pooling and Servicing
Agreement--Master Servicer" herein and "Norwest
Bank," "Servicing of the Mortgage Loans--The Master
Servicer" and "Certain Matters Regarding the Master
Servicer" in the Prospectus.
Trustee................... [Trustee], a national banking association (the
"Trustee"). The Trustee will perform certain admin-
istrative functions and will act as initial paying
agent, certificate registrar and custodian. The
Trustee will be required to make advances, to the
extent described herein under "Description of the
Certificates--Periodic Advances," with respect to
the Mortgage Loans if Norwest Mortgage, as
Servicer, fails to make a required advance. See
"Pooling and Servicing Agreement--Trustee" in this
Prospectus Supplement.
Rating of Certificates.... It is a condition to the issuance of the Series
199 - Certificates that they shall have been rated
[["Aaa" by Moody's Investors Service, Inc.
("Moody's")] ["AAA" by [Fitch Investors Service,
L.P. ("Fitch")] [Duff & Phelps Credit Rating Co.
("DCR")]] [and] ["AAA" and "AAAr" by Standard &
Poor's ("S&P")]] and [["Aa" by Moody's] ["AA" by
[Fitch] [DCR] [S&P] [and] ["A" by [Moody's] [Fitch]
[DCR] [S&P] [and] [["Baa" by Moody's] ["BBB" by
[Fitch] [DCR] [S&P]. The ratings by [Moody's]
[Fitch] [DCR] [S&P] are not recommendations to buy,
sell or hold such Certificates and may be subject
to revision or withdrawal at any time by the as-
signing rating agency. The ratings do not address
the possibility that, as a result of principal pre-
payments, holders of such Certificates may receive
a lower than anticipated yield. See "--Effects of
Prepayments on Investment Expectations" below and
"Ratings" in this Prospectus Supplement.
Description of
Certificates............. The Series 199 - Certificates will consist of the
Class A Certificates, the Class M Certificates and
the Class B Certificates. The Class A Certificates
represent a type of interest referred to in the
Prospectus as "Senior Certificates" and the Class M
and Class B Certificates represent a type of inter-
est referred to in the Prospectus as "Subordinated
Certificates." As these designations suggest, the
Class A Certificates are entitled to a certain pri-
ority, relative to the Class M and Class B Certifi-
cates, in right of distributions on the mortgage
loans underlying the Series 199 - Certificates
(the "Mortgage Loans"). As between the Class M Cer-
tificates and the Class B Certificates, the Class M
Certificates are entitled to a certain priority in
right of distributions on the Mortgage Loans and,
as among the Subclasses of Class B Certificates,
the Subclasses with lower numerical designations
are entitled to a certain priority in right of dis-
tributions on the Mortgage Loans relative to those
Subclasses with higher numerical designations. See
"--Distributions of Principal and Interest" below.
S-8
<PAGE>
The Class A Certificates will consist of twelve
Subclasses designated as the Class A-1, Class A-2,
Class A-3, Class A-4, Class A-5, Class A-6, Class
A-7, Class A-8, Class A-9, Class A-10, Class A-PO
and Class A-R Certificates. The Class M Certifi-
cates will not be divided into subclasses. The
Class B Certificates will consist of five
Subclasses, designated as the Class B-1, Class B-2,
Class B-3, Class B-4 and Class B-5 Certificates.
The Class A Certificates, the Class M Certificates
and the Class B-1 and Class B-2 Certificates are
referred to in this Prospectus Supplement collec-
tively as the "Offered Certificates." The Class B-1
and Class B-2 Certificates are referred to in this
Prospectus Supplement collectively as the "Offered
Class B Certificates." The Class B-3, Class B-4 and
Class B-5 Certificates are not offered hereby and
may be retained or sold by the Seller.
The Offered Certificates have the approximate ag-
gregate initial principal balances set forth on the
cover of this Prospectus Supplement. Any difference
between the aggregate principal balance of the
Class A, Class M and Offered Class B Certificates
as of the date of issuance of the Series 199 - Cer-
tificates and the approximate initial aggregate
principal balance of such Subclasses and Class as
of the date of this Prospectus Supplement will not,
with respect to the Class A Certificates, exceed 5%
of the initial aggregate principal balance of the
Class A Certificates as stated on the cover of this
Prospectus Supplement and, with respect to the
Class M Certificates and Offered Class B Certifi-
cates, will depend on the final subordination lev-
els for the Series 199 - Certificates. Any differ-
ence allocated to the Class A Certificates will be
allocated to one or more of the Subclasses of Class
A Certificates, other than the Class A-R Certifi-
cate.
The following table sets forth for each Class and
Subclass indicated the approximate undivided inter-
est in the principal balance of the Mortgage Loans
that is expected to be evidenced in the aggregate
by such Class and Subclass as of the Closing Date.
<TABLE>
<CAPTION>
APPROXIMATE INITIAL
CLASS OR SUBCLASS UNDIVIDED INTEREST
----------------- -------------------
<S> <C> <C>
Class A (other than Class A-PO)........... %
Class A-PO*............................... %
---------
Class A (all Subclasses)................ %
Class M................................... %
Class B-1................................. %
Class B-2................................. %
Classes B-3, B-4 and B-5.................. %
---------
Total................................... %
</TABLE>
--------------------
* The Class A-PO Certificates in the aggregate
represent an approximate % initial interest in
the principal balances of the Mortgage Loans
(such portions in the aggregate, the "Pool
Balance (PO Portion)") that have Net Mortgage
Interest Rates, as defined on page S- , of less
than % (the "Discount Mortgage Loans").
--------------------
By virtue of the subordination of the Class M and
Class B Certificates, it is possible that the Class
A-PO Certificates may also receive support
S-9
<PAGE>
from certain payments made with respect to the
other Mortgage Loans in the Trust Estate. The Class
A Certificates (other than the Class A-PO Certifi-
cates), the Class M Certificates and the Class B
Certificates will evidence the entire remaining in-
terest in the principal balance of the Mortgage
Loans (the "Pool Balance (Non-PO Portion)").
The following table sets forth for each Class indi-
cated the approximate undivided interest in the
Pool Balance (Non-PO Portion) that is expected to
be evidenced in the aggregate by such Classes as of
the Closing Date.
<TABLE>
<CAPTION>
APPROXIMATE INITIAL
UNDIVIDED INTEREST
CLASS PERCENTAGE IN DOLLARS
----- ---------- ----------
<S> <C> <C>
Class A (other than Class A-PO)......... % $
Class M................................. % $
Class B................................. % $
--- -----
Totals................................ % $
</TABLE>
----------------------------------------------------
The relative interests in the initial Pool Balance
(Non-PO Portion) represented by the Class A Certif-
icates (other than the Class A-PO Certificates),
the Class M Certificates and the Class B Certifi-
cates are subject to change over time because of
the disproportionate allocation of certain
unscheduled principal payments to the Class A Cer-
tificates (other than the Class A-PO Certificates)
for a specified period and the allocation of cer-
tain losses and certain shortfalls first to the
Subclasses of Class B Certificates in reverse nu-
merical order and then to the Class M Certificates
prior to the allocation of such losses and
shortfalls to the Class A Certificates, as dis-
cussed in "--Distributions of Principal and Inter-
est" and "--Credit Enhancement" below.
The Class A-5, Class A-6 and Class A-7 Certificates
are planned amortizaton class certificates (re-
ferred to herein collectively as the "PAC Certifi-
cates") because, based on certain assumptions de-
scribed in the last paragraph beginning on page S-
, if prepayments on the Mortgage Loans occur at
any constant rate between approximately % SPA (as
defined herein under "Prepayment and Yield Consid-
erations") and approximately % SPA, it is expected
that their principal balances would be reduced to
the percentages of their initial principal balances
indicated in the tables on page S- . However, it is
highly unlikely that principal prepayments on the
Mortgage Loans will occur at any constant rate or
that the Mortgage Loans will prepay at the same
rate. The Class A-8 Certificates are companion cer-
tificates (referred to herein as the "Companion
Certificates") because payments of principal allo-
cated to the Class A Certificates (other than the
Class A-PO Certificates) in excess of amounts re-
sulting from certain prepayment levels will be paid
first to the holders of the Companion Certificates
for so long as such Certificates remain outstand-
ing, prior to being paid to the holders of the PAC
Certificates. See "Description of the Certifi-
cates--Principal (Including Prepayments)--Alloca-
tion of Amount to be Distributed" and
S-10
<PAGE>
"--Principal Payment Characteristics of the PAC
Certificates and the Companion Certificates" in
this Prospectus Supplement.
Forms of Certificates;
Denominations............ The Offered Certificates will be issued either in
book-entry form or in fully registered, certifi-
cated form ("Definitive Certificates"). The follow-
ing table sets forth the original certificate form,
the minimum denomination and the incremental denom-
ination of the Offered Certificates. The Offered
Certificates are not intended to be directly or in-
directly held or beneficially owned in amounts
lower than such minimum denominations. See "De-
scriptions of the Certificates--Denominations" in
this Prospectus Supplement.
- --------------------------------------------------------------------------------
FORM AND DENOMINATIONS OF OFFERED CERTIFICATES
<TABLE>
<CAPTION>
MINIMUM INCREMENTAL
CLASS OR SUBCLASS ORIGINAL CERTIFICATE FORM DENOMINATION DENOMINATION
----------------- ------------------------- ------------ ------------
<S> <C> <C> <C>
Classes A-1, A-2, A-3, A-
4, A-5, A-6, A-7, A-8, A-
9 and A-10............... Book-Entry $100,000 $1,000
Class A-PO................ Definitive $100,000 $1,000*
Class A-R................. Definitive $ N/A
Class M................... Definitive $100,000 $1,000
Classes B-1 and B-2....... Definitive $100,000 $1,000
</TABLE>
- --------------------
* In order to aggregate the original principal balance of the Class A-PO
Certificates, one of the Class A-PO Certificates will be issued in an
incremental denomination of less than that shown.
- --------------------------------------------------------------------------------
Book-Entry Form. The Offered Certificates, other
than the Class A-PO, Class A-R, Class M and Offered
Class B Certificates, will be issued in book-entry
form, through the facilities of The Depository
Trust Company ("DTC"). These Certificates are
referred to collectively in this Prospectus
Supplement as the "Book-Entry Certificates." An
investor in a Subclass of Book- Entry Certificates
will not receive a physical certificate
representing its ownership interest in such Book-
Entry Certificates, except under extraordinary
circumstances which are discussed in "Description
of the Certificates--Book-Entry Form" in the
Prospectus. Instead, DTC will effect payments and
transfers by means of its electronic recordkeeping
services, acting through certain participating
organizations. This may result in certain delays in
receipt of distributions by an investor and may
restrict an investor's ability to pledge its
securities. The rights of investors in the Book-
Entry Certificates may generally only be exercised
through DTC and its participating organizations.
See "Description of the Certificates--
Denominations" and "--Book-Entry Form" in this
Prospectus Supplement and "Description of the
Certificates--Book-Entry Form" in the Prospectus.
Definitive Form. The Class A-PO, Class A-R, Class M
and Offered Class B Certificates will each be
issued as Definitive Certificates. See "Description
of the Certificates--Denominations" and "--
Definitive
S-11
<PAGE>
Form" in this Prospectus Supplement and
"Description of the Certificates--Definitive Form"
in the Prospectus.
Mortgage Loans............ General. The Mortgage Loans, which are the source
of distributions to holders of the Series 199 -
Certificates, will consist of conventional, fixed
interest rate, monthly pay, fully amortizing, one-
to four-family, residential first mortgage loans,
having original terms to stated maturity ranging
from approximately to approximately years,
which may include loans secured by shares issued by
cooperative housing corporations. Some of the Mort-
gage Loans are expected to be mortgage loans origi-
nated in connection with the relocation of employ-
ees of various corporate employers participating in
Norwest Mortgage's relocation program and of em-
ployees of various employers that did not partici-
pate in such program. The Mortgage Loans are ex-
pected to have the further specifications set forth
in the following table and under the heading "De-
scription of the Mortgage Loans" in this Prospectus
Supplement.
- --------------------------------------------------------------------------------
SELECTED MORTGAGE LOAN DATA(/1/)
(AS OF THE CUT-OFF DATE)
<TABLE>
<S> <C>
Cut-Off Date: 1, 199
Number of Mortgage Loans:
Aggregate Unpaid Principal Balance(/2/): $
Range of Unpaid Principal Balances(/2/): $ to $
Average Unpaid Principal Balance(/2/): $
Aggregate Unpaid Principal Balance of Relocation Mortgage
Loans(/2/) $
Relocation Mortgage Loans as a Percentage of the
Aggregate Unpaid Principal Balance(/2/): %
Range of Mortgage Interest Rates: % to %
Weighted Average Mortgage Interest Rate(/2/): %
Range of Remaining Terms to Stated Maturity: months to months
Weighted Average Remaining Term to Stated Maturity(/2/): months
Range of Original Loan-to-Value Ratios(/2/): % to %
Weighted Average Original Loan-to-Value Ratio(/2/): %
Geographic Concentration of Mortgaged Properties Securing
Mortgage Loans in Excess of 5% of the Aggregate Unpaid
Principal Balance(/2/): [states]% %
%
%
%
%
Maximum Five-Digit Zip Code Concentration(/2/): %
</TABLE>
- --------------------
(1) Information concerning the Discount Mortgage Loans and Premium Mortgage
Loans is set forth under "Description of the Mortgage Loans--Mortgage Loan
Characteristics."
(2) Approximate.
Changes to Pool. Mortgage Loans may be removed from
the pool, or a substitution may be made for certain
Mortgage Loans, in advance of the issuance of the
Series 199 - Certificates (which is expected to
occur on or about , 199 ) (the "Closing
Date"). Any of such Mortgage Loans may be excluded
from the Trust Estate (i) as a
S-12
<PAGE>
result of principal prepayment thereof in full or
(ii) if, as a result of delinquencies or otherwise,
the Seller otherwise deems such exclusion necessary
or desirable. In either event, other Mortgage Loans
may be included in the Trust Estate. This may
result in changes in certain of the pool
characteristics set forth in the table above and
elsewhere in this Prospectus Supplement. In the
event that any of the characteristics as of the
Cut-Off Date of the Mortgage Loans that constitute
the Trust Estate on the date of initial issuance of
the Series 199 - Certificates vary materially from
those described herein, revised information
regarding the Mortgage Loans will be made available
to purchasers of the Offered Certificates on or
before such issuance date, and a Current Report on
Form 8-K containing such information will be filed
with the Securities and Exchange Commission within
15 days following such issuance date. See
"Description of the Mortgage Loans" in this
Prospectus Supplement. Subsequent to the issuance
of the Series 199 - Certificates, certain Mortgage
Loans may be removed from the pool through
repurchase or, under certain circumstances, through
substitution by the Seller, if the Mortgage Loans
are discovered to have defective documentation or
if they otherwise do not conform to the standards
established by the Seller's representations and
warranties concerning the Mortgage Loans. See
"Description of the Mortgage Loans--Mandatory
Repurchase or Substitution of Mortgage Loans" in
this Prospectus Supplement.
Optional Termination...... The Seller is entitled, subject to certain condi-
tions relating to the then-remaining size of the
pool, to purchase all outstanding Mortgage Loans in
the pool and thereby effect early retirement of the
Series 199 - Certificates. See "Pooling and Ser-
vicing Agreement--Optional Termination" in this
Prospectus Supplement.
Underwriting Standards.... Approximately % (by Cut-Off Date Aggregate Princi-
pal Balance) of the Mortgage Loans were generally
originated by Norwest Mortgage or Norwest Mortgage
Correspondents (other than those Norwest Mortgage
Correspondents who were permitted to use their own
underwriting criteria) in conformity with Norwest
Mortgage's general underwriting standards (the
"General Standards") or modified underwriting stan-
dards (the "Modified Standards" and together with
the General Standards, the "Underwriting Stan-
dards") described in the Prospectus under the head-
ing "The Mortgage Loan Programs--Mortgage Loan Un-
derwriting--General Standards" and "--Modified
Standards". In certain instances, exceptions to the
Underwriting Standards may have been granted by
Norwest Mortgage. Approximately % (by Cut-Off Date
Aggregate Principal Balance) of the Mortgage Loans
were reviewed by United Guaranty Residential Insur-
ance Company ("UGRIC") to ensure compliance with
its credit, appraisal and underwriting standards
(the "Pool Certification Underwritten Loans"). Nei-
ther the Series 199 - Certificates nor the Mort-
gage Loans are insured or guaranteed under a mort-
gage pool insurance policy issued by UGRIC. The
Pool Certification Underwritten Loans were evalu-
ated by Norwest Mortgage using
S-13
<PAGE>
credit scoring as described in the Prospectus under
"The Mortgage Loan Programs--Mortgage Loan Under-
writing" and, based on the credit scores of such
Mortgage Loans, some of such Mortgage Loans were
re-underwritten. Approximately % (by Cut-Off Date
Aggregate Principal Balance) of the Mortgage Loans
were originated by Norwest Mortgage Correspondents
who were permitted to use their own underwriting
criteria based on a review of such criteria by
Norwest Mortgage ("Institutional Conduit Correspon-
dents"), and the underwriting policies of these In-
stitutional Conduit Correspondents may vary from
the Underwriting Standards or the standards of a
pool insurer. The remaining approximate % (by Cut-
Off Date Aggregate Principal Balance) of the Mort-
gage Loans were purchased by Norwest Mortgage in
bulk purchase transactions and were underwritten
using underwriting standards which may vary from
the Underwriting Standards (the "Bulk Purchase Un-
derwritten Loans"). However, Norwest Mortgage has
in each case reviewed the underwriting standards
applied by such Institutional Conduit Correspon-
dents and for such Bulk Purchase Underwritten Loans
and determined that such variances did not depart
materially from the Underwriting Standards[, except
as described under "Description of the Mortgage
Loans--Mortgage Loan Origination and Underwriting"
in this Prospectus Supplement]. See "Description of
the Mortgage Loans" in this Prospectus Supplement
and "The Mortgage Loan Programs--Mortgage Loan Un-
derwriting" in the Prospectus.
Distributions of
Principal and Interest... Distributions in General. Distributions on the Se-
ries 199 - Certificates will be made on the 25th
day of each month, or, if such day is not a busi-
ness day, on the succeeding business day (each such
date is referred to in this Prospectus Supplement
as a "Distribution Date"), commencing in
199 , to holders of record at the close of business
on the last business day of the preceding month. In
the case of the Book-Entry Certificates, the holder
of record will be Cede & Co., as nominee of DTC.
The amount available for distribution on any Dis-
tribution Date is primarily a function of (i) the
amount remitted by mortgagors of the Mortgage Loans
in payment of their scheduled installments of prin-
cipal and interest, (ii) the amount of prepayments
made by the mortgagors and (iii) proceeds from liq-
uidations of defaulted Mortgage Loans.
On any Distribution Date, holders of the Class A
Certificates will be entitled to receive all
amounts due them (other than the Class A-PO De-
ferred Amount, as defined on page S- ) before any
distributions are made to holders of the Class M
and Class B Certificates on that Distribution Date.
The Class A-PO Certificates will be entitled to re-
ceive the Class A-PO Deferred Amount as described
below. The amount that is available to be distrib-
uted on any Distribution Date will be allocated
first to pay interest due holders of the Class A
Certificates and then, if the amount available for
distribution exceeds the amount of interest due
holders of the Class A Certificates, to pay the
principal due to the Class
S-14
<PAGE>
A Certificates. The likelihood that a holder of a
particular Subclass of Class A Certificates (other
than the Class A-PO Certificates) will receive
principal distributions on any Distribution Date
will depend on the priority in which such Subclass
is entitled to principal distributions, as set
forth under the headings "Description of the Cer-
tificates--Principal (Including Prepayments)--Allo-
cation of Amount to be Distributed" and "--Calcula-
tion of Amount to be Distributed to the Class A
Certificates (other than the Class A-PO Certifi-
cates)" in this Prospectus Supplement.
After all amounts due on the Class A Certificates
(other than the Class A-PO Deferred Amount) have
been paid, the amount remaining will be distribut-
ed, in the following order, to pay (i) any Class A-
PO Deferred Amount first from amounts otherwise
distributable as principal on the Subclasses of
Class B Certificates in reverse numerical order
(i.e., first from amounts otherwise distributable
as principal on the Class B-5 Certificates, then
from amounts otherwise distributable as principal
on the Class B-4 Certificates, and so on), and then
from amounts otherwise distributable as principal
on the Class M Certificates, (ii) interest due to
the holders of the Class M Certificates, (iii)
principal due to the holders of the Class M Certif-
icates less any amounts used to pay the Class A-PO
Deferred Amount and (iv) with respect to each
Subclass of Class B Certificates sequentially in
numerical order interest due and then principal due
to the holders of each such Subclass of Class B
Certificates before any Subclasses of Class B Cer-
tificates with higher numerical designations re-
ceive any payments in respect of interest or prin-
cipal, provided that the principal due any Subclass
will be reduced by any amount used to pay the Class
A-PO Deferred Amount. See "Description of the Cer-
tificates--Distributions" in this Prospectus Sup-
plement.
If any mortgagor is delinquent in the payment of
principal or interest on a Mortgage Loan in any
month, the respective Servicer is required to ad-
vance such payment unless such Servicer determines
that the delinquent amount will not be recoverable
by such Servicer from insurance proceeds, liquida-
tion proceeds or other recoveries on the related
Mortgage Loan. The Master Servicer or Trustee may,
in certain circumstances, be required to make such
advances upon a Servicer's default on its obliga-
tion to advance. See "Description of the Certifi-
cates--Periodic Advances" in this Prospectus Sup-
plement.
Interest Distributions. The amount of interest to
which holders of each Subclass or Class of Offered
Certificates, other than the Class A-PO Certifi-
cates, will be entitled each month is calculated
based on the outstanding principal balance of such
Subclass or Class as of the related Distribution
Date. Interest will accrue each month on each such
Subclass or Class according to the following formu-
la: 1/12th of the Pass-Through Rate for such
Subclass or Class multiplied by the outstanding
principal balance of such Subclass or Class as of
the related Distribution Date. Holders of the Class
A-PO Certificates will not be entitled to receive
distributions of interest. The "Pass-Through Rate"
S-15
<PAGE>
for each Subclass and Class of Offered Certificates
(other than the Class A-PO Certificates) is the
percentage set forth on the cover of this Prospec-
tus Supplement.
When mortgagors prepay principal or when principal
is recovered through foreclosures or other liquida-
tions of defaulted Mortgage Loans, a full month's
interest for the month of payment or recovery may
not be paid or recovered, resulting in interest
shortfalls. These interest shortfalls are variously
handled, depending on the nature of the event re-
sulting in the interest shortfall.
In the case of principal prepayments in full, the
Master Servicer will be obligated to cover result-
ing interest shortfalls with respect to a Distribu-
tion Date in an amount (such amount, "Compensating
Interest") up to the lesser of (a) the product of
(i) 1/12th of % and (ii) the aggregate scheduled
principal balance of the Mortgage Loans with re-
spect to such Distribution Date and (b) the Avail-
able Master Servicing Compensation for such Distri-
bution Date.
Shortfalls in collection of interest resulting from
principal prepayments in full, to the extent they
exceed the amount of Compensating Interest with re-
spect to a Distribution Date ("Non-Supported Inter-
est Shortfalls"), will be allocated pro rata among
the Class A Certificates (after subtracting the
principal balance of the Class A-PO Certificates),
the Class M Certificates and the Class B Certifi-
cates, based on their then-outstanding principal
balances. The amount allocated to the Class A or
Class B Certificates will be allocated pro rata
among the Subclasses of Class A or Class B Certifi-
cates, as the case may be, based on interest ac-
crued.
Interest shortfalls resulting from partial princi-
pal prepayments will not be covered by the Master
Servicer, but instead will be borne first by the
Class B Certificates in reverse numerical order,
second by the Class M Certificates and finally pro
rata by the Class A Certificates (other than the
Class A-PO Certificates). See "Description of the
Certificates--Subordination of Class M and Class B
Certificates" in this Prospectus Supplement.
In addition, the amount of interest required to be
distributed to holders of the Series 199 - Certif-
icates will be reduced by a portion of certain Spe-
cial Hazard Losses, Fraud Losses and Bankruptcy
Losses attributable to interest. See "--Credit En-
hancement--Extent of Loss Coverage" below and "De-
scription of the Certificates--Interest" in this
Prospectus Supplement.
To the extent that the amount available for distri-
bution on any Distribution Date is insufficient to
permit the distribution of the applicable amount of
accrued interest on the Class A Certificates (net
of any Non-Supported Interest Shortfall, other
shortfalls and losses allocable to the Class A Cer-
tificates as described above), the amount of inter-
est to be distributed will be allocated among the
outstanding Subclasses of Class
S-16
<PAGE>
A Certificates (other than the Class A-PO Certifi-
cates) in accordance with their respective entitle-
ments to interest. The amount of any deficiency
will be added to the amount of interest that such
Class A Certificates are entitled to receive on
subsequent Distribution Dates. No interest will ac-
crue on such deficiencies.
To the extent that the amount available for distri-
bution on any Distribution Date, after the payment
of all amounts due the Class A Certificates (other
than any Class A-PO Deferred Amount) has been made,
is insufficient to permit distribution in full of
accrued interest on the Class M Certificates (net
of any Non-Supported Interest Shortfall, other
shortfalls and losses allocable to the Class M Cer-
tificates as described above), the amount of any
deficiency will be added to the amount of interest
that the Class M Certificates are entitled to re-
ceive on subsequent Distribution Dates. No interest
will accrue on such deficiencies.
To the extent that the amount available for distri-
bution on any Distribution Date, after the payment
of all amounts due the Class A Certificates (other
than the Class A-PO Deferred Amount), the Class M
Certificates and each Subclass of Class B Certifi-
cates with a lower numerical designation has been
made, is insufficient to permit distribution in
full of accrued interest on a Subclass of Class B
Certificates (net of any Non-Supported Interest
Shortfall, other shortfalls and losses allocable to
such Subclass of Class B Certificates as described
above), the amount of any deficiency will be added
to the amount of interest that such Subclass of
Class B Certificates is entitled to receive on sub-
sequent Distribution Dates. No interest will accrue
on such deficiencies.
Interest on the Class A Certificates (other than
the Class A-PO Certificates), the Class M Certifi-
cates and the Class B Certificates will be calcu-
lated on the basis of a 360-day year consisting of
twelve 30-day months.
See "Description of the Certificates--Interest" in
this Prospectus Supplement.
Principal Distributions. The aggregate amount of
principal to which the holders of the Class A Cer-
tificates (other than the holders of the Class A-PO
Certificates) are entitled each month will equal
the sum for each Mortgage Loan of the product of
(a) the Non-PO Fraction applicable to such Mortgage
Loan and (b) the sum of (i) a percentage (the
"Class A Percentage") of scheduled payments of
principal on each Mortgage Loan and (ii) a percent-
age (the "Class A Prepayment Percentage") of cer-
tain unscheduled payments of principal on each
Mortgage Loan. The "Non-PO Fraction" with respect
to any Mortgage Loan will equal the Net Mortgage
Interest Rate for such Mortgage Loan divided by %.
The Class A Percentage will be equal, on each Dis-
tribution Date, to the percentage corresponding to
the fraction that represents the ratio of the then-
outstanding principal balance of the Class A Cer-
tificates (after subtracting the principal balance
of the Class A-PO Certificates) to the Pool Balance
(Non-PO Portion). The Class A Pre-
S-17
<PAGE>
payment Percentage will be equal to the percentage
described in the preceding sentence plus an addi-
tional amount equal to a percentage of the princi-
pal otherwise distributable to the holders of the
Subordinated Certificates. As a result, the per-
centage of certain unscheduled principal payments
otherwise distributable to the holders of the Sub-
ordinated Certificates that is instead distributa-
ble to the holders of the Class A Certificates
(other than the Class A-PO Certificates) will be
equal to 100% during the first five years beginning
on the first Distribution Date and, subject to
meeting certain conditions, will likely decline
during the subsequent four years, as described un-
der the heading "Description of the Certificates--
Principal (Including Prepayments)--Calculation of
Amount to be Distributed to the Class A Certifi-
cates (other than the Class A-PO Certificates)" in
this Prospectus Supplement, until the ninth anni-
versary of the first Distribution Date and thereaf-
ter will likely be equal to zero. On each Distribu-
tion Date, the Subordinated Certificates will col-
lectively be entitled to receive the percentages of
the scheduled and certain unscheduled payments of
principal on the portion of each Mortgage Loan rep-
resenting the Non-PO Fraction of such Mortgage Loan
equal, in each case, to 100% less the applicable
percentage for the Class A Certificates (other than
the Class A-PO Certificates) described above.
The aggregate amount of principal to which holders
of the Class A-PO Certificates are entitled each
month will equal the sum for each Discount Mortgage
Loan of the product of (a) the PO Fraction for such
Mortgage Loan and (b) the sum of (i) scheduled
principal payments on such Mortgage Loan and (ii)
certain unscheduled payments of principal on such
Mortgage Loan. See "Description of the Certifi-
cates--Principal (Including Prepayments)--Calcula-
tion of Amount to be Distributed to the Class A-PO
Certificates" in this Prospectus Supplement. In ad-
dition, the Class A-PO Certificates will be enti-
tled to receive any previously unpaid amounts of
principal to which such Certificates were entitled
on prior Distribution Dates as part of the Class A-
PO Deferred Amount. The "PO Fraction" with respect
to any Discount Mortgage Loan will equal the dif-
ference between 1.0 and the Non-PO Fraction for
such Discount Mortgage Loan. The PO Fraction with
respect to each Mortgage Loan that is not a Dis-
count Mortgage Loan will be equal to zero. See "De-
scription of the Certificates--Principal (Including
Prepayments)" in this Prospectus Supplement.
The holders of the Class A-PO Certificates will
also be entitled each month to an amount equal to
the Class A-PO Deferred Amount. The Class A-PO De-
ferred Amount will be paid to holders of the Class
A-PO Certificates only from amounts otherwise dis-
tributable as principal to the Subclasses of Class
B Certificates in reverse numerical order and then
from amounts otherwise distributable as principal
to the Class M Certificates. No interest will ac-
crue on any Class A-PO Deferred Amount.
Except as described below under "--Effect of Subor-
dination Level on Principal Distributions," on each
Distribution Date, the Class M, Class
S-18
<PAGE>
B-1 and Class B-2 Certificates will be entitled to
a portion of scheduled payments and certain
unscheduled payments of principal on the Mortgage
Loans allocable to the Subordinated Certificates
that represents the ratio of the then-outstanding
principal balance of the Class M, Class B-1 or
Class B-2 Certificates, as the case may be, to the
then-outstanding principal balance of the Subordi-
nated Certificates.
The amount that is available for distribution to
the holders of the Class A Certificates on any Dis-
tribution Date as a distribution of principal
(other than any Class A-PO Deferred Amount) is
equal to the amount remaining after deducting the
amount of interest distributable on the Class A
Certificates from the total amount collected that
is available to be distributed to holders of the
Series 199 - Certificates on such Distribution
Date. Principal will be distributed to the holders
of the Class A Certificates (other than the Class
A-PO Certificates) in accordance with the payment
priorities described under the heading "Description
of the Certificates--Principal (Including Prepay-
ments)--Allocation of Amount to be Distributed" in
this Prospectus Supplement.
The amount that is available for distribution to
the holders of the Class M Certificates on any Dis-
tribution Date as a distribution of principal is
the amount remaining after all interest and princi-
pal distributions due on the Class A Certificates
(including any Class A-PO Deferred Amount) and in-
terest due on the Class M Certificates have been
deducted from the total amount collected that is
available to be distributed to holders of the Se-
ries 199 - Certificates.
The amount that is available for distribution to
the holders of a Subclass of Class B Certificates
on any Distribution Date as a distribution of prin-
cipal is the amount remaining after all interest
and principal distributions due on the Class A Cer-
tificates (including any Class A-PO Deferred
Amount), all interest and principal distributions
on the Class M Certificates and the Subclasses of
Class B Certificates with lower numerical designa-
tions and interest due on such Subclass of Class B
Certificates have been deducted from the total
amount collected that is available to be distrib-
uted to holders of the Series 199 - Certificates.
Effect of Subordination Level on Principal
Distributions. In order to preserve the availabil-
ity of the original subordination level as protec-
tion against losses on the Class M Certificates,
the Class B-1 Certificates, the Class B-2 Certifi-
cates, the Class B-3 Certificates and the Class B-4
Certificates, some or all of the Subclasses of
Class B Certificates, as described below, may not
be entitled to distributions of principal on cer-
tain Distribution Dates and the principal balances
of such Subclasses will not be considered for pur-
poses of allocation of principal among the Subordi-
nated Certificates.
In the case of the Class M Certificates, if on any
Distribution Date the percentage obtained by divid-
ing the outstanding principal balance of the Class
B Certificates by the sum of the outstanding prin-
cipal balances of the Class A Certificates (other
than the Class A-PO Certificates), the
S-19
<PAGE>
Class M Certificates and the Class B Certificates
is less than such percentage was upon the initial
issuance of the Series 199 - Certificates, then
the Class B Certificates will not be entitled to
distributions of principal on such Distribution
Date and the Class M Certificates will be entitled
to all distributions of principal allocable to the
Subordinated Certificates for such Distribution
Date.
In the case of the Class B-1, Class B-2, Class B-3
or Class B-4 Certificates, if on any Distribution
Date the percentage obtained by dividing the sum of
the then-outstanding principal balances of the
Subclasses of Class B Certificates with higher nu-
merical designations by the sum of the then-out-
standing principal balances of the Class A Certifi-
cates (other than the Class A-PO Certificates), the
Class M Certificates and the Class B Certificates
is less than such percentage at the time of the
initial issuance of the Series 199 - Certificates,
then such Subclasses of Class B Certificates with
higher numerical designations will not be entitled
to distributions of principal and the principal
balances of such Subclasses will not be taken into
account for purposes of calculating the portions of
scheduled and unscheduled principal payments allo-
cable to the Class M Certificates and to the
Subclasses of Class B Certificates with lower nu-
merical designations.
In either of the cases described above, the Class M
Certificates and those Subclasses of Class B Cer-
tificates with lower numerical designations will
receive a greater portion of scheduled and
unscheduled payments of principal on the Mortgage
Loans allocable to the Subordinated Certificates
than the Class M Certificates and those Subclasses
of Class B Certificates with lower numerical desig-
nations would have received had all Subclasses of
Class B Certificates been entitled to their portion
of such principal payments. See "Description of the
Certificates--Principal (Including Prepayments)--
Calculation of Amount to be Distributed to the
Class M and Class B Certificates" in this Prospec-
tus Supplement.
Credit Enhancement........ Description of "Shifting-Interest" Subordination.
The rights of the holders of the Class M
Certificates to receive distributions will be
subordinated to the rights of the holders of the
Class A Certificates to receive distributions, to
the extent described herein under "Description of
the Certificates--Subordination of Class M and Class
B Certificates." The rights of the holders of a
Subclass of Class B Certificates to receive dis-
tributions will be subordinated to the rights of the
holders of the Class A Certificates, the Class M
Certificates and the Subclasses of Class B Cer-
tificates with lower numerical designations to re-
ceive distributions, to the extent described herein
under "Description of the Certificates--Subordina-
tion of Class M and Class B Certificates." This
subordination provides a certain amount of protec-
tion to the holders of the Class A Certificates (to
the extent of the subordination of the Class M and
Class B Certificates), the Class M Certificates (to
the extent of the subordination of the Class B Cer-
tificates) and the Subclasses of Class B Certifi-
cates (other than the Class B-5 Certificates) (to
the extent of the subordination of the Subclasses of
Class B Certificates with higher numerical des-
ignations) against delays in the receipt of sched-
uled payments of interest and principal and against
losses associated
S-20
<PAGE>
with the liquidation of defaulted Mortgage Loans
and certain losses resulting from the bankruptcy of
a mortgagor.
In general, the protection afforded the holders of
the Class A Certificates by means of this subordi-
nation will be effected in two ways: (i) by the
preferential right of the holders of the Class A
Certificates to receive, prior to any distribution
being made on any Distribution Date in respect of
the Class M and Class B Certificates, the amounts
of interest and principal due the holders of the
Class A Certificates and, if necessary, by the
right of such holders to receive future distribu-
tions on the Mortgage Loans that would otherwise
have been allocated to the holders of the Class M
and Class B Certificates and (ii) by the allocation
to the Class M and Class B Certificates, until
their respective principal balances have been re-
duced to zero, of certain losses resulting from the
liquidation of defaulted Mortgage Loans or the
bankruptcy of mortgagors prior to the allocation of
such losses to the Class A Certificates. See "De-
scription of the Certificates--Distributions" in
this Prospectus Supplement.
In general, the protection afforded the holders of
the Class M Certificates by means of this subordi-
nation will also be effected in two ways: (i) by
the preferential right of the holders of the Class
M Certificates to receive, prior to any distribu-
tion being made on any Distribution Date in respect
of the Class B Certificates, the amounts of inter-
est and principal due the holders of the Class M
Certificates on such date and, if necessary, by the
right of such holders to receive future distribu-
tions on the Mortgage Loans that would otherwise
have been allocated to the holders of the Class B
Certificates and (ii) by the allocation to the
Class B Certificates, until their principal balance
has been reduced to zero, of certain losses result-
ing from the liquidation of defaulted Mortgage
Loans or the bankruptcy of mortgagors prior to the
allocation of such losses to the Class M Certifi-
cates. See "Description of the Certificates--Dis-
tributions" in this Prospectus Supplement.
In general, the protection afforded the holders of
a Subclass of Class B Certificates by means of this
subordination will also be effected in two ways:
(i) by the preferential right of the holders of
such Subclass to receive, prior to any distribution
being made on any Distribution Date in respect of
the Subclasses of Class B Certificates with higher
numerical designations, the amounts of interest and
principal due the holders of such Subclass on such
date and, if necessary, by the right of such hold-
ers to receive future distributions on the Mortgage
Loans that would otherwise have been allocated to
the holders of the Subclasses of Class B Certifi-
cates with higher numerical designations and (ii)
by the allocation to the Subclasses of Class B Cer-
tificates with higher numerical designations, until
their principal balances have been reduced to zero,
of certain losses resulting from the liquidation of
defaulted Mortgage Loans or the bankruptcy of mort-
gagors prior to the allocation of such losses to
such Subclass. See "Description of the Certifi-
cates--Distributions" in this Prospectus Supple-
ment.
In addition, in order to increase the period during
which the principal balances of the Class M and
Class B Certificates remain available as
S-21
<PAGE>
credit enhancement to the Class A Certificates, a
disproportionate amount of prepayments and certain
unscheduled recoveries with respect to the Mortgage
Loans will be allocated to the Class A Certificates
(other than the Class A-PO Certificates). This al-
location has the effect of accelerating the amorti-
zation of the Class A Certificates (other than the
Class A-PO Certificates) while, in the absence of
losses in respect of the liquidation of defaulted
Mortgage Loans or losses resulting from the bank-
ruptcy of mortgagors, increasing the respective
percentage interests in the principal balance of
the Mortgage Loans evidenced by the Class M and
Class B Certificates.
Extent of Loss Coverage. Realized losses on Mort-
gage Loans, other than losses that are (i) attrib-
utable to "special hazards" not insured against un-
der a standard hazard insurance policy, (ii) in-
curred on defaulted Mortgage Loans as to which
there was fraud in the origination of such Mortgage
Loans or (iii) attributable to certain actions
which may be taken by a bankruptcy court in connec-
tion with a Mortgage Loan, including a reduction by
a bankruptcy court of the principal balance of or
the interest rate on a Mortgage Loan or an exten-
sion of its maturity, will not be allocated to the
Class A Certificates until the date on which the
aggregate principal balance of the Class M and
Class B Certificates (which aggregate balance is
expected initially to be approximately $ ) has
been reduced to zero; will not be allocated to the
Class M Certificates until the date on which the
aggregate principal balance of the Class B Certifi-
cates (which aggregate balance is expected ini-
tially to be approximately $ ) has been reduced
to zero; and will not be allocated to the Class B-1
or Class B-2 Certificates until the date on which
the aggregate principal balance of the Subclasses
of Class B Certificates with higher numerical des-
ignations has been reduced to zero (which aggregate
balance is expected initially to be approximately
$ with respect to the Class B-1 Certificates and
approximately $ with respect to the Class B-2
Certificates). Such losses will be allocated first
among the Subclasses of Class B Certificates, in
reverse numerical order (that is, to the Class B-5,
Class B-4, Class B-3, Class B-2 and Class B-1 Cer-
tificates, respectively).
With respect to any Distribution Date subsequent to
the first Distribution Date, the availability of
the credit enhancement provided by the Class M Cer-
tificates and the Subclasses of Class B Certifi-
cates will be affected by the prior reduction of
the principal balance of the Class M Certificates
and such Subclasses of Class B Certificates. Reduc-
tion of the principal balance of the Class M Cer-
tificates and any Subclass of Class B Certificates
will result from (i) the prior allocation of losses
due to the liquidation of defaulted Mortgage Loans,
including losses due to special hazards and fraud
losses up to the respective limits referred to be-
low, (ii) the prior allocation of bankruptcy losses
up to the limit referred to below and (iii) the
prior receipt of principal distributions by the
holders of such Certificates.
As of the date of issuance of the Series 199 -
Certificates, the amount of losses attributable to
special hazards, fraud and bankruptcy that will
S-22
<PAGE>
be absorbed solely by the holders of the Subclasses
of Class B Certificates in reverse numerical order
and then solely by the Class M Certificates will be
approximately %, % and %, respectively, of the
Cut-Off Date Aggregate Principal Balance of the
Mortgage Loans (approximately $ , $ and $ ,
respectively). If losses due to special hazards,
fraud or bankruptcy exceed any of such amounts
prior to the principal balances of the Class M and
Class B Certificates being reduced to zero, (a) the
principal portion of any such excess losses with
respect to the Mortgage Loans will generally be
shared pro rata by (i) the Class A Certificates
(other than the Class A-PO Certificates), the Class
M Certificates and the Class B Certificates and
(ii) to the extent such losses arise with respect
to Discount Mortgage Loans, the Class A-PO Certifi-
cates, in each case according to their respective
interests in such Mortgage Loans and (b) the inter-
est portion of any such losses with respect to the
Mortgage Loans will generally be shared pro rata by
the Class A, Class M and Class B Certificates based
on their respective interest accrual amounts. Under
certain circumstances, the limits set forth above
may be reduced as described under "Description of
the Certificates--Subordination of Class M and
Class B Certificates--Allocation of Losses" in this
Prospectus Supplement. After the principal balances
of the Class M and Class B Certificates have been
reduced to zero, the principal portion of all
losses (other than the portion attributable to the
Class A-PO Certificates, if any) will be allocated
to the Class A Certificates (other than the Class
A-PO Certificates). To the extent such losses arise
with respect to Discount Mortgage Loans, principal
losses will be shared among the Class A Certifi-
cates according to their respective interests in
such Mortgage Loans. The principal portion of any
losses borne by the Class A Certificates (other
than losses borne by the Class A-PO Certificates)
will be shared pro rata by the Subclasses of Class
A Certificates (other than the Class A-PO Certifi-
cates) based on their then-outstanding principal
balances and the interest portion of such losses
will be shared pro rata by such Subclasses based on
interest accrued. See "Description of the Certifi-
cates--Interest" and "--Subordination of Class M
and Class B Certificates--Allocation of Losses" in
this Prospectus Supplement.
THE YIELD TO MATURITY ON THE CLASS M CERTIFICATES
WILL BE MORE SENSITIVE TO LOSSES DUE TO LIQUIDA-
TIONS OF THE MORTGAGE LOANS (AND THE TIMING THERE-
OF) THAN THE CLASS A CERTIFICATES, IN THE EVENT
THAT THE AGGREGATE PRINCIPAL BALANCE OF THE CLASS B
CERTIFICATES HAS BEEN REDUCED TO ZERO.
THE YIELD TO MATURITY ON EACH SUBCLASS OF OFFERED
CLASS B CERTIFICATES WILL BE MORE SENSITIVE TO
LOSSES DUE TO LIQUIDATIONS OF THE MORTGAGE LOANS
(AND THE TIMING THEREOF) THAN THE CLASS A CERTIFI-
CATES AND THE CLASS M CERTIFICATES AND, IN THE CASE
OF THE CLASS B-2 CERTIFICATES, THE CLASS B-1 CER-
TIFICATES, IN THE EVENT THAT THE PRINCIPAL BALANCES
OF THE SUBCLASSES OF CLASS B CERTIFICATES WITH
HIGHER NUMERICAL DESIGNATIONS HAVE BEEN REDUCED TO
ZERO.
S-23
<PAGE>
See "Description of the Certificates--Subordination
of Class M and Class B Certificates" in this Pro-
spectus Supplement.
Effects of Prepayments on
Investment
Expectations............. The actual rate of prepayment of principal on the
Mortgage Loans cannot be predicted. The investment
performance of the Offered Certificates may vary
materially and adversely from the investment expec-
tations of investors due to prepayments on the
Mortgage Loans being higher or lower than antici-
pated by investors. In addition, the Class A Cer-
tificates (other than the Class A-PO Certificates)
in the aggregate will be more sensitive to prepay-
ments on the Mortgage Loans than the Subordinated
Certificates due to the disproportionate allocation
of such prepayments to investors in such Class A
Certificates then entitled to principal distribu-
tions during the nine years beginning on the first
Distribution Date. The actual yield to the holder
of an Offered Certificate may not be equal to the
yield anticipated at the time of purchase of the
Certificate or, notwithstanding that the actual
yield is equal to the yield anticipated at that
time, the total return on investment expected by
the investor or the expected weighted average life
of the Certificate may not be realized. These ef-
fects are summarized below. IN DECIDING WHETHER TO
PURCHASE ANY OFFERED CERTIFICATES, AN INVESTOR
SHOULD MAKE AN INDEPENDENT DECISION AS TO THE AP-
PROPRIATE PREPAYMENT ASSUMPTIONS TO BE USED.
Yield. If an investor purchases an Offered Certifi-
cate (other than a Class A-PO Certificate) at an
amount equal to its unpaid principal balance (that
is, at "par"), the effective yield to that investor
(assuming that there are no interest shortfalls and
assuming the full return of the investor's invested
principal) will approximate the Pass-Through Rate
on that Certificate. If an investor pays less or
more than the unpaid principal balance of an Of-
fered Certificate (that is, buys the Certificate at
a "discount" or "premium," respectively), then,
based on the assumptions set forth in the preceding
sentence, the effective yield to the investor will
be higher or lower, respectively, than the stated
interest rate on the Certificate, because such dis-
count or premium will be amortized over the life of
the Certificate. Any deviation in the actual rate
of prepayments on the Mortgage Loans from the rate
assumed by the investor will affect the period of
time over which, or the rate at which, the discount
or premium will be amortized and, consequently,
will change the investor's actual yield from that
anticipated. The timing of receipt of prepayments
may also affect the investor's actual yield. The
yield experienced by an investor in the Class A-PO
Certificates, which do not bear interest, is pri-
marily a function of the price paid by such invest-
or, the rate and timing of principal payments on
the Discount Mortgage Loans and losses incurred on
and after the Cross-Over Date. The particular sen-
sitivity of the Class A-PO Certificates is dis-
played in a table appearing under the heading "Pre-
payment and Yield Considerations" in this Prospec-
tus Supplement. AN INVESTOR THAT PURCHASES ANY OF-
FERED CERTIFICATES AT A DISCOUNT, PARTICULARLY THE
CLASS A-PO CERTIFICATES, SHOULD CONSIDER THE RISK
THAT A SLOWER THAN ANTICIPATED RATE
S-24
<PAGE>
OF PRINCIPAL PAYMENTS ON THE MORTGAGE LOANS, OR IN
THE CASE OF THE CLASS A-PO CERTIFICATES, ON THE
DISCOUNT MORGAGE LOANS, WILL RESULT IN AN ACTUAL
YIELD THAT IS LOWER THAN SUCH INVESTOR'S EXPECTED
YIELD. AN INVESTOR THAT PURCHASES ANY OFFERED CER-
TIFICATES AT A PREMIUM SHOULD CONSIDER THE RISK
THAT A FASTER THAN ANTICIPATED RATE OF PRINCIPAL
PAYMENTS ON THE MORTGAGE LOANS WILL RESULT IN AN
ACTUAL YIELD THAT IS LOWER THAN SUCH INVESTOR'S EX-
PECTED YIELD AND SHOULD CONSIDER THE RISK THAT A
RAPID RATE OF PRINCIPAL PAYMENTS ON THE MORTGAGE
LOANS COULD RESULT IN THE FAILURE OF SUCH INVESTOR
TO FULLY RECOVER ITS INITIAL INVESTMENT. THE YIELD
ON THE CLASS A-PO CERTIFICATES WILL BE INFLUENCED
PRIMARILY BY PRINCIPAL PAYMENTS SOLELY WITH RESPECT
TO THE DISCOUNT MORTGAGE LOANS.
Reinvestment Risk. As stated above, if an Offered
Certificate (other than a Class A-PO Certificate)
is purchased at par, fluctuations in the rate of
distributions of principal will generally not af-
fect the yield to maturity of that Certificate.
However, the total return on any investor's invest-
ment, including an investor who purchases at par,
will be reduced to the extent that principal dis-
tributions received on its Certificate cannot be
reinvested at a rate as high as the stated interest
rate of the Certificate or, in the case of the
Class A-PO Certificates, the expected yield, which
is based on the price paid by the investor and the
rate of prepayments anticipated by such investor.
Investors in the Offered Certificates should con-
sider the risk that rapid rates of prepayments on
the Mortgage Loans may coincide with periods of low
prevailing market interest rates. During periods of
low prevailing market interest rates, mortgagors
may be expected to prepay or refinance Mortgage
Loans that carry interest rates significantly
higher than then-current interest rates for mort-
gage loans. Consequently, the amount of principal
distributions available to an investor for rein-
vestment at such low prevailing interest rates may
be relatively large. Conversely, slow rates of pre-
payments on the Mortgage Loans may coincide with
periods of high prevailing market interest rates.
During such periods, it is less likely that mortga-
gors will elect to prepay or refinance Mortgage
Loans and, therefore, the amount of principal dis-
tributions available to an investor for reinvest-
ment at such high prevailing interest rates may be
relatively small.
Weighted Average Life Volatility. One indication of
the impact of varying prepayment speeds on a secu-
rity is the change in its weighted average life.
The "weighted average life" of an Offered Certifi-
cate is the average amount of time that will elapse
between the date of issuance of the Certificate and
the date on which each dollar in reduction of the
principal balance of the Certificate is distributed
to the investor. Low rates of prepayment may result
in the extension of the weighted average life of a
Certificate; high rates, in the shortening of such
weighted average life.
In general, if the weighted average life of a Cer-
tificate purchased at par is extended beyond that
initially anticipated, such Certificate's market
value may be adversely affected even though the
yield to maturity on
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the Certificate is unaffected. The weighted average
life of the Class A-PO Certificates will be deter-
mined by the rate of prepayment of the Discount
Mortgage Loans and generally will not be affected
by the rate of prepayment on other Mortgage Loans.
THE WEIGHTED AVERAGE LIFE OF THE COMPANION CERTIFI-
CATES WILL BE MORE SENSITIVE THAN THE OTHER
SUBCLASSES OF CLASS A CERTIFICATES TO THE RATE OF
PREPAYMENTS ON THE MORTGAGE LOANS AT RATES AT OR
ABOVE CERTAIN PREPAYMENT LEVELS BECAUSE PAYMENTS OF
PRINCIPAL ALLOCATED TO THE CLASS A CERTIFICATES
(OTHER THAN THE CLASS A-PO CERTIFICATES) IN EXCESS
OF SUCH PREPAYMENT LEVELS WILL BE PAID TO THE HOLD-
ERS OF THE COMPION CERTIFICATES WHILE SUCH CERTIFI-
CATES REMAIN OUTSTANDING PRIOR TO BEING PAID TO THE
HOLDERS OF THE PAC CERTIFICATES.
The weighted average lives of the Offered Certifi-
cates, under various prepayment scenarios, are dis-
played in the tables appearing under the heading
"Prepayment and Yield Considerations" in this Pro-
spectus Supplement.
See "Description of the Certificates--Principal
(Including Prepayments)--Allocation of Amount to be
Distributed" and "--Principal Payment Characteris-
tics of the PAC Certificates and the Companion Cer-
tificates" in this Prospectus Supplement.
Federal Income Tax
Status................... An election will be made to treat the Trust Estate
as a real estate mortgage investment conduit (the
"REMIC") for federal income tax purposes. The Class
A-1, Class A-2, Class A-3, Class A-4, Class A-5,
Class A-6, Class A-7, Class A-8, Class A-9, Class
A-10 and Class A-PO Certificates, the Class M Cer-
tificates and the Class B-1, Class B-2, Class B-3,
Class B-4 and Class B-5 Certificates will consti-
tute "regular interests" in the REMIC and the Class
A-R Certificate will constitute the "residual in-
terest" in the REMIC.
The Regular Certificates (as defined herein under
"Material Federal Income Tax Consequences") gener-
ally will be treated as newly originated debt in-
struments for federal income tax purposes. Benefi-
cial owners of the Regular Certificates will be re-
quired to report income thereon in accordance with
the accrual method of accounting. The Class A-PO
Certificates will be issued with original issue
discount in an amount equal to the excess of the
initial principal balance thereof over their issue
price. It is anticipated that the Class Certif-
icates will be issued with original issue discount
in an amount equal to the excess of their initial
principal balances (plus days of interest at the
pass-through rates thereon) over their respective
issue prices (including accrued interest). It is
also anticipated that the Class Certificates
will be issued at a premium and the Class Cer-
tificates will be issued with de minimus original
issue discount for federal income tax purposes. It
is further anticipated that the Class B-3, Class B-
4 and Class B-5 Certificates, which are not offered
hereby, will be issued with original issue discount
for federal income tax purposes.
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<PAGE>
The holder of the Class A-R Certificate will be re-
quired to include the taxable income or loss of the
REMIC in determining its federal taxable income. It
is anticipated that all or a substantial portion of
the taxable income of the REMIC includible by the
Class A-R Certificateholder will be treated as "ex-
cess inclusion" income subject to special limita-
tions for federal income tax purposes. AS A RESULT,
THE EFFECTIVE AFTER-TAX RETURN OF THE CLASS A-R
CERTIFICATE MAY BE SIGNIFICANTLY LOWER THAN WOULD
BE THE CASE IF THE CLASS A-R CERTIFICATE WERE TAXED
AS A DEBT INSTRUMENT, OR MAY BE NEGATIVE. FURTHER,
SIGNIFICANT RESTRICTIONS APPLY TO THE TRANSFER OF
THE CLASS A-R CERTIFICATE. THE CLASS A-R CERTIFI-
CATE WILL BE CONSIDERED A "NONECONOMIC RESIDUAL IN-
TEREST," CERTAIN TRANSFERS OF WHICH MAY BE DISRE-
GARDED FOR FEDERAL INCOME TAX PURPOSES.
See "Description of the Certificates--Restrictions
on Transfer of the Class A-R, Class M and Offered
Class B Certificates" and "Material Federal Income
Tax Consequences" in this Prospectus Supplement and
"Material Federal Income Tax Consequences--Federal
Income Tax Consequences for REMIC Certificates" in
the Prospectus.
ERISA Considerations...... A fiduciary of any employee benefit plan subject to
Title I of the Employee Retirement Income Security
Act of 1974, as amended ("ERISA"), or Section 4975
of the Internal Revenue Code of 1986, as amended
(the "Code"), or a governmental plan (as defined in
Section 3(32) of ERISA) subject to any federal,
state or local law ("Similar Law") which is, to a
material extent, similar to the foregoing provi-
sions of ERISA or the Code (collectively, a
"Plan"), should carefully review with its legal ad-
visors whether the purchase or holding of Offered
Certificates could give rise to a transaction pro-
hibited or not otherwise permissible under ERISA,
the Code or Similar Law. BECAUSE THE CLASS M AND
OFFERED CLASS B CERTIFICATES ARE SUBORDINATED TO
THE CLASS A CERTIFICATES, THE CLASS M AND OFFERED
CLASS B CERTIFICATES MAY NOT BE TRANSFERRED UNLESS
THE TRANSFEREE HAS DELIVERED (I) A REPRESENTATION
LETTER TO THE TRUSTEE AND SELLER STATING EITHER (A)
THAT THE TRANSFEREE IS NOT A PLAN AND IS NOT ACTING
ON BEHALF OF A PLAN OR USING THE ASSETS OF A PLAN
IN EFFECT SUCH PURCHASE OR (B) SUBJECT O CERTAIN
CONDITIONS DESCRIBED HEREIN, THAT THE SOURCE OF
FUNDS USED TO PURCHASE THE CLASS M OR OFFERED CLASS
B CERTIFICATES IS AN "INSURANCE COMPANY GENERAL AC-
COUNT" OR (II) AN OPINION OF COUNSEL AND SUCH OTHER
DOCUMENTATION AS DESCRIBED UNDER "ERISA CONSIDERA-
TIONS" IN THIS PROSPECTUS SUPPLEMENT RELATING TO
THE OFFERING OF SUCH CERTIFICATES. THE CLASS A-R
CERTIFICATE MAY NOT BE PURCHASED BY OR TRANSFERRED
TO A PLAN. See "ERISA Considerations" in this Pro-
spectus Supplement and in the Prospectus.
Legal Investment.......... The Class A and Class M Certificates will consti-
tute "mortgage related securities" for purposes of
the Secondary Mortgage Market Enhancement Act of
1984 (the "Enhancement Act") so long as they are
rated in one of the two highest rating categories
by at least one nationally recognized statistical
rating organization. As such, the Class A and
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<PAGE>
Class M Certificates are legal investments for cer-
tain entities to the extent provided in such act.
However, there are regulatory requirements and con-
siderations applicable to regulated financial in-
stitutions and restrictions on the ability of such
institutions to invest in certain types of mortgage
rated securities. The Class B-1 and Class B-2 Cer-
tificates will not constitute "mortgage related se-
curities" under the Enhancement Act. The appropri-
ate characterization of the Class B-1 and Class B-2
Certificates under various legal investment re-
strictions, and thus the ability of investors sub-
ject to these restrictions to purchase the Class B-
1 and Class B-2 Certificates, may be subject to
significant interpretive uncertainties. Prospective
purchasers of the Offered Certificates should con-
sult their own legal, tax and accounting advisors
in determining the suitability of and consequences
to them of the purchase, ownership and disposition
of the Offered Certificates. See "Legal Investment"
in this Prospectus Supplement.
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<PAGE>
RISK FACTORS
GENERAL
The rate of distributions in reduction of the principal balance of any
Subclass or Class of Offered Certificates, the aggregate amount of
distributions of principal and interest on any Subclass or Class of Offered
Certificates and the yield to maturity of any Subclass or Class of Offered
Certificates will be directly related to the rate of payments of principal on
the Mortgage Loans in the Trust Estate or, in the case of the Class A-PO
Certificates, on the Discount Mortgage Loans, and the amount and timing of
mortgagor defaults resulting in Realized Losses. The rate of principal
payments on the Mortgage Loans will in turn be affected by the amortization
schedules of the Mortgage Loans, the rate of principal prepayments (including
partial prepayments and those resulting from refinancing) thereon by
mortgagors, liquidations of defaulted Mortgage Loans, repurchases of Mortgage
Loans by the Seller as a result of defective documentation or breaches of
representations and warranties, optional purchase by the Seller of defaulted
Mortgage Loans and optional purchase by the Seller of all of the Mortgage
Loans in connection with the termination of the Trust Estate. See "Pooling and
Servicing Agreement--Optional Termination" herein and "The Pooling and
Servicing Agreement--Assignment of Mortgage Loans to the Trustee," "--Optional
Purchases" and "--Termination; Purchase of Mortgage Loans" in the Prospectus.
Mortgagors are permitted to prepay the Mortgage Loans, in whole or in part, at
any time without penalty.
The rate of payments (including prepayments) on pools of mortgage loans is
influenced by a variety of factors, including changes in economic, geographic
and social conditions. If prevailing rates for similar mortgage loans fall
below the Mortgage Interest Rates on the Mortgage Loans, the rate of
prepayment would generally be expected to increase. Conversely, if interest
rates on similar mortgage loans rise above the Mortgage Interest Rates on the
Mortgage Loans, the rate of prepayment would generally be expected to
decrease. See "Prepayment and Yield Considerations" herein.
An investor that purchases any Offered Certificates at a discount,
particularly the Class A-PO Certificates, should consider the risk that a
slower than anticipated rate of principal payments on the Mortgage Loans or,
in the case of the Class A-PO Certificates, on the Discount Mortgage Loans,
will result in an actual yield that is lower than such investor's expected
yield. An investor that purchases any Offered Certificates at a premium should
consider the risk that a faster than anticipated rate of principal payments on
the Mortgage Loans will result in an actual yield that is lower than such
investor's expected yield. See "Prepayment and Yield Considerations" herein.
SUBORDINATION
The rights of the holders of the Class M Certificates to receive
distributions with respect to the Mortgage Loans in the Trust Estate will be
subordinated to such rights of the holders of the Class A Certificates and the
rights of the holders of a Subclass of Class B Certificates to receive
distributions with respect to the Mortgage Loans in the Trust Estate will be
subordinated to such rights of the holders of the Class A Certificates, the
Class M Certificates and the Subclasses of Class B Certificates with lower
numerical designations, all to the extent described herein under "Description
of the Certificates--Subordination of Class M and Class B Certificates."
UNDERWRITING STANDARDS
Certain of the Mortgage Loans (including certain loans made to foreign
nationals) will have been originated using underwriting standards that are
different from and, in certain respects, less stringent than the general
underwriting policies of Norwest Mortgage. See "The Mortgage Loan Programs--
Mortgage Loan Underwriting--Modified Standards" in the Prospectus. For
example, certain of the Mortgage Loans may have been originated with higher
maximum Loan-to-Value Ratios, less restrictive requirements for investment
properties or "equity take out" financings, and may be secured by shares in
cooperative housing communities, "condotels" or unique parcels of land. In
return for placing greater emphasis on borrower credit history and current
assets, ratios of prospective borrower's debt service on the Mortgage Loan and
total debt obligations to income may not be required to be taken into account
in making the loan. Such Mortgage Loans may also experience rates of
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<PAGE>
delinquencies, defaults, foreclosure, bankruptcy and loss that are higher than
those experienced by mortgage loans underwritten to Norwest Mortgage's general
underwriting standards. See "Prepayment and Yield Considerations" herein.
BOOK-ENTRY SYSTEM FOR CERTAIN SUBCLASSES OF CLASS A CERTIFICATES
Transactions in the Subclasses of Book-Entry Certificates generally can be
effected only through DTC, DTC Participants and Indirect DTC Participants. The
ability of a Beneficial Owner to pledge Book-Entry Certificates and the
liquidity of the Book-Entry Certificates in general may be limited due to the
lack of a physical certificate for such Book-Entry Certificates. In addition,
Beneficial Owners may experience delays in their receipt of payments. See
"Risk Factors--Book-Entry System for Certain Classes and Subclasses of
Certificates" and "Description of the Certificates--Book-Entry Form" in the
Prospectus.
See "Risk Factors" in the Prospectus.
DESCRIPTION OF THE CERTIFICATES
DENOMINATIONS
The Offered Certificates, other than the Class A-R Certificate, will be
issued in minimum denominations of $100,000 initial principal balance and
integral multiples of $1,000 initial principal balance in excess thereof,
except that one Class A-PO Certificate may be issued in any denomination in
excess of $100,000. The Class A-R Certificate will be issued as a single
Certificate with a denomination of $ initial principal balance.
DEFINITIVE FORM
Offered Certificates issued in fully registered, certificated form are
referred to herein as "Definitive Certificates." The Class A-PO, Class A-R,
Class M and Offered Class B Certificates will be issued as Definitive
Certificates. Distributions of principal of, and interest on, the Definitive
Certificates will be made by the Trustee or other paying agent directly to
holders of Definitive Certificates in accordance with the procedures set forth
in the Pooling and Servicing Agreement. The Definitive Certificates will be
transferable and exchangeable at the offices of the Trustee or other
certificate registrar. No service charge will be imposed for any registration
of transfer or exchange, but the Trustee may require payment of a sum
sufficient to cover any tax or other governmental charge imposed in connection
therewith.
BOOK-ENTRY FORM
Each Subclass of the Book-Entry Certificates initially will be represented
by one physical certificate registered in the name of Cede & Co. ("Cede"), as
nominee of DTC, which will be the "holder" or "Certificateholder" of such
Certificates, as such terms are used herein. No person acquiring an interest
in the Book-Entry Certificates (a "Beneficial Owner") will be entitled to
receive a Definitive Certificate representing such person's interest in the
Book-Entry Certificates, except as set forth under "Description of the
Certificates--Book-Entry Form" in the Prospectus. Unless and until Definitive
Certificates are issued under the limited circumstances described therein, all
references to actions taken by Certificateholders or holders shall, in the
case of the Book-Entry Certificates, refer to actions taken by DTC upon
instructions from its DTC Participants (as defined under "Description of the
Certificates--Book-Entry Form" in the Prospectus), and all references herein
to distributions, notices, reports and statements to Certificateholders or
holders shall, in the case of the Book-Entry Certificates, refer to
distributions, notices, reports and statements to DTC or Cede, as the
registered holder of the Book-Entry Certificates, as the case may be, for
distribution to Beneficial Owners in accordance with DTC procedures. See
"Description of the Certificates--Book-Entry Form" in the Prospectus.
DISTRIBUTIONS
Distributions of interest and in reduction of principal balance to holders
of each Subclass of Class A and Class B Certificates and the Class M
Certificates will be made monthly, to the extent of each Subclass's or
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<PAGE>
Class's entitlement thereto, on the 25th day of each month or, if such day is
not a business day, on the succeeding business day (each, a "Distribution
Date"), beginning in 199 . The "Determination Date" with respect to
each Distribution Date will be the 17th day of each month, or if such day is
not a business day, the preceding business day. Distributions will be made on
each Distribution Date to holders of record (which, in the case of the Book-
Entry Certificates, will be Cede, as nominee for DTC) at the close of business
on the last business day of the preceding month (each, a "Record Date"),
except that the final distribution in respect of any Certificate will only be
made upon presentation and surrender of such Certificate at the office or
agency appointed by the Trustee and specified in the notice of final
distribution in respect of such Certificate.
The aggregate amount available for distribution to Certificateholders on
each Distribution Date will be the Pool Distribution Amount. The "Pool
Distribution Amount" for a Distribution Date will be the sum of all previously
undistributed payments or other receipts on account of principal (including
principal prepayments and Liquidation Proceeds in respect of principal, if
any), and interest on or in respect of the Mortgage Loans received by the
Master Servicer, including without limitation any related insurance proceeds
and the proceeds of any purchase of a related Mortgage Loan for breach of a
representation or warranty or the sale of a Mortgaged Property by a Servicer
in connection with the liquidation of the related Mortgage Loan on or prior to
the Remittance Date in the month in which such Distribution Date occurs, plus
(i) all Periodic Advances made and (ii) all other amounts (including any
insurance proceeds and Compensating Interest) placed in the Certificate
Account by any Servicer on or before the Remittance Date or by the Master
Servicer on or before the Distribution Date pursuant to the Pooling and
Servicing Agreement, but excluding the following:
(a) amounts received as late payments of principal or interest respecting
which one or more unreimbursed Periodic Advances has been made;
(b) to the extent permitted by the Pooling and Servicing Agreement, that
portion of Liquidation Proceeds with respect to a Mortgage Loan that
represents any unreimbursed Periodic Advances of such Servicer;
(c) those portions of each payment of interest on a particular Mortgage
Loan which represent (i) the applicable Servicing Fee, (ii) the Master
Servicing Fee and (iii) the Fixed Retained Yield, if any;
(d) all amounts representing scheduled payments of principal and interest
due after the Due Date occurring in the month in which such Distribution
Date occurs;
(e) all principal prepayments in full, all partial principal prepayments,
all proceeds of any Mortgage Loans or property acquired in respect thereof,
or liquidated pursuant to the Pooling and Servicing Agreement, including
net Partial Liquidation Proceeds but excluding any Net Foreclosure Profits
(as defined under "--Additional Rights of the Class A-R Certificateholder"
below), and other unscheduled receipts in respect of principal of the
Mortgage Loans other than proceeds of a repurchase of a Mortgage Loan by
the Seller or amounts deposited by the Seller in the Certificate Account in
connection with the substitution of a Mortgage Loan (collectively,
"Unscheduled Principal Receipts") that were received by the Servicers after
the Unscheduled Principal Receipt Period (as described under "Servicing of
the Mortgage Loans--Unscheduled Principal Receipts" below) relating to the
Distribution Date for the applicable type of Unscheduled Principal Receipt,
and all related payments of interest on such amounts;
(f) all repurchase proceeds with respect to Mortgage Loans repurchased by
the Seller on or following the Due Date in the month in which such
Distribution Date occurs and the excess of the unpaid principal balance of
any defective Mortgage Loan for which a Mortgage Loan was substituted over
the unpaid principal balance of such substituted Mortgage Loan on or
following the Due Date in the month in which such Distribution Date occurs;
(g) to the extent permitted by the Pooling and Servicing Agreement, that
portion of Liquidation Proceeds or insurance proceeds with respect to a
Mortgage Loan or proceeds of any Mortgaged Property that becomes owned by
the Trustee which represents any unpaid Servicing Fee or Master Servicing
Fee to which such Servicer or the Master Servicer, respectively, is
entitled, or which represents unpaid Fixed Retained Yield, and the portion
of net Liquidation Proceeds used to reimburse any unreimbursed Periodic
Advances;
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<PAGE>
(h) all amounts representing certain expenses reimbursable to the Master
Servicer and other amounts permitted to be retained by the Master Servicer
or withdrawn by the Master Servicer from the Certificate Account pursuant
to the Pooling and Servicing Agreement;
(i) reinvestment earnings on payments received in respect of the Mortgage
Loans or on other amounts on deposit in the Certificate Account;
(j) Net Foreclosure Profits;
(k) Month End Interest; and
(l) the amount of any recoveries in respect of principal which had
previously been allocated as a loss to one or more Subclasses of the Class
A or Class B Certificates or the Class M Certificates.
The "Remittance Date" with respect to any Distribution Date and any Mortgage
Loan serviced by an Other Servicer will be the 18th day of each month, or if
any such day is not a business day, the preceding business day. The
"Remittance Date" with respect to any Distribution Date and any Mortgage Loan
serviced by Norwest Mortgage will, except as described below under "Servicing
of the Mortgage Loans--Anticipated Changes in Servicing," be the 24th day of
each month, or if any such day is not a business day, the preceding business
day.
"Partial Liquidation Proceeds" are Liquidation Proceeds received by a
Servicer on a Mortgage Loan prior to such Mortgage Loan becoming a Liquidated
Loan and "net Partial Liquidation Proceeds" are Partial Liquidation Proceeds
less expenses incurred with respect to such liquidation.
Each Servicer is required to deposit in the Certificate Account on the
Remittance Date certain amounts in respect of the Mortgage Loans as set forth
herein under "Servicing of the Mortgage Loans--Custodial Accounts." The Master
Servicer is required to remit to the Trustee on or before the Distribution
Date any payments constituting part of the Pool Distribution Amount that are
received by the Master Servicer or are required to be made with the Master
Servicer's own funds. Except as described below under "Description of the
Certificates--Periodic Advances," neither the Master Servicer nor the Trustee
is obligated to remit any amounts which a Servicer was required but failed to
deposit in the Certificate Account.
On each Distribution Date, the Pool Distribution Amount will be allocated
among the Classes or Subclasses of Certificates and distributed to the holders
thereof of record as of the related Record Date as follows (the "Pool
Distribution Amount Allocation"):
first, to the Subclasses of Class A Certificates (other than the Class A-PO
Certificates), pro rata based on their respective Class A Subclass Interest
Accrual Amounts, in an aggregate amount up to the sum of the Class A Subclass
Interest Accrual Amounts with respect to such Distribution Date;
second, to the Subclasses of Class A Certificates (other than the Class A-PO
Certificates), pro rata based on their respective unpaid Class A Subclass
Interest Shortfall Amounts in an aggregate amount up to the sum of the
previously unpaid Class A Subclass Interest Shortfall Amounts;
third, concurrently, pro rata to the Class A Certificates (other than the
Class A-PO Certificates), based on the Class A Non-PO Optimal Principal
Amount, and the Class A-PO Certificates, based on the Class A-PO Optimal
Principal Amount, (A) to the Subclasses of Class A Certificates, (other than
the Class A-PO Certificates), in an aggregate amount up to the Class A Non-PO
Optimal Principal Amount, such distribution to be allocated among such
Subclasses in accordance with the priorities set forth below under "--
Principal (Including Prepayments)--Allocation of Amount to be Distributed" and
(B) to the Class A-PO Certificates in an amount up to the Class A-PO Optimal
Principal Amount;
fourth, to the Class A-PO Certificates in an amount up to the Class A-PO
Deferred Amount, but only, first from amounts otherwise distributable (without
regard to this priority) to the Subclasses of Class B Certificates pursuant to
priorities fourteenth clause (C), thirteenth and tenth of this Pool
Distribution Amount Allocation and
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then from amounts otherwise distributable (without regard to this priority) to
the Class M Certificates pursuant to priority seventh of this Pool
Distribution Amount Allocation;
fifth, to the Class M Certificates in an amount up to the Class M Interest
Accrual Amount with respect to such Distribution Date;
sixth, to the Class M Certificates in an amount up to the sum of the
previously unpaid Class M Interest Shortfall Amounts;
seventh, to the Class M Certificates in an amount up to the Class M Optimal
Principal Amount; provided, however, that the amount distributable pursuant to
this priority seventh to the Class M Certificates will be reduced by the
amount, if any, otherwise distributable as principal hereunder used to pay the
Class A-PO Deferred Amount in accordance with priority fourth;
eighth, to the Class B-1 Certificates in an amount up to the Class B
Subclass Interest Accrual Amount for such Subclass with respect to such
Distribution Date;
ninth, to the Class B-1 Certificates in an amount up to the sum of the
previously unpaid Class B Subclass Interest Shortfall Amounts for such
Subclass;
tenth, to the Class B-1 Certificates in an amount up to the Subclass B
Optimal Principal Amount for such Subclass; provided, however, that the amount
distributable pursuant to this priority tenth will be reduced by the amount,
if any, otherwise distributable as principal hereunder used to pay the Class
A-PO Deferred Amount in accordance with priority fourth;
eleventh, to the Class B-2 Certificates in an amount up to the Class B
Subclass Interest Accrual Amount for such Subclass with respect to such
Distribution Date;
twelfth, to the Class B-2 Certificates in an amount up to the sum of the
previously unpaid Class B Subclass Interest Shortfall Amounts for such
Subclass;
thirteenth, to the Class B-2 Certificates in an amount up to the Subclass B
Optimal Principal Amount for such Subclass; provided, however, that the amount
distributable pursuant to this priority thirteenth will be reduced by the
amount, if any, otherwise distributable as principal hereunder used to pay the
Class A-PO Deferred Amount in accordance with priority fourth; and
fourteenth, sequentially, to the Class B-3, Class B-4 and Class B-5
Certificates so that each such Subclass shall receive (A) an amount up to its
Class B Subclass Interest Accrual Amount with respect to such Distribution
Date, (B) then, an amount up to its previously unpaid Class B Subclass
Interest Shortfall Amounts and (C) finally, an amount up to its Subclass B
Optimal Principal Amount before any Subclasses of Class B Certificates with
higher numerical designations receive any payments in respect of interest or
principal; provided, however, that the amount distributable pursuant to this
priority fourteenth clause (C) to any Subclasses of Class B Certificates will
be reduced by the amount, if any, otherwise distributable as principal
hereunder used to pay the Class A-PO Deferred Amount in accordance with
priority fourth.
The "Class A Non-PO Distribution Amount" for any Distribution Date will be
equal to the sum of the amounts distributed in accordance with priorities
first, second and third clause (A) of the Pool Distribution Amount Allocation
set forth above.
The "Class M Distribution Amount" for any Distribution Date will be equal to
the sum of the amounts distributed in accordance with priorities fifth through
seventh of the Pool Distribution Amount Allocation set forth above.
The "Class B Subclass Distribution Amount" for any Distribution Date and the
Class B-1 or Class B-2 Certificates will be equal to the sum of the amounts
distributed in accordance with priorities eighth through tenth
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of the Pool Distribution Amount Allocation set forth above with respect to the
Class B-1 Certificates and priorities eleventh through thirteenth of the Pool
Distribution Amount Allocation set forth above with respect to the Class B-2
Certificates.
The undivided percentage interest (the "Percentage Interest") represented by
any Offered Certificate of a Subclass or Class in distributions to such
Subclass or Class will be equal to the percentage obtained by dividing the
initial principal balance of such Certificate by the aggregate initial
principal balance of all Certificates of such Subclass or Class.
INTEREST
The amount of interest that will accrue on each Subclass of Class A
Certificates, other than the Class A-PO Certificates, during each month, after
taking into account any Non-Supported Interest Shortfalls and the interest
portion of certain losses allocated to such Subclass, is referred to herein as
the "Class A Subclass Interest Accrual Amount" for such Subclass. The Class A
Subclass Interest Accrual Amount for each Subclass of Class A Certificates,
other than the Class A-PO Certificates, will equal the difference between (a)
the product of (i) 1/12th of the Pass-Through Rate for such Subclass and (ii)
the outstanding Class A Subclass Principal Balance of such Subclass and (b)
the sum of (i) any Non-Supported Interest Shortfall allocable to such
Subclass, (ii) the interest portion of any Excess Special Hazard Losses,
Excess Fraud Losses and Excess Bankruptcy Losses allocable to such Subclass
and (iii) the interest portion of any Realized Losses, other than the interest
portion of any Excess Special Hazard Losses, Excess Fraud Losses and Excess
Bankruptcy Losses, allocable to such Subclass on or after the Cross-Over Date.
The pass-through rate for each Subclass of Class A Certificates (other than
the Class A-PO Certificates) (the "Pass-Through Rate") is the percentage set
forth on the cover of this Prospectus Supplement.
No interest will accrue on the Class A-PO Certificates.
The amount of interest that will accrue on the Class M Certificates during
each month, after taking into account any Non-Supported Interest Shortfalls
and the interest portion of certain losses allocated to such Class, is
referred to herein as the "Class M Interest Accrual Amount." The Class M
Interest Accrual Amount will equal the difference between (a) the product of
(i) 1/12th of % and (ii) the outstanding Class M Principal Balance and (b)
the sum of (i) any Non-Supported Interest Shortfall allocable to such Class
and (ii) the interest portion of any Excess Special Hazard Losses, Excess
Fraud Losses and Excess Bankruptcy Losses allocable to such Class.
The amount of interest that will accrue on each Subclass of Class B
Certificates during each month, after taking into account any Non-Supported
Interest Shortfalls and the interest portion of certain losses allocated to
such Subclass, is referred to herein as the "Class B Subclass Interest Accrual
Amount." The Class B Subclass Interest Accrual Amount will equal the
difference between (a) the product of (i) 1/12th of % and (ii) the
outstanding Class B Subclass Principal Balance and (b) the sum of (i) any Non-
Supported Interest Shortfall allocable to such Subclass and (ii) the interest
portion of any Excess Special Hazard Losses, Excess Fraud Losses and Excess
Bankruptcy Losses allocable to such Subclass.
The "Class A Subclass Principal Balance" of a Subclass of Class A
Certificates (other than the Class A-PO Certificates) as of any Determination
Date will be the principal balance of such Subclass on the date of initial
issuance of the Class A Certificates, less (i) all amounts previously
distributed to holders of Certificates of such Subclass in reduction of the
principal balance of such Subclass and (ii) such Subclass's pro rata share of
the principal portion of Excess Special Hazard Losses, Excess Fraud Losses and
Excess Bankruptcy Losses previously allocated to the holders of Class A
Certificates (other than the Class A-PO Certificates) in the manner described
herein under "--Subordination of Class M and Class B Certificates--Allocation
of Losses." After the Cross-Over Date, the Class A Subclass Principal Balance
of a Subclass of Class A Certificates (other than the Class A-PO Certificates)
may be subject to further reduction in an amount equal to such Subclass's pro
rata share of the difference, if any, between (a) the Class A Non-PO Principal
Balance as of such Determination Date without regard to this provision and (b)
the difference between (i) the Adjusted Pool Amount for the preceding
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Distribution Date and (ii) the Adjusted Pool Amount (PO Portion) for the
preceding Distribution Date. Any pro rata allocation among the Subclasses of
Class A Certificates described in this paragraph will be made among the
Subclasses of Class A Certificates (other than the Class A-PO Certificates) on
the basis of their then-outstanding Class A Subclass Principal Balances.
The "Class A Subclass Principal Balance" of the Class A-PO Certificates as
of any Determination Date will be the principal balance of such Subclass on
the date of initial issuance of the Class A Certificates less (i) all amounts
previously distributed to the holders of the Class A-PO Certificates pursuant
to priorities third clause (B) and fourth of the Pool Distribution Amount
Allocation and (ii) the principal portion of Excess Special Hazard Losses,
Excess Fraud Losses and Excess Bankruptcy Losses previously allocated to the
Class A-PO Certificates in the manner described herein under "--Subordination
of Class M and Class B Certificates--Allocation of Losses." After the Cross-
Over Date, the Class A Subclass Principal Balance of the Class A-PO
Certificates will be subject to further reduction in an amount equal to the
excess, if any, of (a) the Class A Subclass Principal Balance of the Class A-
PO Certificates as of such Determination Date without regard to this provision
over (b) the Adjusted Pool Amount (PO Portion) for the preceding Distribution
Date.
