<PAGE>
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED MAY 26, 1998)
[LOGO OF NORWEST FINANCIAL APPEARS HERE]
$234,707,000
(APPROXIMATE)
NORWEST INTEGRATED STRUCTURED ASSETS, INC.
LOGO
SELLER
MORTGAGE ASSET-BACKED PASS-THROUGH CERTIFICATES, SERIES 1998-1
PRINCIPAL AND INTEREST PAYABLE MONTHLY, COMMENCING IN JUNE 1998
----------------
The Series 1998-1 Mortgage Asset-Backed Pass-Through Certificates (the
"CERTIFICATES") will consist of two groups of senior certificates (each, a
"GROUP" and, respectively, the "GROUP I-A CERTIFICATES" and the "GROUP II-A
CERTIFICATES") designated collectively as the "CLASS A CERTIFICATES" and six
Classes of junior certificates designated collectively as the "SUBORDINATED
CERTIFICATES" or the "CLASS B CERTIFICATES". The Group I-A Certificates will
consist of two Classes of senior Certificates and the Group II-A Certificates
will consist of ten Classes of senior Certificates. Only the Classes of
Certificates identified in the table below (collectively, the "OFFERED
CERTIFICATES") are being offered hereby.
(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-77, 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>
Initial Pass-Through
lass DesignationC Principal Balance(1) Rate
- ----------------------------------------------------
<S> <C> <C>
Class I-A-1..... $29,848,000 6.750%
Class II-A-1.... $67,500,000 7.000%
Class II-A-2.... $ 4,000,000 7.000%
Class II-A-3.... $ 4,769,000 7.000%
Class II-A-4.... $28,881,517 7.000%
Class II-A-5.... $20,800,386 7.000%
Class II-A-6.... $ 6,892,997 (2)
</TABLE>
<TABLE>
<CAPTION>
Initial Pass-Through
Class Designation Principal Balance(1) Rate
<S> <C> <C>
Class II-A-7...... $31,985,534 7.000%
Class II-A-8...... $28,174,466 7.000%
Class II-A-R...... $ 100 6.750%
Class B-1......... $ 4,743,000 6.750%
Class B-2......... $ 5,453,000 6.750%
Class B-3......... $ 1,659,000 6.750%
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) Approximate. The initial Principal Balances are subject to adjustment as
described herein.
(2) The Class II-A-6 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 BEGINNING ON PAGE
S-18 AND IN THE PROSPECTUS BEGINNING ON PAGE 11.
The Offered Certificates will be purchased by Donaldson, Lufkin & Jenrette
Securities Corporation (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 99.53% of the aggregate initial Principal Balance of the Class A
Certificates being offered, approximately 98.00% of the aggregate initial
Principal Balance of the Class B-1 Certificates, approximately 97.25% of the
aggregate initial Principal Balance of the Class B-2 Certificates and
approximately 95.00% of the aggregate initial Principal Balance of the Class B-
3 Certificates, plus, in each case, accrued interest thereon from May 1, 1998
to (but not including) May 28, 1998, before deducting expenses payable by the
Seller estimated to be $350,000. The price to be paid to the Seller for the
Class A Certificates being offered hereby has not been allocated among such
Classes of Class A Certificates. See "Underwriting" herein.
The Offered Certificates are offered by the Underwriter subject to prior
sale, when, as and if accepted by the Underwriter and subject to approval of
certain legal matters by Brown & Wood LLP, counsel for the Underwriter. It is
expected that delivery of the Offered Certificates will be made on or about May
28, 1998 through the facilities of The Depository Trust Company, or in the case
of the Class II-A-6, Class II-A-R, Class B-1, Class B-2 and Class B-3
Certificates, at the office of Donaldson, Lufkin & Jenrette Securities
Corporation, New York, N.Y., in each case against payment therefor in
immediately available funds.
----------------
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
----------------
THE DATE OF THIS PROSPECTUS SUPPLEMENT IS MAY 26, 1998.
<PAGE>
(Continued from previous page)
The 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 primarily of
fixed interest rate, conventional, monthly pay, fully amortizing, one- to four-
family, residential first mortgage loans (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. The Mortgage Loans will consist of two groups
("LOAN GROUP I" and "LOAN GROUP II," and each a "LOAN GROUP"). The Mortgage
Loans in Loan Group I are sometimes referred to as the "GROUP I MORTGAGE LOANS"
and the Mortgage Loans in Loan Group II are sometimes referred to as the "GROUP
II MORTGAGE LOANS." The Group I-A Certificates will represent interests in the
Group I Mortgage Loans, which consist of Mortgage Loans substantially all of
which have original terms to maturity of approximately 15 years. The Group II-A
Certificates will represent interests in the Group II Mortgage Loans, which
consist of Mortgage Loans substantially all of which have original terms to
maturity of approximately 30 years. Distributions of interest and principal on
the Group I-A Certificates and the Group II-A Certificates will be based on
interest and principal received or advanced with respect to the Group I
Mortgage Loans and Group II Mortgage Loans, respectively, except with respect
to the Class A-PO Deferred Amounts and under the limited circumstances
described in "Description of the Certificates--Cross-Collateralization" herein.
The rights of the holders of the Class B Certificates to receive distributions
with respect to the Mortgage Loans will be based on interest and principal
received or advanced with respect to both Loan Groups, and will be subordinate
to the rights of the holders of the Class A Certificates to the extent
described herein.
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 Certificates from
Norwest Mortgage, and will have been originated by Norwest Mortgage or acquired
by Norwest Mortgage from various other entities. 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.
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 June 1998, to the
holders of Offered Certificates, as described herein under "Description of the
Certificates--Distributions."
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 IN THE RELATED LOAN GROUP, OR BOTH LOAN GROUPS IN THE CASE OF THE CLASS B
CERTIFICATES. INVESTORS IN THE OFFERED CERTIFICATES SHOULD CONSIDER THE
ASSOCIATED RISKS, INCLUDING, IN THE CASE OF OFFERED CERTIFICATES PURCHASED AT A
DISCOUNT, PARTICULARLY THE CLASS II-A-6 CERTIFICATES, THE RISK THAT A SLOWER
THAN ANTICIPATED RATE OF PAYMENTS IN RESPECT OF PRINCIPAL (INCLUDING
PREPAYMENTS) ON THE MORTGAGE LOANS IN THE RELATED LOAN GROUP, OR BOTH LOAN
GROUPS IN THE CASE OF THE CLASS B CERTIFICATES, COULD RESULT IN AN ACTUAL YIELD
THAT IS LOWER THAN ANTICIPATED AND, IN THE CASE OF OFFERED CERTIFICATES
PURCHASED AT A PREMIUM, THAT A FASTER THAN ANTICIPATED RATE OF PAYMENTS IN
RESPECT OF PRINCIPAL (INCLUDING PREPAYMENTS) ON THE MORTGAGE LOANS IN THE
RELATED LOAN GROUP, OR BOTH LOAN GROUPS IN THE CASE OF THE CLASS B
CERTIFICATES, COULD RESULT IN AN ACTUAL YIELD THAT IS LOWER THAN ANTICIPATED OR
THE FAILURE OF SUCH INVESTORS TO FULLY RECOVER THEIR INITIAL INVESTMENTS. IN
ADDITION, THE YIELD TO MATURITY OF EACH CLASS OF SUBORDINATED CERTIFICATES WILL
BE MORE SENSITIVE TO THE AMOUNT AND TIMING OF LOSSES ON THE MORTGAGE LOANS IN
THE AGGREGATE AND THE OCCURRENCE OF CERTAIN INTEREST SHORTFALLS THAN THE
CLASSES TO WHICH THEY ARE SUBORDINATE. SEE "RISK FACTORS", "DESCRIPTION OF THE
CERTIFICATES--INTEREST", "--PRINCIPAL (INCLUDING PREPAYMENTS)"
S-2
<PAGE>
(Continued from previous page)
AND "--SUBORDINATION OF CLASS B CERTIFICATES" HEREIN AND "PREPAYMENT AND YIELD
CONSIDERATIONS" HEREIN AND IN THE PROSPECTUS.
The Offered Certificates, other than the Class II-A-6, Class II-A-R, Class B-
1, Class B-2 and Class B-3 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.
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. IN ADDITION,
THE CLASS II-A-R, CLASS B-1, CLASS B-2 AND CLASS B-3 CERTIFICATES ARE SUBJECT
TO VARIOUS TRANSFER RESTRICTIONS DESCRIBED HEREIN. See "ERISA Considerations"
and "Description of the Certificates--Restrictions on Transfer of the Class II-
A-R and Class B Certificates" herein and "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.
An election will be made to treat the Trust Estate as a real estate mortgage
investment conduit (the "REMIC") for federal income tax purposes. See "Material
Federal Income Tax Consequences" herein.
The Offered Certificates are part of a separate Series of Certificates being
offered by the Seller pursuant to the Prospectus dated May 26, 1998
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 NINETY DAYS AFTER THE DATE OF THIS PROSPECTUS SUPPLEMENT, ALL DEALERS
EFFECTING TRANSACTIONS IN THE OFFERED CERTIFICATES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS
SUPPLEMENT AND 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-3
<PAGE>
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SUMMARY INFORMATION....................................................... S-5
RISK FACTORS.............................................................. S-18
Prepayments May Adversely Affect Yield................................... S-18
Subordination of Subordinated Certificates Increases Risk of Loss........ S-18
Class B Certificates Provide Subordination for Both Groups............... S-18
Underwriting Standards................................................... S-19
Rights of Beneficial Owners May Be Limited By Book-Entry System for
Certain Classes of Class A Certificates................................. S-19
Certificates May Not Be Appropriate For Individual Investors............. S-19
Risks Associated with Year 2000 Compliance............................... S-20
DESCRIPTION OF THE CERTIFICATES........................................... S-21
Denominations; Forms of Certificates..................................... S-21
Distributions............................................................ S-21
Interest................................................................. S-24
Principal (Including Prepayments)........................................ S-28
Calculation of Amount to be Distributed on the Certificates............. S-28
Allocation of Amount to be Distributed on the Class A Certificates...... S-33
Cross-Collateralization.................................................. S-35
Additional Rights of the Class II-A-R Certificateholder.................. S-35
Periodic Advances........................................................ S-35
Restrictions on Transfer of the Class II-A-R and Class B Certificates.... S-36
Reports.................................................................. S-38
Subordination of Class B Certificates.................................... S-38
Allocation of Losses.................................................... S-38
DESCRIPTION OF THE MORTGAGE LOANS......................................... S-41
General.................................................................. S-41
Mortgage Loan Underwriting............................................... S-41
Group I Mortgage Loan Data............................................... S-42
Group II Mortgage Loan Data.............................................. S-44
Mandatory Repurchase or Substitution of Mortgage Loans................... S-54
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Optional Repurchase of Defaulted Mortgage Loans.......................... S-54
PREPAYMENT AND YIELD CONSIDERATIONS....................................... S-54
Sensitivity of the Class II-A-6 Certificates............................. S-64
Yield Considerations with Respect to the Class B-2 and Class B-3
Certificates............................................................ S-65
POOLING AND SERVICING AGREEMENT........................................... S-67
General.................................................................. S-67
Distributions............................................................ S-67
Voting................................................................... S-67
Trustee.................................................................. S-67
Master Servicer.......................................................... S-68
Special Servicing Agreements............................................. S-68
Optional Termination..................................................... S-68
SERVICING OF THE MORTGAGE LOANS........................................... S-68
The Servicers............................................................ S-69
Servicer Custodial Accounts.............................................. S-69
Unscheduled Principal Receipts........................................... S-69
Anticipated Changes in Servicing......................................... S-70
Fixed Retained Yield; Servicing Compensation and Payment of Expenses..... S-71
Servicer Defaults........................................................ S-71
MATERIAL FEDERAL INCOME TAX CONSEQUENCES.................................. S-71
Regular Certificates..................................................... S-72
Residual Certificate..................................................... S-72
ERISA CONSIDERATIONS...................................................... S-73
LEGAL INVESTMENT.......................................................... S-74
SECONDARY MARKET.......................................................... S-74
UNDERWRITING.............................................................. S-75
LEGAL MATTERS............................................................. S-75
USE OF PROCEEDS........................................................... S-75
RATINGS................................................................... S-75
INDEX OF SIGNIFICANT PROSPECTUS SUPPLEMENT DEFINITIONS.................... S-77
</TABLE>
S-4
<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-77 and the "Index of Significant Definitions"
in the Prospectus.
Title of Securities..... Mortgage Asset-Backed Pass-Through Certificates, Se-
ries 1998-1 (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. See "Description of the Mort-
gage Loans" in this Prospectus Supplement.
Servicing/Servicers..... Norwest Mortgage and one or more other Servicers ap-
proved by the Master Servicer will provide customary
servicing functions with respect to the Mortgage
Loans pursuant to servicing agreements (each, an
"UNDERLYING SERVICING AGREEMENT") assigned to the
Trust Estate. See "Servicing of the Mortgage 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"). See "The Pooling
and Servicing Agreement--Master Servicer" in this
Prospectus Supplement.
Trustee................. First Union National Bank, a national banking asso-
ciation (the "TRUSTEE"). See "Pooling and Servicing
Agreement--Trustee" in this Prospectus Supplement.
Rating of It is a condition to the issuance of the Offered
Certificates........... Certificates that they shall have received at least
the following ratings from Moody's Investors Serv-
ice, Inc. ("MOODY'S") and Fitch IBCA, Inc. ("FITCH",
and, together with Moody's, the "RATING AGENCIES"):
RATINGS OF OFFERED CERTIFICATES
<TABLE>
<CAPTION>
CLASS MOODY'S FITCH
----- ------- -----
<S> <C> <C>
Class A........................................................ Aaa AAA
Class B-1...................................................... Aa2 AA
Class B-2...................................................... N/A A
Class B-3...................................................... N/A BBB
</TABLE>
The ratings by Moody's and Fitch are not recommenda-
tions to buy, sell or hold such Certificates and may
be subject to revision or withdrawal at any time by
the assigning Rating Agency. The ratings do not ad-
dress the possibility that, as a result of principal
prepayments, holders of such Certificates may re-
ceive a lower than anticipated yield. See "--Effects
of Prepayments on Investment Expectations" below and
"Ratings" in this Prospectus Supplement.
S-5
<PAGE>
Description of The Certificates will consist of the "CLASS A CER-
Certificates........... TIFICATES" and the "CLASS B CERTIFICATES." The Class
A Certificates will be senior certificates and will
consist of two groups (each, a "GROUP" and respec-
tively, the "GROUP I-A CERTIFICATES" and the "GROUP
II-A CERTIFICATES"). The Group I-A Certificates will
consist of two Classes designated as the Class I-A-1
and Class I-A-PO Certificates. The Group II-A Cer-
tificates will consist of ten Classes designated as
the Class II-A-1, Class II-A-2, Class II-A-3, Class
II-A-4, Class II-A-5, Class II-A-6, Class II-A-7,
Class II-A-8, Class II-A-PO and Class II-A-R Certif-
icates. The Class B Certificates will be junior cer-
tificates and will consist of six Classes, desig-
nated as the Class B-1, Class B-2, Class B-3, Class
B-4, Class B-5 and Class B-6 Certificates. The Class
B Certificates are sometimes referred to herein as
the "SUBORDINATED CERTIFICATES." The Class I-A-PO
and Class II-A-PO Certificates are sometimes re-
ferred to herein as the "CLASS A-PO CERTIFICATES."
The Class A Certificates, other than the Class A-PO
Certificates, and the Class B-1, Class B-2 and Class
B-3 Certificates are referred to herein collectively
as the "OFFERED CERTIFICATES." The Class A-PO, Class
B-4, Class B-5 and Class B-6 Certificates are not
offered hereby and may be retained or sold by the
Seller.
The Offered Certificates belong to the following
categories described in the Prospectus under "De-
scription of the Certificates--Categories of Classes
of Certificates":
<TABLE>
<CAPTION>
CATEGORIES CLASSES
---------- -------
<S> <C> <C>
Fixed Rate Classes...... All Classes of Offered Certificates, other
than the Class II-A-6 Certificates
Principal Only Class.... Class II-A-6 Certificates
Component Certificates.. Class II-A-6 Certificates
----------------------------------------------------------------
</TABLE>
The Certificates will have an approximate aggregate
initial principal balance of $237,109,431. Any dif-
ference between the aggregate principal balance of
the Certificates as of the date of issuance of the
Certificates and the approximate aggregate initial
principal balance thereof as of the date of this
Prospectus Supplement will not exceed 5% of the ag-
gregate initial principal balance of the Certifi-
cates, and will be allocated among the various Clas-
ses of Certificates so as to retain materially the
characteristics thereof described herein.
The following tables set forth the approximate undi-
vided interest in the principal balance of the Mort-
gage Loans of the applicable Loan Group(s) that is
expected to be evidenced in the aggregate by such
related Class or Group of Classes indicated as of
the Closing Date.
S-6
<PAGE>
<TABLE>
----------------------------------------------------
<CAPTION>
APPROXIMATE INITIAL
UNDIVIDED INTEREST
LOAN GROUP I IN THE GROUP I
CLASS OR CLASSES MORTGAGE LOANS
---------------- -------------------
<S> <C> <C>
Group I-A (other than Class I-A-PO)..... 93.92%
Class I-A-PO*........................... 0.08%
---------
Group I-A (all Classes)............... 94.00%
=========
</TABLE>
-------------------
* The Class I-A-PO Certificates in the aggregate
represent an approximate 1.80% initial interest in
the aggregate principal balance of the Group I
Discount Mortgage Loans.
-----------------------------------------------------
<TABLE>
<CAPTION>
APPROXIMATE INITIAL
UNDIVIDED INTEREST
LOAN GROUP II IN THE GROUP II
CLASS OR CLASSES MORTGAGE LOANS
---------------- -------------------
<S> <C> <C>
Group II-A (other than Class II-A-PO)... 94.00%
Class II-A-PO*.......................... 0.00%
---------
Group II-A (all Classes).............. 94.00%
=========
</TABLE>
-------------------
* The Class II-A-PO Certificates in the aggregate
represent an approximate 0.64% initial interest in
the aggregate principal balance of the Group II
Discount Mortgage Loans.
-----------------------------------------------------
<TABLE>
<CAPTION>
APPROXIMATE INITIAL
UNDIVIDED INTEREST
IN THE
CLASS OR CLASSES MORTGAGE LOANS
---------------- --------------------
<S> <C> <C>
Group I-A (other than
Class I-A-PO)............ 12.59%
Class I-A-PO*............. 0.01%
---------
Group I-A (all
Classes)............... 12.60%
Group II-A (other than
Class II-A-PO)........... 81.40%
Group II-A-PO*............ 0.00%
---------
Group II-A (all
Classes)............... 81.40%
Class B-1................. 2.00%
Class B-2................. 2.30%
Class B-3................. 0.70%
Class B-4, B-5 and B-6.... 1.00%
---------
Total................... 100.00%
=========
</TABLE>
-------------------
* The Class I-A-PO and Class II-A-PO Certificates
represent approximately 1.31% and 0.17%, respec-
tively, initial interests in the aggregate princi-
pal balance of the Discount Mortgage Loans.
-----------------------------------------------------
The following tables set forth for the Classes or
Groups of Classes indicated the approximate undi-
vided interest in the Pool Balance (Non-PO Portion)
for the related Loan Group(s) that is expected to be
evidenced in the aggregate thereby as of the Closing
Date.
-----------------------------------------------------
<TABLE>
<CAPTION>
APPROXIMATE INITIAL
UNDIVIDED INTEREST
IN POOL BALANCE
(NON-PO PORTION)
FOR LOAN GROUP I
LOAN GROUP I ----------------------
CLASS OR CLASSES PERCENTAGE IN DOLLARS
---------------- ---------- -----------
<S> <C> <C>
Group I-A (other than Class I-A-
PO)................................ 93.99% $29,848,000
----- -----------
Totals............................ 93.99% $29,848,000
===== ===========
---------------------------------------------------
</TABLE>
S-7
<PAGE>
<TABLE>
----------------------------------------------------
<CAPTION>
APPROXIMATE INITIAL
UNDIVIDED INTEREST IN
POOL BALANCE
(NON-PO PORTION)
FOR LOAN GROUP II
LOAN GROUP II ------------------------------
CLASS OR CLASSES PERCENTAGE IN DOLLARS
---------------- ------------- ----------------
<S> <C> <C>
Group II-A (other than Class
II-A-PO)................... 94.00% $ 193,004,000
---------- ----------------
Totals.................... 94.00% $ 193,004,000
========== ================
----------------------------------------------------
<CAPTION>
APPROXIMATE INITIAL
UNDIVIDED INTEREST IN
AGGREGATE OF POOL BALANCES
(NON-PO PORTION)
------------------------------
CLASS OR CLASSES PERCENTAGE IN DOLLARS
---------------- ------------- ----------------
<S> <C> <C>
Group I-A (other than Class
I-A-PO).................... 12.59% $ 29,848,000
Group II-A (other than Class
II-A-PO)................... 81.41% 193,004,000
Class B..................... 6.00% 14,227,799
---------- ----------------
Totals.................... 100.00% $237,079,799
========== ================
</TABLE>
-----------------------------------------------------
The relative interests in the applicable initial
Pool Balance (Non-PO Portion) represented by the
Class A Certificates of a Group (other than the
Class A-PO Certificates of such Group) and the Class
B Certificates are subject to change over time be-
cause of the disproportionate allocation of certain
unscheduled principal payments on the Mortgage Loans
of the related Loan Group to the related Group of
Class A Certificates (other than the Class A-PO Cer-
tificates of such Group) for a specified period and
the allocation of certain losses and certain
shortfalls on the Mortgage Loans in such Loan Group
first to the Classes of Class B Certificates in re-
verse numerical order prior to the allocation of
such losses and shortfalls to the related Group of
Class A Certificates, as discussed in "--Distribu-
tions" and "--Subordination of Class B Certificates"
in this Prospectus Supplement.
Forms of Certificates;
Denominations.......... The Offered Certificates will be issued either in
book-entry form or in fully registered, certificated
form. The table under "Description of the Certifi-
cates--Denominations; Form of Certificates" in this
Prospectus Supplement sets forth the original cer-
tificate form, the minimum denomination and the in-
cremental denomination of the Offered Certificates.
The Offered Certificates are not intended to be di-
rectly or indirectly held or beneficially owned in
amounts lower than such minimum denominations.
Mortgage Loans.......... General. The Mortgage Loans will consist of conven-
tional, fixed interest rate, monthly pay, fully am-
ortizing, one- to four-family, residential first
mortgage loans. Some of the Mortgage Loans are ex-
pected to be mortgage loans originated in connection
with the relocation of employees of various corpo-
rate employers participating in Norwest Mortgage's
relocation program and of employees of various em-
ployers that did not participate in such program.
The Group I Mortgage Loans (which, except to the ex-
tent of cross-collateralization payments described
below, are the source of distributions to holders of
the Group I-A Certificates and the source of a por-
tion of the distributions to holders of the Class B
Certificates) will consist
S-8
<PAGE>
of Mortgage Loans substantially all of which have
original terms to maturity of approximately 15
years. The Group II Mortgage Loans (which, except to
the extent of cross-collateralization payments de-
scribed below, are the source of distributions to
holders of the Group II-A Certificates and the
source of a portion of the distributions to holders
of the Class B Certificates) will consist of Mort-
gage Loans substantially all of which have original
terms to maturity of approximately 30 years.
The Mortgage Loans are expected to have the further
specifications set forth in the following table and
under the heading "Description of the Mortgage
Loans" in this Prospectus Supplement.
- --------------------------------------------------------------------------------
GROUP I MORTGAGE LOANS
SELECTED MORTGAGE LOAN DATA(/1/)
(AS OF THE CUT-OFF DATE)
<TABLE>
<S> <C> <C>
Cut-Off Date: May 1, 1998
Number of Group I Mortgage Loans: 275
Aggregate Unpaid Principal Balance(/2/): $31,781,747
Range of Unpaid Principal Balances(/2/): $14,746 to $641,092
Average Unpaid Principal Balance(/2/): $115,570
Range of Mortgage Interest Rates: 6.500% to 9.125%
Weighted Average Mortgage Interest Rate(/2/): 7.775%
Range of Remaining Terms to Stated Maturity: 154 months to 180 months
Weighted Average Remaining Term to Stated
Maturity(/2/): 174 months
Range of Original Loan-to-Value Ratios(/2/): 25.68% to 95.00%
Weighted Average Original Loan-to-Value
Ratio(/2/): 69.27%
Geographic Concentration of Mortgaged
Properties Securing Mortgage Loans in Excess
of 5% of the Aggregate Unpaid Principal
Balance(/2/): New York 10.97%
Florida 10.81%
Colorado 10.18%
California 9.04%
Texas 8.04%
Massachusetts 6.70%
Maximum Five-Digit Zip Code
Concentration(/2/): 2.02%
</TABLE>
- -------------------
(1) Information concerning the Group I Discount Mortgage Loans and Group I
Premium Mortgage Loans is set forth under "Description of the Mortgage
Loans--Mortgage Loan Characteristics."
(2) Approximate.
- --------------------------------------------------------------------------------
GROUP II MORTGAGE LOANS
SELECTED MORTGAGE LOAN DATA(/1/)
(AS OF THE CUT-OFF DATE)
<TABLE>
<S> <C> <C>
Cut-Off Date: May 1, 1998
Number of Group II Mortgage Loans: 1,477
Aggregate Unpaid Principal Balance(/2/): $205,327,684
Range of Unpaid Principal Balances(/2/): $18,188 to $875,509
Average Unpaid Principal Balance(/2/): $139,017
Range of Mortgage Interest Rates: 6.875% to 9.750%
Weighted Average Mortgage Interest Rate(/2/): 8.069%
Range of Remaining Terms to Stated Maturity: 239 months to 360 months
Weighted Average Remaining Term to Stated
Maturity(/2/): 354 months
Range of Original Loan-to-Value Ratios(/2/): 11.29% to 95.00%
Weighted Average Original Loan-to-Value
Ratio(/2/): 75.78%
Geographic Concentration of Mortgaged
Properties Securing Mortgage Loans in Excess
of 5% of the Aggregate Unpaid Principal
Balance(/2/): California 18.06%
Colorado 7.62%
Florida 5.68%
Texas 5.16%
New York 5.12%
Maximum Five-Digit Zip Code
Concentration(/2/): 0.65%
</TABLE>
- -------------------
(1) Information concerning the Group II Discount Mortgage Loans and Group II
Premium Mortgage Loans is set forth under "Description of the Mortgage
Loans--Mortgage Loan Characteristics."
(2) Approximate.
- --------------------------------------------------------------------------------
S-9
<PAGE>
Changes to Pool. Mortgage Loans may be removed from
a Loan Group, or a substitution may be made for
certain Mortgage Loans, in advance of the issuance
of the Certificates (which is expected to occur on
or about May 28, 1998 (the "CLOSING DATE")).
Subsequent to the issuance of the Certificates,
certain Mortgage Loans may be removed from a Loan
Group through repurchase or, under certain
circumstances, through substitution by the Seller,
in the circumstances described under "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
Trust Estate, to purchase all outstanding Mortgage
Loans in the Trust Estate and thereby effect early
retirement of the Certificates. See "Pooling and
Servicing Agreement--Optional Termination" in this
Prospectus Supplement.
Underwriting Approximately 97.41% (by the aggregate unpaid prin-
Standards.............. cipal balance as of the Cut-Off Date) of the Group I
Mortgage Loans and approximately 99.17% (by the ag-
gregate unpaid principal balance as of the Cut-Off
Date) of the Group II Mortgage Loans were generally
originated in conformity with Norwest Mortgage's
general underwriting standards (the "GENERAL STAN-
DARDS") 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". In certain
instances, exceptions to the Underwriting Standards
may have been granted by Norwest Mortgage. The re-
maining approximate 2.59% (by the aggregate unpaid
principal balance as of the Cut-Off Date) of the
Group I Mortgage Loans and approximate 0.83% (by the
aggregate unpaid principal balance as of the Cut-Off
Date) of the Group II Mortgage 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 UNDERWRITTEN LOANS"). Norwest Mort-
gage has in each case reviewed the underwriting
standards applied for such Bulk Purchase Underwrit-
ten Loans and determined that such variances did not
depart materially from the Underwriting Standards.
See "Description of the Mortgage Loans" in this Pro-
spectus Supplement and "The Mortgage Loan Programs--
Mortgage Loan Underwriting" in the Prospectus.
Distributions of
Principal and On each Distribution Date the Pool Distribution
Interest............... Amount relating to each Loan Group, which consists
of those payments, recoveries, advances and other
receipts in respect of the Mortgage Loans in such
Loan Group which are available for distribution on
such date, will be distributed generally in the
following order of priority:
S-10
<PAGE>
First, to the holders of the Group I-A
Certificates or Group II-A Certificates, as
applicable, in respect of interest which they
are entitled to receive on such Distribution
Date;
Second, to the holders of the Group I-A
Certificates or Group II-A Certificates, as
applicable, in respect of principal which they
are entitled to receive on such Distribution
Date; and
Third, to the holders of the Class B
Certificates in numerical order (i.e., first
to the Class B-1 Certificates, then the Class
B-2 Certificates, etc.) in respect of interest
and principal which they are entitled to
receive on such Distribution Date.
Notwithstanding the foregoing, the portion, if any,
of principal to which the Class A-PO Certificates of
a Group are entitled on a Distribution Date which
consists of the applicable Class A-PO Deferred
Amount will only be paid out of aggregate amounts
otherwise distributable on such Distribution Date as
principal on the Class B Certificates from both Pool
Distribution Amounts.
The amount of interest which will accrue on each
Class of Offered Certificates (other than the Class
II-A-6 Certificates) each month is equal to (i)
1/12th of the Pass-Through Rate for such Class
multiplied by the outstanding Principal Balance of
such Class on the related Distribution Date minus
(ii) the amount of certain interest shortfalls
arising from the timing of prepayments on the
Mortgage Loans and interest losses allocated to such
Class, as described under "Description of the
Certificates--Interest" in this Prospectus
Supplement. The Class II-A-6 Certificates are not
entitled to distributions in respect of interest.
The calculation of the amount of principal which
each Class of Offered Certificates is entitled to
receive on each Distribution Date and the allocation
of interest and priority of principal distributions
among the Class A Certificates of each Group are
described under "Description of the Certificates--
Distributions," "--Interest" and "--Principal
(Including Prepayments)" in this Prospectus
Supplement.
Credit Enhancement...... The rights of the holders of each Class of Class B
Certificates to receive distributions will be subor-
dinated to the rights of the holders of the Class A
Certificates and the Classes of Class B Certificates
with lower numerical designations to receive distri-
butions, to the extent described herein.