The "Class A Principal Balance" as of any Determination Date will be equal
to the sum of the Class A Subclass Principal Balances of the Subclasses of
Class A Certificates as of such date.
The "Class A Non-PO Principal Balance" as of any Determination Date will be
equal to the sum of the Class A Subclass Principal Balances of the Subclasses
of Class A Certificates (other than the Class A-PO Certificates).
The "Class M Principal Balance" as of any Determination Date will be the
lesser of (a) the principal balance of the Class M Certificates on the date of
initial issuance of the Class M Certificates less (i) all amounts previously
distributed to holders of the Class M Certificates in reduction of the
principal balance thereof and (ii) the principal portion of Excess Special
Hazard Losses, Excess Fraud Losses and Excess Bankruptcy Losses previously
allocated to the holders of the Class M Certificates in the manner described
herein under "--Subordination of Class M and Class B Certificates--Allocation
of Losses" and (b) the Adjusted Pool Amount as of the preceding Distribution
Date less the Class A Principal Balance as of such Determination Date.
The "Class B Subclass Principal Balance" of a Subclass of Class B
Certificates as of any Determination Date will be the lesser of (a) the
principal balance of such Subclass on the date of initial issuance of the
Class B Certificates less (i) all amounts previously distributed to holders of
such Subclass in reduction of the principal balance thereof and (ii) the
principal portion of Excess Special Hazard Losses, Excess Fraud Losses and
Excess Bankruptcy Losses previously allocated to the holders of such Subclass
in the manner described under "--Subordination of Class M and Class B
Certificates--Allocation of Losses" and (b) the Adjusted Pool Amount as of the
preceding Distribution Date less the sum of (i) the Class A Principal Balance,
(ii) the Class M Principal Balance and (iii) the Class B Subclass Principal
Balances of the Subclasses of Class B Certificates with lower numerical
designations, each as of such Determination Date.
The "Class B Principal Balance" as of any date will be equal to the sum of
the Class B Subclass Principal Balances of the Subclasses of Class B
Certificates as of such date.
With respect to any Distribution Date, the "Adjusted Pool Amount" will equal
the Cut-Off Date Aggregate Principal Balance of the Mortgage Loans minus the
sum of (i) all amounts in respect of principal received in respect of the
Mortgage Loans (including amounts received as Periodic Advances, principal
prepayments and Liquidation Proceeds in respect of principal) and distributed
to holders of the Series 199 - Certificates on such Distribution Date and all
prior Distribution Dates and (ii) the principal portion of all Realized Losses
(other than Debt Service Reductions) incurred on the Mortgage Loans from the
Cut-Off Date through the end of the month preceding such Distribution Date.
With respect to any Distribution Date, the "Adjusted Pool Amount (PO
Portion)" will equal the sum as to each Mortgage Loan outstanding at the Cut-
Off Date of the product of (A) the PO Fraction for such Mortgage
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<PAGE>
Loan and (B) the principal balance of such Mortgage Loan as of the Cut-Off
Date less the sum of (i) all amounts in respect of principal received in
respect of such Mortgage Loan (including amounts received as Periodic
Advances, principal prepayments and Liquidation Proceeds in respect of
principal) and distributed to holders of the Series 199 - Certificates on
such Distribution Date and all prior Distribution Dates and (ii) the principal
portion of any Realized Loss (other than a Debt Service Reduction) incurred on
such Mortgage Loan from the Cut-Off Date through the end of the month
preceding the month in which such Distribution Date occurs.
The "Net Mortgage Interest Rate" on each Mortgage Loan will be equal to the
Mortgage Interest Rate on such Mortgage Loan as stated in the related mortgage
note minus the sum of (i) the Servicing Fee Rate of % per annum, (ii) the
Master Servicing Fee Rate for such Mortgage Loan and (iii) the Fixed Retained
Yield rate, if any, for such Mortgage Loan. See "Servicing of the Mortgage
Loans--Fixed Retained Yield; Servicing Compensation and Payment of Expenses"
herein.
When mortgagors prepay principal, or when principal is recovered through
foreclosure sales or other liquidations of defaulted Mortgage Loans, or when
other Unscheduled Principal Receipts occur, a full month's interest for the
month of payment or recovery may not be paid or recovered, resulting in
interest shortfalls to the extent that such payment or recovery is not
included in the distribution to Certificateholders made in the month in which
it is received. Interest shortfalls resulting from principal prepayments in
full made by mortgagors ("Prepayments in Full") are referred to herein as
"Prepayment Interest Shortfalls." The Master Servicer will be obligated, on or
before each Distribution Date, to pay to the Trustee for the benefit of
Certificateholders, from the Master Servicer's own funds (including amounts
otherwise payable to the Master Servicer in respect of such Distribution Date
as Master Servicing Fees) an amount (such amount, "Compensating Interest")
equal to the lesser of (i) the aggregate Prepayment Interest Shortfall with
respect to such Distribution Date and (ii) the lesser of (X) the product of
(A) 1/12th of % and (B) the Pool Scheduled Principal Balance for such
Distribution Date and (Y) the Available Master Servicing Compensation for such
Distribution Date.
The "Available Master Servicing Compensation" for any Distribution Date will
be equal to the sum of (a) the Master Servicing Fee for such Distribution
Date, (b) interest earned through the business day preceding the applicable
Distribution Date on any Prepayments in Full remitted to the Master Servicer
and deposited in the Certificate Account (which amount of interest with
respect to Prepayments in Full on the Mortgage Loans serviced by Norwest
Mortgage is expected to be zero unless the Remittance Date for such Mortgage
Loans changes as described below under "Servicing of the Mortgage Loans--
Anticipated Changes in Servicing") and (c) the aggregate amount of Month End
Interest remitted by the Servicers to the Master Servicer pursuant to the
related Underlying Servicing Agreements. With respect to the Mortgage Loans
serviced by Norwest Mortgage, "Month End Interest" for each Distribution Date
will be equal to the lesser of (i) the aggregate Prepayment Interest
Shortfalls with respect to the Mortgage Loans serviced by Norwest Mortgage and
(ii) the product of 1/12th of % and the aggregate scheduled principal balance
(as determined in the applicable Underlying Servicing Agreement) of the
Mortgage Loans serviced by Norwest Mortgage. With respect to the Mortgage
Loans serviced by each Other Servicer, "Month End Interest" for each
Distribution Date will be equal to the lesser of (i) the sum of the aggregate
Prepayment Interest Shortfalls and aggregate Curtailment Interest Shortfalls
with respect to the Mortgage Loans serviced by such Other Servicer and (ii)
the sum of (X) the product of 1/12th of % and the aggregate scheduled
principal balance (as determined in the applicable Underlying Servicing
Agreement) of the Mortgage Loans serviced by such Other Servicer and (Y)
reinvestment earnings on payments received in respect of the Mortgage Loans or
on other amounts on deposit in the related Servicer Custodial Account pursuant
to the related Underlying Servicing Agreement on such Distribution Date. As
described below under "Servicing of the Mortgage Loans--Anticipated Changes in
Servicing," any or all of the Servicers may be required to begin to remit to
the Master Servicer Unscheduled Principal Receipts in full for deposit into
the Certificate Account daily on a specified business day following receipt
thereof which will generally result in a deposit earlier than on the following
Remittance Date and, in conjunction therewith, may be relieved of its
obligation to remit Month End Interest. Any such change may have an impact on
the amount of Compensating Interest by increasing the amount described in
clause (b) of the definition of Available Master Servicing Compensation and
decreasing the amount described in clause (c) of the definition thereof. No
assurance can be given as to the timing of any such changes or that any such
changes will occur.
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<PAGE>
As to any Distribution Date, Prepayment Interest Shortfalls to the extent
that they exceed Compensating Interest are referred to herein as "Non-
Supported Interest Shortfalls" and will be allocated to (i) the Class A
Certificates (other than the Class A-PO Certificates) according to the
percentage obtained by dividing the then-outstanding Class A Non-PO Principal
Balance by the sum of the then-outstanding Class A Non-PO Principal Balance,
Class M Principal Balance and Class B Principal Balance, (ii) the Class M
Certificates according to the percentage obtained by dividing the then-
outstanding Class M Principal Balance by the sum of the then-outstanding Class
A Non-PO Principal Balance, Class M Principal Balance and Class B Principal
Balance and (iii) the Class B Certificates according to the percentage
obtained by dividing the then-outstanding Class B Principal Balance by the sum
of the then-outstanding Class A Non-PO Principal Balance, Class M Principal
Balance and Class B Principal Balance. Such allocation of the Non-Supported
Interest Shortfall will reduce the amount of interest due to be distributed to
holders of the Class A Certificates then entitled to distributions in respect
of interest. Such allocation of the Non-Supported Interest Shortfall will also
reduce the amount of interest due to be distributed to the holders of the
Class M Certificates and the Class B Certificates. Any such reduction in
respect of interest allocated to the Class A Certificates or Class B
Certificates will be allocated among such Subclasses of Class A or Class B
Certificates, as the case may be, pro rata on the basis of their respective
Class A Subclass Interest Accrual Amounts or Class B Subclass Interest Accrual
Amounts, without regard to any reduction pursuant to this paragraph, for such
Distribution Date.
Any interest shortfalls arising from Unscheduled Principal Receipts in full
that are not Prepayments in Full and any interest shortfalls resulting from
the timing of the receipt of partial principal prepayments by mortgagors
("Curtailment Interest Shortfalls") or of other partial Unscheduled Principal
Receipts with respect to the Mortgage Loans will not be offset by Compensating
Interest, but instead will be borne first by the Subclasses of Class B
Certificates in reverse numerical order, second by the Class M Certificates
and then pro rata by the Class A Certificates (other than the Class A-PO
Certificates). See "Description of the Certificates--Subordination of Class M
and Class B Certificates" herein. After the Cross-Over Date all interest
shortfalls arising from Unscheduled Principal Receipts, other than Prepayment
Interest Shortfalls covered by Compensating Interest, will be treated as Non-
Supported Interest Shortfalls and allocated in reduction of interest accrued
on the Class A Certificates.
The interest portion of any Excess Special Hazard Losses, Excess Fraud
Losses or Excess Bankruptcy Losses will be allocated among the Class A, Class
M and Class B Certificates pro rata based on the interest accrued on each such
Class and among the Subclasses of Class A Certificates (other than the Class
A-PO Certificates) or Class B Certificates, as the case may be, pro rata on
the basis of their respective Class A Subclass Interest Accrual Amounts or
Class B Subclass Interest Accrual Amounts, without regard to any reduction
pursuant to this paragraph, for such Distribution Date.
Allocations of the interest portion of Realized Losses (other than Excess
Special Hazard Losses, Excess Fraud Losses or Excess Bankruptcy Losses) first
to the Subclasses of Class B Certificates in reverse numerical order and then
to the Class M Certificates will result from the priority of distributions
first to the holders of the Class A Certificates, second to the holders of the
Class M Certificates and finally to holders of the Subclasses of Class B
Certificates in numerical order of the Pool Distribution Amount as described
above under "Description of the Certificates--Distributions."
On each Distribution Date on which the Pool Distribution Amount equals or
exceeds the sum of the Class A Subclass Interest Accrual Amounts,
distributions in respect of interest to each Subclass of Class A Certificates
will equal such Subclass's Class A Subclass Interest Accrual Amount.
If, on any Distribution Date, the Pool Distribution Amount is less than the
sum of the Class A Subclass Interest Accrual Amounts, the amount of interest
currently distributed on the Class A Certificates will equal the Pool
Distribution Amount and will be allocated among the Subclasses of Class A
Certificates (other than the Class A-PO Certificates) pro rata in accordance
with each such Subclass's Class A Subclass Interest Accrual Amount. Amounts so
allocated will be distributed in respect of interest to each such Subclass of
Class A Certificates. Any difference between the portion of the Pool
Distribution Amount distributed in respect of current
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<PAGE>
interest to each such Subclass of Class A Certificates and the Class A
Subclass Interest Accrual Amount for such Subclass with respect to the related
Distribution Date (as to each Subclass, the "Class A Subclass Interest
Shortfall Amount") will be added to the amount to be distributed on subsequent
Distribution Dates to such Subclass, but only so long as it is outstanding, to
the extent that the Pool Distribution Amount is sufficient therefor. No
interest will accrue on the unpaid Class A Subclass Interest Shortfall
Amounts.
On each Distribution Date on which the Pool Distribution Amount exceeds the
sum of the Class A Subclass Interest Accrual Amounts, any excess will then be
allocated first to pay previously unpaid Class A Subclass Interest Shortfall
Amounts. Such amounts will be allocated among the Subclasses of Class A
Certificates (other than the Class A-PO Certificates) pro rata in accordance
with the respective unpaid Class A Subclass Interest Shortfall Amounts
immediately prior to such Distribution Date.
On each Distribution Date on which the Pool Distribution Amount equals or
exceeds the sum for such Distribution Date of (A) the sum of (i) the sum of
the Class A Subclass Interest Accrual Amounts with respect to the Subclasses
of Class A Certificates, (ii) the sum of the unpaid Class A Subclass Interest
Shortfall Amounts with respect to the Subclasses of Class A Certificates and
(iii) the Class A Non-PO Optimal Principal Amount (collectively with the
amounts described in clauses (i) and (ii), the "Class A Non-PO Optimal
Amount"), (B) the Class A-PO Optimal Principal Amount (collectively with the
amount described in clause (A), the "Class A Optimal Amount") and (C) the
Class M Interest Accrual Amount, distributions in respect of current interest
to the Class M Certificates will equal the Class M Interest Accrual Amount.
If, on any Distribution Date, the Pool Distribution Amount is less than the
sum of (i) the Class A Optimal Amount and (ii) the Class M Interest Accrual
Amount, the amount of current interest distributed on the Class M Certificates
will equal the Pool Distribution Amount minus the amounts distributed to the
Class A Certificates with respect to such Distribution Date. Any difference
between the portion of the Pool Distribution Amount distributed in respect of
current interest to the Class M Certificates and the Class M Interest Accrual
Amount with respect to such Distribution Date (the "Class M Interest Shortfall
Amount") will be added to the amount to be distributed on subsequent
Distribution Dates to the Class M Certificates, but only so long as they are
outstanding, to the extent that the Pool Distribution Amount is sufficient
therefor. No interest will accrue on the unpaid Class M Interest Shortfall
Amount.
Subject to the payment of any Class A-PO Deferred Amount, on each
Distribution Date on which the Pool Distribution Amount exceeds the sum of the
Class A Optimal Amount and the Class M Interest Accrual Amount, any excess
will be allocated first to pay previously unpaid Class M Interest Shortfall
Amounts and then to make distributions in respect of principal on the Class M
Certificates. With respect to each Distribution Date, the "Class M Optimal
Amount" will equal the sum of (i) the Class M Interest Accrual Amount, (ii)
the unpaid Class M Interest Shortfall Amount and (iii) the Class M Optimal
Principal Amount.
On each Distribution Date on which the Pool Distribution Amount equals or
exceeds the sum of (i) the Class B Subclass Interest Accrual Amount for a
particular Subclass of Class B Certificates and (ii) all amounts senior in
priority to such Class B Subclass Interest Accrual Amount as set forth in the
Pool Distribution Amount Allocation, the distribution in respect of current
interest to such Subclass of Class B Certificates will equal such Subclass's
Class B Subclass Interest Accrual Amount.
If on any Distribution Date, the Pool Distribution Amount is less than the
sum of (i) the Class B Subclass Interest Accrual Amount for a particular
Subclass of Class B Certificates and (ii) all amounts senior in priority to
such Class B Subclass Interest Accrual Amount based on the priorities in the
Pool Distribution Amount Allocation, the amount of current interest
distributed on such Subclass of Class B Certificates will equal the Pool
Distribution Amount less all amounts senior in priority to such Class B
Subclass Interest Accrual Amount as set forth in the Pool Distribution Amount
Allocation. Any difference between the amount distributed in respect of
current interest to such Subclass of Class B Certificates and the Class B
Subclass Interest Accrual Amount for such Subclass with respect to the related
Distribution Date (as to such Subclass, the "Class B Subclass Interest
Shortfall Amount") will be added to the amount to be distributed on subsequent
Distribution Dates to such
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Subclass, but only so long as it is outstanding, to the extent the Pool
Distribution Amount is sufficient therefor. No interest will accrue on such
Class B Subclass Interest Shortfall Amount.
For a particular Subclass of Class B Certificates, subject to the payment of
any Class A-PO Deferred Amount, on each Distribution Date on which the Pool
Distribution Amount exceeds the sum of the Class A Optimal Amount, the Class M
Optimal Amount, the Subclass B Optimal Amount for each Subclass of Class B
Certificates with a lower numerical designation and the Class B Subclass
Interest Accrual Amount for such Subclass, any excess will be allocated first
to pay previously unpaid Class B Subclass Interest Shortfall Amounts of such
Subclass and then to make distributions in respect of principal on such
Subclass. With respect to each Distribution Date, the "Subclass B Optimal
Amount" for any Subclass of Class B Certificates will equal the sum of (i) the
Class B Subclass Interest Accrual Amount, (ii) the unpaid Class B Subclass
Interest Shortfall Amounts and (iii) the Subclass B Optimal Principal Amount.
On any Distribution Date on which the Pool Distribution Amount is less than
the Class A Optimal Amount, the Class M Certificates and the Subclasses of
Class B Certificates will not be entitled to any distributions of interest or
principal.
PRINCIPAL (INCLUDING PREPAYMENTS)
The principal balance of a Class A or Class B Certificate of any Subclass or
of any Class M Certificate at any time is equal to the product of the Class A
Subclass Principal Balance or Class B Subclass Principal Balance of such
Subclass or the Class M Principal Balance, as the case may be, and such
Certificate's Percentage Interest, and represents the maximum specified dollar
amount (exclusive of (i) any interest that may accrue on such Class A, Class M
or Class B Certificate and (ii) in the case of the Class A-R Certificate, any
additional amounts to which the holder of such Certificate may be entitled as
described below under "--Additional Rights of the Class A-R
Certificateholder") to which the holder thereof is entitled from the cash flow
on the Mortgage Loans at such time, and will decline to the extent of
distributions in reduction of the principal balance of, and allocations of
losses to, such Certificate. The approximate initial Class A Subclass
Principal Balance or Class B Subclass Principal Balance of each Subclass of
Class A and Offered Class B Certificates and the approximate initial Class M
Principal Balance are set forth on the cover of this Prospectus Supplement.
Calculation of Amount to be Distributed to the Class A Certificates (other
than the Class A-PO Certificates)
Distributions in reduction of the principal balance of the Class A
Certificates (other than the Class A-PO Certificates) will be made on each
Distribution Date pursuant to priority third clause (A) of the Pool
Distribution Amount Allocation, in an aggregate amount, (the "Class A Non-PO
Principal Distribution Amount") up to the Class A Non-PO Optimal Principal
Amount.
The "Class A Non-PO Optimal Principal Amount" with respect to each
Distribution Date will be an amount equal to the sum for each outstanding
Mortgage Loan (including each defaulted Mortgage Loan, other than a Liquidated
Loan, with respect to which the related Mortgaged Property has been acquired
by the Trust Estate) of the product of (A) the Non-PO Fraction for such
Mortgage Loan and (B) the sum of:
(i) the Class A Percentage of (A) the scheduled payment of principal due
on such Mortgage Loan on the first day of the month in which the
Distribution Date occurs, less (B) if the Bankruptcy Loss Amount is zero,
the principal portion of Debt Service Reductions with respect to such
Mortgage Loan,
(ii) the Class A Prepayment Percentage of all Unscheduled Principal
Receipts that were received by a Servicer with respect to such Mortgage
Loan during the Unscheduled Principal Receipt Period relating to such
Distribution Date for each applicable type of Unscheduled Principal
Receipt,
(iii) the Class A Prepayment Percentage of the Scheduled Principal
Balance of such Mortgage Loan which, during the month preceding the month
of such Distribution Date was repurchased by the Seller, as described under
the heading "Description of the Mortgage Loans--Mandatory Repurchase or
Substitution of Mortgage Loans" herein, and
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(iv) the Class A Percentage of the excess of the unpaid principal balance
of any defective Mortgage Loan for which a Mortgage Loan was substituted
during the month preceding the month in which such Distribution Date occurs
over the unpaid principal balance of such substituted Mortgage Loan, less
the amount allocable to the principal portion of any unreimbursed advances
in respect of such defective Mortgage Loan. See "The Pooling and Servicing
Agreement--Assignment of the Mortgage Loans to the Trustee" in the
Prospectus.
In addition, in the event that there is any recovery of an amount in respect
of principal which had previously been allocated as a Realized Loss to the
Class A Certificates (other than the Class A-PO Certificates), each Subclass
of Class A Certificates, for so long as its principal balance has not been
reduced to zero, will be entitled to its pro rata share of such recovery in an
amount up to the amount by which the Class A Subclass Principal Balance of
such Subclass was reduced as a result of such Realized Loss.
The "Non-PO Fraction" with respect to any Mortgage Loan will equal the Net
Mortgage Interest Rate for such Mortgage Loan divided by %.
The "Scheduled Principal Balance" of a Mortgage Loan as of any Distribution
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 bankruptcy (other than Deficient Valuations),
moratorium or similar waiver or grace period) as of the Due Date occurring in
the month preceding the month in which such Distribution Date occurs, after
giving effect to any principal prepayments or other unscheduled recoveries of
principal previously received, to any partial principal prepayments and
Deficient Valuations occurring prior to such Due Date, to the payment of
principal due on such Due Date irrespective of any delinquency in payment by
the mortgagor and to any Unscheduled Principal Receipts received or applied
during the applicable Unscheduled Principal Receipt Period for the
Distribution Date in the month preceding such Distribution Date.
A "Realized Loss" is any Liquidated Loan Loss (including any Special Hazard
Loss and any Fraud Loss) or any Bankruptcy Loss. A "Liquidated Loan" is a
defaulted Mortgage Loan as to which the Servicer has determined that all
recoverable liquidation and insurance proceeds have been received. A
"Liquidated Loan Loss" on a Liquidated Loan is equal to the excess, if any, of
(i) the unpaid principal balance of such Liquidated Loan, plus accrued
interest thereon in accordance with the amortization schedule at the Net
Mortgage Interest Rate through the last day of the month in which such
Mortgage Loan was liquidated, over (ii) net Liquidation Proceeds. For purposes
of calculating the amount of any Liquidated Loan Loss, all net Liquidation
Proceeds (after reimbursement of any previously unreimbursed Periodic Advance)
will be applied first to accrued interest and then to the unpaid principal
balance of the Liquidated Loan. A "Special Hazard Loss" is (A) a Liquidated
Loan Loss suffered by a Mortgaged Property on account of direct physical loss
exclusive of (i) any loss covered by a standard hazard insurance policy or, if
the Mortgaged Property is located in an area identified in the Federal
Register by the Federal Emergency Management Agency as having special flood
hazards, a flood insurance policy, of the types described in the Prospectus
under "The Trust Estates--Mortgage Loans--Insurance Policies" and (ii) any
loss caused by or resulting from (a) normal wear and tear, (b) dishonest acts
of the Trustee, the Master Servicer or the Servicer or (c) errors in design,
faulty workmanship or faulty materials, unless the collapse of the property or
a part thereof ensues or (B) a Liquidated Loan Loss arising from or relating
to the presence or suspected presence of hazardous wastes or substances on a
Mortgaged Property. A "Fraud Loss" is a Liquidated Loan Loss incurred on a
Liquidated Loan as to which there was fraud in the origination of such
Mortgage Loan. A "Bankruptcy Loss" is a loss attributable to certain actions
which may be taken by a bankruptcy court in connection with a Mortgage Loan,
including a reduction by a bankruptcy court of the principal balance of or the
interest rate on a Mortgage Loan or an extension of its maturity. A "Debt
Service Reduction" means a reduction in the amount of monthly payments due to
certain bankruptcy proceedings, but does not include any permanent forgiveness
of principal. A "Deficient Valuation" with respect to a Mortgage Loan means a
valuation by a court of the Mortgaged Property in an amount less than the
outstanding indebtedness under the Mortgage Loan or any reduction in the
amount of monthly payments that results in a permanent forgiveness of
principal, which valuation or reduction results from a bankruptcy proceeding.
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The "Class A Percentage" for any Distribution Date occurring on or prior to
the Cross-Over Date is the percentage (subject to rounding), which in no event
will exceed 100%, obtained by dividing the Class A Non-PO Principal Balance as
of such date (before taking into account distributions in reduction of
principal balance on such date) by the Pool Balance (Non-PO Portion). The
"Pool Balance (Non-PO Portion)" is the sum for each outstanding Mortgage Loan
of the product of (i) the Non-PO Fraction for such Mortgage Loan and (ii) the
Scheduled Principal Balance of such Mortgage Loan as of such Distribution
Date. The Class A Percentage for the first Distribution Date will be
approximately %. The Class A Percentage will decrease as a result of the
allocation of certain unscheduled payments in respect of principal according
to the Class A Prepayment Percentage for a specified period to the Class A
Certificates (other than the Class A-PO Certificates) and will increase as a
result of the allocation of Realized Losses to the Class M and Class B
Certificates. The Class A Percentage for each Distribution Date occurring
after the Cross-Over Date will be 100%.
The "Class A Prepayment Percentage" for any Distribution Date will be the
percentage indicated below:
<TABLE>
<CAPTION>
DISTRIBUTION DATE OCCURRING IN CLASS A PREPAYMENT PERCENTAGE
------------------------------ ----------------------------------------
<S> <C>
through ................ 100%;
through ................ the Class A Percentage, plus 70% of the
Subordinated Percentage;
through ................ the Class A Percentage, plus 60% of the
Subordinated Percentage;
through ................ the Class A Percentage, plus 40% of the
Subordinated Percentage;
through ................ the Class A Percentage, plus 20% of the
Subordinated Percentage; and
and thereafter............... the Class A Percentage;
</TABLE>
provided, however, that if on any of the foregoing Distribution Dates the
Class A Percentage exceeds the initial Class A Percentage, the Class A
Prepayment Percentage for such Distribution Date will once again equal 100%.
See "Prepayment and Yield Considerations" herein and in the Prospectus.
Notwithstanding the foregoing, no reduction of the Class A Prepayment
Percentage will occur on any Distribution Date if (i) as of such Distribution
Date as to which any such reduction applies, the average outstanding principal
balance on such Distribution Date and for the preceding five Distribution
Dates on the Mortgage Loans that were delinquent 60 days or more (including
for this purpose any Mortgage Loans in foreclosure and Mortgage Loans with
respect to which the related Mortgaged Property has been acquired by the Trust
Estate) is greater than or equal to 50% of the sum of the then-outstanding
Class M Principal Balance and the then-outstanding Class B Principal Balance,
or (ii) for any Distribution Date, cumulative Realized Losses with respect to
the Mortgage Loans exceed the percentages of the principal balance of the
Subordinated Certificates as of the Cut-Off Date (the "Original Subordinated
Principal Balance") indicated below:
<TABLE>
<CAPTION>
PERCENTAGE OF ORIGINAL SUBORDINATED
DISTRIBUTION DATE OCCURRING IN PRINCIPAL BALANCE
------------------------------ -----------------------------------
<S> <C>
through ............. 30%
through ............. 35%
through ............. 40%
through ............. 45%
and thereafter............ 50%
</TABLE>
This disproportionate allocation of certain unscheduled payments in respect
of principal will have the effect of accelerating the amortization of the
Class A Certificates (other than the Class A-PO Certificates) while, in the
absence of Realized Losses, increasing the interest in the principal balance
of the Mortgage Loans evidenced by the Class M and Class B Certificates.
Increasing the respective interest of the Class M and Class B Certificates
relative to that of the Class A Certificates (other than the Class A-PO
Certificates) is intended to preserve the availability of the subordination
provided by the Class M and Class B Certificates. See "--Subordination of
S-41
<PAGE>
Class M and Class B Certificates" below. The "Subordinated Percentage" for any
Distribution Date will be calculated as the difference between 100% and the
Class A Percentage for such date. The "Subordinated Prepayment Percentage" for
any Distribution Date will be calculated as the difference between 100% and
the Class A Prepayment Percentage for such date. If on any Distribution Date
the allocation to the Class A Certificates (other than the Class A-PO
Certificates) of full and partial principal prepayments and other amounts in
the percentage required above would reduce the outstanding Class A Non-PO
Principal Balance below zero, the Class A Prepayment Percentage for such
Distribution Date will be limited to the percentage necessary to reduce the
Class A Non-PO Principal Balance to zero.
Calculation of Amount to be Distributed to the Class A-PO Certificates
Distributions in reduction of the Class A Subclass Principal Balance of the
Class A-PO Certificates will be made on each Distribution Date in an aggregate
amount equal to the Class A-PO Distribution Amount. The "Class A-PO
Distribution Amount" with respect to any Distribution Date will be equal to
the sum of (i) the amount distributed pursuant to priority third clause (B) of
the Pool Distribution Amount Allocation, in an aggregate amount up to the
Class A-PO Optimal Principal Amount and (ii) the amount distributed pursuant
to priority fourth of the Pool Distribution Amount Allocation, in an aggregate
amount up to the Class A-PO Deferred Amount.
The "Class A-PO Optimal Principal Amount" with respect to each Distribution
Date will be an amount equal to the sum for each outstanding Mortgage Loan
(including each defaulted Mortgage Loan, other than a Liquidated Loan, with
respect to which the related Mortgaged Property has been acquired by the Trust
Estate) of the product of (A) the PO Fraction for such Mortgage Loan and (B)
the sum of:
(i) the scheduled payment of principal due on such Mortgage Loan on the
first day of the month in which the Distribution Date occurs, less, if the
Bankruptcy Loss Amount is zero, the principal portion of Debt Service
Reductions with respect to such Mortgage Loan,
(ii) all Unscheduled Principal Receipts that were received by a Servicer
with respect to such Mortgage Loan during the Unscheduled Principal Receipt
Period relating to such Distribution Date for each applicable type of
Unscheduled Principal Receipt,
(iii) the Scheduled Principal Balance of such Mortgage Loan which, during
the month preceding the month of such Distribution Date was repurchased by
the Seller, as described under the heading "Description of the Mortgage
Loans--Mandatory Repurchase or Substitution of Mortgage Loans" herein, and
(iv) the excess of the unpaid principal balance of any defective Mortgage
Loan for which a Mortgage Loan was substituted during the month preceding
the month in which such Distribution Date occurs over the unpaid principal
balance of such substituted Mortgage Loan, less the amount allocable to the
principal portion of any unreimbursed advances in respect of such defective
Mortgage Loan. See "The Pooling and Servicing Agreement--Assignment of
Mortgage Loans to the Trustee" in the Prospectus.
The "Class A-PO Deferred Amount" for any Distribution Date prior to the
Cross-Over Date will equal the difference between (A) the sum of (i) the
amount by which the Class A-PO Optimal Principal Amount for all prior
Distribution Dates exceeds the amounts distributed to the Class A-PO
Certificates on such prior Distribution Dates pursuant to priority third,
clause (B) of the Pool Distribution Amount Allocation, but only to the extent
such shortfall is not attributable to Realized Losses allocated to the Class
A-PO Certificates as described in "--Subordination of Class M and Class B
Certificates--Allocation of Losses" below and (ii) the sum of the product for
each Discount Mortgage Loan which became a Liquidated Loan at any time on or
prior to the last day of the applicable Unscheduled Receipt Period for the
current Distribution Date of (a) the PO Fraction for such Discount Mortgage
Loan and (b) an amount equal to the principal portion of Realized Losses
(other than Bankruptcy Losses due to Debt Service Reductions) incurred with
respect to such Discount Mortgage Loan other than Excess Special Hazard
Losses, Excess Fraud Losses and Excess Bankruptcy Losses and (B) amounts
distributed on the Class A-PO Certificates on prior Distribution Dates
pursuant to priority fourth of the Pool Distribution Amount Allocation. On or
after the Cross-Over Date, the Class A-PO Deferred Amount will be zero. No
interest will accrue on any Class A-PO Deferred Amount.
S-42
<PAGE>
In addition, in the event that there is any recovery of an amount in respect
of principal which had previously been allocated as a Realized Loss to the
Class A-PO Certificates, such Subclass, for so long as its principal balance
has not been reduced to zero, will be entitled to its share of such recovery
in an amount up to the amount by which the Class A Subclass Principal Balance
of the Class A-PO Certificates was reduced as a result of such Realized Loss.
The "PO Fraction" with respect to any Discount Mortgage Loan will equal the
difference between 1.0 and the Non-PO Fraction for such Mortgage Loan. The PO
Fraction with respect to each Mortgage Loan that is not a Discount Mortgage
Loan will be zero.
The "Pool Balance (PO Portion)" is the sum for each Discount Mortgage Loan
of the product of the Scheduled Principal Balance of such Discount Mortgage
Loan and the PO Fraction for such Discount Mortgage Loan.
Calculation of Amount to be Distributed to the Class M and Class B
Certificates
Distributions in reduction of the principal balance of the Class M
Certificates will be made on each Distribution Date, pursuant to priority
seventh of the Pool Distribution Amount Allocation, in an aggregate amount
(the "Class M Principal Distribution Amount"), up to the Class M Optimal
Principal Amount.
The "Class M Optimal Principal Amount" with respect to each Distribution
Date will be an amount equal to the sum for each outstanding Mortgage Loan
(including each defaulted Mortgage Loan, other than a Liquidated Loan, with
respect to which the related Mortgaged Property has been acquired by the Trust
Estate) of the product of (A) the Non-PO Fraction for such Mortgage Loan and
(B) the sum of:
(i) the Class M Percentage of (A) the scheduled payment of principal due
on such Mortgage Loan on the first day of the month in which the
Distribution Date occurs, less (B) if the Bankruptcy Loss Amount is zero,
the principal portion of Debt Service Reductions with respect to such
Mortgage Loan,
(ii) the Class M Prepayment Percentage of all Unscheduled Principal
Receipts that were received by a Servicer with respect to such Mortgage
Loan during the Unscheduled Principal Receipt Period relating to such
Distribution Date for each applicable type of Unscheduled Principal
Receipt,
(iii) the Class M Prepayment Percentage of the Scheduled Principal
Balance of such Mortgage Loan which, during the month preceding the month
of such Distribution Date was repurchased by the Seller, as described under
the heading "Description of the Mortgage Loans--Mandatory Repurchase or
Substitution of Mortgage Loans" herein, and
(iv) the Class M Percentage of the excess of the unpaid principal balance
of any defective Mortgage Loan for which a Mortgage Loan was substituted
during the month preceding the month in which such Distribution Date occurs
over the unpaid principal balance of such substituted Mortgage Loan, less
the amount allocable to the principal portion of any unreimbursed advances
in respect of such defective Mortgage Loan. See "The Pooling and Servicing
Agreement--Assignment of the Mortgage Loans to the Trustee" in the
Prospectus.
Distributions in reduction of the principal balances of the Class B-1 and
Class B-2 Certificates will be made on each Distribution Date, pursuant to
priorities tenth and thirteenth, respectively, of the Pool Distribution Amount
Allocation, in an aggregate amount with respect to each such Subclass (the
"Class B-1 Principal Distribution Amount" and "Class B-2 Principal
Distribution Amount," respectively) up to the Subclass B Optimal Principal
Amount for such Subclass.
The "Subclass B Optimal Principal Amount" for a particular Subclass of Class
B Certificates with respect to each Distribution Date will be an amount equal
to the sum for each outstanding Mortgage Loan (including each defaulted
Mortgage Loan, other than a Liquidated Loan, with respect to which the related
Mortgaged
S-43
<PAGE>
Property has been acquired by the Trust Estate) of the product of (A) the Non-
PO Fraction for such Mortgage Loan and (B) the sum of:
(i) the Subclass B Percentage for such Subclass of (A) the scheduled
payment of principal due on such Mortgage Loan on the first day of the
month in which the Distribution Date occurs, less (B) if the Bankruptcy
Loss Amount is zero, the principal portion of Debt Service Reductions with
respect to such Mortgage Loan,
(ii) the Subclass B Prepayment Percentage for such Subclass of all
Unscheduled Principal Receipts that were received by a Servicer with
respect to such Mortgage Loan during the Unscheduled Principal Receipt
Period relating to such Distribution Date for each applicable type of
Unscheduled Principal Receipt.
(iii) the Subclass B Prepayment Percentage for such Subclass of the
Scheduled Principal Balance of such Mortgage Loan which, during the month
preceding the month of such Distribution Date was repurchased by the
Seller, as described under the heading "Description of the Mortgage Loans--
Mandatory Repurchase or Substitution of Mortgage Loans" herein, and
(iv) the Subclass B Percentage for such Subclass of the excess of the
unpaid principal balance of any defective Mortgage Loan for which a
Mortgage Loan was substituted during the month preceding the month in which
such Distribution Date occurs over the unpaid principal balance of such
substituted Mortgage Loan, less the amount allocable to the principal
portion of any unreimbursed advances in respect of such defective Mortgage
Loan. See "The Pooling and Servicing Agreement--Assignment of the Mortgage
Loans to the Trustee" in the Prospectus.
The principal distribution to the holders of Class M Certificates or a
Subclass of Class B Certificates will be reduced on any Distribution Date on
which (i) the principal balance of the Class M Certificates or such Subclass
of Class B Certificates on the following Determination Date would be reduced
to zero as a result of principal distributions or allocation of losses and
(ii) the principal balance of any Class A Certificates, and in the case of a
Subclass of Class B Certificates, the principal balances of the Class M
Certificates or any Subclass of Class B Certificates with a lower numerical
designation, would be subject to reduction on such Determination Date as a
result of allocation of Realized Losses (other than Excess Bankruptcy Losses,
Excess Fraud Losses and Excess Special Hazard Losses). The amount of any such
reduction in the principal distributed to the holders of Class M Certificates
or such Subclass of Class B Certificates will instead be distributed pro rata
to the holders of any Subclass (other than the Class A-PO Certificates) and
Class senior in priority to receive distributions in accordance with the Pool
Distribution Amount Allocation.
In addition, in the event that there is any recovery of an amount in respect
of principal which had previously been allocated as a Realized Loss to the
Class M Certificates or any Subclass of Class B Certificates, the Class M
Certificates or such Subclass, for so long as the principal balance of such
Class or Subclass has not been reduced to zero, will be entitled to their pro
rata share of such recovery up to the amount by which the Class M Principal
Balance or Class B Subclass Principal Balance was reduced as a result of such
Realized Loss.
The "Class M Percentage" and "Class M Prepayment Percentage" for any
Distribution Date will equal that portion of the Subordinated Percentage and
Subordinated Prepayment Percentage, as the case may be, represented by the
fraction the numerator of which is the then-outstanding Class M Principal
Balance and the denominator of which is the sum of the Class M Principal
Balance and, if any of the Subclasses of the Class B Certificates are entitled
to principal distributions for such Distribution Date as described below, the
Class B Subclass Principal Balances of the Subclasses entitled to principal
distributions.
The "Subclass B Percentage" and "Subclass B Prepayment Percentage" for a
Subclass of Class B Certificates will equal the portion of the Subordinated
Percentage and Subordinated Prepayment Percentage, as the case may be,
represented by the fraction, the numerator of which is the then-outstanding
Class B Subclass Principal Balance for such Subclass of Class B Certificates
and the denominator of which is the sum of the Class M Principal Balance and
the Class B Subclass Principal Balances of the Subclasses entitled to
principal
S-44
<PAGE>
distributions for such Distribution Date as described below. In the event that
a Subclass of Class B Certificates is not entitled to principal distributions
for such Distribution Date, the Subclass B Percentage and Subclass B
Prepayment Percentage for such Subclass will both be 0% with respect to such
Distribution Date.
In the event that on any Distribution Date, the Current Class M Fractional
Interest is less than the Original Class M Fractional Interest, then the Class
B-1, Class B-2, Class B-3, Class B-4 and Class B-5 Certificates will not be
entitled to distributions in respect of principal and the Class B Subclass
Principal Balances thereof will not be used to determine the Class M
Percentage and Class M Prepayment Percentage for such Distribution Date. For
such Distribution Date, the Class M Percentage and Class M Prepayment
Percentage will equal the Subordinated Percentage and the Subordinated
Prepayment Percentage, respectively. In the event that the Current Class M
Fractional Interest equals or exceeds the Original Class M Fractional Interest
but the Current Class B-1 Fractional Interest is less than the Original Class
B-1 Fractional Interest, the Class B-2, Class B-3, Class B-4 and Class B-5
Certificates will not be entitled to distributions in respect of principal and
the Class B Subclass Principal Balances of such Subclasses will not be used to
determine the Class M Percentage, the Class M Prepayment Percentage, the
Subclass B Percentage for the Class B-1 Certificates and the Subclass B
Prepayment Percentage for the Class B-1 Certificates for such Distribution
Date. In the event that each of the Current Class M Fractional Interest and
the Current Class B-1 Fractional Interest equals or exceeds the Original Class
M Fractional Interest and the Original Class B-1 Fractional Interest,
respectively, but the Current Class B-2 Fractional Interest is less than the
Original Class B-2 Fractional Interest, the Class B-3, Class B-4 and Class B-5
Certificates will not be entitled to distributions in respect of principal and
the Class B Subclass Principal Balances of such Subclasses will not be used to
determine the Class M Percentage, the Class M Prepayment Percentage, the
Subclass B Percentages for the Subclasses of Class B Certificates with lower
numerical designations and the Subclass B Prepayment Percentages for the
Subclasses of Class B Certificates with lower numerical designations for such
Distribution Date. In the event that each of the Current Class M Fractional
Interest, the Current Class B-1 Fractional Interest and the Current Class B-2
Fractional Interest equals or exceeds the Original Class M Fractional
Interest, the Original Class B-1 Fractional Interest and the Original Class B-
2 Fractional Interest, respectively, but the Current Class B-3 Fractional
Interest is less than the Original Class B-3 Fractional Interest, the Class B-
4 and Class B-5 Certificates will not be entitled to distributions in respect
of principal and the Class B Subclass Principal Balances of such Subclasses
will not be used to determine the Class M Percentage, the Class M Prepayment
Percentage, the Subclass B Percentages for the Subclasses of Class B
Certificates with lower numerical designations and the Subclass B Prepayment
Percentages for the Subclasses of Class B Certificates with lower numerical
designations for such Distribution Date. In the event that each of the Current
Class M Fractional Interest, the Current Class B-1 Fractional Interest, the
Current Class B-2 Fractional Interest and the Current Class B-3 Fractional
Interest equals or exceeds the Original Class M Fractional Interest, the
Original Class B-1 Fractional Interest, the Original Class B-2 Fractional
Interest and the Original Class B-3 Fractional Interest, respectively, but the
Current Class B-4 Fractional Interest is less than the Original Class B-4
Fractional Interest, the Class B-5 Certificates will not be entitled to
distributions in respect of principal and the Class B Subclass Principal
Balance of such Subclass will not be used to determine the Class M Percentage,
the Class M Prepayment Percentage, the Subclass B Percentages for the
Subclasses of Class B Certificates with lower numerical designations and the
Subclass B Prepayment Percentages for the Subclasses of Class B Certificates
with lower numerical designations for such Distribution Date. The Class B-5
Certificates will not have original or current fractional interests which are
required to be maintained as described above.
The "Original Class M Fractional Interest" is the percentage obtained by
dividing the sum of the initial Class B Subclass Principal Balances of the
Class B-1, Class B-2, Class B-3, Class B-4 and Class B-5 Certificates by the
sum of the initial Class A Non-PO Principal Balance, initial Class M Principal
Balance and initial Class B Principal Balance. The Original Class M Fractional
Interest is expected to be approximately %. The "Current Class M Fractional
Interest" for any Distribution Date is the percentage obtained by dividing the
sum of the then-outstanding Class B Subclass Principal Balances of the Class
B-1, Class B-2, Class B-3, Class B-4 and Class B-5 Certificates by the sum of
the then-outstanding Class A Non-PO Principal Balance, the Class M Principal
Balance and the Class B Principal Balance.
S-45
<PAGE>
The "Original Class B-1 Fractional Interest" is the percentage obtained by
dividing the sum of the initial Class B Subclass Principal Balances of the
Class B-2, Class B-3, Class B-4 and Class B-5 Certificates by the sum of the
initial Class A Non-PO Principal Balance, initial Class M Principal Balance
and initial Class B Principal Balance. The Original Class B-1 Fractional
Interest is expected to be approximately %. The "Current Class B-1 Fractional
Interest" for any Distribution Date is the percentage obtained by dividing the
sum of the then-outstanding Class B Subclass Principal Balances of the Class
B-2, Class B-3, Class B-4 and Class B-5 Certificates by the sum of the then-
outstanding Class A Non-PO Principal Balance, the Class M Principal Balance
and the Class B Principal Balance.
The "Original Class B-2 Fractional Interest" is the percentage obtained by
dividing the sum of the initial Class B Subclass Principal Balances of the
Class B-3, Class B-4 and Class B-5 Certificates by the sum of the initial
Class A Non-PO Principal Balance, initial Class M Principal Balance and
initial Class B Principal Balance. The Original Class B-2 Fractional Interest
is expected to be approximately %. The "Current Class B-2 Fractional
Interest" for any Distribution Date is the percentage obtained by dividing the
sum of the then-outstanding Class B Subclass Principal Balances of the Class
B-3, Class B-4 and Class B-5 Certificates by the sum of the then-outstanding
Class A Non-PO Principal Balance, the Class M Principal Balance and the Class
B Principal Balance.
The "Original Class B-3 Fractional Interest" is the percentage obtained by
dividing the sum of the initial Class B Subclass Principal Balances of the
Class B-4 and Class B-5 Certificates by the sum of the initial Class A Non-PO
Principal Balance, initial Class M Principal Balance and initial Class B
Principal Balance. The Original Class B-3 Fractional Interest is expected to
be approximately %. The "Current Class B-3 Fractional Interest" for any
Distribution Date is the percentage obtained by dividing the sum of the then-
outstanding Class B Subclass Principal Balances of the Class B-4 and Class B-5
Certificates by the sum of the then-outstanding Class A Non-PO Principal
Balance, the Class M Principal Balance and the Class B Principal Balance.
The "Original Class B-4 Fractional Interest" is the percentage obtained by
dividing the initial Class B Subclass Principal Balance of the Class B-5
Certificates by the sum of the initial Class A Non-PO Principal Balance,
initial Class M Principal Balance and initial Class B Principal Balance. The
Original Class B-4 Fractional Interest is expected to be approximately %. The
"Current Class B-4 Fractional Interest" for any Distribution Date is the
percentage obtained by dividing the then-outstanding Class B Subclass
Principal Balance of the Class B-5 Certificates by the sum of the then-
outstanding Class A Non-PO Principal Balance, the Class M Principal Balance
and the Class B Principal Balance.
Allocation of Amount to be Distributed
On each Distribution Date prior to the Cross-Over Date, the Class A Non-PO
Principal Distribution Amount will be allocated among and distributed in
reduction of the Class A Subclass Principal Balances (other than the Class A
Subclass Principal Balance of the Class A-PO Certificates) as follows:
[INSERT DISTRIBUTION PRIORITIES]
As used above, the "PAC Principal Amount" for any Distribution Date and for
any Subclass of PAC Certificates means the amount, if any, that would reduce
the Class A Subclass Principal Balance of such Subclass to the percentage of
its initial Class A Subclass Principal Balance shown in the following tables
with respect to such Distribution Date.
Notwithstanding the foregoing, on each Distribution Date occurring on or
after the Cross-Over Date, the Class A Non-PO Distribution Amount will be
distributed among the Subclasses of Class A Certificates (other than the Class
A-PO Certificates) pro rata in accordance with their respective outstanding
Class A Subclass Principal Balances without regard to either the proportions
or the priorities set forth above.
S-46
<PAGE>
Any amounts distributed on a Distribution Date to the holders of Class A
Certificates of any Subclass in reduction of principal balance will be
allocated among the holders of Class A Certificates of such Subclass pro rata
in accordance with their respective Percentage Interests.
Amounts distributed on any Distribution Date to the holders of the Class M
and Offered Class B Certificates in reduction of principal balance will be
allocated among the holders of each such Class or Subclass pro rata in
accordance with their respective Percentage Interests.
The following tables set forth for each Distribution Date the planned Class
A Subclass Principal Balances for each Subclass of PAC Certificates expressed
as a percentage of the initial Class A Subclass Principal Balance of each such
Subclass.
PLANNED CLASS A SUBCLASS PRINCIPAL BALANCES
AS PERCENTAGES OF INITIAL CLASS A SUBCLASS PRINCIPAL BALANCE
<TABLE>
<CAPTION>
PERCENTAGE OF PERCENTAGE OF
INITIAL CLASS A INITIAL CLASS A
DISTRIBUTION SUBCLASS DISTRIBUTION SUBCLASS
DATE PRINCIPAL BALANCE DATE PRINCIPAL BALANCE
- ------------ ----------------- ------------ -----------------
<S> <C> <C> <C>
</TABLE>
Principal Payment Characteristics of the PAC Certificates and the Companion
Certificates
The percentages of the initial Class A Subclass Principal Balances of the
Subclasses of PAC Certificates set forth in the preceding tables were
calculated using the Structuring Assumptions. Based on such assumptions, the
Class A Subclass Principal Balance of each Subclass of PAC Certificates would
be reduced to the percentage of its initial Class A Subclass Principal Balance
indicated in the preceding tables for each Distribution Date if prepayments on
the Mortgage Loans occur at any constant rate between approximately % SPA
(as defined herein under "Prepayment and Yield Considerations") and
approximately % SPA. However, it is highly unlikely that principal
prepayments on the Mortgate Loans will occur at any constant rate or that the
Mortgage Loans will prepay at the same rate. In addition, even if principal
prepayments were to occur at a constant rate, there may be differences between
the characteristics of the mortgage loans ultimately included in the Trust
Estate and the Mortgage Loans which are expected to be included, as described
herein under "Description of the Mortgage Loans." Therefore, there can be no
assurance that the Class A Subclass Principal Balance of any Subclass of PAC
Certificates, after the application of the distributions to be made on any
Distribution Date, will be equal to the applicable percentage of the initial
Class A Subclass Principal Balance for such Distribution Date specified in the
preceding tables.
The weighted average lives of the Subclasses of PAC Certificates will vary
under different prepayment scenarios. To the extent that principal prepayments
occur at a constant rate that is slower than approximately % SPA with respect
to the PAC Certificates, the Class A Non-PO Principal Distribution Amount on
each Distribution Date may be insufficient to make distributions in reduction
of the principal balances of one or more Subclasses of PAC Certificates in
amounts that would reduce their principal balances to their respective planned
principal balances for such Distribution Date. The weighted average lives of
the Subclasses of PAC Certificates may therefore be extended, as illustrated
by the tables beginning on page S- .
To the extent that such principal prepayments occur at a constant rate that
is higher than approximately % SPA with respect to the PAC Certificates, the
weighted average lives of the Subclasses of PAC Certificates may be shortened,
as illustrated by the tables beginning on page S- .
S-47
<PAGE>
Because any Excess Principal Payments for any Distribution Date will be
distributed to Certificateholders on such Distribution Date, the ability to
distribute the PAC Principal Amounts on any Distribution Date will not be
enhanced by the averaging of high and low principal prepayment rates on the
Mortgage Loans over several Distribution Dates, as might be the case if any
such Excess Principal Payments were held for future applications and not
distributed monthly. There is no assurance that, with respect to the Class A
Principal Amount (i) distributions in reduction of the Class A Subclass
Principal Balance of any Subclass of PAC Certificates will not commence
significantly earlier than the first Distribution Date shown in the preceding
tables relating to such Subclass, (ii) distributions in reduction of the Class
A Subclass Principal Balance of any Subclass of PAC Certificates will not
commence significantly later than the first Distribution Date shown in the
preceding tables relating to such Subclass or (iii) the Class A Subclass
Principal Balance of any Subclass of PAC Certificates will not be reduced to
zero significantly earlier or significantly later than the last Distribution
Date shown in the preceding tables.
The extent to which the planned principal balances will be achieved and the
sensitivity of the PAC Certificates to principal prepayments on the Mortgage
Loans will depend, in part, upon the period of time during which the Companion
Certificates remain outstanding. On each Distribution Date, the excess of the
portion of the Class A Non-PO Principal Distribution Amount available to make
distributions of principal to the PAC Certificates over the PAC Principal
Amounts ("Excess Principal Payment") for such Distribution Date will be
distributed to the Companion Certificates before being distributed to the PAC
Certificates, in accordance with the proportions and priorities set forth
above under "--Allocation of Amount to be Distributed." This is intended to
decrease the likelihood that the principal balances of the PAC Certificates
will be reduced below their planned principal balances on a given Distribution
Date. As such, and in accordance with the priorities described above under "--
Allocation of Amount to be Distributed," the Companion Certificates support
the PAC Certificates. However, under certain relatively fast prepayment
scenarios, the PAC Certificates may continue to be outstanding when the
Companion Certificates are no longer outstanding. Under such circumstances,
all Excess Principal Payments will be applied to the PAC Certificates and in
accordance with the priorities described herein. Thus, when the principal
balance of the Companion Certificates has been reduced to zero, any Subclasses
of PAC Certificates then outstanding will, in accordance with the proportions
and priorities set forth above under "--Allocation of Amount to be
Distributed," become more sensitive to the rate of prepayment on the Mortgage
Loans as such Subclasses will receive all Excess Principal Payments until the
principal balances of the PAC Certificates have been reduced to zero.
Conversely, under certain relatively slow prepayment scenarios, the portion of
the Class A Non-PO Principal Distribution Amount available to make
distributions of principal to the PAC Certificates may not be sufficient to
pay the PAC Principal Amounts for the PAC Certificates on a given Distribution
Date. In such cases, the portion of the Class A Non-PO Principal Distribution
Amount available to make distributions of principal to the PAC Certificates
for each subsequent Distribution Date will be applied in accordance with the
priorities described herein such that the Companion Certificates will not
receive any distributions in reduction of their principal balance until the
outstanding principal balances of the PAC Certificates have reached their
respective planned principal balances for such Distribution Date. As a result,
the weighted average life of any Subclass of PAC Certificates may be extended
if such Subclass does not receive its PAC Principal Amount on a Distribution
Date.
THE WEIGHTED AVERAGE LIFE OF THE COMPANION CERTIFICATES WILL BE MORE
SENSITIVE THAN THE OTHER SUBCLASSES OF CLASS A CERTIFICATES TO THE RATE OF
PRINCIPAL PAYMENTS (INCLUDING PREPAYMENTS) ON THE MORTGAGE LOANS. See
"Prepayment and Yield Considerations" herein.
ADDITIONAL RIGHTS OF THE CLASS A-R CERTIFICATEHOLDER
The Class A-R Certificate will remain outstanding for as long as the Trust
Estate shall exist, whether or not such Subclass is receiving current
distributions of principal or interest. The holder of the Class A-R
Certificate will be entitled to receive the proceeds of the remaining assets
of the Trust Estate, if any, on the final Distribution Date for the Series
199 - Certificates, after distributions in respect of any accrued but unpaid
interest on the Series 199 - Certificates and after distributions in reduction
of principal balance have reduced the principal balances of the Series 199 -
Certificates to zero. It is not anticipated that there will be any assets
remaining in
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<PAGE>
the Trust Estate on the final Distribution Date following the distributions of
interest and in reduction of principal balance made on the Series 199 --
Certificates on such date.
In addition, the Class A-R Certificateholder will be entitled on each
Distribution Date to receive any Pool Distribution Amount remaining after all
distributions pursuant to the Pool Distribution Amount Allocation have been
made and any Net Foreclosure Profits. "Net Foreclosure Profits" means, with
respect to any Distribution Date, the excess, if any, of (i) the aggregate
profits on Liquidated Loans in the related period with respect to which net
Liquidation Proceeds exceed the unpaid principal balance thereof plus accrued
interest thereon at the Mortgage Interest Rate over (ii) the aggregate
Realized Losses on Liquidated Loans in the related period with respect to
which net Liquidation Proceeds are less than the unpaid principal balance
thereof plus accrued interest thereon at the Mortgage Interest Rate. It is not
anticipated that there will be any such Net Foreclosure Profits or
undistributed portion of the Pool Distribution Amounts.
PERIODIC ADVANCES
If, on any Determination Date, payments of principal and interest due on any
Mortgage Loan in the Trust Estate on the related Due Date have not been
received, the Servicer of the Mortgage Loan will, in certain circumstances, be
required to advance on or before the related Distribution Date for the benefit
of holders of the Series 199 --Certificates an amount in cash equal to all
delinquent payments of principal and interest due on each Mortgage Loan in the
Trust Estate (with interest adjusted to the applicable Net Mortgage Interest
Rate) not previously advanced, but only to the extent that such Servicer
believes that such amounts will be recoverable by it from liquidation proceeds
or other recoveries in respect of the related Mortgage Loan (each, a "Periodic
Advance"). Upon a Servicer's failure to make a required Periodic Advance, the
Trustee, if such Servicer is Norwest Mortgage, or the Master Servicer, if such
Servicer is not Norwest Mortgage, will be required to make such Periodic
Advance.
The Underlying Servicing Agreements and the Pooling and Servicing Agreement
provide that any advance of the kind described in the preceding paragraph may
be reimbursed to the related Servicer or the Master Servicer or the Trustee,
as applicable, at any time from funds available in the Servicer Custodial
Account or the Certificate Account, as the case may be, to the extent that (i)
such funds represent receipts on, or liquidation, insurance, purchase or
repurchase proceeds in respect of, the Mortgage Loans to which the advance
relates or (ii) the Servicer, the Master Servicer or Trustee, as applicable,
has determined in good faith that the advancing party will be unable to
recover such advance from funds of the type referred to in clause (i) above.
[FOR SERIES WITH A FINANCIAL GUARANTY INSURANCE POLICY:
FINANCIAL SECURITY ASSURANCE INC.
General. Financial Security Assurance Inc. ("Financial Security") is a
monoline insurance company incorporated in 1984 under the laws of the State of
New York. Financial Security is licensed to engage in financial guaranty
insurance business in all 50 states, the District of Columbia and Puerto Rico.
Financial Security and its subsidiaries are engaged in the business of
writing financial guaranty insurance, principally in respect of securities
offered in domestic and foreign markets. In general, financial guaranty
insurance consists of the issuance of a guaranty of scheduled payments of an
issuer's securities--thereby enhancing the credit rating of those securities--
in consideration for the payment of a premium to the insurer. Financial
Security and its subsidiaries principally insure asset-backed, collateralized
and municipal securities. Asset-backed securities are generally supported by
residential mortgage loans, consumer or trade receivables, securities or other
assets having an ascertainable cash flow or market value. Collateralized
securities include public utility first mortgage bonds and sale/leaseback
obligation bonds. Municipal securities consist largely of general obligation
bonds, special revenue bonds and other special obligations of state and local
governments. Financial Security insures both newly issued securities sold in
the primary market and outstanding securities sold in the secondary market
that satisfy Financial Security's underwriting criteria.
S-49
<PAGE>
Financial Security is a wholly owned subsidiary of Financial Security
Assurance Holdings Ltd. ("Holdings"), a New York Stock Exchange listed
company. Major shareholders of Holdings include Fund American Enterprises
Holdings, Inc., US WEST Capital Corporation and The Tokio Marine and Fire
Insurance Co., Ltd. No shareholder of Holdings is obligated to pay any debt of
Financial Security or any claim under any insurance policy issued by Financial
Security or to make any additional contribution to the capital of Financial
Security.
The principal executive offices of Financial Security are located at 350
Park Avenue, New York, New York, 10022, and its telephone number at that
location is (212) 826-0100.
Reinsurance. Pursuant to an intercompany agreement, liabilities on financial
guaranty insurance written or reinsured from third parties by Financial
Security or any of its domestic operating insurance company subsidiaries are
reinsured among such companies on an agreed-upon percentage substantially
proportional to their respective capital, surplus and reserves, subject to
applicable statutory risk limitations. In addition, Financial Security
reinsures a portion of its liabilities under certain of its financial guaranty
insurance policies with other reinsurers under various quota share treaties
and on a transaction-by-transaction basis. Such reinsurance is utilized by
Financial Security as a risk management device and to comply with certain
statutory and rating agency requirements; it does not alter or limit Financial
Security's obligations under any financial guaranty insurance policy.
Rating of Claims-Paying Ability. Financial Security's claims-paying ability
is rated "Aaa" by Moody's and "AAA" by S&P, Nippon Investors Services Inc. and
Standard & Poor's (Australia) Pty. Ltd. Such ratings reflect only the views of
the respective rating agencies, are not recommendations to buy, sell or hold
securities and are subject to revision or withdrawal at any time by such
rating agencies.
Capitalization. The following table sets forth the capitalization of
Financial Security and its wholly owned subsidiaries on the basis of generally
accepted accounting principles as of September 30, 1996 (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
------------------
(UNAUDITED)
<S> <C>
Deferred Premium Revenue (net of prepaid reinsurance
premiums).............................................. $ 358,145
----------
Shareholder's Equity:
Common Stock.......................................... 15,000
Additional Paid-In Capital............................ 666,470
Unrealized Gain on Investments (net of deferred income
taxes)............................................... 2,482
Accumulated Earnings.................................. 111,231
----------
Total Shareholder's Equity.............................. $ 795,183
----------
Total Deferred Premium Revenue and Shareholder's Equi-
ty..................................................... $1,153,328
==========
</TABLE>
For further information concerning Financial Security, see the Consolidated
Financial Statements of Financial Security and Subsidiaries, and the notes
thereto, incorporated by reference herein. Copies of the statutory quarterly
and annual statements filed with the State of New York Insurance Department by
Financial Security are available upon request to the State of New York
Insurance Department or by contacting Financial Security at 350 Park Avenue,
New York, New York 10022, Attention: Controller Department; (212) 826-0100.
Incorporation of Certain Documents by Reference. The consolidated financial
statements of Financial Security and Subsidiaries for the year ended December
31, 1995 included as an exhibit to the Annual Report on Form 10-K for the year
ended December 31, 1995 and the unaudited financial statements of Financial
Security for the nine month period ended September 30, 1996 included as an
exhibit to the Quarterly Report on Form 10-Q for the quarter ended September
30, 1996, each of which has been filed with the Securities and Exchange
Commission by Holdings, are hereby incorporated by reference in this
Prospectus Supplement.
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<PAGE>
All financial statements of Financial Security and Subsidiaries included in
documents filed by Holdings pursuant to Section 13(a), 13(c), 14 or 15(d) of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
subsequent to the date of this Prospectus Supplement and prior to the
termination of the offering of the Certificates shall be deemed to be
incorporated by reference into this Prospectus Supplement and to be part
hereof from the respective dates of filing such document.
Insurance Regulation. Financial Security is licensed and subject to
regulation as a financial guaranty insurance corporation under the laws of the
State of New York, its state of domicile. In addition, Financial Security and
its insurance subsidiaries are subject to regulation by insurance laws of the
various other jurisdictions in which they are licensed to do business. As a
financial guaranty insurance corporation licensed to do business in the State
of New York, Financial Security is subject to Article 69 of the New York
Insurance Law which, among other things, limits the business of each such
insurer to financial guaranty insurance and related lines, requires that each
such insurer maintain a minimum surplus to policyholders, establishes
contingency, loss and unearned premium reserve requirements for each such
insurer, and limits the size of individual transactions ("single risks") and
the volume of transactions ("aggregate risks") that may be underwritten by
each such insurer. Other provisions of the New York Insurance Law, applicable
to non-life insurance companies such as Financial Security, regulate, among
other things, permitted investments, payment of dividends, transactions with
affiliates, mergers, consolidations, acquisitions or sales of assets and
incurrence of liability for borrowings.]
RESTRICTIONS ON TRANSFER OF THE CLASS A-R, CLASS M AND OFFERED CLASS B
CERTIFICATES
The Class A-R Certificate will be subject to the following restrictions on
transfer, and the Class A-R Certificate will contain a legend describing such
restrictions.
The REMIC provisions of the Code impose certain taxes on (i) transferors of
residual interests to, or agents that acquire residual interests on behalf of,
Disqualified Organizations and (ii) certain Pass-Through Entities (as defined
in the Prospectus) that have Disqualified Organizations as beneficial owners.
No tax will be imposed on a Pass-Through Entity with respect to the Class A-R
Certificate to the extent it has received an affidavit from the owner thereof
that such owner is not a Disqualified Organization or a nominee for a
Disqualified Organization. The Pooling and Servicing Agreement will provide
that no legal or beneficial interest in the Class A-R Certificate may be
transferred to or registered in the name of any person unless (i) the proposed
purchaser provides to the Trustee an affidavit (or, to the extent acceptable
to the Trustee, a representation letter signed under penalty of perjury) to
the effect that, among other items, such transferee is not a Disqualified
Organization (as defined in the Prospectus) and is not purchasing the Class A-
R Certificate as an agent for a Disqualified Organization (i.e., as a broker,
nominee, or other middleman thereof) and (ii) the transferor states in writing
to the Trustee that it has no actual knowledge that such affidavit is false.
Further, such affidavit or letter requires the transferee to affirm that it
(i) historically has paid its debts as they have come due and intends to do so
in the future, (ii) understands that it may incur tax liabilities with respect
to the Class A-R Certificate in excess of cash flows generated thereby, (iii)
intends to pay taxes associated with holding the Class A-R Certificate as such
taxes become due and (iv) will not transfer the Class A-R Certificate to any
person or entity that does not provide a similar affidavit (or letter). The
transferor must certify in writing to the Trustee that, as of the date of the
transfer, it had no knowledge or reason to know that the affirmations made by
the transferee pursuant to the preceding sentence were false.
In addition, the Class A-R Certificate may not be purchased by or
transferred to any person that is not a "U.S. Person," unless (i) such person
holds such Class A-R Certificate in connection with the conduct of a trade or
business within the United States and furnishes the transferor and the Trustee
with an effective Internal Revenue Service Form 4224 or (ii) the transferee
delivers to both the transferor and the Trustee an opinion of a nationally
recognized tax counsel to the effect that such transfer is in accordance with
the requirements of the Code and the regulations promulgated thereunder and
that such transfer of the Class A-R Certificate will not be disregarded for
federal income tax purposes. The term "U.S. Person" means a citizen or
resident of the United
S-51
<PAGE>
States, a corporation, partnership or other entity created or organized in or
under the laws of the United States or any political subdivision thereof, an
estate that is subject to United States federal income tax regardless of the
source of its income, or a trust if (A) for taxable years beginning after
December 31, 1996 (or for taxable years ending after August 20, 1996, if the
trustee has made an applicable election), a court within the United States is
able to exercise primary supervision over the administration of such trust,
and one or more United States fiduciaries have the authority to control all
substantial decisions of such trust or (B) for all other taxable years, such
trust is subject to United States federal income tax regardless of the source
of its income.
The Pooling and Servicing Agreement will provide that any attempted or
purported transfer in violation of these transfer restrictions will be null
and void and will vest no rights in any purported transferee. Any transferor
or agent to whom the Trustee provides information as to any applicable tax
imposed on such transferor or agent may be required to bear the cost of
computing or providing such information. See "Material Federal Income Tax
Consequences--Federal Income Tax Consequences for REMIC Certificates--Taxation
of Residual Certificates--Tax-Related Restrictions on Transfer of Residual
Certificates" in the Prospectus.
THE CLASS A-R CERTIFICATE MAY NOT BE PURCHASED BY OR TRANSFERRED TO A PLAN.
See "ERISA Considerations" herein and in the Prospectus.
Because the Class M and Offered Class B Certificates are subordinated to the
Class A Certificates, the Class M and Offered Class B Certificates may not be
transferred unless the transferee has delivered (i) a representation letter to
the Trustee and the Seller stating either (a) that the transferee is not a
Plan and is not acting on behalf of a Plan or using the assets of a Plan to
effect such purchase or (b) subject to the conditions described herein, that
the source of funds used to purchase the Class M or Offered Class B
Certificates is an "insurance company general account" or (ii) an opinion of
counsel and such other documentation as described herein under "ERISA
Considerations." See "ERISA Considerations" herein and in the Prospectus.
REPORTS
In addition to the applicable information specified in the Prospectus, the
Master Servicer will include in the statement delivered to holders of Class A,
Class M and Class B Certificates with respect to each Distribution Date the
following information: (i) the amount of such distribution allocable to
interest, the amount of interest currently distributable to each Subclass of
Class A and Class B Certificates and to the Class M Certificates, any Class A
Subclass Interest Shortfall Amount or Class B Subclass Interest Shortfall
Amount arising with respect to each Subclass or any Class M Interest Shortfall
Amount on such Distribution Date, any remaining unpaid Class A Subclass
Interest Shortfall Amount or Class B Subclass Interest Shortfall Amount with
respect to each Subclass, or any remaining unpaid Class M Interest Shortfall
Amount, after giving effect to such distribution and any Non-Supported
Interest Shortfall or the interest portion of Realized Losses allocable to
such Subclass or Class with respect to such Distribution Date, (ii) the amount
of such distribution allocable to principal, (iii) the Class A Non-PO
Principal Balance, the Class M Principal Balance, the Class B Principal
Balance, the Class A Subclass Principal Balance of each Subclass of Class A
Certificates and the Class B Subclass Principal Balance of each Subclass of
Class B Certificates in each case after giving effect to the distribution of
principal and the allocation of the principal portion of Realized Losses to
such Subclass or Class with respect to such Distribution Date, (iv) the
Adjusted Pool Amount, the Adjusted Pool Amount (PO Portion) and the Pool
Scheduled Principal Balance of the Mortgage Loans and the aggregate Scheduled
Principal Balance of the Discount Mortgage Loans for such Distribution Date,
(v) the Class A Percentage, Class M Percentage and Subclass B Percentage of
each Subclass of Class B Certificates for the following Distribution Date
(without giving effect to Unscheduled Principal Receipts received after the
applicable Unscheduled Principal Receipt Period for the current Distribution
Date that are applied during such Unscheduled Principal Receipt Period), and
(vi) the amount of the remaining Special Hazard Loss Amount, the Fraud Loss
Amount and the Bankruptcy Loss Amount as of the close of business on such
Distribution Date. See "Servicing of the Mortgage Loans--Reports to
Certificateholders" in the Prospectus.
Copies of the foregoing reports are available upon written request to the
Trustee at its corporate trust office. See "Pooling and Servicing Agreement--
Trustee" herein.
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<PAGE>
SUBORDINATION OF CLASS M AND CLASS B CERTIFICATES
The rights of the holders of the Class M Certificates to receive
distributions with respect to the Mortgage Loans in the Trust Estate will be
subordinated to such rights of the holders of the Class A Certificates, the
rights of the holders of the Class B Certificates to receive distributions
with respect to the Mortgage Loans in the Trust Estate will be subordinated to
such rights of the holders of the Class A Certificates and the Class M
Certificates and the rights of the holders of the Subclasses of Class B
Certificates with higher numerical designations to receive distributions with
respect to the Mortgage Loans in the Trust Estate will be subordinated to such
rights of the holders of Subclasses of Class B Certificates with lower
numerical designations, all to the extent described below. This subordination
is intended to enhance the likelihood of timely receipt by the holders of the
Class A Certificates (to the extent of the subordination of the Class M and
Class B Certificates), the holders of the Class M Certificates (to the extent
of the subordination of the Class B Certificates) and the holders of a
Subclass of Class B Certificates (to the extent of the subordination of
Subclasses of Class B Certificates with higher numerical designations) of the
full amount of their scheduled monthly payments of interest and principal and
to afford the holders of the Class A Certificates (to the extent of the
subordination of the Class M and Class B Certificates), the holders of the
Class M Certificates (to the extent of the subordination of the Class B
Certificates) and the holders of the Subclasses of Class B Certificates (to
the extent of the subordination of Subclasses of Class B Certificates with
higher numerical designations) protection against Realized Losses, as more
fully described below. If Realized Losses exceed the credit support provided
through subordination to the Class A Certificates, the Class M Certificates or
a Subclass of Class B Certificates or if Excess Special Hazard Losses, Excess
Fraud Losses or Excess Bankruptcy Losses occur, all or a portion of such
losses will be borne by the Class A Certificates, the Class M Certificates or
such Subclass of Class B Certificates.
The protection afforded to the holders of Class A Certificates by means of
the subordination feature will be accomplished by the preferential right of
such holders to receive, prior to any distribution being made on a
Distribution Date in respect of the Class M and Class B Certificates, the
amounts of principal and interest due the Class A Certificateholders on each
Distribution Date out of the Pool Distribution Amount with respect to such
date and, if necessary, by the right of such holders to receive future
distributions on the Mortgage Loans that would otherwise have been payable to
the holders of Class M and Class B Certificates. The application of this
subordination to cover Realized Losses experienced in periods prior to the
periods in which a Subclass of Class A Certificates is entitled to
distributions in reduction of principal balance will decrease the protection
provided by the subordination to any such Subclass.
The protection afforded to the holders of Class M Certificates by means of
the subordination feature will be accomplished by the preferential right of
such holders to receive, prior to any distribution being made on a
Distribution Date in respect of the Class B Certificates, the amounts of
principal (other than any amount used to pay the Class A-PO Deferred Amount)
and interest due the Class M Certificateholders on each Distribution Date from
the Pool Distribution Amount with respect to such date (after all required
payments on the Class A Certificates have been made) and, if necessary, by the
right of such holders to receive future distributions on the Mortgage Loans
that would otherwise have been payable to the holders of the Class B
Certificates.
A Subclass of Class B Certificates will be entitled, on each Distribution
Date, to the remaining portion, if any, of the applicable Pool Distribution
Amount, after payment of the Class A Optimal Amount, the Class A-PO Deferred
Amount, the Class M Optimal Amount and the Subclass B Optimal Amount of each
Subclass of Class B Certificates with a lower numerical designation for such
date. Amounts so distributed to Class B Certificateholders will not be
available to cover delinquencies or Realized Losses in respect of subsequent
Distribution Dates.
Allocation of Losses
Realized Losses (other than Excess Special Hazard Losses, Excess Fraud
Losses or Excess Bankruptcy Losses) will not be allocated to the holders of
the Class A Certificates until the date on which the amount of principal
payments on the Mortgage Loans to which the holders of the Subordinated
Certificates are entitled has been reduced to zero as a result of the
allocation of losses to the Subordinated Certificates, i.e., the date on which
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<PAGE>
the Subordinated Percentage has been reduced to zero (the "Cross-Over Date").
Prior to such time, such Realized Losses will be allocated to the Subclasses
of Class B Certificates sequentially in reverse numerical order, until the
Class B Subclass Principal Balance of each such Subclass has been reduced to
zero, and then to the Class M Certificates until the Class M Principal Balance
has been reduced to zero.
The allocation of the principal portion of a Realized Loss (other than a
Debt Service Reduction, Excess Special Hazard Loss, Excess Fraud Loss or
Excess Bankruptcy Loss) will be effected through the adjustment of the
principal balance of the most subordinate Class (or in the case of the
Subclasses of Class B Certificates, the most subordinate Subclass) then-
outstanding in such amount as is necessary to cause the sum of the Class A
Subclass Principal Balances, the Class M Principal Balance and the Class B
Subclass Principal Balances to equal the Adjusted Pool Amount.
Allocations to the Class M Certificates or the Subclasses of Class B
Certificates of (i) the principal portion of Debt Service Reductions, (ii) the
interest portion of Realized Losses (other than Excess Special Hazard Losses,
Excess Fraud Losses and Excess Bankruptcy Losses), (iii) any interest
shortfalls resulting from delinquencies for which the Servicer, the Master
Servicer or the Trustee does not advance, (iv) any interest shortfalls or
losses resulting from the application of the Soldiers' and Sailors' Civil
Relief Act of 1940, as more fully described under "Certain Legal Aspects of
the Mortgage Loans--Soldiers' and Sailors' Civil Relief Act" in the Prospectus
and (v) any interest shortfalls resulting from the timing of the receipt of
Unscheduled Principal Receipts (other than Prepayments in Full) with respect
to Mortgage Loans will result from the priority of distributions of the Pool
Distribution Amount first to the holders of the Class A Certificates, second
to the Class M Certificates and finally to the Subclasses of Class B
Certificates in numerical order as described above under "--Distributions."
The allocation of the principal portion of Realized Losses in respect of the
Mortgage Loans allocated on or after the Cross-Over Date will be effected
through the adjustment on any Determination Date of the Class A Non-PO
Principal Balance and the Class A Subclass Principal Balance of the Class A-PO
Certificates such that (i) the Class A Non-PO Principal Balance equals the
Adjusted Pool Amount less the Adjusted Pool Amount (PO Portion) as of the
preceding Distribution Date and (ii) the Class A Subclass Principal Balance of
the Class A-PO Certificates equals the Adjusted Pool Amount (PO Portion) as of
the preceding Distribution Date. The principal portion of such Realized Losses
allocated to the Class A Certificates (other than the Class A-PO Certificates)
will be allocated to such outstanding Subclasses of Class A Certificates pro
rata in accordance with their Class A Subclass Principal Balances. The
interest portion of any Realized Loss allocated on or after the Cross-Over
Date will be allocated among the outstanding Subclasses of Class A
Certificates (other than the Class A-PO Certificates) pro rata in accordance
with their respective Class A Subclass Interest Accrual Amounts, without
regard to any reduction pursuant to this sentence. Any such losses will be
allocated among the outstanding Class A Certificates within each Subclass pro
rata in accordance with their respective Percentage Interests.
Any Excess Special Hazard Losses, Excess Fraud Losses or Excess Bankruptcy
Losses will be allocated (i) with respect to the principal portion of such
losses (a) to the outstanding Subclasses of the Class A Certificates (other
than the Class A-PO Certificates), Class M Certificates and Class B
Certificates pro rata based on their outstanding principal balances in
proportion to the Non-PO Fraction of such losses and (b) in respect of
Discount Mortgage Loans, to the Class A-PO Certificates in proportion to the
PO Fraction of such losses and (ii) with respect to the interest portion of
such losses, to the Class A, Class M and Class B Certificates pro rata based
on the interest accrued. The principal portion of any such losses so allocated
to the Class A Certificates (other than the Class A-PO Certificates) will be
allocated among the outstanding Subclasses of Class A Certificates (other than
the Class A-PO Certificates) pro rata in accordance with their then-
outstanding Class A Subclass Principal Balances, and the interest portion of
any such losses will be allocated among the outstanding Subclasses of Class A
Certificates (other than Class A-PO Certificates) in accordance with their
Class A Subclass Interest Accrual Amounts, without regard to any reduction
pursuant to this sentence. Any losses allocated to a Subclass of Class A
Certificates will be allocated among the outstanding Class A Certificates
within such Subclass pro rata in accordance with their respective Percentage
Interests.
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<PAGE>
The interest portion of Excess Special Hazard Losses, Excess Fraud Losses
and Excess Bankruptcy Losses will be allocated by reducing the Class A
Subclass Interest Accrual Amounts, Class M Interest Accrual Amount and Class B
Subclass Interest Accrual Amounts.
As described under "--Distributions" above, the Pool Distribution Amount for
any Distribution Date will include current receipts (other than certain
unscheduled payments in respect of principal) from the Mortgage Loans
otherwise payable to holders of the Class M and Class B Certificates. If the
Pool Distribution Amount is not sufficient to cover the amount of principal
payable to the holders of the Class A Certificates on a particular
Distribution Date, then the percentage of principal payments on the Mortgage
Loans to which the holders of the Class A Certificates (other than the Class
A-PO Certificates) will be entitled (i.e., the Class A Percentage) on and
after the next Distribution Date will be proportionately increased, thereby
reducing, as a relative matter, the respective interest of the Class M and
Class B Certificates in future payments of principal on the Mortgage Loans in
the Trust Estate. Such a shortfall could occur, for example, if a considerable
number of Mortgage Loans were to become Liquidated Loans in a particular
month.
Special Hazard Losses, other than Excess Special Hazard Losses, will be
allocated solely to the Subclasses of Class B Certificates in reverse
numerical order, or following the reduction of the Class B Principal Balance
to zero, solely to the Class M Certificates. Special Hazard Losses in excess
of the Special Hazard Loss Amount are "Excess Special Hazard Losses." Excess
Special Hazard Losses will be allocated among (i) the Class A Certificates
(other than the Class A-PO Certificates), the Class M Certificates and the
Class B Certificates and (ii) to the extent such Excess Special Hazard Losses
arise with respect to Discount Mortgage Loans, the Class A-PO Certificates. If
the aggregate of all Special Hazard Losses incurred in the month preceding the
month of the related Distribution Date (the "Aggregate Current Special Hazard
Losses") is less than or equal to the then-applicable Special Hazard Loss
Amount, no Special Hazard Losses will be regarded as Excess Special Hazard
Losses. If Aggregate Current Special Hazard Losses exceed the then-applicable
Special Hazard Loss Amount, a portion of each Special Hazard Loss will be
regarded as an "Excess Special Hazard Loss" in proportion to the ratio of (a)
the excess of (i) Aggregate Current Special Hazard Losses over (ii) the then-
applicable Special Hazard Loss Amount, to (b) the Aggregate Current Special
Hazard Losses. Thereafter, when the Special Hazard Loss Amount is zero, all
Special Hazard Losses will be regarded as Excess Special Hazard Losses. Upon
initial issuance of the Series 199 - Certificates, the "Special Hazard Loss
Amount" with respect thereto will be equal to approximately % (approximately
$ ) of the Cut-Off Date Aggregate Principal Balance of the Mortgage Loans.