In general, the protection afforded the holders of
more senior Classes of Certificates by means of this
subordination will be effected in two ways: (i) by
the preferential right of the holders of such Clas-
ses to receive, prior to any distribution being made
on any Distribution Date in respect of more junior
Classes of Certificates, the amounts of interest and
principal due the holders of more senior Classes of
Certificates (other than the Class A-PO Deferred
Amounts) and, if necessary, by the right of such
holders to receive future distributions on the Mort-
gage Loans that would otherwise have been allocated
to the holders of the more junior Classes of Certif-
icates and (ii) by the allocation to the more junior
Classes of
S-11
<PAGE>
Certificates (in inverse order of seniority), until
their respective Principal Balances have been re-
duced to zero, of certain losses resulting from the
liquidation of defaulted Mortgage Loans or the bank-
ruptcy of mortgagors prior to the allocation of such
losses to the more senior Classes of Certificates
(other than certain excess losses arising from spe-
cial hazards, mortgagor fraud or mortgagor bankrupt-
cy). See "Description of the Certificates--Distribu-
tions and "--Subordination of Class B Certificates"
in this Prospectus Supplement.
In addition, in order to increase the period during
which the Principal Balances of the Class B Certifi-
cates remain available as credit enhancement to the
Class A Certificates, a disproportionate amount of
prepayments and certain unscheduled recoveries with
respect to the Mortgage Loans of each Loan Group
will be allocated to the related Group of Class A
Certificates (other than the Class A-PO Certificates
of such Group). This allocation has the effect of
accelerating the amortization of the Class A Certif-
icates of such Group (other than the Class A-PO Cer-
tificates of such Group) 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 per-
centage interest in the principal balance of the
Mortgage Loans in the related Loan Group evidenced
by the Class B Certificates. See "Description of the
Certificates" and "Prepayment and Yield Considera-
tions" in this Prospectus Supplement.
After the Principal Balances of the Class B Certifi-
cates have been reduced to zero, the principal por-
tion of all losses (other than the portion attribut-
able to the Discount Mortgage Loans in such Loan
Group, if any) will be allocated to the related
Group of Class A Certificates (other than the Class
A-PO Certificates of such Group). To the extent such
losses arise with respect to Discount Mortgage
Loans, principal losses will be shared among the
Class A Certificates of the related Group according
to their respective interests in such Mortgage
Loans. The principal portion of any losses borne by
the Class A Certificates of a Group (other than
losses borne by the Class A-PO Certificates of such
Group) will be shared pro rata by the Classes of
Class A Certificates of such Group (other than the
Class A-PO Certificates of such Group) based on
their then-outstanding Principal Balances and the
interest portion of such losses will be shared pro
rata by such Classes based on interest accrued. See
"Description of the Certificates--Interest" and "--
Subordination of Class B Certificates--Allocation of
Losses" in this Prospectus Supplement.
The principal portion of excess losses arising from
special hazards, mortgagor fraud and mortgagor bank-
ruptcy will be allocated to the Classes of Class A
Certificates of the related Group (other than the
Class A-PO Certificates of such Group) and the Class
B Certificates pro rata based, in the case of such
Class A Certificates, on their then-outstanding
Principal Balances and, in the case of the Class B
Certificates, on their related Apportioned Principal
Balances. To the extent such
S-12
<PAGE>
losses arise with respect to Discount Mortgage
Loans, such losses will be allocated between the
Class A-PO Certificates of the related Group based
upon their respective interests in such Mortgage
Loans, and among the other Classes of Class A Cer-
tificates of such Group and the Class B Certificates
pro rata based, in the case of the Class A Certifi-
cates, on their then-outstanding Principal Balances
or, in the case of the Class B Certificates, their
related Apportioned Principal Balances. The interest
portion of such losses will be shared pro rata among
the Class A Certificates of the related Group and
the Class B Certificates based on interest accrued
on the Principal Balances or Apportioned Principal
Balances, as applicable. See "Description of the
Certificates--Interest" and "Subordination of Class
B Certificates--Allocation of Losses" in this Pro-
spectus Supplement.
Because the Class B Certificates represent interests
in both Loan Groups, the Principal Balances of the
Class B Certificates could be reduced to zero as a
result of a disproportionate amount of losses on the
Mortgage Loans in one Loan Group, increasing the
likelihood that losses on the Mortgage Loans in the
other Loan Group will be allocated to the Group of
Class A Certificates corresponding to such other
Loan Group.
Under certain limited circumstances, payments on the
Mortgage Loans in a Loan Group may be distributed to
holders of the Group of Class A Certificates (other
than the Class A-PO Certificates of such Group) cor-
responding to the other Loan Group. After the Prin-
cipal Balances of a Group of Class A Certificates
(other than the Class A-PO Certificates of such
Group) have been reduced to zero, payments on the
Mortgage Loans in the corresponding Loan Group may,
under certain conditions, be distributed as princi-
pal to the holders of the other Group of Class A
Certificates (other than the Class A-PO Certificates
of such Group) prior to being distributed as princi-
pal to holders of the Class B Certificates. Also,
holders of Class A Certificates of a Group (other
than the Class A-PO Certificates of such Group) cor-
responding to a Loan Group for which the interest in
such Loan Group represented by the Class B Certifi-
cates has been reduced to zero, may receive payments
on the Mortgage Loans in the other Loan Group from
amounts otherwise distributable as principal to
holders of the Class B Certificates in the event
that the aggregate Principal Balance of such Class A
Certificates exceeds the Adjusted Pool Amount (Non-
PO Portion) for such Group. See "Description of the
Certificates--Cross Collateralization" herein. In
addition, the Class A-PO Deferred Amounts are pay-
able from amounts otherwise distributable as princi-
pal on the Class B Certificates regardless of the
Loan Group from which such payments are derived.
THE YIELD TO MATURITY ON EACH CLASS OF CLASS B CER-
TIFICATES WILL BE MORE SENSITIVE TO LOSSES DUE TO
LIQUIDATIONS OF THE MORTGAGE LOANS (AND THE TIMING
THEREOF) THAN THE YIELD TO MATURITY OF THE MORE SE-
NIOR CLASSES OF CERTIFICATES, IN THE EVENT THAT THE
PRINCIPAL BALANCES OF THE CLASSES OF CERTIFICATES
THAT ARE JUNIOR TO IT HAVE BEEN REDUCED TO ZERO.
S-13
<PAGE>
See "Description of the Certificates--Subordination
of Class B Certificates" in this Prospectus Supple-
ment.
Effects of Prepayments
on Investment
Expectations........... The Offered Certificates were structured assuming,
among other things that prepayments on the Mortgage
Loans occur at a constant rate of 100% of the Pre-
payment Vector (as defined herein). However, the ac-
tual rate of prepayment of principal on the Mortgage
Loans cannot be predicted. The investment perfor-
mance of the Offered Certificates may vary materi-
ally and adversely from the investment expectations
of investors due to prepayments on the Mortgage
Loans being higher or lower than anticipated by in-
vestors. In addition, each Group of Class A Certifi-
cates (other than the Class A-PO Certificates of
such Group) in the aggregate will be more sensitive
to prepayments on the Mortgage Loans in the related
Loan Group than the Subordinated Certificates due to
the disproportionate allocation of such prepayments
to investors in such Class A Certificates then enti-
tled to principal distributions during the nine
years beginning on the first Distribution Date. See
"Description of the Certificates--Principal (Includ-
ing Prepayments)" and "Prepayment and Yield Consid-
erations" in this Prospectus Supplement. 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 ex-
pected by the investor or the expected weighted av-
erage life of the Certificate may not be realized.
These effects are summarized below. IN DECIDING
WHETHER TO PURCHASE ANY OFFERED CERTIFICATES, AN IN-
VESTOR SHOULD MAKE AN INDEPENDENT DECISION AS TO THE
APPROPRIATE PREPAYMENT ASSUMPTIONS TO BE USED.
Yield. If an investor purchases an Offered Certifi-
cate (other than a Class II-A-6 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 Offered Cer-
tificate (that is, buys the Certificate at a "dis-
count" 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 discount or
premium will be amortized over the life of the Cer-
tificate. Any deviation in the actual rate of pre-
payments on the related 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 antici-
pated. The timing of receipt of prepayments may also
affect the investor's actual yield. The yield expe-
rienced by an investor in the Class II-A-6 Certifi-
cates, which do not bear interest, is primarily a
function of the price paid by such investor, the
rate and timing of principal payments on the Group
II Mortgage Loans and losses incurred on and after
the Cross-Over
S-14
<PAGE>
Date. The particular sensitivity of the Class II-A-6
Certificates is displayed in a table appearing under
the heading "Prepayment and Yield Considerations" in
this Prospectus Supplement. AN INVESTOR THAT PUR-
CHASES ANY OFFERED CERTIFICATES AT A DISCOUNT, PAR-
TICULARLY THE CLASS II-A-6 CERTIFICATES, SHOULD CON-
SIDER THE RISK THAT A SLOWER THAN ANTICIPATED RATE
OF PRINCIPAL PAYMENTS ON THE MORTGAGE LOANS IN THE
RELATED LOAN GROUP, OR BOTH LOAN GROUPS IN THE CASE
OF THE CLASS B CERTIFICATES, WILL RESULT IN AN AC-
TUAL YIELD THAT IS LOWER THAN SUCH INVESTOR'S EX-
PECTED 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 IN THE RELATED LOAN
GROUP, OR BOTH LOAN GROUPS IN THE CASE OF THE CLASS
B CERTIFICATES, WILL RESULT IN AN ACTUAL YIELD THAT
IS LOWER THAN SUCH INVESTOR'S EXPECTED YIELD AND
SHOULD CONSIDER THE RISK THAT A RAPID RATE OF PRIN-
CIPAL PAYMENTS ON THE MORTGAGE LOANS IN THE RELATED
LOAN GROUP, OR BOTH LOAN GROUPS IN THE CASE OF THE
CLASS B CERTIFICATES, COULD RESULT IN THE FAILURE OF
SUCH INVESTOR TO FULLY RECOVER ITS INITIAL INVEST-
MENT.
Reinvestment Risk. As stated above, if an Offered
Certificate (other than a Class II-A-6 Certificate)
is purchased at par, fluctuations in the rate of
distributions of principal will generally not affect
the yield to maturity of that Certificate. However,
the total return on any investor's investment, in-
cluding an investor who purchases at par, will be
reduced to the extent that principal distributions
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 II-A-6 Cer-
tificates, the expected yield, which is based on the
price paid by the investor and the rate of prepay-
ments anticipated by such investor. Investors in the
Offered Certificates should consider the risk that
rapid rates of prepayments on the Mortgage Loans in
the related Loan Group, or both Loan Groups in the
case of the Class B Certificates, 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 refi-
nance Mortgage Loans that carry interest rates sig-
nificantly higher than then-current interest rates
for mortgage loans. Consequently, the amount of
principal distributions available to an investor for
reinvestment at such low prevailing interest rates
may be relatively large. Conversely, slow rates of
prepayments on the Mortgage Loans in the related
Loan Group, or both Loan Groups in the case of the
Class B Certificates, may coincide with periods of
high prevailing market interest rates. During such
periods, it is less likely that mortgagors will
elect to prepay or refinance Mortgage Loans and,
therefore, the amount of principal distributions
available to an investor for reinvestment 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 Certificate is
the average amount of time that will elapse between
the date of issuance
S-15
<PAGE>
of the Certificate and the date on which each dollar
in reduction of the principal balance of the Certif-
icate is distributed to the investor. Low rates of
prepayment on the Mortgage Loans in the related Loan
Group, or both Loan Groups in the case of the Class
B Certificates, 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 an Of-
fered Certificate purchased at par is extended be-
yond that initially anticipated, such Certificate's
market value may be adversely affected even though
the yield to maturity on the Certificate is unaf-
fected.
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 (In-
cluding Prepayments)--Allocation of Amount to be
Distributed on the Class A Certificates" 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
I-A-1, Class I-A-PO, Class II-A-1, Class II-A-2,
Class II-A-3, Class II-A-4, Class II-A-5, Class II-
A-6, Class II-A-7, Class II-A-8, Class II-A-PO,
Class B-1, Class B-2, Class B-3, Class B-4, Class B-
5 and Class B-6 Certificates will constitute "regu-
lar interests" in the REMIC and the Class II-A-R
Certificate will constitute the "residual interest"
in the REMIC.
The Regular Certificates (as defined herein) 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. Certain of the
Classes of Offered Certificates may be issued with
original issue discount as described under "Material
Income Tax Consequences" in this Prospectus State-
ment.
The holder of the Class II-A-R Certificate will be
required 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 II-A-R Certificateholder will be treated as
"excess inclusion" income subject to special limita-
tions for federal income tax purposes. AS A RESULT,
THE EFFECTIVE AFTER-TAX RETURN OF THE CLASS II-A-R
CERTIFICATE MAY BE SIGNIFICANTLY LOWER THAN WOULD BE
THE CASE IF THE CLASS II-A-R CERTIFICATE WERE TAXED
AS A DEBT INSTRUMENT, OR MAY BE NEGATIVE. FURTHER,
SIGNIFICANT RESTRICTIONS APPLY TO THE TRANSFER OF
THE CLASS II-A-R CERTIFICATE. THE CLASS II-A-R CER-
TIFICATE WILL BE CONSIDERED A "NONECONOMIC RESIDUAL
INTEREST," CERTAIN TRANSFERS OF WHICH MAY BE DISRE-
GARDED FOR FEDERAL INCOME TAX PURPOSES.
S-16
<PAGE>
See "Description of the Certificates--Restrictions
on Transfer of the Class II-A-R and Class B Certifi-
cates" and "Material Federal Income Tax Conse-
quences" in this Prospectus Supplement and "Material
Federal Income Tax Consequences--Federal Income Tax
Consequences for REMIC Certificates" in the Prospec-
tus.
ERISA Considerations.... A fiduciary of any employee benefit plan or other
retirement plan or arrangement subject to Title I of
the Employee Retirement Income Security Act of 1974,
as amended ("ERISA"), or Section 4975 of the Inter-
nal 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, sim-
ilar to the foregoing provisions of ERISA or the
Code (collectively, a "PLAN"), should carefully re-
view with its legal advisors whether the purchase or
holding of Offered Certificates could give rise to a
transaction prohibited or not otherwise permissible
under ERISA, the Code or Similar Law. BECAUSE THE
CLASS B-1, CLASS B-2 AND CLASS B-3 CERTIFICATES ARE
SUBORDINATED TO THE CLASS A CERTIFICATES, WITH RE-
SPECT TO CERTAIN LOSSES, THE CLASS B-1, CLASS B-2
AND CLASS B-3 CERTIFICATES MAY NOT BE TRANSFERRED
UNLESS THE TRANSFEREE HAS DELIVERED (I) A REPRESEN-
TATION LETTER TO THE TRUSTEE AND SELLER STATING EI-
THER (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 SUCH CERTIFICATES IS AN
"INSURANCE COMPANY GENERAL ACCOUNT" OR (II) AN OPIN-
ION OF COUNSEL AND SUCH OTHER DOCUMENTATION AS DE-
SCRIBED UNDER "DESCRIPTION OF THE CERTIFICATES--RE-
STRICTIONS ON TRANSFER OF THE CLASS II-A-R AND CLASS
B CERTIFICATES" IN THIS PROSPECTUS SUPPLEMENT. THE
CLASS II-A-R CERTIFICATE MAY NOT BE PURCHASED BY OR
TRANSFERRED TO A PLAN OR A PERSON ACTING ON BEHALF
OF OR INVESTING THE ASSETS OF A PLAN. See "Descrip-
tion of the Certificates--Restrictions on Transfer
of the Class II-A-R and Class B Certificates" in
this Prospectus Supplement and "ERISA Considera-
tions" in this Prospectus Supplement and in the Pro-
spectus.
Legal Investment........ The Class A and Class B-1 Certificates will consti-
tute "mortgage related securities" for purposes of
the Secondary Mortgage Market Enhancement Act of
1984, as amended ("SMMEA") so long as they are rated
in one of the two highest rating categories by at
least one nationally recognized statistical rating
organization. The Class B-2 and Class B-3 Certifi-
cates will not constitute "mortgage related securi-
ties" under SMMEA. Prospective purchasers whose in-
vestment activities are subject to legal investment
laws and regulations, regulatory capital require-
ments or review by regulatory authorities may be
subject to restrictions on investment in the Offered
Certificates and should consult their own legal, tax
and accounting advisors in determining the suitabil-
ity of and consequences to them of the purchase,
ownership and disposition of the Offered Certifi-
cates. See "Legal Investment" in the Prospectus.
S-17
<PAGE>
RISK FACTORS
PREPAYMENTS MAY ADVERSELY AFFECT YIELD
The rate of distributions in reduction of the Principal Balance of any Class
of Offered Certificates, the aggregate amount of distributions of principal and
interest on any Class of Offered Certificates and the yield to maturity of any
Class of Offered Certificates will be directly related to the rate of payments
of principal on the Mortgage Loans in the related Loan Group, or both Loan
Groups in the case of the Class B Certificates, and the amount and timing of
mortgagor defaults resulting in Realized Losses on such Mortgage Loans. The
rate of principal payments on the Mortgage Loans in a Loan Group will in turn
be affected by the amortization schedules of such Mortgage Loans, the rate of
principal prepayments (including partial prepayments and those resulting from
refinancing) thereon by mortgagors, liquidations of defaulted Mortgage Loans in
such Loan Group, repurchases of Mortgage Loans in such Loan Group by the Seller
as a result of defective documentation or breaches of representations and
warranties, optional purchase by the Seller of defaulted Mortgage Loans in such
Loan Group and optional purchase by the Seller of all of the Mortgage Loans in
connection with the termination of the Trust Estate. See "Prepayment and Yield
Considerations" 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; Optional 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 economic, geographic, social and other factors. If
prevailing rates for similar mortgage loans fall below the Mortgage Interest
Rates on the Mortgage Loans in a Loan Group, 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 such 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 orginators (including Norwest Mortgage), on a general or targeted
basis, to encourage refinancing.
An investor that purchases any Offered Certificates at a discount,
particularly the Class II-A-6 Certificates, should consider the risk that a
slower than anticipated rate of principal payments on the Mortgage Loans in the
related Loan Group, or both Loan Groups in the case of the Class B
Certificates, 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 in the related Loan Group, or both
Loan Groups in the case of the Class B Certificates, will result in an actual
yield that is lower than such investor's expected yield.
See "Summary Information--Effects of Prepayments on Investment Expectations"
and "Prepayment and Yield Considerations" herein.
SUBORDINATION OF SUBORDINATED CERTIFICATES INCREASES RISK OF LOSS
The rights of the holders of each Class 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, and the
Classes of Class B Certificates with lower numerical designations, all to the
extent described herein under "Description of the Certificates--Subordination
of Class B Certificates." In addition, Realized Losses, other than Excess
Losses, will be allocated to the Class B Certificates in the reverse order in
which they are entitled to distributions of principal before being allocated to
either Group of Class A Certificates. Accordingly, the Class B Certificates are
more likely to experience losses as a result of the occurrence of losses or
interest shortfalls on the Mortgage Loans.
CLASS B CERTIFICATES PROVIDE SUBORDINATION FOR BOTH GROUPS
The Special Hazard Loss Amount, the Fraud Loss Amount and the Bankruptcy Loss
Amount are available to cover Special Hazard Losses, Fraud Losses and
Bankruptcy Losses on Mortgage Loans in both Loan Groups.
S-18
<PAGE>
Therefore, in the event Mortgage Loans in one Loan Group suffer a high level of
such losses, the available coverage for all Class A Certificates will be
reduced. In the event Mortgage Loans in a Loan Group suffer such losses after
the available coverage has been exhausted, such Excess Losses will be allocated
as described herein under "Description of the Certificates--Subordination of
Class B Certificates--Allocation of Losses."
Because the Class B Certificates represent interests in both Loan Groups, the
Principal Balances of the Class B Certificates could be reduced to zero as a
result of a disproportionate amount of Realized Losses on the Mortgage Loans in
one Loan Group. Therefore, Realized Losses on the Mortgage Loans in one Loan
Group will reduce the subordination provided by the Class B Certificates to the
other Group of Class A Certificates and increase the likelihood that Realized
Losses may be allocated to such other Group of Class A Certificates. See
"Description of the Certificates--Subordination of Class B Certificates--
Allocation of Losses" herein.
Under certain circumstances principal otherwise payable to the Class B
Certificates will be paid to the Class A Certificates (other than the Class A-
PO Certificates) as described under "Description of the Certificates--Cross-
Collateralization" herein. In addition, the Class A-PO Deferred Amounts are
payable from amounts otherwise distributable as principal on the Class B
Certificates regardless of the Loan Group from which such payments are derived.
UNDERWRITING STANDARDS
Certain of the Mortgage Loans 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, may be secured by shares in
cooperative housing communities, "condotels" or unique parcels of land, or may
have been made to foreign nationals. In addition, a substantial portion of the
Mortgage Loans are No Ratio Loans (as described under "The Mortgage Loan
Programs--Mortgage Loan Underwriting--Modified Standards" in the Prospectus)
for which ratios of the related prospective borrowers' debt service on the
Mortgage Loan and total debt obligations to income were not required to be
taken into account in making the loan. Accordingly, the 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. See "Prepayment and Yield
Considerations" herein.
RIGHTS OF BENEFICIAL OWNERS MAY BE LIMITED BY BOOK-ENTRY SYSTEM FOR CERTAIN
CLASSES OF CLASS A CERTIFICATES
Transactions in the 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.
CERTIFICATES MAY NOT BE APPROPRIATE FOR INDIVIDUAL INVESTORS
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 Class of Offered Certificates.
This may be the case because, among other things:
. 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 in the related Loan Group, or both
Loan Groups in the case of the Class B Certificates;
. 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 in the related
S-19
<PAGE>
Loan Group, or both Loan Groups in the case of the Class B Certificates,
and the priority of principal distributions among the Classes of Certif-
icates, and as such the Offered Certificates may be inappropriate in-
vestments 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 rela-
tively low interest rates) at a rate at least as high as the Pass-
Through Rate applicable thereto; or
. There can be no assurance that a secondary market for the Offered Cer-
tificates will develop or provide Certificateholders with liquidity of
investment.
Individual investors considering the purchase of an Offered Certificate
should also carefully consider the further risks and other special
considerations discussed above and under the headings "Summary Information --
Effects of Prepayments on Investment Expectations" and "Prepayment and Yield
Considerations" herein and in the Prospectus under the heading "Risk Factors."
RISKS ASSOCIATED WITH YEAR 2000 COMPLIANCE
The Seller is aware of the issues associated with the programming code in the
existing computer systems as the millennium (year 2000) approaches. The "year
2000 problem" is pervasive and complex; virtually every computer operation will
be affected in some way by the rollover of the two digit year value to 00. The
issue is whether computer systems will properly recognize date-sensitive
information when the year changes to 2000. Systems that do not properly
recognize such information could generate erroneous data or cause a system to
fail.
The Seller has been advised by the Master Servicer, Norwest Mortgage and the
Trustee that they are committed to either (i) implementing modifications to
their respective existing systems to the extent required to cause them to be
year 2000 compliant or (ii) acquiring computer systems that are year 2000
compliant, in each case prior to January 1, 2000. The Seller has also been
advised by the Master Servicer that the Master Servicer is engaged in the
process of ascertaining the efforts of the Other Servicers to achieve year 2000
compliance. However, neither the Seller nor any affiliate of the Seller has
made any independent investigation of the computer systems of the Trustee or
any of the Other Servicers. In the event that computer problems arise out of a
failure of such efforts to be completed on time, or in the event that the
computer systems of the Trustee, the Master Servicer, Norwest Mortgage or an
Other Servicer are not fully year 2000 compliant, the resulting disruptions in
the collection or distribution of receipts on the Mortgage Loans could
materially adversely affect the holders of the Offered Certificates.
See "Risk Factors" in the Prospectus for a description of certain other risks
and special considerations applicable to the Offered Certificates.
S-20
<PAGE>
DESCRIPTION OF THE CERTIFICATES
DENOMINATIONS; FORM OF CERTIFICATES
Offered Certificates 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 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.
Offered Certificates, other than those initially issued as Definitive
Certificates, will be issued in book-entry form and are referred to herein as
"BOOK-ENTRY CERTIFICATES." Each Class of the Book-Entry Certificates initially
will be represented by one physical certificate registered in the name of Cede
& Co. ("CEDE"), as nominee of The Depository Trust Company ("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.
The following table sets forth the original certificate form, the minimum
denomination and the incremental denomination of the Offered Certificates. The
Offered Certificates are not intended to be directly or indirectly held or
beneficially owned in amounts lower than such minimum denominations.
FORM AND DENOMINATIONS OF OFFERED CERTIFICATES
<TABLE>
<CAPTION>
ORIGINAL CERTIFICATE MINIMUM INCREMENTAL
CLASS FORM DENOMINATION DENOMINATION
----- -------------------- ------------ ------------
<S> <C> <C> <C>
Classes I-A-1, II-A-1, II-A-2,
II-A-4*, II-A-5*, II-A-7* and
II-A-8*....................... Book-Entry $100,000 $1,000
Class II-A-3................... Book-Entry $ 1,000 $1,000
Class II-A-6*.................. Definitive $100,000 $1,000
Class II-A-R................... Definitive 100 N/A
Classes B-1, B-2 and B-3....... Definitive $100,000 $1,000
</TABLE>
- -------------------
(*) In order to aggregate the original Principal Balance of such Class, one
Certificate of such Class will be issued in an incremental denomination of
less than that shown.
DISTRIBUTIONS
Distributions of interest and in reduction of Principal Balance to holders of
each Class of Certificates will be made monthly, to the extent of each 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 June 1998. 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 at the close of business on the last
business day of the preceding month (each, a "RECORD DATE").
S-21
<PAGE>
The aggregate amount available for distribution to holders of the Group I-A
Certificates on each Distribution Date (except to the extent of cross-
collateralization payments) will be the Group I Pool Distribution Amount. The
aggregate amount available for distribution to holders of the Group II-A
Certificates on each Distribution Date (except to the extent of cross-
collateralization payments) will be the Group II Pool Distribution Amount. The
Class B Certificates will be entitled to distributions from the Group I Pool
Distribution Amount and the Group II Pool Distribution Amount. The Group I Pool
Distribution Amount will be determined by reference to amounts received and
expenses incurred in connection with the Group I Mortgage Loans and the Group
II Pool Distribution Amount will be determined by reference to amounts received
and expenses incurred in connection with the Group II Mortgage Loans. The
"GROUP I POOL DISTRIBUTION AMOUNT" and the "GROUP II POOL DISTRIBUTION AMOUNT"
(each, a "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 Group I Mortgage Loans
or Group II Mortgage Loans, as applicable, received by the Master Servicer,
including without limitation any related insurance proceeds and the proceeds of
any purchase of a related Group I Mortgage Loan or Group II Mortgage Loan, as
applicable, 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 Group I Mortgage Loan or Group II Mortgage Loan, as applicable, on or
prior to the Remittance Date in the month in which such Distribution Date
occurs, plus (i) all Periodic Advances made with respect to a Group I Mortgage
Loan or Group II Mortgage Loan, as applicable, and (ii) all other amounts with
respect to a Group I Mortgage Loan or Group II Mortgage Loan, as applicable,
(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 with
respect to Group I Mortgage Loans or Group II Mortgage Loans, as
applicable, 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 Group I Mortgage Loan or
a Group II Mortgage Loan, as applicable, that represents any unreimbursed
Periodic Advances of such Servicer;
(c) those portions of each payment of interest on a particular Group I
Mortgage Loan or Group II Mortgage Loan, as applicable, which represent (i)
the applicable Servicing Fee, (ii) the Master Servicing Fee and (iii) the
Fixed Retained Yield, if any;
(d) all amounts with respect to Group I Mortgage Loans or Group II
Mortgage Loans, as applicable, 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 Group I Mortgage Loans or Group II Mortgage Loans, as
applicable, 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
"Description of the Certificates" in the Prospectus), 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 Group I Mortgage Loan or Group II Mortgage Loan, as applicable,
(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 Group I Mortgage Loans or
Group II Mortgage Loans, as applicable, 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 Group I
Mortgage Loan or Group II Mortgage Loan, as applicable, 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;
S-22
<PAGE>
(g) to the extent permitted by the Pooling and Servicing Agreement, that
portion of Liquidation Proceeds or insurance proceeds with respect to a
Group I Mortgage Loan or Group II Mortgage Loan, as applicable, or proceeds
of any Mortgaged Property that becomes owned by the Trust Estate 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;
(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 Group I
Mortgage Loans or Group II Mortgage Loans, as applicable, or on other
amounts on deposit in the Certificate Account;
(j) Net Foreclosure Profits in respect of the Group I Mortgage Loans or
Group II Mortgage Loans, as applicable;
(k) Month End Interest in respect of the Group I Mortgage Loans or Group
II Mortgage Loans, as applicable; and
(l) generally, the amount of any recoveries in respect of principal which
had previously been allocated as a loss to one or more Classes of Class A
Certificates of the related Group or the Class B Certificates.
The "REMITTANCE DATE" with respect to any Distribution Date and (i) 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 and (ii)
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 by 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 of a Loan Group
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 for each Loan Group
will be allocated among the Classes of Class A Certificates relating to such
Loan Group and the Class B Certificates and distributed to the holders thereof
of record as of the related Record Date as follows (the "POOL DISTRIBUTION
AMOUNT ALLOCATION"):
(a) with respect to each Group of Class A Certificates, from the Group I Pool
Distribution Amount or Group II Pool Distribution Amount, as applicable, as
follows:
first, to the Classes of Class A Certificates of a Group, pro rata based on
their respective Interest Accrual Amounts, in an aggregate amount up to the sum
of their Interest Accrual Amounts with respect to such Distribution Date;
second, to the Classes of Class A Certificates of such Group, pro rata based
on their respective unpaid Interest Shortfall Amounts in an aggregate amount up
to the sum of their unpaid Interest Shortfall Amounts;
S-23
<PAGE>
third, concurrently, pro rata to the Class A Certificates of such Group
(other than the Class A-PO Certificates of such Group), based on the Class A
Non-PO Optimal Principal Amount for such Group, and the Class A-PO Certificates
of such Group, based on the Class A-PO Optimal Principal Amount for such Group,
(A) to the Classes of Class A Certificates of such Group, (other than the Class
A-PO Certificates of such Group), in an aggregate amount up to the Class A Non-
PO Optimal Principal Amount for such Group, such distribution to be allocated
among such Classes in accordance with the priorities set forth below under "--
Principal (Including Prepayments)--Allocation of Amount to be Distributed on
the Class A Certificates" and (B) to the Class A-PO Certificates of such Group
in an amount up to the Class A-PO Optimal Principal Amount for such Group; and
fourth, to the Class A-PO Certificates of such Group in an amount up to the
applicable Class A-PO Deferred Amount, but only from amounts otherwise
distributable (without regard to this priority) to the Classes of Class B
Certificates in reverse order of priority from their respective Class B
Principal Distribution Amounts; provided, however, that in the event amounts
otherwise distributable to the Class B Certificates in respect of their Class B
Principal Distribution Amounts are insufficient to pay the aggregate of the
Class A-PO Deferred Amounts for the Class A-PO Certificates, such amounts will
be distributable to the Class A-PO Certificates, pro rata, in accordance with
their respective Class A-PO Deferred Amounts; and
(b) to the Class B Certificates, from the Group I Pool Distribution Amount
and Group II Pool Distribution Amount, subject to distributions to the Class A
Certificates described in (a) above and payments described under "--Cross-
Collateralization" below, sequentially, to the Class B-1, Class B-2, Class B-3,
Class B-4, Class B-5 and Class B-6 Certificates so that each such Class shall
receive (A) first, an amount up to its Interest Accrual Amount with respect to
such Distribution Date, (B) then, an amount up to its previously unpaid
Interest Shortfall Amounts and (C) finally, an amount up to its Class B Optimal
Principal Amount, in each case before any Classes of Class B Certificates with
higher numerical designations receive any payments in respect of interest or
principal; provided, however, that the amount distributable to any Class of
Class B Certificates in respect of its Class B Principal Distribution Amount
will be reduced by the amount, if any, otherwise distributable as principal
hereunder used to pay the Class A-PO Deferred Amounts in accordance with clause
(a) priority fourth above.
The undivided percentage interest (the "PERCENTAGE INTEREST") represented by
any Offered Certificate of a Class in distributions to such Class will be equal
to the percentage obtained by dividing the initial principal balance of such
Certificate by the initial Principal Balance of such Class.
INTEREST
The amount of interest that will accrue on each Class of Certificates, other
than the Class II-A-6 and 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 Class, is referred to herein as the
"INTEREST ACCRUAL AMOUNT" for such Class.
The Interest Accrual Amount for each Class of Certificates, other than the
Class II-A-6 and Class A-PO Certificates, will equal (a) the product of (i)
1/12th of the Pass-Through Rate for such Class and (ii) the outstanding
Principal Balance of such Class minus (b) the sum of (i) any Non-Supported
Interest Shortfall allocable to such Class, (ii) the interest portion of any
Excess Losses allocable to such Class and (iii) the interest portion of any
Realized Losses, other than the interest portion of any Excess Losses,
allocable to such Class on or after the Cross-Over Date. The pass-through rate
for each Class of Offered Certificates (the "PASS-THROUGH RATE") is the
percentage set forth on the cover of this Prospectus Supplement.
No interest will accrue on the Class II-A-6 and Class A-PO Certificates.
The "PRINCIPAL BALANCE" of a Class of Class A Certificates (other than the
Class II-A-6 and Class A-PO Certificates) or of a Class II-A-6 Component as of
any Determination Date will be the principal balance of such Class or Component
on the date of initial issuance of the Class A Certificates, less (i) all
amounts previously distributed on such Class or Component in reduction of the
principal balance of such Class or Component and (ii) such Class's or
Component's pro rata share of the principal portion of Excess Losses allocated
through such
S-24
<PAGE>
Determination Date to the holders of Class A Certificates of such Group (other
than the Class A-PO Certificates of such Group) in the manner described herein
under "--Subordination of Class B Certificates--Allocation of Losses." After
the Cross-Over Date, the Principal Balance of a Class of Class A Certificates
(other than the Class II-A-6 and Class A-PO Certificates) or of a Class II-A-6
Component may be subject to further reduction in an amount equal to such
Class's or Component's pro rata share of the difference, if any, between (a)
the Class A Non-PO Principal Balance for the related Group as of such
Determination Date without regard to this provision and (b) the difference
between (i) the Adjusted Pool Amount for the related Loan Group for the
preceding Distribution Date and (ii) the Adjusted Pool Amount (PO Portion) for
the related Loan Group for the preceding Distribution Date. Any pro rata
allocation among the Classes of Class A Certificates of a Group (other than the
Class A-PO Certificates of such Group) and, in the case of the Class II-A-6
Certificates, the Components of a Group described in this paragraph will be
made among such Classes and Components, if applicable, on the basis of their
then-outstanding Principal Balances.
The "PRINCIPAL BALANCE" of the Class II-A-6 Certificates will be equal to the
sum of the Principal Balances of the Class II-A-6 Components.
The "PRINCIPAL BALANCE" of the Class A-PO Certificates of a Group as of any
Determination Date will be the principal balance of such Class on the date of
initial issuance of the Class A Certificates less (i) all amounts previously
distributed to the holders of such Class A-PO Certificates pursuant to clause
(a) priority third clause (B) and clause (a) priority fourth of the Pool
Distribution Amount Allocation and (ii) the principal portion of Excess Losses
allocated through such Determination Date to such Class A-PO Certificates in
the manner described herein under "--Subordination of Class B Certificates--
Allocation of Losses." After the Cross-Over Date, the Principal Balance of the
Class A-PO Certificates of a Group will be subject to further reduction in an
amount equal to the excess, if any, of (a) the Principal Balance of such Class
A-PO Certificates as of such Determination Date without regard to this
provision over (b) the Adjusted Pool Amount (PO Portion) for the related Loan
Group for the preceding Distribution Date.
The "PRINCIPAL BALANCE" of a Class of Class B Certificates as of any
Determination Date will be the lesser of (a) the principal balance of such
Class on the date of initial issuance of the Class B Certificates less (i) all
amounts previously distributed to holders of such Class in reduction of the
principal balance thereof and (ii) the principal portion of Excess Losses
allocated through such Determination Date to the holders of such Class in the
manner described under "--Subordination of Class B Certificates--Allocation of
Losses" and (b) the sum of the Adjusted Pool Amounts as of the preceding
Distribution Date less the sum of (i) the sum of the Class A Principal Balances
and (ii) the Principal Balances of the Classes of Class B Certificates with
lower numerical designations, each as of such Determination Date.
The "CLASS A PRINCIPAL BALANCE" for a Group as of any Determination Date will
be equal to the sum of the Principal Balances of the Classes of Class A
Certificates of such Group as of such date.
The "CLASS A NON-PO PRINCIPAL BALANCE" for a Group as of any Determination
Date will be equal to the sum of the Principal Balances of the Classes of Class
A Certificates of such Group (other than the Class A-PO Certificates of such
Group) as of such date.
The "CLASS B PRINCIPAL BALANCE" as of any date will be equal to the sum of
the Principal Balances of the Classes of Class B Certificates as of such date.
The "AGGREGATE PRINCIPAL BALANCE" as of any date will be equal to the sum of
the Class A Principal Balances and the Class B Principal Balance as of such
date.
The "AGGREGATE NON-PO PRINCIPAL BALANCE" as of any date will be equal to the
sum of the Class A Non-PO Principal Balances and the Class B Principal Balance
as of such date.
With respect to any Distribution Date and any Loan Group, the "ADJUSTED POOL
AMOUNT" will equal the aggregate unpaid principal balance of the Mortgage Loans
in such Loan Group as of the Cut-Off Date minus the
S-25
<PAGE>
sum of (i) all amounts in respect of principal received in respect of the
Mortgage Loans in such Loan Group (including amounts received as Periodic
Advances, principal prepayments and Liquidation Proceeds in respect of
principal) and distributed to holders of the 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 in such Loan Group from the Cut-Off Date through the end of the month
preceding such Distribution Date.
With respect to any Distribution Date and any Loan Group, the "ADJUSTED POOL
AMOUNT (PO PORTION)" will equal the sum as to each Mortgage Loan in such Loan
Group outstanding at the Cut-Off Date of the product of (A) the PO Fraction for
such Mortgage 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 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 applicable Servicing Fee Rate, (ii) the Master
Servicing Fee Rate 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 0.20%
and (B) the aggregate of the Scheduled Principal Balances of the Mortgage Loans
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
0.20% 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 depends in part on
whether such Other Servicer is required to remit to the Master Servicer
Prepayments in Full for deposit into the Certificate Account daily on a
specified business day following receipt thereof. "MONTH END INTEREST" for
Other Servicers will generally equal the lesser of (a) (i) with respect to
Other Servicers required to remit
S-26
<PAGE>
Prepayments in Full on a daily basis, the aggregate Curtailment Interest
Shortfalls with respect to the Mortgage Loans serviced by such Other Servicer
or (ii) with respect to Other Servicers not required to remit Prepayments in
Full on a daily basis, 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 (b) the sum of (X) for each Mortgage
Loan serviced by such Other Servicer the product of 1/12th of the applicable
Servicing Fee Rate and the scheduled principal balance (as determined in the
applicable Underlying Servicing Agreement) of such Mortgage Loan 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," a Servicer not currently
remitting Prepayments in Full on a daily basis may agree to begin to do so at
some time in the future and, in conjunction therewith, the amount of Month End
Interest such Servicer is required to remit may be decreased or such Servicer
may be relieved of its obligation to remit any Month End Interest. If an Other
Servicer that is not currently remitting Prepayments in Full on a daily basis
begins to do so, 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.
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
according to the percentage obtained by dividing the sum of the then-
outstanding Class A Non-PO Principal Balances by the Aggregate Non-PO Principal
Balance and (ii) the Class B Certificates according to the percentage obtained
by dividing the then-outstanding Class B Principal Balance by the Aggregate
Non-PO Principal Balance. Such allocation of Non-Supported Interest Shortfalls
will reduce the amount of interest due to be distributed to holders of
Certificates then entitled to distributions in respect of interest. Any such
reduction in respect of interest allocated to the Class A or Class B
Certificates will be allocated among such Classes of Class A or Class B
Certificates, as the case may be, pro rata on the basis of their respective
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 Classes of Class B
Certificates in reverse numerical order and then pro rata by the Class A
Certificates based on interest accrued. See "--Subordination of 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 Losses will be allocated among the Class A
Certificates of the related Group and the Class B Certificates pro rata based
on (i) in the case of the Class A Certificates, their respective Interest
Accrual Amounts and (ii) in the case of the Class B Certificates, interest
accrued on their respective Apportioned Principal Balances, without regard to
any reduction pursuant to this paragraph, for such Distribution Date.
Allocations of the interest portion of Realized Losses (other than Excess
Losses) first to the Classes of Class B Certificates in reverse numerical order
will result from the priority of distributions first to the holders of the
Class A Certificates and then to the holders of the Classes of Class B
Certificates in numerical order of the Pool Distribution Amount as described
above under "--Distributions."
On each Distribution Date on which the amount available to be distributed in
respect of interest on a Class of Certificates pursuant to the Pool
Distribution Amount Allocation is less than such Class's Interest Accrual
Amount, the amount of any such deficiency (as to each Class, an "INTEREST
SHORTFALL AMOUNT") will be added
S-27
<PAGE>
to the amount of interest distributable on such Class on subsequent
Distribution Dates, but only for so long as such Class's Principal Balance is
greater than zero. No interest will accrue on any Interest Shortfall Amounts.
Under certain circumstances the unpaid Interest Shortfall Amounts for a Group
of Class A Certificates will be payable from amounts otherwise distributable as
principal on the Class B Certificates in reverse order of priority. See "--
Cross-Collateralization" below.
PRINCIPAL (INCLUDING PREPAYMENTS)
The principal balance of a Certificate at any time is equal to the product of
the related Class's Principal Balance and such Certificate's Percentage
Interest, and represents the maximum specified dollar amount (exclusive of (i)
any interest that may accrue on such Certificate and (ii) in the case of the
Class II-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 II-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 Principal
Balance of each Class of Offered Certificates is set forth on the cover of this
Prospectus Supplement. The initial Principal Balances of the Class II-A-6-A
Component and Class II-A-6-B Component will be approximately $1,069,686 and
$5,823,311, respectively. The initial Principal Balances of the Class I-A-PO
and Class II-A-PO Certificates will be approximately $26,177 and $3,454,
respectively.
Calculation of Amount to be Distributed on the Certificates
Distributions in reduction of the Principal Balance of each Group of Class A
Certificates (other than the Class A-PO Certificates of such Group) will be
made on each Distribution Date pursuant to the Pool Distribution Amount
Allocation, in an aggregate amount equal to the Class A Non-PO Principal
Distribution Amount for such Group.
The "CLASS A NON-PO PRINCIPAL DISTRIBUTION AMOUNT" with respect to any Group
and any Distribution Date will be equal to the amount distributed with respect
to such Group pursuant to clause (a) priority third clause (A) of the Pool
Distribution Amount Allocation, in an aggregate amount up to the Class A Non-PO
Optimal Principal Amount for such Group.
Distributions in reduction of the Principal Balance of the Class A-PO
Certificates of a Group will be made on each Distribution Date in an aggregate
amount equal to the Class A-PO Distribution Amount for such Group. The "CLASS
A-PO DISTRIBUTION AMOUNT" with respect to any Group and any Distribution Date
will be equal to the sum of (i) the amount distributed with respect to such
Group pursuant to clause (a) priority third clause (B) of the Pool Distribution
Amount Allocation, in an aggregate amount up to the Class A-PO Optimal
Principal Amount for such Group and (ii) the amount distributed with respect to
such Group pursuant to clause (a) priority fourth of the Pool Distribution
Amount Allocation, in an aggregate amount up to the Class A-PO Deferred Amount
for such Group.
Distributions in reduction of the Principal Balances of the Class B-1, Class
B-2, Class B-3, Class B-4, Class B-5 and Class B-6 Certificates will be made on
each Distribution Date first to the Class B-1 Certificates, second to the Class
B-2 Certificates, third to the Class B-3 Certificates, fourth to the Class B-4
Certificates, fifth to the Class B-5 Certificates and then to the Class B-6
Certificates, pursuant to clause (b) (C) of the Pool Distribution Amount
Allocation, in an aggregate amount with respect to each such Class (each, a
"CLASS B PRINCIPAL DISTRIBUTION AMOUNT") up to the Class B Optimal Principal
Amount for such Class.
The "CLASS A NON-PO OPTIMAL PRINCIPAL AMOUNT" for each Group, the "CLASS B
LOAN GROUP I OPTIMAL PRINCIPAL AMOUNT" and the "CLASS B LOAN GROUP II OPTIMAL
PRINCIPAL AMOUNT" for each Class of Class B Certificates and the "CLASS A-PO
OPTIMAL PRINCIPAL AMOUNT" for each Group with respect to each Distribution Date
will be an amount equal to the sum for each outstanding Mortgage Loan in the
related Loan Group (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) (i) in the case of the Class A Non-PO Optimal Principal Amounts, the
Class B Loan Group I Optimal Principal Amounts and the Class B Loan Group
II Optimal Principal Amounts, the Non-PO Fraction for such Mortgage Loan
and (ii) in the case of the Class A-PO Optimal Principal Amounts, the PO
Fraction for such Mortgage Loan; and
S-28
<PAGE>
(B) the sum of:
(i) the applicable Class Percentage of (x) the scheduled payment of
principal due on such Mortgage Loan on the first day of the month in
which the Distribution Date occurs, less (y) if the Bankruptcy Loss
Amount is zero, the principal portion of Debt Service Reductions with
respect to such Mortgage Loan;
(ii) the applicable Class 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 applicable Class 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 applicable Class 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.
The "CLASS PERCENTAGE" will equal (i) the applicable Class A Percentage, in
the case of the calculation of the Class A Non-PO Optimal Principal Amount for
a Group; (ii) the applicable Class B Percentage, in the case of the calculation
of the Class B Loan Group I Optimal Principal Amount and the Class B Loan Group
II Optimal Principal Amount for a Class of Class B Certificates; and (iii) 100%
in the case of the calculation of the Class A-PO Optimal Principal Amount for a
Group.
The "CLASS PREPAYMENT PERCENTAGE" will equal (i) the applicable Class A
Prepayment Percentage, in the case of the calculation of the Class A Non-PO
Optimal Principal Amount for a Group; (ii) the applicable Class B Prepayment
Percentage, in the case of the calculation of the Class B Loan Group I Optimal
Principal Amount and the Class B Loan Group II Optimal Principal Amount for a
Class of Class B Certificates; and (iii) 100% in the case of the calculation of
the Class A-PO Optimal Principal Amount for a Group.
The "CLASS B OPTIMAL PRINCIPAL AMOUNT" for a Class of Class B Certificates is
equal to the sum of the Class B Loan Group I Optimal Principal Amount and the
Class B Loan Group II Optimal Principal Amount for such Class.
The "CLASS A-PO DEFERRED AMOUNT" for any Group and 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 such Group
for all prior Distribution Dates exceeds the amounts distributed to the Class
A-PO Certificates of such Group on such prior Distribution Dates pursuant to
clause (a) 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 of such Group as
described in "-- Subordination of Class B Certificates -- Allocation of Losses"
below and (ii) the sum of the product for each Discount Mortgage Loan in the
related Loan Group which became a Liquidated Loan at any time on or prior to
the last day of the applicable Unscheduled Principal 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 Losses and (B) amounts
distributed on the Class A-PO Certificates of such Group on prior Distribution
Dates pursuant to clause (a) priority fourth of the Pool Distribution Amount
Allocation. On or after the Cross-Over Date, the Class A-PO Deferred Amount for
each Group will be zero. No interest will accrue on any Class A-PO Deferred
Amount.
The principal distribution to the holders of a Class of Class B Certificates
will be reduced on any Distribution Date on which (i) the Principal Balance of
such Class 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 or any Class of
Class B Certificates with a lower numerical
S-29
<PAGE>
designation, would be subject to reduction on such Determination Date as a
result of allocation of Realized Losses (other than Excess Losses). The amount
of any such reduction in the principal distributed to the holders of such Class
of Class B Certificates will instead be distributed pro rata to the holders of
any Class (other than the Class A-PO Certificates) senior in priority to
receive distributions in accordance with the Pool Distribution Amount
Allocation.
Generally, 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 any Class
of Certificates, such Class, 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 Principal Balance of such Class was
reduced as a result of such Realized Loss.
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 the month in which such Distribution Date occurs.
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.
The "NON-PO FRACTION" with respect to any Mortgage Loan will equal the Net
Mortgage Interest Rate for such Mortgage Loan divided by 6.750%, but will not
be greater than 1.0.
The "POOL BALANCE (NON-PO PORTION") for any Loan Group is the sum for each
outstanding Mortgage Loan in such Loan Group 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.
S-30
<PAGE>
The "PO FRACTION" with respect to any Group I Mortgage Loan or Group II
Mortgage Loan with a Net Mortgage Interest Rate less than 6.750% (a "GROUP I
DISCOUNT MORTGAGE LOAN" or "GROUP II DISCOUNT MORTGAGE LOAN," as applicable,
and each, a "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 of a Group that is not a Discount Mortgage Loan (a "GROUP I
PREMIUM MORTGAGE LOAN" or "GROUP II PREMIUM MORTGAGE LOAN", as applicable and
each, a "Premium Mortgage Loan") will be zero.
The "POOL BALANCE (PO PORTION)" for any Loan Group is the sum for each
Discount Mortgage Loan in such Loan Group of the product of the Scheduled
Principal Balance of such Discount Mortgage Loan and the PO Fraction for such
Discount Mortgage Loan.
The "CLASS A PERCENTAGE" for any Group and 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 for such Group as of such date (before taking into account
distributions in reduction of Principal Balance on such date) by the Pool
Balance (Non-PO Portion) for the related Loan Group. The Class A Percentage for
the Group I-A Certificates for the first Distribution Date will be
approximately 93.99%. The Class A Percentage for the Group II-A Certificates
for the first Distribution Date will be approximately 94.00%. The Class A
Percentage for each Group and any Distribution Date occurring after the Cross-
Over Date will be 100%.
The "CLASS A PREPAYMENT PERCENTAGE" for each Group and any Distribution Date
will be the percentage indicated below:
<TABLE>
<CAPTION>
DISTRIBUTION DATE OCCURRING
IN CLASS A PREPAYMENT PERCENTAGE
--------------------------- ------------------------------------------------
<S> <C>
June 1998 through May
2003...................... 100%;
June 2003 through May the applicable Class A Percentage, plus 70% of
2004...................... the applicable Subordinated Percentage;
June 2004 through May the applicable Class A Percentage, plus 60% of
2005...................... the applicable Subordinated Percentage;
June 2005 through May the applicable Class A Percentage, plus 40% of
2006...................... the applicable Subordinated Percentage;
June 2006 through May the applicable Class A Percentage, plus 20% of
2007...................... the applicable Subordinated Percentage; and
June 2007 and thereafter... the applicable Class A Percentage;
</TABLE>
provided, however, that if on any of the foregoing Distribution Dates the Class
A Percentage for either Group exceeds the related initial Class A Percentage,
the Class A Prepayment Percentage for both Groups 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 level
of the Class A Prepayment Percentage for either Group 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 of the Mortgage
Loans in either Loan Group 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 applicable Group Subordinate Amount or
(ii) for any Distribution Date, cumulative Realized Losses with respect to the
Mortgage Loans in either Loan Group exceed the percentages of the applicable
Group Subordinate Amount as of the Cut-Off Date (with respect to each Loan
Group the "ORIGINAL GROUP SUBORDINATE AMOUNT") indicated below:
<TABLE>
<CAPTION>
PERCENTAGE OF ORIGINAL GROUP
DISTRIBUTION DATE OCCURRING IN SUBORDINATE AMOUNT
------------------------------ ----------------------------
<S> <C>
June 2003 through May 2004.......... 30%
June 2004 through May 2005.......... 35%
June 2005 through May 2006.......... 40%
June 2006 through May 2007.......... 45%
June 2007 and thereafter............ 50%
</TABLE>
S-31
<PAGE>
If on any Distribution Date the allocation to the Class A Certificates of a
Group (other than the Class A-PO Certificates of such Group) of full and
partial principal prepayments and other amounts in the percentage required in
the preceding paragraph would reduce the outstanding Class A Non-PO Principal
Balance for such Group below zero, the Class A Prepayment Percentage with
respect to such Group for such Distribution Date will be limited to the
percentage necessary to reduce such Class A Non-PO Principal Balance to zero.
In addition, once the Principal Balances of the Class A Certificates of a Group
(other than the Class A-PO Certificates of such Group) have been reduced to
zero, the Class A Prepayment Percentage for such Group will be 0%. The tests
described in the preceding paragraph will be performed with respect to each
Loan Group even if the Principal Balance of the related Group of Class A
Certificates (other than the Class A-PO Certificates of such Group) has been
reduced to zero.
This disproportionate allocation of certain unscheduled payments in respect
of principal will have the effect of accelerating the amortization of the Class
A Certificates of a Group (other than the Class A-PO Certificates of such
Group) while, in the absence of Realized Losses, increasing the interest in the
principal balance of the Mortgage Loans in the related Loan Group evidenced by
the Class B Certificates. Increasing the respective interest of the Class B
Certificates in a Loan Group relative to that of the Class A Certificates of
the related Group (other than the Class A-PO Certificates of such Group) is
intended to preserve the availability of the subordination provided by the
Class B Certificates. See "--Subordination of Class B Certificates" below. The
"SUBORDINATED PERCENTAGE" for any Loan Group and any Distribution Date will be
calculated (i) for Loan Group I, as the difference between 100% and the Class A
Percentage for the Class I-A Certificates for such date and (ii) for Loan Group
II, as the difference between 100% and the Class A Percentage for the Class II-
A Certificates for such date. The "SUBORDINATED PREPAYMENT PERCENTAGE" for any
Loan Group and for any Distribution Date will be calculated (i) for Loan Group
I, as the difference between 100% and the Class A Prepayment Percentage for the
Class I-A Certificates for such date and (ii) for Loan Group II, as the
difference between 100% and the Class A Prepayment Percentage for the Class II-
A Certificates for such date.
The "CLASS B PERCENTAGE" and "CLASS B PREPAYMENT PERCENTAGE" for a Class of
Class B Certificates and for any Loan Group and any Distribution Date will
equal that portion of the Subordinated Percentage for such Loan Group and
Subordinated Prepayment Percentage for such Loan Group, as the case may be,
represented by the fraction the numerator of which is the then-outstanding
Principal Balance for such Class of Class B Certificates and the denominator of
which is the sum of the Principal Balances of the Classes of Class B
Certificates entitled to principal distributions for such Distribution Date as
described below. In the event that a Class of Class B Certificates is not
entitled to principal distributions for such Distribution Date, the Class B
Percentage and Class B Prepayment Percentage for such Class will both be 0%
with respect to such Distribution Date.
In the event that on any Distribution Date the Current Fractional Interest of
any Class of Class B Certificates is less than the Original Fractional Interest
of such Class, then the Classes of Certificates that are subordinate to such
Class will not be entitled to distributions in respect of principal and the
Principal Balances of such subordinated Classes will not be used to determine
the Class B Percentages and Class B Prepayment Percentages of the Classes of
Class B Certificates that are senior to such subordinated Classes for such
Distribution Date. The Class B-6 Certificates will not have original or current
fractional interests which are required to be maintained as described above.
The "ORIGINAL FRACTIONAL INTEREST" of a Class of Class B Certificates is the
percentage obtained by dividing the sum of the initial Principal Balances of
the Classes of Certificates that are subordinate to such Class by the initial
Aggregate Non-PO Principal Balance. The "CURRENT FRACTIONAL INTEREST" of a
Class of Class B Certificates for any Distribution Date is the percentage
obtained by dividing the sum of the then-outstanding Principal Balances of the
Classes of Certificates that are subordinate to such Class by the then-
outstanding Aggregate Non-PO Principal Balance.
S-32
<PAGE>
The following table sets forth the expected approximate Original Fractional
Interest for each Class of Class B Certificates on the date of issuance of the
Certificates.
<TABLE>
<CAPTION>
APPROXIMATE
ORIGINAL
FRACTIONAL
CLASS INTEREST
----- -----------
<S> <C>
B-1.............................................................. 4.00%
B-2.............................................................. 1.70%
B-3.............................................................. 1.00%
B-4.............................................................. 0.60%
B-5.............................................................. 0.40%
B-6.............................................................. N/A
</TABLE>
Allocation of Amount to be Distributed on the Class A Certificates
Group I-A Certificates
On each Distribution Date prior to the Cross-Over Date, the Class A Non-PO
Principal Distribution Amount for the Group I-A Certificates will be
distributed in reduction of the Principal Balance of the Class I-A-1
Certificates until the Principal Balance thereof has been reduced to zero.
Group II-A Certificates
Solely for purposes of making distributions in reduction of principal as
described below, the Class II-A-6 Certificates will be deemed to consist of two
components (each, a "COMPONENT" or a "CLASS II-A-6 COMPONENT" and the "CLASS
II-A-6-A COMPONENT" and the "CLASS II-A-6-B COMPONENT", respectively). The
beneficial owner of a Class II-A-6 Certificate will not have a severable
interest in any Component but will have an undivided interest in the entire
Class.
On each Distribution Date prior to the Cross-Over Date, the Class A Non-PO
Principal Distribution Amount for the Group II-A Certificates will be allocated
among and distributed in reduction of the Principal Balances of the Group II-A
Certificates (other than the Principal Balance of the Class II-A-PO
Certificates) and Class II-A-6 Components as follows:
first, concurrently, to the Class II-A-4 Certificates and the Class II-A-
6-A Component, pro rata, up to the Priority Amount for such Distribution
Date;
second, to the Class II-A-R Certificate, until the Principal Balance
thereof has been reduced to zero;
third, concurrently as follows:
(a) approximately 3.5714288124% to the Class II-A-6-B Component until the
Principal Balance thereof has been reduced to zero; and
(b) approximately 96.4285711876% sequentially as follows:
(i) concurrently, as follows, until the Principal Balance of the Class
II-A-7 Certificates has been reduced to zero:
(A) approximately 87.9443372830%, sequentially, as follows:
(1) concurrently, to the Class II-A-1 Certificates and the Class
II-A-8 Certificates, pro rata, until the Principal Balance of each
such Class has been reduced to zero; and
(2) to the Class II-A-7 Certificates, until the Principal Balance
thereof has been reduced to zero;
(B) approximately 12.0556627170%, sequentially, as follows:
(1) to the Class II-A-5 Certificates, until the Principal Balance
thereof has been reduced to approximately $3,300,386;
(2) concurrently, to the Class II-A-2 Certificates and the Class
II-A-5 Certificates, pro rata, until the Principal Balance of each
such Class has been reduced to zero; and
(3) to the Class II-A-3 Certificates until the Principal Balance
thereof has been reduced to zero;
S-33
<PAGE>
(ii) sequentially, as follows:
(A)to the Class II-A-5 Certificates, until the Principal Balance thereof
has been reduced to approximately $3,300,386;
(B)concurrently, to the Class II-A-2 Certificates and the Class II-A-5
Certificates, pro rata, until the Principal Balance of each such Class
has been reduced to zero; and
(C)to the Class II-A-3 Certificates until the Principal Balance thereof
has been reduced to zero; and
fourth, concurrently, to the Class II-A-4 Certificates and the Class II-
A-6-A Component, pro rata, without regard to the Priority Amount, until the
Principal Balance of each such Class and Component has been reduced to
zero.
The "PRIORITY AMOUNT" for any Distribution Date means the lesser of (i) the
sum of the Principal Balances of the Class II-A-4 Certificates and the Class
II-A-6-A Component and (ii) the sum of (A) the product of (1) the Priority
Percentage, (2) the Shift Percentage and (3) the Group II Scheduled Principal
Amount and (B) the product of (1) the Priority Percentage, (2) the Prepayment
Shift Percentage and (3) the Group II Unscheduled Principal Amount.
The "PRIORITY PERCENTAGE" for the Mortgage Loans means the sum of the
Principal Balances of the Class II-A-4 Certificates and the Class II-A-6-A
Component divided by the Pool Balance (Non-PO Portion) for Loan Group II.
The "GROUP II SCHEDULED PRINCIPAL AMOUNT" means the sum for each outstanding
Mortgage Loan in Loan Group II (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 the amounts for the Mortgage
Loans in such Loan Group described in clauses B(i) and B(iv) of the definition
of "Class A Non-PO Optimal Principal Amount" beginning on page S-28, but
without such amount being multiplied by the applicable Class A Percentage.
The "GROUP II UNSCHEDULED PRINCIPAL AMOUNT" means the sum for each
outstanding Mortgage Loan in Loan Group II (including each defaulted Mortgage
Loan, other than a Liquidated Loan, with respect to which the related Mortgage
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 the amounts for the
Mortgage Loans in such Loan Group described in clauses B(ii) and B(iii) of the
definition of "Class A Non-PO Optimal Principal Amount" beginning on page S-28,
but without such amount being multiplied by the applicable Class A Prepayment
Percentage.