As of any Distribution Date, the Special Hazard Loss Amount will equal the
initial Special Hazard Loss Amount less the sum of (A) any Special Hazard
Losses allocated solely to the Class B or Class M Certificates and (B) the
Adjustment Amount. The "Adjustment Amount" on each anniversary of the Cut-Off
Date will be equal to the amount, if any, by which the Special Hazard Amount,
without giving effect to the deduction of the Adjustment Amount for such
anniversary, exceeds the greater of (i) 1.00% (or, if greater than 1.00%, the
highest percentage of Mortgage Loans by principal balance in any California
zip code) times the aggregate principal balance of all the Mortgage Loans on
such anniversary (ii) twice the principal balance of the single Mortgage Loan
having the largest principal balance, and (iii) that which is necessary to
maintain the original ratings on the Class A, Class M and Offered Class B
Certificates, as evidenced by letters to that effect delivered by [Moody's]
[Fitch] [DCR] and [S&P] to the Master Servicer and the Trustee. On and after
the Cross-Over Date, the Special Hazard Loss Amount will be zero.
Fraud Losses, other than Excess Fraud Losses, will be allocated solely to
the Subclasses of Class B Certificates in reverse numerical order, or
following the reduction of the Class B Principal Balance to zero, solely to
the Class M Certificates. Fraud Losses in excess of the Fraud Loss Amount are
"Excess Fraud Losses." Excess Fraud Losses will be allocated among (i) the
Class A Certificates (other than the Class A-PO Certificates), the Class M
Certificates and the Class B Certificates and (ii) to the extent such Excess
Fraud Losses arise with respect to Discount Mortgage Loans, the Class A-PO
Certificates. If the aggregate of all Fraud Losses incurred in the month
preceding the month of the related Distribution Date (the "Aggregate Current
Fraud Losses") is less than or equal to the then-applicable Fraud Loss Amount,
no Fraud Losses will be regarded as Excess Fraud Losses. If Aggregate Current
Fraud Losses exceed the then-applicable Fraud Loss Amount, a portion of each
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<PAGE>
Fraud Loss will be regarded as an "Excess Fraud Loss" in proportion to the
ratio of (a) the excess of (i) Aggregate Current Fraud Losses over (ii) the
then-applicable Fraud Loss Amount, to (b) the Aggregate Current Fraud Losses.
Thereafter, when the Fraud Loss Amount is zero, all Fraud Losses will be
regarded as Excess Fraud Losses. Upon initial issuance of the Series 199 -
Certificates, the "Fraud Loss Amount" with respect thereto will be equal to
approximately % (approximately $ ) of the Cut-Off Date Aggregate Principal
Balance of the Mortgage Loans. As of any Distribution Date prior to the first
anniversary of the Cut-Off Date, the Fraud Loss Amount will equal the initial
Fraud Loss Amount minus the aggregate amount of Fraud Losses allocated solely
to the Class B or Class M Certificates through the related Determination Date.
As of any Distribution Date from the first through fifth anniversary of the
Cut-Off Date, the Fraud Loss Amount will be an amount equal to (1) the lesser
of (a) the Fraud Loss Amount as of the most recent anniversary of the Cut-Off
Date and (b) 1.00% of the aggregate principal balance of all of the Mortgage
Loans as of the most recent anniversary of the Cut-Off Date minus (2) the
aggregate amounts allocated solely to the Class B or Class M Certificates with
respect to Fraud Losses since the most recent anniversary of the Cut-Off Date
through the related Determination Date. On and after the Cross-Over Date or
after the fifth anniversary of the Cut-Off Date, the Fraud Loss Amount will be
zero.
Bankruptcy Losses, other than Excess Bankruptcy Losses, will be allocated
solely to the Subclasses of Class B Certificates in reverse numerical order,
or following the reduction of the Class B Principal Balance to zero, solely to
the Class M Certificates. Bankruptcy losses in excess of the Bankruptcy Loss
Amount are "Excess Bankruptcy Losses." Excess Bankruptcy Losses will be
allocated among (i) the Class A Certificates (other than the Class A-PO
Certificates), the Class M Certificates and the Class B Certificates and (ii)
to the extent such Excess Bankruptcy Losses arise with respect to Discount
Mortgage Loans, the Class A-PO Certificates. If the aggregate of all
Bankruptcy Losses incurred in the month preceding the month of the related
Distribution Date (the "Aggregate Current Bankruptcy Losses") is less than or
equal to the then applicable Bankruptcy Loss Amount, no Bankruptcy Losses will
be regarded as Excess Bankruptcy Losses. If Aggregate Current Bankruptcy
Losses exceed the then-applicable Bankruptcy Loss Amount, a portion of each
Bankruptcy Loss will be regarded as an "Excess Bankruptcy Loss" in proportion
to the ratio of (a) the excess of (i) Aggregate Current Bankruptcy Losses over
(ii) the then-applicable Bankruptcy Loss Amount, to (b) the Aggregate Current
Bankruptcy Losses. Thereafter, when the Bankruptcy Loss Amount is zero, all
Bankruptcy Losses will be regarded as Excess Bankruptcy Losses. Upon initial
issuance of the Series 199 - Certificates, the "Bankruptcy Loss Amount" with
respect thereto will be equal to approximately % (approximately $ ) of the
Cut-Off Date Aggregate Principal Balance of the Mortgage Loans. As of any
Distribution Date prior to the first anniversary of the Cut-Off Date, the
Bankruptcy Loss Amount will equal the initial Bankruptcy Loss Amount minus the
aggregate amount of Bankruptcy Losses allocated solely to the Class B or Class
M Certificates through the related Determination Date. As of any Distribution
Date on or after the first anniversary of the Cut-Off Date, the Bankruptcy
Loss Amount will equal the excess, if any, of (1) the lesser of (a) the
Bankruptcy Loss Amount as of the business day next preceding the most recent
anniversary of the Cut-Off Date and (b) an amount, if any, calculated pursuant
to the terms of the Pooling and Servicing Agreement, which amount as
calculated will provide for a reduction in the Bankruptcy Loss Amount, over
(2) the aggregate amount of Bankruptcy Losses allocated solely to the Class B
or Class M Certificates since such anniversary. The Bankruptcy Loss Amount and
the related coverage levels described above may be reduced or modified upon
written confirmation from [Moody's] [Fitch] [DCR] and [S&P] that such
reduction or modification will not adversely affect the then-current ratings
assigned to the Class A and Class M Certificates by [Moody's] [Fitch] [DCR]
and [S&P] and the then-current ratings assigned to the Offered Class B
Certificates by [Moody's] [Fitch] [DCR] and [S&P]. Such a reduction or
modification may adversely affect the coverage provided by subordination with
respect to Bankruptcy Losses. On and after the Cross-Over Date, the Bankruptcy
Loss Amount will be zero.
Notwithstanding the foregoing, the provisions relating to subordination will
not be applicable in connection with a Bankruptcy Loss so long as the
applicable Servicer has notified the Trustee and the Master Servicer in
writing that such Servicer is diligently pursuing any remedies that may exist
in connection with the representations and warranties made regarding the
related Mortgage Loan and when (A) the related Mortgage Loan is not in default
with regard to the payments due thereunder or (B) delinquent payments of
principal and
S-56
<PAGE>
interest under the related Mortgage Loan and any premiums on any applicable
Standard Hazard Insurance Policy and any related escrow payments in respect of
such Mortgage Loan are being advanced on a current basis by such Servicer, in
either case without giving effect to any Debt Service Reduction.
Since the aggregate initial principal balance of the Class M and Class B
Certificates will be approximately $ , the risk of Special Hazard Losses,
Fraud Losses and Bankruptcy Losses will be separately borne by the Class B
Certificates and, after the principal balance of the Class B Certificates has
been reduced to zero, by the Class M Certificates to a lesser extent (I.E.,
only up to the Special Hazard Loss Amount, Fraud Loss Amount and Bankruptcy
Loss Amount, respectively) than the risk of other Realized Losses, which will
be allocated first to the Class B Certificates and then to the Class M
Certificates to the full extent of their initial principal balances. See "The
Trust Estates--Mortgage Loans--Representations and Warranties" and "--
Insurance Policies," "Certain Legal Aspects of the Mortgage Loans--
Environmental Considerations" and "Servicing of the Mortgage Loans--
Enforcement of Due-on-Sale Clauses; Realization Upon Defaulted Mortgage Loans"
in the Prospectus.
DESCRIPTION OF THE MORTGAGE LOANS(/1/)
MORTGAGE LOAN CHARACTERISTICS
The Mortgage Loans to be included in the Trust Estate will be fixed interest
rate, conventional, monthly pay, fully amortizing, one- to four-family,
residential first mortgage loans having original terms to stated maturity
ranging from approximately to approximately years, which may include loans
secured by shares ("Co-op Shares") issued by private non-profit housing
corporations ("Cooperatives"), and the related proprietary leases or occupancy
agreements granting exclusive rights to occupy specified units in such
Cooperatives' buildings. The Mortgage Loans are expected to include promissory
notes, to have an aggregate unpaid principal balance as of the Cut-Off Date
(the "Cut-Off Date Aggregate Principal Balance") of approximately $ to be
secured by first liens (the "Mortgages") on one- to four-family residential
properties (the "Mortgaged Properties") and to have the additional
characteristics described below and in the Prospectus.
As of the Cut-Off Date, it is expected that of the Mortgage Loans in the
Trust Estate, representing approximately % of the Cut-Off Date Aggregate
Principal Balance of the Mortgage Loans will be secured by Co-op Shares.
Mortgage Loan is a Buy-Down Loan. See "The Trust Estates--Mortgage Loans" in
the Prospectus.
- ---------------------
(1) The descriptions in this Prospectus Supplement of the Trust Estate and the
properties securing the Mortgage Loans to be included in the Trust Estate
are based upon the expected characteristics of the Mortgage Loans at the
close of business on the Cut-Off Date, as adjusted for the scheduled
principal payments due on or before such date. Notwithstanding the
foregoing, any of such Mortgage Loans may be excluded from the Trust
Estate (i) as a result of principal prepayment thereof in full or (ii) if,
as a result of delinquencies or otherwise, the Seller otherwise deems such
exclusion necessary or desirable. In either event, other Mortgage Loans
may be included in the Trust Estate. The Seller believes that the
information set forth herein with respect to the expected characteristics
of the Mortgage Loans on the Cut-Off Date is representative of the
characteristics as of the Cut-Off Date of the Mortgage Loans to be
included in the Trust Estate as it will be constituted at the time the
Series 199 - Certificates are issued, although the Cut-Off Date Aggregate
Principal Balance, the range of Mortgage Interest Rates and maturities,
and certain other characteristics of the Mortgage Loans in the Trust
Estate may vary. In the event that any of the characteristics as of the
Cut-Off Date of the Mortgage Loans that constitute the Trust Estate on the
date of initial issuance of the Series 199 - Certificates vary materially
from those described herein, revised information regarding the Mortgage
Loans will be made available to purchasers of the Offered Certificates, on
or before such issuance date, and a Current Report on Form 8-K containing
such information will be filed with the Securities and Exchange Commission
within 15 days following such date.
S-57
<PAGE>
It is expected that Mortgage Loans, representing approximately % of the
Cut-Off Date Aggregate Principal Balance of the Mortgage Loans, will be
Subsidy Loans. See "The Trust Estates--Mortgage Loans" and "The Mortgage Loan
Programs--Mortgage Loan Underwriting" in the Prospectus.
It is expected that of the Mortgage Loans, representing approximately %
of the Cut-Off Date Aggregate Principal Balance of the Mortgage Loans, will be
Mortgage Loans originated in connection with the relocation of employees of
various corporate employers which participated in Norwest Mortgage's
relocation program and of various nonparticipant employers ("Relocation
Mortgage Loans"). See "The Mortgage Loan Programs--Mortgage Loan Production
Sources" in the Prospectus.
Each of the Mortgage Loans is subject to a due-on-sale clause. See "Certain
Legal Aspects of the Mortgage Loans--Due-on-Sale Clauses" and "Servicing of
the Mortgage Loans--Enforcement of Due-on-Sale Clauses; Realization Upon
Defaulted Mortgage Loans" in the Prospectus.
As of the Cut-Off Date, each Mortgage Loan is expected to have an unpaid
principal balance of not less than approximately $ or more than
approximately $ , and the average unpaid principal balance of the Mortgage
Loans is expected to be approximately $ . The latest stated maturity date of
any of the Mortgage Loans is expected to be ; however, the actual date on
which any Mortgage Loan is paid in full may be earlier than the stated
maturity date due to unscheduled payments of principal. Based on information
supplied by the mortgagors in connection with their loan applications at
origination, of the Mortgaged Properties, which secure approximately % of
the Cut-Off Date Aggregate Principal Balance of the Mortgage Loans, are
expected to be owner occupied primary residences, of the Mortgaged
Properties, which secure approximately % of the Cut-Off Date Aggregate
Principal Balance of the Mortgage Loans, are expected to be second homes and
of the Mortgaged Properties, which secures approximately % of the Cut-Off
Date Aggregate Principal Balance of the Mortgage Loans, is expected to be an
investor property. See "The Mortgage Loan Programs--Mortgage Loan
Underwriting" in the Prospectus.
As of the Cut-Off Date, there were Discount Mortgage Loans having an
aggregate unpaid principal balance of approximately $ , a range of unpaid
principal balances of approximately $ to approximately $ , an average
unpaid principal balance of approximately $ , a range of Mortgage Interest
Rates from % to % per annum, a weighted average Mortgage Interest Rate of
approximately % per annum, a range of remaining terms to stated maturity of
months to months, a weighted average remaining term to stated maturity of
approximately months, a range of original Loan-to-Value Ratios of % to %,
a weighted average original Loan-to-Value Ratio of approximately % and the
following geographic concentration of Mortgaged Properties securing Mortgage
Loans in excess of 5.00% of the aggregate unpaid principal balance of the
Discount Mortgage Loans: approximately % in [STATES].
As of the Cut-Off Date, there were Mortgage Loans that were not Discount
Mortgage Loans (the "Premium Mortgage Loans") having an aggregate unpaid
principal balance of approximately $ , a range of unpaid principal balances
of approximately $ to approximately $ , an average unpaid principal
balance of approximately $ , a range of Mortgage Interest Rates from % to
% per annum, a weighted average Mortgage Interest Rate of approximately %
per annum, a range of remaining terms to stated maturity of months to
months, a weighted average remaining term to stated maturity of approximately
months, a range of original Loan-to-Value Ratios of % to %, a weighted
average original Loan-to-Value Ratio of approximately % and the following
geographic concentration of Mortgaged Properties securing Mortgage Loans in
excess of 5.00% of the aggregate unpaid principal balance of the Mortgage
Loans other than Discount Mortgage Loans: approximately % in [STATES].
MORTGAGE LOAN ORIGINATION AND UNDERWRITING
The Mortgage Loans will have been acquired by the Seller from Norwest
Mortgage. The Mortgage Loans included in the Trust Estate consist of Mortgage
Loans originated by Norwest Mortgage or an affiliate or
S-58
<PAGE>
purchased by Norwest Mortgage or an affiliate from various originators. See
"Norwest Mortgage" in the Prospectus. The Mortgage Loans that were not
originated by Norwest Mortgage were acquired by Norwest Mortgage or an
affiliate from various entities (each, a "Norwest Mortgage Correspondent")
which either originated the Mortgage Loans or acquired the Mortgage Loans
pursuant to mortgage loan purchase programs operated by such Norwest Mortgage
Correspondents. Approximately % (by Cut-Off Date Aggregate Principal Balance)
of the Mortgage Loans were originated in conformity with Norwest Mortgage's
general underwriting standards (the "General Standards") or modified
underwriting standards (the "Modified Standards" and together with the General
Standards, the "Underwriting Standards") described in the Prospectus under the
heading "The Mortgage Loan Programs--Mortgage Loan Underwriting--General
Standards" and "--Modified Standards" and as applied by Norwest Mortgage, or
by eligible originators to whom Norwest Mortgage had delegated all
underwriting functions. In certain instances, exceptions to the Underwriting
Standards may have been granted by Norwest Mortgage. Approximately % (by Cut-
Off Date Aggregate Principal Balance) of the Mortgage Loans (the "Pool
Certification Underwritten Loans") will have been reviewed by UGRIC to ensure
compliance with such company's credit, appraisal and underwriting standards.
Neither the Series 199--Certificates nor any of the Mortgage Loans are insured
or guaranteed under a mortgage pool insurance policy issued by UGRIC. The Pool
Certification Underwritten Loans were evaluated using credit scoring as
described in the Prospectus under "The Mortgage Loan Programs--Mortgage Loan
Underwriting" and, based on the credit scores of such Mortgage Loans, some of
such Mortgage Loans were re-underwritten. Approximately % (by Cut-Off Date
Aggregate Principal Balance) of the Mortgage Loans were originated by Norwest
Mortgage Correspondents who were permitted to use their own underwriting
criteria based on a review of such criteria by Norwest Mortgage
("Institutional Conduit Correspondents"), and the underwriting policies of
these Institutional Conduit Correspondents may vary from the Underwriting
Standards or the standards of a pool insurer. The remaining approximate % (by
Cut-Off Date Aggregate Principal Balance) of the Mortgage Loans (the "Bulk
Purchase Underwritten Loans") will have been underwritten in connection with
bulk purchase transactions under underwriting standards which may vary from
the Underwriting Standards or the standards of a pool insurer. Norwest
Mortgage will have reviewed the underwriting standards applied by
Institutional Conduit Correspondents or by the originators in connection with
Bulk Purchase Underwritten Loans and will have determined that such standards
did not depart materially from the Underwriting Standards [,except as
described in the following paragraph]. Neither the Seller nor Norwest Mortgage
has underwritten any of the Mortgage Loans underwritten by Institutional
Conduit Correspondents or any of the Bulk Purchase Underwritten Loans.
[Describe material underwriting standards variances, if any, or basis for
permitting loans with underwriting standard variances].
S-59
<PAGE>
MORTGAGE LOAN DATA
Set forth below is a description of certain additional expected
characteristics of the Mortgage Loans as of the Cut-Off Date (except as
otherwise indicated).
MORTGAGE INTEREST RATES
<TABLE>
<CAPTION>
PERCENTAGE OF
AGGREGATE CUT-OFF DATE
MORTGAGE NUMBER UNPAID AGGREGATE
INTEREST OF MORTGAGE PRINCIPAL PRINCIPAL
RATE LOANS BALANCE BALANCE
- -------- ----------- --------- -------------
<S> <C> <C> <C>
</TABLE>
As of the Cut-Off Date, the weighted average Mortgage Interest Rate of the
Mortgage Loans is expected to be approximately % per annum. The Net Mortgage
Interest Rate of each Mortgage Loan will be equal to the Mortgage Interest
Rate of such Mortgage Loan minus the sum of (a) the applicable Servicing Fee
Rate, (b) the Master Servicing Fee Rate and (c) the Fixed Retained Field, if
any, for such Mortgage Loan. As of the Cut-Off Date, the weighted average Net
Mortgage Interest Rate of the Mortgage Loans is expected to be approximately
% per annum.
REMAINING TERMS TO STATED MATURITY
<TABLE>
<CAPTION>
PERCENTAGE OF
REMAINING AGGREGATE CUT-OFF DATE
STATED NUMBER UNPAID AGGREGATE
TERM OF MORTGAGE PRINCIPAL PRINCIPAL
(MONTHS) LOANS BALANCE BALANCE
- --------- ----------- --------- -------------
<S> <C> <C> <C>
</TABLE>
As of the Cut-Off Date, the weighted average remaining term to stated
maturity of the Mortgage Loans is expected to be approximately months.
YEARS OF ORIGINATION
<TABLE>
<CAPTION>
PERCENTAGE OF
AGGREGATE CUT-OFF DATE
NUMBER UNPAID AGGREGATE
YEAR OF OF MORTGAGE PRINCIPAL PRINCIPAL
ORIGINATION LOANS BALANCE BALANCE
- ----------- ----------- --------- -------------
<S> <C> <C> <C>
</TABLE>
It is expected that the earliest month and year of origination of any
Mortgage Loan was 199 and the latest month and year of origination was
.
ORIGINAL LOAN-TO-VALUE RATIOS
<TABLE>
<CAPTION>
PERCENTAGE OF
AGGREGATE CUT-OFF DATE
ORIGINAL NUMBER UNPAID AGGREGATE
LOAN-TO-VALUE OF MORTGAGE PRINCIPAL PRINCIPAL
RATIO LOANS BALANCE BALANCE
- ------------- ----------- --------- -------------
<S> <C> <C> <C>
</TABLE>
As of the Cut-Off Date, the minimum and maximum Loan-to-Value Ratios at
origination of the Mortgage Loans are expected to be % and %, respectively,
and the weighted average Loan-to-Value Ratio at origination of the Mortgage
Loans is expected to be approximately %. The Loan-to-Value Ratio of a
Mortgage Loan is calculated using the lesser of (i) the appraised value of the
related Mortgaged Property, as established by an appraisal obtained by the
originator from an appraiser at the time of origination and (ii) the sale
price for such property. See "The Trust Estates--Mortgage Loans" in the
Prospectus. No assurance can be given that the values of the Mortgaged
Properties securing the Mortgage Loans have remained or will remain at the
levels used in calculating the Loan-to-Value Ratios shown above. See "Risk
Factors--Risks of the Mortgage Loans" in the Prospectus. It is expected that
of the Mortgage Loans having Loan-to-Value Ratios at origination in excess of
80%, representing approximately % (by Cut-Off Date Aggregate Principal
Balance) of the Mortgage Loans, were originated without primary mortgage
insurance.
MORTGAGE LOAN DOCUMENTATION LEVELS
<TABLE>
<CAPTION>
PERCENTAGE OF
AGGREGATE CUT-OFF DATE
NUMBER UNPAID AGGREGATE
DOCUMENTATION OF MORTGAGE PRINCIPAL PRINCIPAL
LEVEL LOANS BALANCE BALANCE
- ------------- ----------- --------- -------------
<S> <C> <C> <C>
</TABLE>
Documentation levels vary depending upon several factors, including loan
amount, Loan-to-Value Ratio and the type and purpose of the Mortgage Loan.
Asset, income and mortgage verifications were obtained for Mortgage Loans
processed with "full documentation." In the case of "preferred processing,"
neither asset, income nor mortgage verifications were obtained. In most
instances, a verification of the borrower's employment was obtained. However,
for all of the Mortgage Loans, a credit report on the borrower and a property
appraisal were obtained. See "The Mortgage Loan Programs--Mortgage Loan
Underwriting" in the Prospectus.
S-60
<PAGE>
ORIGINAL MORTGAGE LOAN PRINCIPAL BALANCES
<TABLE>
<CAPTION>
ORIGINAL PERCENTAGE OF
MORTGAGE AGGREGATE CUT-OFF DATE
LOAN NUMBER UNPAID AGGREGATE
PRINCIPAL OF MORTGAGE PRINCIPAL PRINCIPAL
BALANCE LOANS BALANCE BALANCE
- --------- ----------- --------- -------------
<S> <C> <C> <C>
</TABLE>
As of the Cut-Off Date, the average unpaid principal balance of the Mortgage
Loans is expected to be approximately $ . As of the Cut-Off Date, the
weighted average Loan-to-Value Ratio at origination and the maximum Loan-to-
Value Ratio at origination of the Mortgage Loans which had original principal
balances in excess of $600,000 are expected to be approximately % and %,
respectively. See "The Trust Estates--Mortgage Loans" in the Prospectus.
MORTGAGED PROPERTIES
<TABLE>
<CAPTION>
PERCENTAGE OF
AGGREGATE CUT-OFF DATE
NUMBER UNPAID AGGREGATE
OF MORTGAGE PRINCIPAL PRINCIPAL
PROPERTY LOANS BALANCE BALANCE
- -------- ----------- --------- -------------
<S> <C> <C> <C>
</TABLE>
GEOGRAPHIC DISTRIBUTION OF MORTGAGED PROPERTIES
<TABLE>
<CAPTION>
PERCENTAGE OF
AGGREGATE CUT-OFF DATE
NUMBER UNPAID AGGREGATE
GEOGRAPHIC OF MORTGAGE PRINCIPAL PRINCIPAL
AREA LOANS BALANCE BALANCE
- ---------- ----------- --------- -------------
<S> <C> <C> <C>
</TABLE>
No more than approximately % of the Cut-Off Date Aggregate Principal
Balance of the Mortgage Loans is expected to be secured by Mortgaged
Properties located in any one five-digit zip code.
ORIGINATORS OF MORTGAGE LOANS
<TABLE>
<CAPTION>
PERCENTAGE OF
AGGREGATE CUT-OFF DATE
NUMBER UNPAID AGGREGATE
OF MORTGAGE PRINCIPAL PRINCIPAL
ORIGINATOR LOANS BALANCE BALANCE
- ---------- ----------- --------- -------------
<S> <C> <C> <C>
</TABLE>
It is expected that, as of the Mortgage Loan Cut-off Date, of the "Other
Originators" will have accounted for approximately %, % and %,
respectively, of the Cut-Off Date Aggregate Principal Balance. No other single
"Other Originator" is expected to have accounted for more than 5.00% of the
Cut-Off Date Aggregate Principal Balance.
PURPOSES OF MORTGAGE LOANS
<TABLE>
<CAPTION>
PERCENTAGE OF
AGGREGATE CUT-OFF DATE
NUMBER UNPAID AGGREGATE
LOAN OF MORTGAGE PRINCIPAL PRINCIPAL
PURPOSE LOANS BALANCE BALANCE
- ------- ----------- --------- -------------
<S> <C> <C> <C>
</TABLE>
In general, in the case of a Mortgage Loan made for "rate/term" refinance
purposes, substantially all of the proceeds are used to pay in full the
principal balance of a previous mortgage loan of the mortgagor with respect to
a Mortgaged Property and to pay origination and closing costs associated with
such refinancing. However, in the case of a Mortgage Loan made for "equity
take out" refinance purposes, all or a portion of the proceeds are generally
retained by the mortgagor for uses unrelated to the Mortgaged Property. The
amount of such proceeds retained by the mortgagor may be substantial. See "The
Trust Estates--Mortgage Loans" and "The Mortgage Loan Programs--Mortgage Loan
Underwriting" in the Prospectus.
S-61
<PAGE>
FICO SCORES
<TABLE>
<CAPTION>
PERCENTAGE OF
AGGREGATE CUT-OFF DATE
RANGE OF UNPAID AGGREGATE
FICO NUMBER OF PRINCIPAL PRINCIPAL
SCORES MORTGAGE LOANS BALANCE BALANCE
- -------- -------------- --------- -------------
<S> <C> <C> <C>
</TABLE>
"FICO Scores" are statistical credit scores obtained by many mortgage lenders in
connection with the loan application to help assess a borrow-er's credit
worthiness. FICO Scores are generated by models developed by a third party and
are made available to lenders through three national credit bureaus. The models
were de-rived by analyzing data on consumers in order to establish patterns
which are believed to be indicative of the borrower's probability of default.
The FICO Score is based on a borrow-er's historical credit data, includ-ing,
among other things, payment history, delinquencies on accounts, levels of
outstanding indebtedness, length of credit history, types of credit, and
bankruptcy experience. FICO Scores range from approximately 250 to approximately
900, with higher scores indicating an individ-ual with a more favorable credit
history compared to an individual with a lower score. However, a FICO Score
purports only to be a measure-ment of the relative degree of risk a borrower
represents to a lender, i.e., that a borrower with a higher score is
statistically expected to be less likely to default in payment than a borrower
with a lower score. In addition, it should be noted that FICO Scores were
developed to indi-cate a level of default probability over a two-year period,
which does not correspond to the life of a mortgage loan. Furthermore, FICO
Scores were not developed specifi-cally for use in connection with mortgage
loans, but for consumer loans in general. Therefore, a FICO Score does not take
into considera-tion the effect of mortgage loan characteristics on the
probability of repayment by the borrower. The FICO Scores set forth in the table
above were obtained at either the time of origination of the Mortgage Loan or
more recently. Neither the Seller nor Norwest Mortgage make any representations
or warranties as to the actual performance of any Mort-gage Loan or that a
particular FICO Score should be relied upon as a ba-sis for an expectation that
the bor-rower will repay the mortgage loan according to its terms. See "The
Mortgage Loan Programs--The Mortgage Loan Understanding" in the Prospec-tus.
MANDATORY REPURCHASE OR SUBSTITUTION OF MORTGAGE LOANS
The Seller is required, with respect to Mortgage Loans that are found by the
Trustee to have defective documentation, or in respect of which the Seller has
breached a representation or warranty, either to repurchase such Mortgage
Loans or, if within two years of the date of initial issuance of the Series
199 - Certificates, to substitute new Mortgage Loans therefor. Any Mortgage
Loan so substituted must, among other things, have an unpaid principal balance
equal to or less than the Scheduled Principal Balance of the Mortgage Loan for
which it is being substituted (after giving effect to the scheduled principal
payment due in the month of substitution on the Mortgage Loan for which a new
Mortgage Loan is being substituted), a Loan-to-Value Ratio less than or equal
to, and a Mortgage Interest Rate equal to that of the Mortgage Loan for which
it is being substituted. See "Prepayment and Yield Considerations" herein and
"The Pooling and Servicing Agreement--Assignment of Mortgage Loans to the
Trustee" in the Prospectus.
OPTIONAL REPURCHASE OF DEFAULTED MORTGAGE LOANS
Subject to certain limitations, the Seller may, in its sole discretion,
repurchase any defaulted Mortgage Loan, or any Mortgage Loan as to which
default is reasonably foreseeable, from the Trust Estate at a price equal to
the unpaid principal balance of such Mortgage Loan, together with accrued
interest at a rate equal to the Mortgage Interest Rate through the last day of
the month in which such repurchase occurs. See "The Pooling and Servicing
Agreement--Optional Purchases" in the Prospectus. A Servicer may, in its sole
discretion, allow the assumption of a defaulted Mortgage Loan serviced by such
Servicer, subject to certain conditions specified in the applicable Underlying
Servicing Agreement, or encourage the refinancing of a defaulted Mortgage
Loan. See "Prepayment and Yield Considerations" herein and "Servicing of the
Mortgage Loans--Enforcement of Due-on-Sale Clauses; Realization Upon Defaulted
Mortgage Loans" in the Prospectus.
PREPAYMENT AND YIELD CONSIDERATIONS
The rate of distributions in reduction of the principal balance of any
Subclass or Class of the Offered Certificates, the aggregate amount of
distributions on any Subclass or Class of the Offered Certificates and the
yield to maturity of any Subclass or Class of the Offered Certificates
purchased at a discount or premium will be directly related to the rate of
payments of principal on the Mortgage Loans in the Trust Estate and the amount
and timing of mortgagor defaults resulting in Realized Losses. The rate of
principal payments on the Mortgage Loans will in turn be affected by the
amortization schedules of the Mortgage Loans, the rate of principal
prepayments (including partial prepayments and those resulting from
refinancing) thereon by mortgagors, liquidations of defaulted Mortgage Loans,
repurchases by the Seller of Mortgage Loans as a result of defective
documentation or breaches of representations and warranties and optional
purchases by the Seller of all of the Mortgage Loans in connection with the
termination of the Trust Estate. See "Description of the Mortgage
S-62
<PAGE>
Loans--Mandatory Repurchase or Substitution of Mortgage Loans" and "Pooling
and Servicing Agreement--Optional Termination" herein and "The Pooling and
Servicing Agreement--Assignment of Mortgage Loans to the Trustee," "--Optional
Purchases" and "--Termination; Purchase of Mortgage Loans" in the Prospectus.
Mortgagors are permitted to prepay the Mortgage Loans, in whole or in part, at
any time without penalty. As described under "Description of the
Certificates--Principal (Including Prepayments)" herein, all or a
disproportionate percentage of principal prepayments on the Mortgage Loans
(including liquidations and repurchases of Mortgage Loans) will be
distributed, to the extent of the Non-PO Fraction, to the holders of the Class
A Certificates (other than the Class A-PO Certificates) then entitled to
distributions in respect of principal during the nine years beginning on the
first Distribution Date, and, to the extent that such principal prepayments
are made in respect of a Discount Mortgage Loan, to the Class A-PO
Certificates in proportion to the interest of the Class A-PO Certificates in
such Discount Mortgage Loan represented by the PO Fraction. As a result of the
method of calculating the Class A-10 Priority Amount and the priorities for
the allocation of the Class A Non-PO Principal Distribution Amount, it is
expected that, absent an exceptionally high rate of principal prepayments on
the Mortgage Loans, no principal prepayments will be allocated to the Class A-
10 Certificates during the first five years following the issuance of the
Series 199 - Certificates and that, while the percentage of principal
prepayments allocated to the Class A-10 Certificates during the four years
thereafter will gradually increase, such percentage, until the tenth year
following the issuance of the Series 199--Certificates, will be
disproportionately lower than the percentage of such principal prepayments
allocated to the other Class A Certificates (other than the Class A-PO
Certificates). See "Description of the Certificates--Principal (Including
Prepayments)--Allocation of Amount to be Distributed." Prepayments (which, as
used herein, include all unscheduled payments of principal, including payments
as the result of liquidations, purchases and repurchases) of the Mortgage
Loans in the Trust Estate will result in distributions to Certificateholders
then entitled to distributions in respect of principal of amounts which would
otherwise be distributed over the remaining terms of such Mortgage Loans.
Since the rate of prepayment on the Mortgage Loans will depend on future
events and a variety of factors (as described more fully below and in the
Prospectus under "Prepayment and Yield"), no assurance can be given as to such
rate or the rate of principal payments on any Subclass or Class of the Offered
Certificates or the aggregate amount of distributions on any Subclass or Class
of the Offered Certificates.
The rate of payments (including prepayments) on pools of mortgage loans is
influenced by a variety of economic, geographic, social and other factors. If
prevailing rates for similar mortgage loans fall below the Mortgage Interest
Rates on the Mortgage Loans, the rate of prepayment would generally be
expected to increase. Conversely, if interest rates on similar mortgage loans
rise above the Mortgage Interest Rates on the Mortgage Loans, the rate of
prepayment would generally be expected to decrease. The rate of prepayment on
the Mortgage Loans may also be influenced by programs offered by mortgage loan
originators (including Norwest Mortgage), servicers (including Norwest
Mortgage) and mortgage loan brokers to encourage refinancing through such
originators, servicers and brokers, including, but not limited to, general or
targeted solicitations (which may be based on characteristics including, but
not limited to, the mortgage loan interest rate or payment history and the
geographic location of the Mortgaged Property), reduced origination fees or
closing costs, pre-approved applications, waiver of pre-closing interest
accrued with respect to a refinanced loan prior to the pay-off of such loan,
or other financial incentives. See "Prepayment and Yield Considerations--
Weighted Average Life of Certificates" in the Prospectus. In addition, Norwest
Mortgage or third parties may enter into agreements with borrowers providing
for the bi-weekly payment of principal and interest on the related mortgage
loan, thereby accelerating payment of the mortgage loan resulting in partial
prepayments.
The rate of defaults on the Mortgage Loans will also affect the rate and
timing of principal payments on the Mortgage Loans. In general, defaults on
mortgage loans are expected to occur with greater frequency in their early
years. The rate of default on Mortgage Loans that are secured by non-owner
occupied properties. Mortgage Loans with higher Loan-to-Value Ratios and
Mortgage Loans made to borrowers with higher debt-to-income ratios or
borrowers approved under a "No Ratio" program may be higher than for other
types of Mortgage Loans. As a result of Mortgage Loans being originated using
underwriting standards that, in certain respects, may be less stringent than
the General Standards applied by Norwest Mortgage, the Mortgage Loans may
experience rates of delinquency, foreclosure, bankruptcy and loss that are
higher than those experienced by mortgage loans that satisfy the General
Standards applied by Norwest Mortgage.
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<PAGE>
Norwest Mortgage has not had sufficient experience servicing mortgage loans
underwritten by it in accordance with the Modified Standards to provide
meaningful disclosure of its delinquency and loss experience with respect to
such mortgage loans.
Other factors affecting prepayment of mortgage loans include changes in
mortgagors' housing needs, job transfers, unemployment or, in the case of
self-employed mortgagors or mortgagors relying on commission income,
substantial fluctuations in income, significant declines in real estate values
and adverse economic conditions either generally or in particular geographic
areas, mortgagors' equity in the Mortgaged Properties, including the use of
second or "home equity" mortgage loans by mortgagors or the use of the
properties as second or vacation homes, and servicing decisions. In addition,
all of the Mortgage Loans contain due-on-sale clauses which will generally be
exercised upon the sale of the related Mortgaged Properties. Consequently,
acceleration of mortgage payments as a result of any such sale will affect the
level of prepayments on the Mortgage Loans. The extent to which defaulted
Mortgage Loans are assumed by transferees of the related Mortgaged Properties
will also affect the rate of principal payments. The rate of prepayment and,
therefore, the yield to maturity of the Offered Certificates will be affected
by the extent to which (i) the Seller elects to repurchase, rather than
substitute for, Mortgage Loans which are found by the Trustee to have
defective documentation or with respect to which the Seller has breached a
representation or warranty or (ii) a Servicer elects to encourage the
refinancing of any defaulted Mortgage Loan rather than to permit an assumption
thereof by a mortgagor. See "Servicing of the Mortgage Loans--Enforcement of
Due-on-Sale Clauses; Realization Upon Defaulted Mortgage Loans" in the
Prospectus. There can be no certainty as to the rate of prepayments on the
Mortgage Loans during any period or over the life of the Series 199--
Certificates. See "Prepayment and Yield Considerations" in the Prospectus.
THE YIELD TO MATURITY OF THE OFFERED CERTIFICATES WILL BE SENSITIVE IN
VARYING DEGREES TO THE RATE AND TIMING OF PRINCIPAL PAYMENTS (INCLUDING
PREPAYMENTS, WHICH MAY BE MADE AT ANY TIME WITHOUT PENALTY) ON THE MORTGAGE
LOANS. INVESTORS IN THE OFFERED CERTIFICATES SHOULD CONSIDER THE ASSOCIATED
RISKS, INCLUDING, IN THE CASE OF OFFERED CERTIFICATES PURCHASED AT A DISCOUNT,
PARTICULARLY THE CLASS A-PO CERTIFICATES, THE RISK THAT A SLOWER THAN
ANTICIPATED RATE OF PAYMENTS IN RESPECT OF PRINCIPAL (INCLUDING PREPAYMENTS)
ON THE MORTGAGE LOANS OR, IN THE CASE OF THE CLASS A-PO CERTIFICATES, ON THE
DISCOUNT MORTGAGE LOANS, COULD RESULT IN AN ACTUAL YIELD THAT IS LOWER THAN
ANTICIPATED. A FASTER THAN ANTICIPATED RATE OF PAYMENTS IN RESPECT OF
PRINCIPAL (INCLUDING PREPAYMENTS) ON THE MORTGAGE LOANS COULD RESULT IN AN
ACTUAL YIELD THAT IS LOWER THAN ANTICIPATED FOR INVESTORS PURCHASING OFFERED
CERTIFICATES AT A PREMIUM. INVESTORS PURCHASING OFFERED CERTIFICATES AT A
PREMIUM SHOULD ALSO CONSIDER THE RISK THAT A RAPID RATE OF PAYMENTS IN RESPECT
OF PRINCIPAL (INCLUDING PREPAYMENTS) ON THE MORTGAGE LOANS COULD RESULT IN THE
FAILURE OF SUCH INVESTORS TO FULLY RECOVER THEIR INITIAL INVESTMENTS. THE
YIELD ON THE CLASS A-PO CERTIFICATES WILL BE INFLUENCED BY PRINCIPAL PAYMENTS
SOLELY WITH RESPECT TO DISCOUNT MORTGAGE LOANS.
The timing of changes in the rate of prepayment on the Mortgage Loans may
significantly affect the actual yield to maturity experienced by an investor
who purchases an Offered Certificate at a price other than par, even if the
average rate of principal payments experienced over time is consistent with
such investor's expectation. In general, the earlier a prepayment of principal
on the underlying Mortgage Loans, the greater the effect on such investor's
yield to maturity. As a result, the effect on such investor's yield of
principal payments occurring at a rate higher (or lower) than the rate
anticipated by the investor during the period immediately following the
issuance of the Offered Certificates would not be fully offset by a subsequent
like reduction (or increase) in the rate of principal payments.
The yield to maturity on the Class M Certificates will be more sensitive
than the yield to maturity on the Class A Certificates to losses due to
defaults on the Mortgage Loans (and the timing thereof), to the extent not
covered by the Class B Certificates, because the entire amount of such losses
will be allocable to the Class M Certificates prior to the Class A
Certificates, except as otherwise provided herein under "Description of the
Certificates--Subordination of Class M and Class B Certificates." To the
extent not covered by Periodic Advances, delinquencies on Mortgage Loans may
also have a relatively greater effect on the yield to investors in the Class M
Certificates. Amounts otherwise distributable to holders of the Class M
Certificates will be made available to protect the holders of the Class A
Certificates against interruptions in distributions due to certain mortgagor
delinquencies. Such delinquencies, to the extent not covered by the Class B
Certificates, even if
S-64
<PAGE>
subsequently cured, may affect the timing of the receipt of distributions by
the holders of Class M Certificates, because the entire amount of those
delinquencies would be borne by the Class M Certificates prior to the Class A
Certificates.
The yield to maturity on the Subclasses of Class B Certificates with higher
numerical designations will generally be more sensitive to losses than the
Subclasses with lower numerical designations, and the yield to maturity on the
Class B Certificates in the aggregate will generally be more sensitive to
losses than the other Classes of the Series 199--Certificates, because the
entire amount of such losses (except for the portion of Excess Special Hazard
Losses, Excess Fraud Losses and Excess Bankruptcy Losses allocated to the
Class A Certificates, Class M Certificates and Subclasses of Class B
Certificates with lower numerical designations) will be allocable to the
Subclasses of Class B Certificates in reverse numerical order, except as
provided herein under "Description of the Certificates--Subordination of Class
M and Class B Certificates." To the extent not covered by Periodic Advances,
delinquencies on Mortgage Loans will also have a relatively greater effect (i)
on the yield to maturity on the Subclasses of Class B Certificates with higher
numerical designations and (ii) on the yield to maturity on the Class B
Certificates in the aggregate than on the Class A Certificates and Class M
Certificates. Amounts otherwise distributable to holders of the Class B
Certificates will be made available to protect the holders of the Class A and
Class M Certificates against interruptions in distributions due to certain
mortgagor delinquencies. Such delinquencies, even if subsequently cured, may
affect the timing of the receipt of distributions by the holders of the Class
B Certificates.
The actual yield to maturity experienced by an investor may also be affected
by the occurrence of interest shortfalls resulting from Unscheduled Principal
Receipts to the extent, if any, to which such interest shortfalls are not
covered by Compensating Interest or the subordination of, (i) in the case of
the Class A Certificates (other than the Class A-PO Certificates), the Class M
and Class B Certificates, (ii) in the case of the Class M Certificates, the
Class B Certificates and (iii) in the case of a Subclass of Class B
Certificates, the Subclass or Subclasses of Class B Certificates with higher
numerical designations. See "Description of the Certificates--Interest" and
"Servicing of the Mortgage Loans--Anticipated Changes in Servicing."
The yield to maturity on the Offered Certificates and more particularly on
the Class M Certificates and the Offered Class B Certificates, especially the
Class B-2 Certificates, may be affected by the geographic concentration of the
Mortgaged Properties securing the Mortgage Loans, and the yield to maturity on
the Class A-PO Certificates may be particularly affected by the geographic
concentration of the Mortgaged Properties securing the Discount Mortgage
Loans. In recent periods, California and several other regions in the United
States have experienced significant declines in housing prices. In addition,
California and several other regions have experienced natural disasters,
including earthquakes, floods and hurricanes, which may adversely affect
property values. Any deterioration in housing prices in California, as well as
the other states in which the Mortgaged Properties are located, and any
deterioration of economic conditions in such states which adversely affects
the ability of borrowers to make payments on the Mortgage Loans, may increase
the likelihood of losses on the Mortgage Loans. Such losses, if they occur,
may have an adverse effect on the yield to maturity of the Offered
Certificates and more particularly on the Class M Certificates and the Offered
Class B Certificates, especially the Class B-2 Certificates.
No representation is made as to the rate of principal payments on the
Mortgage Loans or as to the yield to maturity of any Subclass or Class of
Offered Certificates. An investor is urged to make an investment decision with
respect to any Subclass or Class of Offered Certificates based on the
anticipated yield to maturity of such Subclass or Class of Offered
Certificates resulting from its purchase price and such investor's own
determination as to anticipated Mortgage Loan prepayment rates under a variety
of scenarios. The extent to which any Subclass or Class of Offered
Certificates is purchased at a discount or a premium and the degree to which
such Subclass or Class is sensitive to the timing of prepayments will
determine the extent to which the yield to maturity of such Subclass or Class
may vary from the anticipated yield. An investor should carefully consider the
associated risks, including, in the case of any Subclass or Class of Offered
Certificates purchased at a discount, particularly the Class A-PO
Certificates, the risk that a slower than anticipated rate of principal
payments on the Mortgage Loans or, in the case of the Class A-PO Certificates,
on the Discount Mortgage Loans, could result in an actual yield to such
investor that is lower than the anticipated yield and, in the case of any
Subclass or Class of Offered
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<PAGE>
Certificates purchased at a premium the risk that a faster than anticipated
rate of principal payments could result in an actual yield to such investor
that is lower than the anticipated yield.
An investor should consider the risk that rapid rates of prepayments on the
Mortgage Loans, and therefore of amounts distributable in reduction of
principal balance of the Offered Certificates, may coincide with periods of
low prevailing interest rates. During such periods, the effective interest
rates on securities in which an investor may choose to reinvest amounts
distributed in reduction of the principal balance of such investor's Offered
Certificate may be lower than the applicable Pass-Through Rate or, in the case
of the Class A-PO Certificates, the anticipated yield thereon. Conversely,
slower rates of prepayments on the Mortgage Loans, and therefore of amounts
distributable in reduction of principal balance of the Offered Certificates,
may coincide with periods of high prevailing interest rates. During such
periods, the amount of principal distributions available to an investor for
reinvestment at such high prevailing interest rates may be relatively small.
As indicated under "Material Federal Income Tax Consequences" herein, the
Class A-R Certificateholder's REMIC taxable income and the tax liability
thereon may exceed, and may substantially exceed, cash distributions to such
holder during certain periods. There can be no assurance as to the amount by
which such taxable income or such tax liability will exceed cash distributions
in respect of the Class A-R Certificate during any such period and no
representation is made with respect thereto under any principal prepayment
scenario or otherwise. DUE TO THE SPECIAL TAX TREATMENT OF RESIDUAL INTERESTS,
THE AFTER-TAX RETURN OF THE CLASS A-R CERTIFICATE MAY BE SIGNIFICANTLY LOWER
THAN WOULD BE THE CASE IF THE CLASS A-R CERTIFICATE WERE TAXED AS A DEBT
INSTRUMENT, OR MAY BE NEGATIVE.
As referred to herein, the weighted average life of a Subclass or Class of
the Offered Certificates refers to the average amount of time that will elapse
from the date of issuance of such Subclass or Class until each dollar in
reduction of the principal balance of such Subclass or Class is distributed to
the investor. The weighted average life of each Subclass or Class of the
Offered Certificates will be influenced by, among other things, the rate and
timing of principal payments on the Mortgage Loans, which may be in the form
of scheduled amortization, prepayments or other recoveries of principal.
THE WEIGHTED AVERAGE LIFE OF THE COMPANION CERTIFICATES WILL BE MORE
SENSITIVE THAN THE OTHER SUBCLASSES OF CLASS A CERTIFICATES TO THE RATE OF
PRINCIPAL PAYMENTS (INCLUDING PREPAYMENTS) ON THE MORTGAGE LOANS.
Specifically, if prepayments result in the portion of the Class A Non-PO
Principal Distribution Amount available to make distributions of principal to
the PAC Certificates in accordance with the proportions and priorities, set
forth under "Description of the Certificates--Principal (Including
Prepayments)--Allocation of Amount to Be Distributed" being equal to or less
than the PAC Principal Amounts on any Distribution Date, the Companion
Certificates will receive no distributions in reduction of principal on such
Distribution Date. Further, on each Distribution Date up to and including the
Distribution Date on which the Class A Subclass Principal Balance of the
Companion Certificates is reduced to zero, any Excess Principal Payments for
such Distribution Date will be applied to the Companion Certificates before
being distributed to the PAC Certificates in the proportions and priorities
set forth above under "Description of the Certificates--Principal (Including
Prepayments)--Principal Payment Characteristics of the PAC Certificates and
the Companion Certificates."
Prepayments on mortgage loans are commonly measured relative to a prepayment
standard or model. The model used in this Prospectus Supplement, the Standard
Prepayment Assumption ("SPA"), represents an assumed rate of prepayment each
month relative to the then outstanding principal balance of a pool of new
mortgage loans. A prepayment assumption of 100% SPA assumes constant
prepayment rates of 0.2% per annum of the then outstanding principal balance
of such mortgage loans in the first month of the life of the mortgage loans
and an additional 0.2% per annum in each month thereafter until the thirtieth
month. Beginning in the thirtieth month and in each month thereafter during
the life of the mortgage loans, 100% SPA assumes a constant prepayment rate of
6% per annum each month. As used in the table below, "0% SPA" assumes
prepayment rates equal to 0% of SPA, i.e., no prepayments. Correspondingly,
" % SPA" assumes prepayment rates equal to % of SPA, and so forth. SPA does
not purport to be a historical description of prepayment experience or a
prediction of the anticipated rate of prepayment of any pool of mortgage
loans, including the Mortgage Loans.
The tables set forth below have been prepared on the basis of the
characteristics of the Mortgage Loans that are expected to be included in the
Trust Estate, as described above under "Description of the Mortgage Loans."
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<PAGE>
The tables assume, among other things, the following (the "Structuring
Assumptions"): (i) the scheduled payment in each month for each Mortgage Loan
has been based on its outstanding balance as of the first day of the month
preceding the month of such payment, its Mortgage Interest Rate and its
remaining term to stated maturity, so that such scheduled payments would
amortize the remaining balance by its remaining term to maturity, (ii)
scheduled monthly payments of principal and interest on the Mortgage Loans
will be timely received on the first day of each month (with no defaults),
commencing in 199 , (iii) the Seller does not repurchase any Mortgage
Loan, as described under "Description of the Mortgage Loans--Mandatory
Repurchase or Substitution of Mortgage Loans" herein, and the Seller does not
exercise its option to purchase the Mortgage Loans and thereby cause a
termination of the Trust Estate, (iv) principal prepayments in full on the
Mortgage Loans will be received on the last day of each month commencing in
1996 at the respective constant percentages of SPA set forth in the tables
and there are no partial principal prepayments or Prepayment Interest
Shortfalls, (v) the Series 199 - Certificates will be issued on , 199 ,
and (vi) distributions to Certificateholders will be made on the 25th day of
each month, commencing in 199 .
It is highly unlikely that the Mortgage Loans will prepay at any constant
rate, that all of the Mortgage Loans will prepay at the same rate or that the
Mortgage Loans will not experience any losses. In addition, there may be
differences between the characteristics of the mortgage loans ultimately
included in the Trust Estate and the Mortgage Loans which are assumed to be
included, as described above under "Description of the Mortgage Loans." Any
difference may have an effect upon the actual percentages of initial Class A
Subclass Principal Balance of the Subclasses of Class A Certificates, initial
principal balances of the Class M Certificates and initial Class B Subclass
Principal Balance of the Subclasses of Class B Certificates outstanding, the
actual weighted average lives of the Subclasses of Class A Certificates, the
Class M Certificates and the Subclasses of Class B Certificates and the date
on which the Class A Subclass Principal Balance of any Subclass of Class A
Certificates, the principal balance of the Class M Certificates and the Class
B Subclass Principal Balance of any Subclass of Offered Class B Certificates
are reduced to zero.
Based upon the foregoing assumptions, the following tables indicate the
weighted average life of each Subclass and Class of Offered Certificates, and
set forth the percentages of the initial Class A Subclass Principal Balance of
each such Subclass, the initial principal balance of the Class M Certificates
and the initial Class B Subclass Principal Balance of each Subclass of Offered
Class B Certificates that would be outstanding after each of the dates shown
at constant percentages of SPA presented.
PERCENTAGE OF INITIAL SUBCLASS PRINCIPAL BALANCE OUTSTANDING FOR:
<TABLE>
<CAPTION>
CLASS A-1 CLASS A-2
CERTIFICATES AT THE CERTIFICATES AT THE
FOLLOWING PERCENTAGES FOLLOWING PERCENTAGES
OF SPA OF SPA
----------------------- -----------------------
DISTRIBUTION
DATE 0% % % % % % 0% % % % % %
------------ --- --- --- --- --- --- --- --- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
</TABLE>
- ---------------------
(1) The weighted average life of an Offered Certificate is determined by (i)
multiplying the amount of each distribution in reduction of principal
balance by the number of years from the date of the issuance of such
Certificate to the related Distribution Date, (ii) adding the results and
(iii) dividing the sum by the aggregate distributions in reduction of
principal balance referred to in clause (i).
* Indicates an amount greater than zero but less than 0.5% of the initial
principal balance of such Subclass.
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<PAGE>
PERCENTAGE OF INITIAL SUBCLASS PRINCIPAL BALANCE OUTSTANDING FOR:
<TABLE>
<CAPTION>
CLASS A-3 CLASS A-4
CERTIFICATES AT THE CERTIFICATES AT THE
FOLLOWING PERCENTAGES FOLLOWING PERCENTAGES
OF SPA OF SPA
----------------------- -----------------------
DISTRIBUTION
DATE 0% % % % % % 0% % % % % %
------------ --- --- --- --- --- --- --- --- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
</TABLE>
- ---------------------
(1) The weighted average life of an Offered Certificate is determined by (i)
multiplying the amount of each distribution in reduction of principal
balance by the number of years from the date of the issuance of such
Certificate to the related Distribution Date, (ii) adding the results and
(iii) dividing the sum by the aggregate distributions in reduction of
principal balance referred to in clause (i).
* Indicates an amount greater than zero but less than 0.5% of the initial
principal balance of such Subclass.
PERCENTAGE OF INITIAL SUBCLASS PRINCIPAL BALANCE OUTSTANDING FOR:
<TABLE>
<CAPTION>
CLASS A-5 CLASS A-6
CERTIFICATES AT THE CERTIFICATES AT THE
FOLLOWING PERCENTAGES FOLLOWING PERCENTAGES
OF SPA OF SPA
----------------------- -----------------------
DISTRIBUTION
DATE 0% % % % % % 0% % % % % %
------------ --- --- --- --- --- --- --- --- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
</TABLE>
- ---------------------
(1) The weighted average life of an Offered Certificate is determined by (i)
multiplying the amount of each distribution in reduction of principal
balance by the number of years from the date of the issuance of such
Certificate to the related Distribution Date, (ii) adding the results and
(iii) dividing the sum by the aggregate distributions in reduction of
principal balance referred to in clause (i).
* Indicates a percentage greater than zero but less than 0.5% of the initial
principal balance of such Subclass.
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<PAGE>
PERCENTAGE OF INITIAL SUBCLASS PRINCIPAL BALANCE OUTSTANDING FOR:
<TABLE>
<CAPTION>
CLASS A-7 CLASS A-8
CERTIFICATES AT THE CERTIFICATES AT THE
FOLLOWING PERCENTAGES FOLLOWING PERCENTAGES
OF SPA OF SPA
----------------------- -----------------------
DISTRIBUTION
DATE 0% % % % % % 0% % % % % %
------------ --- --- --- --- --- --- --- --- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
</TABLE>
- ---------------------
(1) The weighted average life of an Offered Certificate is determined by (i)
multiplying the amount of each distribution in reduction of principal
balance by the number of years from the date of the issuance of such
Certificate to the related Distribution Date, (ii) adding the results and
(iii) dividing the sum by the aggregate distributions in reduction of
principal balance referred to in clause (i).
* Indicates a percentage greater than zero but less than 0.5% of the initial
principal balance of such Subclass.
PERCENTAGE OF INITIAL SUBCLASS PRINCIPAL BALANCE OUTSTANDING FOR:
<TABLE>
<CAPTION>
CLASS A-9 CLASS A-10
CERTIFICATES AT THE CERTIFICATES AT THE
FOLLOWING PERCENTAGES FOLLOWING PERCENTAGES
OF SPA OF SPA
----------------------- -----------------------
DISTRIBUTION
DATE 0% % % % % % 0% % % % % %
------------ --- --- --- --- --- --- --- --- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
</TABLE>
- ---------------------
(1) The weighted average life of an Offered Certificate is determined by (i)
multiplying the amount of each distribution in reduction of principal
balance by the number of years from the date of the issuance of such
Certificate to the related Distribution Date, (ii) adding the results and
(iii) dividing the sum by the aggregate distributions in reduction of
principal balance referred to in clause (i).
* Indicates a percentage greater than zero but less than 0.5% of the initial
principal balance of such Subclass.
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<PAGE>
PERCENTAGE OF INITIAL SUBCLASS OR CLASS PRINCIPAL BALANCE OUTSTANDING FOR:
<TABLE>
<CAPTION>
CLASS A-R CLASS A-PO
CERTIFICATE AT THE CERTIFICATES AT THE
FOLLOWING PERCENTAGES FOLLOWING PERCENTAGES
OF SPA OF SPA
----------------------- -----------------------
DISTRIBUTION
DATE 0% % % % % % 0% % % % % %
------------ --- --- --- --- --- --- --- --- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
</TABLE>
- ---------------------
(1) The weighted average life of an Offered Certificate is determined by (i)
multiplying the amount of each distribution in reduction of principal
balance by the number of years from the date of the issuance of such
Certificate to the related Distribution Date, (ii) adding the results and
(iii) dividing the sum by the aggregate distributions in reduction of
principal balance referred to in clause (i).
* Indicates a percentage greater than zero but less than 0.5% of the initial
principal balance of such Subclass.
PERCENTAGE OF INITIAL SUBCLASS OR CLASS PRINCIPAL BALANCE OUTSTANDING FOR:
<TABLE>
<CAPTION>
CLASS M, CLASS B-1 AND
CLASS B-2
CERTIFICATES AT THE
FOLLOWING PERCENTAGES
OF SPA
-----------------------
DISTRIBUTION
DATE 0% % % % % %
------------ --- --- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C>
</TABLE>
- ---------------------
(1) The weighted average life of an Offered Certificate is determined by (i)
multiplying the amount of each distribution in reduction of principal
balance by the number of years from the date of the issuance of such
Certificate to the related Distribution Date, (ii) adding the results and
(iii) dividing the sum by the aggregate distributions in reduction of
principal balance referred to in clause (i).
* Indicates a percentage greater than zero but less than 0.5% of the initial
principal balance of such Subclass.
Interest accrued on the Class A, Class M and Offered Class B Certificates
will be reduced by the amount of any interest portions of Realized Losses
allocated to such Certificates as described under "Description of the
Certificates--Interest" herein. The yield on the Class A, Class M and Offered
Class B Certificates will be less than the yield otherwise produced by their
respective Pass-Through Rates and the prices at which such Certificates are
purchased because the interest which accrues on the Mortgage Loans during each
month will not be passed through to Certificateholders until the 25th day of
the month following the end of such month (or if such 25th day is not a
business day, the following business day).
The Seller intends to file certain additional yield tables and other
computational materials with respect to one or more Subclasses or Class of
Offered Certificates with the Securities and Exchange Commission in a Report
on Form 8-K. See "Incorporation Of Certain Documents By Reference" in the
Prospectus. Such tables and materials will have been prepared by the
Underwriter at the request of certain prospective investors, based on
assumptions provided by, and satisfying the special requirements of, such
investors. Such tables and assumptions may be based on assumptions that differ
from the Structuring Assumptions. Accordingly, such tables
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<PAGE>
and other materials may not be relevant to or appropriate for investors other
than those specifically requesting them.
SENSITIVITY OF THE CLASS A-PO CERTIFICATES
THE YIELD TO AN INVESTOR IN THE CLASS A-PO CERTIFICATES WILL BE HIGHLY
SENSITIVE TO THE RATE AND TIMING OF PRINCIPAL PAYMENTS (INCLUDING PREPAYMENTS)
ON THE DISCOUNT MORTGAGE LOANS, WHICH RATE MAY FLUCTUATE SIGNIFICANTLY FROM
TIME TO TIME. AN INVESTOR SHOULD FULLY CONSIDER THE ASSOCIATED RISKS,
INCLUDING THE RISK THAT A RELATIVELY SLOW RATE OF PRINCIPAL PAYMENTS
(INCLUDING PREPAYMENTS) ON THE DISCOUNT MORTGAGE LOANS WILL HAVE A NEGATIVE
EFFECT ON THE YIELD TO AN INVESTOR IN THE CLASS A-PO CERTIFICATES. THE
DISCOUNT MORTGAGE LOANS WILL HAVE LOWER NET MORTGAGE INTEREST RATES THAN THE
OTHER MORTGAGE LOANS. IN GENERAL, MORTGAGE LOANS WITH LOWER MORTGAGE INTEREST
RATES MAY TEND TO PREPAY AT A SLOWER RATE OF PAYMENT IN RESPECT OF PRINCIPAL
THAN MORTGAGE LOANS WITH RELATIVELY HIGHER MORTGAGE INTEREST RATES, IN
RESPONSE TO CHANGES IN MARKET INTEREST RATES, AS A RESULT, THE DISCOUNT
MORTGAGE LOANS MAY PREPAY AT A SLOWER RATE OF PAYMENT IN RESPECT OF PRINCIPAL
THAN THE OTHER MORTGAGE LOANS, RESULTING IN A LOWER YIELD ON THE CLASS A-PO
CERTIFICATES THAN WOULD BE THE CASE IF THE DISCOUNT MORTGAGE LOANS PREPAID AT
THE SAME RATE AS THE OTHER MORTGAGE LOANS.
The following table indicates the sensitivity to various rates of prepayment
on the Discount Mortgage Loans of the pre-tax yields to maturity on a
corporate bond equivalent ("CBE") basis of the Class A-PO Certificates. Such
calculations are based on distributions made in accordance with "Description
of the Certificates" above, on the Structuring Assumptions and on the further
assumptions that (i) the Class A-PO Certificates will be purchased on , 199
at an aggregate purchase price of % of the initial Class A Subclass Principal
Balance of the Class A-PO Certificates and (ii) distributions to holders of
the Class A-PO Certificates will be made on the 25th day of each month
commencing in 199 .
SENSITIVITY OF THE PRE-TAX YIELD TO MATURITY ON THE CLASS A-PO CERTIFICATES TO
PREPAYMENTS
<TABLE>
<CAPTION>
PERCENTAGES OF SPA
-----------------------
0% % % % % %
--- --- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C>
Pre-Tax Yield (CBE)..................................... % % % % % %
</TABLE>
The pre-tax yields to maturity set forth in the preceding table were
calculated by (i) determining the monthly discount rates which, when applied
to the assumed stream of cash flows to be paid on the Class A-PO Certificates,
would cause the discounted present value of such assumed stream of cash flows
to equal an assumed aggregate purchase price for the Class A-PO Certificates
of approximately % of their initial Class A Subclass Principal Balance and
(ii) converting such monthly rates to corporate bond equivalent rates. Such
calculation does not take into account the interest rates at which investors
may be able to reinvest funds received by them as distributions on the Class
A-PO Certificates and consequently does not purport to reflect the return on
any investment in the Class A-PO Certificates when such reinvestment rates are
considered.
Notwithstanding the assumed prepayment rates reflected in the preceding
table, it is highly unlikely that the Discount Mortgage Loans will prepay at a
constant rate until maturity or that all of the Discount Mortgage Loans will
prepay at the same rate. In addition, the Discount Mortgage Loans initially
included in the Trust Estate may differ from those currently expected to be
included in the Trust Estate and thereafter may be changed as a result of
permitted substitutions. As a result of these factors, the pre-tax yields on
the Class A-PO Certificates are likely to differ from those shown in such
table, even if all of the Discount Mortgage Loans prepay at the indicated
percentages of SPA.
YIELD CONSIDERATIONS WITH RESPECT TO THE CLASS B-1 AND CLASS B-2 CERTIFICATES
Defaults on mortgage loans may be measured relative to a default standard or
model. The model used in this Prospectus Supplement, the standard default
assumption ("SDA"), represents an assumed rate of default
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each month relative to the then-outstanding performing principal balance of a
pool of new mortgage loans. A default assumption of 100% SDA assumes constant
default rates of 0.02% per annum of the then-outstanding principal balance of
such mortgage loans in the first month of the life of the mortgage loans and
an additional 0.02% per annum in each month thereafter until the 30th month.
Beginning in the 30th month and in each month thereafter through the 60th
month of the life of the mortgage loans, 100% SDA assumes a constant default
rate of 0.60% per annum each month. Beginning in the 61st month and in each
month thereafter through the 120th month of the life of the mortgage loans,
100% SDA assumes that the constant default rate declines each month by 0.0095%
per annum, and that the constant default rate remains at 0.03% per annum in
each month after the 120th month. For the purposes of the following tables, it
is assumed that there is no delay between the default and liquidation of the
mortgage loans. As used in the following tables, "0% SDA" assumes default
rates equal to 0% of SDA (no defaults). Correspondingly, " % SDA" assumes
default rates equal to % of SDA, and so forth. SDA does not purport to be a
historical description of default experience or a prediction of the
anticipated rate of default of any pool of mortgage loans, including the
Mortgage Loans.
The following tables indicate the sensitivity of the pre-tax yield to
maturity on the Class B-1 and Class B-2 Certificates to various rates of
prepayment and varying levels of aggregate Realized Losses. The tables set
forth below are based upon, among other things, the Structuring Assumptions
(other than the assumption that no defaults shall have occurred with respect
to the Mortgage Loans) and the additional assumptions that liquidations (other
than those scenarios indicated as 0% of SDA (no defaults)) occur monthly
(other than on a Due Date) at the percentages of SDA set forth in the table.
In addition, it was assumed that (i) Realized Losses on liquidations of %
or % of the outstanding principal balance of such liquidated Mortgage Loans,
as indicated in the tables below (referred to as a "Loss Severity Percentage")
will occur at the time of liquidation, (ii) there are no Special Hazard
Losses, Fraud Losses or Bankruptcy Losses, (iii) the Class B-1 and Class B-2
Certificates are purchased on , 199 at assumed purchase prices equal to %
and %, respectively, of the Class B Subclass Principal Balances thereof plus
accrued interest from , 199 to (but not including) , 199 and (iv) that
there were no delinquencies on the Mortgage Loans.
It is unlikely that the Mortgage Loans will have the precise characteristics
referred to herein or that they will prepay or liquidate at any of the rates
specified. The assumed percentages of SDA and SPA shown in the tables below
are for illustrative purposes only and the Seller makes no representations
with respect to the reasonableness of such assumptions or that the actual
rates of prepayment and liquidation and loss severity experience of the
Mortgage Loans will in any way correspond to any of the assumptions made
herein. Consequently, there can be no assurance that the pre-tax yield to
maturity of the Class B-1 and Class B-2 Certificates will correspond to any of
the pre-tax yields shown below.
The pre-tax yields set forth in the following tables were calculated by
determining the monthly discount rates which, when applied to the assumed
streams of cash flows to be paid on the Class B-1 and Class B-2 Certificates,
would cause the discounted present value of such assumed streams of cash flows
to equal the aggregate assumed purchase prices of the Class B-1 and Class B-2
Certificates set forth below. In all cases, monthly rates were then converted
to the semi-annual corporate bond equivalent yields shown below. Implicit in
the use of any discounted present value or internal rate of return
calculations such as these is the assumption that intermediate cash flows are
reinvested at the discount rate or internal rate of return. Thus, these
calculations do not take into account the different interest rates at which
investors may be able to reinvest funds received by them as distributions on
the Class B-1 and Class B-2 Certificates. Consequently, these yields do not
purport to reflect the total return on any investment in the Class B-1 and
Class B-2 Certificates when such reinvestment rates are considered.
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<PAGE>
SENSITIVITY OF PRE-TAX YIELDS TO MATURITY OF THE CLASS B-1
CERTIFICATES TO PREPAYMENTS AND REALIZED LOSSES
<TABLE>
<CAPTION>
LOSS PERCENTAGES OF SPA
PERCENTAGE SEVERITY -----------------------
OF SDA PERCENTAGE 0% % % % % %
---------- ---------- --- --- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C> <C>
</TABLE>
SENSITIVITY OF PRE-TAX YIELDS TO MATURITY OF THE CLASS B-2
CERTIFICATES TO PREPAYMENTS AND REALIZED LOSSES
<TABLE>
<CAPTION>
LOSS PERCENTAGES OF SPA
PERCENTAGE SEVERITY -----------------------
OF SDA PERCENTAGE 0% % % % % %
---------- ---------- --- --- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C> <C>
</TABLE>
The following table sets forth the amount of Realized Losses that would be
incurred with respect to the Mortgage Loans, expressed as a percentage of the
aggregate outstanding principal balance of the Mortgage Loans as of the Cut-
Off Date.
AGGREGATE REALIZED LOSSES
<TABLE>
<CAPTION>
LOSS PERCENTAGES OF SPA
PERCENTAGE SEVERITY -----------------------
OF SDA PERCENTAGE 0% % % % % %
---------- ---------- --- --- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C> <C>
</TABLE>
Notwithstanding the assumed percentages of SDA, Loss Severity Percentages
and prepayment rates reflected in the preceding tables, it is highly unlikely
that the Mortgage Loans will be prepaid or that the Realized Losses will be
incurred according to one particular pattern. For this reason, and because the
timing of cash flows is critical to determining yields, the pre-tax yields to
maturity on the Class B-1 and Class B-2 Certificates are likely to differ from
those shown in the tables. There can be no assurance that the Mortgage Loans
will prepay at any particular rate or that Realized Losses will be incurred at
any particular level or that the yields on the Class B-1 and Class B-2
Certificates will conform to any of the yields described herein. Moveover, the
various remaining terms to maturity of the Mortgage Loans could produce slower
or faster principal distributions than indicated in the preceding tables at
the various constant percentages of SPA specified, even if the weighted
average remaining term to maturity of the Mortgage Loans is as assumed.
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<PAGE>
Investors are urged to make their investment decisions based on their
determinations as to anticipated rates of prepayment and Realized Losses under
a variety of scenarios. Investors in Class B-1 and Class B-2 Certificates
should fully consider the risk that Realized Losses on the Mortgage Loans
could result in the failure of such investors to fully recover their
investments.
POOLING AND SERVICING AGREEMENT
GENERAL
The Series 199 - Certificates will be issued pursuant to a Pooling and
Servicing Agreement to be dated as of the date of initial issuance of the
Series 199 - Certificates (the "Pooling and Servicing Agreement") among the
Seller, the Master Servicer and the Trustee. Reference is made to the
Prospectus for important additional information regarding the terms and
conditions of the Pooling and Servicing Agreement and the Series 199 -
Certificates. See "Description of the Certificates," "Servicing of the
Mortgage Loans" and "The Pooling and Servicing Agreement" in the Prospectus.
The Trust Estate created pursuant to the Pooling and Servicing Agreement
will consist of (i) the Mortgage Loans as described under "Description of the
Mortgage Loans," (ii) such assets as from time to time are identified as
deposited in any account held for the benefit of the Certificateholders, (iii)
any Mortgaged Properties acquired on behalf of the Certificateholders by
foreclosure or by deed in lieu of foreclosure after the date of original
issuance of the Certificates and (iv) the rights of the Trustee to receive the
proceeds of all insurance policies and performance bonds, if any, required to
be maintained pursuant to the Pooling and Servicing Agreement.
DISTRIBUTIONS
Distributions (other than the final distribution in retirement of the
Offered Certificates of each Class or Subclass) will be made by check mailed
to the address of the person entitled thereto as it appears on the Certificate
Register. However, with respect to any holder of an Offered Certificate
evidencing at least a $5,000,000 initial principal balance, distributions will
be made on the Distribution Date by wire transfer in immediately available
funds, provided that the Master Servicer, or the paying agent acting on behalf
of the Master Servicer, shall have been furnished with appropriate wiring
instructions not less than seven business days prior to the related
Distribution Date. The final distribution in respect of each Class or Subclass
of Offered Certificates will be made only upon presentation and surrender of
the related Certificate at the office or agency appointed by the Trustee
specified in the notice of final distribution with respect to the related
Subclass or Class.
Unless Definitive Certificates are issued as described under "Description of
the Certificates--Book-Entry Form" in the Prospectus, the Master Servicer and
the Trustee will treat DTC as the Holder of the Book-Entry Certificates for
all purposes, including making distributions thereon and taking actions with
respect thereto. DTC will make book-entry transfers among its participants
with respect to the Book-Entry Certificates; it will also receive
distributions on the Book-Entry Certificates from the Trustee and transmit
them to participants for distribution to Beneficial Owners or their nominees.
VOTING
With respect to any provisions of the Pooling and Servicing Agreement
providing for the action, consent or approval of the holders of all Series
199 - Certificates evidencing specified Voting Interests in the Trust Estate,
the holders of the Class A Certificates will collectively be entitled to a
percentage (the "Class A Voting Interest") of the aggregate Voting Interest
represented by all Series 199 - Certificates equal to the sum of (A) the
product of (i) the then applicable Class A Percentage and (ii) the ratio
obtained by dividing the Pool Balance (Non-PO Portion) by the sum of the Pool
Balance (Non-PO Portion) and the Pool Balance (PO Portion) (the "Non-PO Voting
Interest") and (B) the Pool Balance (PO Portion) divided by the sum of the
Pool Balance (Non-PO Portion) and the Pool Balance (PO Portion); the holders
of the Class M Certificates will collectively be entitled to the then-
applicable percentage of the aggregate Voting Interest represented by all
Series 199 -
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<PAGE>
Certificates equal to the product of (i) the ratio obtained by dividing the
Class M Principal Balance by the sum of the Class A Non-PO Principal Balance,
the Class M Principal Balance and the Class B Principal Balance and (ii) the
Non-PO Voting Interest and the holders of the Class B Certificates will
collectively be entitled to the balance of the aggregate Voting Interest
represented by all Series 199 - Certificates (the "Class B Voting Interest").
The aggregate Voting Interest of each Subclass of Class A Certificates (other
than the Class A-PO Certificates) on any date will be equal to the product of
(a) the Class A Voting Interest on such date represented by clause (A) above
and (b) the fraction obtained by dividing the Class A Subclass Principal
Balance of such Subclass by the Class A Non-PO Principal Balance on such date.
The aggregate Voting Interest of the Class A-PO Certificates will be equal to
the portion of the Class A Voting Interest on such date represented by clause
(B) above. The aggregate Voting Interest of each Subclass of Class B
Certificates on any date will be equal to the product of (a) the Class B
Voting Interest on such date and (b) the fraction obtained by dividing the
Class B Subclass Principal Balance of such Subclass on such date by the Class
B Principal Balance on such date. Each Certificateholder of a Class or
Subclass will have a Voting Interest equal to the product of the Voting
Interest to which such Class or Subclass is collectively entitled and the
Percentage Interest in such Class or Subclass represented by such holder's
Certificates. With respect to any provisions of the Pooling and Servicing
Agreement providing for action, consent or approval of each Class or Subclass
of Certificates or specified Classes or Subclasses of Certificates, each
Certificateholder of a Class or Subclass will have a Voting Interest in such
Class or Subclass equal to such holder's Percentage Interest in such Class or
Subclass. Unless Definitive Certificates are issued as described under
"Description of the Certificates--Book-Entry Form" in the Prospectus,
Beneficial Owners of Book-Entry Certificates may exercise their voting rights
only through Participants.
TRUSTEE
The Trustee for the Series 199 - Certificates will be , a national
banking association. The corporate trust office of the Trustee is located at
. The Trustee will be responsible for monitoring the compliance of the
Master Servicer with the Pooling and Servicing Agreement and the Underlying
Servicing Agreements. See "The Pooling and Servicing Agreement--The Trustee"
in the Prospectus. In addition, the Trustee will be required to make Periodic
Advances to the limited extent described herein under "Description of the
Certificates--Periodic Advances" with respect to the Mortgage Loans serviced
by Norwest Mortgage if Norwest Mortgage, as Servicer, fails to make a Periodic
Advance required by the related Underlying Servicing Agreement.
MASTER SERVICER
Norwest Bank will act as "Master Servicer" of the Mortgage Loans and, in
that capacity, will supervise the servicing of the Mortgage Loans, cause the
Mortgage Loans to be serviced in the event a Servicer is terminated and a
successor servicer is not appointed, provide certain reports to the Trustee
regarding the Mortgage Loans and the Certificates and make Periodic Advances
to the limited extent described herein under "Description of the
Certificates--Periodic Advances" with respect to the Mortgage Loans if a
Servicer other than Norwest Mortgage fails to make a Periodic Advance required
by the related Underlying Servicing Agreement. The Master Servicer will be
entitled to a "Master Servicing Fee" payable monthly equal to the product of
(i) 1/12th of [a fixed percentage per annum]% (the "Master Servicing Fee
Rate") and (ii) the aggregate Scheduled Principal Balances of the Mortgage
Loans as of the first day of each month. The Master Servicer will pay all
administrative expenses to the Trust Estate subject to reimbursement as
described under "Master Servicer" in the Prospectus.
SPECIAL SERVICING AGREEMENTS
The Pooling and Servicing Agreement may permit the Master Servicer to enter
into a special servicing agreement with an unaffiliated holder of a Subclass
of Class B Certificates or of a class of securities representing interests in
the Class B Certificates and/or other subordinated mortgage pass-through
certificates. Pursuant to such an agreement, such holder may instruct the
Master Servicer to instruct the Servicers, to the extent provided in the
applicable Underlying Servicing Agreement to commence or delay foreclosure
proceedings with respect to delinquent Mortgage Loans. Such commencement or
delay at such holder's direction will be taken by the Master Servicer only
after such holder deposits a specified amount of cash with the Master
Servicer. Such cash
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<PAGE>
will be available for distribution to Certificateholders if Liquidation
Proceeds are less than they otherwise may have been had the Servicers acted
pursuant to their normal servicing procedures.
OPTIONAL TERMINATION
At its option, the Seller may purchase from the Trust Estate all of the
Mortgage Loans, and thereby effect early retirement of the Series 199 -
Certificates, on any Distribution Date when the Pool Scheduled Principal
Balance is less than % of the Cut-Off Date Aggregate Principal Balance. Any
such purchase will be made only in connection with a "qualified liquidation"
the REMIC within the meaning of Section 860F(a)(4)(A) of the Code. The
purchase price will generally be equal to the unpaid principal balance of each
Mortgage Loan plus the fair market value of other property (including any
Mortgaged Property title to which has been acquired by the Trust Estate ("REO
Property")) in the Trust Estate plus accrued interest. In the event the Trust
Estate is liquidated as described above, holders of the Certificates, to the
extent funds are available, will receive the unpaid principal balance of their
Certificates and any accrued and unpaid interest thereon. The amount, if any,
remaining in the Certificate Account after the payment of all principal and
interest on the Certificates and expenses of the REMIC will be distributed to
the holder of the Class A-R Certificate. See "Description of the
Certificates--Additional Rights of the Class A-R Certificateholder" herein and
"The Pooling and Servicing Agreement--Termination; Purchase of Mortgage Loans"
in the Prospectus. The exercise of the foregoing option will be in the
Seller's sole discretion. Without limitation, the Seller may enter into
agreements with third parties to (i) exercise such option at the direction of
such third party or (ii) forbear from the exercise of such option.
SERVICING OF THE MORTGAGE LOANS
Norwest Mortgage will service approximately % (by Cut-Off Date Aggregate
Principal Balance) of the Mortgage Loans and the other servicers listed below
(the "Other Servicers", and collectively with Norwest Mortgage, the
"Servicers") will service the balance of the Mortgage Loans, as indicated,
each pursuant to a separate Underlying Servicing Agreement. The rights to
enforce the related Servicer's obligations under each Underlying Servicing
Agreement with respect to the related Mortgage Loans will be assigned to the
Trustee for the benefit of Certificateholders. Among other things, the
Servicers are obligated under certain circumstances to advance delinquent
payments of principal and interest with respect to the Mortgage Loans. See
"Servicing of the Mortgage Loans" in the Prospectus.
THE SERVICERS
The Mortgage Loans initially will be serviced by the following entities:
<TABLE>
<CAPTION>
APPROXIMATE PERCENTAGE OF
CUT-OFF DATE AGGREGATE
NAME OF SERVICER PRINCIPAL BALANCE SERVICED
---------------- --------------------------
<S> <C>
Norwest Mortgage, Inc............................. %
[Other Servicers]................................. %
------
Total........................................... 100.00%
======
</TABLE>
Certain information with respect to the loan servicing experience of Norwest
Mortgage is set forth under "Delinquency and Foreclosure Experience."
The Mortgage Loans serviced by Norwest Mortgage are serviced either from
Norwest Mortgage's servicing center located in Frederick, Maryland (the
"Norwest Frederick-Serviced Loans") or from one of several other regional
servicing centers (the "Norwest Non-Frederick-Serviced Loans"). As of the Cut-
Off Date, it is expected that of the Mortgage Loans in the Trust Estate,
representing approximately % of the Cut-Off Date Aggregate Principal Balance
of the Mortgage Loans will be Norwest Frederick-Serviced Loans and of the
Mortgage Loans in the Trust Estate, representing approximately % of the Cut-
Off Date Aggregate Principal Balance of the Mortgage Loans will be Norwest
Non-Frederick-Serviced Loans.
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<PAGE>
SERVICER CUSTODIAL ACCOUNTS
Each Servicer is required to establish and maintain a custodial account for
principal and interest (each such account, a "Servicer Custodial Account"),
into which it will deposit all collections of principal (including principal
prepayments and Liquidation Proceeds in respect of principal, if any) on any
Mortgage Loan that such Servicer services, interest (net of Servicing Fees) on
any Mortgage Loan that such Servicer services, related insurance proceeds,
advances made from the Servicer's own funds and the proceeds of any purchase
of a related Mortgage Loan for breach of a representation or warranty or the
sale of a Mortgaged Property in connection with liquidation of the related
Mortgage Loan. All Servicer Custodial Accounts are required to be held in a
depository institution and invested in the manner specified in the related
Underlying Servicing Agreement. Funds in such accounts generally must be held
separate and apart from the assets of the Servicer and generally may not be
commingled with funds held by a Servicer with respect to mortgage loans other
than the Mortgage Loans.
Not later than the Remittance Date, the Servicers are obligated to remit to
the Certificate Account all amounts on deposit in the Servicer Custodial
Accounts as of the close of business on the business day preceding the
Remittance Date other than the following:
(a) amounts received as late payments of principal or interest respecting
which such Servicer previously has made one or more unreimbursed Periodic
Advances;
(b) any unreimbursed Periodic Advances of such Servicer with respect to
Liquidated Loans;
(c) those portions of each payment of interest on a particular Mortgage
Loan which represent the applicable Servicing Fee, as adjusted where
applicable in respect of Month End Interest as described under "Description
of the Certificates--Interest";
(d) all amounts representing scheduled payments of principal and interest
due after the Due Date occurring in the month in which such Distribution
Date occurs;
(e) unless the applicable Underlying Servicing Agreement provides for
daily remittances of Unscheduled Principal Receipts, as described below
under "--Anticipated Changes in Servicing," all Unscheduled Principal
Receipts received by such Servicer after the applicable Unscheduled
Principal Receipt Period with respect thereto specified in the applicable
Underlying Servicing Agreement, and all related payments of interest on
such amounts;
(f) all amounts representing certain expenses reimbursable to such
Servicer and any other amounts permitted to be retained by such Servicer or
withdrawn by such Servicer from the Servicer Custodial Account pursuant to
the applicable Underlying Servicing Agreement;
(g) all amounts in the nature of late fees, assumption fees, prepayment
fees and similar fees which such Servicer is entitled to retain as
additional servicing compensation; and
(h) reinvestment earnings on payments received in respect of the Mortgage
Loans or on other amounts on deposit in the related Servicer Custodial
Account.
UNSCHEDULED PRINCIPAL RECEIPTS
The Pooling and Servicing Agreement specifies, as to each type of
Unscheduled Principal Receipt, a period (as to each type of Unscheduled
Principal Receipt, the "Unscheduled Principal Receipt Period") during which
all Unscheduled Principal Receipts of such type received by the Servicer will
be distributed to Certificateholders on the related Distribution Date. Each
Unscheduled Principal Receipt Period will either be (i) the one month period
ending on the last day of the calendar month preceding the month in which the
applicable Remittance Date occurs (such period a "Prior Month Receipt Period")
or (ii) the one month period ending on the day preceding the Determination
Date preceding the applicable Remittance Date (such period a "Mid-Month
Receipt Period").
With respect to the Norwest Frederick-Serviced Loans, the Unscheduled
Principal Receipt Period with respect to all types of Unscheduled Principal
Receipts is a Mid-Month Receipt Period. With respect to the
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<PAGE>
Norwest Non-Frederick-Serviced Loans and Mortgage Loans serviced by Other
Servicers, the Unscheduled Principal Receipt Period with respect to all types
of Unscheduled Principal Receipts is a Prior Month Receipt Period.
ANTICIPATED CHANGES IN SERVICING
Changes in Timing of Remittances of Unscheduled Principal Receipts in Full
and Elimination of Month End Interest. The Pooling and Servicing Agreement
will provide that the Master Servicer may (but is not required), from time to
time and without the consent of any Certificateholder, the Trustee or the
Trust Administrator, require Norwest Mortgage as Servicer under the related
Underlying Servicing Agreement to, or enter into an amendment to any
applicable Underlying Servicing Agreement to require any Other Servicer to,
remit Unscheduled Principal Receipts in full to the Master Servicer for
deposit into the Certificate Account daily on a specified business day
following receipt thereof which will generally result in a deposit earlier
than on the following Remittance Date. In conjunction with any such change,
the applicable Servicer would be relieved of its obligation to remit Month End
Interest and certain other conforming changes may be made. Such changes would
have an effect on the amount of Compensating Interest as described herein
under the heading "Description of the Certificates--Interest." Further, the
Pooling and Servicing Agreement will provide that the Master Servicer may (but
is not required to), without the consent of any Certificateholder or the
Trustee, require Norwest Mortgage or any successor thereto under the
applicable Underlying Servicing Agreement to make remittances to the
Certificate Account (other than any remittances which are required to be made
daily) on the 18th day of each month, or if such 18th day is not a business
day, on the preceding business day. No assurance can be given as to the timing
of any such changes or that any such changes will occur.
Changes in Unscheduled Principal Receipt Period. The Pooling and Servicing
Agreement will provide that the Master Servicer may (but is not required to),
from time to time and without the consent of any Certificateholder or the
Trustee, (i) direct Norwest Mortgage as Servicer under the related Underlying
Servicing Agreement to change the Unscheduled Principal Receipt Period
applicable to any type of Unscheduled Principal Receipt within the parameters
described in (i), (ii) and (iii) below or (ii) with respect to any Other
Servicer, enter into an amendment to any applicable Underlying Servicing
Agreement for the purpose of changing the Unscheduled Principal Receipt Period
applicable to any type of Unscheduled Principal Receipt within the parameters
described in (iv) below and making any necessary conforming changes incident
thereto. In connection therewith, (i) the Unscheduled Principal Receipt Period
for the Norwest Non-Frederick-Serviced Loans may be changed (to achieve
consistency with the Norwest Frederick-Serviced Loans) to a Mid-Month Receipt
Period with respect to all types of Unscheduled Principal Receipts; (ii) the
Unscheduled Principal Receipt Period for the Norwest Non-Frederick-Serviced
Loans may be changed to achieve an Unscheduled Principal Receipt Period regime
(the "Target Regime") under which the Unscheduled Principal Receipt Period
with respect to partial Unscheduled Principal Receipts would be a Prior Month
Receipt Period and the Unscheduled Principal Receipt Period with respect to
Unscheduled Principal Receipts in full would be a Mid-Month Receipt Period;
(iii) the Unscheduled Principal Receipt Period for the Norwest Frederick-
Serviced Loans may be changed to the Target Regime; and (iv) the Unscheduled
Principal Receipt Periods for the Mortgage Loans serviced by Other Servicers
may be changed to the Target Regime.
Because Unscheduled Principal Receipts will result in interest shortfalls to
the extent that they are not distributed to Certificateholders in the month in
which they are received by the applicable Servicer, changing the applicable
Unscheduled Principal Receipt Period from a Mid-Month Receipt Period to a
Prior Month Receipt Period may have the effect of increasing the amount of
interest shortfalls with respect to the applicable type of Unscheduled
Principal Receipt. Conversely, changing the applicable Unscheduled Principal
Receipt Period from a Prior Month Receipt Period to a Mid-Month Receipt Period
may decrease the amount of interest shortfalls with respect to the applicable
type of Unscheduled Principal Receipt. See "Description of the Certificates--
Interest." No assurance can be given as to the timing of any change to any
Unscheduled Principal Receipt Period or that any such changes will occur.
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<PAGE>
FIXED RETAINED YIELD; SERVICING COMPENSATION AND PAYMENT OF EXPENSES
A fixed percentage of the interest on each Mortgage Loan (the "Fixed
Retained Yield") with a per annum Mortgage Interest Rate greater than (i) the
sum of (a) %, (b) the Servicing Fee Rate and (c) the Master Servicing Fee
Rate, which will be determined on a loan by loan basis and will equal the
Mortgage Interest Rate on each Mortgage Loan minus the rate described in
clause (i), will not be included in the Trust Estate. There will be no Fixed
Retained Yield on any Mortgage Loan with a Mortgage Interest Rate equal to or
less than the rate described in clause (i). See "Servicing of the Mortgage
Loans--Fixed Retained Yield, Servicing Compensation and Payment of Expenses"
in the Prospectus for further information regarding Fixed Retained Yield.
The primary compensation payable to each of the Servicers is the aggregate
of the Servicing Fees applicable to the related Mortgage Loans. The Servicing
Fee applicable to each Mortgage Loan is expressed as a fixed percentage (the
"Servicing Fee Rate") of the scheduled principal balance (as defined in the
Underlying Servicing Agreements) of such Mortgage Loan as of the first day of
each month. The Servicing Fee Rate for each Mortgage Loan will be a fixed
percentage rate per annum. The Servicing Fee Rate for each Mortgage Loan is %
per annum. In addition to the Servicing Fees, late payment fees, loan
assumption fees and prepayment fees with respect to the Mortgage Loans, and
any interest or other income earned on collections with respect to the
Mortgage Loans pending remittance to the Certificate Account, will be paid to,
or retained by, the Servicers as additional servicing compensation.
The Master Servicer will pay all routine expenses, including fees of the
Trustee incurred in connection with its responsibilities under the Pooling and
Servicing Agreement, subject to certain rights of reimbursement as described
in the Prospectus. The servicing fees and other expenses of the REMIC will be
allocated to a holder of the Class A-R Certificate who is an individual,
estate or trust (whether such Certificate is held directly or through certain
pass-through entities) as additional gross income without a corresponding
distribution of cash, and any such investor (or its owners, in the case of a
pass-through entity) may be limited in its ability to deduct such expenses for
regular tax purposes and may not be able to deduct such expenses to any extent
for alternative minimum tax purposes. See "Material Federal Income Tax
Consequences--Federal Income Tax Consequences for REMIC Certificates--
Limitations on Deduction of Certain Expenses" in the Prospectus.
SERVICER DEFAULTS
The Trustee will have the right pursuant to the Underlying Servicing
Agreements to terminate a Servicer in certain events, including the breach by
such Servicer of any of its material obligations under its Underlying
Servicing Agreement. In the event of such termination, (i) the Trustee may
enter into a substitute Underlying Servicing Agreement with the Master
Servicer or, at the Master Servicer's nomination, another servicing
institution acceptable to the Trustee and each Rating Agency; and (ii) the
Master Servicer shall assume certain of the Servicer's servicing obligations
under such Underlying Servicing Agreement, including the obligation to make
Periodic Advances (limited as provided herein under the heading "Description
of the Certificates--Periodic Advances"), until such time as a successor
servicer is appointed. Any successor Servicer, including the Master Servicer
or the Trustee, will be entitled to compensation arrangements similar to those
provided to the Servicer. See "Servicing of the Mortgage Loans--Fixed Retained
Yield, Servicing Compensation and Payment of Expenses" in the Prospectus.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The following discussion represents the opinion of Cadwalader, Wickersham &
Taft as to the anticipated material federal income tax consequences of the
purchase, ownership and disposition of the Offered Certificates.
An election will be made to treat the Trust Estate, and the Trust Estate
will qualify, as a REMIC for federal income tax purposes. The Class A-1, Class
A-2, Class A-3, Class A-4, Class A-5, Class A-6, Class A-7, Class A-8, Class
A-9, Class A-10 and Class A-PO Certificates, the Class M Certificates and the
Class B-1 and Class B-2 Certificates (collectively, the "Regular
Certificates"), together with the Class B-3, Class B-4 and
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Class B-5 Certificates, will be designated as regular interests in the REMIC,
and the Class A-R Certificate will be designated as the residual interest in
the REMIC. The Class A-R Certificate is a "Residual Certificate" for purposes
of the Prospectus. The assets of the REMIC will include the Mortgage Loans,
together with the amounts held by the Master Servicer in a separate account in
which collections on the Mortgage Loans will be deposited (the "Certificate
Account"), the hazard insurance policies and primary mortgage insurance
policies, if any, relating to the Mortgage Loans and any property that secured
a Mortgage Loan that is acquired by foreclosure or deed in lieu of
foreclosure.
The Offered Certificates will be treated as "loans . . . secured by an
interest in real property which is . . . residential real property" for
domestic building and loan associations and "real estate assets" for real
estate investment trusts, to the extent described in the Prospectus.
REGULAR CERTIFICATES
The Regular Certificates generally will be treated as newly originated debt
instruments for federal income tax purposes. Beneficial Owners (or in the case
of Definitive Certificates, holders) of the Regular Certificates will be
required to report income on such Certificates in accordance with the accrual
method of accounting.
The Class A-PO Certificates will be issued with original issue discount in
an amount equal to the excess of the initial principal balance thereof over
their issue price. It is anticipated that the Class Certificates will be
issued with original issue discount in an amount equal to the excess of their
initial principal balances (plus days of interest at the pass-through rates
thereon) over their respective issue prices (including accrued interest). It
is also anticipated that the Class Certificates will be issued at a premium
and the Class Certificates will be issued with de minimis original issue
discount for federal income tax purposes. It is further anticipated that the
Class B-3, Class B-4 and Class B-5 Certificates, which are not offered hereby,
will be issued with original issue discount for federal income tax purposes.
The Prepayment Assumption (as defined in the Prospectus) that the Master
Servicer intends to use in determining the rate of accrual of original issue
discount will be calculated using % SPA. No representation is made as to the
actual rate at which the Mortgage Loans will prepay.
RESIDUAL CERTIFICATE
The holder of the Class A-R Certificate must include the taxable income or
loss of the REMIC in determining its federal taxable income. The Class A-R
Certificate will remain outstanding for federal income tax purposes until
there are no Certificates of any other Class outstanding. PROSPECTIVE
INVESTORS ARE CAUTIONED THAT THE CLASS A-R CERTIFICATEHOLDER'S REMIC TAXABLE
INCOME AND THE TAX LIABILITY THEREON MAY EXCEED, AND MAY SUBSTANTIALLY EXCEED,
CASH DISTRIBUTIONS TO SUCH HOLDER DURING CERTAIN PERIODS, IN WHICH EVENT, THE
HOLDER THEREOF MUST HAVE SUFFICIENT ALTERNATIVE SOURCES OF FUNDS TO PAY SUCH
TAX LIABILITY. Furthermore, it is anticipated that all or a substantial
portion of the taxable income of the REMIC includible by the holder of the
Class A-R Certificate will be treated as "excess inclusion" income, resulting
in (i) the inability of such holder to use net operating losses to offset such
income from the REMIC, (ii) the treatment of such income as "unrelated
business taxable income" to certain holders who are otherwise tax-exempt, and
(iii) the treatment of such income as subject to 30% withholding tax to
certain non-U.S. investors, with no exemption or treaty reduction.
The Class A-R Certificate will be considered a "noneconomic residual
interest," with the result that transfers thereof would be disregarded for
federal income tax purposes if any significant purpose of the transferor was
to impede the assessment or collection of tax. Accordingly, the transferee
affidavit used for transfer of the Class A-R Certificate will require the
transferee to affirm that it (i) historically has paid its debts as they have
come due and intends to do so in the future, (ii) understands that it may
incur tax liabilities with respect to the Class A-R Certificate in excess of
cash flows generated thereby, (iii) intends to pay taxes associated with
holding the Class A-R Certificate as such taxes become due and (iv) will not
transfer the Class A-R Certificate to any
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person or entity that does not provide a similar affidavit. The transferor
must certify in writing to the Trustee that, as of the date of the transfer,
it had no knowledge or reason to know that the affirmations made by the
transferee pursuant to the preceding sentence were false. Additionally, the
Class A-R Certificate generally may not be transferred to certain persons who
are not U.S. Persons (as defined herein). See "Description of the
Certificates--Restrictions on Transfer of the Class A-R, Class M and Offered
Class B Certificates" and "Material Federal Income Tax Consequences--Federal
Income Tax Consequences For REMIC Certificates," "--Taxation of Residual
Certificates--Limitations on Offset or Exemption of REMIC Income" and "--Tax-
Related Restrictions on Transfer of Residual Certificates--Noneconomic
Residual Interests" in the Prospectus.
An individual, trust or estate that holds the Class A-R Certificate (whether
such Certificate is held directly or indirectly through certain pass-through
entities) also may have additional gross income with respect to, but may be
subject to limitations on the deductibility of, Servicing Fees on the Mortgage
Loans and other administrative expenses of the REMIC in computing such
holder's regular tax liability, and may not be able to deduct such fees or
expenses to any extent in computing such holder's alternative minimum tax
liability. In addition, some portion of a purchaser's basis, if any, in the
Class A-R Certificate may not be recovered until termination of the REMIC.
Furthermore, the federal income tax consequences of any consideration paid to
a transferee on a transfer of the Class A-R Certificate are unclear. The
preamble to the REMIC Regulations indicates that the Internal Revenue Service
anticipates providing guidance with respect to the federal tax treatment of
such consideration. Any transferee receiving consideration with respect to the
Class A-R Certificate should consult its tax advisors.
DUE TO THE SPECIAL TAX TREATMENT OF RESIDUAL INTERESTS, THE EFFECTIVE AFTER-
TAX RETURN OF THE CLASS A-R CERTIFICATE MAY BE SIGNIFICANTLY LOWER THAN WOULD
BE THE CASE IF THE CLASS A-R CERTIFICATE WERE TAXED AS A DEBT INSTRUMENT, OR
MAY BE NEGATIVE.
See "Material Federal Income Tax Consequences" in the Prospectus.
ERISA CONSIDERATIONS
The Class A-R Certificate may not be purchased by or transferred to any
person which is an employee benefit plan within the meaning of Section 3(3) of
the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and
which is subject to Title I of ERISA or Code Section 4975 (an "ERISA Plan") or
which is a governmental plan, as defined in Section 3(32) of ERISA, subject to
any federal, state or local law ("Similar Law") which is, to a material
extent, similar to the foregoing provisions of ERISA or the Code
(collectively, with an ERISA Plan, a "Plan"), or any person utilizing the
assets of such Plan. Accordingly, the following discussion does not purport to
discuss the considerations under ERISA, Code Section 4975 or Similar Law with
respect to the purchase, acquisition or resale of the Class A-R Certificate
and for purposes of the following discussion all references to the Offered
Certificates are deemed to exclude the Class A-R Certificate.
In addition, under current law the purchase and holding of the Class M or
Offered Class B Certificates by or on behalf of a Plan may result in
"prohibited transactions" within the meaning of ERISA and Code Section 4975 or
Similar Law. Transfer of the Class M or Offered Class B Certificates will not
be made unless the transferee (i) executes a representation letter in form and
substance satisfactory to the Trustee stating that (a) it is not, and is not
acting on behalf of, any such Plan or using the assets of any such Plan to
effect such purchase or (b) if it is an insurance company, that the source of
funds used to purchase the Class M or Offered Class B Certificates is an
"insurance company general account" (as such term is defined in Section V(e)
of Prohibited Transaction Class Exemption 95-60 ("PTE 95-60"), 60 Fed. Reg.
35925 (July 12, 1995)) and there is no Plan with respect to which the amount
of such general account's reserves and liabilities for the contract(s) held by
or on behalf of such Plan and all other Plans maintained by the same employer
(or affiliate thereof as defined in Section V(a)(1) of PTE 95-60) or by the
same employee organization exceeds 10% of the total of all reserves and
liabilities of such general account (as such amounts are determined under
Section I(a) of PTE 95-60) at the
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date of acquisition or (ii) provides (A) an opinion of counsel in form and
substance satisfactory to the Trustee that the purchase or holding of the
Class M or Offered Class B Certificates by or on behalf of such Plan will not
result in the assets of the Trust Estate being deemed to be "plan assets" and
subject to the prohibited transaction provisions of ERISA and the Code or
Similar Law and will not subject the Seller, the Master Servicer or the
Trustee to any obligation in addition to those undertaken in the Pooling and
Servicing Agreement and (B) such other opinions of counsel, officers'
certificates and agreements as the Seller or the Master Servicer may require
in connection with such transfer. The Class M and Offered Class B Certificates
will contain a legend describing such restrictions on transfer and the Pooling
and Servicing Agreement will provide that any attempted or purported transfer
in violation of these transfer restrictions will be null and void and will
vest no rights in any purported transferee. Accordingly, the following
discussion does not purport to discuss the considerations under ERISA, Code
Section 4975 or Similar Law with respect to the purchase, acquisition or
resale of the Class M or Offered Class B Certificates and for purposes of the
following discussion all references to the Offered Certificates are deemed to
exclude the Class M and Offered Class B Certificates.
As described in the Prospectus under "ERISA Considerations," ERISA and the
Code impose certain duties and restrictions on ERISA Plans and certain persons
who perform services for ERISA Plan. Comparable duties and restrictions may
exist under Similar Law on governmental plans and certain persons who perform
services for governmental plans. For example, unless exempted, investment by
an ERISA Plan in the Offered Certificates may constitute a prohibited
transaction under ERISA, the Code or Similar Law. There are certain exemptions
issued by the United States Department of Labor (the "DOL") that may be
applicable to an investment by an ERISA Plan in the Offered Certificates,
including the individual administrative exemption described below and
Prohibited Transaction Class Exemption 83-1 ("PTE 83-1"). For a further
discussion of the individual administrative exemption and PTE 83-1, including
the necessary conditions to their applicability, and other important factors
to be considered by an ERISA Plan contemplating investing in the Offered
Certificates, see "ERISA Considerations" in the Prospectus.
On , , the DOL issued to the Underwriter an individual administrative
exemption, Prohibited Transaction Exemption , Fed. Reg. (the
"Exemption"), from certain of the prohibited transaction rules of ERISA with
respect to the initial purchase, the holding and the subsequent resale by an
ERISA Plan of certificates in pass-through trusts that meet the conditions and
requirements of the Exemption. The Exemption might apply to the acquisition,
holding and resale of the Offered Certificates by an ERISA Plan, provided that
specified conditions are met.
Among the conditions which would have to be satisfied for the Exemption to
apply to the acquisition by an ERISA Plan of the Offered Certificates is the
condition that the ERISA Plan investing in the Offered Certificates be an
"accredited investor" as defined in Rule 501(a)(1) of Regulation D of the
Securities and Exchange Commission under the Securities Act of 1933, as
amended (the "Securities Act").
Before purchasing an Offered Certificate, a fiduciary of an ERISA Plan
should make its own determination as to the availability of the exemptive
relief provided in the Exemption or the availability of any other prohibited
transaction exemptions (including PTE 83-1), and whether the conditions of any
such exemption will be applicable to the Offered Certificates and a fiduciary
of a governmental plan should make its own determination as to the need for
and availability of any exemptive relief under Similar Law. Any fiduciary of
an ERISA Plan considering whether to purchase an Offered Certificate should
also carefully review with its own legal advisors the applicability of the
fiduciary duty and prohibited transaction provisions of ERISA, the Code and
Similar Law to such investment. See "ERISA Considerations" in the Prospectus.
LEGAL INVESTMENT
The Class A and Class M Certificates constitute "mortgage related
securities" for purposes of the Secondary Mortgage Market Enhancement Act of
1984 (the "Enhancement Act") so long as they are rated in one of the two
highest rating categories by at least one nationally recognized statistical
rating organization. As such, the Class A and Class M Certificates are legal
investments for certain entities to the extent provided in the
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Enhancement Act. However, institutions subject to the jurisdiction of the
Office of the Comptroller of the Currency, the Board of Governors of the
Federal Reserve System, the Federal Deposit Insurance Corporation, the Office
of Thrift Supervision, the National Credit Union Administration or state
banking or insurance authorities should review applicable rules, supervisory
policies and guidelines of these agencies before purchasing any of the Offered
Certificates, as certain Subclasses of the Class A Certificates or the Class M
Certificates may be deemed to be unsuitable investments under one or more of
these rules, policies and guidelines and whether certain restrictions may
apply to investments in other Subclasses of the Class A Certificates or the
Class M Certificates. It should also be noted that certain states recently
have enacted, or have proposed enacting, legislation limiting to varying
extents the ability of certain entities (in particular insurance companies) to
invest in mortgage related securities. Investors should consult with their own
legal advisors in determining whether and to what extent the Class A and Class
M Certificates constitute legal investments for such investors. See "Legal
Investment" in the Prospectus.
The Class B-1 and Class B-2 Certificates will not constitute "mortgage
related securities" under the Enhancement Act. The appropriate
characterization of the Class B-1 and Class B-2 Certificates under various
legal investment restrictions, and thus the ability of investors subject to
these restrictions to purchase the Class B-1 and Class B-2 Certificates, may
be subject to significant interpretative uncertainties. All investors whose
investment authority is subject to legal restrictions should consult their own
legal advisors to determine whether, and to what extent, the Class B-1 and
Class B-2 Certificates will constitute legal investments for them. See "Legal
Investment" in the Prospectus.
SECONDARY MARKET
There will not be any market for the Offered Certificates prior to the
issuance thereof. The Underwriter intends to act as a market maker in the
Offered Certificates, subject to applicable provisions of federal and state
securities laws and other regulatory requirements, but is under no obligation
to do so. There can be no assurance that a secondary market in the Offered
Certificates will develop or, if such a market does develop, that it will
provide holders of Offered Certificates with liquidity of investment at any
particular time or for the life of the Offered Certificates. As a source of
information concerning the Certificates and the Mortgage Loans, prospective
investors in Certificates may obtain copies of the reports included in monthly
statements to Certificateholders described under "Description of
Certificates--Reports" upon written request to the Trustee at the Corporate
Trust Office.
UNDERWRITING
Subject to the terms and conditions of the underwriting agreement dated ,
199 and the terms agreement dated , 199 (together, the "Underwriting
Agreement") among Norwest Mortgage, the Seller and [Underwriter], as
underwriter (the "Underwriter"), the Offered Certificates offered hereby are
being purchased from the Seller by the Underwriter upon issuance. The
Underwriter is committed to purchase all of the Offered Certificates if any
Offered Certificates are purchased. The Underwriter has advised the Seller
that it proposes to offer the Offered Certificates, from time to time, for
sale in negotiated transactions or otherwise at prices determined at the time
of sale. Proceeds to the Seller from the sale of the Offered Certificates are
expected to be approximately % of the initial aggregate principal balance of
the Class A Certificates (other than the Class A-PO Certificates),
approximately % of the aggregate initial principal balance of the Class A-PO
Certificates, approximately % of the aggregate initial principal balance of
the Class M Certificates, approximately % of the aggregate initial principal
balance of the Class B-1 Certificates and approximately % of the aggregate
initial principal balance of the Class B-2 Certificates plus, in each case,
accrued interest thereon, other than on an amount equal to the aggregate
initial principal balance of the Class A-PO Certificates, at the rate of %
per annum from , 199 to (but not including) , 199 , before deducting
expenses payable by the Seller. The Underwriter, which is not an affiliate of
the Seller, has advised the Seller that the Underwriter has not allocated the
purchase price paid to the Seller for the Class A Certificates (other than the
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Class A-PO Certificates) among such Subclasses of Class A Certificates. The
Underwriter and any dealers that participate with the Underwriter in the
distribution of the Offered Certificates may be deemed to be underwriters, and
any discounts or commissions received by them and any profit on the resale of
Offered Certificates by them may be deemed to be underwriting discounts or
commissions, under the Securities Act.
The Underwriting Agreement provides that the Seller or Norwest Mortgage will
indemnify the Underwriter against certain civil liabilities under the
Securities Act or contribute to payments which the Underwriter may be required
to make in respect thereof.
LEGAL MATTERS
The validity of the Offered Certificates and certain tax matters with
respect thereto will be passed upon for the Seller by Cadwalader, Wickersham &
Taft, New York, New York. Certain legal matters will be passed upon for the
Underwriters by .
[For Series with a Financial Guaranty Insurance Policy:
EXPERTS
The consolidated balance sheets of Financial Security Assurance Inc. and
Subsidiaries as of December 31, 1995 and 1994, and the related consolidated
statements of income, changes in shareholder's equity, and cash flows for each
of the three years in the period ended December 31, 1995, incorporated by
reference in this Prospectus Supplement, have been incorporated herein in
reliance on the report of Coopers & Lybrand L.L.P., independent accountants,
given on the authority of that firm as experts in auditing and accounting.]
USE OF PROCEEDS
The net proceeds to be received from the sale of the Offered Certificates
will be applied by the Seller to the purchase from Norwest Mortgage of the
Mortgage Loans underlying the Series 199 - Certificates.
RATINGS
It is a condition to the issuance of the Offered Certificates that they will
have been rated [["Aaa" by Moody's Investors Service, Inc. ("Moody's")]["AAA"
by [Fitch Investors Service, L.P. ("Fitch")][Duff & Phelps Credit Rating Co.
("DCR")]][and]["AAA" and "AAAr" by Standard and Poor's ("S&P")]] and [["Aa" by
Moody's]["AA" by [Fitch][DCR][S&P]][and][["A" by [Moody's][Fitch][DCR][S&P]]
[and] [["Baa" by Moody's]["BBB" by [Fitch][DCR][S&P]]. 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. Each security rating
should be evaluated independently of any other security rating.
[The ratings of Moody's on mortgage pass-through certificates address the
likelihood of the receipt by certificateholders of all distributions to which
such certificateholders are entitled. Moody's rating opinions address the
structural, legal and issuer aspects associated with the certificates,
including the nature of the underlying mortgage loans and the credit quality
of the credit support provider, if any. Moody's ratings on pass-through
certificates do not represent any assessment of the likelihood that principal
prepayments may differ from those originally anticipated.]
[The ratings assigned by DCR to mortgage pass-through certificates address
the likelihood of the receipt by certificateholders of all distributions to
which they are entitled under the transaction structure. DCR's ratings
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reflect its analysis of the riskiness of the mortgage loans and its analysis
of the structure of the transaction as set forth in the operative documents.
DCR's ratings do not address the effect on the certificates' yield
attributable to prepayments or recoveries on the underlying mortgage loans. In
addition, the rating of the Class A-R Certificate does not assess the
likelihood of return to the investor in the Class A-R Certificate, except to
the extent of the Class A Subclass Principal Balance thereof and interest
thereon.]
[The ratings of S&P on mortgage pass-through certificates address the
likelihood of the receipt by certificateholders of timely payments of interest
and the ultimate return of principal. S&P ratings take into consideration the
credit quality of the mortgage pool, including any credit support providers,
structural and legal aspects associated with the certificates, and the extent
to which the payment stream on the mortgage pool is adequate to make payments
required under the certificates. S&P's ratings on such certificates do not,
however, constitute a statement regarding frequency of prepayments on the
mortgage loans. S&P's rating does not address the possibility that investors
may suffer a lower than anticipated yield as a result of prepayments of the
underlying mortgages. In addition, it should be noted that in some structures
a default on a mortgage is treated as a prepayment and may have the same
effect on yield as a prepayment.]
[The ratings of Fitch on mortgage pass-through certificates address the
likelihood of the receipt by certificateholders of all distributions to which
such certificateholders are entitled. Fitch's rating opinions address the
structural and legal aspects associated with the certificates, including the
nature of the underlying mortgage loans. Fitch's ratings on pass-through
certificates do not represent any assessment of the likelihood or rate of
principal prepayments and consequently any adverse effect the timing of such
prepayments could have on an investor's anticipated yield.]
The Seller has not requested a rating on the Offered Certificates of any
Subclass or Class by any rating agency other than [Moody's][DCR][S&P] and
[Fitch], although data with respect to the Mortgage Loans may have been
provided to other rating agencies solely for their informational purposes.
There can be no assurance that any rating assigned by any other rating agency
to the Offered Certificates will be as high as those assigned by
[Moody's][DCR][S&P] and [Fitch].
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INDEX OF SIGNIFICANT
PROSPECTUS SUPPLEMENT DEFINITIONS
<TABLE>
<CAPTION>
TERM PAGE
- ---- -----
<S> <C>
Adjusted Pool Amount...................................................... S-35
Adjusted Pool Amount (PO Portion)......................................... S-35
Adjustment Amount......................................................... S-55
Aggregate Current Bankruptcy Losses....................................... S-56
Aggregate Current Fraud Losses............................................ S-55
Aggregate Current Special Hazard Losses................................... S-55
Available Master Servicing Compensation................................... S-36
Bankruptcy Loss........................................................... S-40
Bankruptcy Loss Amount.................................................... S-56
Beneficial Owner.......................................................... S-30
Book-Entry Certificates................................................... S-4
Bulk Purchase Underwritten Loans.......................................... S-14
CBE....................................................................... S-71
Cede...................................................................... S-30
Certificate Account....................................................... S-80
Certificateholder......................................................... S-4
Certificates.............................................................. S-7
Class A Certificates...................................................... Cover
Class A Non-PO Distribution Amount........................................ S-33
Class A Non-PO Optimal Amount............................................. S-37
Class A Non-PO Optimal Principal Amount................................... S-38
Class A Non-PO Principal Balance.......................................... S-35
Class A Non-PO Principal Distribution Amount.............................. S-39
Class A Optimal Amount.................................................... S-38
Class A Percentage........................................................ S-17
Class A-PO Deferred Amount................................................ S-42
Class A-PO Distribution Amount............................................ S-42
Class A-PO Optimal Principal Amount....................................... S-42
Class A Prepayment Percentage............................................. S-17
Class A Principal Balance................................................. S-35
Class A Subclass Interest Accrual Amount.................................. S-34
Class A Subclass Interest Shortfall Amount................................ S-38
Class A Subclass Principal Balance........................................ S-34
Class A Voting Interest................................................... S-74
Class B Certificates...................................................... Cover
Class B Principal Balance................................................. S-35
Class B Subclass Distribution Amount...................................... S-33
Class B Subclass Interest Accrual Amount.................................. S-34
Class B Subclass Interest Shortfall Amount................................ S-38
Class B Subclass Principal Balance........................................ S-35
Class B Voting Interest................................................... S-75
Class B-1 Principal Distribution Amount................................... S-43
Current Class B-1 Fractional Interest..................................... S-46
Class B-2 Principal Distribution Amount................................... S-43
Current Class B-2 Fractional Interest..................................... S-46
Current Class B-3 Fractional Interest..................................... S-46
</TABLE>
<TABLE>
<CAPTION>
TERM PAGE
- ---- -----
<S> <C>
Current Class B-4 Fractional Interest..................................... S-46
Class M Certificates...................................................... Cover
Class M Distribution Amount............................................... S-33
Class M Interest Accrual Amount........................................... S-34
Class M Interest Shortfall Amount......................................... S-38
Class M Optimal Amount.................................................... S-38
Class M Optimal Principal Amount.......................................... S-43
Class M Percentage........................................................ S-44
Class M Prepayment Percentage............................................. S-44
Class M Principal Balance................................................. S-35
Class M Principal Distribution Amount..................................... S-43
Closing Date.............................................................. S-12
Code...................................................................... S-27
Companion Certificates.................................................... S-2
Compensating Interest..................................................... S-16
Cooperatives.............................................................. S-57
Co-op Shares.............................................................. S-57
Cross-Over Date........................................................... S-54
Current Class M Fractional Interest....................................... S-45
Curtailment Interest Shortfalls........................................... S-37
Cut-Off Date Aggregate Principal Balance.................................. S-57
DCR....................................................................... S-8
Debt Service Reduction.................................................... S-40
Deficient Valuation....................................................... S-40
Definitive Certificates................................................... S-11
Determination Date........................................................ S-31
Discount Mortgage Loans................................................... S-3
Disqualified Organization................................................. S-4
Distribution Date......................................................... S-2
DOL....................................................................... S-82
DTC....................................................................... S-11
Enhancement Act........................................................... S-27
ERISA..................................................................... S-27
ERISA Plan................................................................ S-81
Exchange Act.............................................................. S-51
Excess Bankruptcy Loss.................................................... S-56
Excess Bankruptcy Losses.................................................. S-56
Excess Fraud Loss......................................................... S-56
Excess Fraud Losses....................................................... S-55
Excess Principal Payment.................................................. S-48
Excess Special Hazard Loss................................................ S-55
Excess Special Hazard Losses.............................................. S-55
Exemption................................................................. S-82
FICO Scores............................................................... S-62
Financial Security........................................................ S-49
Fitch..................................................................... S-8
Fixed Retained Yield...................................................... S-79
Fraud Loss................................................................ S-40
</TABLE>
S-86
<PAGE>
<TABLE>
<CAPTION>
TERM PAGE
- ---- -----
<S> <C>
Fraud Loss Amount......................................................... S-56
General Standards......................................................... S-13
Holdings.................................................................. S-50
Institutional Conduit Correspondents...................................... S-14
Liquidated Loan........................................................... S-40
Liquidated Loan Loss...................................................... S-40
Loss Severity Percentage.................................................. S-72
Master Servicer........................................................... S-2
Master Servicing Fee...................................................... S-75
Master Servicing Fee Rate................................................. S-75
Mid-Month Receipt Period.................................................. S-77
Modified Standards........................................................ S-13
Month End Interest........................................................ S-36
Moody's................................................................... S-8
Mortgage Loans............................................................ S-2
Mortgaged Properties...................................................... S-57
Mortgages................................................................. S-57
Net Foreclosure Profits................................................... S-49
Net Mortgage Interest Rate................................................ S-36
Net Partial Liquidation Proceeds.......................................... S-32
Non-PO Fraction........................................................... S-17
Non-PO Voting Interest.................................................... S-74
No Ratio.................................................................. S-63
Non-Supported Interest Shortfalls......................................... S-16
Norwest Bank.............................................................. S-2
Norwest Frederick-Serviced Loans.......................................... S-76
Norwest Mortgage.......................................................... S-2
Norwest Mortgage Correspondent............................................ S-2
Norwest Non-Frederick-Serviced Loans...................................... S-76
Offered Certificates...................................................... Cover
Offered Class B Certificates.............................................. Cover
Original Class B-1 Fractional Interest.................................... S-46
Original Class B-2 Fractional Interest.................................... S-46
Original Class B-3 Fractional Interest.................................... S-46
Original Class B-4 Fractional Interest.................................... S-46
Original Class M Fractional Interest...................................... S-45
Original Subordinated Principal Balance................................... S-41
Other Originators......................................................... S-61
Other Servicers........................................................... S-76
PAC Certificates.......................................................... S-2
PAC Principal Amount...................................................... S-46
Partial Liquidation Proceeds.............................................. S-32
Pass-Through Rate......................................................... S-15
Percentage Interest....................................................... S-34
Periodic Advance.......................................................... S-49
Plan...................................................................... S-27
PO Fraction............................................................... S-18
Pool Balance (Non-PO Portion)............................................. S-10
Pool Balance (PO Portion)................................................. S-9
Pool Certification Underwritten Loans..................................... S-13
Pool Distribution Amount.................................................. S-31
</TABLE>
<TABLE>
<CAPTION>
TERM PAGE
- ---- -----
<S> <C>
Pool Distribution Amount Allocation....................................... S-32
Pooling and Servicing Agreement........................................... S-74
Premium Mortgage Loans.................................................... S-58
Prepayments in Full....................................................... S-36
Prepayment Interest Shortfalls............................................ S-36
Prior Month Receipt Period................................................ S-77
Prospectus................................................................ S-7
PTE 83-1.................................................................. S-82
PTE 95-60................................................................. S-81
Realized Loss............................................................. S-40
Record Date............................................................... S-31
Regular Certificates...................................................... S-79
Relocation Mortgage Loans................................................. S-58
REMIC..................................................................... S-4
Remittance Date........................................................... S-32
REO Property.............................................................. S-76
Residual Certificate...................................................... S-80
S&P....................................................................... S-8
Scheduled Principal Balance............................................... S-40
Senior Certificates....................................................... S-8
SDA....................................................................... S-71
Securities Act............................................................ S-82
Seller.................................................................... S-2
Series 199 - Certificates................................................ Cover
Servicer.................................................................. S-2
Servicers................................................................. S-76
Servicer Custodial Account................................................ S-77
Servicing Fee Rate........................................................ S-79
Similar Law............................................................... S-27
SPA....................................................................... S-66
Special Hazard Loss....................................................... S-40
Special Hazard Loss Amount................................................ S-55
Structuring Assumptions................................................... S-66
Subclass.................................................................. Cover
Subclass B Optimal Amount................................................. S-39
Subclass B Optimal Principal Amount....................................... S-43
Subclass B Percentage..................................................... S-44
Subclass B Prepayment Percentage.......................................... S-44
Subordinated Certificates................................................. Cover
Subordinated Percentage................................................... S-42
Subordinated Prepayment Percentage........................................ S-42
Target Regime............................................................. S-78
Trust Estate.............................................................. S-2
Trustee................................................................... S-8
U.S. Person............................................................... S-51
UGRIC..................................................................... S-13
Underlying Servicing Agreement............................................ S-7
Underwriter............................................................... Cover
Underwriting Agreement.................................................... S-23
Underwriting Standards.................................................... S-13
Unscheduled Principal Receipt Period...................................... S-77
Unscheduled Principal Receipts............................................ S-31
</TABLE>
S-87
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS, SUBJECT TO COMPLETION, DATED MARCH 17, 1997
NORWEST INTEGRATED STRUCTURED ASSETS, INC.
SELLER
MORTGAGE ASSET-BACKED PASS-THROUGH CERTIFICATES
(ISSUABLE IN SERIES)
--------------
Norwest Integrated Structured Assets, Inc. (the "Seller") may sell from time
to time, under this Prospectus and applicable Prospectus Supplements, Mortgage
Asset-Backed Pass-Through Certificates (the "Certificates"), issuable in series
(each, a "Series") consisting of one or more classes (each, a "Class") of
Certificates. Any Class of Certificates may be divided into two or more
subclasses (each, a "Subclass").
The Certificates of a Series will represent beneficial ownership interests in
a separate trust formed by the Seller. The property of each such trust (for
each Series, the "Trust Estate") will be comprised of (i) fixed or adjustable
interest rate, conventional, first mortgage loans (the "Mortgage Loans"),
secured by one- to four-family residential properties and (ii) certain
ancillary assets as described under "The Trust Estates--General." The Mortgage
Loans will have been acquired by the Seller from its affiliate, Norwest
Mortgage, Inc. ("Norwest Mortgage"), and will have been underwritten either to
Norwest Mortgage's underwriting standards, to the underwriting standards of
certain unaffiliated originators or of a Pool Insurer. All of the Mortgage
Loans will be serviced by Norwest Mortgage individually or together with one or
more other servicers (each, a "Servicer"). Norwest Bank Minnesota, National
Association ("Norwest Bank"), an affiliate of Norwest Mortgage, will act as
master servicer with respect to each Trust Estate (in such capacity, the
"Master Servicer").
Each Series of Certificates may include one or more Classes of Certificates
(the "Subordinated Certificates") that are subordinate in right of
distributions or otherwise to one or more of the other Classes of such Series
(the "Senior Certificates"). If specified in the applicable Prospectus
Supplement, the relative interests of the Senior Certificates and the
Subordinated Certificates of a Series in the Trust Estate may be subject to
adjustment from time to time on the basis of distributions received in respect
thereof and losses allocated to the Subordinated Certificates. If and to the
extent specified in the Prospectus Supplement, credit support may be provided
for any Series of Certificates, or any Classes or Subclasses thereof, in the
form of a limited guarantee, financial guaranty insurance policy, surety bond,
letter of credit, mortgage pool insurance policy, reserve fund, cross-support,
overcollateralization or other form of credit enhancement as described herein
or therein. See "Description of the Certificates--Other Credit Enhancement."
PROSPECTIVE INVESTORS IN THE CERTIFICATES SHOULD CONSIDER THE FACTORS
DISCUSSED UNDER "RISK FACTORS" ON PAGE 11.
Capitalized terms used in this Prospectus are defined at the locations
identified in the "Index of Significant Definitions" beginning on page 88.
Except for the Seller's limited obligations in connection with certain
breaches of its representations and warranties, certain undertakings and
obligations of the Master Servicer and Norwest Mortgage's obligations as a
Servicer, the Certificates will not represent obligations of the Seller, the
Master Servicer or Norwest Mortgage, or any affiliate of the Seller, the Master
Servicer or Norwest Mortgage.
There will have been no public market for the Certificates of any Series
prior to the offering thereof. No assurance can be given that such a market
will develop, or that if such a market does develop, it will provide
Certificateholders with liquidity of investment or will continue for the life
of the Certificates.
--------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
--------------
The Certificates may be sold from time to time through one or more different
methods, including through underwriting syndicates led by one or more managing
underwriters or through one or more underwriters acting alone. See "Plan of
Distribution." Affiliates of the Seller may from time to time act as agents or
underwriters in connection with the sale of the Certificates.
This Prospectus may not be used to consummate sales of Certificates unless
accompanied by the Prospectus Supplement relating to the offering of such
Certificates.
--------------
THE DATE OF THIS PROSPECTUS IS , 199
<PAGE>
If specified in the applicable Prospectus Supplement, an election will be
made to treat the Trust Estate (or one or more segregated pools of assets
therein) underlying a Series of Certificates as a "real estate mortgage
investment conduit" (a "REMIC") for federal income tax purposes. See "Material
Federal Income Tax Consequences."
REPORTS
The Master Servicer will prepare, and the Trustee or other Paying Agent
appointed for each Series by the Master Servicer will forward to the
Certificateholders of each Series statements containing information with
respect to principal and interest payments and the related Trust Estate, as
described herein under "The Pooling and Servicing Agreement--Reports to
Certificateholders" and in the applicable Prospectus Supplement under
"Description of the Certificates--Reports" for such Series. No information
contained in such reports will have been examined or reported upon by an
independent public accountant. See "The Pooling and Servicing Agreement--
Reports to Certificateholders." In addition, each Servicer for each Series
will furnish to the Master Servicer (who will be required to furnish promptly
to the Trustee for such Series), a statement from a firm of independent public
accountants with respect to the examination of certain documents and records
relating to a random sample of mortgage loans serviced by such Servicer
pursuant to the related Underlying Servicing Agreement and/or other similar
agreements. See "Servicing of the Mortgage Loans--Evidence as to Compliance."
Copies of the statements provided by the Master Servicer to the Trustee will
be furnished to Certificateholders of each Series upon request addressed to
the Trustee for the applicable Series or to the Master Servicer c/o Norwest
Bank Minnesota, National Association, 11000 Broken Land Parkway, Columbia,
Maryland 21044-3562, Attention: Securities Administration Services Manager.
ADDITIONAL INFORMATION
This Prospectus contains, and the Prospectus Supplement for each Series of
Certificates will contain, a summary of the material terms of the documents
referred to herein and therein, but neither contains nor will contain all of
the information set forth in the Registration Statement of which this
Prospectus is a part. For further information, reference is made to such
Registration Statement and the exhibits thereto which the Seller has filed
with the Securities and Exchange Commission (the "Commission"), Washington,
D.C., under the Securities Act of 1933, as amended (the "Securities Act").
Statements contained in this Prospectus and any Prospectus Supplement as to
the contents of any contract or other document referred to are summaries and,
in each instance, reference is made to the copy of the contract or other
document filed as an exhibit to the Registration Statement, each such
statement being qualified in all respects by such reference. Copies of the
Registration Statement may be obtained from the Public Reference Section of
the Commission, Washington, D.C. 20549 upon payment of the prescribed charges,
or may be examined free of charge at the Commission's offices, 450 Fifth
Street N.W., Washington, D.C. 20549 or at the regional offices of the
Commission located at Suite 1300, 7 World Trade Center, New York, New York
10048 and Suite 1400, 500 West Madison Street, Chicago, Illinois 60661-2511.
The Commission also maintains a site on the World Wide Web at "http://
www.sec.gov" at which users can view and download copies of reports, proxy and
information statements and other information filed electronically through the
Electronic Data Gathering, Analysis and Retrieval ("EDGAR") system. The Seller
has filed the Registration Statement, including all exhibits thereto, through
the EDGAR system and therefore such materials should be available by logging
onto the Commission's Web site. The Commission maintains computer terminals
providing access to the EDGAR system at each of the offices referred to above.
Copies of any documents incorporated herein by reference will be provided to
each person to whom a Prospectus is delivered upon written or oral request
directed to Norwest Integrated Structured Assets, Inc., 7485 New Horizon Way,
Frederick, Maryland 21703, telephone number (301) 846-8200.
ADDITIONAL DETAILED INFORMATION
The Seller intends to offer by subscription detailed mortgage loan
information in machine readable format updated on a monthly basis (the
"Detailed Information") with respect to each outstanding Series of
Certificates. The Detailed Information will reflect payments made on the
individual mortgage loans, including prepayments in full and in part made on
such mortgage loans, as well as the liquidation of any such mortgage loans,
and will identify various characteristics of the mortgage loans. Subscribers
of the Detailed Information are expected to include a number of major
investment brokerage firms as well as financial information service firms.
Some of such firms, including certain investment brokerage firms as well as
Bloomberg L.P. through the "The Bloomberg(R)" service and Merrill Lynch
Mortgage Capital Inc. through the "CMO Passport(R)" service, may, in
accordance with their individual business practices and fee schedules, if any,
make portions of, or summaries of portions of, the Detailed Information
available to their customers and subscribers. The Seller, the Master Servicer
and their respective affiliates have no control over and take no
responsibility for the actions of such firms in processing, analyzing or
disseminating such information. For further information regarding the Detailed
Information and subscriptions thereto, please contact Norwest Integrated
Structured Assets, Inc., 7485 New Horizon Way, Frederick, Maryland 21703,
telephone number (301) 846-8200.
2
<PAGE>
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
There are incorporated herein by reference all documents and reports filed
or caused to be filed by the Seller with respect to a Trust Estate pursuant to
Section 13(a), 13(c), 14 or 15(d) of the Exchange Act, prior to the
termination of an offering of Certificates evidencing interests therein. The
Seller does not intend to file periodic reports following the expiration of
the reporting period prescribed by Rule 15d-1 of Regulation 15D under the
Exchange Act. Upon request, the Master Servicer will provide or cause to be
provided without charge to each person to whom this Prospectus is delivered in
connection with the offering of one or more Classes of Certificates a list
identifying all filings with respect to a Trust Estate pursuant to Section
13(a), 13(c), 14 or 15(d) of the Exchange Act since the Seller's latest fiscal
year covered by its annual report on Form 10-K and a copy of any or all
documents or reports incorporated herein by reference, in each case to the
extent such documents or reports relate to one or more of such Classes of such
Certificates, other than the exhibits to such documents (unless such exhibits
are specifically incorporated by reference in such documents). Requests to the
Master Servicer should be directed to: Norwest Integrated Structured Assets,
Inc., 7485 New Horizon Way, Frederick, Maryland 21703, telephone number (301)
846-8200.
3
<PAGE>
TABLE OF CONTENTS
PROSPECTUS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Reports.................................................................... 2
Additional Information..................................................... 2
Additional Detailed Information............................................ 2
Incorporation of Certain Information by Reference.......................... 3
Summary of Prospectus...................................................... 6
Risk Factors............................................................... 11
Limited Liquidity......................................................... 11
Limited Obligations....................................................... 11
Limitations, Reduction and Substitution of Credit Enhancement............. 11
Risks of the Mortgage Loans............................................... 11
Underwriting Standards.................................................... 12
Yield and Prepayment Considerations....................................... 12
Book-Entry System for Certain Classes and Subclasses of Certificates...... 13
The Trust Estates.......................................................... 13
General................................................................... 13
Mortgage Loans............................................................ 13
Fixed Rate Loans......................................................... 14
Adjustable Rate Loans.................................................... 14
Graduated Payment Loans.................................................. 15
Subsidy Loans............................................................ 15
Buy-Down Loans........................................................... 16
Balloon Loans............................................................ 16
Pledged Asset Mortgage Loans............................................. 16
The Seller................................................................. 16
Norwest Mortgage........................................................... 17
Norwest Bank............................................................... 17
The Mortgage Loan Programs................................................. 18
Mortgage Loan Production Sources.......................................... 18
Acquisition of Mortgage Loans from Correspondents......................... 18
Mortgage Loan Underwriting................................................ 19
General Standards........................................................ 19
Modified Standards....................................................... 23
Pool Certification Underwriting.......................................... 23
Representations and Warranties............................................ 24
Description of the Certificates............................................ 27
General................................................................... 27
Definitive Form........................................................... 28
Book-Entry Form........................................................... 29
Distributions to Certificateholders....................................... 30
General.................................................................. 30
Distributions of Interest................................................ 31
Distributions of Principal............................................... 32
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Other Credit Enhancement................................................. 33
Limited Guarantee....................................................... 33
Financial Guaranty Insurance Policy or Surety Bond...................... 33
Letter of Credit........................................................ 33
Pool Insurance Policies................................................. 34
Special Hazard Insurance Policies....................................... 34
Mortgagor Bankruptcy Bond............................................... 34
Reserve Fund............................................................ 34
Cross Support........................................................... 34
Overcollateralization................................................... 34
Prepayment and Yield Considerations....................................... 35
Pass-Through Rates....................................................... 35
Effects of Defaults...................................................... 35
Scheduled Delays in Distributions........................................ 35
Effect of Principal Prepayments.......................................... 35
Weighted Average Life of Certificates.................................... 36
Servicing of the Mortgage Loans........................................... 37
The Master Servicer...................................................... 37
The Servicers............................................................ 38
Payments on Mortgage Loans............................................... 38
Periodic Advances and Limitations Thereon................................ 42
Collection and Other Servicing Procedures................................ 42
Enforcement of Due-on-Sale Clauses; Realization Upon Defaulted Mortgage
Loans................................................................... 43
Insurance Policies....................................................... 44
Fixed Retained Yield, Servicing Compensation and Payment of Expenses..... 45
Evidence as to Compliance................................................ 46
Certain Matters Regarding the Master Servicer............................. 47
The Pooling and Servicing Agreement....................................... 48
Assignment of Mortgage Loans to the Trustee.............................. 48
Optional Purchases....................................................... 49
Reports to Certificateholders............................................ 49
List of Certificateholders............................................... 50
Events of Default........................................................ 50
Rights Upon Event of Default............................................. 50
Amendment................................................................ 51
Termination; Optional Purchase of Mortgage Loans......................... 52
The Trustee.............................................................. 52
Certain Legal Aspects of the Mortgage Loans............................... 53
General.................................................................. 53
Foreclosure.............................................................. 53
Foreclosure on Shares of Cooperatives.................................... 54
Rights of Redemption..................................................... 54
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Anti-Deficiency Legislation and Other Limitations on Lenders.............. 55
Soldiers' and Sailors' Civil Relief Act and Similar Laws.................. 56
Environmental Considerations.............................................. 56
"Due-on-Sale" Clauses..................................................... 58
Applicability of Usury Laws............................................... 59
Enforceability of Certain Provisions...................................... 59
Material Federal Income Tax Consequences................................... 60
Federal Income Tax Consequences for REMIC Certificates.................... 60
General................................................................... 60
Status of REMIC Certificates.............................................. 60
Qualification as a REMIC.................................................. 61
Taxation of Regular Certificates.......................................... 62
General.................................................................. 62
Original Issue Discount.................................................. 62
Acquisition Premium...................................................... 64
Variable Rate Regular Certificates....................................... 65
Market Discount.......................................................... 66
Premium.................................................................. 66
Election to Treat All Interest Under the Constant Yield Method........... 67
Treatment of Losses...................................................... 67
Sale or Exchange of Regular Certificates................................. 67
Taxation of Residual Certificates......................................... 68
Taxation of REMIC Income................................................. 68
Basis and Losses......................................................... 69
Treatment of Certain Items of REMIC Income and Expense................... 70
Original Issue Discount and Premium..................................... 70
Market Discount......................................................... 70
Premium................................................................. 70
Limitations on Offset or Exemption of REMIC Income....................... 70
Tax-Related Restrictions on Transfer of Residual Certificates............ 71
Disqualified Organizations.............................................. 71
Noneconomic Residual Interests.......................................... 72
Foreign Investors....................................................... 72
Sale or Exchange of a Residual Certificate............................... 73
Mark to Market Regulations............................................... 73
Taxes That May Be Imposed on the REMIC Pool............................... 73
Prohibited Transactions.................................................. 73
Contributions to the REMIC Pool After the Startup Day.................... 74
Net Income from Foreclosure Property..................................... 74
Liquidation of the REMIC Pool............................................. 74
Administrative Matters.................................................... 74
Limitations on Deduction of Certain Expenses.............................. 75
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Taxation of Certain Foreign Investors.................................... 75
Regular Certificates.................................................... 75
Residual Certificates................................................... 75
Backup Withholding....................................................... 76
Reporting Requirements................................................... 76
Federal Income Tax Consequences for Certificates as to Which No REMIC
Election is Made........................................................ 76
General................................................................. 76
Tax Status.............................................................. 77
Premium and Discount.................................................... 78
Premium................................................................ 78
Original Issue Discount................................................ 78
Market Discount........................................................ 78
Recharacterization of Servicing Fees.................................... 78
Sale or Exchange of Certificates........................................ 79
Stripped Certificates.................................................... 79
General................................................................. 79
Status of Stripped Certificates......................................... 80
Taxation of Stripped Certificates....................................... 80
Original Issue Discount................................................ 80
Sale or Exchange of Stripped Certificates.............................. 81
Purchase of More Than One Class of Stripped Certificates............... 81
Possible Alternative Characterizations................................. 81
Reporting Requirements and Backup Withholding............................ 82
Taxation of Certain Foreign Investors.................................... 82
ERISA Considerations...................................................... 82
General.................................................................. 82
Certain Requirements Under ERISA......................................... 82
General................................................................. 82
Parties in Interest/Disqualified Persons................................ 83
Delegation of Fiduciary Duty............................................ 83
Administrative Exemptions................................................ 83
Individual Administrative Exemptions.................................... 83
PTE 83-1................................................................ 84
Exempt Plans............................................................. 85
Unrelated Business Taxable Income--Residual Certificates................. 85
Legal Investment.......................................................... 86
Plan of Distribution...................................................... 87
Use of Proceeds........................................................... 88
Legal Matters............................................................. 88
Rating.................................................................... 88
Index of Significant Definitions.......................................... 89
</TABLE>
5
<PAGE>
SUMMARY OF PROSPECTUS
The following is qualified in its entirety by reference to the detailed
information appearing elsewhere in this Prospectus, and by reference to the
information with respect to each Series of Certificates contained in the
applicable Prospectus Supplement. Certain capitalized terms used and not
otherwise defined herein shall have the meanings given elsewhere in this
Prospectus. See the "Index of Significant Definitions," beginning on page 88.
Title of Securities .............. Mortgage Asset-Backed Pass-Through
Certificates (Issuable in Series).
Seller............................ Norwest Integrated Structured Assets, Inc.
(the "Seller"), a direct, wholly-owned
subsidiary of Norwest Mortgage, Inc.
("Norwest Mortgage"), which is an
indirect, wholly-owned subsidiary of
Norwest Corporation ("Norwest
Corporation"). See "The Seller."
Servicers......................... Norwest Mortgage and, to the extent
specified in the applicable Prospectus
Supplement, one or more other entities
identified therein (each, a "Servicer")
will service the Mortgage Loans contained
in each Trust Estate. Each Servicer will
perform certain servicing functions with
respect to the Mortgage Loans serviced by
it pursuant to a related Servicing
Agreement (each, an "Underlying Servicing
Agreement"). See "Servicing of the
Mortgage Loans."
Master Servicer................... Norwest Bank Minnesota, National
Association ("Norwest Bank" and, in such
capacity, the "Master Servicer"). Norwest
Bank is a direct, wholly-owned subsidiary
of Norwest Corporation and an affiliate of
the Seller. The Master Servicer will
perform certain administration,
calculation and reporting functions with
respect to each Trust Estate and will
supervise the Servicers, in each case,
pursuant to a Pooling and Servicing
Agreement. In addition, the Master
Servicer will generally be required to
make Periodic Advances (to the extent
described under "Servicing of the Mortgage
Loans--Periodic Advances and Limitations
Thereon") with respect to the Mortgage
Loans in each Trust Estate to the extent
that the related Servicer (other than
Norwest Mortgage) fails to make a required
Periodic Advance. See "Servicing of the
Mortgage Loans--The Master Servicer" and
"--Periodic Advances and Limitations
Thereon."
The Trust Estates................. Each Trust Estate will be formed and each
Series of Certificates will be issued
pursuant to a pooling and servicing
agreement (each, a "Pooling and Servicing
Agreement") among the Seller, the Master
Servicer and the Trustee specified in the
applicable Prospectus Supplement. Each
Trust Estate will consist of the related
Mortgage Loans (other than the Fixed
Retained Yield, if any) and certain other
related property, as specified in the
applicable Prospectus Supplement.
The Mortgage Loans will have been acquired
by the Seller from its affiliate Norwest
Mortgage. The Mortgage Loans will have
been originated by Norwest Mortgage or an
affiliate or will have been
6
<PAGE>
acquired by Norwest Mortgage directly or
indirectly from other mortgage loan
originators. All of the Mortgage Loans
will have been underwritten either to
Norwest Mortgage's general or modified
standards, to the extent specified in the
applicable Prospectus Supplement, to the
standards of certain unaffiliated
originators or of a Pool Insurer or to
standards otherwise specified in the
Prospectus Supplement. See "The Trust
Estates" and "The Mortgage Loan Programs--
Mortgage Loan Underwriting."
The Mortgage Loans................ The Mortgage Loans will be conventional,
fixed or adjustable interest rate,
mortgage loans secured by first liens on
one- to four-family residential
properties. In addition, if so specified
in the applicable Prospectus Supplement,
such Mortgage Loans may include mortgage
loans with special payment features, such
as graduated payment loans, subsidy loans,
buy-down loans, balloon loans and pledged
asset mortgage loans, which are described
herein under "The Trust Estates--The
Mortgage Loans."
The particular characteristics or expected
characteristics of the Mortgage Loans and
a description of the other property, if
any, included in a Trust Estate will be
set forth in the applicable Prospectus
Supplement. See "The Trust Estates."
Description of the Certificates... Each Series of Certificates will include
one or more Classes, any of which may
consist of multiple Subclasses. A Class or
Subclass of Certificates will be entitled,
to the extent of funds available, to
either (i) principal and interest payments
in respect of the related Mortgage Loans,
(ii) principal distributions, with no
interest distributions, (iii) interest
distributions, with no principal
distributions or (iv) such other
distributions as are described in the
applicable Prospectus Supplement.
Distributions on the
Certificates...................... Interest. With respect to each Series of
Certificates, interest on the related
Mortgage Loans at the weighted average of
the applicable Mortgage Interest Rates
thereof (net of servicing fees and any
other amounts specified in the applicable
Prospectus Supplement), will be passed
through to holders of the related Classes
of Certificates in the aggregate, in
accordance with the particular terms of
each such Class of Certificates. See
"Description of the Certificates--
Distributions to Certificateholders--
Distributions of Interest" herein. Except
as otherwise specified in the applicable
Prospectus Supplement, interest on each
Class and Subclass of Certificates of each
Series will accrue at the pass-through
rate for each Class and Subclass indicated
in the applicable Prospectus Supplement
(each, a "Pass-Through Rate") on the
outstanding principal balance or notional
amount thereof.
Principal. With respect to a Series of
Certificates, principal payments
(including prepayments) will be passed
through to holders of the related
Certificates or otherwise applied in
accordance with the related Pooling and
Servicing Agreement on each Distribution
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Date. Distributions in reduction of
principal balance will be allocated among
the Classes and Subclasses of Certificates
of a Series in the manner specified in the
applicable Prospectus Supplement. See
"Description of the Certificates--
Distributions to Certificateholders--
Distributions of Principal."
Cut-Off Date...................... The date specified in the applicable
Prospectus Supplement.
Distribution Dates................ Distributions on the Certificates will
generally be made on the 25th day (or, if
such day is not a business day, the
business day following the 25th day) of
each month, commencing with the month
following the month in which the
applicable Cut-Off Date occurs (each, a
"Distribution Date"). If so specified in
the applicable Prospectus Supplement,
distributions on Certificates may be made
on a different day of each month or may be
made quarterly, or semi-annually, on the
dates specified in such Prospectus
Supplement.
Record Dates...................... Distributions will be made on each
Distribution Date to Certificateholders of
record at the close of business on (unless
a different date is specified in the
applicable Prospectus Supplement) the last
business day of the month preceding the
month in which such Distribution Date
occurs (each, a "Record Date").
Credit Enhancement................ A Series of Certificates may include one
or more Classes of Senior Certificates and
one or more Classes of Subordinated
Certificates. The rights of the holders of
Subordinated Certificates of a Series to
receive distributions with respect to the
related Mortgage Loans will be
subordinated to such rights of the holders
of the Senior Certificates of the same
Series to the extent and in the manner
specified in the applicable Prospectus
Supplement. This subordination is intended
to enhance the likelihood of the timely
receipt by the Senior Certificateholders
of their proportionate share of scheduled
monthly principal and interest payments on
the related Mortgage Loans and to protect
them against losses. This protection will
be effected by (i) the preferential right
of the Senior Certificateholders to
receive, prior to any distribution being
made in respect of the related
Subordinated Certificates on each Dis-
tribution Date, current distributions on
the related Mortgage Loans of principal
and interest due them on each Distribution
Date out of the funds available for
distributions on such date, (ii) by the
right of such holders to receive future
distributions on the Mortgage Loans that
would otherwise have been payable to the
holders of Subordinated Certificates
and/or (iii) by the prior allocation to
the Subordinated Certificate of all or a
portion of losses realized on the
underlying Mortgage Loans.
If so specified in the applicable
Prospectus Supplement, the Certificates of
any Series, or any one or more Classes
thereof, may be entitled to the benefits
of a limited guarantee, financial guaranty
insurance policy, surety bond, letter of
credit, mortgage pool insurance policy,
reserve fund, cross-support,
overcollateralization
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or other form of credit enhancement as
specified in the applicable Prospectus
Supplement. See "Description of the
Certificates--Other Credit Enhancement."
Periodic Advances................. In the event of delinquencies in payments
on any Mortgage Loan, the Servicer
servicing such Mortgage Loan will be
obligated to make advances of cash
("Periodic Advances") to the Servicer
Custodial Account (as defined herein under
"Servicing of the Mortgage Loans--Payments
on Mortgage Loans") to the extent that
such Servicer determines such Periodic
Advances would be recoverable from future
payments and collections on such Mortgage
Loan. Any such Periodic Advances will be
reimbursable to such Servicer as described
herein under "Servicing of the Mortgage
Loans--Periodic Advances and Limitations
Thereon" and in the applicable Prospectus
Supplement. The Master Servicer or Trustee
will, in certain circumstances, be
required to make Periodic Advances upon a
Servicer default. See "Servicing of the
Mortgage Loans--Periodic Advances and
Limitations Thereon."
Forms of Certificates............. The Certificates will be issued either (i)
in book-entry form ("Book-Entry
Certificates") through the facilities of
The Depository Trust Company ("DTC") or
(ii) in fully registered, certificated
form ("Definitive Certificates").
An investor in a Class or Subclass of
Book-Entry Certificates will not receive a
physical certificate representing its
ownership interest in such Book-Entry
Certificates, except under extraordinary
circumstances which are discussed in
"Description of the Certificates--
Definitive Form" in this Prospectus.
Instead, DTC will effect payments and
transfers by means of its electronic
recordkeeping services, acting through
certain participating organizations. This
may result in certain delays in receipt of
distributions by an investor and may
restrict an investor's ability to pledge
its securities. The rights of investors in
the Book-Entry Certificates may generally
only be exercised through DTC and its
participating organizations. See
"Description of the Certificates--Book-
Entry Form" in this Prospectus.
Optional Purchase of Defaulted
Mortgage Loans.................... The Seller may, subject to the terms of
the applicable Pooling and Servicing
Agreement, purchase any defaulted Mortgage
Loan or any Mortgage Loan as to which
default is reasonably foreseeable from the
related Trust Estate. See "Pooling and
Servicing Agreement--Optional Purchases."
Optional Purchase of All Mortgage
Loans............................. If so specified in the Prospectus
Supplement with respect to a Series, all,
but not less than all, of the Mortgage
Loans in the related Trust Estate and any
property acquired in respect thereof at
the time, may be purchased by the Seller,
Norwest Mortgage or such other party as is
specified in the applicable Prospectus
Supplement, in the manner and at the price
specified in such Prospectus Supplement.
The terms of any such purchase will not
permit the exercise of such
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<PAGE>
an option where the aggregate outstanding
principal balance of any Series of
Certificates is greater than 10% of the
initial principal balance of such
Certificates. In the event that an
election is made to treat the related
Trust Estate (or one or more segregated
pools of assets therein) as a REMIC, any
such purchase will be effected only
pursuant to a "qualified liquidation," as
defined under Section 860F(a)(4)(A) of the
Internal Revenue Code of 1986, as amended
(the "Code"). Exercise of the right of
purchase will effect the early retirement
of the Certificates of that Series. See
"Prepayment and Yield Considerations."
ERISA Limitations................. A fiduciary of any employee benefit plan
subject to the fiduciary responsibility
provisions of the Employee Retirement
Income Security Act of 1974, as amended
("ERISA"), including the "prohibited
transaction" rules thereunder, and to the
corresponding provisions of the Code,
should carefully review with its own legal
advisors whether the purchase or holding
of Certificates could give rise to a
transaction prohibited or otherwise
impermissible under ERISA or the Code. See
"ERISA Considerations."
Tax Status........................ The treatment of the Certificates for
federal income tax purposes will be
determined by whether a REMIC election is
made with respect to a Series of
Certificates and, if a REMIC election is
made, by whether the Certificates are
Regular Interests or Residual Interests.
See "Material Federal Income Tax
Consequences."
Legal Investment.................. The applicable Prospectus Supplement will
specify whether the Class or Classes of
Certificates offered will constitute
"mortgage related securities" for purposes
of the Secondary Mortgage Market
Enhancement Act of 1984. Investors whose
investment authority is subject to legal
restrictions should consult their own
legal advisors to determine whether and to
what extent such Certificates constitute
legal investments for them. See "Legal
Investment" herein and in the applicable
Prospectus Supplement.
Rating............................ It is a condition to the issuance of the
Certificates of any Series offered
pursuant to this Prospectus and a
Prospectus Supplement that each Class or
Subclass be rated in one of the four
highest rating categories by at least one
nationally recognized statistical rating
organization (a "Rating Agency").
Generally, a security rating addresses the
likelihood of the receipt by holders of
Certificates of all distributions of
principal and interest to which such
holders are entitled. A security rating is
not a recommendation to buy, sell or hold
the Certificates of any Series and is
subject to revision or withdrawal at any
time by the assigning rating agency.
Further, such ratings do not address the
effect of prepayments on the yield
anticipated by an investor.
Material Risks.................... Prospective investors are urged to read
"Risk Factors" herein and in the
applicable Prospectus Supplement for a
discussion of the material risks
associated with an investment in the
Certificates.
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<PAGE>
RISK FACTORS
Investors should consider, among other things, the following factors in
connection with the purchase of Certificates.
LIMITED LIQUIDITY
There can be no assurance that a secondary market for the Certificates of
any Series will develop or, if it does develop, that it will provide
Certificateholders with liquidity of investment or that it will continue for
the life of the Certificates of any Series. The Prospectus Supplement for any
Series of Certificates may indicate that an underwriter specified therein
intends to establish a secondary market in such Certificates, however no
underwriter will be obligated to do so. Unless specified in the applicable
Prospectus Supplement, the Certificates will not be listed on any securities
exchange.
LIMITED OBLIGATIONS
Except for any related insurance policies and any reserve fund or credit
enhancement described in the applicable Prospectus Supplement, Mortgage Loans
included in the related Trust Estate will be the sole source of payments on
the Certificates of a Series. The Certificates of any Series will not
represent an interest in or obligation of the Seller, Norwest Mortgage,
Norwest Bank, the Trustee or any of their affiliates, except for the Seller's
limited obligations with respect to certain breaches of its representations
and warranties, Norwest Mortgage's obligations as Servicer and Norwest Bank's
obligations as Master Servicer. Neither the Certificates of any Series nor the
related Mortgage Loans will be guaranteed or insured by any governmental
agency or instrumentality, the Seller, Norwest Mortgage, Norwest Bank, the
Trustee, any of their affiliates or any other person. Consequently, in the
event that payments on the Mortgage Loans are insufficient or otherwise
unavailable to make all payments required on the Certificates, there will be
no recourse to the Seller, Norwest Mortgage, Norwest Bank, the Trustee or,
except as specified in the applicable Prospectus Supplement, any other entity.
LIMITATIONS, REDUCTION AND SUBSTITUTION OF CREDIT ENHANCEMENT
With respect to each Series of Certificates, credit enhancement may be
provided in limited amounts to cover certain types of losses on the underlying
Mortgage Loans. Credit enhancement will be provided in one or more of the
forms referred to herein, including, but not limited to: subordination of
other Classes of Certificates of the same Series; a limited guarantee; a
financial guaranty insurance policy; a surety bond; a letter of credit; a pool
insurance policy; a special hazard insurance policy; a mortgagor bankruptcy
bond; a reserve fund; cross-support; overcollateralization; and any
combination thereof. See "Description of the Certificates--Other Credit
Enhancement" herein. Regardless of the form of credit enhancement provided,
the amount of coverage will be limited in amount and in most cases will be
subject to periodic reduction in accordance with a schedule or formula.
Furthermore, such credit enhancements may provide only very limited coverage
as to certain types of losses, and may provide no coverage as to certain other
types of losses. All or a portion of the credit enhancement for any Series of
Certificates will generally be permitted to be reduced, terminated or
substituted for, in the sole discretion of the Master Servicer, if each
applicable Rating Agency indicates that the then current rating thereof will
not be adversely affected. In the event losses exceed the amount of coverage
provided by any credit enhancement or losses of a type not covered by any
credit enhancement occur, such losses will be borne by the holders of the
related Certificates (or certain Classes thereof). The rating of any Series of
Certificates by any applicable Rating Agency may be lowered following the
initial issuance thereof as a result of the downgrading of the obligations of
any applicable credit support provider, or as a result of losses on the
related Mortgage Loans in excess of the levels contemplated by such Rating
Agency at the time of its initial rating analysis. Neither the Seller, Norwest
Mortgage, Norwest Bank, nor any of their affiliates will have any obligation
to replace or supplement any credit enhancement, or to take any other action
to maintain any rating of any Class of Certificates. See "Description of the
Certificates--Other Credit Enhancement."
RISKS OF THE MORTGAGE LOANS
An investment in securities such as the Certificates, which generally
represent interests in pools of residential mortgage loans, may be affected
by, among other things, a decline in real estate values and changes in the
mortgagor's financial condition. No assurance can be given that the values of
the Mortgaged Properties (as defined herein under "The Trust Estates--
General") securing the Mortgage Loans underlying any Series of Certificates
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
balances of the Mortgage Loans contained in a particular Trust Estate, and any
secondary financing
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<PAGE>
on the Mortgaged Properties, 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 and those experienced in Norwest Mortgage's or other
Servicers' servicing portfolios. In addition to risk factors related to the
residential real estate market generally, certain geographic regions of the
United States from time to time will experience weaker regional economic
conditions and housing markets or be directly or indirectly affected by
natural disasters or civil disturbances such as earthquakes, hurricanes,
floods, eruptions or riots and, consequently, will experience higher rates of
loss and delinquency than on mortgage loans generally. Although Mortgaged
Properties located in certain identified flood zones will be required to be
covered, to the maximum extent available, by flood insurance, as described
under "Servicing of the Mortgage Loans--Insurance Policies," no Mortgaged
Properties will otherwise be required to be insured against earthquake damage
of any other loss not covered by Standard Hazard Insurance Policies, as
described under "Servicing of the Mortgage Loans--Insurance Policies." Adverse
economic conditions generally, in particular geographic areas or industries,
or affecting particular segments of the borrowing community (such as
mortgagors relying on commission income and self-employed mortgagors) and
other factors which may or may not affect real property values (including the
purposes for which the Mortgage Loans were made and the uses of the Mortgaged
Properties) 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 Trust
Estate. The Mortgage Loans underlying certain Series of Certificates may be
concentrated in certain regions, and such concentration may present risk
considerations in addition to those generally present for similar mortgage-
backed securities without such concentration. See "The Mortgage Loan
Programs--Mortgage Loan Underwriting" and "Prepayment and Yield
Considerations--Weighted Average Life of Certificates" herein. To the extent
that such losses are not covered by the applicable credit enhancement, holders
of Certificates of the Series evidencing interests in the related Trust Estate
will bear all risk of loss resulting from default by mortgagors and will have
to look primarily to the value of the Mortgaged Properties for recovery of the
outstanding principal and unpaid interest on the defaulted Mortgage Loans. See
"The Trust Estates--Mortgage Loans" and "The Mortgage Loan Programs--Mortgage
Loan Underwriting."
UNDERWRITING STANDARDS
The Mortgage Loans (including certain loans made to foreign nationals) may
have been originated using underwriting standards that are different from and,
in certain respects, less stringent than the general underwriting policies of
Norwest Mortgage. See "The Mortgage Loan Programs--Mortgage Loan
Underwriting--Modified Standards." For example, certain of the Mortgage Loans
may have been originated with higher maximum Loan-to-Value Ratios, less
restrictive requirements for investment properties or "equity take out"
financings, and may have been secured by shares in cooperative housing
corporations, condotels or unique parcels of land. In return for placing
greater emphasis on borrower credit history and current assets, ratios of a
prospective borrower's debt service on the Mortgage Loan and total debt
obligations to income may not be required to be taken into account in making
the loan. Such Mortgage Loans may also experience rates of delinquencies,
defaults, foreclosure, bankruptcy and loss that are higher than those
experienced by mortgage loans underwritten to Norwest Mortgage's general
underwriting standards.
YIELD AND PREPAYMENT CONSIDERATIONS
The yield of the Certificates of each Series will depend in part on the rate
of principal payment on the Mortgage Loans (including prepayments,
liquidations due to defaults and mortgage loan repurchases). Such yield may be
adversely affected, depending upon whether a particular Certificate is
purchased at a premium or discount price, by a higher or lower than
anticipated rate of prepayments on the related Mortgage Loans. In particular,
the yield on Classes of Certificates entitling the holders thereof primarily
or exclusively to payments of interest or primarily or exclusively to payments
of principal will be extremely sensitive to the rate of prepayments on the
related Mortgage Loans. In addition, the yield on certain Classes of
Certificates may be relatively more sensitive to the rate of prepayment of
specified Mortgage Loans than other Classes of Certificates. In particular,
prepayments are influenced by a number of factors, including prevailing
mortgage market interest rates, local and national economic conditions,
homeowner mobility and the ability of the borrower to obtain refinancing. In
addition, the yield to investors may be adversely affected by interest
shortfalls which may result from the timing of the receipt of prepayments or
liquidations to the extent that such interest shortfalls are not covered by
aggregate Servicing Fees or other mechanisms specified in the applicable
Prospectus Supplement. The yield to investors in Classes of Certificates will
be adversely affected to the extent that losses on the Mortgage Loans in the
related Trust Estate are allocated to such Classes and may be adversely
affected to the extent of unadvanced delinquencies on the Mortgage Loans in
the related Trust Estate. Classes of Certificates identified in the applicable
Prospectus
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<PAGE>
Supplement as Subordinated Certificates are more likely to be affected by
delinquencies and losses than other Classes of Certificates. See "Prepayment
and Yield Considerations."
BOOK-ENTRY SYSTEM FOR CERTAIN CLASSES AND SUBCLASSES OF CERTIFICATES
Since transactions in the Classes and Subclasses of Book-Entry Certificates
of any Series generally can be effected only through DTC, DTC Participants and
Indirect DTC Participants, the ability of a Beneficial Owner to pledge Book-
Entry Certificates to persons or entities that do not participate in the DTC
system, or to otherwise act with respect to such Book-Entry Certificates, may
be limited due to the lack of a physical certificate for such Book-Entry
Certificates. In addition, under a book-entry format, Beneficial Owners may
experience delays in their receipt of payments, since distributions will be
made by the Master Servicer, or a Paying Agent on behalf of the Master
Servicer, to Cede, as nominee for DTC. Also, issuance of the Book-Entry
Certificates in book-entry form may reduce the liquidity thereof in any
secondary trading market that may develop therefor because investors may be
unwilling to purchase securities for which they cannot obtain delivery of
physical certificates. See "Description of the Certificates--Book-Entry Form"
herein.