The "SHIFT PERCENTAGE" for any Distribution Date will be the percentage
indicated below:
<TABLE>
<CAPTION>
DISTRIBUTION DATE OCCURRING IN SHIFT PERCENTAGE
------------------------------ ----------------
<S> <C>
June 1998 through May 2003.................................. 0%
June 2003 and thereafter.................................... 100%
</TABLE>
The "PREPAYMENT SHIFT PERCENTAGE" for any Distribution Date will be the
percentage indicated below:
<TABLE>
<CAPTION>
PREPAYMENT
DISTRIBUTION DATE OCCURRING IN SHIFT PERCENTAGE
------------------------------ ----------------
<S> <C>
June 1998 through May 2003.................................. 0%
June 2003 through May 2004.................................. 30%
June 2004 through May 2005.................................. 40%
June 2005 through May 2006.................................. 60%
June 2006 through May 2007.................................. 80%
June 2007 and thereafter.................................... 100%
</TABLE>
Notwithstanding the foregoing, on each Distribution Date occurring on or
after the Cross-Over Date, the Class A Non-PO Principal Distribution Amount for
each Loan Group will be distributed among the Classes of
S-34
<PAGE>
Class A Certificates for each Loan Group (other than the Class A-PO
Certificates of such Group) pro rata in accordance with their respective
outstanding Principal Balances without regard to either the proportions or the
priorities set forth above.
Any amounts distributed on a Distribution Date to the holders of any Class in
reduction of Principal Balance will be allocated among the holders of such
Class pro rata in accordance with their respective Percentage Interests.
CROSS-COLLATERALIZATION
On each Distribution Date prior to the Cross-Over Date but on or after the
date on which the Principal Balances of the Group I-A Certificates (other than
the Class I-A-PO Certificates) or the Principal Balances of the Group II-A
Certificates (other than the Class II-A-PO Certificates) have been reduced to
zero, amounts otherwise distributable as principal on the Class B Certificates,
in reverse order of priority, from their applicable Apportioned Class B
Principal Distribution Amounts, will be paid as principal to the remaining
Class A Certificates (other than the Class A-PO Certificates of such Group) in
accordance with the priorities set forth for such Group under "--Allocation of
Amount to be Distributed on the Class A Certificates," provided that on such
Distribution Date (a) the Aggregate Subordinate Percentage for such
Distribution Date is less than 200% of the Aggregate Subordinate Percentage as
of the Cut-Off Date or (b) the average outstanding principal balance of the
Mortgage Loans in either Loan Group delinquent 60 days or more over the last
six months as a percentage of the related Group Subordinate Amount is greater
than or equal to 50%.
With respect to each Class of Class B Certificates and any Distribution Date,
the "APPORTIONED CLASS B PRINCIPAL DISTRIBUTION AMOUNT" will equal the product
of (i) the applicable Class B Principal Distribution Amount less any amounts
needed to pay any Class A-PO Deferred Amounts and (ii) the applicable
Apportionment Fraction.
In the event the Principal Balances of the Class I-A Certificates (other than
the Class I-A-PO Certificates) have been reduced to zero, the "APPORTIONMENT
FRACTION" for a Class of Class B Certificates will equal a fraction the
numerator of which is equal to the applicable Class B Loan Group I Optimal
Principal Amount and the denominator of which is equal to the applicable Class
B Optimal Principal Amount. In the event the Principal Balances of the Class
II-A Certificates (other than the Class II-A-PO Certificates) have been reduced
to zero, the "APPORTIONMENT FRACTION" for a Class of Class B Certificates will
equal a fraction the numerator of which is equal to the applicable Class B Loan
Group II Optimal Principal Amount and the denominator of which is equal to
applicable Class B Optimal Principal Amount.
The "AGGREGATE SUBORDINATE PERCENTAGE" at any time will equal the sum of the
Principal Balances of the Class B Certificates divided by the sum of the Pool
Balance (Non-PO Portion) for each Loan Group.
In addition, if on any Distribution Date the Class A Non-PO Principal Balance
of the Group I-A Certificates or Group II-A Certificates (after giving effect
to distributions to be made on such Distribution Date) is greater than the Pool
Balance (Non-PO Portion) of the related Loan Group (any such Group, the
"UNDERCOLLATERALIZED GROUP"), all amounts otherwise distributable as principal
on the Class B Certificates, in reverse order of priority pursuant to clause
(b)(C) of the Pool Distribution Amount Allocation (other than amounts needed to
pay any Class A-PO Deferred Amounts or unpaid Interest Shortfall Amounts as
described below) will be paid as principal to the Class A Certificates (other
than the Class A-PO Certificates) of the Undercollateralized Group in
accordance with the priorities set forth under "--Allocation of Amount to be
Distributed on the Class A Certificates," until the aggregate Principal Balance
of the Class A Certificates (other than the Class A-PO Certificates) of the
Undercollateralized Group equals the Pool Balance (Non-PO Portion) of the
related Loan Group (such amount, the "UNDERCOLLATERALIZED AMOUNT"). In
addition, the amount of any unpaid Interest Shortfall Amounts with respect to
the Undercollateralized Group (including any Interest Shortfall Amount for such
Distribution Date) will be paid to the Undercollateralized Group prior to the
payment of any Undercollateralized Amount from amounts otherwise distributable
as principal on the Class B Certificates, in reverse order of priority pursuant
to clause (b)(C) of the Pool Distribution Amount Allocation (other than any
amounts needed to pay any Class A-PO Deferred Amounts); such amount will be
paid to the Undercollateralized Group in accordance with clause (a) priority
second of the Pool Distribution Amount Allocation.
ADDITIONAL RIGHTS OF THE CLASS II-A-R CERTIFICATEHOLDER
The Class II-A-R Certificate will remain outstanding for as long as the Trust
Estate shall exist, whether or not such Class is receiving current
distributions of principal or interest. The holder of the Class II-A-R
Certificate
S-35
<PAGE>
will be entitled to receive the proceeds of the remaining assets of the Trust
Estate, if any, on the final Distribution Date for the Certificates, after
distributions in respect of any accrued but unpaid interest on the Certificates
and after distributions in reduction of Principal Balance have reduced the
Principal Balances of the Certificates to zero. It is not anticipated that
there will be any assets remaining in the Trust Estate on the final
Distribution Date following the distributions of interest and in reduction of
Principal Balance made on the Certificates on such date.
In addition, the Class II-A-R Certificateholder will be entitled on each
Distribution Date to receive any Pool Distribution Amounts remaining after all
distributions pursuant to the Pool Distribution Amount Allocation have been
made and any Net Foreclosure Profits, as described under "Description of the
Certificates" in the Prospectus. 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 related Servicer will, in certain circumstances, be required to
advance on or before the related Distribution Date for the benefit of holders
of the 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, 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.
RESTRICTIONS ON TRANSFER OF THE CLASS II-A-R AND CLASS B CERTIFICATES
The Class II-A-R Certificate will be subject to the following restrictions on
transfer, and the Class II-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 (other than an "electing large
partnership," as defined in the Prospectus) with respect to the Class II-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 II-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 II-
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 or letter 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 II-A-R Certificate in excess of cash flows generated
thereby, (iii) intends to pay taxes associated with holding the Class II-A-R
Certificate as such taxes become due and (iv)
S-36
<PAGE>
will not transfer the Class II-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 II-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 II-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 II-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 States, a corporation, partnership (except to
the extent provided in applicable Treasury regulations) 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 court within the
United States is able to exercise primary supervision over the administration
of such trust, and one or more such U.S. Persons have the authority to control
all substantial decisions of such trust (or, to the extent provided in
applicable Treasury regulations, certain trusts in existence on August 20, 1996
which are eligible to be treated as U.S. Persons).
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 II-A-R Certificate may not be purchased by or transferred to any
person which is an employee benefit plan or other retirement plan or
arrangement 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 acting on behalf of or investing
the assets of such Plan. See "ERISA Considerations" herein and in the
Prospectus.
Under current law the purchase and holding of the 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 B
Certificates will not be made unless the transferee (i) executes a
representation letter in form and substance satisfactory to the Trustee and the
Seller 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 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)), 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 date of acquisition and the purchase and
holding of such Certificates by the transferee are covered by Sections I and
III of PTE 95-60, or (ii) provides (A) an opinion of counsel in form and
substance satisfactory to the Trustee and the Seller that the purchase or
holding of the 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, 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 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. See "ERISA Considerations" herein and in the Prospectus.
S-37
<PAGE>
REPORTS
The Master Servicer will include in the statement delivered to holders of
Class A and Class B Certificates with respect to each Distribution Date the
information specified in the Prospectus under "The Pooling and Servicing
Agreement--Reports to Certificateholders," which information will be set forth
with respect to each Loan Group, where applicable. In addition, the statement
delivered to holders of Class II-A-6 Certificates will include the Principal
Balances of the Class II-A-6 Components.
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.
SUBORDINATION OF CLASS B 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
rights of the holders of the Classes 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
Classes 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 more senior Certificates of the full amount of their
scheduled monthly payments of interest and principal and to afford the holders
of the more senior Certificates protection against Realized Losses, as more
fully described below. If Realized Losses exceed the credit support provided
through subordination to a given Class of Certificates or if Excess Losses
occur, all or a portion of such losses will be borne by such Class of
Certificates.
The protection afforded to the holders of more senior Classes of 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 more junior Classes of Certificates, the
amounts of principal and interest due such holders on each Distribution Date
out of the Pool Distribution Amounts 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 the
more junior Classes of Certificates. Because of the priority in which the Class
A Non-PO Principal Distribution Amount for a Group is allocated among the Class
A Certificates of such Group (other than the Class A-PO Certificates of such
Group), the application of this subordination to cover Realized Losses
experienced in periods prior to the periods in which a Class of Class A
Certificates is entitled to distributions in reduction of Principal Balance
will decrease the protection provided by the subordination to any such Class.
Amounts distributed to holders of Subordinated Certificates will not be
available to cover delinquencies or Realized Losses in respect of subsequent
Distribution Dates.
Allocation of Losses
Realized Losses (other than Excess Losses) on the Mortgage Loans in a Loan
Group will not be allocated to the holders of the Class A Certificates of the
related Group until the date on which the amount of principal payments on the
Mortgage Loans in both Loan Groups 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 Distribution
Date preceding the Distribution Date for which the Subordinated Percentage for
each Loan Group is equal to zero (the "CROSS-OVER DATE"). Prior to such time,
such Realized Losses (other than a Debt Service Reduction or Excess Loss) will
be effected through the adjustment of the Principal Balance of the most
subordinate Class then outstanding in such amount as is necessary to cause the
Aggregate Principal Balance to equal the sum of the Adjusted Pool Amounts.
Allocations to the Classes of Class B Certificates of (i) the principal
portion of Debt Service Reductions, (ii) the interest portion of Realized
Losses (other than Excess 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
S-38
<PAGE>
Receipts (other than Prepayments in Full) with respect to Mortgage Loans will
result from the priority of distributions of the Pool Distribution Amounts
first to the Class A Certificates and then to the Classes of Class B
Certificates in numerical order as described above under "-- Distributions."
The allocation of the principal portion of Realized Losses (other than Excess
Losses) in respect of the Mortgage Loans in a Loan Group allocated on or after
the Cross-Over Date will be effected through the adjustment on any
Determination Date of the applicable Class A Non-PO Principal Balance and the
Principal Balance of the related Class A-PO Certificates such that (i) such
Class A Non-PO Principal Balance equals the Adjusted Pool Amount for the
related Loan Group less the Adjusted Pool Amount (PO Portion) for such Loan
Group as of the preceding Distribution Date and (ii) the Principal Balance of
such Class A-PO Certificates equals the Adjusted Pool Amount (PO Portion) for
such Loan Group as of the preceding Distribution Date. The principal portion of
such Realized Losses allocated to a Group of Class A Certificates (other than
the Class A-PO Certificates of such Group) will be allocated to such
outstanding Classes of Class A Certificates pro rata in accordance with their
Principal Balances. The interest portion of any Realized Loss allocated to a
Group on or after the Cross-Over Date will be allocated among the outstanding
Classes of Class A Certificates of such Group pro rata in accordance with their
respective 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 such Class pro rata in accordance with their
respective Percentage Interests.
If due to losses on the Mortgage Loans in a Loan Group the applicable Pool
Distribution Amount is not sufficient to cover the applicable Class A Non-PO
Optimal Principal Amount on a particular Distribution Date, then the percentage
of principal payments on the Mortgage Loans in such Loan Group to which the
holders of the related Group of Class A Certificates (other than the Class A-PO
Certificates of such Group) will be entitled (i.e., the applicable 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 B Certificates in future payments of principal on the Mortgage Loans
in such Loan Group.
Special Hazard Losses, Fraud Losses and Bankruptcy Losses, other than Excess
Losses, will be allocated solely to the Classes of Class B Certificates in
reverse numerical order. Special Hazard Losses, Fraud Losses and Bankruptcy
Losses in excess of the Special Hazard Loss Amount, the Fraud Loss Amount and
the Bankruptcy Loss Amount, respectively, are "EXCESS SPECIAL HAZARD LOSSES,"
"EXCESS FRAUD LOSSES" and "EXCESS BANKRUPTCY LOSSES," respectively, and are
referred to herein collectively as "EXCESS LOSSES".
Any Excess Losses on the Mortgage Loans in a Loan Group will be allocated (i)
with respect to the principal portion of such losses (a) to the outstanding
Classes of Class A Certificates of the related Group (other than the Class A-PO
Certificates of such Group) and the Class B Certificates pro rata based on
their outstanding Principal Balances or, in the case of the Class B
Certificates, the applicable Apportioned 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 of the related Group in proportion to the
PO Fraction of such losses and (ii) with respect to the interest portion of
such losses, to the Class A and Class B Certificates pro rata based on interest
accrued in the case of the Class A Certificates or the interest that would
accrue on the Class B Certificates based on the applicable Apportioned
Principal Balance in the case of the Class B Certificates by reducing their
respective Interest Accrual Amounts. The principal portion of any such losses
so allocated to the Class A Certificates of a Group (other than the Class A-PO
Certificates of such Group) will be allocated to such outstanding Classes of
Class A Certificates of such Group pro rata in accordance with their then-
outstanding Principal Balances. Any losses allocated to a Class of
Certificates will be allocated among the outstanding Certificates within such
Class pro rata in accordance with their respective Percentage Interests.
The "APPORTIONED PRINCIPAL BALANCE" of any Class of Class B Certificates for
purposes of allocating Excess Losses on the Mortgage Loans in a Loan Group will
equal the Principal Balance of the Class of Class B Certificates multiplied by
a fraction the numerator of which is the applicable Group Subordinate Amount
and the denominator of which is the sum of the Group Subordinate Amounts. The
"GROUP SUBORDINATE AMOUNT" with respect to any Loan Group is equal to the
excess of the Pool Balance (Non-PO Portion) for such Loan Group over the Class
A Non-PO Principal Balance of the related Group of Class A Certificates.
S-39
<PAGE>
Upon initial issuance of the Certificates, the "SPECIAL HAZARD LOSS AMOUNT"
with respect thereto will be equal to approximately 1.00% (approximately
$2,371,094) of the aggregate unpaid principal balance of the Mortgage Loans as
of the Cut-Off Date. 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 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 assigned to the Class A and Class B Certificates
by the applicable Rating Agencies, as evidenced by letters to that effect
delivered by such Rating Agencies to the Master Servicer and the Trustee. On
and after the Cross-Over Date, the Special Hazard Loss Amount will be zero.
Upon initial issuance of the Certificates, the "FRAUD LOSS AMOUNT" with
respect thereto will be equal to approximately 2.00% (approximately $4,742,189)
of the aggregate unpaid principal balance of the Mortgage Loans as of the Cut-
Off Date. 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
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 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.
Upon initial issuance of the Certificates, the "BANKRUPTCY LOSS AMOUNT" with
respect thereto will be equal to approximately 0.02% (approximately $54,852) of
the aggregate unpaid principal balance of the Mortgage Loans as of the Cut-Off
Date. 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
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 Certificates since such
anniversary. The Bankruptcy Loss Amount and the related coverage levels
described above may be reduced or modified upon written confirmation from each
Rating Agency that such reduction or modification will not adversely affect the
then-current ratings assigned to the Certificates by it. 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 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.
As a result of the mechanism described above, the risk of Special Hazard
Losses, Fraud Losses and Bankruptcy Losses will be borne solely by the Class B
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 in reverse numerical order to the full extent of their initial
Principal Balances.
S-40
<PAGE>
DESCRIPTION OF THE MORTGAGE LOANS(/1/)
GENERAL
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. Substantially all of the Group I Loans will
have original terms to maturity of approximately 15 years, and substantially
all of the Group II Loans will have original terms of maturity of approximately
30 years. The Mortgage Loans are expected 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.
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.
MORTGAGE LOAN UNDERWRITING
Approximately 97.41% (by the aggregate unpaid principal balance as of the
Cut-Off Date) of the Group I Mortgage Loans and approximately 99.17% (by the
aggregate unpaid principal balance as of the Cut-Off Date) of the Group II
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. The remaining approximate 2.59% (by the aggregate
unpaid principal balance as of the Cut-Off Date) of the Group I Mortgage Loans
and approximate 0.83% (by the aggregate unpaid principal balance as of the Cut-
Off Date) of the Group II 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. Norwest Mortgage will have reviewed the underwriting standards
applied 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. Neither the Seller nor Norwest Mortgage has
underwritten any of the Bulk Purchase Underwritten Loans.
- -------------------
(1) The descriptions in this Prospectus Supplement of the Loan Groups and the
properties securing the Mortgage Loans to be included in the Loan Groups
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 related Loan
Group (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 such Loan Group. 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 related
Loan Groups as it will be constituted at the time the Certificates are
issued, although the aggregate principal balance of the Mortgage Loans
included in each Loan Group as of the Cut-Off Date, the range of Mortgage
Interest Rates and maturities, and certain other characteristics of the
Mortgage Loans in a Loan Group may vary. In the event that any of the
characteristics as of the Cut-Off Date of the Mortgage Loans that
constitute a Loan Group on the date of initial issuance of the Certificates
vary materially from those described herein, revised information regarding
such 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-41
<PAGE>
The following table sets forth certain characteristics of all the Group I
Mortgage Loans, the Group I Premium Mortgage Loans and the Group I Discount
Mortgage Loans.
SELECTED GROUP I MORTGAGE LOAN DATA
(AS OF MAY 1, 1998 (THE "CUT-OFF DATE"))
<TABLE>
<CAPTION>
ALL GROUP I GROUP I
GROUP I PREMIUM DISCOUNT
MORTGAGE MORTGAGE MORTGAGE
LOANS LOANS LOANS
------------------- ------------------- -------------------
<S> <C> <C> <C>
Number of Mortgage Loans 275 262 13
Aggregate Unpaid
Principal Balance(/1/) $31,781,747 $30,328,264 $1,453,483
Range of Unpaid
Principal Balances(/1/) $14,746 to $641,092 $14,746 to $641,092 $31,795 to $296,828
Average Unpaid Principal
Balance(/1/) $115,570 $115,757 $111,806
Range of Mortgage
Interest Rates 6.500% to 9.125% 7.125% to 9.125% 6.500% to 7.000%
Weighted Average
Mortgage Interest
Rate(/1/) 7.775% 7.817% 6.895%
Weighted Average Net
Mortgage Interest
Rate(/1/) 6.744% 6.750% 6.628%
Range of Remaining Terms
to Stated Maturity 154 to 180 Months 154 to 180 Months 172 to 180 Months
Weighted Average
Remaining Term to
Stated Maturity(/1/) 174 Months 174 Months 176 Months
Range of Original Loan-
to-Value Ratios 25.68% to 95.00% 25.68% to 95.00% 34.97% to 80.00%
Weighted Average
Original Loan-to-Value
Ratio(/1/) 69.27% 69.43% 65.92%
Number of Mortgage Loans
with Original Loan-to-
Value Ratios greater
than 80% originated
without Primary
Mortgage Insurance 1 1 0
Mortgage Loans with
Original Loan-to-Value
Ratios greater than 80%
originated without
Primary Mortgage
Insurance as a
Percentage of Aggregate
Unpaid Principal
Balance(/1/) 0.11% 0.11% 0.00%
Weighted Average
Original Loan-to-Value
Ratio of Mortgage Loans
with Original Principal
Balance greater than
$600,000(/1/) 59.99% 59.99% 0.00%
Maximum Loans with
Original Principal
Balance greater than
$600,000(/1/) 68.00% 68.00% 0.00%
</TABLE>
- -------------------
(1) Approximate.
S-42
<PAGE>
SELECTED GROUP I MORTGAGE LOAN DATA (CONT.)
<TABLE>
<CAPTION>
ALL GROUP I GROUP I
GROUP I PREMIUM DISCOUNT
MORTGAGE MORTGAGE MORTGAGE
LOANS LOANS LOANS
---------------- ---------------- --------------
<S> <C> <C> <C>
Geographic Concentration of
Mortgage Properties securing
Mortgage Loans in Excess of
5% of the Aggregate Unpaid
Principal Balance(/1/)
New York 10.97% 10.85% 13.67%
Florida 10.81% 10.49% 17.52%
Colorado 10.18% 10.66% *
California 9.04% 8.24% 25.62%
Texas 8.04% 8.43% *
Massachusetts 6.70% 6.72% 6.29%
Alabama * * 20.42%
Nevada * * 5.21%
Maximum Five-Digit Zip Code
Concentration(/1/) 2.02% 2.11% 20.42%
Earliest Origination Month January 1996 January 1996 August 1997
Latest Origination Month April 1998 April 1998 April 1998
Latest Stated Maturity Date May 1, 2013 May 1, 2013 May 1, 2013
Number of Buy-Down Loans 0 0 0
Buy-Down Loans as a
Percentage of Aggregate
Unpaid Principal
Balance(/1/) 0.00% 0.00% 0.00%
Number of Relocation Loans 0 0 0
Relocation Loans as a
Percentage of Aggregate
Unpaid Principal
Balance(/1/) 0.00% 0.00% 0.00%
Number of No Ratio Loans 104 98 6
No Ratio Loans as a
Percentage of Aggregate
Unpaid Principal
Balance(/1/) 46.67% 46.26% 55.29%
Number of Foreign National
Loans 10 9 1
Foreign National Loans as a
Percentage of Aggregate
Unpaid Principal
Balance(/1/) 3.92% 4.01% 2.19%
Weighted Average FICO
Score(/1/) 750 751 747
</TABLE>
- -------------------
(1) Approximate.
* Less than 5% of the aggregate unpaid principal balance as of the Cut-Off
Date.
S-43
<PAGE>
The following table sets forth certain characteristics of all the Group II
Mortgage Loans, the Group II Premium Mortgage Loans and the Group II Discount
Mortgage Loans.
SELECTED GROUP II MORTGAGE LOAN DATA
(AS OF THE CUT-OFF DATE)
<TABLE>
<CAPTION>
ALL GROUP II GROUP II
GROUP II PREMIUM DISCOUNT
MORTGAGE MORTGAGE MORTGAGE
LOANS LOANS LOANS
------------------- ------------------- -------------------
<S> <C> <C> <C>
Number of Mortgage Loans 1,477 1,472 5
Aggregate Unpaid
Principal Balance(/1/) $205,327,684 $204,784,063 $543,621
Range of Unpaid
Principal Balances(/1/) $18,188 to $875,509 $18,188 to $875,509 $84,760 to $139,106
Average Unpaid Principal
Balance(/1/) $139,017 $139,120 $108,724
Range of Mortgage
Interest Rates 6.875% to 9.750% 7.125% to 9.750% 6.875% to 7.000%
Weighted Average
Mortgage Interest
Rate(/1/) 8.069% 8.072% 6.974%
Weighted Average Net
Mortgage Interest
Rate(/1/) 6.750% 6.750% 6.707%
Range of Remaining Terms
to Stated Maturity 239 to 360 Months 239 to 360 months 357 to 359 Months
Weighted Average
Remaining Terms to
Stated Maturity(/1/) 354 Months 354 Months 358 Months
Range of Original Loan-
to-Value Ratios 11.29% to 95.00% 11.29% to 95.00% 40.86% to 80.00%
Weighted Average
Original Loan-to-Value
Ratio(/1/) 75.78% 75.80% 67.45%
Number of Mortgage Loans
with Original Loan-to-
Value Ratios greater
than 80% originated
without Primary
Mortgage Insurance 6 6 0
Mortgage Loans with
Original Loan-to-Value
Ratios greater than 80%
originated without
Primary Mortgage
Insurance as a
Percentage of Aggregate
Unpaid Principal
Balance(/1/) 0.41% 0.41% 0.00%
Weighted Average
Original Loan-to-Value
Ratio of Mortgage Loans
with Original Principal
Balance greater than
$600,000(/1/) 70.21% 70.21% 0.00%
Maximum Original Loan-
to-Value Ratio of
Mortgage Loans with
Original Principal
Balance greater than
$600,000(/1/) 85.00% 85.00% 0.00%
</TABLE>
- -------------------
(1) Approximate.
S-44
<PAGE>
SELECTED GROUP II MORTGAGE LOAN DATA (CONT.)
<TABLE>
<CAPTION>
ALL GROUP II GROUP II
GROUP II PREMIUM DISCOUNT
MORTGAGE MORTGAGE MORTGAGE
LOANS LOANS LOANS
---------------- ---------------- --------------
<S> <C> <C> <C>
Geographic Concentration of
Mortgage Properties securing
Mortgage Loans in Excess of
5% of the Aggregate Unpaid
Principal Balance(/1/)
California 18.06% 18.07% *
Colorado 7.62% 7.64% *
Florida 5.68% 5.70% *
Texas 5.16% 5.11% 25.59%
New York 5.12% 5.14% *
New Jersey * * 20.71%
Pennsylvania * * 19.30%
Virginia * * 18.81%
Massachusetts * * 15.59%
Maximum Five-Digit Zip Code
Concentration(/1/) 0.65% 0.65% 25.59%
Earliest Origination Month January 1997 January 1997 January 1998
Latest Origination Month May 1998 May 1998 March 1998
Latest Stated Maturity Date May 1, 2028 May 1, 2028 April 1, 2028
Number of Buy-Down Loans 1 1 0
Buy-Down Loans as a
Percentage of Aggregate
Unpaid Principal
Balance(/1/) 0.09% 0.09% 0.00%
Number of Relocation Loans 5 5 0
Relocation Loans as a
Percentage of Aggregate
Unpaid Principal
Balance(/1/) 0.71% 0.71% 0.00%
Number of No Ratio Loans 533 531 2
No Ratio Loans as a
Percentage of Aggregate
Unpaid Principal
Balance(/1/) 37.56% 37.57% 34.89%
Number of Foreign National
Loans 71 71 0
Foreign National Loans as a
Percentage of Aggregate
Unpaid Principal
Balance(/1/) 4.89% 4.91% 0.00%
Weighted Average FICO
Score(/1/) 743 743 754
</TABLE>
- -------------------
(1) Approximate.
* Less than 5% of the aggregate unpaid principal balance as of the Cut-Off
Date.
S-45
<PAGE>
GROUP I MORTGAGE LOAN DATA
Set forth below is a description of certain additional expected
characteristics of the Group I Mortgage Loans as of the Cut-Off Date (except as
otherwise indicated).
MORTGAGE INTEREST RATES
<TABLE>
<CAPTION>
PERCENTAGE OF
TOTAL
NUMBER OF AGGREGATE AGGREGATE PERCENT WEIGHTED
GROUP I UNPAID UNPAID WEIGHTED PERCENT SINGLE AVERAGE
MORTGAGE PRINCIPAL PRINCIPAL AVERAGE PERCENT PERCENT PRIMARY FAMILY FICO
MORTGAGE INTEREST RATE LOANS BALANCE BALANCE LTV PURCHASE FULL DOC RESIDENCE DETACHED SCORE
- ---------------------- --------- -------------- ------------- -------- -------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
6.500%................. 1 $ 52,497.60 0.17% 65.85% 0.00% 100.00% 0.00% 0.00% 764
6.750%................. 2 301,661.97 0.95 71.52 74.89 100.00 74.89 100.00 752
6.875%................. 4 402,610.65 1.27 62.60 57.26 22.70 79.96 79.96 766
7.000%................. 6 696,712.28 2.19 65.43 30.01 17.75 82.25 83.38 733
7.125%................. 4 716,228.58 2.25 70.09 12.36 0.00 87.64 100.00 722
7.250%................. 8 1,021,124.24 3.21 61.48 36.87 17.62 64.51 94.70 738
7.375%................. 17 1,537,129.29 4.84 62.60 62.69 55.06 81.66 79.83 750
7.450%................. 1 149,205.39 0.47 66.52 0.00 0.00 100.00 0.00 775
7.500%................. 32 5,044,021.84 15.85 68.60 66.39 41.74 73.15 80.97 751
7.625%................. 30 3,787,971.89 11.92 67.75 68.25 37.69 76.63 80.33 751
7.700%................. 1 218,670.71 0.69 74.98 100.00 100.00 100.00 0.00 761
7.750%................. 38 3,412,109.22 10.74 70.37 63.01 34.98 67.01 65.61 755
7.875%................. 34 4,988,285.53 15.70 70.31 72.92 51.01 42.57 65.12 753
8.000%................. 20 2,231,889.87 7.02 75.14 91.28 67.52 40.83 60.20 737
8.125%................. 22 2,114,321.12 6.65 72.00 48.82 71.11 52.19 68.17 758
8.250%................. 18 1,201,542.36 3.78 67.59 62.86 80.38 26.02 82.56 754
8.375%................. 18 2,206,884.68 6.94 66.36 45.26 39.49 61.73 61.19 760
8.500%................. 12 1,305,506.45 4.11 78.53 92.08 65.28 68.91 15.36 744
8.600%................. 1 27,693.54 0.09 75.00 100.00 0.00 100.00 0.00 731
8.625%................. 1 25,491.68 0.08 49.06 100.00 0.00 0.00 0.00 736
8.750%................. 2 199,793.82 0.63 63.78 51.20 0.00 48.80 100.00 749
8.875%................. 1 49,799.38 0.16 70.00 0.00 100.00 0.00 100.00 793
9.000%................. 1 43,492.80 0.14 75.00 100.00 100.00 0.00 0.00 760
9.125%................. 1 47,101.72 0.15 77.42 0.00 100.00 0.00 0.00 687
--- -------------- ------ ----- ------ ------ ------ ------ ---
Total/Weighted
Average.............. 275 $31,781,746.61 100.00% 69.27% 63.74% 46.96% 62.13% 70.18% 750
=== ============== ====== ===== ====== ====== ====== ====== ===
ORIGINAL LOAN-TO-VALUE RATIOS
<CAPTION>
PERCENTAGE OF
TOTAL
NUMBER OF AGGREGATE AGGREGATE PERCENT WEIGHTED
RANGE OF GROUP I UNPAID UNPAID WEIGHTED PERCENT SINGLE AVERAGE
ORIGINAL LOAN-TO-VALUE MORTGAGE PRINCIPAL PRINCIPAL AVERAGE PERCENT PERCENT PRIMARY FAMILY FICO
RATIOS LOANS BALANCE BALANCE LTV PURCHASE FULL DOC RESIDENCE DETACHED SCORE
- ---------------------- --------- -------------- ------------- -------- -------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
50% or less............ 29 $ 2,283,559.00 7.19% 41.63% 39.84% 19.82% 76.50% 80.98% 763
50.01- 55.00%.......... 11 1,896,195.71 5.97 52.16 35.29 28.60 81.82 75.32 762
55.01- 60.00%.......... 22 3,332,385.79 10.49 58.69 63.77 25.23 64.21 73.30 744
60.01- 65.00%.......... 27 2,574,750.25 8.10 63.03 45.62 37.92 48.34 62.64 759
65.01- 70.00%.......... 47 6,214,164.30 19.55 68.59 61.89 46.88 58.79 77.61 764
70.01- 75.00%.......... 34 5,307,397.65 16.70 74.37 62.90 49.11 67.11 67.93 741
75.01- 80.00%.......... 75 8,449,011.26 26.57 79.65 79.72 57.64 64.32 67.62 745
80.01- 85.00%.......... 2 79,782.38 0.25 83.22 18.78 100.00 0.00 0.00 747
85.01- 90.00%.......... 25 1,419,598.47 4.47 89.94 97.72 100.00 13.40 54.48 736
90.01- 95.00%.......... 3 224,901.80 0.71 95.00 25.93 100.00 100.00 26.07 692
--- -------------- ------ ----- ------ ------ ------ ------ ---
Total/Weighted
Average.............. 275 $31,781,746.61 100.00% 69.27% 63.74% 46.96% 62.13% 70.18% 750
=== ============== ====== ===== ====== ====== ====== ====== ===
</TABLE>
The Loan-to-Value Ratio of a Group I 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. For the purpose
of calculating the Loan-to-Value Ratio of any Group I 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. There can
be no assurance that such appraisal, which is based on the independent judgment
of an appraiser and not an arms-length sales transaction is an accurate
representation of the market value of a Mortgaged Property. See "The Trust
Estates--Mortgage Loans" in the Prospectus. No assurance can be given that the
values of the Mortgaged Properties securing the Group I Mortgage Loans have
remained or will remain at the levels used in calculating the Loan-to-Value
Ratios shown above. The Seller has taken no action to establish the current
value of any Mortgaged Property. See "Risk Factors--Risks of the Mortgage
Loans" in the Prospectus.