THE TRUST ESTATES
GENERAL
The Trust Estate for each Series of Certificates will consist primarily of
Mortgage Loans evidenced by promissory notes (the "Mortgage Notes") secured by
mortgages, deeds of trust or other instruments creating first liens (the
"Mortgages") on some or all of the following types of property (as so secured,
the "Mortgaged Properties"), to the extent set forth in the applicable
Prospectus Supplement: (i) one- to four-family detached residences, (ii)
townhouses, (iii) condominium units including, those where features of the
property may include maid service, a front desk or resident manager, rental
pools and up to 20% of commercial space ("condotels"), (iv) units within
planned unit developments, (v) long-term leases with respect to any of the
foregoing, (vi) shares issued by private non-profit housing corporations
("cooperatives") and the related proprietary leases or occupancy agreements
granting exclusive rights to occupy specified units in such cooperatives'
buildings, and (vii) manufactured homes. In addition, a Trust Estate will also
include (i) amounts held from time to time in the related Certificate Account,
(ii) the Seller's interest in any primary mortgage insurance, hazard
insurance, title insurance or other insurance policies relating to a Mortgage
Loan, (iii) any property which initially secured a Mortgage Loan and which has
been acquired by foreclosure or trustee's sale or deed in lieu of foreclosure
or trustee's sale, (iv) if applicable, and to the extent set forth in the
applicable Prospectus Supplement, any reserve fund or funds and (v) if
applicable, and to the extent set forth in the applicable Prospectus
Supplement, contractual obligations of any person to make payments in respect
of any form of credit enhancement or any interest subsidy agreement. The Trust
Estate will not include the portion of interest on the Mortgage Loans which
constitutes the Fixed Retained Yield, if any. See "Servicing of the Mortgage
Loans--Fixed Retained Yield, Servicing Compensation and Payment of Expenses."
MORTGAGE LOANS
The Mortgage Loans will have been acquired by the Seller from its affiliate,
Norwest Mortgage. The Mortgage Loans will have been originated by Norwest
Mortgage or will have been acquired by Norwest Mortgage from other affiliated
or unaffiliated mortgage loan originators. Each Mortgage Loan will have been
underwritten either to Norwest Mortgage's general standards or modified
standards, to the extent specified in the applicable Prospectus Supplement, to
the standards of certain unaffiliated originators or of a Pool Insurer. See
"The Mortgage Loan Programs--Mortgage Loan Production Sources" and "--Mortgage
Loan Underwriting." The Prospectus Supplement for each Series will set forth
the respective number and principal amounts of Mortgage Loans (i) originated
by Norwest Mortgage or its affiliate and (ii) purchased by Norwest Mortgage or
its affiliates from unaffiliated mortgage loan originators through Norwest
Mortgage's mortgage loan purchase programs.
Each of the Mortgage Loans will be secured by a Mortgage on a Mortgaged
Property located in any of the 50 states or the District of Columbia.
Generally, the land underlying a Mortgaged Property will consist of five acres
or less but may consist of greater acreage in Norwest Mortgage's discretion.
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<PAGE>
If specified in the applicable Prospectus Supplement, the Mortgage Loans may
be secured by leases on real property under circumstances that Norwest
Mortgage determines in its discretion are commonly acceptable to institutional
mortgage investors. A Mortgage Loan secured by a lease on real property is
secured not by a fee simple interest in the Mortgaged Property but rather by a
lease under which the mortgagor has the right, for a specified term, to use
the related real estate and the residential dwelling located thereon.
Generally, a Mortgage Loan will be secured by a lease only if the use of
leasehold estates as security for mortgage loans is customary in the area, the
lease is not subject to any prior lien that could result in termination of the
lease and the term of the lease ends at least five years beyond the maturity
date of the related Mortgage Loan. The provisions of each lease securing a
Mortgage Loan will expressly permit (i) mortgaging of the leasehold estate,
(ii) assignment of the lease without the lessor's consent and (iii)
acquisition by the holder of the Mortgage, in its own or its nominee's name,
of the rights of the lessee upon foreclosure or assignment in lieu of
foreclosure, unless alternative arrangements provide the holder of the
Mortgage with substantially similar protections. No lease will contain
provisions which (i) provide for termination upon the lessee's default without
the holder of the Mortgage being entitled to receive written notice of, and
opportunity to cure, such default, (ii) provide for termination in the event
of damage or destruction as long as the Mortgage is in existence or (iii)
prohibit the holder of the Mortgage from being insured under the hazard
insurance policy or policies related to the premises.
The Prospectus Supplement will set forth the geographic distribution of
Mortgaged Properties and the number and aggregate unpaid principal balances of
the Mortgage Loans by category of Mortgaged Property. The Prospectus
Supplement for each Series will also set forth the range of original terms to
maturity of the Mortgage Loans in the Trust Estate, the weighted average
remaining term to stated maturity at the Cut-Off Date of such Mortgage Loans,
the earliest and latest months of origination of such Mortgage Loans, the
range of Mortgage Interest Rates borne by such Mortgage Loans, if such
Mortgage Loans have varying Net Mortgage Interest Rates, the weighted average
Net Mortgage Interest Rate at the Cut-Off Date of such Mortgage Loans, the
range of Loan-to-Value Ratios at the time of origination of such Mortgage
Loans and the range of principal balances at origination of such Mortgage
Loans.
The information with respect to the Mortgage Loans and Mortgaged Properties
described in the preceding two paragraphs may be presented in the Prospectus
Supplement for a Series as ranges in which the actual characteristics of such
Mortgage Loans and Mortgaged Properties are expected to fall. In all such
cases, information as to the final characteristics of the Mortgage Loans and
Mortgaged Properties will be available in a Current Report on Form 8-K which
will be filed with the Commission within 15 days of the initial issuance of
the related Series.
The Mortgage Loans in a Trust Estate will generally have monthly payments
due on the first of each month (each, a "Due Date") but may, if so specified
in the applicable Prospectus Supplement, have payments due on a different day
of each month and will be of one of the following types of mortgage loans:
a. Fixed Rate Loans. If so specified in the applicable Prospectus
Supplement, a Trust Estate may contain fixed-rate, fully-amortizing mortgage
loans providing for level monthly payments of principal and interest and terms
at origination or modification of not more than 30 years. If specified in the
applicable Prospectus Supplement, fixed rates on certain Mortgage Loans may be
converted to adjustable rates after origination of such Mortgage Loans and
upon the satisfaction of other conditions specified in the applicable
Prospectus Supplement. If so specified in the applicable Prospectus
Supplement, the Pooling and Servicing Agreement will require the Seller or
another party to repurchase each such converted Mortgage Loan at the price set
forth in the applicable Prospectus Supplement. A Trust Estate containing fixed
rate Mortgage Loans may contain convertible Mortgage Loans which have
converted from an adjustable interest rate prior to the formation of the Trust
Estate and which are subject to no further conversions.
b. Adjustable Rate Loans. If so specified in the applicable Prospectus
Supplement, a Trust Estate may contain fully-amortizing adjustable-rate
mortgage loans having an original or modified term to maturity of not more
than 30 years with a related Mortgage Interest Rate which generally adjusts
initially either six months, one, three, five, seven or ten years subsequent
to the initial payment date, and thereafter at either six-month, one-year or
other intervals over the term of the mortgage loan to equal the sum of a fixed
margin set forth in the related Mortgage Note and an index. The applicable
Prospectus Supplement will set forth the relevant index and the highest,
lowest and weighted average margin with respect to the adjustable rate
mortgage loans in the related Trust Estate. The applicable Prospectus
Supplement will also indicate any periodic or lifetime limitations on changes
in any per annum Mortgage Rate at the time of any adjustment.
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<PAGE>
If specified in the applicable Prospectus Supplement, adjustable rates on
certain Mortgage Loans may be converted to fixed rates after origination of
such Mortgage Loans and upon the satisfaction of the conditions specified in
the applicable Prospectus Supplement. If specified in the applicable
Prospectus Supplement, the Seller or another party will generally be required
to repurchase each such converted Mortgage Loan at the price set forth in the
applicable Prospectus Supplement. A Trust Estate containing adjustable rate
Mortgage Loans may contain convertible Mortgage Loans which have converted
from a fixed interest rate prior to the formation of the Trust Estate.
If so specified in the applicable Prospectus Supplement, the Trust Estate
may contain adjustable-rate mortgage loans which have Mortgage Interest Rates
that generally adjust monthly or may adjust at other intervals as specified in
the applicable Prospectus Supplement. The scheduled monthly payment will be
adjusted as and when described in the applicable Prospectus Supplement (at
intervals different from those at which the Mortgage Interest Rate is
adjusted) to an amount that would fully amortize the Mortgage Loan over its
remaining term on a level debt service basis; provided that increases in the
scheduled monthly payment may be subject to certain limitations as specified
in the applicable Prospectus Supplement, thereby resulting in negative
amortization of principal. If an adjustment to the Mortgage Interest Rate on
such a Mortgage Loan causes the amount of interest accrued thereon in any
month to exceed the current scheduled monthly payment on such mortgage loan,
the resulting amount of interest that has accrued but is not then payable
("Deferred Interest") will be added to the principal balance of such Mortgage
Loan.
c. Graduated Payment Loans. If so specified in the applicable Prospectus
Supplement, a Trust Estate may contain fixed-rate, graduated payment mortgage
loans having original or modified terms to maturity of not more than 30 years
with monthly payments during the first year calculated on the basis of an
assumed interest rate which is a specified percentage below the Mortgage Rate
on such mortgage loan. Such monthly payments increase at the beginning of the
second year by a specified percentage of the monthly payment during the
preceding year and each year specified thereafter to the extent necessary to
amortize the mortgage loan over the remainder of its term or other shorter
period. Mortgage loans incorporating such graduated payment features may
include (i) "Graduated Pay Mortgage Loans," pursuant to which amounts
constituting Deferred Interest are added to the principal balances of such
mortgage loans, (ii) "Tiered Payment Mortgage Loans," pursuant to which, if
the amount of interest accrued in any month exceeds the current scheduled
payment for such month, such excess amounts are paid from a subsidy account
(usually funded by a home builder or family member) established at closing and
(iii) "Growing Equity Mortgage Loans," for which the monthly payments increase
at a rate which has the effect of amortizing the loan over a period shorter
than the stated term.
d. Subsidy Loans. If so specified in the applicable Prospectus Supplement, a
Trust Estate may contain Mortgage Loans subject to temporary interest subsidy
agreements ("Subsidy Loans") pursuant to which the monthly payments made by
the related mortgagors will be less than the scheduled monthly payments on
such Mortgage Loans with the present value of the resulting difference in
payment ("Subsidy Payments") being provided by the employer of the mortgagor,
generally on an annual basis. Subsidy Payments will generally be placed in a
custodial account ("Subsidy Account") by the related Servicer. Despite the
existence of a subsidy program, a mortgagor remains primarily liable for
making all scheduled payments on a Subsidy Loan and for all other obligations
provided for in the related Mortgage Note and Mortgage Loan.
Subsidy Loans are offered by employers generally through either a graduated
or fixed subsidy loan program, or a combination thereof. The terms of the
subsidy agreements relating to Subsidy Loans generally range from one to ten
years. The subsidy agreements relating to Subsidy Loans made under a graduated
program generally will provide for subsidy payments that result in effective
subsidized interest rates between three percentage points and five percentage
points below the Mortgage Interest Rates specified in the related Mortgage
Notes. Generally, under a graduated program, the subsidized rate for a
Mortgage Loan will increase approximately one percentage point per year until
it equals the full Mortgage Interest Rate. For example, if the initial
subsidized interest rate is five percentage points below the Mortgage Interest
Rate in year one, the subsidized rate will increase to four percentage points
below the Mortgage Interest Rate in year two, and likewise until year six,
when the subsidized rate will equal the Mortgage Interest Rate. Where the
subsidy agreements relating to Subsidy Loans are in effect for longer than
five years, the subsidized interest rates generally increase at smaller
percentage increments for each year. The subsidy agreements relating to
Subsidy Loans made under a fixed program generally will provide for subsidized
interest rates at fixed percentages (generally one percentage point to two
percentage points) below the Mortgage Interest Rates for specified periods,
generally not in excess of ten years. Subsidy Loans are also offered pursuant
to combination fixed/graduated programs. The subsidy agreements relating to
such Subsidy Loans generally will provide for an initial fixed subsidy of up
to five percentage points below the related Mortgage Interest Rate for up to
five years, and then a periodic reduction in the subsidy for up to five years,
at an equal fixed percentage per year until the subsidized rate equals the
Mortgage Interest Rate.
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Generally, employers may terminate subsidy programs in the event of (i) the
mortgagor's death, retirement, resignation or termination of employment, (ii)
the full prepayment of the Subsidy Loan by the mortgagor, (iii) the sale or
transfer by the mortgagor of the related Mortgaged Property as a result of
which the mortgagee is entitled to accelerate the Subsidy Loan pursuant to the
"due-on-sale" clause contained in the Mortgage, or (iv) the commencement of
foreclosure proceedings or the acceptance of a deed in lieu of foreclosure. In
addition, some subsidy programs provide that if prevailing market rates of
interest on mortgage loans similar to a Subsidy Loan are less than the
Mortgage Interest Rate of such Subsidy Loan, the employer may request that the
mortgagor refinance such Subsidy Loan and may terminate the related subsidy
agreement if the mortgagor fails to refinance such Subsidy Loan. In the event
the mortgagor refinances such Subsidy Loan, the new loan will not be included
in the Trust Estate. See "Prepayment and Yield Considerations" herein. In the
event a subsidy agreement is terminated, the amount remaining in the Subsidy
Account will be returned to the employer, and the mortgagor will be obligated
to make the full amount of all remaining scheduled payments, if any. The
mortgagor's reduced monthly housing expense as a consequence of payments under
a subsidy agreement is used by Norwest Mortgage in determining certain
expense-to-income ratios utilized in underwriting a Subsidy Loan. See "The
Mortgage Loan Programs--Mortgage Loan Underwriting."
e. Buy-Down Loans. If so specified in the applicable Prospectus Supplement,
a Trust Estate may contain Mortgage Loans subject to temporary buy-down plans
("Buy-Down Loans") pursuant to which the monthly payments made by the
mortgagor during the early years of the Mortgage Loan will be less than the
scheduled monthly payments on the Mortgage Loan. The resulting difference in
payment will be compensated for from an amount contributed by the seller of
the related Mortgaged Property or another source, including the originator of
the Mortgage Loan (generally on a present value basis) and, if so specified in
the applicable Prospectus Supplement, placed in a custodial account (the "Buy-
Down Fund") by the related Servicer. If the mortgagor on a Buy-Down Loan
prepays such Mortgage Loan in its entirety, or defaults on such Mortgage Loan
and the Mortgaged Property is sold in liquidation thereof, during the period
when the mortgagor is not obligated, on account of the buy-down plan, to pay
the full monthly payment otherwise due on such loan, the unpaid principal
balance of such Buy-Down Loan will be reduced by the amounts remaining in the
Buy-Down Fund with respect to such Buy-Down Loan, and such amounts will be
deposited in the Servicer Custodial Account or the Certificate Account, net of
any amounts paid with respect to such Buy-Down Loan by any insurer, guarantor
or other person pursuant to a credit enhancement arrangement described in the
applicable Prospectus Supplement.
f. Balloon Loans. If so specified in the applicable Prospectus Supplement, a
Trust Estate may include Mortgage Loans which are amortized over a fixed
period not exceeding 30 years but which have shorter terms to maturity (each
such Mortgage Loan, a "Balloon Loan") that causes the outstanding principal
balance of the related Mortgage Loan to be due and payable at the end of a
certain specified period (the "Balloon Period"). The borrower of such Balloon
Loan will be obligated to pay the entire outstanding principal balance of the
Balloon Loan at the end of the related Balloon Period. In the event Norwest
Mortgage refinances a mortgagor's Balloon Loan at maturity, the new loan will
not be included in the Trust Estate. See "Prepayment and Yield Considerations"
herein.
g. Pledged Asset Mortgage Loans. If so specified in the applicable
Prospectus Supplement, a Trust Estate may contain fixed rate mortgage loans
having original terms to stated maturity of not more than 30 years which are
either (i) secured by a security interest in additional collateral (normally
securities) owned by the borrower or (ii) supported by a third party guarantee
(usually a parent of the borrower); which is in turn secured by a security
interest in collateral (usually securities) owned by such guarantor (any such
loans, "Pledged Asset Mortgage Loans," and any such collateral, "Additional
Collateral"). Generally, the amount of such Additional Collateral will not
exceed 30% of the amount of such loan, and the requirement to maintain
Additional Collateral will terminate when the principal amount of the loan is
paid down to a predetermined amount.
THE SELLER
Norwest Integrated Structured Assets, Inc. (the "Seller") is a direct,
wholly owned subsidiary of Norwest Mortgage, Inc. and an indirect, wholly
owned subsidiary of Norwest Corporation, a corporation organized under the
laws of Delaware ("Norwest Corporation"). The Seller was incorporated in the
State of Delaware on December 10, 1996.
The limited purposes of the Seller are, in general, to acquire, own and sell
mortgage loans; to issue, acquire, own, hold and sell mortgage asset-backed
pass-through securities which represent ownership interests in mortgage loans,
collections thereon and
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related properties; and to engage in any acts which are incidental to, or
necessary, suitable or convenient to accomplish, the foregoing.
The Seller maintains its principal office at 7485 New Horizon Way,
Frederick, Maryland 21703. Its telephone number is (301) 846-8200.
At the time of the formation of any Trust Estate, the Seller will be the
sole owner of all the related Mortgage Loans. The Seller will have acquired
the Mortgage Loans included in any Trust Estate from Norwest Mortgage. Except
to the extent otherwise specified in the applicable Prospectus Supplement, the
Seller's only obligation with respect to the Certificates of any Series will
be to repurchase or substitute for Mortgage Loans in a Trust Estate in the
event of defective documentation or upon the breach of certain representations
and warranties made by the Seller. See "The Pooling and Servicing Agreement--
Assignment of Mortgage Loans to the Trustee."
NORWEST MORTGAGE
Norwest Mortgage, Inc. ("Norwest Mortgage") was originally incorporated as a
Minnesota corporation on July 1, 1983. On August 30, 1995, Norwest Mortgage
and Directors Mortgage Loan Corporation, a California corporation, completed a
statutory merger. As a result of the merger, Norwest became a California
corporation as of September 1, 1995. Norwest Mortgage is engaged principally
in the business of (i) originating and purchasing residential mortgage loans
in its own name and through its affiliates, Norwest Funding, Inc. and Norwest
Funding II, Inc. (collectively, "Norwest Funding") and (ii) servicing
residential mortgage loans for its own account or for the account of others.
Norwest Mortgage is a direct, wholly owned subsidiary of Norwest Nova, Inc.
and an indirect, wholly owned subsidiary of Norwest Corporation. The executive
offices of Norwest Mortgage are located at 405 Southwest 5th Street, Des
Moines, Iowa 50309-4603, and its telephone number is (515) 221-7300.
On May 7, 1996 Norwest Mortgage and Norwest Funding acquired all of the
mortgage origination, servicing and secondary marketing operations of The
Prudential Home Mortgage Company, Inc. ("PHMC"), an indirect, wholly owned
subsidiary of The Prudential Insurance Company of America, and purchased
certain mortgage loans from PHMC and a substantial portion of PHMC's mortgage
servicing portfolio. On January 7, 1997, a complaint was served on The
Prudential Home Mortgage Company, Inc. ("PHMC") with respect to an individual
and purported class action filed by The Capitol Life Insurance Company (the
"plaintiff") in the Superior Court of New Jersey against PHMC, The Prudential
Home Mortgage Securities Company, Inc. ("PHMSC") and certain of their
affiliates and 100 unnamed "Doe defendants" (collectively, the "defendants").
The complaint alleges, among other things, that the defendants made false and
misleading statements and/or omissions of material fact and fraudulently
concealed material facts in connection with the purchase in 1993 by the
plaintiff of certain of PHMSC's Subordinated Mortgage Securities, Series 1992-
A. The complaint alleges and implies that, in connection therewith, certain
false and misleading statements were made to the plaintiffs by then-officers
and employees of PHMC or PHMSC, certain of whom may now be officers or
employees of the Seller or Norwest Mortgage. The Seller has been advised by a
representative of PHMC and PHMSC that PHMC and PHMSC will deny the allegations
in their answers to the complaint and intend to vigorously defend the action.
Based on the foregoing, the Seller does not believe that this litigation will
have an adverse effect on any Series of Certificates.
Norwest Mortgage is an approved servicer of the Federal National Mortgage
Association ("Fannie Mae"), the Federal Home Loan Mortgage Corporation
("Freddie Mac") and the Government National Mortgage Association ("Ginnie
Mae"). As of December 31, 1995, Norwest Mortgage had a net worth of
approximately $314.8 million.
NORWEST BANK
Norwest Bank Minnesota, National Association ("Norwest Bank") will act as
Master Servicer with respect to each Series. Norwest Bank is a direct, wholly
owned subsidiary of Norwest Corporation. Norwest Bank is a national banking
association originally chartered in 1872 and is engaged in a wide range of
activities typical of a national bank.
Norwest Bank's principal office is located at Norwest Center, Sixth and
Marquette, Minneapolis, Minnesota 55479. Norwest Bank conducts its master
servicing and securities administration services at its offices in Columbia,
Maryland. Its address there is 11000 Broken Land Parkway, Columbia, Maryland
21044-3662 and its telephone number is (410) 884-2000.
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THE MORTGAGE LOAN PROGRAMS
MORTGAGE LOAN PRODUCTION SOURCES
Norwest Mortgage conducts a significant portion of its mortgage loan
originations through more than 700 loan production offices (the "Loan Stores")
located throughout all 50 states. Norwest Mortgage also conducts a significant
portion of its mortgage loan originations through centralized production
offices located in Frederick, Maryland and Minneapolis, Minnesota. At the
latter locations, Norwest Mortgage receives applications for home mortgage
loans on toll-free telephone numbers that can be called from anywhere in the
United States.
The following are Norwest Mortgage's primary sources of mortgage loan
originations: (i) direct contact with prospective borrowers (including
borrowers with mortgage loans currently serviced by Norwest Mortgage or
borrowers referred by borrowers with mortgage loans currently serviced by
Norwest Mortgage), (ii) referrals by realtors, other real estate professionals
and prospective borrowers to the Loan Stores, (iii) referrals from selected
corporate clients, (iv) referrals from the private mortgage banking group, a
division of Norwest Funding, Inc., which specializes in mortgage loans with
original principal balances in excess of the limits of Fannie Mae and Freddie
Mac, (v) several joint ventures into which Norwest Mortgage, through its
wholly owned subsidiary, Norwest Mortgage Ventures, Inc., has entered with
realtors and banking institutions (the "Joint Ventures") and (vi) referrals
from mortgage brokers and similar entities. In addition to its own mortgage
loan originations, Norwest Mortgage acquires qualifying mortgage loans from
other unaffiliated originators ("Correspondents"). See "--Acquisition of
Mortgage Loans from Correspondents" below. The relative contribution of each
of these sources to Norwest Mortgage's business, measured by the volume of
loans generated, tends to fluctuate over time.
Norwest Mortgage Ventures, Inc. owns at least a 50% interest in each of the
Joint Ventures, with the remaining ownership interest in each being owned by a
realtor or a banking institution having significant contact with potential
borrowers. Mortgage loans that are originated by Joint Ventures in which
Norwest Mortgage's partners are realtors are generally made to finance the
acquisition of properties marketed by such Joint Venture partners.
Applications for mortgage loans originated through Joint Ventures are
generally taken by Joint Venture employees and underwritten by Norwest
Mortgage in accordance with its standard underwriting criteria. Such mortgage
loans are then closed by the Joint Ventures in their own names and
subsequently purchased by Norwest Mortgage or Norwest Funding.
Norwest Mortgage may directly contact prospective borrowers (including
borrowers with mortgage loans currently serviced by Norwest Mortgage) through
general and targeted solicitations. Such solicitations are made through direct
mailings, mortgage loan statement inserts and television, radio and print
advertisements and by telephone. Norwest Mortgage's targeted solicitations may
be based on characteristics such as the borrower's mortgage loan interest rate
or payment history and the geographic location of the mortgaged property. See
"Prepayment and Yield Considerations" herein.
A majority of Norwest Mortgage's corporate clients are companies that
sponsor relocation programs for their employees and in connection with which
Norwest Mortgage provides mortgage financing. Eligibility for a relocation
loan is based, in general, on an employer's providing financial assistance to
the relocating employee in connection with a job-required move. Although
Subsidy Loans are typically generated through such corporate-sponsored
programs, the assistance extended by the employer need not necessarily take
the form of a loan subsidy. (Not all relocation loans are generated by Norwest
Mortgage through referrals from its corporate clients; some relocation loans
are generated as a result of referrals from mortgage brokers and similar
entities and others are generated through Norwest Mortgage's acquisition of
mortgage loans from other originators.) Also among Norwest Mortgage's
corporate clients are various professional associations. These associations,
as well as the other corporate clients, promote the availability of a broad
range of Norwest Mortgage mortgage products to their members or employees,
including refinance loans, second-home loans and investment-property loans.
ACQUISITION OF MORTGAGE LOANS FROM CORRESPONDENTS
In order to qualify for participation in Norwest Mortgage's mortgage loan
purchase programs, lending institutions must (i) meet and maintain certain net
worth and other financial standards, (ii) demonstrate experience in
originating residential mortgage loans and (iii) meet certain criteria (as
described in the following paragraph).
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The contractual arrangements with Correspondents may involve the commitment
by Norwest Mortgage to accept delivery of a certain dollar amount of mortgage
loans over a period of time; this commitment may be satisfied either by
delivery of mortgage loans one at a time or in multiples as aggregated by the
Correspondent. The contractual arrangements with certain Correspondents may
also involve the delegation of all underwriting functions to such
Correspondents ("Delegated Underwriting"), which will result in Norwest
Mortgage not performing any underwriting functions prior to acquisition of the
loan but instead relying on such originators' representations, and Norwest
Mortgage's post-purchase reviews of samplings of mortgage loans acquired from
such originators regarding the originators' compliance with Norwest Mortgage's
underwriting standards. Norwest will require Correspondents participating in
Delegated Underwriting to meet some or all of the following requirements: (i)
such Correspondent must have a net worth of at least $500,000, (ii) if such
Correspondent is a depository institution, its capital requirement ratio must
be in compliance with federal requirements, (iii) such Correspondent must
generally have a two year history, although for younger companies the
experience level of key management personnel may be taken into consideration,
(iv) such Correspondent must maintain fidelity bond insurance and errors and
omission insurance, in each case in an amount of $300,000 or more and (v) such
Correspondent must be Fannie Mae/Freddie Mac approved. In addition, in
connection with the approval of any Correspondent's participation in Delegated
Underwriting, Norwest Mortgage will review such Correspondent's financial
statements, along with those of its parent company, if applicable, for
indications of general business health as well as net worth. Norwest Mortgage
will also review delinquency ratios with respect to such Correspondent.
Certain institutional conduit Correspondents may be permitted to utilize
their own underwriting criteria based upon a comparison of such criteria by
Norwest Mortgage to the criteria used by Norwest Mortgage and a determination
by Norwest Mortgage of the materiality of variances therefrom and the
underwriting policies of these Correspondents may vary from Norwest Mortgage's
underwriting standards. Norwest Mortgage may also acquire portfolios of
seasoned loans in negotiated transactions.
MORTGAGE LOAN UNDERWRITING
The Trust Estate for each Series of Certificates will include Mortgage Loans
which have been underwritten in accordance with one or more of the following:
(i) Norwest Mortgage's general underwriting standards, (ii) Norwest Mortgage's
modified underwriting standards that have been applied in the underwriting of
mortgage loans under Norwest Mortgage's "alternative" mortgage loan
underwriting program, (iii) the underwriting standards of a Pool Insurer and
(iv) the underwriting standards of certain institutional conduit
Correspondents.
General Standards. Norwest Mortgage's underwriting standards are applied by
or on behalf of Norwest Mortgage or by Correspondents to evaluate the
applicant's credit standing and ability to repay the loan, as well as the
value and adequacy of the mortgaged property as collateral. The underwriting
standards that guide the determination represent a balancing of several
factors that may affect the ultimate recovery of the loan amount, including,
among others, the amount of the loan, the ratio of the loan amount to the
property value (i.e., the lower of the appraised value of the mortgaged
property and the purchase price), the borrower's means of support and the
borrower's credit history. Norwest Mortgage's guidelines for underwriting may
vary according to the nature of the borrower or the type of loan, since
differing characteristics may be perceived as presenting different levels of
risk. In addition, where compensating factors exist with respect to a
prospective applicant, the underwriting standards described below may be
permitted to vary. With respect to certain Mortgage Loans, the originators of
such loans may have contracted with unaffiliated third parties to perform the
underwriting process.
Norwest Mortgage utilizes various systems of credit scoring as a tool to
supplement the mortgage loan underwriting process. The most comprehensive
credit scoring applied by Norwest Mortgage utilizes consistent, objective
measures of borrower credit history (the "FICO Score") described in the
following paragraph, and also considers specific loan attributes, including,
but not limited to, loan-to-value ratio, principal balance, loan purpose and
property type. Such objective measures and attributes are used to evaluate
loan applications and assign each application a "Credit Score."
The portion of the Credit Score related to borrower credit history is
generally based on computer models developed by a third party. These models
evaluate information available from three major credit reporting bureaus
regarding historical patterns of consumer credit behavior in relation to
default experience for similar types of borrower profiles. A particular
borrower's credit patterns are then considered in order to derive a FICO Score
which indicates a level of default probability over a two-year period.
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The Credit Score is used by Norwest Mortgage to determine the type of
underwriting process and which level of underwriter will review the loan file.
For transactions which are determined to be low-risk transactions, based upon
the Credit Score and other parameters (including the mortgage loan production
source), the lowest underwriting authority is generally required. Features
leading to the characterization of a transaction as low-risk may include, for
example, a low loan-to-value ratio, a low principal balance, a standard loan
purpose and/or a traditional property type. For moderate and higher risk
transactions, higher level underwriters and a full review of the mortgage file
are generally required. Features leading to the characterization of a
transaction as moderate- or high-risk may include, for example (relative to
low-risk transactions), a higher loan-to-value ratio, higher principal
balance, nonstandard loan purpose and/or a nontraditional property type.
Borrowers who have a satisfactory Credit Score (based upon the mortgage loan
production source) are generally subject to streamlined credit review (which
relies on the credit scoring process for various elements of the underwriting
assessments). Such borrowers may also be eligible for a limited documentation
program and are generally permitted a greater latitude in the application of
borrower debt-to-income ratios.
With respect to all mortgage loans underwritten by Norwest Mortgage, Norwest
Mortgage's underwriting of a mortgage loan may be based on data obtained by
parties other than Norwest Mortgage that are involved at various stages in the
mortgage origination or acquisition process. This typically occurs under
circumstances in which loans are subject to more than one approval process, as
when correspondents, certain mortgage brokers or similar entities that have
been approved by Norwest Mortgage to process loans on its behalf, or
independent contractors hired by Norwest Mortgage to perform underwriting
services on its behalf ("contract underwriters") make initial determinations
as to the consistency of loans with Norwest Mortgage underwriting guidelines.
The underwriting of mortgage loans acquired by Norwest Mortgage pursuant to a
Delegated Underwriting arrangement with a Correspondent is not reviewed prior
to acquisition of the mortgage loan by Norwest Mortgage although the mortgage
loan file is reviewed by Norwest Mortgage to confirm that certain documents
are included in the file. Instead, Norwest Mortgage relies on (i) the
Correspondent's representations that such mortgage loan was underwritten in
accordance with Norwest Mortgage's underwriting standards and (ii) a post-
purchase review of a sampling of all mortgage loans acquired from such
originator. In addition, in order to be eligible to sell mortgage loans to
Norwest Mortgage pursuant to a Delegated Underwriting arrangement, the
originator must meet certain requirements including, among other things,
certain quality, operational and financial guidelines. See "--Acquisition of
Mortgage Loans from Correspondents" above.
A prospective borrower applying for a mortgage loan is required to complete
a detailed application. The loan application elicits pertinent information
about the applicant, with particular emphasis on the applicant's financial
health (assets, liabilities, income and expenses), the property being financed
and the type of loan desired. A self-employed applicant may be required to
submit his or her most recent signed federal income tax returns. With respect
to every applicant, credit reports are obtained from commercial reporting
services, summarizing the applicant's credit history with merchants and
lenders. Significant unfavorable credit information reported by the applicant
or a credit reporting agency must be explained by the applicant. The credit
review process generally is streamlined for borrowers with a qualifying Credit
Score.
Verifications of employment, income, assets or mortgages may be used to
supplement the loan application and the credit report in reaching a
determination as to the applicant's ability to meet his or her monthly
obligations on the proposed mortgage loan, as well as his or her other
mortgage payments (if any), living expenses and financial obligations. A
mortgage verification involves obtaining information regarding the borrower's
payment history with respect to any existing mortgage the applicant may have.
This verification is accomplished by either having the present lender complete
a verification of mortgage form, evaluating the information on the credit
report concerning the applicant's payment history for the existing mortgage,
communicating, either verbally or in writing, with the applicant's present
lender or analyzing cancelled checks provided by the applicant. Verifications
of income, assets or mortgages may be waived under certain programs offered by
Norwest Mortgage, but Norwest Mortgage's underwriting guidelines require, in
most instances, a verbal or written verification of employment to be obtained.
In some cases, employment histories may be obtained through V.I.E., Inc., an
affiliate of Norwest Mortgage, that obtains employment data from state
unemployment insurance departments or other state agencies. In addition, the
loan applicant may be eligible for a loan approval process permitting limited
documentation. The above referenced reduced documentation options and waivers
limit the amount of documentation required for an underwriting decision and
have the effect of increasing the relative importance of the credit report and
the appraisal. Documentation requirements vary based upon a number of factors,
including the purpose of the loan, the amount of the loan, the ratio of the
loan amount to the property value and the mortgage loan production source.
Norwest Mortgage accepts alternative methods of verification, in those
instances where verifications are part of the underwriting decision; for
example, salaried income may be substantiated either by means of a form
independently prepared and signed by the applicant's
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employer or by means of the applicant's most recent paystub and W-2. In cases
where two or more persons have jointly applied for a mortgage loan, the gross
incomes and expenses of all of the applicants, including nonoccupant co-
mortgagors, are combined and considered as a unit.
In general, except for borrowers meeting certain standards who apply for
loans with certain qualifying characteristics under Norwest Mortgage's
"retention program" applicable to then-current borrowers, borrowers applying
for loans must demonstrate that the ratio of their total monthly housing debt
to their monthly gross income, and the ratio of their total monthly debt to
their monthly gross income do not exceed certain maximum levels. Applicants
for mortgage loans with respect to which the Loan-to-Value Ratio is less than
or equal to 75% generally must demonstrate a 33% total monthly housing debt-
to-monthly gross income ratio and a 38% total monthly debt-to-monthly gross
income ratio. Applicants for mortgage loans with Loan-to-Value Ratios in
excess of 75% generally must demonstrate a 28% total monthly housing debt-to-
monthly gross income ratio and a 36% total monthly debt-to-monthly gross
income ratio. These ratios may be exceeded, in the judgment of Norwest
Mortgage, based on the presence of other factors such as an applicant's good
credit history, significant other assets, ability to accumulate assets,
potential for continued employment advancement or income growth, or a
relatively low Loan-to-Value Ratio. Under the "retention program," however,
such maximum levels may not be applied, depending on a number of factors
including Loan-to-Value Ratio, a borrower's credit history, a borrower's
liquid net worth, the potential of a borrower for continued employment
advancement or income growth, the ability of the borrower to accumulate assets
or to devote a greater portion of income to basic needs such as housing
expense, a borrower's Credit Score and the type of loan for which the borrower
is applying. The debt-to-income ratio calculations described above are based
on the amortization schedule and the interest rate of the related loan, with
each ratio being computed on the basis of the proposed monthly mortgage
payment. In the case of adjustable-rate mortgage loans, the interest rate used
to determine a mortgagor's monthly payment for purposes of such ratios may, in
certain cases, be the initial mortgage interest rate or another interest rate,
which, in either case, is lower than the sum of the index rate that would have
been applicable at origination plus the applicable margin. In evaluating
applications for Subsidy Loans and Buy-Down Loans, such ratios are determined
by including in the applicant's total monthly housing expense and total
monthly debt the proposed monthly mortgage payment reduced by the amount
expected to be applied on a monthly basis under the related subsidy agreement
or buy-down agreement or, in certain cases, the mortgage payment that would
result from an interest rate lower than the Mortgage Interest Rate but higher
than the effective rate to the mortgagor as a result of the subsidy agreement
or the buy-down agreement. See "The Trust Estates--Mortgage Loans." Secondary
financing is permitted on mortgage loans under certain circumstances. In those
cases, the payment obligations under both primary and secondary financing are
included in the computation of the housing debt-to-income ratios, and the
combined amount of primary and secondary loans will be used to calculate the
combined loan-to-value ratio. Any secondary financing permitted will generally
mature prior to the maturity date of the related mortgage loan. In evaluating
an application with respect to a "non-owner-occupied" property, which Norwest
Mortgage defines as a property leased to a third party by its owner (as
distinct from a "second home," which Norwest Mortgage defines as an owner-
occupied, non-rental property that is not the owner's principal residence),
Norwest Mortgage will include projected rental income net of certain mortgagor
obligations and other assumed expenses or loss from such property to be
included in the applicant's monthly gross income or total monthly debt in
calculating the foregoing ratios. A mortgage loan secured by a two- to four-
family Mortgaged Property is considered to be an owner-occupied property if
the borrower occupies one of the units; rental income on the other units is
generally taken into account in evaluating the borrower's ability to repay the
mortgage loan.
Mortgage Loans will not generally have had at origination a Loan-to-Value
Ratio in excess of 95%. However, if so specified in the applicable Prospectus
Supplement, Mortgage Loans that had Loan-to-Value Ratios at origination in
excess of 95% may be included in the related Trust Estate. The Loan-to-Value
Ratio is the ratio, expressed as a percentage, of the principal amount of the
Mortgage Loan at origination to the lesser of (i) the appraised value of the
related Mortgaged Property, as established by an appraisal obtained by the
originator generally no more than four months prior to origination (or, with
respect to newly constructed properties, no more than twelve months prior to
origination), or (ii) the sale price for such property. In some instances, the
Loan-to-Value Ratio may be based on an appraisal that was obtained by the
originator more than four months prior to origination, provided that (i) a
recertification of the original appraisal is obtained and (ii) the original
appraisal was obtained no more than twelve months prior to origination. For
the purpose of calculating the Loan-to-Value Ratio of any Mortgage Loan that
is the result of the refinancing (including a refinancing for "equity take
out" purposes) of an existing mortgage loan, the appraised value of the
related Mortgaged Property is generally determined by reference to an
appraisal obtained in connection with the origination of the replacement loan.
In connection with certain of its mortgage originations, Norwest Mortgage
currently obtains appraisals through its affiliate, Value Information
Technology, Inc.
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No assurance can be given that values of the Mortgaged Properties have
remained or will remain at the levels which existed on the dates of appraisal
(or, where applicable, recertification of value) of the related Mortgage
Loans. The appraisal of any Mortgaged Property reflects the individual
appraiser's judgment as to value, based on the market values of comparable
homes sold within the recent past in comparable nearby locations and on the
estimated replacement cost. The appraisal relates both to the land and to the
structure; in fact, a significant portion of the appraised value of a
Mortgaged Property may be attributable to the value of the land rather than to
the residence. Because of the unique locations and special features of certain
Mortgaged Properties, identifying comparable properties in nearby locations
may be difficult. The appraised values of such Mortgaged Properties will be
based to a greater extent on adjustments made by the appraisers to the
appraised values of reasonably similar properties rather than on objectively
verifiable sales data. If residential real estate values generally or in
particular geographic areas decline such that the outstanding balances of the
Mortgage Loans and any secondary financing on the Mortgaged Properties in a
particular Trust Estate become equal to or greater than the values of the
related Mortgaged Properties, the actual rates of delinquencies, foreclosures
and losses could be higher than those now generally experienced in the
mortgage lending industry and those now experienced in Norwest Mortgage's
servicing portfolios. In addition, adverse economic conditions generally, in
particular geographic areas or industries, or affecting particular segments of
the borrowing community (such as mortgagors relying on commission income and
self-employed mortgagors) and other factors which may or may not affect real
property values, including the purposes for which the Mortgage Loans were made
and the uses of the Mortgaged Properties, 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 Trust Estate. See "Prepayment and Yield
Considerations--Weighted Average Life of Certificates" herein. To the extent
that such losses are not covered by the methods of credit support or the
insurance policies described herein under "Description of the Certificates--
Other Credit Enhancement" and "Servicing of the Mortgage Loans--Insurance
Policies", they will be borne by holders of the Certificates of the Series
evidencing interests in such Trust Estate.
Norwest Mortgage originates mortgage loans with Loan-to-Value Ratios in
excess of 80%, either with or without the requirement to obtain primary
mortgage insurance. In cases for which primary mortgage insurance is obtained,
the excess over 75% (or such lower percentage as Norwest Mortgage may require
at origination) will be covered by primary mortgage insurance from an approved
primary mortgage insurance company until the unpaid principal balance of the
Mortgage Loan is reduced to an amount that will result in a Loan-to-Value
Ratio less than or equal to 80%. However, Norwest Mortgage does not require
primary mortgage insurance on loans that have Loan-to-Value Ratios exceeding
80% if such loans are secured by primary residences or second homes (excluding
cooperatives). Each loan originated without primary mortgage insurance will
have been made at an interest rate that was higher than the rate would have
been if the Loan-to-Value Ratio was 80% or less or if primary mortgage
insurance was obtained. The Prospectus Supplement will specify the number and
percentage of Mortgage Loans contained in the Trust Estate for a particular
Series of Certificates with Loan-to-Value Ratios at origination in excess of
80% which were originated without primary mortgage insurance.
Except as described below, Mortgage Loans will generally be covered by an
appropriate standard form American Land Title Association ("ALTA") title
insurance policy, or a substantially similar policy or form of insurance
acceptable to Fannie Mae or Freddie Mac. Certain Mortgage Loans ("T.O.P.
Loans") originated by Norwest Mortgage or Norwest Funding in connection with
the "Title Option Plus" program are not covered by title insurance policies,
although title searches are performed in connection with the origination of
T.O.P. Loans by American Land Title Company, Inc., an affiliate of Norwest
Mortgage. The Seller will represent and warrant to the Trustee of any Trust
Estate that the Mortgaged Property related to each Mortgage Loan (including
each T.O.P. Loan) is free and clear of all encumbrances and liens having
priority over the first lien of the related Mortgage, subject to certain
limited exceptions as set forth below under "--Representations and
Warranties." However in the event that a lien senior to the lien of the
Mortgage related to a T.O.P. Loan that is contained in the Trust Estate for
any Series is found to exist, the sole recourse of the Trustee will be against
the Seller for breach of its representation and warranty. The Trustee will not
have recourse against any title insurance company or other party.
Where permitted by law, Norwest Mortgage generally requires that a borrower
include in each monthly payment a portion of the real estate taxes,
assessments, primary mortgage insurance (if applicable), and hazard insurance
premiums and other similar items with respect to the related mortgage loan.
Norwest Mortgage may, however, on a case-by-case basis, in its discretion not
require such advance payments for certain Mortgage Loans, based on an
evaluation of the borrowers' ability to pay such taxes and charges as they
become due.
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Modified Standards. In comparison to Norwest Mortgage's "general"
underwriting standards described above, the underwriting standards applicable
to mortgage loans under Norwest Mortgage's "alternative" mortgage loan
underwriting program permit different underwriting criteria, additional types
of mortgaged properties or certain other less restrictive parameters.
Generally, relative to the "general" underwriting standards, and in return for
placing greater emphasis on higher FICO Scores (or for "foreign nationals"
without a FICO Score who hold certain types of visas and have acceptable
credit references) these standards include higher loan amounts, higher maximum
Loan-to-Value Ratios, higher maximum "combined" Loan-to-Value Ratios in cases
of simultaneous primary and secondary financings, less restrictive
requirements for "equity take out" refinancings, the removal of limitations on
the number of permissible mortgage loans that may be extended to one borrower
and the ability to originate mortgage loans with Loan-to-Value Ratios in
excess of 80% without the requirement to obtain primary mortgage insurance if
such loans are secured by cooperatives or investment properties.
With respect to mortgaged property types, mortgage loans may be secured by
shares in cooperative housing corporations, "manufactured homes", investment
properties permitted under less stringent guidelines, condotels (features of
which may include maid service, a front desk or resident manager, rental pools
and up to 20% of commercial space), and the mortgaged properties may represent
an unusually high percentage of land vs. structure or have other unique
characteristics.
In addition, borrowers may have been approved under a "No Ratio" program
applicable to loan applicants satisfying certain minimum FICO Score
thresholds. For such cases, the borrower's income would not have been verified
nor would there have been the calculation of any ratios, as part of the loan
underwriting decision, of the borrower's expected monthly housing debt or
total monthly debt obligations to the borrower's monthly income. In connection
with such No Ratio program, the borrower's assets would have been verified and
certain minimum "cash reserves" required.
Pool Certification Underwriting. If specified in the applicable Prospectus
Supplement, certain of the Mortgage Loans will have been reviewed by General
Electric Mortgage Insurance Corporation ("GEMICO"), United Guaranty
Residential Insurance Company ("UGRIC") or a similar entity (collectively, the
"Pool Insurers") to determine conformity, in the aggregate, with such
company's respective credit, appraisal and underwriting guidelines. Norwest
Mortgage will not have underwritten such Mortgage Loans. Neither GEMICO nor
UGRIC have underwritten any of the Mortgage Loans for compliance with any
investor guidelines.
Based on information provided by the relevant company, as a condition to
eligibility of a Mortgage Loan for inclusion in a mortgage pool to be insured
by GEMICO or UGRIC, the loan originator generally will be required to comply
with the following procedures, although exceptions may be made if permitted by
such company.
Initially, a prospective borrower must fill out a detailed application
providing pertinent credit information. The loan originator obtains a credit
report, which summarizes the prospective borrower's credit history with
merchants and lenders and any record of bankruptcy, or other pertinent legal
history. In addition, a verification of employment for the last two years is
made from either the applicant's employer or a Form W-2 for the most recent
two years and the applicant's most recent pay stub. If an applicant is self-
employed, such applicant submits copies of signed tax returns with all
schedules for the prior two years together with a current year-to-date profit
and loss statement and any other documentation deemed necessary. Rental income
used to qualify the applicant is verified either by lease agreements or by the
borrower's tax returns. In the case of refinancings, the loan originator must
require, among other things, that there has not been more than one delinquency
in the prior 12 months nor, in the case of mortgage loans reviewed by GEMICO,
any delinquency in the past 90 days on the prior mortgage loan.
In determining the adequacy of the Mortgaged Property as collateral, an
independent appraisal must be made of each property considered for financing.
Each appraiser must be selected in accordance with predetermined guidelines
established for appraisers. The appraiser is required to inspect the property
and verify that it is in good condition and that construction, if new, has
been completed. The appraisal is based on the market value of comparable
homes. No appraisal more than six months old will be accepted by GEMICO and no
appraisal more than 120 days old will be accepted by UGRIC.
Once all applicable employment, credit and property information is received,
a determination must be made by the loan originator (and confirmed on review
by GEMICO or UGRIC) as to whether the prospective borrower has sufficient
monthly income to meet (i) the monthly payment obligations on the proposed
mortgage loan (including principal and interest payments, real estate taxes,
insurance on the subject property, and homeowners' association dues and
secondary financing, if any), and (ii) the aggregate of the foregoing and all
other financial obligations not expected to be fully repaid within the next 10
months. As a
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general rule, UGRIC permits a maximum ratio of a prospective borrower's debt,
as described in clauses (i) and (ii) above, to such borrower's income to be
33% and 38%, respectively for fixed rate, fixed payment loans and for
adjustable rate loans with Loan-to-Value Ratios of 75% or less. Maximum ratios
of 28% and 33%, respectively, are permitted for adjustable rate loans with
Loan-to-Value Ratios above 75%. These general rules may be varied, and higher
debt-to-income ratios may be permitted, in appropriate cases characterized by
lower Loan-to-Value Ratios or other favorable factors. GEMICO's underwriting
process relies on a combination of its own proprietary credit scoring model
(which includes factors related to a borrower's credit history as well as
specific loan attributes) and the consideration of borrower debt-to-income
ratios. Depending upon the credit score, GEMICO will permit maximum ratios, as
described in clauses (i) and (ii) above, of 40% and 50%, respectively.
In some special cases, GEMICO and UGRIC may underwrite loans under a
"limited documentation" program. With respect to such loans, limited
investigation into the borrower's credit history and income profile is
undertaken by the originator and such loans may be underwritten primarily on
the basis of an appraisal of the mortgaged property and Loan-to-Value Ratio on
origination. Thus, if the Loan-to-Value Ratio is less than the percentage
required under standard guidelines, the originator may forego certain aspects
of the review relating to monthly income, and, in the case of mortgage loans
reviewed by GEMICO, traditional ratios of monthly or total expenses to gross
income may not be applied. At a minimum, a limited documentation program must
require a loan application, a credit report, an appraisal acceptable to Fannie
Mae/Freddie Mac performed by an independent appraiser, and a verification of
downpayment or three months of bank statements. The maximum Loan-to-Value
Ratio allowed under any limited documentation program underwritten by GEMICO
and UGRIC is 70%. UGRIC's "limited documentation" program is limited
exclusively to self-employed borrowers.
For any rate or term refinance of a mortgage loan, or conversion of an
adjustable rate mortgage loan, where GEMICO or UGRIC has already insured the
prior loan, GEMICO or UGRIC may have determined a loan's insurability without
reviewing updated credit or collateral information. In the case of seasoned
loans, GEMICO or UGRIC may have determined a loan's insurability by performing
a more limited credit and collateral review.
The foregoing should not be taken as a full and complete discussion of all
of the procedures undertaken in connection with a particular underwriting.
Both GEMICO and UGRIC consider various other factors including, but not
limited to, reviewing sales contracts, verifying deposits and other assets and
examining additional supporting documentation in certain instances such as
divorce decrees and separation agreements. Investors should consult the
particular Pool Insurer's underwriting guidelines for more specific and
complete requirements regarding underwriting standards. Furthermore, the
underwriting process often results in certain compensating factors being
considered to offset the existence of other negative factors in a loan file.
The use of pool certification underwriting by a Pool Insurer in no way
indicates that the related Certificates or Mortgage Loans are insured or
guaranteed under a mortgage pool insurance policy unless the applicable
Prospectus Supplement so specifies.
GEMICO may be contacted at 640 Freedom Business Center, King of Prussia,
Pennsylvania 19406, Attention: Compliance Underwriting; (800) 288-4364. UGRIC
may be contacted at 1815 South Meyers Road, Suite 430 Oakbrook Terrace,
Illinois 60181, Attention: Pool Department; (800) 323-7324.
REPRESENTATIONS AND WARRANTIES
In connection with the transfer of the Mortgage Loans related to any Series
by the Seller to the Trust Estate, the Seller will generally make certain
representations and warranties regarding the Mortgage Loans. In certain cases
where the Seller acquired some or all of the Mortgage Loans related to a
Series from a Correspondent, if so indicated in the applicable Prospectus
Supplement, the Seller may, rather than itself making representations and
warranties, cause the representations and warranties made by the Correspondent
in connection with its sale of Mortgage Loans to Norwest Mortgage or Norwest
Funding to be assigned to the Trust Estate. In such cases, the Correspondent's
representations and warranties may have been made as of a date prior to the
date of execution of the Pooling and Servicing Agreement. Unless otherwise
provided in the applicable Prospectus Supplement, such representations and
warranties (whether made by the Seller or another party) will generally
include the following with respect to the Mortgage Loans, or each Mortgage
Loan, as the case may be:
(i) the information set forth in the schedule of Mortgage Loans appearing
as an exhibit to such Pooling and Servicing Agreement is correct in all
material respects at the date or dates respecting which such information is
furnished as specified therein;
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(ii) immediately prior to the transfer and assignment contemplated by the
Pooling and Servicing Agreement, the Seller is the sole owner and holder of
the Mortgage Loan, free and clear of any and all liens, pledges, charges or
security interests of any nature and has full right and authority to sell
and assign the same;
(iii) the Mortgage is a valid, subsisting and enforceable first lien on
the related Mortgaged Property, and the Mortgaged Property is free and
clear of all encumbrances and liens having priority over the first lien of
the Mortgage except for liens for real estate taxes and special assessments
not yet due and payable and liens or interests arising under or as a result
of any federal, state or local law, regulation or ordinance relating to
hazardous wastes or hazardous substances; and, if the Mortgaged Property is
a condominium unit, any lien for common charges permitted by statute or
home owners association fees; and, if the Mortgaged Property consists of
shares of a cooperative housing corporation, any lien for amounts due to
the cooperative housing corporation for unpaid assessments or charges or
any lien of any assignment of rents or maintenance expenses secured by the
real property owned by the cooperative housing corporation; and any
security agreement, chattel mortgage or equivalent document related to, and
delivered to the Trustee or a custodian with, any Mortgage establishes in
the Seller a valid first lien on the property described therein and the
Seller has full right to sell and assign the same to the Trustee;
(iv) neither the Seller nor any prior holder of the Mortgage or the
related Mortgage Note has modified the Mortgage in any material respect;
satisfied, cancelled or subordinated the Mortgage or the related Mortgage
Note in whole or in part; or released the Mortgaged Property in whole or in
part from the lien of the Mortgage; or executed any instrument of release,
cancellation, modification or satisfaction, except in each case as
reflected in a document delivered by the Seller to the Trustee or a
custodian together with the related Mortgage;
(v) all taxes, governmental assessments, insurance premiums, and water,
sewer and municipal charges previously due and owing have been paid, or an
escrow of funds in an amount sufficient to pay for every such item which
remains unpaid has been established to the extent permitted by law; and the
Seller has not advanced funds or received any advance of funds by a party
other than the mortgagor, directly or indirectly (except pursuant to any
Buy-Down Loan or Subsidy Loan arrangement), for the payment of any amount
required by the Mortgage, except for interest accruing from the date of the
related Mortgage Note or date of disbursement of the Mortgage Loan
proceeds, whichever is later, to the date which precedes by 30 days the
first Due Date under the related Mortgage Note;
(vi) the Mortgaged Property is undamaged by water, fire, earthquake or
earth movement, windstorm, flood, tornado or similar casualty (excluding
casualty from the presence of hazardous wastes or hazardous substances, as
to which the Seller makes no representation), so as to affect adversely the
value of the Mortgaged Property as security for the Mortgage Loan or the
use for which the premises were intended and to the best of the Seller's
knowledge, there is no proceeding pending or threatened for the total or
partial condemnation of the Mortgaged Property;
(vii) the Mortgaged Property is free and clear of all mechanics' and
materialmen's liens or liens in the nature thereof; provided, however, that
this warranty shall be deemed not to have been made at the time of the
initial issuance of the Certificates if a title policy affording, in
substance, the same protection afforded by this warranty is furnished to
the Trustee by the Seller;
(viii) except for Mortgage Loans secured by shares in cooperatives, the
Mortgaged Property consists of a fee simple or leasehold estate in real
property, all of the improvements which are included for the purpose of
determining the appraised value of the Mortgaged Property lie wholly within
the boundaries and building restriction lines of such property and no
improvements on adjoining properties encroach upon the Mortgaged Property
(unless insured against under an applicable title insurance policy) and, to
the best of the Seller's knowledge, the Mortgaged Property and all
improvements thereon comply with all requirements of any applicable zoning
and subdivision laws and ordinances;
(ix) the Mortgage Loan meets, or is exempt from, applicable state or
federal laws, regulations and other requirements pertaining to usury, and
the Mortgage Loan is not usurious;
(x) to the best of the Seller's knowledge, all inspections, licenses and
certificates required to be made or issued with respect to all occupied
portions of the Mortgaged Property and, with respect to the use and
occupancy of the same, including, but not limited to, certificates of
occupancy and fire underwriting certificates, have been made or obtained
from the appropriate authorities;
(xi) all payments required to be made up to the Due Date immediately
preceding the Cut-Off Date for such Mortgage Loan under the terms of the
related Mortgage Note have been made and no Mortgage Loan had more than one
delinquency in the 12 months preceding the Cut-Off Date;
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(xii) the Mortgage Note, the related Mortgage and other agreements
executed in connection therewith are genuine, and each is the legal, valid
and binding obligation of the maker thereof, enforceable in accordance with
its terms except as such enforcement may be limited by bankruptcy,
insolvency, reorganization or other similar laws affecting the enforcement
of creditors' rights generally and by general equity principles (regardless
of whether such enforcement is considered in a proceeding in equity or at
law); and, to the best of the Seller's knowledge, all parties to the
Mortgage Note and the Mortgage had legal capacity to execute the Mortgage
Note and the Mortgage and each Mortgage Note and Mortgage has been duly and
properly executed by the mortgagor;
(xiii) any and all requirements of any federal, state or local law with
respect to the origination of the Mortgage Loans including, without
limitation, truth-in-lending, real estate settlement procedures, consumer
credit protection, equal credit opportunity or disclosure laws applicable
to the Mortgage Loans have been complied with;
(xiv) the proceeds of the Mortgage Loans have been fully disbursed, there
is no requirement for future advances thereunder and any and all
requirements as to completion of any on-site or off-site improvements and
as to disbursements of any escrow funds therefor have been complied with,
except for escrow funds for exterior items which could not be completed due
to weather; and all costs, fees and expenses incurred in making, closing or
recording the Mortgage Loan have been paid, except recording fees with
respect to Mortgages not recorded as of the date of the Pooling and
Servicing Agreement;
(xv) the Mortgage Loan (except a T.O.P. Loan as described above under "--
Mortgage Loan Underwriting" and any Mortgage Loan secured by Mortgaged
Property located in Iowa, as to which an opinion of counsel of the type
customarily rendered in such State in lieu of title insurance is instead
received) is covered by an ALTA mortgagee title insurance policy or other
generally acceptable form of policy or insurance acceptable to Fannie Mae
or Freddie Mac, issued by a title insurer acceptable to Fannie Mae or
Freddie Mac insuring the originator, its successors and assigns, as to the
first priority lien of the Mortgage in the original principal amount of the
Mortgage Loan and subject only to (A) the lien of current real property
taxes and assessments not yet due and payable, (B) covenants, conditions
and restrictions, rights-of-way, easements and other matters of public
record as of the date of recording of such Mortgage acceptable to mortgage
lending institutions in the area in which the Mortgaged Property is located
or specifically referred to in the appraisal performed in connection with
the origination of the related Mortgage Loan, (C) liens created pursuant to
any federal, state or local law, regulation or ordinance affording liens
for the costs of clean-up of hazardous substances or hazardous wastes or
for other environmental protection purposes and (D) such other matters to
which like properties are commonly subject which do not individually, or in
the aggregate, materially interfere with the benefits of the security
intended to be provided by the Mortgage; the Seller is the sole insured of
such mortgagee title insurance policy, the assignment to the Trustee of the
Seller's interest in such mortgagee title insurance policy does not require
any consent of or notification to the insurer which has not been obtained
or made, such mortgagee title insurance policy is in full force and effect
and will be in full force and effect and inure to the benefit of the
Trustee and no claims have been made under such mortgagee title insurance
policy, and no prior holder of the related Mortgage, including the Seller,
has done, by act or omission, anything which would impair the coverage of
such mortgagee title insurance policy;
(xvi) the Mortgaged Property securing each Mortgage Loan is insured by an
insurer acceptable to Fannie Mae or Freddie Mac against loss by fire and
such hazards as are covered under a standard extended coverage endorsement,
in an amount which is not less than the lesser of 100% of the insurable
value of the Mortgaged Property and the outstanding principal balance of
the Mortgage Loan, but in no event less than the minimum amount necessary
to fully compensate for any damage or loss on a replacement cost basis; if
the Mortgaged Property is a condominium unit, it is included under the
coverage afforded by a blanket policy for the project; if upon origination
of the Mortgage Loan, the improvements on the Mortgaged Property were in an
area identified in the Federal Register by the Federal Emergency Management
Agency as having special flood hazards, a flood insurance policy meeting
the requirements of the current guidelines of the Federal Insurance
Administration is in effect with a generally acceptable insurance carrier,
in an amount representing coverage not less than the least of (A) the
outstanding principal balance of the Mortgage Loan, (B) the full insurable
value of the Mortgaged Property and (C) the maximum amount of insurance
which was available under the Flood Disaster Protection Act of 1973; and
each Mortgage obligates the mortgagor thereunder to maintain all such
insurance at the mortgagor's cost and expense;
(xvii) to the best of the Seller's knowledge, there is no default,
breach, violation or event of acceleration existing under any Mortgage or
the related Mortgage Note and no event which, with the passage of time or
with notice and the expiration of any grace or cure period, would
constitute a default, breach, violation or event of acceleration; and the
Seller has not waived any default, breach, violation or event of
acceleration; no foreclosure action is threatened or has been commenced
with respect to the Mortgage Loan;
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(xviii) no Mortgage Note or Mortgage is subject to any right of
rescission, set-off, counterclaim or defense, including the defense of
usury, nor will the operation of any of the terms of the Mortgage Note or
Mortgage, or the exercise of any right thereunder, render such Mortgage
unenforceable, in whole or in part, or subject it to any right of
rescission, set-off, counterclaim or defense, including the defense of
usury, and no such right of rescission, set-off, counterclaim or defense
has been asserted with respect thereto;
(xix) each Mortgage Note is payable in monthly payments, resulting in
complete amortization of the Mortgage Loan over a term of not more than 360
months;
(xx) each Mortgage contains customary and enforceable provisions such as
to render the rights and remedies of the holder thereof adequate for the
realization against the Mortgaged Property of the benefits of the security,
including realization by judicial foreclosure (subject to any limitation
arising from any bankruptcy, insolvency or other law for the relief of
debtors), and there is no homestead or other exemption available to the
mortgagor which would interfere with such right of foreclosure;
(xxi) to the best of the Seller's knowledge, no mortgagor is a debtor in
any state or federal bankruptcy or insolvency proceeding;
(xxii) each Mortgaged Property is located in the United States and
consists of a one- to four-unit single family residential property which
may include a detached home, townhouse, condominium unit (including
condotels), unit in a planned unit development or a leasehold interest with
respect to any of the foregoing, or, in the case of Mortgage Loans secured
by shares of cooperatives, leases or occupancy agreements;
(xxiii) with respect to each Buy-Down Loan, the funds deposited in the
Buy-Down Fund, if any, will be sufficient, together with interest thereon
at the rate customarily received by the Seller on such funds, compounded
monthly, and adding the amounts required to be paid by the mortgagor, to
make the scheduled payments stated in the Mortgage Note for the term of the
buy-down agreement; and
(xxiv) each Mortgage Loan is a "Qualified Mortgage" within the meaning of
Section 860G of the Code.
No representations or warranties are made by the Seller or any other party
as to the environmental condition of such Mortgaged Property; the absence,
presence or effect of hazardous wastes or hazardous substances on any
Mortgaged Property; any casualty resulting from the presence or effect of
hazardous wastes or hazardous substances on, near or emanating from such
Mortgaged Property; the impact on Certificateholders of any environmental
condition or presence of any substance on or near such Mortgaged Property; or
the compliance of any Mortgaged Property with any environmental laws, nor is
any agent, person or entity otherwise affiliated with the Seller authorized or
able to make any such representation, warranty or assumption of liability
relative to any such Mortgaged Property. See "Certain Legal Aspects of the
Mortgage Loans--Environmental Considerations" below.
See "The Pooling and Servicing Agreement--Assignment of Mortgage Loans to
the Trustee" for a description of the limited remedies available in connection
with breaches of the foregoing representations and warranties.
DESCRIPTION OF THE CERTIFICATES
GENERAL
Each Series of Certificates will include one or more Classes, each of which
may be divided into two or more Subclasses. Any references herein to the
characteristics of a Class of Certificates may also describe the
characteristics of a Subclass of Certificates. In addition, any Class or
Subclass of Certificates may consist of two or more non-severable components,
each of which may exhibit any of the principal or interest payment
characteristics described herein with respect to a Class of Certificates. A
Series may include one or more Classes of Certificates entitled, to the extent
of funds available, to (i) principal and interest distributions in respect of
the related Mortgage Loans, (ii) principal distributions, with no interest
distributions, (iii) interest distributions, with no principal distributions
or (iv) such other distributions as are described in the applicable Prospectus
Supplement.
Each Series of Certificates will be issued pursuant to a Pooling and
Servicing Agreement (the "Pooling and Servicing Agreement") among the Seller,
Norwest Bank, as the Master Servicer, and the Trustee named in the applicable
Prospectus
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Supplement. An illustrative form of Pooling and Servicing Agreement has been
filed as an exhibit to the Registration Statement of which this Prospectus is
a part. The following summaries describe certain provisions common to the
Certificates and to 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
for each Series of Certificates and the applicable Prospectus Supplement.
Wherever particular sections or defined terms of the Pooling and Servicing
Agreement are referred to, such sections or defined terms are thereby
incorporated herein by reference from the form of Pooling and Servicing
Agreement filed as an exhibit to the Registration Statement.
Unless otherwise specified in the applicable Prospectus Supplement,
distributions to Certificateholders of all Series (other than the final
distribution in retirement of the Certificates) will be made by check mailed
to the address of the person entitled thereto (which in the case of Book-Entry
Certificates will be DTC) as it appears on the certificate register, except
that, with respect to any holder of a Certificate evidencing not less than a
certain minimum denomination set forth in the applicable Prospectus
Supplement, distributions will be made by wire transfer in immediately
available funds, provided that the Master Servicer or the Paying Agent acting
on behalf of the Master Servicer shall have been furnished with appropriate
wiring instructions not less than seven business days prior to the related
Distribution Date. The final distribution in retirement of Certificates will
be made only upon presentation and surrender of the Certificates at the office
or agency maintained by the Trustee or other entity for such purpose, as
specified in the final distribution notice to Certificateholders.
Each Series of Certificates will represent ownership interests in the
related Trust Estate. An election may be made to treat the Trust Estate (or
one or more segregated pools of assets therein) with respect to a Series of
Certificates as a REMIC. If such an election is made, such Series will consist
of one or more Classes of Certificates that will represent "regular interests"
within the meaning of Code Section 860G(a)(1) (such Class or Classes
collectively referred to as the "Regular Certificates") and one Class or
Subclass of Certificates with respect to each REMIC that will be designated as
the "residual interest" within the meaning of Code Section 860G(a)(2) (the
"Residual Certificates") representing the right to receive distributions as
specified in the Prospectus Supplement for such Series. See "Material Federal
Income Tax Consequences" herein.
The Seller may sell certain Classes or Subclasses of the Certificates of a
Series, including one or more Classes of Subordinated Certificates, in
privately negotiated transactions exempt from registration under the
Securities Act. Alternatively, if so specified in a Prospectus Supplement
relating to such Subordinated Certificates, the Seller may offer one or more
Classes of the Subordinated Certificates of a Series by means of this
Prospectus and such Prospectus Supplement.
DEFINITIVE FORM
Certificates of a Series that are issued in fully registered, certificated
form are referred to herein as "Definitive Certificates." Distributions of
principal of, and interest on, the Definitive Certificates will be made
directly to holders of Definitive Certificates in accordance with the
procedures set forth in the Pooling and Servicing Agreement. The Definitive
Certificates of a Series offered hereby and by means of the applicable
Prospectus Supplements will be transferable and exchangeable at the office or
agency maintained by the Trustee or such other entity for such purpose set
forth in the applicable Prospectus Supplement. No service charge will be made
for any transfer or exchange of Definitive Certificates, but the Trustee or
such other entity may require payment of a sum sufficient to cover any tax or
other governmental charge in connection with such transfer or exchange.
In the event that an election is made to treat the Trust Estate (or one or
more segregated pools of assets therein) as a REMIC, the "residual interest"
thereof will be issued as a Definitive Certificate. No legal or beneficial
interest in all or any portion of any "residual interest" may be transferred
without the receipt by the transferor and the Trustee of an affidavit signed
by the transferee stating, among other things, that the transferee (i) is not
a disqualified organization within the meaning of Code Section 860E(e) or an
agent (including a broker, nominee, or middleman) thereof and (ii) understands
that it may incur tax liabilities in excess of any cash flows generated by the
residual interest. Further, the transferee must state in the affidavit that it
(x) historically has paid its debts as they have come due, (y) intends to pay
its debts as they come due in the future and (z) intends to pay taxes
associated with holding the residual interest as they become due. The
transferor must certify to the Trustee that, as of the time of the transfer,
it has no actual knowledge that any of the statements made in the transferee
affidavit are false and no reason to know that the statements made by the
transferee pursuant to clauses (x), (y) and (z) of the preceding sentence are
false. See "Material Federal Income Tax Consequences--Federal Income Tax
Consequences for REMIC Certificates--Taxation of Residual Certificates--Tax-
Related Restrictions on Transfer of Residual Certificates."
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BOOK-ENTRY FORM
Each Class or Subclass of the Book-Entry Certificates of a Series initially
will be represented by one or more physical certificates registered in the
name of Cede & Co. ("Cede"), as nominee of DTC, which will be the "holder" or
"Certificateholder" of such Certificates, as such terms are used herein. No
person acquiring an interest in a Book-Entry Certificate (a "Beneficial
Owner") will be entitled to receive a Definitive Certificate representing such
person's interest in the Book-Entry Certificate, except as set forth below.
Unless and until Definitive Certificates are issued under the limited
circumstances described below in this section, all references to actions taken
by Certificateholders or holders shall, in the case of the Book-Entry
Certificates, refer to actions taken by DTC upon instructions from its DTC
Participants, and all references herein to distributions, notices, reports and
statements to Certificateholders or holders shall, in the case of the Book-
Entry Certificates, refer to distributions, notices, reports and statements to
DTC or Cede, as the registered holder of the Book-Entry Certificates, as the
case may be, for distribution to Beneficial Owners in accordance with DTC
procedures.
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 New York Uniform Commercial Code and a "clearing
agency" registered pursuant to Section 17A of the Securities Exchange Act of
1934, as amended. DTC was created to hold securities for its participating
organizations ("DTC Participants") and to facilitate the clearance and
settlement of securities transactions among DTC Participants through
electronic book-entries, thereby eliminating the need for physical movement of
certificates. DTC Participants include securities brokers and dealers (which
may include any underwriter identified in the Prospectus Supplement applicable
to any Series), banks, trust companies and clearing corporations. Indirect
access to the DTC system also is available to banks, brokers, dealers, trust
companies and other institutions that clear through or maintain a custodial
relationship with a DTC Participant, either directly or indirectly ("Indirect
DTC Participants").
Under the rules, regulations and procedures creating and affecting DTC and
its operations (the "Rules"), DTC is required to make book-entry transfers of
Book-Entry Certificates among DTC Participants on whose behalf it acts with
respect to the Book-Entry Certificates and to receive and transmit
distributions of principal of and interest on the Book-Entry Certificates. DTC
Participants and Indirect DTC Participants with which Beneficial Owners have
accounts with respect to the Book-Entry Certificates similarly are required to
make book-entry transfers and receive and transmit such payments on behalf of
their respective Beneficial Owners.
Beneficial Owners that are not DTC Participants or Indirect DTC Participants
but desire to purchase, sell or otherwise transfer ownership of, or other
interests in, Book-Entry Certificates may do so only through DTC Participants
and Indirect DTC Participants. In addition, Beneficial Owners will receive all
distributions of principal and interest from the Master Servicer, or a Paying
Agent on behalf of the Master Servicer, through DTC Participants. DTC will
forward such distributions to its DTC Participants, which thereafter will
forward them to Indirect DTC Participants or Beneficial Owners. Beneficial
Owners will not be recognized by the Trustee or the Master Servicer or any
paying agent as Certificateholders, as such term is used in the Pooling and
Servicing Agreement, and Beneficial Owners will be permitted to exercise the
rights of Certificateholders only indirectly through DTC and its DTC
Participants.
Because DTC can only act on behalf of DTC Participants, who in turn act on
behalf of Indirect DTC Participants and certain banks, the ability of a
Beneficial Owner to pledge Book-Entry Certificates to persons or entities that
do not participate in the DTC system, or to otherwise act with respect to such
Book-Entry Certificates, may be limited due to the lack of a physical
certificate for such Book-Entry Certificates. In addition, under a book-entry
format, Beneficial Owners may experience delays in their receipt of payments,
since distributions will be made by the Master Servicer, or a paying agent on
behalf of the Master Servicer, to Cede, as nominee for DTC.
DTC has advised the Seller that it will take any action permitted to be
taken by a Certificateholder under the Pooling and Servicing Agreement only at
the direction of one or more DTC Participants to whose accounts with DTC the
Book-Entry Certificates are credited. Additionally, DTC has advised the Seller
that it will take such actions with respect to specified Voting Interests only
at the direction of and on behalf of DTC Participants whose holdings of Book-
Entry Certificates evidence such specified Voting Interests. DTC may take
conflicting actions with respect to Voting Interests to the extent that DTC
Participants whose holdings of Book-Entry Certificates evidence such Voting
Interests authorize divergent action.
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Neither the Seller, the Master Servicer nor the Trustee will have any
responsibility for any aspect of the records relating to or payments made on
account of beneficial ownership interests of the Book-Entry Certificates held
by Cede, as nominee for DTC, or for maintaining, supervising or reviewing any
records relating to such beneficial ownership interests. In the event of the
insolvency of DTC, a DTC Participant or an Indirect DTC Participant in whose
name Book-Entry Certificates are registered, the ability of the Beneficial
Owners of such Book-Entry Certificates to obtain timely payment and, if the
limits of applicable insurance coverage by the Securities Investor Protection
Corporation are exceeded or if such coverage is otherwise unavailable,
ultimate payment, of amounts distributable with respect to such Book-Entry
Certificates may be impaired.
The Book-Entry Certificates will be converted to Definitive Certificates and
reissued to Beneficial Owners or their nominees, rather than to DTC or its
nominee, only if (i) the Trustee is advised in writing that DTC is no longer
willing or able to discharge properly its responsibilities as depository with
respect to the Book-Entry Certificates and the Trustee is unable to locate a
qualified successor, (ii) the Master Servicer, at its option, elects to
terminate the book-entry system through DTC or (iii) after the occurrence of a
dismissal or resignation of the Master Servicer under the Pooling and
Servicing Agreement, Beneficial Owners representing not less than 51% of the
Voting Interests of the outstanding Book-Entry Certificates advise the Trustee
through DTC, in writing, that the continuation of a book-entry system through
DTC (or a successor thereto) is no longer in the Beneficial Owners' best
interest.
Upon the occurrence of any event described in the immediately preceding
paragraph, the Trustee will be required to notify all Beneficial Owners
through DTC Participants of the availability of Definitive Certificates. Upon
surrender by DTC of the physical certificates representing the Book-Entry
Certificates and receipt of instructions for re-registration, the Trustee will
reissue the Book-Entry Certificates as Definitive Certificates to Beneficial
Owners. The procedures relating to payment on and transfer of Certificates
initially issued as Definitive Certificates will thereafter apply to those
Book-Entry Certificates that have been reissued as Definitive Certificates.
DISTRIBUTIONS TO CERTIFICATEHOLDERS
General. On each Distribution Date, each holder of a Certificate of a Class
will be entitled to receive its Certificate's Percentage Interest of the
portion of the Pool Distribution Amount (as defined below) allocated to such
Class. The undivided percentage interest (the "Percentage Interest")
represented by any Certificate of a Subclass or any Class in distributions to
such Subclass or Class will be equal to the percentage obtained by dividing
the initial principal balance (or notional amount) of such Certificate by the
aggregate initial principal balance (or notional amount) of all Certificates
of such Subclass or Class, as the case may be.
In general, the funds available for distribution to Certificateholders of a
Series of Certificates with respect to each Distribution Date for such Series
(the "Pool Distribution Amount") will be the sum of all previously
undistributed payments or other receipts on account of principal (including
principal prepayments and Liquidation Proceeds, if any) and interest on or in
respect of the related Mortgage Loans received by the related Servicer after
the Cut-Off Date (except for amounts due on or prior to the Cut-Off Date), or
received by the related Servicer on or prior to the Cut-Off Date but due after
the Cut-Off Date, in either case received on or prior to the business day
preceding the Determination Date in the month in which such Distribution Date
occurs, plus all Periodic Advances with respect to payments due to be received
on the Mortgage Loans on the Due Date preceding such Distribution Date, but
excluding the following:
(a) amounts received as late payments of principal or interest respecting
which one or more unreimbursed Periodic Advances has been made;
(b) that portion of Liquidation Proceeds with respect to a Mortgage Loan
which represents any unreimbursed Periodic Advances;
(c) those portions of each payment of interest on a particular Mortgage
Loan which represent (i) the Fixed Retained Yield, if any, (ii) the
applicable Servicing Fee, (iii) the applicable Master Servicing Fee, (iv)
the Trustee's fee and (v) any other amounts described in the applicable
Prospectus Supplement;
(d) all amounts representing scheduled payments of principal and interest
due after the Due Date occurring in the month in which such Distribution
Date occurs;
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(e) all proceeds (including Liquidation Proceeds other than, in certain
cases as specified in the applicable Prospectus Supplement, Liquidation
Proceeds which were received prior to the related Servicer's determination
that no further recoveries on a defaulted Mortgage Loan will be forthcoming
("Partial Liquidation Proceeds")) of any Mortgage Loans, or property
acquired in respect thereof, that were liquidated, foreclosed, purchased or
repurchased pursuant to the applicable Pooling and Servicing Agreement,
which proceeds were received on or after the Due Date occurring in the
month in which such Distribution Date occurs and all principal prepayments
in full, partial principal prepayments and Partial Liquidation Proceeds
received by the related Servicer on or after the Determination Date (or, in
certain cases as specified in the applicable Prospectus Supplement, the Due
Date) occurring in the month in which such Distribution Date occurs, and
all related payments of interest on such amounts;
(f) that portion of Liquidation Proceeds which represents any unpaid
Servicing Fees, Master Servicing Fee or any Trustee Fee to which the
related Servicer, the Trustee or the Master Servicer, respectively, is
entitled and any unpaid Fixed Retained Yield;
(g) if an election has been made to treat the applicable Trust Estate as
a REMIC, any Net Foreclosure Profits with respect to such Distribution
Date;
(h) all amounts representing certain expenses reimbursable to the Master
Servicer or any Servicer and other amounts permitted to be withdrawn by the
Master Servicer from the Certificate Account, in each case pursuant to the
applicable Pooling and Servicing Agreement;
(i) all amounts in the nature of late fees, assumption fees, prepayment
fees and similar fees and payments of interest related to principal
prepayments received on or after the first day of the month in which a
Distribution Date occurs and prior to the Determination Date in the month
of such Distribution Date which the related Servicer is entitled to retain
pursuant to the applicable Underlying Servicing Agreement;
(j) reinvestment earnings on payments received in respect of the Mortgage
Loans; and
(k) any recovery of an amount in respect of principal which had
previously been allocated as a realized loss to such Series of
Certificates.
The applicable Prospectus Supplement for a Series will describe any
variation in the calculation of the Pool Distribution Amount for such Series.
"Net Foreclosure Profits" with respect to a Distribution Date will be the
excess of (i) the portion of aggregate net Liquidation Proceeds which
represents the amount by which aggregate profits on Liquidated Loans with
respect to which net Liquidation Proceeds exceed the unpaid principal balance
thereof plus accrued interest thereon at the Mortgage Interest Rate over (ii)
aggregate realized losses on Liquidated Loans with respect to which net
Liquidation Proceeds are less than the unpaid principal balance thereof plus
accrued interest thereon at the Mortgage Interest Rate.
Distributions of Interest. With respect to each Series of Certificates,
interest on the related Mortgage Loans at the weighted average of the
applicable Net Mortgage Interest Rates thereof, will be passed through monthly
to holders of the related Classes of Certificates in the aggregate, in
accordance with the particular terms of each such Class of Certificates. The
"Net Mortgage Interest Rate" for each Mortgage Loan in a given period will
equal the mortgage interest rate for such Mortgage Loan in such period, as
specified in the related mortgage note (the "Mortgage Interest Rate"), less
the portion thereof, if any, not contained in the Trust Estate (the "Fixed
Retained Yield"), and less amounts payable to the Servicers for servicing the
Mortgage Loan (the "Servicing Fee"), the fee payable to the Master Servicer
(the "Master Servicing Fee"), the fee payable to the Trustee (the "Trustee
Fee") and any related expenses specified in the applicable Prospectus.
Interest will accrue on the principal balance (or notional amount, as
described below) of each Class of Certificates entitled to interest at the
Pass-Through Rate for such Class indicated in the applicable Prospectus
Supplement (which may be a fixed rate or an adjustable rate) from the date and
for the periods specified in such Prospectus Supplement. To the extent the
Pool Distribution Amount is available therefor, interest accrued during each
such specified period on each Class of Certificates entitled to interest
(other than a Class 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 applicable Prospectus
Supplement until the principal balance (or notional amount) of such Class has
been reduced to zero. Distributions allocable to interest on each Certificate
that is
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not entitled to distributions allocable to principal will generally 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 solely for convenience in
expressing the calculation of interest and for certain other purposes.
With respect to any Class of Accrual Certificates, any interest that has
accrued but is not paid on a given Distribution Date will be added to the
principal balance of such Class of Certificates on that Distribution Date.
Distributions of interest on each Class of Accrual Certificates will commence
only after the occurrence of the events or the existence of the circumstance
specified in such Prospectus Supplement and, prior to such time, or in the
absence of such circumstances, the principal balance of such Class will
increase on each Distribution Date by the amount of interest that accrued on
such Class during the preceding interest accrual period but that was not
required to be distributed to such Class on such Distribution Date. Any such
Class of Accrual Certificates will thereafter accrue interest on its
outstanding principal balance as so adjusted.