S-46
<PAGE>
ORIGINAL GROUP I MORTGAGE LOAN PRINCIPAL BALANCES
<TABLE>
<CAPTION>
PERCENTAGE
OF TOTAL
NUMBER OF AGGREGATE AGGREGATE PERCENT WEIGHTED
RANGE OF GROUP I UNPAID UNPAID WEIGHTED PERCENT SINGLE AVERAGE
ORIGINAL MORTGAGE LOAN MORTGAGE PRINCIPAL PRINCIPAL AVERAGE PERCENT PERCENT PRIMARY FAMILY FICO
PRINCIPAL BALANCES LOANS BALANCE BALANCE LTV PURCHASE FULL DOC RESIDENCE DETACHED SCORE
- ---------------------- --------- -------------- ---------- -------- -------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Less than or equal to
$200,000............... 235 $19,416,492.80 61.10% 69.25% 56.63% 48.86% 57.00% 67.30% 750
$200,001-$250,000....... 13 2,749,873.79 8.65 71.98 68.19 39.34 84.57 62.08 753
$250,001-$300,000....... 13 3,625,772.64 11.41 67.96 76.29 53.36 45.70 53.24 744
$300,001-$350,000....... 2 632,763.02 1.99 70.25 100.00 46.75 53.25 100.00 720
$350,001-$400,000....... 6 2,200,645.57 6.92 73.00 66.54 50.50 83.26 100.00 756
$400,001-$450,000....... 3 1,255,991.95 3.95 74.45 100.00 30.89 100.00 69.11 734
$600,001-$650,000....... 3 1,900,206.84 5.98 59.99 66.78 33.04 66.96 100.00 772
--- -------------- ------ ----- ------ ----- ------ ------ ---
Total/Weighted
Average.............. 275 $31,781,746.61 100.00% 69.27% 63.74% 46.96% 62.13% 70.18% 750
=== ============== ====== ===== ====== ===== ====== ====== ===
</TABLE>
MORTGAGED PROPERTIES
<TABLE>
<CAPTION>
PERCENTAGE OF
TOTAL
NUMBER OF AGGREGATE AGGREGATE WEIGHTED
GROUP I UNPAID UNPAID WEIGHTED PERCENT AVERAGE
MORTGAGE PRINCIPAL PRINCIPAL AVERAGE PERCENT PERCENT PRIMARY FICO
PROPERTY LOANS BALANCE BALANCE LTV PURCHASE FULL DOC RESIDENCE SCORE
- -------- --------- -------------- ------------- -------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Single-family detached.. 177 $22,305,890.98 70.18% 68.37% 60.29% 40.64% 72.31% 752
Two- to four-family
units.................. 38 4,527,379.47 14.25 73.45 72.31 62.38 37.11 742
Condominiums
High-rise (greater than
four stories)......... 4 237,932.65 0.75 64.12 43.67 14.61 85.39 751
Low-rise (four stories
or less).............. 28 2,276,265.09 7.16 72.24 72.36 73.20 31.09 748
Planned unit
developments........... 17 1,582,541.73 4.98 63.13 70.64 34.39 56.39 768
Townhouses.............. 4 509,647.49 1.60 79.11 72.46 100.00 21.19 729
Cooperative Units....... 1 27,693.54 0.09 75.00 100.00 0.00 100.00 731
Manufactured Home....... 0 0.00 0.00 0.00 0.00 0.00 0.00 0
Condotel
High-Rise.............. 2 73,293.96 0.23 53.14 40.34 100.00 0.00 782
Low-Rise............... 4 241,101.70 0.76 74.16 100.00 86.41 0.00 752
--- -------------- ------ ----- ------ ------ ------ ---
Total/Weighted
Average.............. 275 $31,781,746.61 100.00% 69.27% 63.74% 46.96% 62.13% 750
=== ============== ====== ===== ====== ====== ====== ===
</TABLE>
ORIGINATORS OF GROUP I MORTGAGE LOANS
<TABLE>
<CAPTION>
PERCENTAGE
OF TOTAL
NUMBER OF AGGREGATE AGGREGATE PERCENT WEIGHTED
GROUP I UNPAID UNPAID WEIGHTED PERCENT SINGLE AVERAGE
MORTGAGE PRINCIPAL PRINCIPAL AVERAGE PERCENT PERCENT PRIMARY FAMILY FICO
ORIGINATOR LOANS BALANCE BALANCE LTV PURCHASE FULL DOC RESIDENCE DETACHED SCORE
- ---------- --------- -------------- ---------- -------- -------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NMI or Affiliate........ 236 $27,326,365.52 85.98% 68.98% 63.30% 43.49% 64.42% 71.74% 751
Other Originators....... 39 4,455,381.09 14.02 71.01 66.46 68.26 48.12 60.63 744
--- -------------- ------ ----- ----- ----- ----- ----- ---
Total/Weighted
Average.............. 275 $31,781,746.61 100.00% 69.27% 63.74% 46.96% 62.13% 70.18% 750
=== ============== ====== ===== ===== ===== ===== ===== ===
</TABLE>
It is expected that, as of the Cut-Off Date, no single "Other Originator"
will have accounted for more than 5.00% of the aggregate principal balance of
the Group I Mortgage Loans as of the Cut-Off Date.
S-47
<PAGE>
PURPOSES OF GROUP I MORTGAGE LOANS
<TABLE>
<CAPTION>
PERCENTAGE
OF TOTAL
NUMBER OF AGGREGATE AGGREGATE PERCENT WEIGHTED
GROUP I UNPAID UNPAID WEIGHTED PERCENT SINGLE AVERAGE
MORTGAGE PRINCIPAL PRINCIPAL AVERAGE PERCENT PERCENT PRIMARY FAMILY FICO
LOAN PURPOSE LOANS BALANCE BALANCE LTV PURCHASE FULL DOC RESIDENCE DETACHED SCORE
- ------------ --------- -------------- ---------- -------- -------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Purchase................ 162 $20,258,916.18 63.74% 71.88% 100.00% 44.60% 62.40% 66.38% 750
Equity Take Out Refi-
nance.................. 51 4,442,125.81 13.98 63.90 0.00 65.02 53.54 78.72 760
Rate/Term Refinance..... 62 7,080,704.62 22.28 65.14 0.00 42.39 66.75 75.71 746
--- -------------- ------ ----- ------ ----- ----- ----- ---
Total/Weighted
Average.............. 275 $31,781,746.61 100.00% 69.27% 63.74% 46.96% 62.13% 70.18% 750
=== ============== ====== ===== ====== ===== ===== ===== ===
</TABLE>
In general, in the case of a Group I 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 Group I 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.
FICO SCORES
<TABLE>
<CAPTION>
PERCENTAGE
OF TOTAL
NUMBER OF AGGREGATE AGGREGATE PERCENT WEIGHTED
GROUP I UNPAID UNPAID WEIGHTED PERCENT SINGLE AVERAGE
RANGE OF MORTGAGE PRINCIPAL PRINCIPAL AVERAGE PERCENT PERCENT PRIMARY FAMILY FICO
FICO SCORES LOANS BALANCE BALANCE LTV PURCHASE FULL DOC RESIDENCE DETACHED SCORE
- ----------- --------- -------------- ---------- -------- -------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
250-300................. 0 $ 0.00 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0
301-350................. 0 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0
351-400................. 0 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0
401-450................. 0 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0
451-500................. 0 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0
501-550................. 0 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0
551-600................. 0 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0
601-650................. 5 443,894.13 1.40 76.42 22.24 100.00 0.00 66.76 631
651-700................. 18 2,060,445.23 6.48 77.04 62.72 37.73 68.31 78.34 688
701-750................. 107 12,213,525.33 38.43 69.91 69.49 49.93 60.11 65.34 730
751-800................. 138 15,865,117.57 49.92 67.76 59.09 41.16 67.40 72.91 774
801-850................. 4 943,858.07 2.97 67.33 79.55 86.97 13.03 79.55 805
851-900................. 0 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0
Not Available........... 3 254,906.28 0.80 64.04 100.00 100.00 71.69 38.16 0
--- -------------- ------ ----- ------ ------ ----- ----- ---
Total/Weighted
Average.............. 275 $31,781,746.61 100.00% 69.27% 63.74% 46.96% 62.13% 70.18% 750
=== ============== ====== ===== ====== ====== ===== ===== ===
</TABLE>
"FICO SCORES" are statistical credit scores obtained by many mortgage lenders
in connection with the loan application to help assess a borrower's credit wor-
thiness. 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 derived 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 borrower's historical credit data, including,
among other things, payment history, delinquencies on accounts, levels of out-
standing indebtedness, length of credit history, types of credit, and bank-
ruptcy experience. FICO Scores range from approximately 250 to approximately
900, with higher scores indicating an individual with a more favorable credit
history compared to an individual with a lower score. However, a FICO Score
purports only to be a measurement of the relative degree of risk a borrower
represents to a lender, i.e., that a borrower with a higher score is statisti-
cally 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
indicate 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 specifically for use in connection with mortgage loans, but for con-
sumer loans in general. Therefore, a FICO Score does not take into considera-
tion the effect of mortgage loan characteristics on the probability of repay-
ment by the borrower. The FICO Scores set forth in the table above were ob-
tained at either the time of origination of the Group I Mortgage Loan or more
recently. Neither the Seller nor Norwest Mortgage make any representations or
warranties as to the actual performance of any Group I Mortgage Loan or that a
particular FICO Score should be relied upon as a basis for an expectation that
the borrower will repay the mortgage loan according to its terms. See "The
Mortgage Loan Programs--The Mortgage Loan Understanding" in the Prospectus.
S-48
<PAGE>
GROUP I MORTGAGE LOAN DOCUMENTATION LEVELS
<TABLE>
<CAPTION>
PERCENTAGE OF
TOTAL
NUMBER OF AGGREGATE AGGREGATE PERCENT WEIGHTED
GROUP I UNPAID UNPAID PERCENT SINGLE AVERAGE
MORTGAGE PRINCIPAL PRINCIPAL WEIGHTED PERCENT PERCENT PRIMARY FAMILY FICO
DOCUMENTATION LEVEL LOANS BALANCE BALANCE AVERAGE LTV PURCHASE FULL DOC RESIDENCE DETACHED SCORE
- ------------------- --------- -------------- ------------- ----------- -------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Full Documentation.... 152 $14,925,897.76 46.96% 73.26% 60.54% 100.00% 31.75% 60.74% 747
Income Verification... 0 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0
Asset Verification.... 123 16,855,848.85 53.04 65.73 66.58 0.00 89.04 78.55 754
Preferred Processing.. 0 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0
--- -------------- ------ ----- ----- ------ ----- ----- ---
Total/Weighted Average.. 275 $31,781,746.61 100.00% 69.27% 63.74% 46.96% 62.13% 70.18% 750
=== ============== ====== ===== ===== ====== ===== ===== ===
</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 Group I 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 Group I 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.
REMAINING TERMS TO STATED MATURITY
<TABLE>
<CAPTION>
PERCENTAGE OF
TOTAL
NUMBER OF AGGREGATE AGGREGATE
GROUP I UNPAID UNPAID
REMAINING STATED MORTGAGE PRINCIPAL PRINCIPAL
TERM (MONTHS) LOANS BALANCE BALANCE
- ---------------- --------- -------------- -------------
<S> <C> <C> <C>
154...................................... 1 $ 41,001.46 0.13%
166...................................... 1 387,971.54 1.22
167...................................... 6 486,138.93 1.53
168...................................... 9 1,118,961.36 3.52
169...................................... 6 700,564.07 2.20
170...................................... 17 2,521,188.97 7.93
171...................................... 14 1,582,744.92 4.98
172...................................... 28 4,324,212.76 13.62
173...................................... 18 2,094,460.33 6.59
174...................................... 28 3,407,284.40 10.72
175...................................... 26 2,248,213.74 7.07
176...................................... 25 2,260,054.07 7.11
177...................................... 30 3,355,484.59 10.56
178...................................... 31 3,665,097.54 11.53
179...................................... 28 3,015,367.93 9.49
180...................................... 7 573,000.00 1.80
--- -------------- ------
Total................................ 275 $31,781,746.61 100.00%
=== ============== ======
</TABLE>
YEARS OF ORIGINATION
<TABLE>
<CAPTION>
PERCENTAGE OF
TOTAL
NUMBER OF AGGREGATE AGGREGATE
GROUP I UNPAID UNPAID
MORTGAGE PRINCIPAL PRINCIPAL
YEAR OF ORIGINATION LOANS BALANCE BALANCE
- ------------------- --------- -------------- -------------
<S> <C> <C> <C>
1996..................................... 1 $ 41,001.46 0.13%
1997..................................... 179 21,344,576.09 67.16
1998..................................... 95 10,396,169.06 32.71
--- -------------- ------
Total................................ 275 $31,781,746.61 100.00%
=== ============== ======
</TABLE>
GEOGRAPHIC DISTRIBUTION OF MORTGAGED PROPERTIES
<TABLE>
<CAPTION>
PERCENTAGE OF
TOTAL
NUMBER AGGREGATE AGGREGATE
OF GROUP I UNPAID UNPAID
MORTGAGE PRINCIPAL PRINCIPAL
GEOGRAPHIC AREA LOANS BALANCE BALANCE
- --------------- ---------- -------------- -------------
<S> <C> <C> <C>
Alabama................................. 1 $ 296,827.97 0.93%
Arizona................................. 10 915,279.50 2.88
Arkansas................................ 3 192,928.36 0.61
California.............................. 20 2,871,675.61 9.04
Colorado................................ 22 3,234,377.19 10.18
District of Columbia.................... 1 175,919.60 0.55
Florida................................. 27 3,434,879.80 10.81
Georgia................................. 9 783,085.82 2.46
Hawaii.................................. 5 1,264,835.17 3.98
Idaho................................... 3 167,050.76 0.53
Illinois................................ 1 29,527.77 0.09
Indiana................................. 2 96,602.30 0.30
Iowa.................................... 2 694,695.30 2.19
Kansas.................................. 2 97,678.64 0.31
Kentucky................................ 2 84,247.58 0.27
Louisiana............................... 2 113,528.26 0.36
Maryland................................ 6 658,202.57 2.07
Massachusetts........................... 13 2,130,092.59 6.70
Michigan................................ 3 217,769.90 0.69
Minnesota............................... 9 1,123,606.47 3.54
Mississippi............................. 1 51,124.65 0.16
Montana................................. 1 83,234.16 0.26
Nebraska................................ 1 54,532.04 0.17
Nevada.................................. 8 950,159.87 2.99
New Jersey.............................. 3 252,573.74 0.79
New Mexico.............................. 2 392,643.28 1.24
New York................................ 27 3,490,244.14 10.97
North Carolina.......................... 16 1,278,509.05 4.02
North Dakota............................ 2 269,399.86 0.85
Ohio.................................... 9 580,627.38 1.83
Oklahoma................................ 3 153,216.87 0.48
Oregon.................................. 2 201,018.50 0.63
Pennsylvania............................ 7 300,233.75 0.94
Rhode Island............................ 2 164,351.68 0.52
South Carolina.......................... 5 479,611.95 1.51
Tennessee............................... 5 363,244.37 1.14
Texas................................... 18 2,555,437.08 8.04
Utah.................................... 4 547,185.04 1.72
Virginia................................ 9 580,596.81 1.83
Washington.............................. 1 55,353.29 0.17
Wisconsin............................... 5 291,637.94 0.92
Wyoming................................. 1 104,000.00 0.33
--- -------------- ------
Total............................... 275 $31,781,746.61 100.00%
=== ============== ======
</TABLE>
S-49
<PAGE>
GROUP II MORTGAGE LOAN DATA
Set forth below is a description of certain additional expected
characteristics of the Group II Mortgage Loans as of the Cut-Off Date (except
as otherwise indicated).
MORTGAGE INTEREST RATES
<TABLE>
<CAPTION>
PERCENTAGE OF
TOTAL
NUMBER AGGREGATE AGGREGATE PERCENT WEIGHTED
OF GROUP II UNPAID UNPAID WEIGHTED PERCENT SINGLE AVERAGE
MORTGAGE INTEREST MORTGAGE PRINCIPAL PRINCIPAL AVERAGE PERCENT PERCENT PRIMARY FAMILY FICO
RATE LOANS BALANCE BALANCE LTV PURCHASE FULL DOC RESIDENCE DETACHED SCORE
- ----------------- ------------ --------------- ------------- -------- -------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
6.875%............... 1 $ 112,609.92 0.05% 80.00% 0.00% 100.00% 0.00% 100.00% 792
7.000%............... 4 431,011.31 0.21 64.17 76.28 55.99 56.62 76.28 745
7.125%............... 5 1,389,189.04 0.68 77.55 42.15 88.86 100.00 50.70 732
7.250%............... 17 3,041,930.91 1.48 75.17 54.54 90.65 86.17 81.52 721
7.375%............... 23 4,217,740.80 2.05 74.71 36.89 81.02 72.27 78.44 730
7.500%............... 62 10,845,010.20 5.28 76.07 76.70 57.73 82.23 78.50 746
7.625%............... 70 12,607,584.12 6.14 72.43 61.94 30.63 90.11 83.27 748
7.700%............... 1 404,919.94 0.20 69.91 100.00 0.00 100.00 0.00 741
7.750%............... 114 19,550,955.39 9.52 75.20 64.04 62.11 65.57 82.82 739
7.850%............... 1 201,353.45 0.10 75.00 100.00 0.00 100.00 0.00 762
7.875%............... 160 25,811,530.48 12.57 75.55 75.02 59.13 72.63 73.31 743
8.000%............... 165 25,520,302.59 12.43 74.15 71.89 53.74 73.33 73.92 749
8.125%............... 134 17,704,281.20 8.62 75.69 64.99 48.30 62.36 78.14 740
8.150%............... 1 198,657.83 0.10 63.49 0.00 0.00 100.00 0.00 772
8.250%............... 221 28,201,679.45 13.74 75.71 71.04 61.09 46.60 73.16 743
8.375%............... 155 18,097,770.04 8.81 77.23 76.65 55.46 61.17 72.38 744
8.500%............... 169 19,046,117.84 9.28 77.31 70.66 56.96 49.51 65.45 745
8.625%............... 59 6,352,125.03 3.09 76.15 76.06 59.78 49.88 65.68 747
8.750%............... 58 6,242,669.45 3.04 81.87 94.67 64.40 50.70 72.57 744
8.875%............... 38 3,984,489.70 1.94 78.04 65.65 50.30 45.50 73.08 743
9.000%............... 12 981,435.07 0.48 82.24 65.89 43.39 51.12 55.46 738
9.125%............... 2 67,106.70 0.03 90.00 100.00 100.00 0.00 50.59 750
9.250%............... 1 36,419.09 0.02 55.88 100.00 100.00 0.00 0.00 763
9.375%............... 2 108,182.23 0.05 90.00 100.00 100.00 0.00 100.00 764
9.625%............... 1 96,113.24 0.05 90.00 100.00 100.00 0.00 100.00 710
9.750%............... 1 76,499.41 0.04 90.00 100.00 100.00 0.00 100.00 742
----- --------------- ------ ----- ------ ------ ------ ------ ---
Total/Weighted Average.. 1,477 $205,327,684.43 100.00% 75.78% 70.30% 56.64% 64.29% 74.24% 743
===== =============== ====== ===== ====== ====== ====== ====== ===
</TABLE>
ORIGINAL LOAN-TO-VALUE RATIOS
<TABLE>
<CAPTION>
PERCENTAGE OF
TOTAL
NUMBER AGGREGATE AGGREGATE PERCENT WEIGHTED
OF GROUP II UNPAID UNPAID WEIGHTED PERCENT SINGLE AVERAGE
RANGE OF ORIGINAL MORTGAGE PRINCIPAL PRINCIPAL AVERAGE PERCENT PERCENT PRIMARY FAMILY FICO
LOAN-TO-VALUE RATIOS LOANS BALANCE BALANCE LTV PURCHASE FULL DOC RESIDENCE DETACHED SCORE
- -------------------- ----------- --------------- ------------- -------- -------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
50% or less............ 78 $ 7,987,720.73 3.89% 41.94% 40.63% 27.71% 64.40% 76.50% 750
50.01- 55.00%.......... 38 5,822,168.11 2.84 52.84 46.84 21.45 82.19 89.36 753
55.01- 60.00%.......... 46 6,827,939.89 3.33 58.27 42.74 38.44 52.62 82.08 741
60.01- 65.00%.......... 78 9,155,161.22 4.46 63.78 38.36 37.95 46.88 68.03 751
65.01- 70.00%.......... 141 22,690,337.93 11.05 68.82 60.27 46.23 59.43 76.58 745
70.01- 75.00%.......... 180 31,769,738.18 15.47 74.22 67.38 51.62 70.05 63.71 745
75.01- 80.00%.......... 592 85,834,725.81 41.80 79.61 76.45 51.98 74.37 78.52 743
80.01- 85.00%.......... 16 2,662,391.67 1.30 84.28 70.23 100.00 58.20 81.25 725
85.01- 90.00%.......... 278 26,286,411.87 12.80 89.80 90.03 100.00 25.75 68.78 741
90.01- 95.00%.......... 30 6,291,089.02 3.06 94.98 90.82 100.00 100.00 64.04 718
----- --------------- ------ ----- ----- ------ ------ ----- ---
Total/Weighted
Average............... 1,477 $205,327,684.43 100.00% 75.78% 70.30% 56.64% 64.29% 74.24% 743
===== =============== ====== ===== ===== ====== ====== ===== ===
</TABLE>
The Loan-to-Value Ratio of a Group II 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. For the purpose
of calculating the Loan-to-Value Ratio of any Group II 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. There can
be no assurance that such appraisal, which is based on the independent judgment
of an appraiser and not an arms-length sales transaction is an accurate
representation of the market value of a Mortgaged Property. See "The Trust
Estates--Mortgage Loans" in the Prospectus. No assurance can be given that the
values of the Mortgaged Properties securing the Group II Mortgage Loans have
remained or will remain at the levels used in calculating the Loan-to-Value
Ratios shown above. The Seller has taken no action to establish the current
value of any Mortgaged Property. See "Risk Factors--Risks of the Mortgage
Loans" in the Prospectus.
S-50
<PAGE>
ORIGINAL GROUP II MORTGAGE LOAN PRINCIPAL BALANCES
<TABLE>
<CAPTION>
PERCENTAGE OF
TOTAL
RANGE OF NUMBER AGGREGATE AGGREGATE PERCENT WEIGHTED
ORIGINAL MORTGAGE OF GROUP II UNPAID UNPAID WEIGHTED PERCENT SINGLE AVERAGE
LOAN MORTGAGE PRINCIPAL PRINCIPAL AVERAGE PERCENT PERCENT PRIMARY FAMILY FICO
PRINCIPAL BALANCES LOANS BALANCE BALANCE LTV PURCHASE FULL DOC RESIDENCE DETATCHED SCORE
- ------------------ ----------- --------------- ------------- -------- -------- -------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Less than or equal to
$200,000............ 1,200 $117,035,354.21 57.00% 76.27% 71.51% 56.34% 53.17% 71.40% 747
$200,001-$250,000.... 102 23,039,515.81 11.22 74.99 65.21 51.55 78.76 76.29 741
$250,001-$300,000.... 60 16,624,298.91 8.10 74.56 69.19 47.35 72.21 77.02 743
$300,001-$350,000.... 36 11,709,667.35 5.70 77.38 74.43 58.38 75.01 74.83 734
$350,001-$400,000.... 28 10,527,872.58 5.13 75.12 56.96 63.99 65.02 82.84 728
$400,001-$450,000.... 15 6,390,938.70 3.11 77.30 73.34 53.81 86.81 66.86 729
$450,001-$500,000.... 18 8,656,311.77 4.22 76.51 66.23 66.92 94.23 94.34 722
$500,001-$550,000.... 6 3,143,117.66 1.53 73.11 66.58 33.47 66.53 100.00 755
$550,001-$600,000.... 2 1,114,986.08 0.54 77.49 100.00 100.00 100.00 49.83 753
$600,001-$650,000.... 3 1,916,717.25 0.93 72.98 67.35 66.21 100.00 67.35 743
$650,001-$700,000.... 2 1,361,121.33 0.66 66.39 50.65 100.00 100.00 100.00 739
$700,001-$750,000.... 3 2,137,236.53 1.04 75.00 100.00 100.00 100.00 66.51 746
$750,001-$800,000.... 1 795,038.07 0.39 51.95 100.00 0.00 100.00 100.00 798
$850,001-$900,000.... 1 875,508.18 0.43 75.00 100.00 100.00 100.00 0.00 771
----- --------------- ------ ----- ------ ------ ------ ------ ---
Total/Weighted Average.. 1,477 $205,327,684.43 100.00% 75.78% 70.30% 56.64% 64.29% 74.24% 743
===== =============== ====== ===== ====== ====== ====== ====== ===
</TABLE>
MORTGAGED PROPERTIES
<TABLE>
<CAPTION>
PERCENTAGE OF
TOTAL
NUMBER AGGREGATE AGGREGATE WEIGHTED
OF GROUP II UNPAID UNPAID WEIGHTED PERCENT AVERAGE
MORTGAGE PRINCIPAL PRINCIPAL AVERAGE PERCENT PERCENT PRIMARY FICO
PROPERTY LOANS BALANCE BALANCE LTV PURCHASE FULL DOC RESIDENCE SCORE
- -------- ----------- --------------- ------------- -------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Single-family detached.. 1,064 $152,431,641.04 74.23% 75.48% 68.62% 51.86% 70.98% 742
Two- to four-family
units.................. 182 24,633,761.61 12.00 78.36 71.67 76.49 43.24 748
Condominiums
High-rise (greater than
four stories)......... 9 1,543,762.93 0.75 74.60 49.11 61.31 86.96 746
Low-rise (four stories
or less).............. 119 13,791,664.78 6.72 76.95 78.35 64.34 45.86 745
Planned unit
developments........... 57 7,986,747.77 3.89 74.51 74.88 57.57 57.66 754
Townhouses.............. 11 792,786.78 0.39 80.68 79.47 57.23 29.25 726
Cooperative Units....... 0 0.00 0.00 0.00 0.00 0.00 0.00 0
Manufactured Home....... 4 238,602.82 0.12 85.79 68.11 79.19 52.70 718
Condotel
High-Rise.............. 7 1,419,136.74 0.69 64.00 89.34 89.34 10.66 745
Low-Rise............... 24 2,489,579.96 1.21 71.33 100.00 83.28 14.98 756
----- --------------- ------ ----- ------ ----- ----- ---
Total/Weighted
Average................ 1,477 $205,327,684.43 100.00% 75.78% 70.30% 56.64% 64.29% 743
===== =============== ====== ===== ====== ===== ===== ===
</TABLE>
S-51
<PAGE>
ORIGINATORS OF GROUP II MORTGAGE LOANS
<TABLE>
<CAPTION>
PERCENTAGE OF
TOTAL
NUMBER AGGREGATE AGGREGATE PERCENT WEIGHTED
OF GROUP II UNPAID UNPAID WEIGHTED PERCENT SINGLE AVERAGE
MORTGAGE PRINCIPAL PRINCIPAL AVERAGE PERCENT PERCENT PRIMARY FAMILY FICO
ORIGINATOR LOANS BALANCE BALANCE LTV PURCHASE FULL DOC RESIDENCE DETACHED SCORE
- ---------- ----------- --------------- ------------- -------- -------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NMI or Affiliate....... 1,249 $169,722,233.15 82.66% 75.63% 71.02% 56.31% 64.00% 74.31% 744
Other Originators...... 228 35,605,451.28 17.34 76.50 66.89 58.23 65.64 73.89 738
----- --------------- ------ ----- ----- ----- ----- ----- ---
Total/Weighted Aver-
age.................. 1,477 $205,327,684.43 100.00% 75.78% 70.30% 56.64% 64.29% 74.24% 743
===== =============== ====== ===== ===== ===== ===== ===== ===
</TABLE>
It is expected that, as of the Cut-Off Date, no single "Other Originator"
will have accounted for more than 5.00% of the aggregate principal balance of
the Group II Mortgage Loans as of the Cut-Off Date.
PURPOSES OF GROUP II MORTGAGE LOANS
<TABLE>
<CAPTION>
PERCENTAGE OF
TOTAL
NUMBER AGGREGATE AGGREGATE PERCENT WEIGHTED
OF GROUP II UNPAID UNPAID WEIGHTED PERCENT SINGLE AVERAGE
MORTGAGE PRINCIPAL PRINCIPAL AVERAGE PERCENT PERCENT PRIMARY FAMILY FICO
LOAN PURPOSE LOANS BALANCE BALANCE LTV PURCHASE FULL DOC RESIDENCE DETACHED SCORE
- ------------ ----------- --------------- ------------- -------- -------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Purchase............... 1,062 $144,350,573.14 70.30% 78.11% 100.00% 55.04% 66.37% 72.46% 745
Equity Take Out Refi-
nance................. 174 24,927,043.29 12.14 67.50 0.00 63.05 70.13 81.49 748
Rate/Term Refinance.... 241 36,050,068.00 17.56 72.19 0.00 58.62 51.90 76.33 733
----- --------------- ------ ----- ------ ----- ----- ----- ---
Total/Weighted Aver-
age.................. 1,477 $205,327,684.43 100.00% 75.78% 70.30% 56.64% 64.29% 74.24% 743
===== =============== ====== ===== ====== ===== ===== ===== ===
</TABLE>
In general, in the case of a Group II 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 Group II 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.
FICO SCORES
<TABLE>
<CAPTION>
PERCENTAGE OF
TOTAL
NUMBER AGGREGATE AGGREGATE PERCENT WEIGHTED
GROUP II UNPAID UNPAID WEIGHTED PERCENT SINGLE AVERAGE
RANGE OF OF MORTGAGE PRINCIPAL PRINCIPAL AVERAGE PERCENT PERCENT PRIMARY FAMILY FICO
FICO SCORES LOANS BALANCE BALANCE LTV PURCHASE FULL DOC RESIDENCE DETACHED SCORE
- ----------- ----------- --------------- ------------- -------- -------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
250-300................ 0 $ 0.00 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0
301-350................ 0 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0
351-400................ 0 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0
401-450................ 0 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0
451-500................ 0 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0
501-550................ 0 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0
551-600................ 4 575,354.88 0.28 75.33 79.78 100.00 23.02 76.98 595
601-650................ 19 3,504,126.42 1.71 73.88 44.56 80.49 55.54 90.42 636
651-700................ 114 16,909,750.61 8.24 78.04 63.53 66.15 66.33 74.54 685
701-750................ 632 91,578,031.87 44.59 76.93 70.55 58.68 65.13 77.22 728
751-800................ 652 85,512,537.81 41.65 74.33 72.39 51.73 62.86 71.30 771
801-850................ 47 6,055,130.04 2.95 74.12 64.12 43.35 69.31 57.08 806
851-900................ 0 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0
Not Available.......... 9 1,192,752.80 0.58 74.27 100.00 94.44 93.12 89.46 0
----- --------------- ------ ----- ------ ------ ----- ----- ---
Total/Weighted Aver-
age.................. 1,477 $205,327,684.43 100.00% 75.78% 70.30% 56.64% 64.29% 74.24% 743
===== =============== ====== ===== ====== ====== ===== ===== ===
</TABLE>
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 borrower's historical credit data, including, among other
things, payment history, delinquencies on accounts, levels of outstanding in-
debtedness, length of credit history, types of credit, and bankruptcy experi-
ence. FICO Scores range from approximately 250 to approximately 900, with
higher scores indicating an individual with a more favorable credit history
compared to an individual with a lower score. However, a FICO Score purports
only to be a measurement of the relative degree of risk a borrower represents
to a lender, i.e., that a borrower with a higher score is statistically ex-
pected 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 cor-
respond to the life of a mortgage loan. Furthermore, FICO Scores were not de-
veloped specifically for use in connection with mortgage loans, but for con-
sumer loans in general. Therefore, a FICO Score does not take into considera-
tion the effect of mortgage loan characteristics on the probability of repay-
ment by the borrower. The FICO Scores set forth in the table above were ob-
tained at either the time of origination of the Group II Mortgage Loan or more
recently. Neither the Seller nor Norwest Mortgage make any representations or
warranties as to the actual performance of any Group II Mortgage Loan or that a
particular FICO Score should be relied upon as a basis for an expectation that
the borrower will repay the mortgage loan according to its terms. See "The
Mortgage Loan Programs--The Mortgage Loan Understanding" in the Prospectus.
S-52
<PAGE>
GROUP II MORTGAGE LOAN DOCUMENTATION LEVELS
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER TOTAL
OF AGGREGATE AGGREGATE PERCENT WEIGHTED
GROUP II UNPAID UNPAID WEIGHTED PERCENT SINGLE AVERAGE
MORTGAGE PRINCIPAL PRINCIPAL AVERAGE PERCENT PERCENT PRIMARY FAMILY FICO
DOCUMENTATION LEVEL LOANS BALANCE BALANCE LTV PURCHASE FULL DOC RESIDENCE DETACHED SCORE
- ------------------- -------- --------------- ------------- -------- -------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Full Documentation...... 869 $116,301,592.38 56.64% 79.25% 68.32% 100.00% 43.51% 67.98% 739
Income Verification..... 0 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0
Asset Verification...... 608 89,026,092.05 43.36 71.26 72.90 0.00 91.44 82.42 749
Preferred Processing.... 0 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0
----- --------------- ------ ----- ----- ------ ----- ----- ---
Total/Weighted
Average................ 1,477 $205,327,684.43 100.00% 75.78% 70.30% 56.64% 64.29% 74.24% 743
===== =============== ====== ===== ===== ====== ===== ===== ===
</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 Group II 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 Group II 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.
REMAINING TERMS TO STATED MATURITY
<TABLE>
<CAPTION>
PERCENTAGE OF
TOTAL
NUMBER AGGREGATE AGGREGATE
OF GROUP II UNPAID UNPAID
REMAINING STATED MORTGAGE PRINCIPAL PRINCIPAL
TERM (MONTHS) LOANS BALANCE BALANCE
- ---------------- ----------- --------------- -------------
<S> <C> <C> <C>
239................................... 1 $ 78,763.95 0.04%
345................................... 2 161,511.15 0.08
346................................... 1 69,659.73 0.03
347................................... 29 3,740,215.13 1.82
348................................... 43 5,066,857.83 2.47
349................................... 40 5,239,355.94 2.55
350................................... 93 12,803,603.04 6.24
351................................... 113 17,515,516.97 8.53
352................................... 135 18,083,150.18 8.81
353................................... 115 15,159,333.52 7.38
354................................... 122 17,019,554.48 8.29
355................................... 136 21,607,381.81 10.52
356................................... 173 22,723,470.23 11.06
357................................... 128 16,859,436.87 8.21
358................................... 150 19,989,756.46 9.74
359................................... 146 22,357,417.14 10.89
360................................... 50 6,852,700.00 3.34
----- --------------- ------
Total............................. 1,477 $205,327,684.43 100.00%
===== =============== ======
</TABLE>
YEARS OF ORIGINATION
<TABLE>
<CAPTION>
PERCENTAGE OF
TOTAL
NUMBER AGGREGATE AGGREGATE
OF GROUP II UNPAID UNPAID
MORTGAGE PRINCIPAL PRINCIPAL
YEAR OF ORIGINATION LOANS BALANCE BALANCE
- ------------------- ----------- --------------- -------------
<S> <C> <C> <C>
1997.................................. 997 $138,151,741.55 67.28%
1998.................................. 480 67,175,942.88 32.72
----- --------------- ------
Total............................. 1,477 $205,327,684.43 100.00%
===== =============== ======
</TABLE>
GEOGRAPHIC DISTRIBUTION OF MORTGAGED PROPERTIES
<TABLE>
<CAPTION>
PERCENTAGE OF
TOTAL
NUMBER AGGREGATE AGGREGATE
OF GROUP II UNPAID UNPAID
MORTGAGE PRINCIPAL PRINCIPAL
GEOGRAPHIC AREA LOANS BALANCE BALANCE
- --------------- ----------- --------------- -------------
<S> <C> <C> <C>
Alabama............................... 10 $ 784,687.33 0.38%
Alaska................................ 13 1,303,914.53 0.64
Arizona............................... 68 7,668,731.54 3.73
Arkansas.............................. 3 162,029.43 0.08
California............................ 181 37,008,235.78 18.06
Colorado.............................. 107 15,637,479.04 7.62
Connecticut........................... 14 2,456,012.75 1.20
Delaware.............................. 8 1,287,649.39 0.63
District of Columbia.................. 4 903,859.81 0.44
Florida............................... 115 11,670,939.25 5.68
Georgia............................... 57 7,272,631.00 3.54
Hawaii................................ 26 5,405,109.49 2.63
Idaho................................. 12 1,463,405.69 0.71
Illinois.............................. 20 2,647,391.12 1.29
Indiana............................... 25 2,205,456.47 1.07
Iowa.................................. 2 115,645.04 0.06
Kansas................................ 10 935,995.88 0.46
Kentucky.............................. 7 928,133.63 0.45
Louisiana............................. 10 1,591,279.06 0.77
Maine................................. 3 355,357.52 0.17
Maryland.............................. 28 5,734,885.28 2.79
Massachusetts......................... 55 7,657,660.29 3.73
Michigan.............................. 14 1,352,101.03 0.66
Minnesota............................. 16 2,554,833.10 1.24
Mississippi........................... 4 266,351.63 0.13
Missouri.............................. 10 1,098,231.86 0.53
Montana............................... 9 1,460,402.34 0.71
Nebraska.............................. 8 632,761.88 0.31
Nevada................................ 37 5,461,032.40 2.66
New Hampshire......................... 15 1,945,257.58 0.95
New Jersey............................ 49 7,688,246.50 3.74
New Mexico............................ 20 2,289,266.59 1.11
New York.............................. 66 10,521,413.21 5.12
North Carolina........................ 69 9,247,528.91 4.50
North Dakota.......................... 1 73,572.57 0.04
Ohio.................................. 57 4,726,631.91 2.30
Oklahoma.............................. 9 1,708,709.52 0.83
Oregon................................ 60 8,216,249.09 4.00
Pennsylvania.......................... 30 3,021,320.58 1.47
Rhode Island.......................... 3 278,581.37 0.14
South Carolina........................ 26 2,970,353.50 1.45
South Dakota.......................... 1 111,718.62 0.05
Tennessee............................. 19 1,773,716.53 0.86
Texas................................. 81 10,604,204.91 5.16
Utah.................................. 16 2,238,294.35 1.09
Vermont............................... 1 87,217.14 0.04
Virginia.............................. 32 4,068,434.92 1.98
Washington............................ 35 4,572,442.26 2.23
Wisconsin............................. 4 428,154.73 0.21
Wyoming............................... 7 734,166.08 0.36
----- --------------- ------
Total............................. 1,477 $205,327,684.43 100.00%
===== =============== ======
</TABLE>
S-53
<PAGE>
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 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 from the Trust Estate any defaulted Mortgage Loan, or any Mortgage
Loan as to which default is reasonably foreseeable, up to the limit specified
in the Pooling and Servicing Agreement 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 Class
of the Offered Certificates, the aggregate amount of distributions on any Class
of the Offered Certificates and the weighted average life and yield to maturity
of any 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 related Loan Group, or both Loan Groups in the case of the Class B
Certificates, and the amount and timing of mortgagor defaults resulting in
Realized Losses on the Mortgage Loans in the related Loan Group, or both Loan
Groups in the case of the Class B Certificates. 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
a Loan Group will result in distributions to Certificateholders then entitled
to distributions in respect of principal in respect of such Mortgage Loans 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 Considerations"), no assurance can
be given as to such rate or the rate of principal payments or yield on, or
weighted average life of, any Class of the Offered Certificates or the
aggregate amount of distributions on any Class of the Offered Certificates.
The rate of principal payments on the Mortgage Loans will 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 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; Optional Purchase
of Mortgage Loans" in the Prospectus. Mortgagors are permitted to prepay the
Mortgage Loans, in
S-54
<PAGE>
whole or in part, at any time without penalty. 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. 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.
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 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 the
properties as second or vacation homes, and servicing decisions, such as,
without limitation, the decision as to whether to foreclose on a Mortgage Loan
or to modify the terms of the related Mortgage Note and decisions as to the
timing of any foreclosure. 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, (ii) a Servicer elects to
encourage the refinancing of any defaulted Mortgage Loan rather than to permit
an assumption thereof by a mortgagor or (iii) a Servicer agrees to modify the
payment terms of a Mortgage Note rather than foreclose on the related Mortgage
Loan. See "Servicing of the Mortgage Loans--Enforcement of Due-on-Sale Clauses;
Realization Upon Defaulted Mortgage Loans" in the Prospectus.
As described under "Description of the Certificates--Principal (Including
Prepayments)" herein, all or a disproportionate percentage of principal
prepayments on the Mortgage Loans in a Loan Group (including liquidations and
repurchases of Mortgage Loans in such Loan Group) will be distributed, to the
extent of the Non-PO Fraction, to the holders of the Class A Certificates of
the related Group (other than the Class A-PO Certificates of such Group) 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 in such
Loan Group, to the related Class A-PO Certificates in proportion to the
interest of such Class A-PO Certificates in such Discount Mortgage Loan
represented by the PO Fraction.
S-55
<PAGE>
As described herein under "Description of the Certificates--Principal
(Including Prepayments)--Allocation of Amount to be Distributed on the Class A
Certificates" unless the Principal Balances of the other Group II-A
Certificates (other than the Class II-A-PO Certificates) have been reduced to
zero, the Class II-A-4 Certificates and Class II-A-6 Certificates with respect
to their Class II-A-6-A Component will not be entitled to any distributions of
principal payments for five years following the issuance of the Certificates.
Thereafter, the Class II-A-4 Certificates and Class II-A-6 Certificates with
respect to their Class II-A-6-A Component will be entitled to their
proportional share of scheduled principal payments, and during the following
five years the percentage of principal prepayments from the Group II Mortgage
Loans allocated to the Class II-A-4 Certificates and Class II-A-6 Certificates
with respect to their Class II-A-6-A Component will gradually increase.
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 IN THE RELATED LOAN GROUP, OR BOTH LOAN GROUPS IN THE CASE OF THE CLASS B
CERTIFICATES. INVESTORS IN THE OFFERED CERTIFICATES SHOULD CONSIDER THE
ASSOCIATED RISKS, INCLUDING, IN THE CASE OF OFFERED CERTIFICATES PURCHASED AT A
DISCOUNT, PARTICULARLY THE CLASS II-A-6 CERTIFICATES, THE RISK THAT A SLOWER
THAN ANTICIPATED RATE OF PAYMENTS IN RESPECT OF PRINCIPAL (INCLUDING
PREPAYMENTS) ON THE MORTGAGE LOANS IN THE RELATED LOAN GROUP, OR BOTH LOAN
GROUPS IN THE CASE OF THE CLASS B CERTIFICATES, COULD RESULT IN AN ACTUAL YIELD
THAT IS LOWER THAN ANTICIPATED AND, IN THE CASE OF OFFERED CERTIFICATES
PURCHASED AT A PREMIUM, THAT A FASTER THAN ANTICIPATED RATE OF PAYMENTS IN
RESPECT OF PRINCIPAL (INCLUDING PREPAYMENTS) ON THE MORTGAGE LOANS IN THE
RELATED LOAN GROUP, OR BOTH LOAN GROUPS IN THE CASE OF THE CLASS B
CERTIFICATES, COULD RESULT IN AN ACTUAL YIELD THAT IS LOWER THAN ANTICIPATED.
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 IN THE RELATED LOAN GROUP COULD RESULT IN
THE FAILURE OF SUCH INVESTORS TO FULLY RECOVER THEIR INITIAL INVESTMENTS. AN
INVESTOR IS URGED TO MAKE AN INVESTMENT DECISION WITH RESPECT TO ANY CLASS OF
OFFERED CERTIFICATES BASED ON THE ANTICIPATED YIELD TO MATURITY OF SUCH CLASS
RESULTING FROM ITS PURCHASE PRICE AND SUCH INVESTOR'S OWN DETERMINATION AS TO
ANTICIPATED MORTGAGE LOAN PREPAYMENT RATES UNDER A VARIETY OF SCENARIOS.
The timing of changes in the rate of prepayment on the Mortgage Loans in a
Loan Group may significantly affect the actual yield to maturity experienced by
an investor who purchases a Class A Certificate of the related Group or a Class
B 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 in a related Loan Group, 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 Classes of Class B Certificates with higher
numerical designations will generally be more sensitive to losses than the
Classes with lower numerical designations, because the entire amount of such
losses (except for the portion of Excess Losses allocated to the Class A
Certificates of the related Group and Classes of Class B Certificates with
lower numerical designations) will be allocable to the Classes of Class B
Certificates in reverse numerical order, except as provided herein. To the
extent not covered by Periodic Advances, delinquencies on Mortgage Loans in a
Loan Group will also have a relatively greater effect on the yield to maturity
on the Classes of Class B Certificates with higher numerical designations
because amounts otherwise distributable to holders of the Class B Certificates
will be made available to protect the holders of the Class A Certificates of
the related Group against interruptions in distributions due to such unadvanced
mortgagor delinquencies. Such unadvanced 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 subordination. See "Description of the
Certificates--Interest" and "Servicing of the Mortgage Loans--Anticipated
Changes in Servicing."
S-56
<PAGE>
The yield to maturity on the Offered Certificates and more particularly on
the Class B-1 and Class B-2 Certificates and, especially the Class B-3
Certificates, may be affected by the geographic concentration of the Mortgaged
Properties securing the Mortgage Loans in the related Loan Group, or both Loan
Groups in the case of the Class B Certificates. In recent periods, California,
the New York metropolitan area, the Washington D.C. metropolitan area 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, fires, floods and
hurricanes, which may adversely affect property values. Any deterioration in
housing prices in the states in which there is a significant concentration of
Mortgaged Properties, as well as 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 B-1 and Class B-2
Certificates and especially the Class B-3 Certificates.
As to Mortgaged Properties in regions that have recently experienced natural
disasters, neither the Seller nor Norwest Mortgage has undertaken the physical
inspection of such Mortgaged Properties. As a result, there can be no assurance
that material damage to any Mortgaged Property in an affected region has not
occurred. In the Pooling and Servicing Agreement, the Seller will represent and
warrant that, as of the date of issuance of the Certificates, each Mortgaged
Property is undamaged by flood, water, fire, earthquake or earth movement,
windstorm, 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 adversely affect the value of such Mortgaged Property
as security for such Mortgage Loan or the use for which such premises were
intended. In the event of a breach of such representation with respect to a
Mortgaged Property which materially and adversely affects the interests of
Certificateholders in the related Mortgage Loan, the Seller will be obligated
to repurchase or substitute for such Mortgage Loan, as described under "The
Mortgage Loan Programs -- Representations and Warranties" and "The Pooling and
Servicing Agreement -- Assignment of Mortgage Loans to the Trustee" in the
Prospectus. Repurchase of any such Mortgage Loan will affect in varying degrees
the yields and weighted average lives of the related Classes of Offered
Certificates and could adversely affect the yield of any related Offered
Certificates purchased at a premium.
No representation is made as to the rate of principal payments on the
Mortgage Loans or as to the yield to maturity of any Class of Offered
Certificates.
An investor should consider the risk that rapid rates of prepayments on the
Mortgage Loans in a Loan Group, or both Loan Groups in the case of the Class B
Certificates, and therefore of amounts distributable in reduction of principal
balance of the related 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 II-
A-6 Certificates, the anticipated yield thereon. Conversely, slower rates of
prepayments on the Mortgage Loans in a Loan Group, or both Loan Groups in the
case of the Class B Certificates, and therefore of amounts distributable in
reduction of principal balance of the related 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.
DUE TO THE SPECIAL TAX TREATMENT OF RESIDUAL INTERESTS, THE AFTER-TAX RETURN
OF THE CLASS II-A-R CERTIFICATE MAY BE SIGNIFICANTLY LOWER THAN WOULD BE THE
CASE IF THE CLASS II-A-R CERTIFICATE WERE TAXED AS A DEBT INSTRUMENT, OR MAY BE
NEGATIVE. See "Material Federal Income Tax Consequences" herein.
As referred to herein, the "WEIGHTED AVERAGE LIFE" of a Class of Offered
Certificates refers to the average amount of time that will elapse from the
date of issuance of such Class until each dollar in reduction of the Principal
Balance of such Class is distributed to the investor.
S-57
<PAGE>
Prepayments of mortgage loans commonly are measured relative to a prepayment
standard or model. The prepayment model used in this Prospectus Supplement (the
"PREPAYMENT VECTOR") represents an assumed rate of prepayment each month
relative to the then outstanding principal balance of a pool of mortgage loans.
A 100% Prepayment Vector assumes a Constant Prepayment Rate ("CPR") of 4.0% per
annum of the then outstanding principal balance of such mortgage loans in the
first month of the life of the mortgage loans and an additional 1.09090909%
(precisely 12/11%) per annum in each month thereafter until the eleventh month.
Beginning in the twelfth month and in each month thereafter during the life of
the mortgage loans, a 100% Prepayment Vector assumes a CPR of 16% per annum
each month. As used in the table below, a 50% Prepayment Vector assumes, for
example, a CPR of 2.0% per annum on the then-outstanding principal balance of
the Mortgage Loans in each Loan Group in the first month of the life of such
Mortgage Loans and an additional 0.54545455% (precisely 6/11%) per annum in
each month thereafter until the eleventh month. Beginning in the twelfth month
and in each month thereafter during the life of such Mortgage Loans, a 50%
Prepayment Vector assumes a CPR of 8% per annum each month. The Prepayment
Vector 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 in any Loan Group.
The tables set forth below have been prepared assuming, among other things,
the following (the "STRUCTURING ASSUMPTIONS"): (i) each Loan Group consists of
one "ASSUMED DISCOUNT MORTGAGE LOAN" and one "ASSUMED PREMIUM MORTGAGE LOAN"
(collectively, the "ASSUMED MORTGAGE LOANS") with the characteristics set forth
below, (ii) the scheduled payment in each month for each Assumed 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 over its remaining term to maturity, (iii)
scheduled monthly payments of principal and interest on the Assumed Mortgage
Loans will be timely received on the first day of each month (with no
defaults), commencing in June 1998, (iv) the Seller does not repurchase any
Assumed Mortgage Loan and the Seller does not exercise its option to purchase
the Assumed Mortgage Loans and thereby cause a termination of the Trust Estate,
(v) principal prepayments in full on the Assumed Mortgage Loans will be
received on the last day of each month commencing in May 1998 at the respective
constant percentages of the Prepayment Vector set forth in the tables and there
are no partial principal prepayments or Prepayment Interest Shortfalls, (vi)
the Certificates will be issued on May 28, 1998, (vii) distributions to
Certificateholders will be made on the 25th day of each month, commencing in
June 1998, (viii) the sum of the Servicing Fee Rate and the Master Servicing
Fee Rate for each Assumed Mortgage Loan (the "EXPENSE RATE") is as set forth
below and (ix) the initial Principal Balance of each Class of Offered
Certificates will be as set forth on the cover hereof and the initial Principal
Balances of the Class I-A-PO, Class II-A-PO, Class B-4, Class B-5 and Class B-6
Certificates are approximately $26,177, $3,454, $949,000, $474,000 and
$949,798, respectively.
ASSUMED MORTGAGE LOAN CHARACTERISTICS
<TABLE>
<CAPTION>
REMAINING TERM ORIGINAL TERM
PRINCIPAL BALANCE AS MORTGAGE TO MATURITY TO MATURITY
OF THE CUT-OFF DATE INTEREST RATE EXPENSE RATE (IN MONTHS) (IN MONTHS)
-------------------- ------------- ------------ -------------- -------------
<S> <C> <C> <C> <C> <C>
LOAN GROUP I
Assumed Discount
Mortgage Loan.......... $ 1,453,482.50$ 6.8954300284% 0.2670000000% 176 180
Assumed Premium Mortgage
Loan................... $ 30,328,264.11$ 7.8169194473% 0.2670000000% 174 180
LOAN GROUP II
Assumed Discount
Mortgage Loan.......... $ 543,621.23$ 6.9741065300% 0.2670000000% 358 360
Assumed Premium Mortgage
Loan................... $ 204,784,063.20$ 8.0719463345% 0.2671722505% 354 360
</TABLE>
S-58
<PAGE>
It is highly unlikely that the Mortgage Loans in a Loan Group will prepay at
any constant Prepayment Vector, that all of the Mortgage Loans in a Loan Group
will prepay at the same Prepayment Vector or that the Mortgage Loans in a Loan
Group will not experience any losses. In addition, there will be differences
between the characteristics of the Mortgage Loans ultimately included in each
Loan Group and the characteristics which are assumed in preparing the tables,
as described above. Any difference may have an effect upon the actual
percentages of initial Principal Balances of the Classes of Certificates
outstanding, the actual weighted average lives of the Classes of Certificates
and the date on which the Principal Balance of any Class of Certificates is
reduced to zero.
Based upon the foregoing assumptions, the following tables indicate the
weighted average life of each Class of Offered Certificates, and set forth the
percentages of the initial Principal Balance of each such Class, of Offered
Certificates that would be outstanding after each of the dates shown at
constant percentages of the Prepayment Vector presented.
PERCENTAGE OF INITIAL PRINCIPAL BALANCE OUTSTANDING FOR:
<TABLE>
<CAPTION>
CLASS II-A-1
CLASS I-A-1 AND CLASS II-A-8
CERTIFICATES AT THE CERTIFICATES AT THE
FOLLOWING PERCENTAGES FOLLOWING PERCENTAGES
OF THE PREPAYMENT VECTOR OF THE PREPAYMENT VECTOR
------------------------ -------------------------
DISTRIBUTION
DATE 0% 50% 100% 150% 200% 0% 50% 100% 150% 200%
- ------------ ---- ---- ---- ---- ---- ----- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial...................... 100 100 100 100 100 100 100 100 100 100
May 1999..................... 96 89 81 74 66 99 85 72 59 46
May 2000..................... 92 78 64 52 41 97 71 46 24 4
May 2001..................... 87 67 50 36 25 95 57 25 0 0
May 2002..................... 83 58 39 25 14 93 45 7 0 0
May 2003..................... 77 50 30 16 7 91 33 0 0 0
May 2004..................... 72 42 23 11 4 89 24 0 0 0
May 2005..................... 65 35 17 7 2 87 16 0 0 0
May 2006..................... 59 29 13 5 1 85 9 0 0 0
May 2007..................... 51 23 9 3 * 83 3 0 0 0
May 2008..................... 44 18 7 2 * 80 0 0 0 0
May 2009..................... 35 14 4 1 * 78 0 0 0 0
May 2010..................... 26 9 3 1 * 75 0 0 0 0
May 2011..................... 16 5 1 * * 71 0 0 0 0
May 2012..................... 6 2 * * * 68 0 0 0 0
May 2013..................... 0 0 0 0 0 64 0 0 0 0
May 2014..................... 0 0 0 0 0 60 0 0 0 0
May 2015..................... 0 0 0 0 0 56 0 0 0 0
May 2016..................... 0 0 0 0 0 51 0 0 0 0
May 2017..................... 0 0 0 0 0 45 0 0 0 0
May 2018..................... 0 0 0 0 0 40 0 0 0 0
May 2019..................... 0 0 0 0 0 34 0 0 0 0
May 2020..................... 0 0 0 0 0 27 0 0 0 0
May 2021..................... 0 0 0 0 0 20 0 0 0 0
May 2022..................... 0 0 0 0 0 12 0 0 0 0
May 2023..................... 0 0 0 0 0 3 0 0 0 0
May 2024..................... 0 0 0 0 0 0 0 0 0 0
May 2025..................... 0 0 0 0 0 0 0 0 0 0
May 2026..................... 0 0 0 0 0 0 0 0 0 0
May 2027..................... 0 0 0 0 0 0 0 0 0 0
May 2028..................... 0 0 0 0 0 0 0 0 0 0
Weighted Average Life(/1/)... 8.62 5.71 3.95 2.84 2.12 16.57 3.96 2.01 1.35 1.00
</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 Class.
S-59
<PAGE>
PERCENTAGE OF INITIAL PRINCIPAL BALANCE OUTSTANDING FOR:
<TABLE>
<CAPTION>
CLASS II-A-2 CLASS II-A-3
CERTIFICATES AT THE CERTIFICATES AT THE
FOLLOWING PERCENTAGES FOLLOWING PERCENTAGES
OF THE PREPAYMENT VECTOR OF THE PREPAYMENT VECTOR
--------------------------- ---------------------------
DISTRIBUTION
DATE 0% 50% 100% 150% 200% 0% 50% 100% 150% 200%
- ------------ ----- ----- ----- ---- ---- ----- ----- ----- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial................. 100 100 100 100 100 100 100 100 100 100
May 1999................ 100 100 100 100 100 100 100 100 100 100
May 2000................ 100 100 100 100 100 100 100 100 100 100
May 2001................ 100 100 100 100 100 100 100 100 100 100
May 2002................ 100 100 100 100 0 100 100 100 100 41
May 2003................ 100 100 100 54 0 100 100 100 100 0
May 2004................ 100 100 100 0 0 100 100 100 3 0
May 2005................ 100 100 100 0 0 100 100 100 0 0
May 2006................ 100 100 100 0 0 100 100 100 0 0
May 2007................ 100 100 87 0 0 100 100 100 0 0
May 2008................ 100 100 60 0 0 100 100 100 0 0
May 2009................ 100 100 38 0 0 100 100 100 0 0
May 2010................ 100 100 19 0 0 100 100 100 0 0
May 2011................ 100 100 4 0 0 100 100 100 0 0
May 2012................ 100 100 0 0 0 100 100 86 0 0
May 2013................ 100 100 0 0 0 100 100 70 0 0
May 2014................ 100 100 0 0 0 100 100 57 0 0
May 2015................ 100 100 0 0 0 100 100 45 0 0
May 2016................ 100 100 0 0 0 100 100 36 0 0
May 2017................ 100 100 0 0 0 100 100 29 0 0
May 2018................ 100 100 0 0 0 100 100 23 0 0
May 2019................ 100 96 0 0 0 100 100 18 0 0
May 2020................ 100 70 0 0 0 100 100 14 0 0
May 2021................ 100 47 0 0 0 100 100 10 0 0
May 2022................ 100 25 0 0 0 100 100 8 0 0
May 2023................ 100 6 0 0 0 100 100 5 0 0
May 2024................ 100 0 0 0 0 100 81 4 0 0
May 2025................ 100 0 0 0 0 100 55 2 0 0
May 2026................ 100 0 0 0 0 100 32 1 0 0
May 2027................ 28 0 0 0 0 100 10 * 0 0
May 2028................ 0 0 0 0 0 0 0 0 0 0
Weighted Average
Life(/1/).............. 28.91 22.97 10.64 5.09 3.67 29.36 27.31 17.62 5.74 4.01
</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 Class.