Distributions of Principal. The principal balance of any Class of
Certificates entitled to distributions of principal will generally be the
original principal balance of such Class specified in such Prospectus
Supplement, reduced by all distributions reported to the holders of such
Certificates as allocable to principal and any losses on the related Mortgage
Loans allocated to such Class of Certificates and (i) in the case of Accrual
Certificates, increased by all interest accrued but not then distributable on
such Accrual Certificates and (ii) in the case of a Series of Certificates
representing interests in a Trust Estate containing adjustable rate Mortgage
Loans, increased by any Deferred Interest allocable to such Class. The
principal balance of a Class or Subclass of Certificates generally represents
the maximum specified dollar amount (exclusive of (i) any interest that may
accrue on such Class or Subclass to which the holder thereof is entitled from
the cash flow on the related Mortgage Loans at such time) and will decline to
the extent of distributions in reduction of the principal balance of, and
allocations of losses to such Class or Subclass. Certificates with no
principal balance will not receive distributions in respect of principal. The
applicable 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.
If so provided in the applicable Prospectus Supplement, one or more Classes
of Senior Certificates will be entitled to receive all or a disproportionate
percentage of the payments of principal that are received from borrowers in
advance of their scheduled due dates and are not accompanied by amounts
representing scheduled interest due after the months of such payments or of
other unscheduled principal receipts or recoveries in the percentages and
under the circumstances or for the periods specified in such Prospectus
Supplement. Any such allocation of principal prepayments or other unscheduled
receipts or recoveries in respect of principal to such Class or Classes of
Senior Certificates will have the effect of accelerating the amortization of
such Senior Certificates while increasing the interests evidenced by the
Subordinated Certificates in the Trust Estate. Increasing the interests of the
Subordinated Certificates relative to that of the Senior Certificates is
intended to preserve the availability of the subordination provided by the
Subordinated Certificates.
If specified in the applicable Prospectus Supplement, the rights of the
holders of the Subordinated Certificates of a Series of Certificates for which
credit enhancement is provided through subordination to receive distributions
with respect to the Mortgage Loans in the related Trust Estate will be
subordinated to such rights of the holders of the Senior Certificates of the
same Series to the extent described below, except as otherwise set forth in
such Prospectus Supplement. This subordination is intended to enhance the
likelihood of regular receipt by holders of Senior Certificates of the full
amount of scheduled monthly payments of principal and interest due them and to
provide limited protection to the holders of the Senior Certificates against
losses due to mortgagor defaults.
The protection afforded to the holders of Senior Certificates of a Series of
Certificates for which credit enhancement is provided through subordination by
the subordination feature described above will be effected by (i) the
preferential right of such holders to receive, prior to any distribution being
made in respect of the related Subordinated Certificates on each Distribution
Date, current distributions on the related Mortgage Loans of principal and
interest due them on each Distribution Date out of the funds available for
distribution on such date in the related Certificate Account, (ii) by the
right of such holders to receive future distributions on the Mortgage Loans
that would otherwise have been payable to the holders of Subordinated
Certificates and/or (iii) by the prior allocation to the Subordinated
Certificates of all or a portion of losses realized on the related Mortgage
Loans.
Losses realized on liquidated Mortgage Loans (other than Excess Special
Hazard Losses, Excess Fraud Losses and Excess Bankruptcy Losses as described
below) will be allocated to the holders of Subordinated Certificates through a
reduction of the
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amount of principal payments on the Mortgage Loans to which such holders are
entitled before any corresponding reduction is made in respect of the Senior
Certificate.
A "Special Hazard Loss" is a loss on a liquidated Mortgage Loan occurring as
a result of a hazard not insured against under a standard hazard insurance
policy of the type described herein under "The Trust Estates--Mortgage Loans--
Insurance Policies." A "Fraud Loss" is a loss on a liquidated Mortgage Loan as
to which there was fraud in the origination of such Mortgage Loan. A
"Bankruptcy Loss" is a loss on a liquidated Mortgage Loan attributable to
certain actions which may be taken by a bankruptcy court in connection with a
Mortgage Loan, including a reduction by a bankruptcy court of the principal
balance of or the interest rate on a Mortgage Loan or an extension of its
maturity. Special Hazard Losses in excess of the amount specified in the
applicable Prospectus Supplement (the "Special Hazard Loss Amount") are
"Excess Special Hazard Losses." Fraud Losses in excess of the amount specified
in the applicable Prospectus Supplement (the "Fraud Loss Amount") are "Excess
Fraud Losses." Bankruptcy losses in excess of the amount specified in the
applicable Prospectus Supplement (the "Bankruptcy Loss Amount") are "Excess
Bankruptcy Losses." Any Excess Special Hazard Losses, Excess Fraud Losses or
Excess Bankruptcy Losses with respect to a Series will be allocated on a pro
rata basis among the related Classes of Senior and Subordinated Certificates.
An allocation of a loss on a "pro rata basis" among two or more Classes of
Certificates means an allocation on a pro rata basis to each such Class of
Certificates on the basis of their then-outstanding principal balances in the
case of the principal portion of a loss or based on the accrued interest
thereon in the case of an interest portion of a loss.
Since the amounts of the Special Hazard Loss Amount, Fraud Loss Amount and
Bankruptcy Loss Amount for a Series of Certificates are each expected to be
less than the amount of principal payments on the Mortgage Loans to which the
holders of the Subordinated Certificates of such Series are initially entitled
(such amount being subject to reduction, as described above, as a result of
allocation of losses on liquidated Mortgage Loans that are not Special Hazard
Losses, Fraud Losses or Bankruptcy Losses), the holders of Subordinated
Certificates of such Series will bear the risk of Special Hazard Losses, Fraud
Losses and Bankruptcy Losses to a lesser extent than they will bear other
losses on liquidated Mortgage Loans.
Although the subordination feature described above is intended to enhance
the likelihood of timely payment of principal and interest to the holders of
Senior Certificates, shortfalls could result in certain circumstances. For
example, a shortfall in the payment of principal otherwise due the holders of
Senior Certificates could occur if losses realized on the Mortgage Loans in a
Trust Estate were exceptionally high and were concentrated in a particular
month.
The holders of Subordinated Certificates will not be required to refund any
amounts previously properly distributed to them, regardless of whether there
are sufficient funds on a subsequent Distribution Date to make a full
distribution to holders of each Class of Senior Certificates of the same
Series.
OTHER CREDIT ENHANCEMENT
In addition to, or in substitution for, the subordination discussed under
"Distributions to Certificateholders--Distributions of Principal" above,
credit enhancement may be provided with respect to any Series of Certificates
in any other manner which may be described in the applicable Prospectus
Supplement, including, but not limited to, credit enhancement through an
alternative form of subordination and/or one or more of the methods described
below.
Limited Guarantee
If so specified in the Prospectus Supplement with respect to a Series of
Certificates, credit enhancement may be provided in the form of a limited
guarantee issued by a guarantor named therein.
Financial Guaranty Insurance Policy or Surety Bond
If so specified in the Prospectus Supplement with respect to a Series of
Certificates credit enhancement may be provided in the form of a financial
guaranty insurance policy or a surety bond issued by an insurer named therein.
Letter of Credit
Alternative credit support with respect to a Series of Certificates may be
provided by the issuance of a letter of credit by the bank or financial
institution specified in the applicable Prospectus Supplement. The coverage,
amount and frequency of any
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reduction in coverage provided by a letter of credit issued with respect to a
Series of Certificates will be set forth in the Prospectus Supplement relating
to such Series.
Pool Insurance Policies
If so specified in the Prospectus Supplement relating to a Series of
Certificates, the Seller will obtain a pool insurance policy for the Mortgage
Loans in the related Trust Estate. The pool insurance policy will cover any
loss (subject to the limitations described in the applicable Prospectus
Supplement) by reason of default to the extent a related Mortgage Loan is not
covered by any primary mortgage insurance policy. The amount and principal
terms of any such coverage will be set forth in the Prospectus Supplement.
Special Hazard Insurance Policies
If so specified in the applicable Prospectus Supplement, for each Series of
Certificates as to which a pool insurance policy is provided, the Seller will
also obtain a special hazard insurance policy for the related Trust Estate in
the amount set forth in such Prospectus Supplement. The special hazard
insurance policy will, subject to the limitations described in the applicable
Prospectus Supplement, protect against loss by reason of damage to Mortgaged
Properties caused by certain hazards not insured against under the standard
form of hazard insurance policy for the respective states in which the
Mortgaged Properties are located. The amount and principal terms of any such
coverage will be set forth in the Prospectus Supplement.
Mortgagor Bankruptcy Bond
If so specified in the applicable Prospectus Supplement, losses resulting
from a bankruptcy proceeding relating to a mortgagor affecting the Mortgage
Loans in a Trust Estate with respect to a Series of Certificates will be
covered under a mortgagor bankruptcy bond (or any other instrument that will
not result in a downgrading of the rating of the Certificates of a Series by
the Rating Agency or Rating Agencies that rated such Series). Any mortgagor
bankruptcy bond or such other instrument will provide for coverage in an
amount meeting the criteria of the Rating Agency or Rating Agencies rating the
Certificates of the related Series, which amount will be set forth in the
applicable Prospectus Supplement. The amount and principal terms of any such
coverage will be set forth in the Prospectus Supplement.
Reserve Fund
If so specified in the applicable Prospectus Supplement, credit enhancement
with respect to a Series of Certificates may be provided by the establishment
of one or more reserve funds (each, a "Reserve Fund") for such Series.
The Reserve Fund for a Series may be funded (i) by the deposit therein of
cash, U.S. Treasury securities or instruments evidencing ownership of
principal or interest payments thereon, letters of credit, demand notes,
certificates of deposit or a combination thereof in the aggregate amount
specified in the applicable Prospectus Supplement, (ii) by the deposit therein
from time to time of certain amounts, as specified in the applicable
Prospectus Supplement, to which the certain Classes of Certificates would
otherwise be entitled or (iii) in such other manner as may be specified in the
applicable Prospectus Supplement.
Cross Support
If specified in the applicable Prospectus Supplement, the beneficial
ownership of separate groups of Mortgage Loans included in a Trust Estate 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 certain Classes from mortgage loan payments that would
otherwise be distributed to Subordinated Certificates evidencing a beneficial
ownership interest in other loan groups within the same Trust Estate. The
applicable Prospectus Supplement for a Series that includes a cross support
feature will describe the specific operation of any such cross support
feature.
Overcollateralization
If specified in the applicable Prospectus Supplement, credit enhancement
with respect to a Series of Certificates may be provided through
"overcollateralization." Overcollateralization can occur by the initial
deposit to the Trust Estate of Mortgage
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Loans which have an outstanding principal balance that exceeds the initial
principal balance of the Certificates. Overcollateralization can also occur
when interest collections on the Mortgage Loans (less any Fixed Retained
Yield, Master Servicing Fee and Servicing Fee) exceed interest payments on the
Certificates for the related Distribution Date and such excess interest is
applied as principal payments on the Certificates thereby reducing the
principal balance of the Certificates relative to the outstanding principal
balance of the Mortgage Loans.
PREPAYMENT AND YIELD CONSIDERATIONS
PASS-THROUGH RATES
Any Class of Certificates of a Series may have a fixed Pass-Through Rate, or
a Pass-Through Rate which varies based on changes in an index or based on
changes with respect to the underlying Mortgage Loans (such as, for example,
varying on the basis of changes in the weighted average Net Mortgage Interest
Rate of the underlying Mortgage Loans).
The Prospectus Supplement for each Series will specify the range and the
weighted average of the Mortgage Interest Rates and, if applicable, Net
Mortgage Interest Rates for the Mortgage Loans underlying such Series as of
the Cut-Off Date. If the Trust Estate includes adjustable-rate Mortgage Loans
or includes Mortgage Loans with different Net Mortgage Interest Rates, the
weighted average Net Mortgage Interest Rate may vary from time to time as set
forth below. See "The Trust Estates." The Prospectus Supplement for a Series
will also specify the initial weighted average Pass-Through Rate for each
Class of Certificates of such Series and will specify whether each such Pass-
Through Rate is fixed or is variable.
The Net Mortgage Interest Rate for any adjustable-rate Mortgage Loan will
change with any changes in the index specified in the applicable Prospectus
Supplement on which such Mortgage Interest Rate adjustments are based, subject
to any applicable periodic or aggregate caps or floors on the related Mortgage
Interest Rate. The weighted average Net Mortgage Interest Rate with respect to
any Series may vary due to changes in the Net Mortgage Interest Rates of
adjustable-rate Mortgage Loans, to the timing of the Mortgage Interest Rate
readjustments of such Mortgage Loans and to different rates of payment of
principal of fixed or adjustable-rate Mortgage Loans bearing different
Mortgage Interest Rates.
EFFECTS OF DEFAULTS
The rate of defaults on the Mortgage Loans will also affect the rate and
timing of principal payments on the Mortgage Loans. In general, defaults on
mortgage loans are expected to occur with greater frequency in their early
years. The rate of default on Mortgage Loans that are secured by non-owner
occupied properties, Mortgage Loans with higher Loan-to-Value Ratios and
Mortgage Loans made to borrowers with higher debt-to-income ratios or
borrowers approved under a "No Ratio" program, may be higher than for other
types of Mortgage Loans. As a result of the Mortgage Loans being originated
using "alternative" underwriting standards that, in certain respects, may be
less stringent than the "general" standards applied by Norwest Mortgage, the
Mortgage Loans may experience rates of delinquency, foreclosure, bankruptcy
and loss that are higher than those experienced by mortgage loans that satisfy
the standards generally applied by Norwest Mortgage.
SCHEDULED DELAYS IN DISTRIBUTIONS
At the date of initial issuance of the Certificates of each Series offered
hereby, the initial purchasers of a Class of Certificates may be required to
pay accrued interest at the applicable Pass-Through Rate for such Class from
the Cut-Off Date for such Series to, but not including, the date of issuance.
The effective yield to Certificateholders will be below the yield otherwise
produced by the applicable Pass-Through Rate because the distribution of
principal and interest which is due on each Due Date will not be made until
the 25th day (or if such 25th day is not a business day, the business day
immediately following such 25th day) of the month in which such Due Date
occurs (or until such other Distribution Date specified in the applicable
Prospectus Supplement).
EFFECT OF PRINCIPAL PREPAYMENTS
When a Mortgage Loan is prepaid in full, the mortgagor pays interest on the
amount prepaid only to the date of prepayment and not thereafter. Liquidation
Proceeds (as defined herein under "Servicing of the Mortgage Loans--Payments
on Mortgage Loans") and amounts received in settlement of insurance claims are
also likely to include interest only to the time of payment or
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settlement. When a Mortgage Loan is prepaid in full or in part, an interest
shortfall may result depending on the timing of the receipt of the prepayment
and the timing of when those prepayments are passed through to
Certificateholders. To partially mitigate this reduction in yield, the
Underlying Servicing Agreements relating to a Series may provide, to the
extent specified in the applicable Prospectus Supplement, that with respect to
certain principal prepayments received on or, the Master Servicer will be
obligated, on or before each Distribution Date, to pay an amount equal to the
lesser of (i) the aggregate interest shortfall with respect to such
Distribution Date resulting from principal prepayments in full by mortgagors
and (ii) the portion of the Master Servicer's master servicing compensation
for such Distribution Date specified in the applicable Prospectus Supplement.
No comparable interest shortfall coverage will be provided by the Master
Servicer with respect to liquidations of any Mortgage Loans or partial
principal payments. Any interest shortfall arising from prepayments not so
covered or from liquidations will be covered by means of the subordination of
the rights of Subordinated Certificateholders or any other credit support
arrangements.
A lower rate of principal prepayments than anticipated would negatively
affect the total return to investors in any Certificates of a Series that are
offered at a discount to their principal amount and a higher rate of principal
prepayments than anticipated would negatively affect the total return to
investors in the Certificates of a Series that are offered at a premium to
their principal amount. The yield on Certificates that are entitled solely or
disproportionately to distributions of principal or interest may be
particularly sensitive to prepayment rates, and further information with
respect to yield on such Certificates will be included in the applicable
Prospectus Supplement.
WEIGHTED AVERAGE LIFE OF CERTIFICATES
The Mortgage Loans may be prepaid in full or in part at any time. Mortgage
Loan generally will not provide for a prepayment penalty but may so provide if
indicated in the related Prospectus Supplement. Fixed rate Mortgage Loans
generally will contain due-on-sale clauses permitting the mortgagee to
accelerate the maturities of the Mortgage Loans upon conveyance of the related
Mortgaged Properties, and adjustable-rate Mortgage Loans generally will permit
creditworthy borrowers to assume the then-outstanding indebtedness on the
Mortgage Loans.
Prepayments on Mortgage Loans are commonly measured relative to a prepayment
standard or model. The Prospectus Supplement for each Series of Certificates
may describe one or more such prepayment standards or models and contain
tables setting forth the weighted average life of each Class and the
percentage of the original aggregate principal balance of each Class that
would be outstanding on specified Distribution Dates for such Series and the
projected yields to maturity on certain Classes thereof, in each case based on
the assumptions stated in such Prospectus Supplement, including assumptions
that prepayments on the Mortgage Loans are made at rates corresponding to
various percentages of the prepayment standard or model specified in such
Prospectus Supplement.
There is no assurance that prepayment of the Mortgage Loans underlying a
Series of Certificates will conform to any level of the prepayment standard or
model specified in the applicable Prospectus Supplement. A number of factors,
including but not limited to homeowner mobility, economic conditions, natural
disasters, changes in mortgagors' housing needs, job transfers, unemployment
or, in the case of borrowers relying on commission income and self-employed
borrowers, significant fluctuations in income or adverse economic conditions,
mortgagors' net equity in the properties securing the mortgages, including the
use of second or "home equity" mortgage loans by mortgagors or the use of the
properties as second or vacation homes, servicing decisions, enforceability of
due-on-sale clauses, mortgage market interest rates, mortgage recording taxes,
competition among mortgage loan originators resulting in reduced refinancing
costs, reduction in documentation requirements and willingness to accept
higher loan-to-value ratios, and the availability of mortgage funds, may
affect prepayment experience. In general, however, if prevailing interest
rates fall below the Mortgage Interest Rates borne by the Mortgage Loans
underlying a Series of Certificates, the prepayment rates of such Mortgage
Loans are likely to be higher than if prevailing rates remain at or above the
rates borne by such Mortgage Loans. Conversely, if prevailing interest rates
rise above the Mortgage Interest Rates borne by the Mortgage Loans, the
Mortgage Loans are likely to experience a lower prepayment rate than if
prevailing rates remain at or below such Mortgage Interest Rates. However,
there can be no assurance that prepayments will rise or fall according to such
changes in interest rates. It should be noted that Certificates of a Series
may evidence an interest in a Trust Estate with different Mortgage Interest
Rates. Accordingly, the prepayment experience of such Certificates will to
some extent be a function of the mix of interest rates of the Mortgage Loans.
In addition, the terms of the Underlying Servicing Agreements will require the
related Servicer to enforce any due-on-sale clause to the extent it has
knowledge of the conveyance or the proposed conveyance of the underlying
Mortgaged Property; provided, however, that any enforcement action that the
Servicer determines would jeopardize any recovery under any
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related primary mortgage insurance policy will not be required and provided,
further, that the Servicer may permit the assumption of defaulted Mortgage
Loans. See "Servicing of the Mortgage Loans--Enforcement of Due-on-Sale
Clauses; Realization Upon Defaulted Mortgage Loans" and "Certain Legal Aspects
of the Mortgage Loans--Due-On-Sale Clauses" for a description of certain
provisions of each Pooling and Servicing Agreement and certain legal
developments that may affect the prepayment experience on the Mortgage Loans.
At the request of the mortgagor, a Servicer, including Norwest Mortgage, may
allow the refinancing of a Mortgage Loan in any Trust Estate serviced by such
Servicer by accepting prepayments thereon and permitting a new loan secured by
a Mortgage on the same property. Upon such refinancing, the new loan will not
be included in the Trust Estate. A mortgagor may be legally entitled to
require the Servicer to allow such a refinancing. Any such refinancing will
have the same effect as a prepayment in full of the related Mortgage Loan. In
this regard a Servicer may, from time to time, implement programs designed to
encourage refinancing through such Servicer, including but not limited to
general or targeted solicitations, or the offering of pre-approved
applications, reduced origination fees or closing costs, or other financial
incentives. A Servicer may also encourage refinancing of defaulted Mortgage
Loans, including Mortgage Loans that would permit creditworthy borrowers to
assume the outstanding indebtedness.
The Seller will be obligated, under certain circumstances, to repurchase
certain of the Mortgage Loans. In addition, if specified in the applicable
Prospectus Supplement, the Pooling and Servicing Agreement will permit, but
not require, the Seller, and the terms of certain insurance policies relating
to the Mortgage Loans may permit the applicable insurer, to purchase any
Mortgage Loan which is in default or as to which default is reasonably
foreseeable. The proceeds of any such purchase or repurchase will be deposited
in the related Certificate Account and such purchase or repurchase will have
the same effect as a prepayment in full of the related Mortgage Loan. See "The
Pooling and Servicing Agreement--Assignment of Mortgage Loans to the Trustee"
and "--Optional Purchases." In addition, if so specified in the applicable
Prospectus Supplement, the Seller or another person identified therein will
have the option to purchase all, but not less than all, of the Mortgage Loans
in any Trust Estate under the limited conditions specified in such Prospectus
Supplement. For any Series of Certificates for which an election has been made
to treat the Trust Estate (or one or more segregated pools of assets therein)
as a REMIC, any such purchase or repurchase may be effected only pursuant to a
"qualified liquidation," as defined in Code Section 860F(a)(4)(A). See "The
Pooling and Servicing Agreement--Termination; Optional Purchase of Mortgage
Loans."
SERVICING OF THE MORTGAGE LOANS
The following is a summary of certain provisions of the forms of the
Underlying Servicing Agreement and the Pooling and Servicing Agreement that
have been filed as exhibits to the Registration Statement of which this
Prospectus forms a part. 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 Underlying Servicing
Agreements for each Series of Certificates and the applicable Prospectus
Supplement.
THE MASTER SERVICER
The Master Servicer with respect to each Series of Certificates will be
Norwest Bank. See "Norwest Bank" above. The Master Servicer generally will (a)
be responsible under each Pooling and Servicing Agreement for providing
general administrative services for the Trust Estate for any such Series,
including, among other things, (i) for administering and supervising the
performance by the Servicers of their duties and responsibilities under the
Underlying Servicing Agreements, (ii) oversight of payments received on
Mortgage Loans, (iii) monitoring the amounts on deposit in various trust
accounts, (iv) calculation of the amounts payable to Certificateholders on
each Distribution Date, (v) preparation of periodic reports to the Trustee or
the Certificateholders with respect to the foregoing matters, (vi) preparation
of federal and applicable state and local tax and information returns; (vii)
preparation of reports, if any, required under the Securities and Exchange Act
of 1934, as amended and (viii) performing certain of the servicing obligations
of a terminated Servicer as described below under "--The Servicers";
(b) maintain any mortgage pool insurance policy, mortgagor bankruptcy bond,
special hazard insurance policy or other form of credit support that may be
required with respect to any Series and (c) make advances of delinquent
payments of principal and interest on the Mortgage Loans to the limited extent
described below under "--Periodic Advances and Limitations Thereon," if such
amounts are not advanced by a Servicer (other than Norwest Mortgage). The
Master Servicer will also perform additional
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duties as described in the applicable Pooling and Servicing Agreement. The
Master Servicer will be entitled to receive a portion of the interest payments
on the Mortgage Loans included in the Trust Estate for such a Series to cover
its fees as Master Servicer. The Master Servicer may subcontract with Norwest
Mortgage or any other entity the obligations of the Master Servicer under any
Pooling and Servicing Agreement. The Master Servicer will remain primarily
liable for any such contractor's performance in accordance with the applicable
Pooling and Servicing Agreement. The Master Servicer may be released from its
obligations in certain circumstances. See "Certain Matters Regarding the
Master Servicer."
The Master Servicer will generally be required to pay all expenses incurred
in connection with the administration of the Trust Estate, including, without
limitation, fees or other amounts payable pursuant to any applicable agreement
for the provision of credit enhancement for such Series, the fees and
disbursements of the Trustee and any custodian, fees due to the independent
accountants and expenses incurred in connection with distributions and reports
to Certificateholders. Certain of these expenses may be reimbursable to the
Master Servicer pursuant to the terms of the applicable Pooling and Servicing
Agreement.
THE SERVICERS
For each Series, Norwest Mortgage and, if specified in the applicable
Prospectus Supplement, one or more other Servicers will provide certain
customary servicing functions with respect to Mortgage Loans pursuant to
separate servicing agreements ("Underlying Servicing Agreements") with the
Seller or an affiliate thereof. The rights of the Seller or such affiliate
under the applicable Underlying Servicing Agreements in respect of the
Mortgage Loans included in the Trust Estate for any such Series will be
assigned (directly or indirectly) to the Trustee for such Series. The
Servicers may be entitled to withhold their Servicing Fees and certain other
fees and charges from remittances of payments received on Mortgage Loans
serviced by them.
Each Servicer generally will be approved by Fannie Mae or Freddie Mac as a
servicer of mortgage loans and must be approved by the Master Servicer. In
determining whether to approve a Servicer, the Master Servicer will review the
credit of the Servicer, including capitalization ratios, liquidity,
profitability and other similar items that indicate financial ability to
perform its obligations. In addition, the Master Servicer's mortgage servicing
personnel will review the Servicer's servicing record and evaluate the ability
of the Servicer to conform with required servicing procedures. Once a Servicer
is approved, the Master Servicer will continue to monitor on an annual basis
the financial position and servicing performance of the Servicer.
The duties to be performed by each Servicer include collection and
remittance of principal and interest payments on the Mortgage Loans,
administration of mortgage escrow accounts, collection of insurance claims,
foreclosure procedures, and, if necessary, the advance of funds to the extent
certain payments are not made by the mortgagor and have not been determined by
the Servicer to be not recoverable under the applicable insurance policies
with respect to such Series, from proceeds of liquidation of such Mortgage
Loans or otherwise. Each Servicer also will provide such accounting and
reporting services as are necessary to enable the Master Servicer to provide
required information to the Trustee with respect to the Mortgage Loans
included in the Trust Estate for such Series. Each Servicer is entitled to a
periodic Servicing Fee equal to a specified percentage of the outstanding
principal balance of each Mortgage Loan serviced by such Servicer. With the
consent of the Master Servicer, any of the servicing obligations of a Servicer
may be delegated to another person approved by the Master Servicer. In
addition, certain limited duties of a Servicer may be delegated without
consent.
The Trustee, or if so provided in the applicable Servicing Agreement, the
Master Servicer, may terminate a Servicer who has failed to comply with its
covenants or breached one of its representations contained in the Underlying
Servicing Agreement or in certain other circumstances. Upon termination of a
Servicer by the Master Servicer, the Master Servicer will assume certain
servicing obligations of the terminated Servicer, or, at its option, may
appoint a substitute Servicer acceptable to the Trustee (which substitute
Servicer may be Norwest Mortgage) to assume the servicing obligations of the
terminated Servicer. The Master Servicer's obligations to act as a servicer
following the termination of an Underlying Servicing Agreement will not,
however, require the Master Servicer to (i) purchase a Mortgage Loan from the
Trust Estate due to a breach by such Servicer of a representation or warranty
in respect of such Mortgage Loan or (ii) with respect to a default by Norwest
Mortgage as Servicer, advance payments of principal and interest on a
delinquent Mortgage Loan.
PAYMENTS ON MORTGAGE LOANS
The Master Servicer will, as to each Series of Certificates, establish and
maintain a separate trust account in the name of the Trustee (the "Certificate
Account"). Such account may be established at Norwest Bank or an affiliate
thereof. Each such account
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must be maintained with a depository institution ("Depository") either (i)
whose long-term debt obligations (or, in the case of a depository institution
which is part of a holding company structure, the long-term debt obligations
of such parent holding company) are, at the time of any deposit therein rated
in at least one of the two highest rating categories by each nationally
recognized statistical rating organization that rated the related Series of
Certificates, or (ii) that is otherwise acceptable to the Rating Agency or
Rating Agencies rating the Certificates of such Series and, if a REMIC
election has been made, that would not cause the related Trust Estate (or one
or more segregated pools of assets therein) to fail to qualify as a REMIC. To
the extent that the portion of funds deposited in the Certificate Account at
any time exceeds the limit of insurance coverage established by the Federal
Deposit Insurance Corporation (the "FDIC"), such excess will be subject to
loss in the event of the failure of the Depository. Such insurance coverage
will be based on the number of holders of Certificates, rather than the number
of underlying mortgagors. Holders of the Subordinated Certificates of a Series
will bear any such loss up to the amount of principal payments on the related
Mortgage Loans to which such holders are entitled.
Pursuant to the applicable Underlying Servicing Agreements with respect to a
Series, each Servicer will be required to establish and maintain one or more
accounts (collectively, the "Servicer Custodial Account") into which the
Servicer will be required to deposit on a daily basis amounts received with
respect to Mortgage Loans serviced by such Servicer included in the Trust
Estate for such Series, as more fully described below. Each Servicer Custodial
Account must be a separate custodial account insured to the available limits
by the FDIC and limited to funds held with respect to a particular Series,
unless the Underlying Servicing Agreement specifies that a Servicer may
establish an account which is an eligible account meeting the requirements of
the applicable Rating Agencies (an "Eligible Custodial Account") to serve as a
unitary Servicer Custodial Account both for such Series and for other Series
of Certificates for which Norwest Bank is the Master Servicer and having the
same financial institution acting as Trustee and to be maintained in the name
of such financial institution, in its respective capacities as Trustee for
each such Series.
Each Servicer will be required to deposit in the Certificate Account for
each Series of Certificates on the date the Certificates are issued any
amounts representing scheduled payments of principal and interest on the
Mortgage Loans serviced by such Servicer due after the applicable Cut-Off Date
but received on or prior thereto, and except as specified in the applicable
Pooling and Servicing Agreement or Underlying Servicing Agreement, will
deposit in the Servicer Custodial Account on receipt and, thereafter, not
later than the 24th calendar day of each month or such earlier day as may be
specified in the Underlying Servicing Agreement (the "Remittance Date"), will
remit to the Master Servicer for deposit in the Certificate Account, the
following payments and collections received or made by such Servicer with
respect to the Mortgage Loans serviced by such Servicer subsequent to the
applicable Cut-Off Date (other than (x) payments due on or before the Cut-Off
Date and (y) amounts held for future distribution):
(i) all payments on account of principal, including prepayments, and
interest;
(ii) all amounts received by the Servicer in connection with the
liquidation of defaulted Mortgage Loans or property acquired in respect
thereof, whether through foreclosure sale or otherwise, including payments
in connection with defaulted Mortgage Loans received from the mortgagor
other than amounts required to be paid to the mortgagor pursuant to the
terms of the applicable Mortgage Loan or otherwise pursuant to law
("Liquidation Proceeds") less, to the extent permitted under the applicable
Underlying Servicing Agreement, the amount of any expenses incurred in
connection with the liquidation of such Mortgage Loans;
(iii) all proceeds received by the Servicer under any title, hazard or
other insurance policy covering any such Mortgage Loan, other than proceeds
to be applied to the restoration or repair of the property subject to the
related Mortgage or released to the mortgagor in accordance with the
Underlying Servicing Agreement;
(iv) all Periodic Advances made by the Servicer;
(v) all amounts withdrawn from Buy-Down Funds or Subsidy Funds, if any,
with respect to such Mortgage Loans, in accordance with the terms of the
respective agreements applicable thereto;
(vi) all proceeds of any such Mortgage Loans or property acquired in
respect thereof purchased or repurchased pursuant to the Pooling and
Servicing Agreement or the Underlying Servicing Agreement; and
(vii) all other amounts required to be deposited therein pursuant to the
applicable Pooling and Servicing Agreement or the Underlying Servicing
Agreement.
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Notwithstanding the foregoing, if at any time the sums in (x) any Servicer
Custodial Account, other than any Eligible Custodial Account, exceed $100,000
or (y) any such Servicer Custodial Account, in certain circumstances, exceed
such amount less than $100,000 as shall have been specified by the Master
Servicer, the Servicer will be required within one business day to withdraw
such excess funds from such account and remit such amounts to the Certificate
Account.
Notwithstanding the foregoing, each Servicer will be entitled, at its
election, either (a) to withhold and pay itself the applicable Servicing Fee
from any payment or other recovery on account of interest as received and
prior to deposit in the Servicer Custodial Account or (b) to withdraw from the
Servicer Custodial Account the applicable Servicing Fee after the entire
payment or recovery has been deposited in such account.
The Master Servicer or Trustee will deposit in the Certificate Account any
Periodic Advances made by the Master Servicer or Trustee in the event of a
Servicer default not later than the Distribution Date on which such amounts
are required to be distributed. All other amounts will be deposited in the
Certificate Account not later than the business day next following the day of
receipt and posting by the Master Servicer. On or before each Distribution
Date, the Master Servicer will withdraw from the Certificate Account and remit
to the Trustee for distribution to Certificateholders all amounts allocable to
the Pool Distribution Amount for such Distribution Date.
If a Servicer, the Master Servicer or the Trustee deposits in the
Certificate Account for a Series any amount not required to be deposited
therein, the Master Servicer may at any time withdraw such amount from such
account for itself or for remittance to such Servicer or the Trustee, as
applicable. Funds on deposit in the Certificate Account may be invested in
certain investments acceptable to the Rating Agencies ("Eligible Investments")
maturing in general not later than the business day preceding the next
Distribution Date, including the following:
(i) obligations of the United States of America or any agency thereof,
provided such obligations are backed by the full faith and credit of the
United States of America;
(ii) general obligations of or obligations guaranteed by any state of the
United States of America or the District of Columbia receiving the highest
short-term or highest long-term rating of each Rating Agency, or such lower
rating as would not result in the downgrading or withdrawal of the rating
then assigned to any of the Certificates by any Rating Agency or result in
any of such rated Certificates being placed on credit review status (other
than for possible upgrading) by any Rating Agency;
(iii) commercial or finance company paper which is then rated in the
highest long-term commercial or finance company paper rating category of
each Rating Agency or the highest short-term rating category of each Rating
Agency, or such lower rating category as would not result in the
downgrading or withdrawal of the rating then assigned to any of the
Certificates by either Rating Agency or result in any of such rated
Certificates being placed on credit review status (other than for possible
upgrading) by any Rating Agency;
(iv) certificates of deposit, demand or time deposits, federal funds or
banker's acceptances issued by any depository institution or trust company
incorporated under the laws of the United States or of any state thereof
and subject to supervision and examination by federal and/or state banking
authorities, provided that the commercial paper and/or debt obligations of
such depository institution or trust company (or in the case of the
principal depository institution in a holding company system, the
commercial paper or debt obligations of such holding company) are then
rated in the highest short-term or the highest long-term rating category
for such securities of each of the Rating Agencies, or such lower rating
categories as would not result in the downgrading or withdrawal of the
rating then assigned to any of the Certificates by any Rating Agency or
result in any of such rated Certificates being placed on credit review
status (other than for possible upgrading) by any Rating Agency;
(v) guaranteed reinvestment agreements issued by any bank, insurance
company or other corporation acceptable to each Rating Agency at the time
of the issuance of such agreements;
(vi) repurchase agreements on obligations with respect to any security
described in clauses (i) or (ii) above or any other security issued or
guaranteed by an agency or instrumentality of the United States of America,
in either case entered into with a depository institution or trust company
(acting as principal) described in (iv) above;
(vii) securities (other than stripped bonds or stripped coupon
securities) bearing interest or sold at a discount issued by any
corporation incorporated under the laws of the United States of America or
any state thereof which, at the time of such
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investment or contractual commitment providing for such investment, are
then rated in the highest short-term or the highest long-term rating
category by each Rating Agency, or in such lower rating category as would
not result in the downgrading or withdrawal of the rating then assigned to
any of the Certificates by any Rating Agency or result in any of such rated
Certificates being placed on credit review status (other than for possible
upgrading) by any Rating Agency; and
(viii) such other investments acceptable to each Rating Agency as would
not result in the downgrading of the rating then assigned to the
Certificates by any Rating Agency or result in any of such rated
Certificates being placed on credit review status (other than for possible
upgrading) by any Rating Agency.
In the event that an election has been made to treat the Trust Estate (or one
or more segregated pools of assets therein) with respect to a Series as a
REMIC, no such Eligible Investments will be sold or disposed of at a gain
prior to maturity unless the Master Servicer has received an opinion of
counsel or other evidence satisfactory to it that such sale or disposition
will not cause the Trust Estate (or segregated pool of assets) to be subject
to the tax on "prohibited transactions" imposed by Code Section 860F(a)(1),
otherwise subject the Trust Estate (or segregated pool of assets) to tax, or
cause the Trust Estate (or any segregated pool of assets) to fail to qualify
as a REMIC while any Certificates of the Series are outstanding. Except as
otherwise specified in the applicable Prospectus Supplement, all income and
gain realized from any such investment will be for the account of the Master
Servicer as additional compensation and all losses from any such investment
will be deposited by the Master Servicer out of its own funds to the
Certificate Account immediately as realized.
The Master Servicer is permitted, from time to time, to make withdrawals
from the Certificate Account for the following purposes, to the extent
permitted in the applicable Pooling and Servicing Agreement (and, in the case
of Servicer reimbursements by the Master Servicer, only to the extent funds in
the respective Servicer Custodial Account are not sufficient therefor):
(i) to reimburse the Master Servicer, the Trustee or any Servicer for
Advances;
(ii) to reimburse any Servicer for liquidation expenses and for amounts
expended by itself or any Servicer, as applicable, in connection with the
restoration of damaged property;
(iii) to pay to itself the applicable Master Servicing Fee and any other
amounts constituting additional master servicing compensation, to pay the
Trustee the applicable Trustee Fee, to pay any other fees described in the
applicable Prospectus Supplement; and to pay to the owner thereof any Fixed
Retained Yield;
(iv) to reimburse itself or any Servicer for certain expenses (including
taxes paid on behalf of the Trust Estate) incurred by and recoverable by or
reimbursable to itself or the Servicer, as applicable;
(v) to pay to the Seller, a Servicer or itself with respect to each
Mortgage Loan or property acquired in respect thereof that has been
repurchased by the Seller or purchased by a Servicer or the Master Servicer
all amounts received thereon and not distributed as of the date as of which
the purchase price of such Mortgage Loan was determined;
(vi) to pay to itself any interest earned on or investment income earned
with respect to funds in the Certificate Account (all such interest or
income to be withdrawn not later than the next Distribution Date);
(vii) to pay to itself, the Servicer and the Trustee from net Liquidation
Proceeds allocable to interest, the amount of any unpaid Master Servicing
Fee, Servicing Fees or Trustee Fees and any unpaid assumption fees, late
payment charges or other mortgagor charges on the related Mortgage Loan;
(viii) to withdraw from the Certificate Account any amount deposited in
such account that was not required to be deposited therein; and
(ix) to clear and terminate the Certificate Account.
The Master Servicer will be authorized to appoint a paying agent (the
"Paying Agent") to make distributions, as agent for the Master Servicer, to
Certificateholders of a Series. If the Paying Agent for a Series is the
Trustee of such Series, such Paying Agent will be authorized to make
withdrawals from the Certificate Account in order to make distributions to
Certificateholders. If the Paying Agent for a Series is not the Trustee for
such Series, the Master Servicer will, on each Distribution Date, deposit in
immediately available funds in an account designated by any such Paying Agent
the amount required to be distributed to the Certificateholders on such
Distribution Date.
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The Master Servicer will cause any Paying Agent that is not the Trustee to
execute and deliver to the Trustee an instrument in which such Paying Agent
agrees with the Trustee that such Paying Agent will:
(1) hold all amounts deposited with it by the Master Servicer for
distribution to Certificateholders in trust for the benefit of
Certificateholders until such amounts are distributed to Certificateholders
or otherwise disposed of as provided in the applicable Pooling and
Servicing Agreement;
(2) give the Trustee notice of any default by the Master Servicer in the
making of such deposit; and
(3) at any time during the continuance of any such default, upon written
request to the Trustee, forthwith pay to the Trustee all amounts held in
trust by such Paying Agent.
PERIODIC ADVANCES AND LIMITATIONS THEREON
Generally each Servicer will be required to make (i) Periodic Advances to
cover delinquent payments of principal and interest on such Mortgage Loan and
(ii) other advances of cash ("Other Advances" and, collectively with Periodic
Advances, "Advances") to cover (x) delinquent payments of taxes, insurance
premiums, and other escrowed items and (y) rehabilitation expenses and
foreclosure costs, including reasonable attorneys' fees, in either case unless
such Servicer has determined that any subsequent payments on that Mortgage
Loan or from the borrower will ultimately not be available to reimburse such
Servicer for such amounts. The failure of the Servicer to make any required
Periodic Advances or Other Advances under an Underlying Servicing Agreement
constitutes a default under such agreement for which the Servicer will be
terminated. Upon default by a Servicer, other than Norwest Mortgage, the
Master Servicer may, and upon default by Norwest Mortgage the Trustee may, in
each case if so provided in the Pooling and Servicing Agreement, be required
to make Periodic Advances to the extent necessary to make required
distributions on certain Certificates or certain Other Advances, provided that
the Master Servicer or Trustee, as applicable, determines that funds will
ultimately be available to reimburse it. In the case of Certificates of any
Series for which credit enhancement is provided in the form of a mortgage pool
insurance policy, the Seller may obtain an endorsement to the mortgage pool
insurance policy which obligates the Pool Insurer to advance delinquent
payments of principal and interest. The Pool Insurer would only be obligated
under such endorsement to the extent the mortgagor fails to make such payment
and the Master Servicer or Trustee fails to make a required advance.
The advance obligation of the Master Servicer and Trustee may be further
limited to an amount specified by the Rating Agency rating the Certificates.
Any such Periodic Advances by the Servicers or the Master Servicer or Trustee,
as the case may be, must be deposited into the applicable Servicer Custodial
Account or the Certificate Account and will be due no later than the business
day before the Distribution Date to which such delinquent payment relates.
Advances by the Servicers or the Master Servicer or Trustee, as the case may
be, will be reimbursable out of insurance proceeds or Liquidation Proceeds of,
or, except for Other Advances, future payments on, the Mortgage Loans for
which such amounts were advanced. If an Advance made by a Servicer, the Master
Servicer or the Trustee later proves, or is deemed by the Master Servicer or
the Trustee, to be unrecoverable, such Servicer, the Master Servicer or the
Trustee, as the case may be, will be entitled to reimbursement from funds in
the Certificate Account prior to the distribution of payments to the
Certificateholders to the extent provided in the Pooling and Servicing
Agreement.
Any Periodic Advances made by a Servicer, the Master Servicer or the Trustee
with respect to Mortgage Loans included in the Trust Estate for any Series are
intended to enable the Trustee to make timely payment of the scheduled
distributions of principal and interest on the Certificates of such Series.
However, neither the Master Servicer, the Trustee, any Servicer nor any other
person will, except as otherwise specified in the applicable Prospectus
Supplement, insure or guarantee the Certificates of any Series or the Mortgage
Loans included in the Trust Estate for any Certificates.
COLLECTION AND OTHER SERVICING PROCEDURES
Each Servicer will be required by the related Underlying Servicing Agreement
to make reasonable efforts to collect all payments called for under the
Mortgage Loans and, consistent with the applicable Underlying Servicing
Agreement and any applicable agreement governing any form of credit
enhancement, to follow such collection procedures as it follows with respect
to mortgage loans serviced by it that are comparable to the Mortgage Loans.
Consistent with the above, the Servicer may, in its discretion, (i) waive any
prepayment charge, assumption fee, late payment charge or any other charge in
connection with the prepayment of a Mortgage Loan and (ii) arrange with a
mortgagor a schedule for the liquidation of deficiencies running for not
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more than 180 days (or such longer period to which the Master Servicer and any
applicable Pool Insurer or primary mortgage insurer have consented) after the
applicable Due Date.
Under each Underlying Servicing Agreement, each Servicer, to the extent
permitted by law, will establish and maintain one or more escrow accounts
(each such account, a "Servicing Account") in which each such Servicer will be
required to deposit any payments made by mortgagors in advance for taxes,
assessments, primary mortgage (if applicable) and hazard insurance premiums
and other similar items. Withdrawals from the Servicing Account may be made to
effect timely payment of taxes, assessments, mortgage and hazard insurance, to
refund to mortgagors amounts determined to be overages, to pay interest to
mortgagors on balances in the Servicing Account, if required, and to clear and
terminate such account. Each Servicer will be responsible for the
administration of its Servicing Account. A Servicer will be obligated to
advance certain amounts which are not timely paid by the mortgagors, to the
extent that it determines, in good faith, that they will be recoverable out of
insurance proceeds, liquidation proceeds, or otherwise. Alternatively, in lieu
of establishing a Servicing Account, a Servicer may procure a performance bond
or other form of insurance coverage, in an amount acceptable to the Master
Servicer and each Rating Agency rating the related Series of Certificates,
covering loss occasioned by the failure to escrow such amounts.
ENFORCEMENT OF DUE-ON-SALE CLAUSES; REALIZATION UPON DEFAULTED MORTGAGE LOANS
With respect to each Mortgage Loan having a fixed interest rate, the
applicable Underlying Servicing Agreement will generally provide that, when
any Mortgaged Property is about to be conveyed by the mortgagor, the Servicer
will, to the extent it has knowledge of such prospective conveyance, exercise
its rights to accelerate the maturity of such Mortgage Loan under the "due-on-
sale" clause applicable thereto, if any, unless it is not exercisable under
applicable law or if such exercise would result in loss of insurance coverage
with respect to such Mortgage Loan or would, in the Servicer's judgment, be
reasonably likely to result in litigation by the mortgagor and such Servicer
has not obtained the Master Servicer's consent to such exercise. In either
case, the Servicer is authorized to take or enter into an assumption and
modification agreement from or with the person to whom such Mortgaged Property
has been or is about to be conveyed, pursuant to which such person becomes
liable under the Mortgage Note and, unless prohibited by applicable state law,
the mortgagor remains liable thereon, provided that the Mortgage Loan will
continue to be covered by any pool insurance policy and any related primary
mortgage insurance policy and the Mortgage Interest Rate with respect to such
Mortgage Loan and the payment terms shall remain unchanged. The Servicer will
also be authorized, with the prior approval of the pool insurer and the
primary mortgage insurer, if any, to enter into a substitution of liability
agreement with such person, pursuant to which the original mortgagor is
released from liability and such person is substituted as mortgagor and
becomes liable under the Mortgage Note.
Each Underlying Servicing Agreement and Pooling and Servicing Agreement with
respect to a Series will require the Servicer or the Master Servicer, as the
case may be, to present claims to the insurer under any insurance policy
applicable to the Mortgage Loans included in the Trust Estate for such Series
and to take such reasonable steps as are necessary to permit recovery under
such insurance policies with respect to defaulted Mortgage Loans, or losses on
the Mortgaged Property securing the Mortgage Loans.
Each Servicer is obligated under the applicable Underlying Servicing
Agreement for each Series to realize upon defaulted Mortgage Loans in
accordance with its normal servicing practices, which will conform generally
to those of prudent mortgage lending institutions which service mortgage loans
of the same type in the same jurisdictions. Notwithstanding the foregoing, the
Servicer is authorized under the applicable Underlying Servicing Agreement to
permit the assumption of a defaulted Mortgage Loan rather than to foreclose or
accept a deed-in-lieu of foreclosure if, in the Servicer's judgment, the
default is unlikely to be cured and the assuming borrower meets Norwest
Mortgage's applicable underwriting guidelines. In connection with any such
assumption, the Mortgage Interest Rate and the payment terms of the related
Mortgage Note will not be changed. Each Servicer may also, with the consent of
the Master Servicer, modify the payment terms of Mortgage Loans that are in
default, or as to which default is reasonably foreseeable, that remain in the
Trust Estate rather than foreclose on such Mortgage Loans; provided that no
such modification shall forgive principal owing under such Mortgage Loan or
permanently reduce the interest rate on such Mortgage Loan. Any such
modification will be made only upon the determination by the Servicer and the
Master Servicer that such modification is likely to increase the proceeds of
such Mortgage Loan over the amount expected to be collected pursuant to
foreclosure. See also "The Pooling and Servicing Agreement--Optional
Purchases," above, with respect to the Seller's right to repurchase Mortgage
Loans that are in default, or as to which default is reasonably foreseeable.
Further, a Servicer may encourage the refinancing of such defaulted Mortgage
Loans, including Mortgage Loans that would permit creditworthy borrowers to
assume the outstanding indebtedness.
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In the case of foreclosure or of damage to a Mortgaged Property from an
uninsured cause, the Servicer will not be required to expend its own funds to
foreclose or restore any damaged property, unless it reasonably determines (i)
that such foreclosure or restoration will increase the proceeds to
Certificateholders of such Series of liquidation of the Mortgage Loan after
reimbursement to the related Servicer for its expenses and (ii) that such
expenses will be recoverable to it through Liquidation Proceeds or any
applicable insurance policy in respect of such Mortgage Loan. In the event
that Servicer has expended its own funds for foreclosure or to restore damaged
property, it will be entitled to be reimbursed from the Certificate Account
for such Series an amount equal to all costs and expenses incurred by it.
Norwest Mortgage will not be obligated to, and any other Servicer will not
(except with the express written approval of the Master Servicer), foreclose
on any Mortgaged Property which it believes may be contaminated with or
affected by hazardous wastes or hazardous substances. See "Certain Legal
Aspects of the Mortgage Loans--Environmental Considerations." If a Servicer
does not foreclose on a Mortgaged Property, the Certificateholders of the
related Series may experience a loss on the related Mortgage Loan. A Servicer
will not be liable to the Certificateholders if it fails to foreclose on a
Mortgaged Property which it believes may be so contaminated or affected, even
if such Mortgaged Property is, in fact, not so contaminated or affected.
Conversely, a Servicer will not be liable to the Certificateholders if, based
on its belief that no such contamination or effect exists, the Servicer
forecloses on a Mortgaged Property and takes title to such Mortgaged Property,
and thereafter such Mortgaged Property is determined to be so contaminated or
affected.
The Servicer may foreclose against property securing a defaulted Mortgage
Loan either by foreclosure, by sale or by strict foreclosure and in the event
a deficiency judgment is available against the mortgagor or other person (see
"Certain Legal Aspects of the Mortgage Loans--Anti-Deficiency Legislation and
Other Limitations on Lenders" for a discussion of the availability of
deficiency judgments), may proceed for the deficiency. It is anticipated that
in most cases the Servicer will not seek deficiency judgments, and will not be
required under the applicable Underlying Servicing Agreement to seek
deficiency judgments. In lieu of foreclosure, each Servicer may arrange for
the sale by the borrower of the Mortgaged Property related to a defaulted
Mortgage Loan to a third party, rather than foreclosing upon and selling such
Mortgaged Property.
With respect to a Trust Estate (or any segregated pool of assets therein) as
to which a REMIC election has been made, if the Trustee acquires ownership of
any Mortgaged Property as a result of a default or reasonably foreseeable
default of any Mortgage Loan secured by such Mortgaged Property, the Trustee
or Master Servicer will be required to dispose of such property within two
years following its acquisition by the Trust Estate unless the Trustee (a)
receives an opinion of counsel to the effect that the holding of the Mortgaged
Property by the Trust Estate will not cause the Trust Estate to be subject to
the tax on "prohibited transactions" imposed by Code Section 860F(a)(1) or
cause the Trust Estate (or any segregated pool of assets therein as to which
one or more REMIC elections have been made or will be made) to fail to qualify
as a REMIC or (b) applies for and is granted an extension of the two-year
period in the manner contemplated by Code Section 856(e)(3). The Servicer also
will be required to administer the Mortgaged Property in a manner which does
not cause the Mortgaged Property to fail to qualify as "foreclosure property"
within the meaning of Code Section 860G(a)(8) or result in the receipt by the
Trust Estate of any "net income from foreclosure property" within the meaning
of Code Section 860G(c)(2), respectively. In general, this would preclude the
holding of the Mortgaged Property by a party acting as a dealer in such
property or the receipt of rental income based on the profits of the lessee of
such property. See "Material Federal Income Tax Consequences."
INSURANCE POLICIES
Each Underlying Servicing Agreement will require the related Servicer to
cause to be maintained for each Mortgage Loan a standard hazard insurance
policy issued by a generally acceptable insurer insuring the improvements on
the Mortgaged Property underlying such Mortgage Loan against loss by fire,
with extended coverage (a "Standard Hazard Insurance Policy"). The Underlying
Servicing Agreements will require that such Standard Hazard Insurance Policy
be in an amount at least equal to the lesser of 100% of the insurable value of
the improvements on the Mortgaged Property or the principal balance of such
Mortgage Loan; provided, however, that such insurance may not be less than the
minimum amount required to fully compensate for any damage or loss on a
replacement cost basis. Each Servicer will also maintain on property acquired
upon foreclosure, or deed in lieu of foreclosure, of any Mortgage Loan, a
Standard Hazard Insurance Policy in an amount that is at least equal to the
lesser of 100% of the insurable value of the improvements which are a part of
such property or the principal balance of such Mortgage Loan plus accrued
interest and liquidation expenses; provided, however, that such insurance may
not be less than the minimum amount required to fully compensate for any
damage or loss on a replacement cost basis. Any amounts collected under any
such
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policies (other than amounts to be applied to the restoration or repair of the
Mortgaged Property or released to the borrower in accordance with normal
servicing procedures) will be deposited in the Servicer Custodial Account for
remittance to the Certificate Account by a Servicer.
The Standard Hazard Insurance Policies covering the Mortgage Loans generally
will cover physical damage to, or destruction of, the improvements on the
Mortgaged Property caused by fire, lightning, explosion, smoke, windstorm,
hail, riot, strike and civil commotion, subject to the conditions and
exclusions particularized in each policy. Because the Standard Hazard
Insurance Policies relating to such Mortgage Loans will be underwritten by
different insurers and will cover Mortgaged Properties located in various
states, such policies will not contain identical terms and conditions. The
most significant terms thereof, however, generally will be determined by state
law and generally will be similar. Most such policies typically will not cover
any physical damage resulting from the following: war, revolution,
governmental actions, floods and other water-related causes, earth movement
(including earthquakes, landslides and mudflows), nuclear reaction, wet or dry
rot, vermin, rodents, insects or domestic animals, hazardous wastes or
hazardous substances, theft and, in certain cases, vandalism. The foregoing
list is merely indicative of certain kinds of uninsured risks and is not all-
inclusive.
In general, if the improvements on a Mortgaged Property are located in an
area identified in the Federal Register by the Federal Emergency Management
Agency as having special flood hazards (and such flood insurance has been made
available) each Underlying Servicing Agreement will require the related
Servicer to cause to be maintained a flood insurance policy meeting the
requirements of the current guidelines of the Federal Insurance Administration
with a generally acceptable insurance carrier. Generally, the Underlying
Servicing Agreement will require that such flood insurance be in an amount not
less than the least of (i) the outstanding principal balance of the Mortgage
Loan, (ii) the full insurable value of the improvements, or (iii) the maximum
amount of insurance which is available under the Flood Disaster Protection Act
of 1973, as amended. Norwest Mortgage does not provide financing for flood
zone properties located in communities not participating in the National Flood
Insurance Program or if available insurance coverage is, in its judgment,
unrealistically low.
Each Servicer may maintain a blanket policy insuring against hazard losses
on all of the Mortgaged Properties in lieu of maintaining the required
Standard Hazard Insurance Policies and may maintain a blanket policy insuring
against special hazards in lieu of maintaining any required flood insurance.
Each Servicer will be liable for the amount of any deductible under a blanket
policy if such amount would have been covered by a required Standard Hazard
Insurance Policy or flood insurance, had it been maintained.
Any losses incurred with respect to Mortgage Loans due to uninsured risks
(including earthquakes, mudflows, floods and hazardous wastes or hazardous
substances) or insufficient hazard insurance proceeds will adversely affect
distributions to the Certificateholders.
FIXED RETAINED YIELD, SERVICING COMPENSATION AND PAYMENT OF EXPENSES
Fixed Retained Yield with respect to any Mortgage Loan is that portion, if
any, of interest at the Mortgage Interest Rate that is not included in the
related Trust Estate. The Prospectus Supplement for a Series will specify
whether there is any Fixed Retained Yield with respect to the Mortgage Loans
of such Series. If so, the Fixed Retained Yield will be established on a loan-
by-loan basis and will be specified in the schedule of Mortgage Loans attached
as an exhibit to the applicable Pooling and Servicing Agreement. Norwest
Mortgage as Servicer may deduct the Fixed Retained Yield from mortgagor
payments as received or deposit such payments in the Servicer Custodial
Account or Certificate Account for such Series and then either withdraw the
Fixed Retained Yield from the Servicer Custodial Account or Certificate
Account or request the Master Servicer to withdraw the Fixed Retained Yield
from the Certificate Account for remittance to Norwest Mortgage. In the case
of any Fixed Retained Yield with respect to Mortgage Loans serviced by a
Servicer other than Norwest Mortgage, the Master Servicer will make
withdrawals from the Certificate Account for the purpose of remittances to
Norwest Mortgage as owner of the Fixed Retained Yield. Notwithstanding the
foregoing, with respect to any payment of interest received by Norwest
Mortgage as Servicer relating to a Mortgage Loan (whether paid by the
mortgagor or received as Liquidation Proceeds, insurance proceeds or
otherwise) which is less than the full amount of interest then due with
respect to such Mortgage Loan, the owner of the Fixed Retained Yield with
respect to such Mortgage Loan will bear a ratable share of such interest
shortfall.
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For each Series of Certificates, each Servicer will be entitled to be paid
the Servicing Fee on the related Mortgage Loans serviced by such Servicer
until termination of the applicable Underlying Servicing Agreement. A
Servicer, at its election, will pay itself the Servicing Fee for a Series with
respect to each Mortgage Loan by (a) withholding the Servicing Fee from any
scheduled payment of interest prior to deposit of such payment in the Servicer
Custodial Account for such Series or (b) withdrawing the Servicing Fee from
the Servicer Custodial Account after the entire interest payment has been
deposited in such account. A Servicer may also pay itself out of the
Liquidation Proceeds of a Mortgage Loan or other recoveries with respect
thereto, or withdraw from the Servicer Custodial Account or request the Master
Servicer to withdraw from the Certificate Account for remittance to the
Servicer such amounts after the deposit thereof in such accounts, or if such
Liquidation Proceeds or other recoveries are insufficient, from Net
Foreclosure Profits with respect to the related Distribution Date the
Servicing Fee in respect of such Mortgage Loan to the extent provided in the
applicable Pooling and Servicing Agreement. The Servicing Fee or the range of
Servicing Fees with respect to the Mortgage Loans underlying the Certificates
of a Series will be specified in the applicable Prospectus Supplement.
Additional servicing compensation in the form of prepayment charges,
assumption fees, late payment charges or otherwise will be retained by the
Servicers.
Each Servicer will pay all expenses incurred in connection with the
servicing of the Mortgage Loans serviced by such Servicer underlying a Series,
including, without limitation, payment of the hazard insurance policy
premiums. The Servicer will be entitled, in certain circumstances, to
reimbursement from the Certificate Account of Periodic Advances, of Other
Advances made by it to pay taxes, insurance premiums and similar items with
respect to any Mortgaged Property or for expenditures incurred by it in
connection with the restoration, foreclosure or liquidation of any Mortgaged
Property (to the extent of Liquidation Proceeds or insurance policy proceeds
in respect of such Mortgaged Property) and of certain losses against which it
is indemnified by the Trust Estate.
As set forth in the preceding paragraph, a Servicer may be entitled to
reimbursement for certain expenses incurred by it, and payment of additional
fees for certain extraordinary services rendered by it (provided that such
fees do not exceed those which would be charged by third parties for similar
services) in connection with the liquidation of defaulted Mortgage Loans and
related Mortgaged Properties. In the event that claims are either not made or
are not fully paid from any applicable form of credit enhancement, the related
Trust Estate will suffer a loss to the extent that Liquidation Proceeds, after
reimbursement of the Servicing Fee and the expenses of the Servicer, are less
than the principal balance of the related Mortgage Loan.
EVIDENCE AS TO COMPLIANCE
Each Servicer will deliver annually to the Trustee or Master Servicer, as
applicable, on or before the date specified in the applicable Underlying
Servicing Agreement, an Officer's Certificate stating that (i) a review of the
activities of such Servicer during the preceding calendar year and of
performance under the applicable Underlying Servicing Agreement has been made
under the supervision of such officer, and (ii) to the best of such officer's
knowledge, based on such review, such Servicer has fulfilled all its
obligations under the applicable Underlying Servicing Agreement throughout
such year, or, if there has been a default in the fulfillment of any such
obligation, specifying each such default known to such officer and the nature
and status thereof. Such Officer's Certificate shall be accompanied by a
statement of a firm of independent public accountants to the effect that, on
the basis of an examination of certain documents and records relating to a
random sample of the mortgage loans being serviced by such Servicer pursuant
to such Underlying Servicing Agreement and/or other similar agreements,
conducted substantially in compliance with the Uniform Single Audit Program
for Mortgage Bankers, the servicing of such mortgage loans was conducted in
compliance with the provisions of the applicable Underlying Servicing
Agreement and other similar agreements, except for (i) such exceptions as such
firm believes to be immaterial and (ii) such other exceptions as are set forth
in such statement.
The Master Servicer will deliver annually to the Trustee, on or before the
date specified in the applicable Pooling and Servicing Agreement, an Officer's
Certificate stating that such officer has received, with respect to each
Servicer, the Officer's Certificate and accountant's statement described in
the preceding paragraph, and, that on the basis of such officer's review of
such information, each Servicer has fulfilled all its obligations under the
applicable Underlying Servicing Agreement throughout such year, or, if there
has been a default in the fulfillment of any such obligation, specifying each
such default known to such officer and the nature and status thereof.
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CERTAIN MATTERS REGARDING THE MASTER SERVICER
The Master Servicer may not resign from its obligations and duties under the
Pooling and Servicing Agreement for each Series without the consent of the
Trustee, except upon its determination that its duties thereunder are no
longer permissible under applicable law or are in material conflict by reason
of applicable law with any other activities of a type and nature carried on by
it. No such resignation will become effective until the Trustee for such
Series or a successor master servicer has assumed the Master Servicer's
obligations and duties under the Pooling and Servicing Agreement. If the
Master Servicer resigns for any of the foregoing reasons and the Trustee is
unable or unwilling to assume responsibility for its duties under the Pooling
and Servicing Agreement, it may appoint another institution to so act as
described under "The Pooling and Servicing Agreement--Rights Upon Event of
Default" below.
The Pooling and Servicing Agreement will also provide that neither the
Master Servicer nor any subcontractor, nor any partner, director, officer,
employee or agent of any of them, will be under any liability to the Trust
Estate or the Certificateholders, for the taking of any action or for
refraining from the taking of any action in good faith pursuant to the Pooling
and Servicing Agreement, or for errors in judgment; provided, however, that
neither the Master Servicer, any subcontractor, nor any such person will be
protected against any liability that would otherwise be imposed by reason of
willful misfeasance, bad faith or gross negligence in the performance of his
or its duties or by reason of reckless disregard of his or its obligations and
duties thereunder. The Pooling and Servicing Agreement will further provide
that the Master Servicer, any subcontractor, and any partner, director,
officer, employee or agent of either of them shall be entitled to
indemnification by the Trust Estate 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, other
than any loss, liability or expense incurred by reason of willful misfeasance,
bad faith or gross negligence in the performance of his or its duties
thereunder or by reason of reckless disregard of his or its obligations and
duties thereunder. In addition, the Pooling and Servicing Agreement will
provide that the Master Servicer will not be under any obligation to appear
in, prosecute or defend any legal action that is not incidental to its duties
under the Pooling and Servicing Agreement and that in its opinion may involve
it in any expense or liability. The Master Servicer may, however, in its
discretion, undertake any such action deemed by it necessary or desirable with
respect to the Pooling and Servicing Agreement and the rights and duties of
the parties thereto and the interests of the 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
Estate and the Master Servicer will be entitled to be reimbursed therefor out
of the Certificate Account, and any loss to the Trust Estate arising from such
right of reimbursement will be allocated first to the Subordinated Certificate
of a Series before being allocated to the related Senior Certificates, or if
such Series does not contain Subordinated Certificates, pro rata among the
various Classes of Certificates unless otherwise specified in the applicable
Pooling and Servicing Agreement.
Any person into which the Master Servicer may be merged or consolidated, or
any person resulting from any merger, conversion or consolidation to which the
Master Servicer is a party, or any person succeeding to the business through
the transfer of substantially all of its assets or all assets relating to such
business, or otherwise, of the Master Servicer will be the successor of the
Master Servicer under the Pooling and Servicing Agreement for each Series
provided that such successor or resulting entity has a net worth of not less
than $15,000,000 and is qualified to service mortgage loans for Fannie Mae or
Freddie Mac.
The Master Servicer also has the right to assign its rights and delegate its
duties and obligations under the Pooling and Servicing Agreement for each
Series; provided that, if the Master Servicer desires to be released from its
obligations under the Pooling and Servicing Agreement, (i) the purchaser or
transferee accepting such assignment or delegation is qualified to service
mortgage loans for Fannie Mae or Freddie Mac, (ii) the purchaser is
satisfactory to the Trustee for such Series, in the reasonable exercise of its
judgment, and executes and delivers to the Trustee an agreement, in form and
substance reasonably satisfactory to the Trustee, which contains an assumption
by such purchaser or transferee of the due and punctual performance and
observance of each covenant and condition to be performed or observed by the
Master Servicer under the Pooling and Servicing Agreement from and after the
date of such agreement; and (iii) each applicable Rating Agency's rating of
any Certificates for such Series in effect immediately prior to such
assignment, sale or transfer would not be qualified, downgraded or withdrawn
as a result of such assignment, sale or transfer and the Certificates would
not be placed on credit review status by any such Rating Agency. The Master
Servicer will be released from its obligations under the Pooling and Servicing
Agreement upon any such assignment and delegation, except that the Master
Servicer will remain liable for all liabilities and obligations incurred by it
prior to the time that the conditions contained in clauses (i), (ii) and (iii)
above are met.
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THE POOLING AND SERVICING AGREEMENT
ASSIGNMENT OF MORTGAGE LOANS TO THE TRUSTEE
The Seller will have acquired the Mortgage Loans included in each Trust
Estate from Norwest Mortgage pursuant to an agreement (the "Norwest Mortgage
Sale Agreement"). In connection with the conveyance of the Mortgage Loans to
the Seller, Norwest Mortgage will (i) agree to deliver to the Seller all of
the documents which the Seller is required to deliver to the Trustee; (ii)
make certain representations and warranties to the Seller which will be the
basis of certain of the Seller's representations and warranties to the Trustee
or assign the representations and warranties made by a Correspondent to
Norwest Mortgage; and (iii) agree to repurchase or substitute (or assign
rights to a comparable agreement of a Correspondent) for any Mortgage Loan for
which any document is not delivered or is found to be defective in any
material respect, or which Mortgage Loan is discovered at any time not to be
in conformance with any representation and warranty Norwest Mortgage has made
to the Seller and the breach of such representation and warranty materially
and adversely affects the interests of the Certificateholders in the related
Mortgage Loan, if Norwest Mortgage cannot deliver such document or cure such
defect or breach within 60 days after notice thereof. Such agreement will
inure to the benefit of the Trustee and is intended to help ensure the
Seller's performance of its limited obligation to repurchase or substitute for
Mortgage Loans. See "The Mortgage Loan Programs--Representations and
Warranties" above.
At the time of issuance of each Series of Certificates, the Mortgage Loans
in the related Trust Estate will, pursuant to the applicable Pooling and
Servicing Agreement, be assigned to the Trustee, together with all principal
and interest received on or with respect to such Mortgage Loans after the
applicable Cut-Off Date other than principal and interest due and payable on
or before such Cut-Off Date and interest attributable to the Fixed Retained
Yield on such Mortgage Loans, if any. See "Servicing of the Mortgage Loans--
Fixed Retained Yield, Servicing Compensation and Payment of Expenses." The
Trustee or its agent will, concurrently with such assignment, authenticate and
deliver the Certificates evidencing such Series to the Seller in exchange for
the Mortgage Loans. Each Mortgage Loan will be identified in a schedule
appearing as an exhibit to the applicable Pooling and Servicing Agreement.
Each such schedule will include, among other things, the unpaid principal
balance as of the close of business on the applicable Cut-Off Date, the
maturity date and the Mortgage Interest Rate for each Mortgage Loan in the
related Trust Estate.
In addition, with respect to each Mortgage Loan in a Trust Estate, the
mortgage or other promissory note, any assumption, modification or conversion
to fixed interest rate agreement, a mortgage assignment in recordable form and
the recorded Mortgage (or other documents as are required under applicable law
to create perfected security interest in the Mortgaged Property in favor of
the Trustee) will be delivered to the Trustee or, if indicated in the
applicable Prospectus Supplement, to a custodian; provided that, in instances
where recorded documents cannot be delivered due to delays in connection with
recording, copies thereof, certified by the Seller to be true and complete
copies of such documents sent for recording, may be delivered and the original
recorded documents will be delivered promptly upon receipt. The assignment of
each Mortgage will be recorded promptly after the initial issuance of
Certificates for the related Trust Estate, except in states where, in the
opinion of counsel acceptable to the Trustee, such recording is not required
to protect the Trustee's interest in the Mortgage Loan against the claim of
any subsequent transferee or any successor to or creditor of the Seller,
Norwest Mortgage or the originator of such Mortgage Loan.
The Trustee or custodian will hold such documents in trust for the benefit
of Certificateholders of the related Series and will review such documents
within 45 days of the date of the applicable Pooling and Servicing Agreement.
If any document is not delivered or is found to be defective in any material
respect, or if the Seller is in breach of any of its representations and
warranties, and such breach materially and adversely affects the interests of
the Certificateholders in a Mortgage Loan, and the Seller cannot deliver such
document or cure such defect or breach within 60 days after written notice
thereof, the Seller will, within 60 days of such notice, either repurchase the
related Mortgage Loan from the Trustee at a price equal to the then unpaid
principal balance thereof, plus accrued and unpaid interest at the applicable
Mortgage Interest Rate (minus any Fixed Retained Yield) through the last day
of the month in which such repurchase takes place, or (in the case of a Series
for which one or more REMIC elections have been or will be made, unless the
maximum period as may be provided by the Code or applicable regulations of the
Department of the Treasury ("Treasury Regulations") shall have elapsed since
the execution of the applicable Pooling and Servicing Agreement) substitute
for such Mortgage Loan a new mortgage loan having characteristics such that
the representations and warranties of the Seller made pursuant to the
applicable Pooling and Servicing Agreement (except for representations and
warranties as to the correctness of the applicable schedule of mortgage loans)
would not have been incorrect had such substitute Mortgage Loan originally
been a Mortgage Loan. In the case of a repurchased Mortgage Loan, the purchase
price will be deposited
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by the Seller in the related Certificate Account. In the case of a substitute
Mortgage Loan, the mortgage file relating thereto will be delivered to the
Trustee or the custodian and the Seller will deposit in the Certificate
Account, an amount equal to the excess of (i) the unpaid principal balance of
the Mortgage Loan which is substituted for, over (ii) the unpaid principal
balance of the substitute Mortgage Loan, together with interest on such excess
at the Mortgage Interest Rate (minus any Fixed Retained Yield) to the next
scheduled Due Date of the Mortgage Loan which is being substituted for. In no
event will any substitute Mortgage Loan have an unpaid principal balance
greater than the scheduled principal balance calculated in accordance with the
amortization schedule (the "Scheduled Principal Balance") of the Mortgage Loan
for which it is substituted (after giving effect to the scheduled principal
payment due in the month of substitution on the Mortgage Loan substituted
for), or a term greater than, a Mortgage Interest Rate less than, a Mortgage
Interest Rate more than one percent per annum greater than or a Loan-to-Value
Ratio greater than, the Mortgage Loan for which it is substituted. If
substitution is to be made for an adjustable rate Mortgage Loan, the
substitute Mortgage Loan will have an unpaid principal balance no greater than
the Scheduled Principal Balance of the Mortgage Loan for which it is
substituted (after giving effect to the scheduled principal payment due in the
month of substitution on the Mortgage Loan substituted for), a Loan-to-Value
Ratio less than or equal to, and a Mortgage Interest Rate at least equal to,
that of the Mortgage Loan for which it is substituted, and will bear interest
based on the same index, margin and frequency of adjustment as the substituted
Mortgage Loan. The repurchase obligation and the mortgage substitution
referred to above will constitute the sole remedies available to the
Certificateholders or the Trustee with respect to missing or defective
documents or breach of the Seller's representations and warranties.
If no custodian is named in the Pooling and Servicing Agreement, the Trustee
will be authorized to appoint a custodian to maintain possession of the
documents relating to the Mortgage Loans and to conduct the review of such
documents described above. Any custodian so appointed will keep and review
such documents as the Trustee's agent under a custodial agreement.
OPTIONAL PURCHASES
Subject to the provisions of the applicable Pooling and Servicing Agreement,
the Seller or the Master Servicer may, at such party's option, repurchase any
Mortgage Loan which is in default or as to which default is reasonably
foreseeable if, in the Seller's or the Master Servicer's judgment, the related
default is not likely to be cured by the borrower or default is not likely to
be averted, at a price equal to the unpaid principal balance thereof plus
accrued interest thereon and under the conditions set forth in the applicable
Prospectus Supplement.
REPORTS TO CERTIFICATEHOLDERS
Unless otherwise specified or modified in the related Pooling and Servicing
Agreement for each Series, the Master Servicer will prepare and the Trustee
will include with each distribution to Certificateholders of record of such
Series a statement setting forth the following information, if applicable:
(i) the amount of such distribution allocable to principal of the related
Mortgage Loans, separately identifying the aggregate amount of any
principal prepayments included therein, the amount of such distribution
allocable to interest on the related Mortgage Loans and the aggregate
unpaid principal balance of the Mortgage Loans evidenced by each Class
after giving effect to the principal distributions on such Distribution
Date;
(ii) the amount of servicing compensation with respect to the related
Trust Estate and such other customary information as is required to enable
Certificateholders to prepare their tax returns;
(iii) the amount by which the Servicing Fee for the related Distribution
Date has been reduced by interest shortfalls due to prepayments;
(iv) the aggregate amount of any Periodic Advances by the Servicer, the
Master Servicer or the Trustee included in the amounts actually distributed
to the Certificateholders;
(v) to each holder of a Certificate entitled to the benefits of payments
under any form of credit enhancement or from any Reserve Fund:
(a) the amounts so distributed under any such form of credit
enhancement or from any such Reserve Fund on the applicable Distribution
Date; and
(b) the amount of coverage remaining under any such form of credit
enhancement and the balance in any such Reserve Fund, after giving
effect to any payments thereunder and other amounts charged thereto on
the Distribution Date;
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(vi) in the case of a Series of Certificates with a variable Pass-Through
Rate, such Pass-Through Rate;
(vii) the aggregate principal balance of the Mortgage Loans and the
percentage interest, if any, of such aggregate principal balance
represented by such class;
(viii) the book value of any collateral acquired by the Trust Estate
through foreclosure or otherwise ("REO Property");
(ix) the unpaid principal balance of any Mortgage Loan as to which the
Servicer has notified the Master Servicer that such Servicer has determined
not to foreclose because it believes the related Mortgaged Property may be
contaminated with or affected by hazardous wastes or hazardous substances;
(x) the number and aggregate principal amount of Mortgage Loans one
month, two months and three or more months delinquent;
(xi) the number and aggregate principal balance of Mortgage Loans in
foreclosure;
(xii) the number and aggregate principal balance of Mortgage Loans with
respect to which the related mortgaged property has become REO Property;
and
(xiii) the amount of realized losses as a result of bankruptcy or the
liquidation of REO Property.
In addition, within a reasonable period of time after the end of each
calendar year, the Master Servicer will furnish either directly, or through
the Trustee, a report to each Certificateholder of record at any time during
such calendar year such information as required by the Code and applicable
regulations thereunder to enable Certificateholders to prepare their tax
returns. In the event that an election has been made to treat the Trust Estate
(or one or more segregated pools of assets therein) as a REMIC, the Trustee
will be required to sign the federal and applicable state and local income tax
returns of the REMIC (which will be prepared by the Master Servicer). See
"Material Federal Income Tax Consequences--Administrative Matters."
LIST OF CERTIFICATEHOLDERS
The Pooling and Servicing Agreement for each Series will require the Trustee
to provide access to the most current list of names and addresses of
Certificateholders of such Series to any group of five or more
Certificateholders who advise the Trustee in writing that they desire to
communicate with other Certificateholders with respect to their rights under
the Pooling and Servicing Agreement or under the Certificates.
EVENTS OF DEFAULT
Events of Default under the Pooling and Servicing Agreement for each Series
include (i) any failure by the Master Servicer to make a required deposit
which continues unremedied for three business days after the giving of written
notice of such failure to the Master Servicer by the Trustee for such Series,
or to the Master Servicer and the Trustee by the holders of Certificates of
such Series having voting rights allocated to such Certificates ("Voting
Interests") aggregating not less than 25% of the Voting Interests allocated to
all Certificates for such Series; (ii) any failure by the Master Servicer duly
to observe or perform in any material respect any other of its covenants or
agreements in the Pooling and Servicing Agreement which continues unremedied
for 60 days (or 30 days in the case of a failure to maintain any pool
insurance policy required to be maintained pursuant to the Pooling and
Servicing Agreement) 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
the holders of Certificates aggregating not less than 25% of the Voting
Interests; (iii) certain events of insolvency, readjustment of debt,
marshaling of assets and liabilities or similar proceedings and certain action
by the Master Servicer indicating its insolvency, reorganization or inability
to pay its obligations and (iv) it and any subservicer appointed by it
becoming ineligible to service for both Fannie Mae and Freddie Mac (unless
remedied within 90 days). (Section 7.01).
RIGHTS UPON EVENT OF DEFAULT
So long as an Event of Default remains unremedied under the Pooling and
Servicing Agreement for a Series, the Trustee for such Series or holders of
Certificates of such Series evidencing not less than 66 2/3% of the Voting
Interests in the Trust Estate for such Series may terminate all of the rights
and obligations of the Master Servicer under the Pooling and Servicing
Agreement and in and to the Mortgage Loans (other than the Master Servicer's
right to recovery of the aggregate Master Servicing Fees due prior to the date
of termination, and other expenses and amounts advanced pursuant to the terms
of the Pooling and Servicing Agreement, which rights the Master Servicer will
retain under all circumstances), whereupon the Trustee will succeed to all the
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responsibilities, duties and liabilities of the Master Servicer under the
Pooling and Servicing Agreement and will be entitled to monthly compensation
not to exceed the aggregate Master Servicing Fees together with the other
compensation to which the Master Servicer is entitled under the Pooling and
Servicing Agreement. In the event that the Trustee is unwilling or unable so
to act, it may select, pursuant to the public bid procedure described in the
applicable Pooling and Servicing Agreement, or petition a court of competent
jurisdiction to appoint, a housing and home finance institution, bank or
mortgage servicing institution with a net worth of at least $10,000,000 to act
as successor to the Master Servicer under the provisions of the Pooling and
Servicing Agreement; provided however, that until such a successor Master
Servicer is appointed and has assumed the responsibilities, duties and
liabilities of the Master Servicer under the Pooling and Servicing Agreement,
the Trustee shall continue as the successor to the Master Servicer as
described above. In the event such public bid procedure is utilized, the
successor would be entitled to compensation in an amount equal to the
aggregate Master Servicing Fees, together with the other compensation to which
the Master Servicer is entitled under the Pooling and Servicing Agreement, and
the Master Servicer would be entitled to receive the net profits, if any,
realized from the sale of its rights and obligations under the Pooling and
Servicing Agreement. (Sections 7.01 and 7.05).
During the continuance of any Event of Default under the Pooling and
Servicing Agreement for a Series, the Trustee for such Series will have the
right to take action to enforce its rights and remedies and to protect and
enforce the rights and remedies of the Certificateholders of such Series, and
holders of Certificates evidencing not less than 25% of the Voting Interests
for such Series may direct the time, method and place of conducting any
proceeding for any remedy available to the Trustee or exercising any trust or
power conferred upon the Trustee. However, the Trustee will not be under any
obligation to pursue any such remedy or to exercise any of such trusts or
powers unless such Certificateholders have offered the Trustee reasonable
security or indemnity against the cost, expenses and liabilities which may be
incurred by the Trustee thereby. Also, the Trustee may decline to follow any
such direction if the Trustee determines that the action or proceeding so
directed may not lawfully be taken or would involve it in personal liability
or be unjustly prejudicial to the non-assenting Certificateholders. (Sections
7.02 and 7.03).
No Certificateholder of a Series, solely by virtue of such holder's status
as a Certificateholder, will have any right under the Pooling and Servicing
Agreement for such Series to institute any proceeding with respect to the
Pooling and Servicing Agreement, unless such holder previously has given to
the Trustee for such Series written notice of default and unless the holders
of Certificates evidencing not less than 25% of the Voting Interests for such
Series have made written request upon the Trustee to institute such proceeding
in its own name as Trustee thereunder and have offered to the Trustee
reasonable indemnity and the Trustee for 60 days has neglected or refused to
institute any such proceeding. (Section 10.03).