S-60
<PAGE>
PERCENTAGE OF INITIAL PRINCIPAL BALANCE OUTSTANDING FOR:
<TABLE>
<CAPTION>
CLASS II-A-4 CLASS II-A-5
CERTIFICATES AT THE CERTIFICATES AT THE
FOLLOWING PERCENTAGES FOLLOWING PERCENTAGES
OF THE PREPAYMENT VECTOR OF THE PREPAYMENT VECTOR
--------------------------- -------------------------
DISTRIBUTION
DATE 0% 50% 100% 150% 200% 0% 50% 100% 150% 200%
- ------------ ----- ----- ----- ---- ---- ----- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial................... 100 100 100 100 100 100 100 100 100 100
May 1999.................. 100 100 100 100 100 99 91 82 74 66
May 2000.................. 100 100 100 100 100 98 81 66 52 40
May 2001.................. 100 100 100 100 100 97 73 53 36 22
May 2002.................. 100 100 100 100 100 96 65 41 23 0
May 2003.................. 100 100 100 100 59 95 58 32 9 0
May 2004.................. 99 96 94 91 32 93 52 25 0 0
May 2005.................. 97 92 86 64 15 92 47 21 0 0
May 2006.................. 96 86 76 45 7 91 43 17 0 0
May 2007.................. 94 79 65 32 3 89 39 14 0 0
May 2008.................. 92 71 54 24 2 88 36 10 0 0
May 2009.................. 90 64 44 18 1 86 33 6 0 0
May 2010.................. 88 57 36 13 1 84 31 3 0 0
May 2011.................. 85 51 30 10 1 82 29 1 0 0
May 2012.................. 83 46 24 7 * 80 26 0 0 0
May 2013.................. 80 41 20 5 * 77 25 0 0 0
May 2014.................. 77 36 16 4 * 75 23 0 0 0
May 2015.................. 74 32 13 3 * 72 21 0 0 0
May 2016.................. 70 28 10 2 * 69 20 0 0 0
May 2017.................. 66 24 8 1 * 66 18 0 0 0
May 2018.................. 62 21 6 1 * 62 17 0 0 0
May 2019.................. 58 18 5 1 * 58 15 0 0 0
May 2020.................. 53 15 4 1 * 54 11 0 0 0
May 2021.................. 47 12 3 * * 49 7 0 0 0
May 2022.................. 42 10 2 * * 44 4 0 0 0
May 2023.................. 35 8 2 * * 39 1 0 0 0
May 2024.................. 29 6 1 * * 33 0 0 0 0
May 2025.................. 21 4 1 * * 27 0 0 0 0
May 2026.................. 13 2 * * * 20 0 0 0 0
May 2027.................. 5 1 * * * 4 0 0 0 0
May 2028.................. 0 0 0 0 0 0 0 0 0 0
Weighted Average
Life(/1/)................ 21.07 14.51 11.50 8.74 5.75 20.74 9.19 4.24 2.46 1.80
</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 Class.
S-61
<PAGE>
PERCENTAGE OF INITIAL PRINCIPAL BALANCE OUTSTANDING FOR:
<TABLE>
<CAPTION>
CLASS II-A-6 CLASS II-A-7
CERTIFICATES AT THE CERTIFICATES AT THE
FOLLOWING PERCENTAGES FOLLOWING PERCENTAGES
OF THE PREPAYMENT VECTOR OF THE PREPAYMENT VECTOR
------------------------- --------------------------
DISTRIBUTION
DATE 0% 50% 100% 150% 200% 0% 50% 100% 150% 200%
- ------------ ----- ---- ---- ---- ---- ----- ----- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial.................... 100 100 100 100 100 100 100 100 100 100
May 1999................... 99 91 84 76 68 100 100 100 100 100
May 2000................... 98 83 69 56 44 100 100 100 100 100
May 2001................... 97 75 56 40 28 100 100 100 94 28
May 2002................... 96 68 46 29 17 100 100 100 35 0
May 2003................... 95 61 37 20 9 100 100 76 0 0
May 2004................... 94 55 30 14 5 100 100 45 0 0
May 2005................... 92 50 24 10 2 100 100 22 0 0
May 2006................... 91 45 20 7 1 100 100 7 0 0
May 2007................... 89 40 16 5 1 100 100 0 0 0
May 2008................... 87 36 13 4 * 100 96 0 0 0
May 2009................... 85 33 11 3 * 100 83 0 0 0
May 2010................... 83 29 9 2 * 100 71 0 0 0
May 2011................... 81 26 7 2 * 100 60 0 0 0
May 2012................... 79 23 6 1 * 100 50 0 0 0
May 2013................... 76 21 5 1 * 100 41 0 0 0
May 2014................... 73 18 4 1 * 100 33 0 0 0
May 2015................... 70 16 3 * * 100 25 0 0 0
May 2016................... 67 14 3 * * 100 17 0 0 0
May 2017................... 63 12 2 * * 100 11 0 0 0
May 2018................... 59 11 2 * * 100 5 0 0 0
May 2019................... 55 9 1 * * 100 0 0 0 0
May 2020................... 50 8 1 * * 100 0 0 0 0
May 2021................... 45 6 1 * * 100 0 0 0 0
May 2022................... 39 5 1 * * 100 0 0 0 0
May 2023................... 33 4 * * * 100 0 0 0 0
May 2024................... 27 3 * * * 83 0 0 0 0
May 2025................... 20 2 * * * 53 0 0 0 0
May 2026................... 13 1 * * * 20 0 0 0 0
May 2027................... 4 * * * * 0 0 0 0 0
May 2028................... 0 0 0 0 0 0 0 0 0 0
Weighted Average
Life(/1/)................. 20.13 9.00 5.02 3.23 2.27 27.09 14.47 6.07 3.79 2.76
</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 Class.
S-62
<PAGE>
PERCENTAGE OF INITIAL PRINCIPAL BALANCE OUTSTANDING FOR:
<TABLE>
<CAPTION>
CLASS B-1, CLASS B-
CLASS II-A-R 2 AND CLASS B-3
CERTIFICATE AT THE CERTIFICATES AT THE
FOLLOWING PERCENTAGES FOLLOWING PERCENTAGES
OF THE PREPAYMENT VECTOR OF THE PREPAYMENT VECTOR
------------------------ ---------------------------
DISTRIBUTION
DATE 0% 50% 100% 150% 200% 0% 50% 100% 150% 200%
- ------------ ---- ---- ---- ---- ---- ----- ----- ----- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial.................... 100 100 100 100 100 100 100 100 100 100
May 1999................... 0 0 0 0 0 99 99 99 99 99
May 2000................... 0 0 0 0 0 97 97 97 97 97
May 2001................... 0 0 0 0 0 96 96 96 96 96
May 2002................... 0 0 0 0 0 94 94 94 94 94
May 2003................... 0 0 0 0 0 93 93 93 93 93
May 2004................... 0 0 0 0 0 91 88 86 84 81
May 2005................... 0 0 0 0 0 89 84 78 73 68
May 2006................... 0 0 0 0 0 86 78 69 61 53
May 2007................... 0 0 0 0 0 84 71 58 47 38
May 2008................... 0 0 0 0 0 81 63 47 35 25
May 2009................... 0 0 0 0 0 79 56 39 26 16
May 2010................... 0 0 0 0 0 76 49 31 19 11
May 2011................... 0 0 0 0 0 72 44 25 14 7
May 2012................... 0 0 0 0 0 69 38 20 10 4
May 2013................... 0 0 0 0 0 66 33 16 7 3
May 2014................... 0 0 0 0 0 63 30 13 5 2
May 2015................... 0 0 0 0 0 61 26 10 4 1
May 2016................... 0 0 0 0 0 58 23 8 3 1
May 2017................... 0 0 0 0 0 54 20 7 2 1
May 2018................... 0 0 0 0 0 51 17 5 1 *
May 2019................... 0 0 0 0 0 47 15 4 1 *
May 2020................... 0 0 0 0 0 43 12 3 1 *
May 2021................... 0 0 0 0 0 39 10 2 * *
May 2022................... 0 0 0 0 0 34 8 2 * *
May 2023................... 0 0 0 0 0 29 6 1 * *
May 2024................... 0 0 0 0 0 23 5 1 * *
May 2025................... 0 0 0 0 0 17 3 1 * *
May 2026................... 0 0 0 0 0 11 2 * * *
May 2027................... 0 0 0 0 0 4 1 * * *
May 2028................... 0 0 0 0 0 0 0 0 0 0
Weighted Average
Life(/1/)................. 0.08 0.08 0.08 0.08 0.08 18.59 13.13 10.59 9.23 8.40
</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 Class.
S-63
<PAGE>
Interest accrued on the Offered 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 Offered 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 in the
related Loan Group, or both Loan Groups in the case of the Class B
Certificates, 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 Classes 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 and other materials may not be relevant
to or appropriate for investors other than those specifically requesting them.
SENSITIVITY OF THE CLASS II-A-6 CERTIFICATES
THE YIELD TO AN INVESTOR IN THE CLASS II-A-6 CERTIFICATES WILL BE HIGHLY
SENSITIVE TO THE RATE AND TIMING OF PRINCIPAL PAYMENTS (INCLUDING PREPAYMENTS)
ON THE GROUP II 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 GROUP II MORTGAGE LOANS WILL HAVE A NEGATIVE EFFECT ON THE
YIELD TO AN INVESTOR IN THE CLASS II-A-6 CERTIFICATES.
The following table indicates the sensitivity to various rates of prepayment
on the Group II Mortgage Loans of the pre-tax yields to maturity on a corporate
bond equivalent ("CBE") basis of the Class II-A-6 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 II-A-6 Certificates will be purchased on May 28,
1998 at an aggregate purchase price of 78.50% of the initial Principal Balance
of the Class II-A-6 Certificates and (ii) distributions to holders of the Class
II-A-6 Certificates will be made on the 25th day of each month commencing in
June 1998.
SENSITIVITY OF THE PRE-TAX YIELD TO MATURITY ON THE CLASS II-A-6 CERTIFICATES
TO PREPAYMENTS
<TABLE>
<CAPTION>
PERCENTAGES OF THE PREPAYMENT VECTOR
---------------------------------------
0% 50% 100% 150% 200%
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Pre-Tax Yield to Maturity (CBE)........ 1.23% 2.95% 5.46% 8.51% 12.01%
</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 II-A-6 Certificates,
would cause the discounted present value of such assumed stream of cash flows
to equal an assumed aggregate purchase price for the Class II-A-6 Certificates
of approximately 78.50% of their initial 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 II-A-6
Certificates and consequently does not purport to reflect the return on any
investment in the Class II-A-6 Certificates when such reinvestment rates are
considered.
Notwithstanding the assumed prepayment rates reflected in the preceding
table, it is highly unlikely that the Group II Mortgage Loans will prepay at a
constant Prepayment Vector until maturity or that all of the Group II Mortgage
Loans will prepay at the same Prepayment Vector. In addition, there will be
differences between the characteristics of the Mortgage Loans ultimately
included in Loan Group II and those which are assumed to be included. As a
result of these factors, the pre-tax yields on the Class II-A-6 Certificates
are likely to differ from those shown in such table, even if all of the Group
II Mortgage Loans prepay at the indicated percentages of the Prepayment Vector.
S-64
<PAGE>
YIELD CONSIDERATIONS WITH RESPECT TO THE CLASS B-2 AND CLASS B-3 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 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). 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-2 and Class B-3 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 25%
or 50% 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 and (iii) the Class B-2 and Class B-3
Certificates are purchased on May 28, 1998 at assumed purchase prices equal to
97.25% and 95.00%, respectively, of the Principal Balances thereof plus accrued
interest from May 1, 1998 to (but not including) May 28, 1998.
The actual Mortgage Loans ultimately included in each Loan Group will have
characteristics differing from those assumed in preparing the table and it is
unlikely that they will prepay or liquidate at any of the rates specified. In
addition, it is unlikely that Realized Losses will be incurred according to any
one particular pattern. The assumed percentages of SDA and the Prepayment
Vector 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. For these reasons, and because the timing of cash
flows is critical to determining yield, the pre-tax yields to maturity of the
Class B-2 and Class B-3 Certificates are likely to differ from the pre-tax
yields to maturity shown below in the tables.
The pre-tax yields to maturity 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-2 and Class B-3
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-2
and Class B-3 Certificates set forth above. 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-2 and Class B-3 Certificates. Consequently, these yields do not
purport to reflect the total return on any investment in the Class B-2 and
Class B-3 Certificates when such reinvestment rates are considered.
S-65
<PAGE>
SENSITIVITY OF PRE-TAX YIELDS TO MATURITY OF THE CLASS B-2
CERTIFICATES TO PREPAYMENTS AND REALIZED LOSSES
<TABLE>
<CAPTION>
LOSS PERCENTAGES OF THE PREPAYMENT VECTOR
PRCENTAGEE SEVERITY -------------------------------------
OF SDA PERCENTAGE 0% 50% 100% 150% 200%
- ---------- ---------- -------- ------ ---------------------
<S> <C> <C> <C> <C> <C> <C>
0%........................... 0% 7.09% 7.14% 7.18% 7.21% 7.23%
50%........................... 25% 7.09% 7.15% 7.18% 7.21% 7.23%
50%........................... 50% 7.07% 7.15% 7.18% 7.21% 7.23%
100%........................... 25% 7.07% 7.15% 7.18% 7.21% 7.23%
100%........................... 50% 6.75% 7.16% 7.18% 7.21% 7.23%
150%........................... 25% 7.06% 7.15% 7.18% 7.21% 7.23%
150%........................... 50% 3.95% 6.23% 7.19% 7.21% 7.23%
200%........................... 25% 6.82% 7.16% 7.19% 7.21% 7.23%
200%........................... 50% (1.81)% 3.63% 6.26% 7.21% 7.23%
</TABLE>
SENSITIVITY OF PRE-TAX YIELDS TO MATURITY OF THE CLASS B-3
CERTIFICATES TO PREPAYMENTS AND REALIZED LOSSES
<TABLE>
<CAPTION>
LOSS PERCENTAGES OF THE PREPAYMENT VECTOR
PERCENTAGE SEVERITY ----------------------------------------
OF SDA PERCENTAGE 0% 50% 100% 150% 200%
---------- ---------- -------- -------- -------- ------- -----
<S> <C> <C> <C> <C> <C> <C>
0%....................... 0% 7.34% 7.44% 7.52% 7.58% 7.62%
50%....................... 25% 7.28% 7.45% 7.52% 7.58% 7.62%
50%....................... 50% 7.24% 7.46% 7.52% 7.58% 7.62%
100%....................... 25% 7.25% 7.46% 7.53% 7.58% 7.62%
100%....................... 50% (23.60)% 3.67% 7.53% 7.58% 7.62%
150%....................... 25% 3.63% 7.39% 7.53% 7.58% 7.62%
150%....................... 50% (46.74)% (34.33)% (0.28)% 6.31% 7.62%
200%....................... 25% (22.68)% 3.92% 7.53% 7.58% 7.62%
200%....................... 50% (63.91)% (53.68)% (39.50)% (2.44)% 6.19%
</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 THE PREPAYMENT VECTOR
PRCENTAGEE SEVERITY ---------------------------------------
OF SDA PERCENTAGE 0% 50% 100% 150% 200%
- ---------- ---------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
50%........................ 25% 0.48% 0.33% 0.24% 0.18% 0.14%
50%........................ 50% 0.96% 0.67% 0.49% 0.36% 0.27%
100%........................ 25% 0.95% 0.66% 0.48% 0.36% 0.27%
100%........................ 50% 1.89% 1.33% 0.97% 0.72% 0.54%
150%........................ 25% 1.41% 0.99% 0.72% 0.54% 0.40%
150%........................ 50% 2.81% 1.98% 1.44% 1.07% 0.81%
200%........................ 25% 1.86% 1.31% 0.96% 0.71% 0.54%
200%........................ 50% 3.72% 2.62% 1.91% 1.42% 1.07%
</TABLE>
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-2 and Class B-3 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.
S-66
<PAGE>
POOLING AND SERVICING AGREEMENT
GENERAL
The Certificates will be issued pursuant to a Pooling and Servicing Agreement
to be dated as of the date of initial issuance of the 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 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) 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
$500,000 initial Principal Balance, distributions will be made on the
Distribution Date by wire transfer in immediately available funds. The final
distribution in respect of each Class 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 Class. See "Description of the Certificates --
General" in the Prospectus.
DTC will 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
Certificates evidencing specified Voting Interests in the Trust Estate, the
holders of each Class of Certificates will be entitled to a pro rata portion of
the aggregate Voting Interest represented by all Certificates based on the
outstanding Principal Balance of such Class. Each Certificateholder of a Class
will have a Voting Interest equal to the product of the Voting Interest to
which such Class is collectively entitled and the Percentage Interest in such
Class 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 of Certificates or specified Classes of Certificates,
each Certificateholder of a Class will have a Voting Interest in such Class
equal to such holder's Percentage Interest in such Class. Unless Definitive
Certificates are issued as described above, Beneficial Owners of Book-Entry
Certificates may exercise their voting rights only through Participants.
TRUSTEE
The Trustee for the Certificates will be First Union National Bank, a
national banking association. The corporate trust office of the Trustee is
located at 230 South Tryon Street, Charlotte, North Carolina 28288. See "The
Pooling and Servicing Agreement--The Trustee" in the Prospectus. The Trustee
will be required to make Periodic Advances to the limited extent described
herein. See "Description of the Certificates -- Periodic Advances."
S-67
<PAGE>
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. See "Description of the Certificates --
Periodic Advances" herein. Under the Pooling and Servicing Agreement, any good
faith interpretation of the Master Servicer of any provisions of the Pooling
and Servicing Agreement relating to the distributions to be made on or the
allocation of any losses to the Certificates which the Master Servicer
concludes are ambiguous or unclear will be binding on Certificateholders. The
Master Servicer will be entitled to a "MASTER SERVICING FEE" payable monthly
equal to the product of (i) 1/12th of 0.017% (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 Class of
Class B Certificates or of a class of securities representing interests in one
or more Classes of 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 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
The Seller may purchase from the Trust Estate all of the Mortgage Loans, and
thereby effect early retirement of the Certificates, on any Distribution Date
when the aggregate Scheduled Principal Balance of the Mortgage Loans is less
than 10% of the aggregate unpaid principal balance of the Mortgage Loans as of
the Cut-Off Date. Any such purchase is required 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 II-A-R Certificate. See
"Description of the Certificates -- Additional Rights of the Class II-A-R
Certificateholder" herein and "The Pooling and Servicing Agreement --
Termination; Optional 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 and the other servicers listed below (the "OTHER SERVICERS,"
and collectively with Norwest Mortgage, the "SERVICERS") will service the
Mortgage Loans, 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.
S-68
<PAGE>
THE SERVICERS
The Group I Mortgage Loans initially will be serviced by the following
entities:
<TABLE>
<CAPTION>
APPROXIMATE PERCENTAGE OF
AGGREGATE UNPAID PRINCIPAL
BALANCE AS OF
NAME OF SERVICER THE CUT-OFF DATE SERVICED
---------------- --------------------------
<S> <C>
Norwest Mortgage, Inc............................ 96.92%
FT Mortgage Companies............................ 1.73%
Suntrust Mortgage Inc............................ 1.22%
Citicorp Mortgage, Inc. ......................... 0.13%
------
Total.......................................... 100.00%
======
</TABLE>
The Group II Mortgage Loans initially will be serviced by the following
entities:
<TABLE>
<CAPTION>
APPROXIMATE PERCENTAGE OF
AGGREGATE UNPAID PRINCIPAL
BALANCE AS OF
NAME OF SERVICER THE CUT-OFF DATE SERVICED
---------------- --------------------------
<S> <C>
Norwest Mortgage, Inc............................ 99.27%
FT Mortgage Companies............................ 0.43%
Suntrust Mortgage Inc............................ 0.16%
Banc One Mortgage Corp. ......................... 0.14%
------
Total.......................................... 100.00%
======
</TABLE>
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) and
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 as described in the Prospectus under "Servicing of the Mortgage
Loans -- Payments on Mortgage Loans."
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").
S-69
<PAGE>
With respect to the certain Mortgage Loans serviced by Norwest Mortgage
("NORWEST TYPE 1 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 certain other Mortgage Loans serviced by Norwest Mortgage
("NORWEST TYPE 2 LOANS") and Mortgage Loans serviced by certain Other
Servicers, the Unscheduled Principal Receipt Period with respect to all types
of Unscheduled Principal Receipts is a Prior Month Receipt Period. For certain
Other Servicers, the Unscheduled Principal Receipt Period with respect to
partial Unscheduled Principal Receipts is a Prior Month Receipt Period and with
respect to Unscheduled Principal Receipts in full is a Mid-Month Receipt
Period. Approximately 77.26% and 19.66% of the aggregate unpaid principal
balance of the Group I Mortgage Loans as of the Cut-Off Date and approximately
82.27% and 17.00% of the aggregate unpaid principal balance of the Group II
Mortgage Loans as of the Cut-Off Date were Norwest Type 1 Loans and Norwest
Type 2 Loans, respectively.
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 or the Trustee, 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 (to the extent such Other
Servicer is not currently remitting such amount on a daily basis) 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, the Unscheduled Principal Receipt Period for
the Norwest Type 2 Loans may be changed (to achieve consistency with the
Norwest Type 1 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 Type 2 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 Type 1 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
S-70
<PAGE>
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.
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)
6.750%, (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
0.25% per annum or, with respect to one Group II Mortgage Loan representing
approximately 0.14% of the aggregate unpaid principal balance of the Group II
Mortgage Loans as of the Cut-Off Date, 0.375% per annum. The Servicers also are
entitled to additional servicing compensation as described in the Prospectus
under "Servicing of the Mortgage Loans -- Fixed Retained Yield, Servicing
Compensation and Payment of Expenses."
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 II-A-R Certificate. See "Material Federal
Income Tax Consequences" herein and "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. 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.
S-71
<PAGE>
An election will be made to treat the Trust Estate, and the Trust Estate will
qualify, as a REMIC for federal income tax purposes. Each Class of Offered
Certificates (other than the Class II-A-R Certificate) (collectively, the
"REGULAR CERTIFICATES"), together with each Class of Certificates not offered
hereby, will be designated as regular interests in the REMIC, and the Class II-
A-R Certificate will be designated as the residual interest in the REMIC. The
Class II-A-R Certificate is a "RESIDUAL CERTIFICATE" for purposes of the
Prospectus. The assets of the REMIC will include the Mortgage Loans (exclusive
of Fixed Retained Yield), 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 a
domestic building and loan association, "real estate assets" for a real estate
investment trust and, other than the Class II-A-R Certificate, "qualified
mortgages" for a REMIC and "permitted assets" for a financial asset
securitization investment trust, 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 II-A-6 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 B-3 Certificates will be
issued with original issue discount in an amount equal to the excess of their
initial principal balance (plus three days of interest at the Pass-Through Rate
thereon) over their issue price (including accrued interest). It is also
anticipated that the Class I-A-1, Class II-A-1, Class II-A-3, Class II-A-4,
Class II-A-5, Class II-A-7 and Class II-A-8 Certificates will be issued at a
premium and the Class II-A-2, Class B-1 and Class B-2 Certificates will be
issued with de minimis original issue discount for federal income tax purposes.
It is further anticipated that the Class I-A-PO, Class II-A-PO, Class B-4,
Class B-5 and Class B-6 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 and whether the original issue discount is considered de minimis, and
that may be used by Beneficial Owners (or holders) to amortize premium, will be
calculated using 100% of the Prepayment Vector. No representation is made as to
the actual rate at which the Mortgage Loans will prepay.
RESIDUAL CERTIFICATE
The holder of the Class II-A-R Certificate must include the taxable income or
loss of the REMIC in determining its federal taxable income. The Class II-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 II-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 II-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.
S-72
<PAGE>
The Class II-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 Class II-A-R
Certificate is subject to certain restrictions on transfer and any prospective
transferee thereof will be required to furnish to the Trustee an affidavit as
described herein under "Description of the Certificates -- Restrictions on
Transfer of the Class II-A-R and Class B Certificates." See "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 II-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 II-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 II-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 II-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 II-A-R CERTIFICATE MAY BE SIGNIFICANTLY LOWER THAN
WOULD BE THE CASE IF THE CLASS II-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 II-A-R Certificate may not be purchased by or transferred to a Plan
or a person acting on behalf of or investing the assets of a Plan. See
"Description of the Certificates -- Restrictions on Transfer of the Class II-A-
R and Class B Certificates."
In addition, because the Class B Certificates are subordinated to the Class A
Certificates with respect to certain losses, the 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 to effect
such purchase or (b) subject to the conditions described herein, that the
source of funds used to purchase the Class B Certificates is an "insurance
company general account" as defined in Section V(e) of PTE 95-60 and the
purchase and holding of such Certificates are covered by Sections I and III of
PTE 95-60, or (ii) an opinion of counsel and such other documentation as
described herein under "Description of the Certificates -- Restrictions on
Transfer of the Class II-A-R and Class B Certificates."
Accordingly, the following discussion applies to the Class A Certificates
(other than the Class II-A-R Certificate) offered hereby and 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 II-A-R or
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 a
Plan in the Class A Certificates may
S-73
<PAGE>
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 Class A
Certificates, including the individual administrative exemption described
below. For a further discussion of the individual administrative exemption,
including the necessary conditions to its applicability, and other important
factors to be considered by an ERISA Plan contemplating investing in the Class
A Certificates, see "ERISA Considerations" in the Prospectus.
On December 5, 1990, the DOL issued to the Underwriter an individual
administrative exemption, Prohibited Transaction Exemption 90-83, 55 Fed. Reg.
50250 (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 Class A 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 Class A 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 a Class A 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, and whether the conditions of any such exemption will
be applicable to the Class A 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 a Class A 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 B-1 Certificates constitute "mortgage related
securities" for purposes of the Secondary Mortgage Market Enhancement Act of
1984, as amended ("SMMEA") so long as they are rated in one of the two highest
rating categories by at least one nationally recognized statistical rating
organization. The Class B-2 and Class B-3 Certificates will not constitute
"mortgage related securities" under SMMEA.
Prospective purchasers whose investment activities are subject to legal
investment laws and regulations, regulatory capital requirements or review by
regulatory authorities may be subject to restrictions on investment in the
Offered Certificates and should consult 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 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 the
Certificates -- Reports" herein and "The Pooling and Servicing Agreement--
Reports to Certificateholders" in the Prospectus upon written request to the
Trustee at the Corporate Trust Office.
S-74
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the underwriting agreement dated May
4, 1998 and the terms agreement dated May 4, 1998 (together, the "UNDERWRITING
AGREEMENT") among Norwest Mortgage, the Seller and Donaldson, Lufkin & Jenrette
Securities Corporation, 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 99.53% of the initial
aggregate Principal Balance of the Class A Certificates being offered hereby,
approximately 98.00% of the aggregate initial Principal Balance of the Class B-
1 Certificates, approximately 97.25% of the aggregate initial Principal Balance
of the Class B-2 Certificates and approximately 95.00% of the aggregate initial
Principal Balance of the Class B-3 Certificates plus, in each case, accrued
interest thereon, at the rate of 6.750% per annum from May 1, 1998 to (but not
including) May 28, 1998, 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 being offered hereby among such Classes 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
Underwriter by Brown & Wood LLP, New York, New York.
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 Certificates.
RATINGS
It is a condition to the issuance of the Class A Certificates offered hereby
that each such Class will have been rated "Aaa" by Moody's Investors Service,
Inc. ("MOODY'S") and "AAA" by Fitch IBCA, Inc. ("FITCH"). It is a condition to
the issuance of the Class B-1 Certificates that they will have been rated "Aa2"
by Moody's and "AA" by Fitch. It is a condition to the issuance of the Class B-
2 and Class B-3 Certificates that they will have been rated "A" and "BBB",
respectively by Fitch. 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
S-75
<PAGE>
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 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
Class by any rating agency other than Moody's 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 and Fitch.