AMENDMENT
Each Pooling and Servicing Agreement may be amended by the Seller, the
Master Servicer and the Trustee without the consent of the Certificateholders,
(i) to cure any ambiguity or mistake, (ii) to correct or supplement any
provision therein that may be inconsistent with any other provision therein,
(iii) to modify, eliminate or add to any of its provisions to such extent as
shall be necessary to maintain the qualification of the Trust Estate (or one
or more segregated pools of assets therein) as a REMIC at all times that any
Certificates are outstanding or to avoid or minimize the risk of the
imposition of any tax on the Trust Estate pursuant to the Code that would be a
claim against the Trust Estate, provided that the Trustee has received an
opinion of counsel to the effect that such action is necessary or desirable to
maintain such qualification or to avoid or minimize the risk of the imposition
of any such tax and such action will not, as evidenced by such opinion of
counsel, adversely affect in any material respect the interests of any
Certificateholder, (iv) to change the timing and/or nature of deposits into
the Certificate Account, provided that such change will not, as evidenced by
an opinion of counsel, adversely affect in any material respect the interests
of any Certificateholder and that such change will not adversely affect the
then current rating assigned to any Certificates, as evidenced by a letter
from each Rating Agency to such effect, (v) to add to, modify or eliminate any
provisions therein restricting transfers of residual Certificates to certain
disqualified organizations described below under "Material Federal Income Tax
Consequences--Federal Income Tax Consequences for REMIC Certificates--Taxation
of Residual Certificates--Tax-Related Restrictions on Transfer of Residual
Certificates," (vi) to make certain provisions with respect to the
denominations of, and the manner of payments on, certain Classes or Subclasses
of Certificates initially retained by the Seller or an affiliate, or (vii) to
make any other provisions with respect to matters or questions arising under
such Pooling and Servicing Agreement that are not inconsistent with the
provisions thereof, provided that such action will not, as evidenced by an
opinion of counsel, adversely affect in any material respect the interests of
the Certificateholders of the related Series. The Pooling and Servicing
Agreement may also be amended by the Seller, the Master Servicer and the
Trustee with the consent of the holders of Certificates evidencing interests
aggregating not less than 66 2/3% of the Voting Interests evidenced by the
Certificates of each Class or Subclass affected thereby, for the purpose of
adding any provisions
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to or changing in any manner or eliminating any of the provisions of such
Pooling and Servicing Agreement or of modifying in any manner the rights of
the Certificateholders; provided, however, that no such amendment may (i)
reduce in any manner the amount of, or delay the timing of, any payments
received on or with respect to Mortgage Loans that are required to be
distributed on any Certificates, without the consent of the holder of such
Certificate, (ii) adversely affect in any material respect the interests of
the holders of a Class or Subclass of Certificates of a Series in a manner
other than that set forth in (i) above without the consent of the holders of
Certificates aggregating not less than 66 2/3% of the Voting Interests
evidenced by such Class or Subclass, or (iii) reduce the aforesaid percentage
of Certificates of any Class or Subclass, the holders of which are required to
consent to such amendment, without the consent of the holders of all
Certificates of such Class or Subclass affected then outstanding.
Notwithstanding the foregoing, the Trustee will not consent to any such
amendment if such amendment would subject the Trust Estate (or any segregated
pool of assets therein) to tax or cause the Trust Estate (or any segregated
pool of assets therein) to fail to qualify as a REMIC.
TERMINATION; OPTIONAL PURCHASE OF MORTGAGE LOANS
The obligations created by the Pooling and Servicing Agreement for a Series
of Certificates will terminate on the Distribution Date following the final
payment or other liquidation of the last Mortgage Loan subject thereto and the
disposition of all property acquired upon foreclosure of any such Mortgage
Loan. In no event, however, will the trust created by the Pooling and
Servicing Agreement continue beyond the expiration of 21 years from the death
of the last survivor of certain persons named in such Pooling and Servicing
Agreement. For each Series of Certificates, the Trustee 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 appointed by the
Seller and specified in the notice of termination.
If so provided in the applicable Prospectus Supplement, the Pooling and
Servicing Agreement for each Series of Certificates will permit, but not
require, the Seller, Norwest Mortgage or such other party as is specified in
the applicable Prospectus Supplement, to purchase from the Trust Estate for
such Series all remaining Mortgage Loans at the time subject to the Pooling
and Servicing Agreement at a price specified in such Prospectus Supplement. In
the event that such party has caused the related Trust Estate (or any
segregated pool of assets therein) to be treated as a REMIC, any such purchase
will be effected only pursuant to a "qualified liquidation" as defined in Code
Section 860F(a)(4)(A) and, if the Trust Estate is liquidated other than in the
manner specified in the Pooling and Servicing Agreement, the receipt by the
Trustee of an opinion of counsel or other evidence that such other liquidation
method will not (i) result in the imposition of a tax on "prohibited
transactions" under Code Section 860F(a)(1), (ii) otherwise subject the Trust
Estate to tax, or (iii) cause the Trust Estate (or any segregated pool of
assets) to fail to qualify as a REMIC. The exercise of such right will effect
early retirement of the Certificates of that Series, but the right so to
purchase may be exercised only after the aggregate principal balance of the
Mortgage Loans for such Series at the time of purchase is less than a
specified percentage of the aggregate principal balance at the Cut-Off Date
for the Series, or after the date set forth in the applicable Prospectus
Supplement.
THE TRUSTEE
The Trustee under each Pooling and Servicing Agreement (the "Trustee") will
be named in the applicable Prospectus Supplement. The commercial bank or trust
company serving as Trustee may have normal banking relationships with the
Seller or any of its affiliates.
The Trustee may resign at any time, in which event the Master Servicer will
be obligated to appoint a successor trustee. The Master Servicer may also
remove the Trustee if the Trustee ceases to be eligible to act as Trustee
under the Pooling and Servicing Agreement, if the Trustee becomes insolvent or
in order to change the situs of the Trust Estate for state tax reasons. Upon
becoming aware of such circumstances, the Master Servicer will become
obligated to appoint a successor trustee. The Trustee may also be removed at
any time by the holders of Certificates evidencing not less than 51% of the
Voting Interests in the Trust Estate, except that, any Certificate registered
in the name of the Seller, the Master Servicer or any affiliate thereof will
not be taken into account in determining whether the requisite Voting Interest
in the Trust Estate necessary to effect any such removal has been obtained.
Any resignation and removal of the Trustee, and the appointment of a successor
trustee, will not become effective until acceptance of such appointment by the
successor trustee. The Trustee, and any successor trustee, will have a
combined capital and surplus of at least $50,000,000, or will be a member of a
bank holding system, the aggregate combined capital and surplus of which is at
least $50,000,000, provided that the Trustee's and any such successor
trustee's separate capital and surplus shall at all times be at least the
amount specified in Section 310(a)(2) of the Trust Indenture Act of 1939, and
will be subject to supervision or examination by federal or state authorities.
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CERTAIN LEGAL ASPECTS OF THE MORTGAGE LOANS
The following discussion contains summaries of certain legal aspects of
mortgage loans which are general in nature. Because such legal aspects are
governed 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, nor 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 applicable federal and state laws governing
the Mortgage Loans.
GENERAL
The Mortgage Loans will, in general, be secured by either first mortgages or
first deeds of trust, depending upon the prevailing practice in the state in
which the underlying property is located. A mortgage creates a lien upon the
real property described in the mortgage. There are two parties to a mortgage:
the mortgagor, who is the borrower (or, in the case of a Mortgage Loan secured
by a property that has been conveyed to an inter vivos revocable trust, the
settlor of such trust); and the mortgagee, who is the lender. In a mortgage
instrument state, the mortgagor delivers to the mortgagee a note or bond
evidencing the loan and the mortgage. Although a deed of trust is similar to a
mortgage, a deed of trust has three parties: a borrower called the trustor
(similar to a mortgagor), a lender called the beneficiary (similar to a
mortgagee), 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 loan. The trustee's authority under a deed of trust and the mortgagee's
authority under a mortgage are governed by the express provisions of the deed
of trust or mortgage, applicable law, and, in some cases, with respect to the
deed of trust, the directions of the beneficiary.
FORECLOSURE
Foreclosure of a mortgage is generally accomplished by judicial action.
Generally, the action is initiated by the service of legal pleadings upon all
parties having an interest of record in the real property. Delays in
completion of the foreclosure occasionally may result from difficulties in
locating necessary parties defendant. When the mortgagee's right of
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 may issue a judgment of foreclosure and appoint a
receiver or other officer to conduct the sale of the property. In some states,
mortgages may also be foreclosed by advertisement, pursuant to a power of sale
provided in the mortgage. Foreclosure of a mortgage by advertisement is
essentially similar to foreclosure of a deed of trust by non-judicial power of
sale.
Foreclosure of a deed of trust is generally accomplished by a non-judicial
trustee's sale under a specific provision in the deed of trust that authorizes
the trustee to sell the property to a third party 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, 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 a notice of default and notice of sale. In
addition, the trustee must provide notice in some states to any other
individual having an interest of record in the real property, including any
junior lienholders. If the deed of trust is not reinstated within any
applicable cure period, a notice of sale must be posted in a public place and,
in most states, published for a specified 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 of
record in the property.
In some states, 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 attorneys' fees, which may be recovered by a lender.
In case of foreclosure under either a mortgage or a deed of trust, the sale
by the receiver or other designated officer, or by the trustee, is a public
sale. However, because of the difficulty a potential buyer at the sale would
have in determining the exact status of title and because the physical
condition of the property may have deteriorated during the foreclosure
proceedings, it is uncommon for a third party to purchase the property at the
foreclosure sale. Rather, it is common for the lender to purchase the
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property from the trustee or receiver for an amount equal to the unpaid
principal amount of the note, accrued and unpaid interest and the expenses of
foreclosure. Thereafter, subject to the right of the borrower in some states
to remain in possession during the redemption period, the lender will assume
the burdens 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 commonly will obtain the services of a real estate broker
and pay the broker a 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. Any loss may
be reduced by the receipt of mortgage insurance proceeds, if any, or by
judicial action against the borrower for the deficiency, if such action is
permitted by law. See "--Anti-Deficiency Legislation and Other Limitations on
Lenders" below.
FORECLOSURE ON SHARES OF COOPERATIVES
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 By-laws, as well
as in 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 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 a 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 by the agreement in any rights it may have to dispossess the
tenant-stockholders.
Foreclosure on the cooperative shares is accomplished by a sale in
accordance with the provisions of Article 9 of the Uniform Commercial Code
(the "UCC") and the security agreement relating to those shares. Article 9 of
the UCC requires that a sale be conducted in a "commercially reasonable"
manner. Whether a foreclosure sale has been conducted in a "commercially
reasonable" manner will depend on the facts in each case. In determining
commercial reasonableness, a court will look to the notice given the debtor
and the method, manner, time, place and terms of the foreclosure. Generally, a
sale conducted according to the usual practice of banks selling similar
collateral will be considered reasonably conducted.
Article 9 of the UCC provides that the proceeds of the sale will be applied
first to pay the costs and expenses of the sale and then to satisfy the
indebtedness secured by the lender's security interest. The recognition
agreement, however, generally provides that the lender's right to
reimbursement is subject to the right of the cooperative corporation 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 and/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
most states where the right
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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 delay 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 maintain 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, 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 former borrower equal in most cases to the difference between the
amount due to the lender and the net amount realized upon 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.
Other statutory provisions may limit any deficiency judgment against the
former borrower following a foreclosure sale to the excess of the outstanding
debt over the fair market value of the property at the time of such sale. The
purpose of these statutes is to prevent a beneficiary or a mortgagee from
obtaining a large deficiency judgment against the former borrower as a result
of low or no bids at the foreclosure sale.
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.
Generally, Article 9 of the UCC governs foreclosure on cooperative shares
and the related proprietary lease or occupancy agreement and foreclosure on
the beneficial interest in a land trust. 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 Mortgage
Loan secured by shares of a cooperative, would be such shares and the related
proprietary lease or occupancy agreement) was conducted in a commercially
reasonable manner.
A Servicer generally will not be required under the applicable Underlying
Servicing Agreement to pursue deficiency judgments on the Mortgage Loans even
if permitted by law.
In addition to anti-deficiency and related legislation, numerous other
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 a secured mortgage lender to realize upon its security. For
example, numerous statutory provisions under the United States Bankruptcy
Code, 11 U.S.C. Sections 101 et seq., (the "Bankruptcy Code") may interfere
with or affect the ability of the Seller to obtain payment of a Mortgage Loan,
to realize upon collateral and/or enforce a deficiency judgment. For example,
under federal bankruptcy law, virtually all actions (including foreclosure
actions and deficiency judgment proceedings) are automatically stayed upon the
filing of a bankruptcy petition, and often no interest or principal payments
are made during the course of the bankruptcy proceeding. In a case under the
Bankruptcy Code, the secured party is precluded from foreclosing without
authorization from the bankruptcy court. In addition, a court with federal
bankruptcy jurisdiction may permit a debtor through his or her Chapter 11 or
Chapter 13 plan to cure a monetary default in respect of a Mortgage Loan by
paying arrearages within a reasonable time period and reinstating the original
mortgage loan payment schedule even though the lender accelerated the mortgage
loan and final judgment of foreclosure had been entered in state court
(provided no foreclosure sale had yet occurred) prior to the filing of the
debtor's
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petition. Some courts with federal bankruptcy jurisdiction have approved
plans, based on the particular facts of the case, that effected the curing of
a mortgage loan default by paying arrearages over a number of years.
If a Mortgage Loan is secured by property not consisting solely of the
debtor's principal residence, the Bankruptcy Code also permits such Mortgage
Loan to be modified. Such modifications may include reducing the amount of
each monthly payment, changing the rate of interest, altering the repayment
schedule, and reducing the lender's security interest to the value of the
property, thus leaving the lender in the position of a general unsecured
creditor for the difference between the value of the property and the
outstanding balance of the Mortgage Loan. Some courts have permitted such
modifications when the Mortgage Loan is secured both by the debtor's principal
residence and by personal property.
If a court relieves a borrower's obligation to repay amounts otherwise due
on a Mortgage Loan, the Servicer will not be required to advance such amounts,
and any loss in respect thereof will be borne by the Certificateholders.
The Internal Revenue Code of 1986, as amended, provides priority to certain
tax liens over the lien of the mortgage or deed of trust. The laws of some
states provide priority to certain tax liens over the lien of the mortgage or
deed of trust. Numerous federal and some 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 laws and state laws impose
specific statutory liabilities upon lenders who originate or service mortgage
loans and who fail to comply with the provisions of the law. In some cases,
this liability may affect assignees of the mortgage loans.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT AND SIMILAR LAWS
Generally, under the terms of the Soldiers' and Sailors' Civil Relief Act of
1940, as amended (the "Relief Act"), a borrower who enters military service
after the origination of such borrower's Mortgage Loan (including a borrower
who is a member of the National Guard or is in reserve status at the time of
the origination of the Mortgage Loan and is later called to active duty) may
not be charged interest above an annual rate of 6% during the period of such
borrower's active duty status, unless a court orders otherwise upon
application of the lender. It is possible that such action could have an
effect, for an indeterminate period of time, on the ability of the Servicer to
collect full amounts of interest on certain of the Mortgage Loans in a Trust
Estate. Any shortfall in interest collections resulting from the application
of the Relief Act could result in losses to the holders of the Certificates of
the related Series. Further, the Relief Act imposes limitations which would
impair the ability of the 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. Certain states have enacted comparable legislation which may
interfere with or affect the ability of the Servicer to timely collect
payments of principal and interest on, or to foreclose on, Mortgage Loans of
borrowers in such states who are active or reserve members of the armed
services.
ENVIRONMENTAL CONSIDERATIONS
A lender may be subject to unforeseen environmental risks when taking a
security interest in real or personal property. Property subject to such a
security interest may be subject to federal, state, and local laws and
regulations relating to environmental protection. Such laws may regulate,
among other things: emissions of air pollutants; discharges of wastewater or
storm water; generation, transport, storage or disposal of hazardous waste or
hazardous substances; operation, closure and removal of underground storage
tanks; removal and disposal of asbestos-containing materials; management of
electrical or other equipment containing polychlorinated biphenyls ("PCBs").
Failure to comply with such laws and regulations may result in significant
penalties, including civil and criminal fines. Under the laws of certain
states, environmental contamination on a property may give rise to a lien on
the property to ensure the availability and/or reimbursement of cleanup costs.
Generally all subsequent liens on such property are subordinated to such a
lien and, in some states, even prior recorded liens are subordinated to such
liens ("Superliens"). In the latter states, the security interest of the
Trustee in a property that is subject to such a Superlien could be adversely
affected.
Under the federal Comprehensive Environmental Response, Compensation and
Liability Act, as amended ("CERCLA"), and under state law in certain states, a
secured party which takes a deed in lieu of foreclosure, purchases a mortgaged
property at a
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foreclosure sale, operates a mortgaged property or undertakes certain types of
activities that may constitute management of the mortgaged property may become
liable in certain circumstances for the costs of remedial action ("Cleanup
Costs") if hazardous wastes or hazardous substances have been released or
disposed of on the property. Such Cleanup Costs may be substantial. CERCLA
imposes strict, as well as joint and several liability for environmental
remediation and/or damage costs on several classes of "potentially responsible
parties," including current "owners and/or operators" of property,
irrespective of whether those owners or operators caused or contributed to
contamination on the property. In addition, owners and operators of properties
that generate hazardous substances that are disposed of at other "off-site"
locations may held strictly, jointly and severally liable for environmental
remediation and/or damages at those off-site locations. Many states also have
laws that are similar to CERCLA. Liability under CERCLA or under similar state
law could exceed the value of the property itself as well as the aggregate
assets of the property owner.
The law is unclear as to whether and under what precise circumstances
cleanup costs, or the obligation to take remedial actions, could be imposed on
a secured lender such as the Trust Estate. Under the laws of some states and
under CERCLA, a lender may be liable as an "owner or operator" for costs of
addressing releases or threatened releases of hazardous substances on a
mortgaged property if such lender or its agents or employees have
"participated in the management" of the operations of the borrower, even
though the environmental damage or threat was caused by a prior owner or
current owner or operator or other third party. Excluded from CERCLA's
definition of "owner or operator," is a person "who without participating in
the management of . . . [the] facility, holds indicia of ownership primarily
to protect his security interest" (the "secured-creditor exemption"). This
exemption for holders of a security interest such as a secured lender applies
only to the extent that a lender seeks to protect its security interest in the
contaminated facility or property. Thus, if a lender's activities begin to
encroach on the actual management of such facility or property, the lender
faces potential liability as an "owner or operator" under CERCLA. Similarly,
when a lender forecloses and takes title to a contaminated facility or
property, the lender may incur potential CERCLA liability in various
circumstances, including among others, when it holds the facility or property
as an investment (including leasing the facility or property to a third
party), fails to market the property in a timely fashion or fails to properly
address environmental conditions at the property or facility.
A decision in May 1990 of the United States Court of Appeals for the
Eleventh Circuit in United States v. Fleet Factors Corp. very narrowly
construed CERCLA's secured-creditor exemption. The court's opinion suggested
that a lender need not have involved itself in the day-to-day operations of
the facility or participated in decisions relating to hazardous waste to be
liable under CERCLA; rather, liability could attach to a lender if its
involvement with the management of the facility were broad enough to support
the inference that the lender had the capacity to influence the borrower's
treatment of hazardous waste. The court added that a lender's capacity to
influence such decisions could be inferred from the extent of its involvement
in the facility's financial management. A subsequent decision by the United
States Court of Appeals for the Ninth Circuit in In re Bergsoe Metal Corp.,
apparently disagreeing with, but not expressly contradicting, the Fleet
Factors court, held that a secured lender had no liability absent "some actual
management of the facility" on the part of the lender.
On April 29, 1992, the United States Environmental Protection Agency (the
"EPA") issued a final rule interpreting and delineating CERCLA's secured-
creditor exemption and the range of permissible actions that may be undertaken
by a holder of a contaminated facility without exceeding the bounds of the
secured-creditor exemption. However, on February 4, 1994, the United States
Court of Appeals for the District of Columbia Circuit in Kelley v. EPA
invalidated the EPA rule. As a result of the Kelley case, the state of the law
with respect to the secured creditor exemption was, until recently, very
unclear.
On September 28, 1996, Congress enacted, and on September 30, 1996 the
President signed into law, the Asset Conservation, Lender Liability and
Deposit Insurance Protection Act of 1996 (the Asset Conservation Act"). The
Asset Conservation Act was intended to clarify the scope of the secured
creditor exemption. This legislation more clearly defines the kinds of
activities that would constitute "participation in management" and that
therefore would trigger liability for secured parties under CERCLA. It also
identified certain activities that ordinarily would not trigger liability,
provided, however, that such activities did not otherwise rise to the level of
"participation in management." The Asset Conservation Act specifically
reverses the Fleet Factors "capacity to influence" standard. The Asset
Conservation Act also provides additional protection against liability in the
event of foreclosure. However, since the courts have not yet had the
opportunity to interpret the new statutory provisions, the scope of the
additional protections offered by the Asset Conservation Act is not fully
defined. It also is important to note that the Asset Conservation Act does not
offer complete protection to lenders and that the risk of liability remains.
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If a secured lender does become liable, it may be entitled to bring an
action for contribution against the owner or operator who created the
environmental contamination or against some other liable party, but that
person or entity may be bankrupt or otherwise judgment-proof. It is therefore
possible that cleanup or other environmental liability costs could become a
liability of the Trust Estate and occasion a loss to the Trust Estate and to
Certificateholders in certain circumstances. The new secured creditor
amendments to CERCLA, also, would not necessarily affect the potential for
liability in actions by either a state or a private party under other federal
or state laws which may impose liability on "owners or operators" but do not
incorporate the secured-creditor exemption.
Traditionally, residential mortgage lenders have not taken steps to evaluate
whether hazardous wastes or hazardous substances are present with respect to
any mortgaged property prior to the origination of the mortgage loan or prior
to foreclosure or accepting a deed-in-lieu of foreclosure. Accordingly,
neither the Seller, Norwest Mortgage nor Norwest Funding has made such
evaluations prior to the origination of the Mortgage Loans, nor does Norwest
Mortgage or Norwest Funding require that such evaluations be made by
originators who have sold the Mortgage Loans to Norwest Mortgage. Neither the
Seller nor Norwest Mortgage is required to undertake any such evaluations
prior to foreclosure or accepting a deed-in-lieu of foreclosure. Neither the
Seller nor the Master Servicer makes any representations or warranties or
assumes any liability with respect to: the environmental condition of such
Mortgaged Property; the absence, presence or effect of hazardous wastes or
hazardous substances on any Mortgaged Property; any casualty resulting from
the presence or effect of hazardous wastes or hazardous substances on, near or
emanating from such Mortgaged Property; the impact on Certificateholders of
any environmental condition or presence of any substance on or near such
Mortgaged Property; or the compliance of any Mortgaged Property with any
environmental laws, nor is any agent, person or entity otherwise affiliated
with the Seller authorized or able to make any such representation, warranty
or assumption of liability relative to any such Mortgaged Property. See "The
Trust Estates--Mortgage Loans--Representations and Warranties" and "Servicing
of the Mortgage Loans--Enforcement of Due-on-Sale Clauses; Realization Upon
Defaulted Mortgage Loans" above.
"DUE-ON-SALE" CLAUSES
The forms of note, mortgage and deed of trust relating to conventional
Mortgage Loans may contain a "due-on-sale" clause permitting acceleration of
the maturity of a loan if the borrower transfers its interest in the property.
In recent years, court decisions and legislative actions placed substantial
restrictions on the right of lenders to enforce such clauses in many states.
However, effective October 15, 1982, Congress enacted the Garn-St Germain
Depository Institutions Act of 1982 (the "Garn Act") which purports to preempt
state laws which prohibit the enforcement of "due-on-sale" clauses by
providing among other matters, that "due-on-sale" clauses in certain loans
(which loans may include the Mortgage Loans) made after the effective date of
the Garn Act are enforceable, within certain limitations as set forth in the
Garn Act and the regulations promulgated thereunder. "Due-on-sale" clauses
contained in mortgage loans originated by federal savings and loan
associations or federal savings banks are fully enforceable pursuant to
regulations of the Office of Thrift Supervision ("OTS"), as successor to the
Federal Home Loan Bank Board ("FHLBB"), which preempt state law restrictions
on the enforcement of such clauses. Similarly, "due-on-sale" clauses in
mortgage loans made by national banks and federal credit unions are now fully
enforceable pursuant to preemptive regulations of the Comptroller of the
Currency and the National Credit Union Administration, respectively.
The Garn Act created a limited exemption from its general rule of
enforceability for "due-on-sale" clauses in certain mortgage loans ("Window
Period Loans") which were originated by non-federal lenders and made or
assumed in certain states ("Window Period States") during the period, prior to
October 15, 1982, in which that state prohibited the enforcement of "due-on-
sale" clauses by constitutional provision, statute or statewide court decision
(the "Window Period"). Though neither the Garn Act nor the OTS regulations
actually names the Window Period States, the Federal Home Loan Mortgage
Corporation has taken the position, in prescribing mortgage loan servicing
standards with respect to mortgage loans which it has purchased, that the
Window Period States were: Arizona, Arkansas, California, Colorado, Georgia,
Iowa, Michigan, Minnesota, New Mexico, Utah and Washington. Under the Garn
Act, unless a Window Period State took action by October 15, 1985, the end of
the Window Period, to further regulate enforcement of "due-on-sale" clauses in
Window Period Loans, "due-on-sale" clauses would become enforceable even in
Window Period Loans. Five of the Window Period States (Arizona, Minnesota,
Michigan, New Mexico and Utah) have taken actions which restrict the
enforceability of "due-on-sale" clauses in Window Period Loans beyond October
15, 1985. The actions taken vary among such states.
By virtue of the Garn Act, a Servicer may generally be permitted to
accelerate any conventional Mortgage Loan which contains a "due-on-sale"
clause upon transfer of an interest in the property subject to the mortgage or
deed of trust. With respect
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to any Mortgage Loan secured by a residence occupied or to be occupied by the
borrower, this ability to accelerate will not apply to certain types of
transfers, including (i) the granting of a leasehold interest which has a term
of three years or less and which does not contain an option to purchase, (ii)
a transfer to a relative resulting from the death of a borrower, or a transfer
where the spouse or children become an owner of the property in each case
where the transferee(s) will occupy the property, (iii) a transfer resulting
from a decree of dissolution of marriage, legal separation agreement or from
an incidental property settlement agreement by which the spouse becomes an
owner of the property, (iv) the creation of a lien or other encumbrance
subordinate to the lender's security instrument which does not relate to a
transfer of rights of occupancy in the property (provided that such lien or
encumbrance is not created pursuant to a contract for deed), (v) a transfer by
devise, descent or operation of law on the death of a joint tenant or tenant
by the entirety, (vi) a transfer into an inter vivos trust in which the
borrower is the beneficiary and which does not relate to a transfer of rights
of occupancy; and (vii) other transfers as set forth in the Garn Act and the
regulations thereunder. The extent of the effect of the Garn Act on the
average lives and delinquency rates of the Mortgage Loans cannot be predicted.
See "Prepayment and Yield Considerations."
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 OTS as successor
to the FHLBB is authorized to issue rules and regulations and to publish
interpretations governing implementation of Title V. The statute authorized
any state to reimpose interest rate limits by adopting before April 1, 1983, a
law or constitutional provision which expressly rejects application of the
federal law. Fifteen states have adopted laws reimposing or reserving the
right to reimpose interest rate limits. In addition, even where Title V is not
so rejected, any state is authorized to adopt a provision limiting certain
other loan charges.
The Seller will represent and warrant in the Pooling and Servicing Agreement
to the Trustee for the benefit of Certificateholders that all Mortgage Loans
are originated in full compliance with applicable state laws, including usury
laws. See "The Pooling and Servicing Agreement--Assignment of Mortgage Loans
to the Trustee."
ENFORCEABILITY OF CERTAIN PROVISIONS
Standard forms of note, mortgage and deed of trust generally contain
provisions obligating the borrower to pay a late charge if payments are not
timely made and in some circumstances may provide for prepayment fees or
penalties if the obligation is paid prior to maturity. In certain states,
there are or may be specific limitations upon late charges which a lender may
collect from a borrower for delinquent payments. Certain states also limit the
amounts that a lender may collect from a borrower as an additional charge if
the loan is prepaid. Under the Pooling and Servicing Agreement, late charges
and prepayment fees (to the extent permitted by law and not waived by the
Servicer) will be retained by the Servicer as additional servicing
compensation.
Courts have imposed general equitable principles upon foreclosure. These
equitable principles are generally designed to relieve the borrower from the
legal effect of defaults under the loan documents. Examples of judicial
remedies that may be fashioned include judicial requirements that the lender
undertake affirmative and expensive actions to determine the causes for the
borrower's default and the likelihood that the borrower will be able to
reinstate the loan. In some cases, courts have substituted their judgment for
the lender's judgment and have required lenders to reinstate loans or recast
payment schedules to accommodate borrowers who are suffering from temporary
financial disability. In some cases, courts have limited the right of lenders
to foreclose if the default under the mortgage instrument is not monetary,
such as the borrower failing to adequately maintain the property or the
borrower executing a second mortgage or deed of trust affecting the property.
In other cases, some courts have been faced with the issue of whether federal
or state constitutional provisions reflecting due process concerns for
adequate notice require that borrowers under the deeds of trust receive
notices in addition to the statutorily-prescribed minimum requirements. 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 or
under a mortgage having a power of sale does not involve sufficient state
action to afford constitutional protections to the borrower.
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MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The following general discussion represents the opinion of Cadwalader,
Wickersham & Taft as to the anticipated material federal income tax
consequences of the purchase, ownership and disposition of Certificates. The
discussion below does not purport to address all federal income tax
consequences that may be applicable to particular categories of investors,
some of which may be subject to special rules. The authorities on which this
discussion is based are subject to change or differing interpretations, and
any such change or interpretation could apply retroactively. This discussion
reflects the applicable provisions of the Code, as well as regulations (the
"REMIC Regulations") promulgated by the U.S. Department of the Treasury on
December 23, 1992. Investors should consult their own tax advisors in
determining the federal, state, local and any other tax consequences to them
of the purchase, ownership and disposition of Certificates.
For purposes of this discussion, where the applicable Prospectus Supplement
provides for a Fixed Retained Yield with respect to the Mortgage Loans of a
Series of Certificates, references to the Mortgage Loans will be deemed to
refer to that portion of the Mortgage Loans held by the Trust Estate that does
not include the Fixed Retained Yield. References to a "Holder" or
"Certificateholder" in this discussion generally mean the beneficial owner of
a Certificate.
FEDERAL INCOME TAX CONSEQUENCES FOR REMIC CERTIFICATES
GENERAL
With respect to a particular Series of Certificates, an election may be made
to treat the Trust Estate or one or more segregated pools of assets therein as
one or more REMICs within the meaning of Code Section 860D. A Trust Estate or
a portion or portions thereof as to which one or more REMIC elections will be
made will be referred to as a "REMIC Pool." For purposes of this discussion,
Certificates of a Series as to which one or more REMIC elections are made are
referred to as "REMIC Certificates" and will consist of one or more Classes of
"Regular Certificates" and one Class of "Residual Certificates" in the case of
each REMIC Pool. Qualification as a REMIC requires ongoing compliance with
certain conditions. With respect to each Series of REMIC Certificates,
Cadwalader, Wickersham & Taft, counsel to the Seller, has advised the Seller
that in the firm's opinion, assuming (i) the making of an appropriate
election, (ii) compliance with the Pooling and Servicing Agreement, and (iii)
compliance with any changes in the law, including any amendments to the Code
or applicable Treasury regulations thereunder, each REMIC Pool will qualify as
a REMIC. In such case, the Regular Certificates will be considered to be
"regular interests" in the REMIC Pool and generally will be treated for
federal income tax purposes as if they were newly originated debt instruments,
and the Residual Certificates will be considered to be "residual interests" in
the REMIC Pool. The Prospectus Supplement for each Series of Certificates will
indicate whether one or more REMIC elections with respect to the related Trust
Estate will be made, in which event references to "REMIC" or "REMIC Pool"
herein shall be deemed to refer to each such REMIC Pool.
STATUS OF REMIC CERTIFICATES
REMIC Certificates held by a domestic building and loan association will
constitute "a regular or residual interest in a REMIC" within the meaning of
Code Section 7701(a)(19)(C)(xi) in the same proportion that the assets of the
REMIC Pool would be treated as "loans . . . secured by an interest in real
property which is . . . residential property" within the meaning of Code
Section 7701(a)(19)(C)(v) or as other assets described in Code Section
7701(a)(19)(C). REMIC Certificates held by a real estate investment trust will
constitute "real estate assets" within the meaning of Code Section
856(c)(5)(A), and interest on the Regular Certificates and income with respect
to Residual Certificates will be considered "interest on obligations secured
by mortgages on real property or on interests in real property" within the
meaning of Code Section 856(c)(3)(B) in the same proportion that, for both
purposes, the assets of the REMIC Pool would be so treated. If at all times
95% or more of the assets of the REMIC Pool qualify for each of the foregoing
treatments, the REMIC Certificates will qualify for the corresponding status
in their entirety. For purposes of Code Section 856(c)(5)(A), payments of
principal and interest on the Mortgage Loans that are reinvested pending
distribution to holders of REMIC Certificates qualify for such treatment.
Where two REMIC Pools are a part of a tiered structure they will be treated as
one REMIC for purposes of the tests described above respecting asset ownership
of more or less than 95%. In addition, if the assets of the REMIC include Buy-
Down Loans, it is possible that the percentage of such assets constituting
"loans . . . secured by an interest in real property which
is . . . residential real property" for purposes of Code Section
7701(a)(19)(C)(v) may be required to be reduced by the amount of the related
Buy-Down Funds. REMIC Certificates held by a regulated investment company will
not constitute "Government securities" within the meaning of Code Section
851(b)(4)(A)(i).
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REMIC Certificates held by certain financial institutions will constitute an
"evidence of indebtedness" within the meaning of Code Section 582(c)(1). The
Small Business Job Protection Act of 1996 (the "SBJPA of 1996") repealed the
reserve method for bad debts of domestic building and loan associations and
mutual savings banks, and thus has eliminated the asset category of
"qualifying real property loans" in former Code Section 593(d) for taxable
years beginning after December 31, 1995. The requirement in the SBJPA of 1996
that such institutions must "recapture" a portion of their existing bad debt
reserves is suspended if a certain portion of their assets are maintained in
"residential loans" under Code Section 7701(a)(19)(C)(v), but only if such
loans were made to acquire, construct or improve the related real property and
not for the purpose of refinancing. However, no effort will be made to
identify the portion of the Mortgage Loans of any Series meeting this
requirement, and no representation is made in this regard.
QUALIFICATION AS A REMIC
In order for the REMIC Pool to qualify as a REMIC, there must be ongoing
compliance on the part of the REMIC Pool with the requirements set forth in
the Code. The REMIC Pool must fulfill an asset test, which requires that no
more than a de minimis portion of the assets of the REMIC Pool, as of the
close of the third calendar month beginning after the "Startup Day" (which for
purposes of this discussion is the date of issuance of the REMIC Certificates)
and at all times thereafter, may consist of assets other than "qualified
mortgages" and "permitted investments." The REMIC Regulations provide a safe
harbor pursuant to which the de minimus requirement will be met if at all
times the aggregate adjusted basis of the nonqualified assets is less than 1%
of the aggregate adjusted basis of all the REMIC Pool's assets. An entity that
fails to meet the safe harbor may nevertheless demonstrate that it holds no
more than a de minimis amount of nonqualified assets. A REMIC Pool also must
provide "reasonable arrangements" to prevent its residual interests from being
held by "disqualified organizations" or agents thereof and must furnish
applicable tax information to transferors or agents that violate this
requirement. See "Taxation of Residual Certificates--Tax-Related Restrictions
on Transfer of Residual Certificates--Disqualified Organizations."
A qualified mortgage is any obligation that is principally secured by an
interest in real property and that is either transferred to the REMIC Pool on
the Startup Day or is purchased by the REMIC Pool within a three-month period
thereafter pursuant to a fixed price contract in effect on the Startup Day.
Qualified mortgages include whole mortgage loans, such as the Mortgage Loans,
and, generally, certificates of beneficial interest in a grantor trust that
holds mortgage loans and regular interests in another REMIC, such as lower-
tier regular interests in a tiered REMIC. The REMIC Regulations specify that
loans secured by timeshare interests and shares held by a tenant stockholder
in a cooperative housing corporation can be qualified mortgages. A qualified
mortgage includes a qualified replacement mortgage, which is any property that
would have been treated as a qualified mortgage if it were transferred to the
REMIC Pool on the Startup Day and that is received either (i) in exchange for
any qualified mortgage within a three-month period thereafter or (ii) in
exchange for a "defective obligation" within a two-year period thereafter. A
"defective obligation" includes (i) a mortgage in default or as to which
default is reasonably foreseeable, (ii) a mortgage as to which a customary
representation or warranty made at the time of transfer to the REMIC Pool has
been breached, (iii) a mortgage that was fraudulently procured by the
mortgagor, and (iv) a mortgage that was not in fact principally secured by
real property (but only if such mortgage is disposed of within 90 days of
discovery). A Mortgage Loan that is "defective" as described in clause (iv)
that is not sold or, if within two years of the Startup Day, exchanged, within
90 days of discovery, ceases to be a qualified mortgage after such 90-day
period.
Permitted investments include cash flow investments, qualified reserve
assets, and foreclosure property. A cash flow investment is an investment,
earning a return in the nature of interest, of amounts received on or with
respect to qualified mortgages for a temporary period, not exceeding 13
months, until the next scheduled distribution to holders of interests in the
REMIC Pool. A qualified reserve asset is any intangible property held for
investment that is part of any reasonably required reserve maintained by the
REMIC Pool to provide for payments of expenses of the REMIC Pool or amounts
due on the regular or residual interests in the event of defaults (including
delinquencies) on the qualified mortgages, lower than expected reinvestment
returns, prepayment interest shortfalls and certain other contingencies. The
reserve fund will be disqualified if more than 30% of the gross income from
the assets in such fund for the year is derived from the sale or other
disposition of property held for less than three months, unless required to
prevent a default on the regular interests caused by a default on one or more
qualified mortgages. A reserve fund must be reduced "promptly and
appropriately" as payments on the Mortgage Loans are received. Foreclosure
property is real property acquired by the REMIC Pool in connection with the
default or imminent default of a qualified mortgage and generally held for not
more than two years, with extensions granted by the Internal Revenue Service.
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In addition to the foregoing requirements, the various interests in a REMIC
Pool also must meet certain requirements. All of the interests in a REMIC Pool
must be either of the following: (i) one or more classes of regular interests
or (ii) a single class of residual interests on which distributions, if any,
are made pro rata. A regular interest is an interest in a REMIC Pool that is
issued on the Startup Day with fixed terms, is designated as a regular
interest, and unconditionally entitles the holder to receive a specified
principal amount (or other similar amount), and provides that interest
payments (or other similar amounts), if any, at or before maturity either are
payable based on a fixed rate or a qualified variable rate, or consist of a
specified, nonvarying portion of the interest payments on qualified mortgages.
Such a specified portion may consist of a fixed number of basis points (a
"basis point" being equal to 0.01%), a fixed percentage of the total interest,
or a qualified variable rate, inverse variable rate or difference between two
fixed or qualified variable rates on some or all of the qualified mortgages.
The specified principal amount of a regular interest that provides for
interest payments consisting of a specified, nonvarying portion of interest
payments on qualified mortgages may be zero. A residual interest is an
interest in a REMIC Pool other than a regular interest that is issued on the
Startup Day and that is designated as a residual interest. An interest in a
REMIC Pool may be treated as a regular interest even if payments of principal
with respect to such interest are subordinated to payments on other regular
interests or the residual interest in the REMIC Pool, and are dependent on the
absence of defaults or delinquencies on qualified mortgages or permitted
investments, lower than reasonably expected returns on permitted investments,
unanticipated expenses incurred by the REMIC Pool or prepayment interest
shortfalls. Accordingly, the Regular Certificates of a Series will constitute
one or more classes of regular interests, and the Residual Certificates with
respect to that Series will constitute a single class of residual interests on
which distributions are made pro rata.
If an entity, such as the REMIC Pool, fails to comply with one or more of
the ongoing requirements of the Code for REMIC status during any taxable year,
the Code provides that the entity will not be treated as a REMIC for such year
and thereafter. In this event, an entity with multiple classes of ownership
interests may be treated as a separate association taxable as a corporation
under Treasury regulations, and the Regular Certificates may be treated as
equity interests therein. The Code, however, authorizes the Treasury
Department to issue regulations that address situations where failure to meet
one or more of the requirements for REMIC status occurs inadvertently and in
good faith, and disqualification of the REMIC Pool would occur absent
regulatory relief. Investors should be aware, however, that the Conference
Committee Report to the Tax Reform Act of 1986 (the "1986 Act") indicates that
the relief may be accompanied by sanctions, such as the imposition of a
corporate tax on all or a portion of the REMIC Pool's income for the period of
time in which the requirements for REMIC status are not satisfied.
TAXATION OF REGULAR CERTIFICATES
General
In general, interest, original issue discount, and market discount on a
Regular Certificate will be treated as ordinary income to a holder of the
Regular Certificate (the "Regular Certificateholder"), and principal payments
on a Regular Certificate will be treated as a return of capital to the extent
of the Regular Certificateholder's basis in the Regular Certificate allocable
thereto. Regular Certificateholders must use the accrual method of accounting
with regard to Regular Certificates, regardless of the method of accounting
otherwise used by such Regular Certificateholders.
Original Issue Discount
Compound Interest Certificates will be, and other classes of Regular
Certificates may be, issued with "original issue discount" within the meaning
of Code Section 1273(a). Holders of any Class or Subclass of Regular
Certificates having original issue discount generally must include original
issue discount in ordinary income for federal income tax purposes as it
accrues, in accordance with a constant interest method that takes into account
the compounding of interest, in advance of receipt of the cash attributable to
such income. The following discussion is based in part on temporary and final
Treasury regulations issued on February 2, 1994, as amended on June 14, 1996,
(the "OID Regulations") under Code Sections 1271 through 1273 and 1275 and in
part on the provisions of the 1986 Act. Regular Certificateholders should be
aware, however, that the OID Regulations do not adequately address certain
issues relevant to prepayable securities, such as the Regular Certificates. To
the extent such issues are not addressed in such regulations, the Seller
intends to apply the methodology described in the Conference Committee Report
to the 1986 Act. No assurance can be provided that the Internal Revenue
Service will not take a different position as to those matters not currently
addressed by the OID Regulations. Moreover, the OID Regulations include an
anti-abuse rule allowing the Internal Revenue Service to apply or depart from
the OID Regulations where necessary or appropriate to ensure a reasonable tax
result in
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light of the applicable statutory provisions. A tax result will not be
considered unreasonable under the anti-abuse rule in the absence of a
substantial effect on the present value of a taxpayer's tax liability.
Investors are advised to consult their own tax advisors as to the discussion
herein and the appropriate method for reporting interest and original issue
discount with respect to the Regular Certificates.
Each Regular Certificate (except to the extent described below with respect
to a Regular Certificate on which principal is distributed in a single
installment or by lots of specified principal amounts upon the request of a
Certificateholder or by random lot (a "Non-Pro Rata Certificate")) will be
treated as a single installment obligation for purposes of determining the
original issue discount includible in a Regular Certificateholder's income.
The total amount of original issue discount on a Regular Certificate is the
excess of the "stated redemption price at maturity" of the Regular Certificate
over its "issue price." The issue price of a Class of Regular Certificates
offered pursuant to this Prospectus generally is the first price at which a
substantial amount of such Class is sold to the public (excluding bond houses,
brokers and underwriters). Although unclear under the OID Regulations, the
Seller intends to treat the issue price of a Class as to which there is no
substantial sale as of the issue date or that is retained by the Seller as the
fair market value of that Class as of the issue date. The issue price of a
Regular Certificate also includes any amount paid by an initial Regular
Certificateholder for accrued interest that relates to a period prior to the
issue date of the Regular Certificate, unless the Regular Certificateholder
elects on its federal income tax return to exclude such amount from the issue
price and to recover it on the first Distribution Date. The stated redemption
price at maturity of a Regular Certificate always includes the original
principal amount of the Regular Certificate, but generally will not include
distributions of interest if such distributions constitute "qualified stated
interest." Under the OID Regulations, qualified stated interest generally
means interest payable at a single fixed rate or a qualified variable rate (as
described below) provided that such interest payments are unconditionally
payable at intervals of one year or less during the entire term of the Regular
Certificate. Because there is no penalty or default remedy in the case of
nonpayment of interest with respect to a Regular Certificate, it is possible
that no interest on any Class of Regular Certificates will be treated as
qualified stated interest. However, except as provided in the following three
sentences or in the applicable Prospectus Supplement, because the underlying
Mortgage Loans provide for remedies in the event of default, the Seller
intends to treat interest with respect to the Regular Certificates as
qualified stated interest. Distributions of interest on a Compound Interest
Certificate, or on other Regular Certificates with respect to which deferred
interest will accrue, will not constitute qualified stated interest, in which
case the stated redemption price at maturity of such Regular Certificates
includes all distributions of interest as well as principal thereon. Likewise,
the Seller intends to treat an interest-only Class or a Class on which
interest is substantially disproportionate to its principal amount (a so-
called "super-premium" Class) as having no qualified stated interest. 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, the interest attributable to the additional days will be
included in the stated redemption price at maturity.
Under a de minimis rule, original issue discount on a Regular Certificate
will be considered to be zero if such original issue discount is less than
0.25% of the stated redemption price at maturity of the Regular Certificate
multiplied by the weighted average maturity of the Regular Certificate. For
this purpose, the weighted average maturity of the Regular Certificate is
computed as the sum of the amounts determined by multiplying the number of
full years (i.e., rounding down partial years) from the issue date until each
distribution in reduction of stated redemption price at maturity is scheduled
to be made by a fraction, the numerator of which is the amount of each
distribution included in the stated redemption price at maturity of the
Regular Certificate and the denominator of which is the stated redemption
price at maturity of the Regular Certificate. The Conference Committee Report
to the 1986 Act provides that the schedule of such distributions should be
determined in accordance with the assumed rate of prepayment of the Mortgage
Loans (the "Prepayment Assumption") and the anticipated reinvestment rate, if
any, relating to the Regular Certificates. The Prepayment Assumption with
respect to a Series of Regular Certificates will be set forth in the
applicable Prospectus Supplement. Holders generally must report de minimis
original issue discount pro rata as principal payments are received, and such
income will be capital gain if the Regular Certificate is held as a capital
asset. Under the OID Regulations, however, Regular Certificateholders may
elect to accrue all de minimis original issue discount as well as market
discount and market premium, under the constant yield method. See "Election to
Treat All Interest Under the Constant Yield Method."
A Regular Certificateholder generally must include in gross income for any
taxable year the sum of the "daily portions," as defined below, of the
original issue discount on the Regular Certificate accrued during an accrual
period for each day on which it holds the Regular Certificate, including the
date of purchase but excluding the date of disposition. The Seller will treat
the monthly period ending on the day before each Distribution Date as the
accrual period. With respect to each Regular Certificate, a calculation
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will be made of the original issue discount that accrues during each
successive full accrual period (or shorter period from the date of original
issue) that ends on the day before the related Distribution Date on the
Regular Certificate. The Conference Committee Report to the 1986 Act states
that the rate of accrual of original issue discount is intended to be based on
the Prepayment Assumption. Other than as discussed below with respect to a
Non-Pro Rata Certificate, the original issue discount accruing in a full
accrual period would be the excess, if any, of (i) the sum of (a) the present
value of all of the remaining distributions to be made on the Regular
Certificate as of the end of that accrual period, and (b) the distributions
made on the Regular Certificate during the accrual period that are included in
the Regular Certificate's stated redemption price at maturity, over (ii) the
adjusted issue price of the Regular Certificate at the beginning of the
accrual period. The present value of the remaining distributions referred to
in the preceding sentence is calculated based on (i) the yield to maturity of
the Regular Certificate at the issue date, (ii) events (including actual
prepayments) that have occurred prior to the end of the accrual period, and
(iii) the Prepayment Assumption. For these purposes, the adjusted issue price
of a Regular Certificate at the beginning of any accrual period equals the
issue price of the Regular Certificate, increased by the aggregate amount of
original issue discount with respect to the Regular Certificate that accrued
in all prior accrual periods and reduced by the amount of distributions
included in the Regular Certificate's stated redemption price at maturity that
were made on the Regular Certificate in such prior periods. The original issue
discount accruing during any accrual period (as determined in this paragraph)
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 period. 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.
Under the method described above, the daily portions of original issue
discount required to be included in income by a Regular Certificateholder
generally will increase to take into account prepayments on the Regular
Certificates as a result of prepayments on the Mortgage Loans that exceed the
Prepayment Assumption, and generally will decrease (but not below zero for any
period) if the prepayments are slower than the Prepayment Assumption. An
increase in prepayments on the Mortgage Loans with respect to a Series of
Regular Certificates can result in both a change in the priority of principal
payments with respect to certain Classes of Regular Certificates and either an
increase or decrease in the daily portions of original issue discount with
respect to such Regular Certificates.
In the case of a Non-Pro Rata Certificate, the Seller intends to determine
the yield to maturity of such Certificate based upon the anticipated payment
characteristics of the Class as a whole under the Prepayment Assumption. In
general, the original issue discount accruing on each Non-Pro Rata Certificate
in a full accrual period would be its allocable share of the original issue
discount with respect to the entire Class, as determined in accordance with
the preceding paragraph. However, in the case of a distribution in retirement
of the entire unpaid principal balance of any Non-Pro Rata Certificate (or
portion of such unpaid principal balance), (a) the remaining unaccrued
original issue discount allocable to such Certificate (or to such portion)
will accrue at the time of such distribution, and (b) the accrual of original
issue discount allocable to each remaining Certificate of such Class (or the
remaining unpaid principal balance of a partially redeemed Non-Pro Rata
Certificate after a distribution of principal has been received) will be
adjusted by reducing the present value of the remaining payments on such Class
and the adjusted issue price of such Class to the extent attributable to the
portion of the unpaid principal balance thereof that was distributed. The
Seller believes that the foregoing treatment is consistent with the "pro rata
prepayment" rules of the OID Regulations, but with the rate of accrual of
original issue discount determined based on the Prepayment Assumption for the
Class as a whole. Investors are advised to consult their tax advisors as to
this treatment.
Acquisition Premium
A purchaser of a Regular Certificate at a price greater than its adjusted
issue price but less than its stated redemption price at maturity will be
required to include in gross income the daily portions of the original issue
discount on the Regular Certificate reduced pro rata by a fraction, the
numerator of which is the excess of its purchase price over such adjusted
issue price and the denominator of which is the excess of the remaining stated
redemption price at maturity over the adjusted issue price. Alternatively,
such a subsequent purchaser may elect to treat all such acquisition premium
under the constant yield method, as described below under the heading
"Election to Treat All Interest Under the Constant Yield Method."
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Variable Rate Regular Certificates
Regular Certificates may provide for interest based on a variable rate.
Under the OID Regulations, interest is treated as payable at a variable rate
if, generally, (i) the issue price does not exceed the original principal
balance by more than a specified amount and (ii) the interest compounds or is
payable at least annually at current values of (a) one or more "qualified
floating rates," (b) a single fixed rate and one or more qualified floating
rates, (c) a single "objective rate," or (d) a single fixed rate and a single
objective rate that is a "qualified inverse floating rate." A floating rate is
a qualified floating rate if variations in the rate can reasonably be expected
to measure contemporaneous variations in the cost of newly borrowed funds,
where such rate is subject to a fixed multiple that is greater than 0.65 but
not more than 1.35. Such rate may also be increased or decreased by a fixed
spread or subject to a fixed cap or floor, or a cap or floor that is not
reasonably expected as of the issue date to affect the yield of the instrument
significantly. An objective rate is any 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, provided that such information is
not (i) within the control of the issuer or a related party or (ii) unique to
the circumstances of the issuer or a related party. A qualified inverse
floating rate is a rate equal to a fixed rate minus a qualified floating rate
that inversely reflects contemporaneous variations in the cost of newly
borrowed funds; an inverse floating rate that is not a qualified inverse
floating rate may nevertheless be an objective rate. A Class of Regular
Certificates may be issued under this Prospectus that does not have a variable
rate under the foregoing rules, for example, a Class that bears different
rates at different times during the period it is outstanding such that it is
considered significantly "front-loaded" or "back-loaded" within the meaning of
the OID Regulations. It is possible that such a Class may be considered to
bear "contingent interest" within the meaning of the OID Regulations. The OID
Regulations, as they relate to the treatment of contingent interest, are by
their terms not applicable to Regular Certificates. However, if final
regulations dealing with contingent interest with respect to Regular
Certificates apply the same principles as the OID Regulations, such
regulations may lead to different timing of income inclusion than would be the
case under the OID Regulations for non-contingent debt instruments.
Furthermore, application of such principles could lead to the characterization
of gain on the sale of contingent interest Regular Certificates as ordinary
income. Investors should consult their tax advisors regarding the appropriate
treatment of any Regular Certificate that does not pay interest at a fixed
rate or variable rate as described in this paragraph.
Under the REMIC Regulations, a Regular Certificate (i) bearing a rate that
qualifies as a variable rate under the OID Regulations that is tied to current
values of a variable rate (or the highest, lowest or average of two or more
variable rates, including a rate based on the average cost of funds of one or
more financial institutions), or a positive or negative multiple of such a
rate (plus or minus a specified number of basis points), or that represents a
weighted average of rates on some or all of the Mortgage Loans, including such
a rate that is subject to one or more caps or floors, or (ii) bearing one or
more such variable rates for one or more periods, or one or more fixed rates
for one or more periods, and a different variable rate or fixed rate for other
periods, qualifies as a regular interest in a REMIC. Accordingly, unless
otherwise indicated in the applicable Prospectus Supplement, the Seller
intends to treat Regular Certificates that qualify as regular interests under
this rule in the same manner as obligations bearing a variable rate for
original issue discount reporting purposes.
The amount of original issue discount with respect to a Regular Certificate
bearing a variable rate of interest will accrue in the manner described above
under "Original Issue Discount," with the yield to maturity and future
payments on such Regular Certificate generally to be determined by assuming
that interest will be payable for the life of the Regular Certificate based on
the initial rate (or, if different, the value of the applicable variable rate
as of the pricing date) for the relevant Class. Unless required otherwise by
applicable final regulations, the Seller intends to treat such variable
interest as qualified stated interest, other than variable interest on an
interest-only or super-premium Class, which will be treated as non-qualified
stated interest includible in the stated redemption price at maturity.
Ordinary income reportable for any period will be adjusted based on subsequent
changes in the applicable interest rate index.
Although unclear under the OID Regulations, unless required otherwise by
applicable final regulations, the Seller intends to treat Regular Certificates
bearing an interest rate that is a weighted average of the net interest rates
on Mortgage Loans as having qualified stated interest, except to the extent
that initial "teaser" rates cause sufficiently "back-loaded" interest to
create more than de minimis original issue discount. The yield on such Regular
Certificates for purposes of accruing original issue discount will be a
hypothetical fixed rate based on the fixed rates, in the case of fixed rate
Mortgage Loans, and initial "teaser rates" followed by fully indexed rates, in
the case of adjustable rate Mortgage Loans. In the case of adjustable rate
Mortgage Loans, the applicable index used to compute interest on the Mortgage
Loans in effect on the pricing date (or possibly the issue date) will be
deemed to be in effect beginning with the period in which the first weighted
average adjustment date occurring after the issue date
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occurs. Adjustments will be made in each accrual period either increasing or
decreasing the amount of ordinary income reportable to reflect the actual
Pass-Through Rate on the Regular Certificates.
Market Discount
A purchaser of a Regular Certificate also may be subject to the market
discount rules of Code Sections 1276 through 1278. Under these sections and
the principles applied by the OID Regulations in the context of original issue
discount, "market discount" is the amount by which the purchaser's original
basis in the Regular Certificate (i) is exceeded by the then-current principal
amount of the Regular Certificate, or (ii) in the case of a Regular
Certificate having original issue discount, is exceeded by the adjusted issue
price of such Regular Certificate at the time of purchase. Such purchaser
generally will be required to recognize ordinary income to the extent of
accrued market discount on such Regular Certificate as distributions
includible in the stated redemption price at maturity thereof are received, in
an amount not exceeding any such distribution. Such market discount would
accrue in a manner to be provided in Treasury regulations and should take into
account the Prepayment Assumption. The Conference Committee Report to the 1986
Act provides that until such regulations are issued, such market discount
would accrue either (i) on the basis of a constant interest rate, or (ii) in
the ratio of stated interest allocable to the relevant period to the sum of
the interest for such period plus the remaining interest as of the end of such
period, or in the case of a Regular Certificate issued with original issue
discount, in the ratio of original issue discount accrued for the relevant
period to the sum of the original issue discount accrued for such period plus
the remaining original issue discount as of the end of such period. Such
purchaser also generally will be required to treat a portion of any gain on a
sale or exchange of the Regular Certificate as ordinary income to the extent
of the market discount accrued to the date of disposition under one of the
foregoing methods, less any accrued market discount previously reported as
ordinary income as partial distributions in reduction of the stated redemption
price at maturity were received. Such purchaser will be required to defer
deduction of a portion of the excess of the interest paid or accrued on
indebtedness incurred to purchase or carry a Regular Certificate over the
interest distributable thereon. The deferred portion of such interest expense
in any taxable year generally will not exceed the accrued market discount on
the Regular Certificate for such year. Any such deferred interest expense is,
in general, allowed as a deduction not later than the year in which the
related market discount income is recognized or the Regular Certificate is
disposed of. As an alternative to the inclusion of market discount in income
on the foregoing basis, the Regular Certificateholder may elect to include
market discount in income currently as it accrues on all market discount
instruments acquired by such Regular Certificateholder in that taxable year or
thereafter, in which case the interest deferral rule will not apply. See
"Election to Treat All Interest Under the Constant Yield Method" below
regarding an alternative manner in which such election may be deemed to be
made.
By analogy to the OID Regulations, market discount with respect to a Regular
Certificate will be considered to be zero if such market discount is less than
0.25% of the remaining stated redemption price at maturity of such Regular
Certificate multiplied by the weighted average maturity of the Regular
Certificate (determined as described above in the third paragraph under
"Original Issue Discount") remaining after the date of purchase. It appears
that de minimis market discount would be reported in a manner similar to de
minimis original issue discount. See "Original Issue Discount" above. Treasury
regulations implementing the market discount rules have not yet been issued,
and therefore investors should consult their own tax advisors regarding the
application of these rules. Investors should also consult Revenue Procedure
92-67 concerning the elections to include market discount in income currently
and to accrue market discount on the basis of the constant yield method.
Premium
A Regular Certificate purchased at a cost greater than its remaining stated
redemption price at maturity generally is considered to be purchased at a
premium. If the Regular Certificateholder holds such Regular Certificate as a
"capital asset" within the meaning of Code Section 1221, the Regular
Certificateholder may elect under Code Section 171 to amortize such premium
under the constant yield method. Such election will apply to all debt
obligations acquired by the Regular Certificateholder at a premium held in
that taxable year or thereafter, unless revoked with the permission of the
Internal Revenue Service. The Conference Committee Report to the 1986 Act
indicates a Congressional intent that the same rules that apply to the accrual
of market discount on installment obligations will also apply to amortizing
bond premium under Code Section 171 on installment obligations such as the
Regular Certificates, although it is unclear whether the alternatives to the
constant interest method described above under "Market Discount" are
available. Amortizable bond premium will be treated as an offset to interest
income on a Regular Certificate, rather than as a separate deduction item. See
"Election to Treat All Interest Under the Constant Yield Method" below
regarding an alternative manner in which the Code Section 171 election may be
deemed to be made.
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Election to Treat All Interest Under the Constant Yield Method
A holder of a debt instrument such as a Regular Certificate may elect to
treat all interest that accrues on the instrument using the constant yield
method, with none of the interest being treated as qualified stated interest.
For purposes of applying the constant yield method to a debt instrument
subject to such an election, (i) "interest" includes stated interest, original
issue discount, de minimis original issue discount, market discount and de
minimis market discount, as adjusted by any amortizable bond premium or
acquisition premium and (ii) the debt instrument is treated as if the
instrument were issued on the holder's acquisition date in the amount of the
holder's adjusted basis immediately after acquisition. It is unclear whether,
for this purpose, the initial Prepayment Assumption would continue to apply or
if a new prepayment assumption as of the date of the holder's acquisition
would apply. A holder generally may make such an election on an instrument by
instrument basis or for a class or group of debt instruments. However, if the
holder makes such an election with respect to a debt instrument with
amortizable bond premium or with market discount, the holder is deemed to have
made elections to amortize bond premium or to report market discount income
currently as it accrues under the constant yield method, respectively, for all
premium bonds held or market discount bonds acquired by the holder in the same
taxable year or thereafter. The election is made on the holder's federal
income tax return for the year in which the debt instrument is acquired and is
irrevocable except with the approval of the Internal Revenue Service.
Investors should consult their own tax advisors regarding the advisability of
making such an election.
Treatment of Losses
Regular Certificateholders will be required to report income with respect to
Regular Certificates on the accrual method of accounting, without giving
effect to delays or reductions in distributions attributable to defaults or
delinquencies on the Mortgage Loans, except to the extent it can be
established that such losses are uncollectible. Accordingly, the holder of a
Regular Certificate, particularly a Subordinated Certificate, may have income,
or may incur a diminution in cash flow as a result of a default or
delinquency, but may not be able to take a deduction (subject to the
discussion below) for the corresponding loss until a subsequent taxable year.
In this regard, investors are cautioned that while they may generally cease to
accrue interest income if it reasonably appears that the interest will be
uncollectible, the Internal Revenue Service may take the position that
original issue discount must continue to be accrued in spite of its
uncollectibility until the debt instrument is disposed of in a taxable
transaction or becomes worthless in accordance with the rules of Code Section
166. To the extent the rules of Code Section 166 regarding bad debts are
applicable, it appears that Regular Certificateholders that are corporations
or that otherwise hold the Regular Certificates in connection with a trade or
business should in general be allowed to deduct as an ordinary loss such loss
with respect to principal sustained during the taxable year on account of any
such Regular Certificates becoming wholly or partially worthless, and that, in
general, Regular Certificateholders that are not corporations and do not hold
the Regular Certificates in connection with a trade or business should be
allowed to deduct as a short-term capital loss any loss sustained during the
taxable year on account of a portion of any such Regular Certificates becoming
wholly worthless. Although the matter is not free from doubt, such non-
corporate Regular Certificateholders should be allowed a bad debt deduction at
such time as the principal balance of such Regular Certificates is reduced to
reflect losses resulting from any liquidated Mortgage Loans. The Internal
Revenue Service, however, could take the position that non-corporate holders
will be allowed a bad debt deduction to reflect such losses only after all the
Mortgage Loans remaining in the Trust Estate have been liquidated or the
applicable Class of Regular Certificates has been otherwise retired. The
Internal Revenue Service could also assert that losses on the Regular
Certificates are deductible based on some other method that may defer such
deductions for all holders, such as reducing future cash flow for purposes of
computing original issue discount. This may have the effect of creating
"negative" original issue discount which would be deductible only against
future positive original issue discount or otherwise upon termination of the
Class. Regular Certificateholders are urged to consult their own tax advisors
regarding the appropriate timing, amount and character of any loss sustained
with respect to such Regular Certificates. While losses attributable to
interest previously reported as income should be deductible as ordinary losses
by both corporate and non-corporate holders, the Internal Revenue Service may
take the position that losses attributable to accrued original issue discount
may only be deducted as capital losses in the case of non-corporate holders
who do not hold the Regular Certificates in connection with a trade or
business. Special loss rules are applicable to banks and thrift institutions,
including rules regarding reserves for bad debts. Such taxpayers are advised
to consult their tax advisors regarding the treatment of losses on Regular
Certificates.
Sale or Exchange of Regular Certificates
If a Regular Certificateholder sells or exchanges a Regular Certificate, the
Regular Certificateholder will recognize gain or loss equal to the difference,
if any, between the amount received and its adjusted basis in the Regular
Certificate. The adjusted
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basis of a Regular Certificate generally will equal the cost of the Regular
Certificate to the seller, increased by any original issue discount or market
discount previously included in the seller's gross income with respect to the
Regular Certificate and reduced by amounts included in the stated redemption
price at maturity of the Regular Certificate that were previously received by
the seller, by any amortized premium and by any recognized losses.
Except as described under "--Market Discount" above with respect to market
discount, and except as provided in this paragraph, any gain or loss on the
sale or exchange of a Regular Certificate realized by an investor who holds
the Regular Certificate as a capital asset will be capital gain or loss and
will be long-term or short-term depending on whether the Regular Certificate
has been held for the long-term capital gain holding period (currently, more
than one year). Such gain will be treated as ordinary income (i) if a Regular
Certificate is held as part of a "conversion transaction" as defined in Code
Section 1258(c), up to the amount of interest that would have accrued on the
Regular Certificateholder's net investment in the conversion transaction at
120% of the appropriate applicable Federal rate under Code Section 1274(d) in
effect at the time the taxpayer entered into the transaction minus any amount
previously treated as ordinary income with respect to any prior disposition of
property that was held as part of such transaction, (ii) in the case of a non-
corporate taxpayer, to the extent such taxpayer has made an election under
Code Section 163(d)(4) to have net capital gains taxed as investment income at
ordinary income rates, or (iii) to the extent that such gain does not exceed
the excess, if any, of (a) the amount that would have been includible in the
gross income of the holder if its yield on such Regular Certificate were 110%
of the applicable Federal rate as of the date of purchase, over (b) the amount
of income actually includible in the gross income of such holder with respect
to such Regular Certificate. In addition, gain or loss recognized from the
sale of a Regular Certificate by certain banks or thrift institutions will be
treated as ordinary income or loss pursuant to Code Section 582(c). Pursuant
to the Revenue Reconciliation Act of 1993, capital gains of certain non-
corporate taxpayers are subject to a lower maximum tax rate than ordinary
income of such taxpayers. The maximum tax rate for corporations is the same
with respect to both ordinary income and capital gains.
TAXATION OF RESIDUAL CERTIFICATES
Taxation of REMIC Income
Generally, the "daily portions" of REMIC taxable income or net loss will be
includible as ordinary income or loss in determining the federal taxable
income of holders of Residual Certificates ("Residual Holders"), and will not
be taxed separately to the REMIC Pool. The daily portions of REMIC taxable
income or net loss of a Residual Holder are determined by allocating the REMIC
Pool's taxable income or net loss for each calendar quarter ratably to each
day in such quarter and by allocating such daily portion among the Residual
Holders in proportion to their respective holdings of Residual Certificates in
the REMIC Pool on such day. REMIC taxable income is generally determined in
the same manner as the taxable income of an individual using the accrual
method of accounting, except that (i) the limitations on deductibility of
investment interest expense and expenses for the production of income do not
apply, (ii) all bad loans will be deductible as business bad debts, and (iii)
the limitation on the deductibility of interest and expenses related to tax-
exempt income will apply. The REMIC Pool's gross income includes interest,
original issue discount income, and market discount income, if any, on the
Mortgage Loans, reduced by amortization of any premium on the Mortgage Loans,
plus income from amortization of issue premium, if any, on the Regular
Certificates, plus income on reinvestment of cash flows and reserve assets,
plus any cancellation of indebtedness income upon allocation of realized
losses to the Regular Certificates. The REMIC Pool's deductions include
interest and original issue discount expense on the Regular Certificates,
servicing fees on the Mortgage Loans, other administrative expenses of the
REMIC Pool and realized losses on the Mortgage Loans. The requirement that
Residual Holders report their pro rata share of taxable income or net loss of
the REMIC Pool will continue until there are no Certificates of any class of
the related Series outstanding.
The taxable income recognized by a Residual Holder in any taxable year will
be affected by, among other factors, the relationship between the timing of
recognition of interest and original issue discount or market discount income
or amortization of premium with respect to the Mortgage Loans, on the one
hand, and the timing of deductions for interest (including original issue
discount) or income from amortization of issue premium on the Regular
Certificates, on the other hand. In the event that an interest in the Mortgage
Loans is acquired by the REMIC Pool at a discount, and one or more of such
Mortgage Loans is prepaid, the Residual Holder may recognize taxable income
without being entitled to receive a corresponding amount of cash because (i)
the prepayment may be used in whole or in part to make distributions in
reduction of principal or Stated Amount on the Regular Certificates, and (ii)
the discount on the Mortgage Loans which is includible in income may exceed
the deduction allowed upon such distributions on those Regular Certificates on
account of any unaccrued original issue discount relating to those Regular
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Certificates. When there is more than one Class of Regular Certificates that
distribute principal or payments in reduction of Stated Amount sequentially,
this mismatching of income and deductions is particularly likely to occur in
the early years following issuance of the Regular Certificates when
distributions in reduction of principal or Stated Amount are being made in
respect of earlier Classes of Regular Certificates to the extent that such
Classes are not issued with substantial discount or are issued at a premium.
If taxable income attributable to such a mismatching is realized, in general,
losses would be allowed in later years as distributions on the later maturing
Classes of Regular Certificates are made. Taxable income may also be greater
in earlier years than in later years as a result of the fact that interest
expense deductions, expressed as a percentage of the outstanding principal
amount of such a Series of Regular Certificates, may increase over time as
distributions in reduction of principal or Stated Amount are made on the lower
yielding Classes of Regular Certificates, whereas, to the extent the REMIC
Pool consists of fixed rate Mortgage Loans, interest income with respect to
any given Mortgage Loan will remain constant over time as a percentage of the
outstanding principal amount of that loan. Consequently, Residual Holders must
have sufficient other sources of cash to pay any federal, state, or local
income taxes due as a result of such mismatching or unrelated deductions
against which to offset such income, subject to the discussion of "excess
inclusions" below under "--Limitations on Offset or Exemption of REMIC
Income." The timing of such mismatching of income and deductions described in
this paragraph, if present with respect to a Series of Certificates, may have
a significant adverse effect upon a Residual Holder's after-tax rate of
return. In addition, a Residual Holder's taxable income during certain periods
may exceed the income reflected by such Residual Holder for such periods in
accordance with generally accepted accounting principles. Investors should
consult their own accountants concerning the accounting treatment of their
investment in Residual Certificates.
Basis and Losses
The amount of any net loss of the REMIC Pool that may be taken into account
by the Residual Holder is limited to the adjusted basis of the Residual
Certificate as of the close of the quarter (or time of disposition of the
Residual Certificate if earlier), determined without taking into account the
net loss for the quarter. The initial adjusted basis of a purchaser of a
Residual Certificate is the amount paid for such Residual Certificate. Such
adjusted basis will be increased by the amount of taxable income of the REMIC
Pool reportable by the Residual Holder and will be decreased (but not below
zero), first, by a cash distribution from the REMIC Pool and, second, by the
amount of loss of the REMIC Pool reportable by the Residual Holder. Any loss
that is disallowed on account of this limitation may be carried over
indefinitely with respect to the Residual Holder as to whom such loss was
disallowed and may be used by such Residual Holder only to offset any income
generated by the same REMIC Pool.
A Residual Holder will not be permitted to amortize directly the cost of its
Residual Certificate as an offset to its share of the taxable income of the
related REMIC Pool. However, that taxable income will not include cash
received by the REMIC Pool that represents a recovery of the REMIC Pool's
basis in its assets. Such recovery of basis by the REMIC Pool will have the
effect of amortization of the issue price of the Residual Certificates over
their life. However, in view of the possible acceleration of the income of
Residual Holders described above under "Taxation of REMIC Income," the period
of time over which such issue price is effectively amortized may be longer
than the economic life of the Residual Certificates.
A Residual Certificate may have a negative value if the net present value of
anticipated tax liabilities exceeds the present value of anticipated cash
flows. The REMIC Regulations appear to treat the issue price of such a
residual interest as zero rather than such negative amount for purposes of
determining the REMIC Pool's basis in its assets. The preamble to the REMIC
Regulations states that the Internal Revenue Service may provide future
guidance on the proper tax treatment of payments made by a transferor of such
a residual interest to induce the transferee to acquire the interest, and
Residual Holders should consult their own tax advisors in this regard.
Further, to the extent that the initial adjusted basis of a Residual Holder
(other than an original holder) in the Residual Certificate is greater than
the corresponding portion of the REMIC Pool's basis in the Mortgage Loans, the
Residual Holder will not recover a portion of such basis until termination of
the REMIC Pool unless future Treasury regulations provide for periodic
adjustments to the REMIC income otherwise reportable by such holder. The REMIC
Regulations currently in effect do not so provide. See "--Treatment of Certain
Items of REMIC Income and Expense--Market Discount" below regarding the basis
of Mortgage Loans to the REMIC Pool and "Sale or Exchange of a Residual
Certificate" below regarding possible treatment of a loss upon termination of
the REMIC Pool as a capital loss.
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Treatment of Certain Items of REMIC Income and Expense
Although the Seller intends to compute REMIC income and expense in
accordance with the Code and applicable regulations, the authorities regarding
the determination of specific items of income and expense are subject to
differing interpretations. The Seller makes no representation as to the
specific method that it will use for reporting income with respect to the
Mortgage Loans and expenses with respect to the Regular Certificates and
different methods could result in different timing of reporting of taxable
income or net loss to Residual Holders or differences in capital gain versus
ordinary income.
Original Issue Discount and Premium. Generally, the REMIC Pool's deductions
for original issue discount and income from amortization of issue premium will
be determined in the same manner as original issue discount income on Regular
Certificates as described above under "Taxation of Regular Certificates--
Original Issue Discount" and "--Variable Rate Regular Certificates," without
regard to the de minimis rule described therein, and "--Premium."
Market Discount. The REMIC Pool will have market discount income in respect
of Mortgage Loans if, in general, the basis of the REMIC Pool in such Mortgage
Loans is exceeded by their unpaid principal balances. The REMIC Pool's basis
in such Mortgage Loans is generally the fair market value of the Mortgage
Loans immediately after the transfer thereof to the REMIC Pool. The REMIC
Regulations provide that such basis is equal in the aggregate to the issue
prices of all regular and residual interests in the REMIC Pool. The accrued
portion of such market discount would be recognized currently as an item of
ordinary income in a manner similar to original issue discount. Market
discount income generally should accrue in the manner described above under
"Taxation of Regular Certificates--Market Discount."
Premium. Generally, if the basis of the REMIC Pool in the Mortgage Loans
exceeds the unpaid principal balances thereof, the REMIC Pool will be
considered to have acquired such Mortgage Loans at a premium equal to the
amount of such excess. As stated under "Taxation of Regular Certificates--
Market Discount" above, the REMIC Pool's basis in Mortgage Loans is the fair
market value of the Mortgage Loans, based on the aggregate of the issue prices
of the regular and residual interests in the REMIC Pool immediately after the
transfer thereof to the REMIC Pool. In a manner analogous to the discussion
above under "Taxation of Regular Certificates--Premium," a person that holds a
Mortgage Loan as a capital asset under Code Section 1221 may elect under Code
Section 171 to amortize premium on Mortgage Loans originated after September
27, 1985 under the constant yield method. Amortizable bond premium will be
treated as an offset to interest income on the Mortgage Loans, rather than as
a separate deduction item. Because substantially all of the mortgagors on the
Mortgage Loans are expected to be individuals, Code Section 171 will not be
available for premium on Mortgage Loans originated on or prior to September
27, 1985. Premium with respect to such Mortgage Loans may be deductible in
accordance with a reasonable method regularly employed by the holder thereof.
The allocation of such premium pro rata among principal payments should be
considered a reasonable method; however, the Internal Revenue Service may
argue that such premium should be allocated in a different manner, such as
allocating such premium entirely to the final payment of principal.
Limitations on Offset or Exemption of REMIC Income
A portion (or all) of the REMIC taxable income includible in determining the
federal income tax liability of a Residual Holder will be subject to special
treatment. That portion, referred to as the "excess inclusion," is equal to
the excess of REMIC taxable income for the calendar quarter allocable to a
Residual Certificate over the daily accruals for such quarterly period of (i)
120% of the long-term applicable Federal rate that would have applied to the
Residual Certificate (if it were a debt instrument) on the Startup Day under
Code Section 1274(d), multiplied by (ii) the adjusted issue price of such
Residual Certificate at the beginning of such quarterly period. For this
purpose, the adjusted issue price of a Residual Certificate at the beginning
of a quarter is the issue price of the Residual Certificate, plus the amount
of such daily accruals of REMIC income described in this paragraph for all
prior quarters, decreased by any distributions made with respect to such
Residual Certificate prior to the beginning of such quarterly period.
Accordingly, the portion of the REMIC Pool's taxable income that will be
treated as excess inclusions will be a larger portion of such income as the
adjusted issue price of the Residual Certificates diminishes.
The portion of a Residual Holder's REMIC taxable income consisting of the
excess inclusions generally may not be offset by other deductions, including
net operating loss carryforwards, on such Residual Holder's return. However,
net operating loss carryovers are determined without regard to excess
inclusion income. Further, if the Residual Holder is an organization subject
to the tax on unrelated business income imposed by Code Section 511, the
Residual Holder's excess inclusions will be treated as unrelated business
taxable income of such Residual Holder for purposes of Code Section 511. In
addition, REMIC taxable income
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is subject to 30% withholding tax with respect to certain persons who are not
U.S. Persons (as defined below under "Tax-Related Restrictions on Transfer of
Residual Certificates--Foreign Investors"), and the portion thereof
attributable to excess inclusions is not eligible for any reduction in the
rate of withholding tax (by treaty or otherwise). See "Taxation of Certain
Foreign Investors--Residual Certificates" below. Finally, if a real estate
investment trust or a regulated investment company owns a Residual
Certificate, a portion (allocated under Treasury regulations yet to be issued)
of dividends paid by the real estate investment trust or regulated investment
company could not be offset by net operating losses of its shareholders, would
constitute unrelated business taxable income for tax-exempt shareholders, and
would be ineligible for reduction of withholding to certain persons who are
not U.S. Persons. The SBJPA of 1996 has eliminated the special rule permitting
Section 593 institutions ("thrift institutions") to use net operating losses
and other allowable deductions to offset their excess inclusion income from
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 SBJPA of 1996 provides three rules for determining the
effect of excess inclusions on the alternative minimum taxable income of a
Residual Holder. First, alternative minimum taxable income for a Residual
Holder is determined without regard to the special rule, discussed above, that
taxable income cannot be less than excess inclusions. Second, a Residual
Holder's alternative minimum taxable income for a taxable year cannot be less
than the excess inclusions for the year. Third, the amount of any alternative
minimum tax net operating loss deduction must be computed without regard to
any excess inclusions. These rules are effective for taxable years beginning
after December 31, 1986, unless a Residual Holder elects to have such rules
apply only to taxable years beginning after August 20, 1996.
Tax-Related Restrictions on Transfer of Residual Certificates
Disqualified Organizations. If any legal or beneficial interest in a
Residual Certificate is transferred to a Disqualified Organization (as defined
below), a tax would be imposed in an amount equal to the product of (i) the
present value of the total anticipated excess inclusions with respect to such
Residual Certificate for periods after the transfer and (ii) the highest
marginal federal income tax rate applicable to corporations. The REMIC
Regulations provide that the anticipated excess inclusions are based on actual
prepayment experience to the date of the transfer and projected payments based
on the Prepayment Assumption. The present value rate equals the applicable
Federal rate under Code Section 1274(d) as of the date of the transfer for a
term ending with the last calendar quarter in which excess inclusions are
expected to accrue. Such rate is applied to the anticipated excess inclusions
from the end of the remaining calendar quarters in which they arise to the
date of the transfer. Such a tax generally would be imposed on the transferor
of the Residual Certificate, except that where such transfer is through an
agent (including a broker, nominee, or other middleman) for a Disqualified
Organization, the tax would instead be imposed on such agent. However, a
transferor of a Residual Certificate would in no event be liable for such tax
with respect to a transfer if the transferee furnishes to the transferor an
affidavit stating that the transferee is not a Disqualified Organization and,
as of the time of the transfer, the transferor does not have actual knowledge
that such affidavit is false. The tax also may be waived by the Internal
Revenue Service if the Disqualified Organization promptly disposes of the
Residual Certificate and the transferor pays income tax at the highest
corporate rate on the excess inclusion for the period the Residual Certificate
is actually held by the Disqualified Organization.
In addition, if a "Pass-Through Entity" (as defined below) has excess
inclusion income with respect to a Residual Certificate during a taxable year
and a Disqualified Organization is the record holder of an equity interest in
such entity, then a tax is imposed on such entity equal to the product of (i)
the amount of excess inclusions that are allocable to the interest in the
Pass-Through Entity during the period such interest is held by such
Disqualified Organization, and (ii) the highest marginal federal corporate
income tax rate. Such tax would be deductible from the ordinary gross income
of the Pass-Through Entity for the taxable year. The Pass-Through Entity would
not be liable for such tax if it has received an affidavit from such record
holder that it is not a Disqualified Organization or stating such holder's
taxpayer identification number and, during the period such person is the
record holder of the Residual Certificate, the Pass-Through Entity does not
have actual knowledge that such affidavit is false.
For these purposes, (i) "Disqualified Organization" means the United States,
any state or political subdivision thereof, any foreign government, any
international organization, any agency or instrumentality of any of the
foregoing (provided, that such term does not include an instrumentality if all
of its activities are subject to tax and a majority of its board of directors
is not selected by any such governmental entity), any cooperative organization
furnishing electric energy or providing telephone service to persons in rural
areas as described in Code Section 1381(a)(2)(C), and any organization (other
than a farmers' cooperative described in Code Section 521) that is exempt from
taxation under the Code unless such organization is subject to the tax on
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unrelated business income imposed by Code Section 511, and (ii) "Pass-Through
Entity" means any regulated investment company, real estate investment trust,
common trust fund, partnership, trust or estate and certain corporations
operating on a cooperative basis. Except as may be provided in Treasury
regulations, any person holding an interest in a Pass-Through Entity as a
nominee for another will, with respect to such interest, be treated as a Pass-
Through Entity.
The Pooling and Servicing Agreement with respect to a Series will provide
that no legal or beneficial interest in a Residual Certificate may be
transferred or registered unless (i) the proposed transferee furnishes to the
Seller and the Trustee an affidavit providing its taxpayer identification
number and stating that such transferee is the beneficial owner of the
Residual Certificate and is not a Disqualified Organization and is not
purchasing such Residual Certificate on behalf of a Disqualified Organization
(i.e., as a broker, nominee or middleman thereof) and (ii) the transferor
provides a statement in writing to the Seller and the Trustee that it has no
actual knowledge that such affidavit is false. Moreover, the Pooling and
Servicing Agreement will provide that any attempted or purported transfer in
violation of these transfer restrictions will be null and void and will vest
no rights in any purported transferee. Each Residual Certificate with respect
to a Series will bear a legend referring to such restrictions on transfer, and
each Residual Holder will be deemed to have agreed, as a condition of
ownership thereof, to any amendments to the related Pooling and Servicing
Agreement required under the Code or applicable Treasury regulations to
effectuate the foregoing restrictions. Information necessary to compute an
applicable excise tax must be furnished to the Internal Revenue Service and to
the requesting party within 60 days of the request, and the Seller or the
Trustee may charge a fee for computing and providing such information.
Noneconomic Residual Interests. The REMIC Regulations would disregard
certain transfers of Residual Certificates, in which case the transferor would
continue to be treated as the owner of the Residual Certificates and thus
would continue to be subject to tax on its allocable portion of the net income
of the REMIC Pool. Under the REMIC Regulations, a transfer of a "noneconomic
residual interest" (as defined below) to a Residual Holder (other than a
Residual Holder who is not a U.S. Person, as defined below under "Foreign
Investors") is disregarded for all federal income tax purposes if a
significant purpose of the transferor is to impede the assessment or
collection of tax. A residual interest in a REMIC (including a residual
interest with a positive value at issuance) is a "noneconomic residual
interest" unless, at the time of the transfer, (i) the present value of the
expected future distributions on the residual interest at least equals the
product of the present value of the anticipated excess inclusions and the
highest corporate income tax rate in effect for the year in which the transfer
occurs, and (ii) the transferor reasonably expects that the transferee will
receive distributions from the REMIC at or after the time at which taxes
accrue on the anticipated excess inclusions in an amount sufficient to satisfy
the accrued taxes on each excess inclusion. The anticipated excess inclusions
and the present value rate are determined in the same manner as set forth
above under "Disqualified Organizations." The REMIC Regulations explain that 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 safe harbor is provided if (i) the
transferor conducted, at the time of the transfer, a reasonable investigation
of the financial condition of the transferee and found that the transferee
historically had paid its debts as they came due and found no significant
evidence to indicate that the transferee would not continue to pay its debts
as they came due in the future, and (ii) the transferee represents to the
transferor that it understands that, as the holder of the non-economic
residual interest, the transferee may incur tax liabilities in excess of any
cash flows generated by the interest and that the transferee intends to pay
taxes associated with holding the residual interest as they become due. The
Pooling and Servicing Agreement with respect to each Series of Certificates
will require the transferee of a Residual Certificate to certify to the
matters in the preceding sentence as part of the affidavit described above
under the heading "Disqualified Organizations."
Foreign Investors. The REMIC Regulations provide that the transfer of a
Residual Certificate that has "tax avoidance potential" to a "foreign person"
will be disregarded for all federal tax purposes. This rule appears intended
to apply to a transferee who is not a "U.S. Person" (as defined below), unless
such transferee's income is effectively connected with the conduct of a trade
or business within the United States. A Residual Certificate is deemed to have
tax avoidance potential unless, at the time of the transfer, (i) the future
value of expected distributions equals at least 30% of the anticipated excess
inclusions after the transfer, and (ii) the transferor reasonably expects that
the transferee will receive sufficient distributions from the REMIC Pool at or
after the time at which the excess inclusions accrue and prior to the end of
the next succeeding taxable year for the accumulated withholding tax liability
to be paid. If the non-U.S. Person transfers the Residual Certificate back to
a U.S. Person, the transfer will be disregarded and the foreign transferor
will continue to be treated as the owner unless arrangements are made so that
the transfer does not have the effect of allowing the transferor to avoid tax
on accrued excess inclusions.
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The Prospectus Supplement relating to the Certificates of a Series may
provide that a Residual Certificate may not be purchased by or transferred to
any person that is not a U.S. Person or may describe the circumstances and
restrictions pursuant to which such a transfer may be made. The term "U.S.
Person" means a citizen or resident of the United States, a corporation,
partnership or other entity created or organized in or under the laws of the
United States or any political subdivision thereof, an estate that is subject
to U.S. federal income tax regardless of the source of its income, or a trust
if (A) for taxable years beginning after December 31, 1996 (or for taxable
years ending after August 20, 1996, if the trustee has made an applicable
election), a court within the United States is able to exercise primary
supervision over the administration of such trust, and one or more United
States fiduciaries have the authority to control all substantial decisions of
such trust, or (B) for all other taxable years, such trust is subject to U.S.
federal income tax regardless of the source of its income.
Sale or Exchange of a Residual Certificate
Upon the sale or exchange of a Residual Certificate, the Residual Holder
will recognize gain or loss equal to the excess, if any, of the amount
realized over the adjusted basis (as described above under "Taxation of
Residual Certificates--Basis and Losses") of such Residual Holder in such
Residual Certificate at the time of the sale or exchange. In addition to
reporting the taxable income of the REMIC Pool, a Residual Holder will have
taxable income to the extent that any cash distribution to it from the REMIC
Pool exceeds such adjusted basis on that Distribution Date. Such income will
be treated as gain from the sale or exchange of the Residual Certificate. It
is possible that the termination of the REMIC Pool may be treated as a sale or
exchange of a Residual Holder's Residual Certificate, in which case, if the
Residual Holder has an adjusted basis in its Residual Certificate remaining
when its interest in the REMIC Pool terminates, and if it holds such Residual
Certificate as a capital asset under Code Section 1221, then it will recognize
a capital loss at that time in the amount of such remaining adjusted basis.
Any gain on the sale of a Residual Certificate will be treated as ordinary
income (i) if a Residual Certificate is held as part of a "conversion
transaction" as defined in Code Section 1258(c), up to the amount of interest
that would have accrued on the Residual Certificateholder's net investment in
the conversion transaction at 120% of the appropriate applicable Federal rate
in effect at the time the taxpayer entered into the transaction minus any
amount previously treated as ordinary income with respect to any prior
disposition of property that was held as a part of such transaction or (ii) in
the case of a non-corporate taxpayer, to the extent such taxpayer has made an
election under Code Section 163(d)(4) to have net capital gains taxed as
investment income at ordinary income rates. In addition, gain or loss
recognized from the sale of a Residual Certificate by certain banks or thrift
institutions will be treated as ordinary income or loss pursuant to Code
Section 582(c).
The Conference Committee Report to the 1986 Act provides that, except as
provided in Treasury regulations yet to be issued, the wash sale rules of Code
Section 1091 will apply to dispositions of Residual Certificates where the
seller of the Residual Certificate, during the period beginning six months
before the sale or disposition of the Residual Certificate and ending six
months after such sale or disposition, acquires (or enters into any other
transaction that results in the application of Code Section 1091) any residual
interest in any REMIC or any interest in a "taxable mortgage pool" (such as a
non-REMIC owner trust) that is economically comparable to a Residual
Certificate.
Mark to Market Regulations
The Internal Revenue Service has issued final regulations (the "Mark to
Market Regulations") under Code Section 475 relating to the requirement that a
securities dealer mark to market securities held for sale to customers. This
mark-to-market requirement applies to all securities of a dealer, except to
the extent that the dealer has specifically identified a security as held for
investment. The Mark to Market Regulations provide that, for purposes of this
mark to market requirement, a Residual Certificate is not treated as a
security and thus may not be marked to market. The Mark to Market Regulations
apply to all Residual Certificates acquired on or after January 4, 1995.
TAXES THAT MAY BE IMPOSED ON THE REMIC POOL
Prohibited Transactions
Income from certain transactions by the REMIC Pool, called prohibited
transactions, will not be part of the calculation of income or loss includible
in the federal income tax returns of Residual Holders, but rather will be
taxed directly to the REMIC
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Pool at a 100% rate. Prohibited transactions generally include (i) the
disposition of a qualified mortgage other than for (a) substitution within two
years of the Startup Day for a defective (including a defaulted) obligation
(or repurchase in lieu of substitution of a defective (including a defaulted)
obligation at any time) or for any qualified mortgage within three months of
the Startup Day, (b) foreclosure, default, or imminent default of a qualified
mortgage, (c) bankruptcy or insolvency of the REMIC Pool, or (d) a qualified
(complete) liquidation, (ii) the receipt of income from assets that are not
the type of mortgages or investments that the REMIC Pool is permitted to hold,
(iii) the receipt of compensation for services, or (iv) the receipt of gain
from disposition of cash flow investments other than pursuant to a qualified
liquidation. Notwithstanding (i) and (iv), it is not a prohibited transaction
to sell REMIC Pool property to prevent a default on Regular Certificates as a
result of a default on qualified mortgages or to facilitate a clean-up call
(generally, an optional termination to save administrative costs when no more
than a small percentage of the Certificates is outstanding). The REMIC
Regulations indicate that the modification of a Mortgage Loan generally will
not be treated as a disposition if it is occasioned by a default or reasonably
foreseeable default, an assumption of the Mortgage Loan, the waiver of a due-
on-sale or due-on-encumbrance clause, or the conversion of an interest rate by
a mortgagor pursuant to the terms of a convertible adjustable rate Mortgage
Loan.
Contributions to the REMIC Pool After the Startup Day
In general, the REMIC Pool will be subject to a tax at a 100% rate on the
value of any property contributed to the REMIC Pool after the Startup Day.
Exceptions are provided for cash contributions to the REMIC Pool (i) during
the three months following the Startup Day, (ii) made to a qualified reserve
fund by a Residual Holder, (iii) in the nature of a guarantee, (iv) made to
facilitate a qualified liquidation or clean-up call, and (v) as otherwise
permitted in Treasury regulations yet to be issued. It is not anticipated that
there will be any contributions to the REMIC Pool after the Startup Day.
Net Income from Foreclosure Property
The REMIC Pool will be subject to federal income tax at the highest
corporate rate on "net income from foreclosure property," determined by
reference to the rules applicable to real estate investment trusts. Generally,
property acquired by deed in lieu of foreclosure would be treated as
"foreclosure property" for a period of two years, with possible extensions.
Net income from foreclosure property generally means gain from the sale of a
foreclosure property that is inventory property and gross income from
foreclosure property other than qualifying rents and other qualifying income
for a real estate investment trust. It is not anticipated that the REMIC Pool
will have any taxable net income from foreclosure property.
LIQUIDATION OF THE REMIC POOL
If a REMIC Pool 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 Pool's final tax return a date on which such adoption is deemed to
occur, and sells all of its assets (other than cash) within a 90-day period
beginning on such date, the REMIC Pool will not be subject to the prohibited
transaction rules on the sale of its assets, provided that the REMIC Pool
credits or distributes in liquidation all of the sale proceeds plus its cash
(other than amounts retained to meet claims) to holders of Regular
Certificates and Residual Holders within the 90-day period.
ADMINISTRATIVE MATTERS
The REMIC Pool will be required to maintain its books on a calendar year
basis and to file federal income tax returns for federal income tax purposes
in a manner similar to a partnership. The form for such income tax return is
Form 1066, U.S. Real Estate Mortgage Investment Conduit Income Tax Return. The
Trustee will be required to sign the REMIC Pool's returns. Treasury
regulations provide that, except where there is a single Residual Holder for
an entire taxable year, the REMIC Pool will be subject to the procedural and
administrative rules of the Code applicable to partnerships, including the
determination by the Internal Revenue Service of any adjustments to, among
other things, items of REMIC income, gain, loss, deduction, or credit in a
unified administrative proceeding. The Master Servicer will be obligated to
act as "tax matters person," as defined in applicable Treasury regulations,
with respect to the REMIC Pool, in its capacity as either Residual Holder or
agent of the Residual Holders. If the Code or applicable Treasury regulations
do not permit the Master Servicer to act as tax matters person in its capacity
as agent of the Residual Holders, the Residual Holder chosen by the Residual
Holders or such other person specified pursuant to Treasury regulations will
be required to act as tax matters person.
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LIMITATIONS ON DEDUCTION OF CERTAIN EXPENSES
An investor who is an individual, estate, or trust will be subject to
limitation with respect to certain itemized deductions described in Code
Section 67, to the extent that such itemized deductions, in the aggregate, do
not exceed 2% of the investor's adjusted gross income. In addition, Code
Section 68 provides that itemized deductions otherwise allowable for a taxable
year of an individual taxpayer will be reduced by the lesser of (i) 3% of the
excess, if any, of adjusted gross income over $100,000 ($50,000 in the case of
a married individual filing a separate return) (subject to adjustment for
inflation), or (ii) 80% of the amount of itemized deductions otherwise
allowable for such year. In the case of a REMIC Pool, such deductions may
include deductions under Code Section 212 for the Servicing Fee and all
administrative and other expenses relating to the REMIC Pool, or any similar
expenses allocated to the REMIC Pool with respect to a regular interest it
holds in another REMIC. Such investors who hold REMIC Certificates either
directly or indirectly through certain pass-through entities may have their
pro rata share of such expenses allocated to them as additional gross income,
but may be subject to such limitation on deductions. In addition, such
expenses are not deductible at all for purposes of computing the alternative
minimum tax, and may cause such investors to be subject to significant
additional tax liability. Temporary Treasury regulations provide that the
additional gross income and corresponding amount of expenses generally are to
be allocated entirely to the holders of Residual Certificates in the case of a
REMIC Pool that would not qualify as a fixed investment trust in the absence
of a REMIC election. However, such additional gross income and limitation on
deductions will apply to the allocable portion of such expenses to holders of
Regular Certificates, as well as holders of Residual Certificates, where such
Regular Certificates are issued in a manner that is similar to pass-through
certificates in a fixed investment trust. Unless indicated otherwise in the
applicable Prospectus Supplement, all such expenses will be allocable to the
Residual Certificates. In general, such allocable portion will be determined
based on the ratio that a REMIC Certificateholder's income, determined on a
daily basis, bears to the income of all holders of Regular Certificates and
Residual Certificates with respect to a REMIC Pool. As a result, individuals,
estates or trusts holding REMIC Certificates (either directly or indirectly
through a grantor trust, partnership, S corporation, REMIC, or certain other
pass-through entities described in the foregoing temporary Treasury
regulations) may have taxable income in excess of the interest income at the
pass-through rate on Regular Certificates that are issued in a single class or
otherwise consistently with fixed investment trust status or in excess of cash
distributions for the related period on Residual Certificates.
TAXATION OF CERTAIN FOREIGN INVESTORS
Regular Certificates
Interest, including original issue discount, distributable to Regular
Certificateholders who are non-resident aliens, foreign corporations, or other
Non-U.S. Persons (as defined below), will be considered "portfolio interest"
and, therefore, generally will not be subject to 30% United States withholding
tax, provided that such Non-U.S. Person (i) is not a "10-percent shareholder"
within the meaning of Code Section 871(h)(3)(B) or a controlled foreign
corporation described in Code Section 881(c)(3)(C) and (ii) provides the
Trustee, or the person who would otherwise be required to withhold tax from
such distributions under Code Section 1441 or 1442, with an appropriate
statement, signed under penalties of perjury, identifying the beneficial owner
and stating, among other things, that the beneficial owner of the Regular
Certificate is a Non-U.S. Person. If such statement, or any other required
statement, is not provided, 30% withholding will apply unless reduced or
eliminated pursuant to an applicable tax treaty or unless the interest on the
Regular Certificate is effectively connected with the conduct of a trade or
business within the United States by such Non-U.S. Person. In the latter case,
such Non-U.S. Person will be subject to United States federal income tax at
regular rates. Investors who are Non-U.S. Persons should consult their own tax
advisors regarding the specific tax consequences to them of owning a Regular
Certificate. The term "Non-U.S. Person" means any person who is not a U.S.
Person.
Residual Certificates
The Conference Committee Report to the 1986 Act indicates that amounts paid
to Residual Holders who are Non-U.S. Persons generally should be treated as
interest for purposes of the 30% (or lower treaty rate) United States
withholding tax. Treasury regulations provide that amounts distributed to
Residual Holders may qualify as "portfolio interest," subject to the
conditions described in "Regular Certificates" above, but only to the extent
that (i) the Mortgage Loans were issued after July 18, 1984 and (ii) the Trust
Estate or segregated pool of assets therein (as to which a separate REMIC
election will be made), to which the Residual Certificate relates, consists of
obligations issued in "registered form" within the meaning of Code Section
163(f)(1). Generally, Mortgage Loans will not be, but regular interests in
another REMIC Pool will be, considered obligations issued in
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registered form. Furthermore, a Residual Holder will not be entitled to any
exemption from the 30% withholding tax (or lower treaty rate) to the extent of
that portion of REMIC taxable income that constitutes an "excess inclusion."
See "Taxation of Residual Certificates--Limitations on Offset or Exemption of
REMIC Income." If the amounts paid to Residual Holders who are Non-U.S.
Persons are effectively connected with the conduct of a trade or business
within the United States by such Non-U.S. Persons, 30% (or lower treaty rate)
withholding will not apply. Instead, the amounts paid to such Non-U.S. Persons
will be subject to United States federal income tax at regular rates. If 30%
(or lower treaty rate) withholding is applicable, such amounts generally will
be taken into account for purposes of withholding only when paid or otherwise
distributed (or when the Residual Certificate is disposed of) under rules
similar to withholding upon disposition of debt instruments that have original
issue discount. See "Tax-Related Restrictions on Transfer of Residual
Certificates--Foreign Investors" above concerning the disregard of certain
transfers having "tax avoidance potential." Investors who are Non-U.S. Persons
should consult their own tax advisors regarding the specific tax consequences
to them of owning Residual Certificates.
BACKUP WITHHOLDING
Distributions made on the Regular Certificates, and proceeds from the sale
of the Regular Certificates to or through certain brokers, may be subject to a
"backup" withholding tax under Code Section 3406 of 31% on "reportable
payments" (including interest distributions, original issue discount, and,
under certain circumstances, principal distributions) unless the Regular
Certificateholder complies with certain reporting and/or certification
procedures, including the provision of its taxpayer identification number to
the Trustee, its agent or the broker who effected the sale of the Regular
Certificate, or such Certificateholder is otherwise an exempt recipient under
applicable provisions of the Code. Any amounts to be withheld from
distribution on the Regular Certificates would be refunded by the Internal
Revenue Service or allowed as a credit against the Regular Certificateholder's
federal income tax liability.
REPORTING REQUIREMENTS
Reports of accrued interest, original issue discount and information
necessary to compute the accrual of market discount will be made annually to
the Internal Revenue Service and to individuals, estates, non-exempt and non-
charitable trusts, and partnerships who are either holders of record of
Regular Certificates or beneficial owners who own Regular Certificates through
a broker or middleman as nominee. All brokers, nominees and all other non-
exempt holders of record of Regular Certificates (including corporations, non-
calendar year taxpayers, securities or commodities dealers, real estate
investment trusts, investment companies, common trust funds, thrift
institutions and charitable trusts) may request such information for any
calendar quarter by telephone or in writing by contacting the person
designated in Internal Revenue Service Publication 938 with respect to a
particular Series of Regular Certificates. Holders through nominees must
request such information from the nominee.
The Internal Revenue Service's Form 1066 has an accompanying Schedule Q,
Quarterly Notice to Residual Interest Holders of REMIC Taxable Income or Net
Loss Allocation. Treasury regulations require that Schedule Q be furnished by
the REMIC Pool to each Residual Holder by the end of the month following the
close of each calendar quarter (41 days after the end of a quarter under
proposed Treasury regulations) in which the REMIC Pool is in existence.
Treasury regulations require that, in addition to the foregoing
requirements, information must be furnished quarterly to Residual Holders,
furnished annually, if applicable, to holders of Regular Certificates, and
filed annually with the Internal Revenue Service concerning Code Section 67
expenses (see "Limitations on Deduction of Certain Expenses" above) allocable
to such holders. Furthermore, under such regulations, information must be
furnished quarterly to Residual Holders, furnished annually to holders of
Regular Certificates, and filed annually with the Internal Revenue Service
concerning the percentage of the REMIC Pool's assets meeting the qualified
asset tests described above under "Status of REMIC Certificates."
FEDERAL INCOME TAX CONSEQUENCES FOR CERTIFICATES AS TO WHICH NO REMIC ELECTION
IS MADE
General
In the event that no election is made to treat a Trust Estate (or a
segregated pool of assets therein) with respect to a Series of Certificates as
a REMIC, the Trust Estate will be classified as a grantor trust under subpart
E, Part 1 of subchapter J of the Code and not as an association taxable as a
corporation or a "taxable mortgage pool" within the meaning of Code Section
7701(i).
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Where there is no Fixed Retained Yield with respect to the Mortgage Loans
underlying the Certificates of a Series, and where such Certificates are not
designated as "Stripped Certificates," the holder of each such Certificate in
such Series will be treated as the owner of a pro rata undivided interest in
the ordinary income and corpus portions of the Trust Estate represented by its
Certificate and will be considered the beneficial owner of a pro rata
undivided interest in each of the Mortgage Loans, subject to the discussion
below under "Recharacterization of Servicing Fees." Accordingly, the holder of
a Certificate of a particular Series will be required to report on its federal
income tax return its pro rata share of the entire income from the Mortgage
Loans represented by its Certificate, including interest at the coupon rate on
such Mortgage Loans, original issue discount (if any), prepayment fees,
assumption fees, and late payment charges received by the Servicer, in
accordance with such Certificateholder's method of accounting. A
Certificateholder generally will be able to deduct its share of the Servicing
Fee and all administrative and other expenses of the Trust Estate in
accordance with its method of accounting, provided that such amounts are
reasonable compensation for services rendered to that Trust Estate. However,
investors who are individuals, estates or trusts who own Certificates, either
directly or indirectly through certain pass-through entities, will be subject
to limitation with respect to certain itemized deductions described in Code
Section 67, including deductions under Code Section 212 for the Servicing Fee
and all such administrative and other expenses of the Trust Estate, to the
extent that such deductions, in the aggregate, do not exceed two percent of an
investor's adjusted gross income. In addition, Code Section 68 provides that
itemized deductions otherwise allowable for a taxable year of an individual
taxpayer will be reduced by the lesser of (i) 3% of the excess, if any, of
adjusted gross income over $100,000 ($50,000 in the case of a married
individual filing a separate return) (in each case, as adjusted for
inflation), or (ii) 80% of the amount of itemized deductions otherwise
allowable for such year. As a result, such investors holding Certificates,
directly or indirectly through a pass-through entity, may have aggregate
taxable income in excess of the aggregate amount of cash received on such
Certificates with respect to interest at the pass-through rate or as discount
income on such Certificates. In addition, such expenses are not deductible at
all for purposes of computing the alternative minimum tax, and may cause such
investors to be subject to significant additional tax liability. Moreover,
where there is Fixed Retained Yield with respect to the Mortgage Loans
underlying a Series of Certificates or where the servicing fees are in excess
of reasonable servicing compensation, the transaction will be subject to the
application of the "stripped bond" and "stripped coupon" rules of the Code, as
described below under "Stripped Certificates" and "Recharacterization of
Servicing Fees," respectively.
Tax Status
Cadwalader, Wickersham & Taft has advised the Seller that, except as
described below with respect to Stripped Certificates:
1. A Certificate owned by a "domestic building and loan association"
within the meaning of Code Section 7701(a)(19) will be considered to
represent "loans . . . secured by an interest in real property which is
. . . residential real property" within the meaning of Code Section
7701(a)(19)(C)(v), provided that the real property securing the Mortgage
Loans represented by that Certificate is of the type described in such
section of the Code.
2. A Certificate owned by a real estate investment trust will be
considered to represent "real estate assets" within the meaning of Code
Section 856(c)(5)(A) to the extent that the assets of the related Trust
Estate consist of qualified assets, and interest income on such assets will
be considered "interest on obligations secured by mortgages on real
property" to such extent within the meaning of Code Section 856(c)(3)(B).
3. A Certificate owned by a REMIC will be considered to represent an
"obligation (including any participation or certificate of beneficial
ownership therein) which is principally secured by an interest in real
property" within the meaning of Code Section 860G(a)(3)(A) to the extent
that the assets of the related Trust Estate consist of "qualified
mortgages" within the meaning of Code Section 860G(a)(3).
An issue arises as to whether Buy-Down Loans may be characterized in their
entirety under the Code provisions cited in clauses 1 and 2 of the immediately
preceding paragraph. There is indirect authority supporting treatment of an
investment in a Buy-Down Loan as entirely secured by real property if the fair
market value of the real property securing the loan exceeds the principal
amount of the loan at the time of issuance or acquisition, as the case may be.
There is no assurance that the treatment described above is proper.
Accordingly, Certificateholders are urged to consult their own tax advisors
concerning the effects of such arrangements on the characterization of such
Certificateholder's investment for federal income tax purposes.
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Premium and Discount
Certificateholders are advised to consult with their tax advisors as to the
federal income tax treatment of premium and discount arising either upon
initial acquisition of Certificates or thereafter.
Premium. The treatment of premium incurred upon the purchase of a
Certificate will be determined generally as described above under "Federal
Income Tax Consequences for REMIC Certificates--Taxation of Residual
Certificates--Premium."
Original Issue Discount. The original issue discount rules of Code Sections
1271 through 1275 will be applicable to a Certificateholder's interest in
those Mortgage Loans as to which the conditions for the application of those
sections are met. 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. Under the OID Regulations, such original issue discount could
arise by the charging of points by the originator of the mortgages in an
amount greater than the statutory de minimis exception, including a payment of
points that is currently deductible by the borrower under applicable Code
provisions or, under certain circumstances, by the presence of "teaser" rates
on the Mortgage Loans. See "--Stripped Certificates" below regarding original
issue discount on Stripped Certificates.
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, in advance of the cash attributable to such income.
Unless indicated otherwise in the applicable Prospectus Supplement, no
prepayment assumption will be assumed for purposes of such accrual. However,
Code Section 1272 provides for a reduction in the amount of original issue
discount includible in the income of a holder of an obligation that acquires
the obligation after its initial issuance at a price greater than the sum of
the original issue price and the previously accrued original issue discount,
less prior payments of principal. Accordingly, if such Mortgage Loans acquired
by a Certificateholder are purchased at a price equal to the then unpaid
principal amount of such Mortgage Loans, no original issue discount
attributable to the difference between the issue price and the original
principal amount of such Mortgage Loans (i.e., points) will be includible by
such holder.
Market Discount. Certificateholders also will be subject to the market
discount rules to the extent that the conditions for application of those
sections are met. Market discount on the Mortgage Loans will be determined and
will be reported as ordinary income generally in the manner described above
under "Federal Income Tax Consequences for REMIC Certificates--Taxation of
Regular Certificates--Market Discount," except that the ratable accrual
methods described therein will not apply. Rather, the holder will accrue
market discount pro rata over the life of the Mortgage Loans, unless the
constant yield method is elected. Unless indicated otherwise in the applicable
Prospectus Supplement, no prepayment assumption will be assumed for purposes
of such accrual.
Recharacterization of Servicing Fees
If the servicing fees paid to a Servicer were deemed to exceed reasonable
servicing compensation, the amount of such excess would represent neither
income nor a deduction to Certificateholders. In this regard, there are no
authoritative guidelines for federal income tax purposes as to either the
maximum amount of servicing compensation that may be considered reasonable in
the context of this or similar transactions or whether, in the case of the
Certificate, the reasonableness of servicing compensation should be determined
on a weighted average or loan-by-loan basis. If a loan-by-loan basis is
appropriate, the likelihood that such amount would exceed reasonable servicing
compensation as to some of the Mortgage Loans would be increased. Recently
issued Internal Revenue Service guidance indicates that a servicing fee in
excess of reasonable compensation ("excess servicing") will cause the Mortgage
Loans to be treated under the "stripped bond" rules. Such guidance provides
safe harbors for servicing deemed to be reasonable and requires taxpayers to
demonstrate that the value of servicing fees in excess of such amounts is not
greater than the value of the services provided.
Accordingly, if the Internal Revenue Service's approach is upheld, a
Servicer who receives a servicing fee in excess of such amounts would be
viewed as retaining an ownership interest in a portion of the interest
payments on the Mortgage Loans. Under the rules of Code Section 1286, the
separation of ownership of the right to receive some or all of the interest
payments on an obligation from the right to receive some or all of the
principal payments on the obligation would result in treatment of such
Mortgage Loans as "stripped coupons" and "stripped bonds." Subject to the de
minimis rule discussed below under "--Stripped
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Certificates," each stripped bond or stripped coupon could be considered for
this purpose as a non-interest bearing obligation issued on the date of issue
of the Certificates, and the original issue discount rules of the Code would
apply to the holder thereof. While Certificateholders would still be treated
as owners of beneficial interests in a grantor trust for federal income tax
purposes, the corpus of such trust could be viewed as excluding the portion of
the Mortgage Loans the ownership of which is attributed to the Servicer, or as
including such portion as a second class of equitable interest. Applicable
Treasury regulations treat such an arrangement as a fixed investment trust,
since the multiple classes of trust interests should be treated as merely
facilitating direct investments in the trust assets and the existence of
multiple classes of ownership interests is incidental to that purpose. In
general, such a recharacterization should not have any significant effect upon
the timing or amount of income reported by a Certificateholder, except that
the income reported by a cash method holder may be slightly accelerated. See
"Stripped Certificates" below for a further description of the federal income
tax treatment of stripped bonds and stripped coupons.
Sale or Exchange of Certificates
Upon sale or exchange of a Certificate, a Certificateholder will recognize
gain or loss equal to the difference between the amount realized on the sale
and its aggregate adjusted basis in the Mortgage Loans and other assets
represented by the Certificate. In general, the aggregate adjusted basis will
equal the Certificateholder's cost for the Certificate, increased by the
amount of any income previously reported with respect to the Certificate and
decreased by the amount of any losses previously reported with respect to the
Certificate and the amount of any distributions received thereon. Except as
provided under "Federal Income Tax Consequences for REMIC Certificates--
Taxation of Regular Certificates--Market Discount" above with respect to
market discount on any Mortgage Loans, and except for certain financial
institutions subject to the provisions of Code Section 582(c), any such gain
or loss generally would be capital gain or loss if the Certificate was held as
a capital asset. However, gain on the sale of a Certificate will be treated as
ordinary income (i) if a Certificate is held as part of a "conversion
transaction" as defined in Code Section 1258(c), up to the amount of interest
that would have accrued on the Certificateholder's net investment in the
conversion transaction at 120% of the appropriate applicable Federal rate in
effect at the time the taxpayer entered into the transaction minus any amount
previously treated as ordinary income with respect to any prior disposition of
property that was held as a part of such transaction or (ii) in the case of a
non-corporate taxpayer, to the extent such taxpayer has made an election under
Code Section 163(d)(4) to have net capital gains taxed as investment income at
ordinary income rates. Pursuant to the Revenue Reconciliation Act of 1993
capital gains of certain noncorporate taxpayers are subject to a lower maximum
tax rate than ordinary income of such taxpayers. The maximum tax rate for
corporations is the same with respect to both ordinary income and capital
gains.
STRIPPED CERTIFICATES
General
Pursuant to Code Section 1286, the separation of ownership of the right to
receive some or all of the principal payments on an obligation from ownership
of the right to receive some or all of the interest payments results in the
creation of "stripped bonds" with respect to principal payments and "stripped
coupons" with respect to interest payments. For purposes of this discussion,
Certificates that are subject to those rules will be referred to as "Stripped
Certificates." The Certificates will be subject to those rules if (i) the
Seller or any of its affiliates retains (for its own account or for purposes
of resale), in the form of Fixed Retained Yield or otherwise, an ownership
interest in a portion of the payments on the Mortgage Loans, (ii) the Seller
or any of its affiliates is treated as having an ownership interest in the
Mortgage Loans to the extent it is paid (or retains) servicing compensation in
an amount greater than reasonable consideration for servicing the Mortgage
Loans (see "Certificates--Recharacterization of Servicing Fees" above), and
(iii) a Class of Certificates are issued in two or more Classes or Subclasses
representing the right to non-pro-rata percentages of the interest and
principal payments on the Mortgage Loans.
In general, a holder of a Stripped Certificate will be considered to own
"stripped bonds" with respect to its pro rata share of all or a portion of the
principal payments on each Mortgage Loan and/or "stripped coupons" with
respect to its pro rata share of all or a portion of the interest payments on
each Mortgage Loan, including the Stripped Certificate's allocable share of
the servicing fees paid to a Servicer, to the extent that such fees represent
reasonable compensation for services rendered. See the discussion above under
"Certificates--Recharacterization of Servicing Fees." Although not free from
doubt, for purposes of reporting to Stripped Certificateholders, the servicing
fees will be allocated to the Stripped Certificates in proportion to the
respective entitlements to distributions of each Class (or Subclass) of
Stripped Certificates for the related period or periods. The holder of a
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Stripped Certificate generally will be entitled to a deduction each year in
respect of the servicing fees, as described above under "Certificates--
General," subject to the limitation described therein.
Code Section 1286 treats a stripped bond or a stripped coupon generally as
an obligation issued at an original issue discount on the date that such
stripped interest is purchased. Although the treatment of Stripped
Certificates for federal income tax purposes is not clear in certain respects
at this time, particularly where such Stripped Certificates are issued with
respect to a Mortgage Pool containing variable-rate Mortgage Loans, the Seller
has been advised by counsel that (i) the Trust Estate will be treated as a
grantor trust under subpart E, Part I of subchapter J of the Code and not as
an association taxable as a corporation or a "taxable mortgage pool" within
the meaning of Code Section 7701(i), and (ii) each Stripped Certificate should
be treated as a single installment obligation for purposes of calculating
original issue discount and gain or loss on disposition. This treatment is
based on the interrelationship of Code Section 1286, Code Sections 1272
through 1275, and the OID Regulations. Although it is possible that
computations with respect to Stripped Certificates could be made in one of the
ways described below under "Taxation of Stripped Certificates--Possible
Alternative Characterizations," the OID Regulations state, in general, that
two or more debt instruments issued by a single issuer to a single investor in
a single transaction should be treated as a single debt instrument.
Accordingly, for OID purposes, all payments on any Stripped Certificates
should be aggregated and treated as though they were made on a single debt
instrument. The Pooling and Servicing Agreement will require that the Trustee
make and report all computations described below using this aggregate
approach, unless substantial legal authority requires otherwise.
Furthermore, Treasury regulations issued December 28, 1992 provide for
treatment of a Stripped Certificate as a single debt instrument issued on the
date it is purchased for purposes of calculating any original issue discount.
In addition, under these regulations, a Stripped Certificate that represents a
right to payments of both interest and principal may be viewed either as
issued with original issue discount or market discount (as described below),
at a de minimis original issue discount, or, presumably, at a premium. This
treatment indicates that the interest component of such a Stripped Certificate
would be treated as qualified stated interest under the OID Regulations,
assuming it is not an interest-only or super-premium Stripped Certificate.
Further, these final regulations provide that the purchaser of such a Stripped
Certificate will be required to account for any discount as market discount
rather than original issue discount if either (i) the initial discount with
respect to the Stripped Certificate was treated as zero under the de minimis
rule, or (ii) no more than 100 basis points in excess of reasonable servicing
is stripped off the related Mortgage Loans. Any such market discount would be
reportable as described above under "Federal Income Tax Consequences for REMIC
Certificates--Taxation of Regular Certificates--Market Discount," without
regard to the de minimis rule therein, assuming that a prepayment assumption
is employed in such computation.
Status of Stripped Certificates
No specific legal authority exists as to whether the character of the
Stripped Certificates, for federal income tax purposes, will be the same as
that of the Mortgage Loans. Although the issue is not free from doubt, counsel
has advised the Seller that Stripped Certificates owned by applicable holders
should be considered to represent "real estate assets" within the meaning of
Code Section 856(c)(5)(A), "obligation[s] . . . principally secured by an
interest in real property" within the meaning of Code Section 860G(a)(3)(A),
and "loans . . . secured by an interest in real property" within the meaning
of Code Section 7701(a)(19)(C)(v), and interest (including original issue
discount) income attributable to Stripped 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 Mortgage Loans and interest on such Mortgage Loans qualify for such
treatment. The application of such Code provisions to Buy-Down Loans is
uncertain. See "Certificates--Tax Status" above.
Taxation of Stripped Certificates
Original Issue Discount. Except as described above under "General," each
Stripped Certificate will be considered to have been issued at an original
issue discount for federal income tax purposes. Original issue discount with
respect to a Stripped Certificate must be included in ordinary income as it
accrues, in accordance with a constant interest method that takes into account
the compounding of interest, which may be prior to the receipt of the cash
attributable to such income. Based in part on the OID Regulations and the
amendments to the original issue discount sections of the Code made by the
1986 Act, the amount of original issue discount required to be included in the
income of a holder of a Stripped Certificate (referred to in this discussion
as a "Stripped Certificateholder") in any taxable year likely will be computed
generally as described above under "Federal Income Tax Consequences for REMIC
Certificates--Taxation of Regular Certificates--Original Issue Discount" and
"--Variable Rate
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Regular Certificates." However, with the apparent exception of a Stripped
Certificate issued with de minimis original issue discount as described above
under "General," the issue price of a Stripped Certificate will be the
purchase price paid by each holder thereof, and the stated redemption price at
maturity will include the aggregate amount of the payments to be made on the
Stripped Certificate to such Stripped Certificateholder, presumably under the
Prepayment Assumption, other than qualified stated interest.
If the Mortgage Loans prepay at a rate either faster or slower than that
under the Prepayment Assumption, a Stripped Certificateholder's recognition of
original issue discount will be either accelerated or decelerated and the
amount of such original issue discount will be either increased or decreased
depending on the relative interests in principal and interest on each Mortgage
Loan represented by such Stripped Certificateholder's Stripped Certificate.
While the matter is not free from doubt, the holder of a Stripped Certificate
should be entitled in the year that it becomes certain (assuming no further
prepayments) that the holder will not recover a portion of its adjusted basis
in such Stripped Certificate to recognize a loss (which may be a capital loss)
equal to such portion of unrecoverable basis.
As an alternative to the method described above, the fact that some or all
of the interest payments with respect to the Stripped Certificates will not be
made if the Mortgage Loans are prepaid could lead to the interpretation that
such interest payments are "contingent" within the meaning of the OID
Regulations. The OID Regulations, as they relate to the treatment of
contingent interest, are by their terms not applicable to prepayable
securities such as the Stripped Certificates. However, if final regulations
dealing with contingent interest with respect to the Stripped Certificates
apply the same principles as the OID Regulations, such regulations may lead to
different timing of income inclusion than would be the case under the OID
Regulations for non-contingent debt instruments. Furthermore, application of
such principles could lead to the characterization of gain on the sale of
contingent interest Stripped Certificates as ordinary income. Investors should
consult their tax advisors regarding the appropriate tax treatment of Stripped
Certificates.
Sale or Exchange of Stripped Certificates. Sale or exchange of a Stripped
Certificate prior to its maturity will result in gain or loss equal to the
difference, if any, between the amount received and the Stripped
Certificateholder's adjusted basis in such Stripped Certificate, as described
above under "Federal Income Tax Consequences for REMIC Certificates--Taxation
of Regular Certificates--Sale or Exchange of Regular Certificates." To the
extent that a subsequent purchaser's purchase price is exceeded by the
remaining payments on the Stripped Certificates, such subsequent purchaser
will be required for federal income tax purposes to accrue and report such
excess as if it were original issue discount in the manner described under "--
Original Issue Discount" above. It is not clear for this purpose whether the
assumed prepayment rate that is to be used in the case of a Stripped
Certificateholder other than an original Stripped Certificateholder should be
the Prepayment Assumption or a new rate based on the circumstances at the date
of subsequent purchase.
Purchase of More Than One Class of Stripped Certificates. When an investor
purchases more than one Class of Stripped Certificates, it is currently
unclear whether for federal income tax purposes such Classes of Stripped
Certificates should be treated separately or aggregated for purposes of the
rules described under "--Original Issue Discount" and "--Sale or Exchange of
Stripped Certificates" above.
Possible Alternative Characterizations. The characterizations of the
Stripped Certificates discussed above are not the only possible
interpretations of the applicable Code provisions. For example, the Stripped
Certificateholder may be treated as the owner of (i) one installment
obligation consisting of such Stripped Certificate's pro rata share of the
payments attributable to principal on each Mortgage Loan and a second
installment obligation consisting of such Stripped Certificate's pro rata
share of the payments attributable to interest on each Mortgage Loan, (ii) as
many stripped bonds or stripped coupons as there are scheduled payments of
principal and/or interest on each Mortgage Loan, or (iii) a separate
installment obligation for each Mortgage Loan, representing the Stripped
Certificate's pro rata share of payments of principal and/or interest to be
made with respect thereto. Alternatively, the holder of one or more Classes of
Stripped Certificates may be treated as the owner of a pro rata fractional
undivided interest in each Mortgage Loan to the extent that such Stripped
Certificate, or Classes of Stripped Certificates in the aggregate, represent
the same pro rata portion of principal and interest on each such Mortgage
Loan, and a stripped bond or stripped coupon (as the case may be), treated as
an installment obligation or contingent payment obligation, as to the
remainder. Final regulations issued on December 28, 1992 regarding original
issue discount on stripped obligations make the foregoing interpretations less
likely to be applicable. The preamble to those regulations states that they
are premised on the assumption that an aggregation approach is appropriate for
determining whether original issue discount on a stripped bond or stripped
coupon is de minimis, and solicits comments on appropriate rules for
aggregating stripped bonds and stripped coupons under Code Section 1286.
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Because of these possible varying characterizations of Stripped Certificates
and the resultant differing treatment of income recognition, Stripped
Certificateholders are urged to consult their own tax advisors regarding the
proper treatment of Stripped Certificates for federal income tax purposes.
REPORTING REQUIREMENTS AND BACKUP WITHHOLDING
The Master Servicer will furnish, within a reasonable time after the end of
each calendar year, to each Certificateholder or Stripped Certificateholder at
any time during such year, such information (prepared on the basis described
in this section) as is necessary to enable such Certificateholders to prepare
their federal income tax returns. Such information will include the amount of
original issue discount accrued on Certificates held by persons other than
Certificateholders exempted from the reporting requirements. The amount
required to be reported by the Master Servicer may not be equal to the proper
amount of original issue discount required to be reported as taxable income by
a Certificateholder, other than an original Certificateholder that purchased
at the issue price. In particular, in the case of Stripped Certificates,
unless provided otherwise in the applicable Prospectus Supplement, such
reporting will be based upon a representative initial offering price of each
Class of Stripped Certificates. The Master Servicer will also file such
original issue discount information with the Internal Revenue Service. If a
Certificateholder fails to supply an accurate taxpayer identification number
or if the Secretary of the Treasury determines that a Certificateholder has
not reported all interest and dividend income required to be shown on his
federal income tax return, 31% backup withholding may be required in respect
of any reportable payments, as described above under "Federal Income Tax
Consequences for REMIC Certificates--Backup Withholding."
TAXATION OF CERTAIN FOREIGN INVESTORS
To the extent that a 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
nonresident aliens, foreign corporations, or other non-U.S. persons ("foreign
persons") generally will be subject to 30% United States withholding tax, or
such lower rate as may be provided for interest by an applicable tax treaty.
Accrued original issue discount recognized by the Certificateholder on the
sale or exchange of such a Certificate also will be subject to federal income
tax at the same rate.
Treasury regulations provide that interest or original issue discount paid
by the Trustee or other withholding agent to a foreign person evidencing
ownership interest in Mortgage Loans issued after July 18, 1984 will be
"portfolio interest" and will be treated in the manner, and such persons will
be subject to the same certification requirements, described above under
"Federal Income Tax Consequences for REMIC Certificates--Taxation of Certain
Foreign Investors--Regular Certificates."
ERISA CONSIDERATIONS
GENERAL
The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
imposes certain requirements on those employee benefit plans to which it
applies ("Plans") and on those persons who are fiduciaries with respect to
such Plans. The following is a general discussion of such requirements, and
certain applicable exceptions to and administrative exemptions from such
requirements. For purposes of this discussion, a person investing on behalf of
an individual retirement account established under Code Section 408 (an "IRA")
is regarded as a fiduciary and the IRA as a Plan.
Before purchasing any Certificates, a Plan fiduciary should consult with its
counsel and determine whether there exists any prohibition to such purchase
under the requirements of ERISA, whether prohibited transaction exemptions
such as PTE 83-1 or any individual administrative exemption (as described
below) applies, including whether the appropriate conditions set forth therein
would be met, or whether any statutory prohibited transaction exemption is
applicable, and further should consult the applicable Prospectus Supplement
relating to such Series of Certificates.
CERTAIN REQUIREMENTS UNDER ERISA
General. In accordance with ERISA's general fiduciary standards, before
investing in a Certificate a Plan fiduciary should determine whether to do so
is permitted under the governing Plan instruments and is appropriate for the
Plan in view of its overall
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investment policy and the composition and diversification of its portfolio. A
Plan fiduciary should especially consider the ERISA requirement of investment
prudence and the sensitivity of the return on the Certificates to the rate of
principal repayments (including prepayments) on the Mortgage Loans, as
discussed in "Prepayment and Yield Considerations" herein.
Parties in Interest/Disqualified Persons. Other provisions of ERISA (and
corresponding provisions of the Code) prohibit certain transactions involving
the assets of a Plan and persons who have certain specified relationships to
the Plan (so-called "parties in interest" within the meaning of ERISA or
"disqualified persons" within the meaning of the Code). The Seller, the Master
Servicer or Master Servicer or the Trustee or certain affiliates thereof might
be considered or might become "parties in interest" or "disqualified persons"
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 an administrative
exemption described below or some other exemption is available.
Special caution should be exercised before the assets of a Plan (including
assets that may be held in an insurance company's separate or general accounts
where assets in such accounts may be deemed Plan assets for purposes of ERISA)
are used to purchase a Certificate if, with respect to such assets, the
Seller, the Master Servicer or Master Servicer or the Trustee or an affiliate
thereof either: (a) has investment discretion with respect to the investment
of such assets of such Plan; or (b) has authority or responsibility to give,
or regularly gives, investment advice with respect to such assets for a fee
and pursuant to an agreement or understanding that such advice will serve as a
primary basis for investment decisions with respect to such assets and that
such advice will be based on the particular investment needs of the Plan.
Delegation of Fiduciary Duty. Further, if the assets included in a Trust
Estate were deemed to constitute Plan assets, it is possible that 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 fiduciary deciding to
invest in the Certificates, and certain transactions involved in the operation
of the Trust Estate might be deemed to constitute prohibited transactions
under ERISA and the Code. Neither ERISA nor the Code define the term "plan
assets."
The U.S. Department of Labor (the "Department") has issued regulations (the
"Regulations") concerning whether or not a Plan's assets would be deemed to
include an interest in the underlying assets of an entity (such as a Trust
Estate) for purposes of the reporting and disclosure and general fiduciary
responsibility provisions of ERISA, as well as for the prohibited transaction
provisions of ERISA and the Code, if the Plan acquires an "equity interest"
(such as a Certificate) in such an entity.
Certain exceptions are provided in the Regulations whereby an investing
Plan's assets would be deemed merely to include its interest in the
Certificates instead of being deemed to include an interest in the assets of a
Trust Estate. However, it cannot be predicted in advance nor can there be any
continuing assurance whether such exceptions may be met, because of the
factual nature of certain of the rules set forth in the Regulations. For
example, one of the exceptions in the Regulations states that the underlying
assets of an entity will not be considered "plan assets" if less than 25% of
the value of all classes of equity interests are held by "benefit plan
investors," which are defined as Plans, IRAs, and employee benefit plans not
subject to ERISA (for example, governmental plans), but this exception is
tested immediately after each acquisition of an equity interest in the entity
whether upon initial issuance or in the secondary market.
ADMINISTRATIVE EXEMPTIONS
Individual Administrative Exemptions. Several underwriters of mortgage-
backed securities have applied for and obtained ERISA prohibited transaction
exemptions (each, an "Underwriter's Exemption") which are in some respects
broader than Prohibited Transaction Class Exemption 83-1 (described below).
Such exemptions can only apply to mortgage-backed securities which, among
other conditions, are sold in an offering with respect to which such
underwriter serves as the sole or a managing underwriter, or as a selling or
placement agent. If such an Underwriter's Exemption might be applicable to a
Series of Certificates, the applicable Prospectus Supplement will refer to
such possibility.
Among the conditions that must be satisfied for an Underwriter's Exemption
to apply are the following:
(1) The acquisition of 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;
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(2) The rights and interests evidenced by Certificates acquired by the
Plan are not subordinated to the rights and interests evidenced by other
Certificates of the Trust Estate;
(3) The Certificates acquired by the Plan have received a rating at the
time of such acquisition that is one of the three highest generic rating
categories from either Standard & Poor's ("S&P"), Moody's Investors
Service, Inc. ("Moody's"), Duff & Phelps Credit Rating Co. ("DCR") or Fitch
Investors Service, L.P. ("Fitch");
(4) The Trustee must not be an affiliate of any other member of the
Restricted Group (as defined below);
(5) The sum of all payments made to and retained by the underwriter in
connection with the distribution of 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 Mortgage Loans to the Trust Estate represents not more than the fair
market value of such Mortgage 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 Pooling and
Servicing Agreement and reimbursement of such person's reasonable expenses
in connection therewith; and
(6) The Plan investing in the Certificates is an "accredited investor" as
defined in Rule 501(a)(1) of Regulation D of the Securities and Exchange
Commission under the Securities Act of 1933.
The Trust Estate must also meet the following requirements:
(i) the assets of the Trust Estate must consist solely of assets of
the type that have been included in other investment pools in the
marketplace;
(ii) certificates in such other investment pools must have been rated
in one of the three highest rating categories of S&P, Moody's, Fitch or
DCR for at least one year prior to the Plan's acquisition of the
Certificates; and
(iii) certificates evidencing interests in such other investment pools
must have been purchased by investors other than Plans for at least one
year prior to any Plan's acquisition of the Certificates.
If the conditions to an Underwriter's Exemption are met, whether or not a
Plan's assets would be deemed to include an ownership interest in the Mortgage
Loans in a mortgage pool, the acquisition, holding and resale of the
Certificates by Plans would be exempt from the prohibited transaction
provisions of ERISA and the Code.
Moreover, an Underwriter's Exemption can provide relief from certain self-
dealing/conflict of interest prohibited transactions that may occur if a Plan
fiduciary causes a Plan to acquire Certificates in a Trust Estate in which the
fiduciary (or its affiliate) is an obligor on the Mortgage Loans held in the
Trust Estate provided that, among other requirements: (i) in the case of an
acquisition in connection with the initial issuance of Certificates, at least
fifty percent of each class of Certificates in which Plans have invested is
acquired by persons independent of the Restricted Group and at least fifty
percent of the aggregate interest in the Trust Estate is acquired by persons
independent of the Restricted Group (as defined below); (ii) such fiduciary
(or its affiliate) is an obligor with respect to five percent or less of the
fair market value of the Mortgage Loans contained in the Trust Estate; (iii)
the Plan's investment in Certificates of any Class does not exceed twenty-five
percent of all of the Certificates of that Class outstanding at the time of
the acquisition and (iv) immediately after the acquisition no more than
twenty-five percent of the assets of the Plan with respect to which such
person is a fiduciary are invested in Certificates representing an interest in
one or more trusts containing assets sold or served by the same entity.
An Underwriter's Exemption does not apply to Plans sponsored by the Seller,
the underwriter specified in the applicable Prospectus Supplement, the Master
Servicer, the Trustee, the Servicer, any obligor with respect to Mortgage
Loans included in the Trust Estate constituting more than five percent of the
aggregate unamortized principal balance of the assets in the Trust Estate, or
any affiliate of such parties (the "Restricted Group").
PTE 83-1. Prohibited Transaction Class Exemption 83-1 for Certain
Transactions Involving Mortgage Pool Investment Trusts ("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 such mortgage pools, and whether or not such transactions would
otherwise be prohibited under ERISA.
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The term "mortgage pool pass-through certificate" is defined in PTE 83-1 as
"a certificate representing a beneficial undivided fractional interest in a
mortgage pool and entitling the holder of such a certificate to pass-through
payment of principal and interest from the pooled mortgage loans, less any
fees retained by the pool sponsor." It appears that, for purposes of PTE 83-1,
the term "mortgage pool pass-through certificate" would include Certificates
issued in a single Class or in multiple Classes that evidence the beneficial
ownership of both a specified percentage of future interest payments (after
permitted deductions) and a specified percentage of future principal payments
on a Trust Estate.
However, it appears that PTE 83-1 does or might not apply to the purchase
and holding of (a) Certificates that evidence the beneficial ownership only of
a specified percentage of future interest payments (after permitted
deductions) on a Trust Estate or only of a specified percentage of future
principal payments on a Trust Estate, (b) Residual Certificates, (c)
Certificates evidencing ownership interests in a Trust Estate which includes
Mortgage Loans secured by multifamily residential properties or shares issued
by cooperative housing corporations, or (d) Certificates which are
subordinated to other Classes of Certificates of such Series. Accordingly,
unless exemptive relief other than PTE 83-1 applies, Plans should not purchase
any such Certificates.
PTE 83-1 sets forth "general conditions" and "specific conditions" to its
applicability. Section II of PTE 83-1 sets forth the following general
conditions to the application of the exemption: (i) the maintenance of a
system of insurance or other protection for the pooled mortgage loans or the
property securing such loans, and for indemnifying certificateholders against
reductions in pass-through payments due to property damage or defaults in loan
payments; (ii) the existence of a pool trustee who is not an affiliate of the
pool sponsor; and (iii) a requirement that the sum of all payments made to and
retained by the pool sponsor, and all funds inuring to the benefit of the pool
sponsor as a result of the administration of the mortgage pool, must represent
not more than adequate consideration for selling the mortgage loans plus
reasonable compensation for services provided by the pool sponsor to the pool.
The system of insurance or protection referred to in clause (i) above must
provide such protection and indemnification up to an amount not less than the
greater of one percent of the aggregate unpaid principal balance of the pooled
mortgages or the unpaid principal balance of the largest mortgage in the pool.
It should be noted that in promulgating PTE 83-1 (and a predecessor
exemption), the Department did not have under its consideration interests in
pools of the exact nature as some of the Certificates described herein.
EXEMPT PLANS
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 ERISA requirements and assets of such plans may be
invested in Certificates without regard to the ERISA considerations described
under "--General," "--Certain Requirements under ERISA" and "--Administrative
Exemptions" above but such plans may be subject to the provisions of other
applicable federal and state law.
UNRELATED BUSINESS TAXABLE INCOME--RESIDUAL CERTIFICATES
The purchase of a Residual Certificate by any employee benefit plan
qualified under Code Section 401(a) and exempt from taxation under Code
Section 501(a), including most varieties of ERISA Plans, may give rise to
"unrelated business taxable income" as described in Code Sections 511-515 and
860E. Further, prior to the purchase of Residual Certificates, a prospective
transferee may be required to provide an affidavit to a transferor that it is
not, nor is it purchasing a Residual Certificate on behalf of, a "Disqualified
Organization," which term as defined under "Material Federal Income Tax
Consequences--Taxation of Residual Certificates--Tax-Related Restrictions on
the Transfer of Residual Certificates" above includes certain tax-exempt
entities not subject to Code Section 511 such as certain governmental plans,
as discussed above under the caption "Material Federal Income Tax
Consequences--Federal Income Tax Consequences for REMIC Certificates--Taxation
of Residual Certificates--Tax-Related Restrictions on Transfer of Residual
Certificates--Disqualified Organizations."
DUE TO THE COMPLEXITY OF THESE RULES AND THE PENALTIES IMPOSES UPON PERSONS
INVOLVED IN PROHIBITED TRANSACTIONS, IT IS PARTICULARLY IMPORTANT THAT
POTENTIAL INVESTORS WHO ARE PLAN FIDUCIARIES CONSULT WITH THEIR COUNSEL
REGARDING THE CONSEQUENCES UNDER ERISA OF THEIR ACQUISITION AND OWNERSHIP OF
CERTIFICATES.
THE SALE OF CERTIFICATES TO A PLAN IS IN NO RESPECT A REPRESENTATION BY THE
SELLER OR THE APPLICABLE UNDERWRITER THAT THIS INVESTMENT MEETS ALL RELEVANT
LEGAL REQUIREMENTS WITH RESPECT TO INVESTMENTS BY PLANS GENERALLY OR ANY
PARTICULAR PLAN, OR THAT THIS INVESTMENT IS APPROPRIATE FOR PLANS GENERALLY OR
ANY PARTICULAR PLAN.
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LEGAL INVESTMENT
As will be specified in the applicable Prospectus Supplement, certain
Classes of Certificates will constitute "mortgage related securities" for
purposes of the Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA") so
long as they are rated in one of the two highest rating categories by at least
one Rating Agency. As "mortgage related securities" such Classes will
constitute legal investments for persons, trusts, corporations, partnerships,
associations, business trusts and business entities (including but not limited
to state-chartered savings banks, commercial banks, savings and loan
associations and insurance companies, as well as trustees and state government
employee retirement systems) created pursuant to or existing under the laws of
the United States or of any state (including the District of Columbia and
Puerto Rico) whose authorized investments are subject to state regulation to
the same extent that, under applicable law, obligations issued by or
guaranteed as to principal and interest by the United States or any agency or
instrumentality thereof constitute legal investments for such entities.
Pursuant to SMMEA, a number of states enacted legislation, on or before the
October 3, 1991 cut-off for such enactments, limiting to varying extents the
ability of certain entities (in particular, SMMEA insurance companies) to
invest in mortgage related securities, in most cases by requiring the affected
investors to rely solely upon existing state law, and not SMMEA. Accordingly,
the investors affected by such legislation will be authorized to invest in the
Certificates only to the extent provided in 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 with mortgage
related securities without limitation as to the percentage of their assets
represented thereby, federal credit unions may invest in mortgage related
securities, and national banks may purchase mortgage related securities for
their own account without regard to the limitations generally applicable to
investment securities set forth in 12 U.S.C. (S) 24 (Seventh), subject in each
case to such regulations as the applicable federal regulatory authority may
prescribe. In this connection, federal credit unions should review 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. The NCUA has adopted rules, codified as 12 C.F.R. (S)
703.5(f)-(k), which prohibit federal credit unions from investing in certain
mortgage related securities (such as the Residual Certificates and the
Stripped Certificates), except under limited circumstances.
All depository institutions considering an investment in the Certificates
should review the "Supervisory Policy Statement on Securities Activities"
dated January 28, 1992, as revised April 15, 1994 (the "Policy Statement") of
the Federal Financial Institutions Examination Council. The Policy Statement,
which has been adopted by the Board of Governors of the Federal Reserve
System, the Federal Deposit Insurance Corporation, the Comptroller of the
Currency and the Office of Thrift Supervision and by the NCUA (with certain
modifications), prohibits depository institutions from investing in certain
"high-risk mortgage securities" (including securities such as certain Series
and Classes of the Certificates), except under limited circumstances, and sets
forth certain investment practices deemed to be unsuitable for regulated
institutions.
Institutions whose investment activities are subject to regulation by
federal or state authorities should review rules, policies and guidelines
adopted from time to time by such authorities before purchasing any of the
Certificates, as certain Series or Classes (in particular, Certificates which
are entitled solely or disproportionately to distributions of principal or
interest) may be deemed unsuitable investments, or may otherwise be
restricted, under such rules, policies or guidelines (in certain instances
irrespective of SMMEA).
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,
provisions which may restrict or prohibit investment in securities which are
not "interest-bearing" or "income-paying," and, with regard to any
Certificates issued in book-entry form, provisions which may restrict or
prohibit investments in securities which are issued in book-entry form.
Except as to the status of certain Classes of Certificates as "mortgage
related securities," no representation is made as to the proper
characterization of the Certificates for legal investment purposes, financial
institution regulatory purposes, or other purposes, or as to the ability of
particular investors to purchase Certificates under applicable legal
investment restrictions. The uncertainties described above (and any
unfavorable future determinations concerning legal investment or financial
institution regulatory characteristics of the Certificates) may adversely
affect the liquidity of the Certificates.
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All investors should consult with their own legal advisors in determining
whether and to what extent the Certificates constitute legal investments for
such investors.
PLAN OF DISTRIBUTION
The Certificates are being offered hereby in Series through one or more of
the methods described below. The applicable Prospectus Supplement for each
Series will describe the method of offering being utilized for that Series and
will state the public offering or purchase price of each Class of Certificates
of such Series, or the method by which such price is to be determined, and the
net proceeds to the Seller from such sale.
The Certificates will be offered through the following methods from time to
time and offerings may be made concurrently through more than one of these
methods or an offering of a particular Series of Certificates may be made
through a combination of two or more of these methods:
1. By negotiated firm commitment underwriting and public re-offering by
underwriters specified in the applicable Prospectus Supplement;
2. By placements by the Seller with investors through dealers; and
3. By direct placements by the Seller with investors.
If underwriters are used in a sale of any Certificates, such Certificates
will be acquired by the underwriters for their own account 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 to be
determined at the time of sale or at the time of commitment therefor. Firm
commitment underwriting and public reoffering by underwriters may be done
through underwriting syndicates or through one or more firms acting alone. The
specific managing underwriter or underwriters, if any, with respect to the
offer and sale of a particular Series of Certificates will be set forth on the
cover of the Prospectus Supplement applicable to such Series and the members
of the underwriting syndicate, if any, will be named in such Prospectus
Supplement. The Prospectus Supplement will describe any discounts and
commissions to be allowed or paid by the Seller to the underwriters, any other
items constituting underwriting compensation and any discounts and commissions
to be allowed or paid to the dealers. The obligations of the underwriters will
be subject to certain conditions precedent. The underwriters with respect to a
sale of any Class of Certificates will be obligated to purchase all such
Certificates if any are purchased. The Seller, and, if specified in the
applicable Prospectus Supplement, Norwest Mortgage, will indemnify the
applicable underwriters against certain civil liabilities, including
liabilities under the Securities Act.
The Prospectus Supplement with respect to any Series of Certificates offered
other than through underwriters will contain information regarding the nature
of such offering and any agreements to be entered into between the Seller and
dealers and/or the Seller and purchasers of Certificates of such Series.
Purchasers of Certificates, including dealers, may, depending on the facts
and circumstances of such purchases, be deemed to be "underwriters" within the
meaning of the Securities Act in connection with reoffers and sales by them of
Certificates. Certificateholders should consult with their legal advisors in
this regard prior to any such reoffer or sale.
If specified in the Prospectus Supplement relating to a Series of
Certificates, the Seller or any affiliate thereof may purchase some or all of
one or more Classes of Certificates of such Series from the underwriter or
underwriters at a price specified or described in such Prospectus Supplement.
Such purchaser may thereafter from time to time offer and sell, pursuant to
this Prospectus, some or all of such Certificates so purchased directly,
through one or more underwriters to be designated at the time of the offering
of such Certificates or through dealers acting as agent and/or principal. Such
offering may be restricted in the matter specified in such Prospectus
Supplement. Such transactions may be effected at market prices prevailing at
the time of sale, at negotiated prices or at fixed prices. The underwriters
and dealers participating in such purchaser's offering of such Certificates
may receive compensation in the form of underwriting discounts or commissions
from such purchaser and such dealers may receive commissions from the
investors purchasing such Certificates for whom they may act as agent (which
discounts or commissions will not exceed those customary in those types of
transactions involved). Any dealer that participates in the distribution of
such Certificates may be deemed to be an "underwriter" within the meaning of
the Securities Act, and any
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commissions and discounts received by such dealer and any profit on the resale
of such Certificates by such dealer might be deemed to be underwriting
discounts and commissions under the Securities Act.
USE OF PROCEEDS
The net proceeds from the sale of each Series of Certificates will be used
by the Seller for the purchase of the Mortgage Loans represented by the
Certificates of such Series from Norwest Mortgage. It is expected that Norwest
Mortgage will use the proceeds from the sale of the Mortgage Loans to the
Seller for its general business purposes, including, without limitation, the
origination or acquisition of new mortgage loans and the repayment of
borrowings incurred to finance the origination or acquisition of mortgage
loans, including the Mortgage Loans underlying the Certificates of such
Series.
LEGAL MATTERS
Certain legal matters, including the federal income tax consequences to
Certificateholders of an investment in the Certificates of a Series, will be
passed upon for the Seller by Cadwalader, Wickersham & Taft, New York, New
York.
RATING
It is a condition to the issuance of the Certificates of any Series offered
pursuant to this Prospectus and a Prospectus Supplement that they be rated in
one of the four highest categories by at least one Rating Agency.
Generally, a security rating addresses the likelihood of the receipt by
holders of Certificates of all distributions to which such holders are
entitled. A securities 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. Each securities rating should be evaluated
independently of any other rating.
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INDEX OF SIGNIFICANT DEFINITIONS
<TABLE>
<CAPTION>
TERM PAGE
- ---- ----
<S> <C>
1986 Act............................................................. 61
Accrual Certificates................................................. 31
Additional Collateral................................................ 16
Advances............................................................. 42
ALTA................................................................. 22
Asset Conservation Act............................................... 56
Balloon Loan......................................................... 16
Balloon Period....................................................... 16
Bankruptcy Code...................................................... 54
Bankruptcy Loss...................................................... 33
Bankruptcy Loss Amount............................................... 33
Beneficial Owner..................................................... 29
Book-Entry Certificates.............................................. 9
Buy-Down Fund........................................................ 16
Buy-Down Loans....................................................... 16
Cede................................................................. 29
CERCLA............................................................... 55
Certificate Account.................................................. 38
Certificateholder.................................................... 29
Certificates......................................................... Cover
Class................................................................ Cover
Cleanup Costs........................................................ 56
Code................................................................. 10
Commission........................................................... 2
condotels............................................................ 13
cooperatives......................................................... 13
Contract Underwriters................................................ 19
Correspondents....................................................... 18
Credit Score......................................................... 19
Cut-Off-Date......................................................... 30
DCR.................................................................. 83
Deferred Interest.................................................... 15
Definitive Certificates.............................................. 9
Delegated Underwriting............................................... 19
Department........................................................... 82
Depository........................................................... 39
Detailed Information................................................. 2
Disqualified Organization............................................ 70
Distribution Date.................................................... 8
DTC.................................................................. 9
DTC Participants..................................................... 29
Due Date............................................................. 14
Due on Sale.......................................................... 57
EDGAR................................................................ 2
Eligible Custodial Account........................................... 39
Eligible Investments................................................. 40
EPA.................................................................. 56
ERISA................................................................ 10
Excess Bankruptcy Losses............................................. 33
</TABLE>
<TABLE>
<CAPTION>
TERM PAGE
- ---- -----
<S> <C>
Excess Fraud Losses.................................................. 33
Excess Special Hazard Losses......................................... 33
Fannie Mae........................................................... 17
FDIC................................................................. 39
FHLBB................................................................ 57
FICO Score........................................................... 19
Fitch................................................................ 83
Fixed Retained Yield................................................. 31
Fraud Loss........................................................... 33
Fraud Loss Amount.................................................... 33
Freddie Mac.......................................................... 17
Garn Act............................................................. 57
GEMICO............................................................... 23
Ginnie Mae........................................................... 17
Government Securities................................................ 59
Graduated Pay Mortgage Loans......................................... 15
Growing Equity Mortgage Loans........................................ 15
Holder............................................................... 29
Indirect DTC Participants............................................ 29
IRA.................................................................. 81
Joint Ventures....................................................... 18
Liquidation Proceeds................................................. 39
Loan Stores.......................................................... 18
Mark to Market Regulations........................................... 72
Master Servicer...................................................... Cover
Master Servicing Fee................................................. 31
Moody's.............................................................. 83
Mortgage Interest Rate............................................... 31
Mortgage Loans....................................................... Cover
Mortgage Notes....................................................... 13
Mortgaged Properties................................................. 13
Mortgages............................................................ 13
NCUA................................................................. 85
Net Foreclosure Profits.............................................. 31
Net Mortgage Interest Rate........................................... 31
No Ratio............................................................. 23
Non-Pro Rata Certificate............................................. 62
Non-U.S. Person...................................................... 74
Norwest Bank......................................................... Cover
Norwest Corporation.................................................. 6
Norwest Funding...................................................... 17
Norwest Mortgage..................................................... Cover
Norwest Mortgage Sale Agreement...................................... 48
OID Regulations...................................................... 61
Other Advances....................................................... 42
OTS.................................................................. 57
Partial Liquidation Proceeds......................................... 31
Pass-Through Rate.................................................... 7
Pass-Through Entity.................................................. 70
</TABLE>
89
<PAGE>
<TABLE>
<CAPTION>
TERM PAGE
- ---- ----
<S> <C>
Paying Agent......................................................... 41
PCBs................................................................. 55
Percentage Interest.................................................. 30
Periodic Advances.................................................... 9
PHMC................................................................. 17
PHMSC................................................................ 17
Plans................................................................ 81
Pledged Asset Mortgage Loans......................................... 16
Policy Statement..................................................... 85
Pool Distribution Amount............................................. 30
Pool Insurers........................................................ 23
Pooling and Servicing Agreement...................................... 6
Prepayment Assumption................................................ 62
PTE 83-1............................................................. 83
Qualified Mortgage................................................... 27
Rating Agency........................................................ 10
Record Date.......................................................... 8
Regular Certificateholder............................................ 61
Regular Certificates................................................. 28
Regulations.......................................................... 82
Relief Act........................................................... 55
REMIC................................................................ 2
REMIC Certificates................................................... 59
REMIC Pool........................................................... 59
REMIC Regulations.................................................... 59
Remittance Date...................................................... 39
Reserve Fund......................................................... 34
Residual Certificates................................................ 28
Residual Holders..................................................... 67
Restricted Group..................................................... 83
REO Property......................................................... 50
Rules................................................................ 29
S&P.................................................................. 83
SBJPA of 1996........................................................ 60
Scheduled Principal Balance.......................................... 49
Securities Act....................................................... 2
Seller............................................................... Cover
</TABLE>
<TABLE>
<CAPTION>
TERM PAGE
- ---- -----
<S> <C>
Senior Certificates.................................................. Cover
Series............................................................... Cover
Servicer............................................................. Cover
Servicer Custodial Account........................................... 39
Servicing Account.................................................... 43
Servicing Fee........................................................ 31
SMMEA................................................................ 85
Special Hazard Loss.................................................. 33
Special Hazard Loss Amounts.......................................... 33
Standard Hazard Insurance Policy..................................... 44
Startup Day.......................................................... 60
Stripped Certificateholder........................................... 79
Stripped Certificates................................................ 76
Subclass............................................................. Cover
Subordinated Certificates............................................ Cover
Subsidy Account...................................................... 15
Subsidy Loans........................................................ 15
Subsidy Payments..................................................... 15
Superliens........................................................... 55
Tiered Payment Mortgage Loans........................................ 15
Title Option Plus.................................................... 22
Title V.............................................................. 57
T.O.P. Loans......................................................... 22
Treasury Regulations................................................. 48
Trust Estate......................................................... Cover
Trustee.............................................................. 52
Trustee Fee.......................................................... 31
U.S. Person.......................................................... 71
UCC.................................................................. 53
UGRIC................................................................ 23
Underlying Servicing Agreements...................................... 38
Underwriter's Exemption.............................................. 82
Voting Interests..................................................... 50
Window Period........................................................ 57
Window Period Loans.................................................. 57
Window Period States................................................. 57
</TABLE>
90
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS
SUPPLEMENT AND THE PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE SELLER
OR BY THE UNDERWRITER. THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS DO NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY THE
SECURITIES OFFERED HEREBY TO ANYONE IN ANY JURISDICTION IN WHICH THE PERSON
MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANYONE TO
WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY
OF THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT INFORMATION HEREIN
IS CORRECT AS OF ANY TIME SINCE THE DATE OF THIS PROSPECTUS SUPPLEMENT OR THE
PROSPECTUS.
--------------------
INDEX
PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Table of Contents.......................................................... S-6
Summary Information........................................................ S-7
Risk Factors............................................................... S-29
Description of the Certificates............................................ S-30
Description of Mortgage Loans.............................................. S-57
Prepayment and Yield Considerations........................................ S-62
Pooling and Servicing Agreement............................................ S-74
Servicing of the Mortgage Loans............................................ S-76
Material Federal Income Tax Consequences................................... S-79
ERISA Considerations....................................................... S-81
Legal Investment........................................................... S-82
Secondary Market........................................................... S-83
Underwriting............................................................... S-83
Legal Matters.............................................................. S-84
Experts.................................................................... S-84
Use of Proceeds............................................................ S-84
Ratings.................................................................... S-84
Index of Significant Prospectus Supplement Definitions..................... S-86
</TABLE>
PROSPECTUS
<TABLE>
<S> <C>
Reports..................................................................... 2
Additional Information...................................................... 2
Additional Detailed Information............................................. 2
Incorporation of Certain Information by Reference........................... 3
Table of Contents........................................................... 4
Summary of Prospectus....................................................... 6
Risk Factors................................................................ 11
The Trust Estates........................................................... 13
The Seller.................................................................. 16
Norwest Mortgage............................................................ 17
Norwest Bank................................................................ 17
The Mortgage Loan Programs.................................................. 17
Description of the Certificates............................................. 27
Prepayment and Yield Considerations......................................... 34
Servicing of the Mortgage Loans............................................. 37
Certain Matters Regarding the Master Servicer............................... 45
The Pooling and Servicing Agreement......................................... 46
Certain Legal Aspects of the Mortgage Loans................................. 52
Material Federal Income Tax Consequences.................................... 59
ERISA Considerations........................................................ 81
Legal Investment............................................................ 85
Plan of Distribution........................................................ 86
Use of Proceeds............................................................. 87
Legal Matters............................................................... 87
Recent Developments......................................................... 87
Rating...................................................................... 87
Index of Significant Definitions............................................ 88
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
[LOGO]
$
(APPROXIMATE)
NORWEST INTEGRATED STRUCTURED
ASSETS, INC.
SELLER
MORTGAGE ASSET-BACKED
PASS-THROUGH CERTIFICATES,
SERIES 199 -
--------------------
PROSPECTUS SUPPLEMENT
--------------------
[UNDERWRITER]
, 199
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The expenses expected to be incurred in connection with the issuance and
distribution of the securities being registered, other than underwriting
compensation, are as set forth below. All such expenses except for the
registration fees are estimated.
<TABLE>
<S> <C>
SEC Registration Fee................................................ $ *
Legal Fees and Expenses............................................. *
Accounting Fees and Expenses........................................ *
Trustee's Fees and Expenses
(including counsel fees)............................................ *
Printing and Engraving Fees......................................... *
Rating Agency Fees.................................................. *
Miscellaneous....................................................... *
-----
Total............................................................. $ *
=====
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law provides that a Delaware
corporation may indemnify any persons, including officers and directors, who
are made, or are threatened to be made, parties to any threatened, pending or
completed legal action, suit or proceeding, whether civil, criminal,
administrative or investigative (other than an action by or in the right of
such corporation), by reason of the fact that such person is or was an officer
or director of such corporation, or is or was serving at the request of such
corporation as a director, officer, employee or agent of another corporation
or enterprise. The indemnity may include expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably
incurred by such person in connection with such action, suit or proceeding,
provided such officer or director acted in good faith and in a manner he
reasonably believed to be in or not opposed to the corporation's best
interests and, for criminal proceedings, had no reasonable cause to believe
that his conduct was illegal. A Delaware corporation may indemnify officers
and directors in an action by or in the right of the corporation under the
same conditions, except that no indemnification is permitted without judicial
approval if the officer or director is adjudged to be liable to the
corporation. Where an officer or director is successful on the merits or
otherwise in the defense of any action referred to above, the corporation must
indemnify him against the expenses which such officer or director actually and
reasonably incurred.
The By-laws of Norwest Integrated Structured Assets, Inc. provide for
indemnification of officers and directors to the full extent permitted by the
Delaware General Corporation Law.
The Pooling and Servicing Agreements for each Series of Certificates provide
either that the Registrant and the partners, directors, officers, employees
and agents of the Registrant, or that the Master Servicer and the partners,
directors, officers, employees and agents of the Master Servicer, will be
entitled to indemnification by the Trust Estate 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,
other than any loss, liability or expense incurred by reason of willful
misfeasance, bad faith or gross negligence in the performance of his or its
duties thereunder or by reason of reckless disregard of his or its obligations
and duties thereunder.
The directors and officers of the Registrant are covered by a directors' and
officers' liability insurance policy maintained by Norwest Corporation for the
benefit of all of its subsidiaries.
- ---------------------
* To be provided by amendment.
II-1
<PAGE>
ITEM 16. EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
1.1 Form of Underwriting Agreement.*
Certificate of Incorporation of Norwest Integrated Structured Assets,
3.1 Inc.*
Amendment to Certificate of Incorporation of Norwest Integrated
3.1a Structured Assets, Inc.
3.2 By-laws of Norwest Integrated Structured Assets, Inc.*
4.1 Form of Pooling and Servicing Agreement.*
Opinion of Cadwalader, Wickersham & Taft with respect to certain
5.1 matters involving the Certificates.*
8.1 Opinion of Cadwalader, Wickersham & Taft as to tax matters.*
10.1 Form of Servicing Agreement.*
Consent of Cadwalader, Wickersham & Taft (included as part of Exhibits
23.1 5.1 and 8.1).*
Consent of Coopers & Lybrand regarding Financial Security Assurance
23.2 Inc.*
24.1 Power of Attorney.*
24.2 Power of Attorney.*
</TABLE>
- ---------------------
* Previously filed.
ITEM 17. UNDERTAKINGS.
(a) Undertaking pursuant to Rule 415.
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;
(iii) to include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or
any material change to 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; and
(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) Undertaking in respect of indemnification.
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 Securities
Act of 1933 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 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 whether such
indemnification by it is against public policy as expressed in the Securities
Act of 1933 and will be governed by the final adjudication of such issue.
II-2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Pre-Effective
Amendment No. 2 to Form S-3 Registration Statement to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of Frederick, State
of Maryland on March 17, 1997.
/s/ James B. Svinth
By:__________________________________
Name: James B. Svinth
Title: Executive Vice President
II-3
<PAGE>
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS PRE-
EFFECTIVE AMENDMENT NO. 2 TO FORM S-3 REGISTRATION STATEMENT HAS BEEN SIGNED
BELOW BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<S> <C> <C>
* President, March 17, 1997
- ------------------------------------- Secretary, Director
STEPHEN D. MORRISON and Chief Executive
Officer
* Executive Vice March 17, 1997
- ------------------------------------- President, Chief
ROBERT K. CHAPMAN Financial Officer
and Principal
Accounting Officer
/s/ James B. Svinth Executive Vice March 17, 1997
- ------------------------------------- President and
JAMES B. SVINTH Director
* Director March 17, 1997
- -------------------------------------
ROBERT GORSCHE
* By: /s/ James B. Svinth
- -------------------------------------
JAMES B. SVINTH
ATTORNEY-IN-FACT/(1)/
</TABLE>
- ---------------------
(1) James B. Svinth, by signing his name hereto, does sign the document on
behalf of the person indicated above pursuant to a power of attorney duly
executed by such person and filed with the Securities and Exchange
Commission.
II-4
<PAGE>
EXHIBIT 3.la
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
*****
Norwest Structured Assets, Inc., a corporation organized and existing under
and by virtue of the General Corporation Law of the State of Delaware,
DOES HEREBY CERTIFY:
FIRST: That the Board of Directors of said corporation, by the unanimous
written consent of its members, filed with the minutes of the Board,
adopted a resolution proposing and declaring advisable the following
amendment to the Certificate of Incorporation of said corporation:
RESOLVED, that the Certificate of Incorporation of Norwest Structured
Assets, Inc. be amended by changing the First Article thereof so that,
as amended, said Article shall be and read as follows:
The name of the corporation is Norwest Integrated Structured Assets,
Inc. (The "Corporation")
SECOND: That in lieu of a meeting and vote of stockholders, the stockholders
have given unanimous written consent to said amendment in accordance
with the provisions of Section 228 of the General Corporation Law of
the State of Delaware.
THIRD: That the aforesaid amendment was duly adopted in accordance with the
applicable provisions of Sections 242 and 228 of the General
Corporation Law of the State of Delaware.
FOURTH: That this Certificate of Amendment of the Certificate of Incorporation
shall be effective on March 5, 1997.
IN WITNESS WHEREOF, said Norwest Structured Assets, Inc. has caused
this certificate to be signed by David V. Gorsche, its Assistant
Secretary, this Fourth day of March, 1997.
Norwest Structured Assets, Inc.
By: /s/ David V. Gorsche
--------------------------------
Assistant Secretary