S-76
<PAGE>
INDEX OF SIGNIFICANT
PROSPECTUS SUPPLEMENT DEFINITIONS
<TABLE>
<CAPTION>
TERM PAGE
- ---- -----
<S> <C>
Adjusted Pool Amount...................................................... S-25
Adjusted Pool Amount (PO Portion)......................................... S-26
Adjustment Amount......................................................... S-39
Aggregate Non-PO Principal Balance........................................ S-25
Aggregate Principal Balance............................................... S-25
Aggregate Subordinate Percentage.......................................... S-35
Apportioned Principal Balance............................................. S-39
Apportioned Class B Principal Distribution Amount......................... S-35
Apportionment Fraction.................................................... S-35
Assumed Discount Mortgage Loan............................................ S-58
Assumed Mortgage Loans.................................................... S-58
Assumed Premium Mortgage Loan ............................................ S-58
Available Master Servicing Compensation................................... S-26
Bankruptcy Loss........................................................... S-30
Bankruptcy Loss Amount.................................................... S-40
Beneficial Owner.......................................................... S-21
Book-Entry Certificates................................................... S-3
Bulk Purchase Underwritten Loans.......................................... S-41
CBE....................................................................... S-64
Cede...................................................................... S-21
Certificate Account....................................................... S-72
Certificateholder......................................................... S-3
Certificates.............................................................. Cover
Class A Certificates...................................................... Cover
Class A Non-PO Optimal Principal Amount................................... S-28
Class A Non-PO Principal Balance.......................................... S-25
Class A Non-PO Principal Distribution Amount.............................. S-28
Class A Percentage........................................................ S-31
Class A-PO Certificates................................................... S-6
Class A-PO Deferred Amount................................................ S-29
Class A-PO Distribution Amount............................................ S-28
Class A-PO Optimal Principal Amount....................................... S-28
Class A Prepayment Percentage............................................. S-31
Class A Principal Balance................................................. S-25
Class B Certificates...................................................... Cover
Class B Loan Group I Optimal Principal Amount............................. S-28
Class B Loan Group II Optimal Principal Amount............................ S-28
Class B Optimal Principal Amount.......................................... S-29
Class B Percentage........................................................ S-32
Class B Prepayment Percentage............................................. S-32
Class B Principal Balance................................................. S-25
Class B Principal Distribution Amount..................................... S-28
Class II-A-6 Component.................................................... S-33
Class II-A-6-A Component.................................................. S-33
</TABLE>
<TABLE>
<CAPTION>
TERM PAGE
- ---- -----
<S> <C>
Class II-A-6-B Component.................................................. S-33
Class Percentage.......................................................... S-29
Class Prepayment Percentage............................................... S-29
Closing Date.............................................................. S-10
Code...................................................................... S-17
Compensating Interest..................................................... S-26
Component................................................................. S-33
CPR....................................................................... S-58
Cross-Over Date........................................................... S-38
Current Fractional Interest............................................... S-32
Curtailment Interest Shortfalls........................................... S-27
Cut-Off Date.............................................................. S-42
Debt Service Reduction.................................................... S-30
Deficient Valuation....................................................... S-30
Definitive Certificates................................................... S-21
Determination Date........................................................ S-21
Discount Mortgage Loan.................................................... S-31
Distribution Date......................................................... S-21
DOL....................................................................... S-74
DTC....................................................................... S-21
ERISA..................................................................... S-17
ERISA Plan................................................................ S-37
Excess Bankruptcy Losses.................................................. S-39
Excess Fraud Losses....................................................... S-39
Excess Losses............................................................. S-39
Excess Special Hazard Losses.............................................. S-39
Exemption................................................................. S-74
Expense Rate.............................................................. S-58
FICO Scores............................................................... S-48
Fitch..................................................................... S-75
Fixed Retained Yield...................................................... S-71
Fraud Loss................................................................ S-30
Fraud Loss Amount......................................................... S-40
General Standards......................................................... S-41
Group..................................................................... Cover
Group I-A Certificates.................................................... Cover
Group I Discount Mortgage Loan............................................ S-31
Group I Mortgage Loans.................................................... S-2
Group I Pool Distribution Amount.......................................... S-22
Group I Premium Mortgage Loan............................................. S-31
Group II-A Certificates................................................... Cover
Group II Discount Mortgage Loan........................................... S-31
Group II Mortgage Loans................................................... S-2
Group II Pool Distribution Amount......................................... S-22
Group II Premium Mortgage Loan............................................ S-31
Group II Scheduled Principal Amount ...................................... S-34
Group II Unscheduled Principal Amount..................................... S-34
Group Subordinate Amount.................................................. S-39
</TABLE>
S-77
<PAGE>
<TABLE>
<CAPTION>
TERM PAGE
- ---- -----
<S> <C>
Interest Accrual Amount................................................... S-24
Interest Shortfall Amount................................................. S-27
Liquidated Loan........................................................... S-30
Liquidated Loan Loss...................................................... S-30
Loan Group ............................................................... S-2
Loan Group I.............................................................. S-2
Loan Group II............................................................. S-2
Loan-to-Value Ratio....................................................... S-46
Loss Severity Percentage.................................................. S-65
Master Servicer........................................................... S-2
Master Servicing Fee...................................................... S-68
Master Servicing Fee Rate................................................. S-68
Mid-Month Receipt Period.................................................. S-69
Modified Standards........................................................ S-41
Month End Interest........................................................ S-26
Moody's................................................................... S-75
Mortgage Loans............................................................ S-2
Mortgaged Properties...................................................... S-41
Mortgages................................................................. S-41
Net Mortgage Interest Rate................................................ S-26
Net Partial Liquidation Proceeds.......................................... S-23
Non-PO Fraction........................................................... S-30
Non-Supported Interest Shortfalls......................................... S-27
Norwest Bank.............................................................. S-2
Norwest Mortgage.......................................................... S-2
Norwest Type 1 Loans...................................................... S-70
Norwest Type 2 Loans...................................................... S-70
Offered Certificates...................................................... Cover
Original Group Subordinate Amount......................................... S-31
Original Subordinated Principal Balance................................... S-31
Original Fractional Interest.............................................. S-32
Other Servicers........................................................... S-68
Partial Liquidation Proceeds.............................................. S-23
Pass-Through Rate......................................................... S-24
Percentage Interest....................................................... S-24
Periodic Advance.......................................................... S-36
Plan...................................................................... S-37
PO Fraction............................................................... S-31
Pool Balance (Non-PO Portion)............................................. S-30
Pool Balance (PO Portion)................................................. S-31
Pool Distribution Amount.................................................. S-22
Pool Distribution Amount Allocation....................................... S-23
Pooling and Servicing Agreement........................................... S-67
Prepayments in Full....................................................... S-26
Prepayment Interest Shortfalls............................................ S-26
Prepayment Shift Percentage............................................... S-34
</TABLE>
<TABLE>
<CAPTION>
TERM PAGE
- ---- -----
<S> <C>
Prepayment Vector......................................................... S-58
Principal Balance......................................................... S-24
Prior Month Receipt Period................................................ S-69
Priority Amount........................................................... S-34
Priority Percentage....................................................... S-34
Prospectus................................................................ S-5
PTE 95-60................................................................. S-37
Rating Agencies........................................................... S-5
Realized Loss............................................................. S-30
Record Date............................................................... S-21
Regular Certificates...................................................... S-72
REMIC..................................................................... S-3
Remittance Date........................................................... S-23
REO Property.............................................................. S-68
Residual Certificate...................................................... S-72
Scheduled Principal Balance............................................... S-30
SDA....................................................................... S-65
Securities Act............................................................ S-74
Seller.................................................................... S-2
Servicer.................................................................. S-2
Servicers................................................................. S-68
Servicer Custodial Account................................................ S-69
Servicing Fee Rate........................................................ S-71
Shift Percentage.......................................................... S-34
Similar Law............................................................... S-37
SMMEA..................................................................... S-74
Special Hazard Loss....................................................... S-30
Special Hazard Loss Amount................................................ S-39
Structuring Assumptions................................................... S-58
Subordinated Certificates................................................. Cover
Subordinated Percentage................................................... S-32
Subordinated Prepayment Percentage........................................ S-32
Target Regime............................................................. S-70
Trust Estate.............................................................. S-2
Trustee................................................................... S-5
U.S. Person............................................................... S-36
Undercollateralized Amount................................................ S-35
Undercollateralized Group ................................................ S-35
Underlying Servicing Agreement............................................ S-5
Underwriter............................................................... Cover
Underwriting Agreement.................................................... S-75
Underwriting Standards.................................................... S-41
Unscheduled Principal Receipt Period...................................... S-69
Unscheduled Principal Receipts............................................ S-22
Weighted Average Life..................................................... S-57
</TABLE>
S-78
<PAGE>
NORWEST INTEGRATED STRUCTURED ASSETS, INC.
(NISTARSM)
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 first liens on 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" BEGINNING ON PAGE 11.
Capitalized terms used in this Prospectus are defined at the locations
identified in the "Index of Significant Definitions" beginning on page 90.
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 MAY 26, 1998
<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, Citicorp Center, 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 Securities Exchange Act of 1934, as
amended (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
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............................................ 25
General................................................................... 25
Definitive Form........................................................... 26
Book-Entry Form........................................................... 26
Distributions to Certificateholders....................................... 28
General.................................................................. 28
Distributions of Interest................................................ 29
Distributions of Principal............................................... 30
Categories of Classes of Certificates..................................... 31
Other Credit Enhancement.................................................. 33
Limited Guarantee........................................................ 33
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Financial Guaranty Insurance Policy or Surety Bond...................... 33
Letter of Credit........................................................ 33
Pool Insurance Policies................................................. 33
Special Hazard Insurance Policies....................................... 33
Mortgagor Bankruptcy Bond............................................... 34
Reserve Fund............................................................ 34
Cross Support........................................................... 34
Overcollateralization................................................... 34
PREPAYMENT AND YIELD CONSIDERATIONS....................................... 34
Pass-Through Rates....................................................... 34
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............................................................ 37
Payments on Mortgage Loans............................................... 38
Periodic Advances and Limitations Thereon................................ 41
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............................. 46
THE POOLING AND SERVICING AGREEMENT....................................... 47
Assignment of Mortgage Loans to the Trustee.............................. 47
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..................................................... 55
Anti-Deficiency Legislation and Other Limitations on Lenders............. 55
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
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................................ 68
Taxation of Residual Certificates........................................ 68
Taxation of REMIC Income................................................ 68
Basis and Losses........................................................ 69
Treatment of Certain Items of REMIC Income and Expense.................. 70
Limitations on Offset or Exemption of REMIC Income...................... 70
Tax-Related Restrictions on Transfer of Residual Certificates........... 71
Sale or Exchange of a Residual Certificate.............................. 73
Mark to Market Regulations.............................................. 74
Taxes That May Be Imposed on the REMIC Pool.............................. 74
Prohibited Transactions................................................. 74
Contributions to the REMIC Pool After the Startup Day................... 74
Net Income from Foreclosure Property.................................... 74
Liquidation of the REMIC Pool............................................ 74
Administrative Matters................................................... 75
Limitations on Deduction of Certain Expenses............................. 75
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Taxation of Certain Foreign Investors................................... 75
Regular Certificates................................................... 75
Residual Certificates.................................................. 76
Backup Withholding..................................................... 76
Reporting Requirements................................................. 77
Federal Income Tax Consequences for Certificates as to Which No REMIC
Election is Made........................................................ 77
General................................................................. 77
Tax Status.............................................................. 78
Premium and Discount.................................................... 78
Premium................................................................ 78
Original Issue Discount................................................ 78
Market Discount........................................................ 79
Recharacterization of Servicing Fees.................................... 79
Sale or Exchange of Certificates........................................ 79
Stripped Certificates................................................... 80
General................................................................ 80
Status of Stripped Certificates........................................ 81
Taxation of Stripped Certificates...................................... 81
Reporting Requirements and Backup Withholding........................... 82
Taxation of Certain Foreign Investors................................... 83
ERISA CONSIDERATIONS...................................................... 83
General.................................................................. 83
Certain Requirements Under ERISA......................................... 83
General................................................................. 83
Parties in Interest/Disqualified Persons................................ 83
Delegation of Fiduciary Duty............................................ 84
Administrative Exemptions................................................ 84
Individual Administrative Exemptions.................................... 84
PTE 83-1................................................................ 85
Exempt Plans............................................................. 86
Unrelated Business Taxable Income--Residual Certificates................. 86
LEGAL INVESTMENT.......................................................... 86
PLAN OF DISTRIBUTION...................................................... 88
USE OF PROCEEDS........................................................... 89
LEGAL MATTERS............................................................. 89
RATING.................................................................... 89
INDEX OF SIGNIFICANT DEFINITIONS.......................................... 90
</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 90.
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
7
<PAGE>
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
8
<PAGE>
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 the extent specified in the
Underlying Servicing Agreement 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.
In addition, the Master Servicer may be
required to make Periodic Advances if the
Underlying Servicing Agreement does not
require the Servicer to make Periodic
Advances while a Mortgage Loan is in
liquidation. 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 Certain
Mortgage Loans.................... The Seller may, subject to the terms of
the applicable Pooling and Servicing
Agreement, purchase (i) any defaulted
Mortgage Loan or any Mortgage Loan as to
which default is reasonably foreseeable
from the related Trust Estate, up to the
limit specified in such Pooling and
Servicing Agreement and (ii) any Mortgage
Loan as to which the originator of such
Mortgage Loan breached a representation or
warranty to Norwest Mortgage regarding the
characteristics of such Mortgage Loan. 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
9
<PAGE>
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 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, as amended.
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.
10
<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
11
<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 addition, 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 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
12
<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.
13
<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 adjustable-rate fully-amortizing
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 Due 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.
14
<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.
15
<PAGE>
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." 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 contain Mortgage Loans which are amortized over a fixed
period not exceeding 30 years but which have shorter terms to maturity
("BALLOON LOANS") 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 the related mortgagor refinances a
Balloon Loan at maturity, the new loan will not be included in the Trust
Estate. See "Prepayment and Yield Considerations."
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
16
<PAGE>
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 PHMC with respect to an
individual and purported class action filed by The Capitol Life Insurance
Company ("CAPITOL LIFE") 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". On March 26, 1997, PHMC and
others filed a motion to dismiss the complaint for failure to state a claim on
which relief can be granted. On June 2, 1997, an amended complaint was filed
and American Investors Life Insurance Company joined Capitol Life as a named
plaintiff in the actions. As amended, the complaint asserts claims against
PHMC, PHMSC, certain of their present and former affiliates and certain former
employees as well as Merrill Lynch & Co., Kidder, Peabody & Co. Incorporated,
Lehman Brothers Inc. and Salomon Brothers Inc. As amended, 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 by the plaintiffs of certain of
PHMSC's Subordinated Mortgage Securities, Series 1992-A. One of the named
defendants, who is a former employee of PHMC and certain of its affiliates, is
an officer and employee of the Seller and Norwest Mortgage. The Seller has
been advised that PHMC, PHMSC, their affiliated defendants and such common
employee will 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 Fannie Mae ("FANNIE MAE"), the
Federal Home Loan Mortgage Corporation ("FREDDIE MAC") and the Government
National Mortgage Association ("GINNIE MAE"). As of December 31, 1997, Norwest
Mortgage had a net worth of approximately $446.5 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.
17
<PAGE>
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."
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).
18
<PAGE>
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 general and modified criteria of Norwest Mortgage
described under "--Mortgage Loan Underwriting" below 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.
19
<PAGE>
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 lower Loan-to-Value Ratio, a lower principal balance (in each case,
relative to Mortgage Loans having otherwise similar characteristics), 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 (in each case, relative to Mortgage Loans having otherwise similar
characteristics), 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
20
<PAGE>
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 lower
(relative to Mortgage Loans having otherwise similar characteristics) 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.
21
<PAGE>
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." 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.
22
<PAGE>
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
categories of borrowers such as "foreign nationals" without a FICO Score who
hold certain types of visas and have acceptable credit references (such
Mortgage Loans, "FOREIGN NATIONAL LOANS"), and include certain other less
restrictive parameters. Generally, relative to the "general" underwriting
standards, these standards include higher loan amounts, higher maximum Loan-
to-Value Ratios, higher maximum "combined" Loan-to-Value Ratios (in each case,
relative to Mortgage Loans with otherwise similar characteristics) 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 who satisfy certain guidelines regarding credit
history and current assets may have been approved under a "NO RATIO" program
(such Mortgage Loans, "NO RATIO LOANS"). 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
23
<PAGE>
(ii) the aggregate of the foregoing and all other financial obligations not
expected to be fully repaid within the next 10 months. As a 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 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; (2) immediately prior to the transfer and assignment
contemplated by the Pooling and Servicing
24
<PAGE>
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) no
Mortgage Note or Mortgage is subject to any right of rescission, set-off,
counterclaim or defense; (iv) the Mortgage Loan (other than a T.O.P. Loan as
described above under "--Mortgage Loan Underwriting") is covered by a title
insurance policy (or in the case of any Mortgage Loan secured by a Mortgaged
Property located in a jurisdiction where such policies are generally not
available, an opinion of counsel of the type customarily rendered in such
jurisdiction in lieu of title insurance is instead received); (v) 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 a priority over the first lien of the Mortgage except for those
liens set forth in the Pooling and Servicing Agreement; (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 no representation is
made), 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; (vii) 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; and (viii) any
and all requirements of any federal, state or local law with respect to the
origination of the Mortgage Loans including, without limitation, usury, 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.
No representations or warranties are made by the Seller or any other party
as to the environmental condition of any Mortgaged Property including the
absence, presence or effect of hazardous wastes or hazardous substances on
such Mortgaged Property or any effect from the presence or effect of hazardous
wastes or hazardous substances on, near or emanating from such Mortgaged
Property. See "Certain Legal Aspects of the Mortgage Loans--Environmental
Considerations" below.
In addition, no representations or warranties are made by the Seller or any
other party with respect to the absence or effect of fraud in the origination
of any Mortgage Loan, and any loss or liability resulting from the presence or
effect of fraud will be borne solely be Certificateholders.
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 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.
25
<PAGE>
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 Cede as nominee for 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."
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."
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
26
<PAGE>
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.
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.
27
<PAGE>
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;
(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,
with respect to any such amount and in certain cases
28
<PAGE>
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 Mortgage 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 Mortgage 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 Supplement.
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 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
29
<PAGE>
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 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 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 "Servicing of the Mortgage Loans--
Insurance
30
<PAGE>
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.
CATEGORIES OF CLASSES OF CERTIFICATES
The Certificates of any Series may be comprised of one or more Classes. Such
Classes, in general, fall into different categories. The following chart
identifies and generally defines certain of the more typical categories. The
Prospectus Supplement for a Series of Certificates may identify the Classes
which comprise such Series by reference to the following categories or another
category specified in the applicable Prospectus Supplement.
CATEGORIES OF DEFINITION
CLASSES PRINCIPAL TYPES
Accretion Directed... A Class that receives principal payments from the
accreted interest from specified Accrual Classes. An
Accretion Directed Class also may receive principal
payments from principal paid on the Mortgage Loans for
the related Series.
Component A Class consisting of "Components." The Components of a
Certificates......... Class of Component Certificates may have different
principal and/or interest payment characteristics but
together constitute a single class and do not represent
severable interests. Each Component of a Class of
Component Certificates may be identified as falling
into one or more of the categories in this chart.
Notional Amount
Class................
A Class having no principal balance and bearing
interest on the related notional amount. The notional
amount is used for purposes of the determination of
interest distributions.
31
<PAGE>
Planned Amortization
Class
(also sometimes
referred to as
a "PAC")............ A Class that is designed to receive principal payments
using a predetermined principal balance schedule
derived by assuming two constant prepayment rates for
the underlying Mortgage Loans. These two rates are the
endpoints for the "structuring range" for the Planned
Amortization Class. The Planned Amortization Classes in
any Series of Certificates may be subdivided into
different categories (e.g., Planned Amortization Class
I ("PAC I") Planned Amortization Class II ("PAC II")
and so forth) derived using different structuring
ranges.
Scheduled A Class that is designed to receive principal payments
Amortization Class... using a predetermined principal balance schedule but is
not designated as a Planned Amortization Class or
Targeted Amortization Class. The schedule is derived by
assuming either two constant prepayment rates or a
single constant prepayment rate for the underlying
Mortgage Loans. In the former case, the two rates are
the endpoints for the "structuring range" for the
Scheduled Amortization Class and such range generally
is narrower than that for a Planned Amortization Class.
Typically, the Support Class for the applicable Series
of Certificates generally will represent a smaller
percentage of the Scheduled Amortization Class than a
Support Class generally would represent in relation to
a Planned Amortization Class or a Targeted Amortization
Class.
Sequential Pay Classes that are entitled to receive principal payments
Class................ in a prescribed sequence, that do not have
predetermined principal balance schedules and that, in
most cases, are entitled to receive payments of
principal continuously from the first Distribution Date
on which they receive principal until they are retired.
A single Class is entitled to receive principal
payments before or after other Classes in the same
Series of Certificates may be identified as a
Sequential pay Class.
Strip Class.......... A Class that is entitled to receive a constant
proportion, or "strip," of the principal payments on
the underlying Mortgage Loans.
Support Class (also
sometimes referred
to as a "COMPANION
CLASS").............
A Class that is entitled to receive principal payments
on any Distribution Date only if scheduled payments
have been made on specified Planned Amortization
Classes, Targeted Amortization Classes and/or Scheduled
Amortization Classes.
Targeted
Amortization Class
(also sometimes
referred to as a
"TAC")..............
A Class that is designed to receive principal payments
using a predetermined principal balance schedule
derived by assuming a single constant prepayment rate
for the underlying Mortgage Loans.
INTEREST TYPES
Fixed Rate Class..... A Class with an interest rate that is fixed throughout
the life of the Class.
Floating Rate A Class with an interest rate that resets periodically
Class................ based upon a designated index and that varies directly
with changes in such index.
Inverse Floating
Rate Class........... A Class with an interest rate that resets periodically
based upon a designated index and that varies inversely
with changes in such index and with changes in the
interest rate payable on the related Floating Rate
Class.
32
<PAGE>
Variable Rate A Class with an interest rate that resets periodically
Class................ and is calculated by reference to the rate or rates of
interest applicable to the Mortgage Loans.
Interest Only A Class that is entitled to receive some or all of the
Class................ interest payments made on the Mortgage Loans and little
or no principal. Interest Only Classes have either a
nominal principal balance or a notional amount. A
nominal principal balance represents actual principal
that will be paid on the Class. It is referred to as
nominal since it is extremely small compared to other
Classes. A notional amount is the amount used as a
reference to calculate the amount of interest due on an
Interest Only Class that is not entitled to any
distributions in respect of principal.
Principal Only A Class that does not bear interest and is entitled to
Class................ receive only distributions in respect of principal.
Accrual Class........ A Class that accretes the amount of accrued interest
otherwise distributable on such Class, which amount
will be added as principal to the principal balance of
such Class on each applicable Distribution Date. Such
accretion may continue until some specified event has
occurred or until such Accrual Class is retired.
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 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
33
<PAGE>
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 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).
34
<PAGE>
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 day is not a business day, the first business day
following the 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 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
35
<PAGE>
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 mortgage loans,
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 mortgage 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 mortgage 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
mortgage 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 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.
36
<PAGE>
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." 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 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 Underlying Servicing
37
<PAGE>
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 Pooling and 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 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
38
<PAGE>
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 (a) payments due on or before the Cut-Off
Date, (b) amounts held for future distribution, (c) amounts representing
certain expenses reimbursable to the Servicer, (d) amounts representing
reimbursements for Periodic Advances made by the Servicer, (e) amounts
representing additional servicing compensation and (f) any other amounts
permitted to be retained by the Servicer pursuant to the applicable Underlying
Servicing Agreement):
(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.
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
39
<PAGE>
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 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
40
<PAGE>
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.
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,
41
<PAGE>
"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 addition, if under the terms of an Underlying Servicing Agreement, the
applicable Servicer is not obligated to make Periodic Advances while a
Mortgage Loan is in liquidation, the Master Servicer, to the extent provided
in the Pooling and Servicing Agreement, may be required to make the Periodic
Advances during the period the Servicer is not required to do so. 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 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
42
<PAGE>
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.
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
43
<PAGE>
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 prior to the
close of the third calendar year following the year the Trust Estate acquired
such property (or such shorter period as provided in the applicable Underlying
Servicing Agreement) 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 applicable 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 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
44
<PAGE>
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.
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
45
<PAGE>
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.
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.
46
<PAGE>
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.
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
47
<PAGE>
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.
Notwithstanding the preceding paragraph, with respect to any Mortgage which
has been recorded in the name of Mortgage Electronic Registration Systems,
Inc. ("MERS") or its designee, no mortgage assignment in favor of the Trustee
will be required to be prepared or delivered. Instead, the Trustee and the
applicable Servicer will be required to take all actions as are necessary to
cause the applicable Trust Estate to be shown as the owner of the related
Mortgage Loan on the records of MERS for purposes of the system of recording
transfers of beneficial ownership of mortgages maintained by MERS.
The Trustee or custodian will hold all Mortgage Loan documents delivered to
it in trust for the benefit of Certificateholders of the related Series and
will review such documents within 180 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 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
48
<PAGE>
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 (i)
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, up to the limit specified in such Pooling and Servicing Agreement
and (ii) any Mortgage Loan as to which the originator of such Mortgage Loan
breached a representation or warranty to Norwest Mortgage regarding the
characteristics of such Mortgage Loan, 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;
49
<PAGE>
(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;
(xiii) the amount of realized losses as a result of bankruptcy or the
liquidation of REO Property; and
(xiv) the amount of the remaining Special Hazard Loss Amount, Fraud Loss
Amount and Bankruptcy Loss Amount as of the close of business on such
Distribution Date.
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--Federal Income Tax Consequences for
REMIC Certificates--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).
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
50
<PAGE>
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 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.
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.
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.
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
51
<PAGE>
Voting Interests evidenced by the Certificates of each Class or Subclass
affected thereby, for the purpose of adding any provisions 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
52
<PAGE>
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.
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.
53
<PAGE>
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 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.
54
<PAGE>
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 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
55
<PAGE>
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 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.
56
<PAGE>
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 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.
The Resource Conservation and Recovery Act, as amended ("RCRA"), contains a
similar secured-creditor exemption for those lenders who hold a security
interest in a petroleum underground storage tank ("UST") or in real estate
containing a UST, or that acquire title to a petroleum UST or facility or
property on which such a UST is located. As under CERCLA, a lender may lose
its secured-creditor exemption and be held liable under RCRA as a UST owner or
operator if such lender or its employees or agents participate in the
management of the UST. In addition, if the lender takes title to or possession
of the UST or the real estate containing the UST, under certain circumstances
the secured-creditor exemption may be deemed to be unavailable.
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.
Court decisions have taken varying views of the scope of the secured-
creditor exemption, leading to administrative and legislative efforts to
provide guidance to lenders on the scope of activities that would trigger
CERCLA and/or RCRA liability. Until recently, these efforts have failed to
provide substantial guidance.
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 under both CERCLA and RCRA. The Asset
Conservation Act more explicitly defined the kinds of "participation in
management" that would trigger liability under CERCLA and specified certain
activities that would not constitute
57
<PAGE>
"participation in management" or otherwise result in a forfeiture of the
secured-creditor exemption prior to foreclosure or during a workout period.
The Asset Conservation Act also clarified the extent of protection against
liability under CERCLA in the event of foreclosure and authorized certain
regulatory clarifications of the scope of the secured-creditor exemption for
purposes of RCRA, similar to the statutory protections under CERCLA. 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.
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
Mortgage Loan Programs--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 Freddie Mac 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:
58
<PAGE>
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 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
59
<PAGE>
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.
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 real 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)(4)(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)(4)(A), payments of
principal and interest on the Mortgage Loans that are reinvested pending
60
<PAGE>
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. Regular
Certificates will represent
"qualified mortgages," within the meaning of Code Section 860G(a)(3), for
other REMICs and "permitted assets," within the meaning of Code Section
860L(c), for financial asset securitization investment trusts. REMIC
Certificates held by a regulated investment company will not constitute
"GOVERNMENT SECURITIES" within the meaning of Code Section 851(b)(3)(A)(i).
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 minimis 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
61
<PAGE>
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 not held beyond the close of the third calendar year
following the year in which such property is acquired with an extension that
may be granted by the Internal Revenue Service.
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
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
62
<PAGE>
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 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
63
<PAGE>
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 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
64
<PAGE>
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."
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
65
<PAGE>
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
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. Final Treasury Regulations issued under Code Section
171 do not by their terms apply to prepayable debt instruments such as the
Regular
66
<PAGE>
Certificates. However, 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.
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
67
<PAGE>
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 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 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, mid-
term or short-term depending on whether the Regular Certificate has been held
for the related capital gain holding period. 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). Generally, short-term capital gains of
certain non-corporate taxpayers are subject to the same tax rate as the
ordinary income of such taxpayers (39.6%) for property held for not more than
one year; mid-term capital gains of such taxpayers are subject to a maximum
tax rate of 28% for property held for more than one year but not more than 18
months; and long-term capital gains of such taxpayers are subject to a maximum
tax rate of 20% for property held for more than 18 months. 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
68
<PAGE>
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 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 Certificates.
When there is more than one Class of Regular Certificates that distribute
principal 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 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 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
69
<PAGE>
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.
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 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
70
<PAGE>
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 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
71
<PAGE>
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 taxable years beginning on or after January 1, 1998, if an "electing
large partnership" holds a Residual Certificate, all interests in the electing
large partnership are treated as held by Disqualified Organizations for
purposes of the tax imposed upon a Pass-Through Entity by Section 860E(c) of
the Code. An exception to this tax, otherwise available to a Pass-Through
Entity that is furnished certain affidavits by record holders of interests in
the entity and that does not know such affidavits are false, is not available
to an electing large partnership.
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
unrelated business income imposed by Code Section 511, (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, and (iii) an "ELECTING LARGE PARTNERSHIP" means any
partnership having more than 100 members during the preceding tax year (other
than certain service partnerships and commodity pools), which elect to apply
simplified reporting provisions under the Code.
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
72
<PAGE>
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.
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 (except to the extent provided in applicable Treasury regulations)
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
court within the United States is able to exercise primary supervision over
the administration of such trust, and one or more such U.S. Persons have the
authority to control all substantial decisions of such trust (or, to the
extent provided in applicable Treasury regulations, certain trusts in
existence on August 20, 1996 which are eligible to elect to be treated as U.S.
Persons.
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 "--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
73
<PAGE>
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 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 not exceeding the close of the third
calendar year after the year in which the REMIC Pool acquired such property,
with a possible extension. 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
74
<PAGE>
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.
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 $124,500 for 1998 ($62,250 in
the case of a married individual filing a separate return) (subject to
adjustment for inflation for each year thereafter), 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"
75
<PAGE>
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.
The IRS recently issued final regulations (the "NEW REGULATIONS") which
would provide alternative methods of satisfying the beneficial ownership
certification requirement described above. The New Regulations are effective
January 1, 2000, although valid withholding certificates that are held on
December 31, 1999, remain valid until the earlier of December 31, 2000 or the
due date of expiration of the certificate under the rules as currently in
effect. The New Regulations would require, in the case of Regular Certificates
held by a foreign partnership, that (x) the certification described above be
provided by the partners rather than by the foreign partnership and (y) the
partnership provide certain information, including a United States taxpayer
identification number. A look-through rule would apply in the case of tiered
partnerships. Non-U.S. Persons should consult their own tax advisors
concerning the application of the certification requirements in the New
Regulations.
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 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 "--Taxation of Residual Certificates--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. The New Regulations change certain of the rules
relating to certain presumptions currently available relating to information
reporting and backup withholding. Non-U.S. Persons are urged to contact their
own tax advisors regarding the application to them of backup withholding and
information reporting.
76
<PAGE>
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). 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 $124,500 for 1998 ($62,250 in the case of a married
individual filing a separate return) (in each case, as adjusted for inflation
for each year thereafter), 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
77
<PAGE>
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)(4)(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).
4. A Certificate owned by a "financial asset securitization investment
trust" within the meaning of Code Section 860L(c) will be considered to
represent "permitted assets" within the meaning of Code Section 860L(c) to
the extent that the assets of the Trust Estate consist of "debt
instruments" or other permitted assets within the meaning of Code Section
860L(c).
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.
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--
Treatment of Certain Items of REMIC Income and Expense--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
78
<PAGE>
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 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 above with respect to market
79
<PAGE>
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. Capital
gains of certain noncorporate taxpayers generally are subject to a lower
maximum tax rate (28%) than ordinary income of such taxpayers (39.6%) for
property held for more than one year but not more than 18 months, and a still
lower maximum tax rate (20%) for property held for more than 18 months. 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 "--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
"--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 Stripped
Certificate generally will be entitled to a deduction each year in respect of
the servicing fees, as described above under "--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.
80
<PAGE>
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)(4)(A), "obligation[s] . . . principally secured by an
interest in real property" within the meaning of Code Section 860G(a)(3)(A),
"loans . . . secured by an interest in real property" within the meaning of
Code Section 7701(a)(19)(C)(v) and "permitted assets" within the meaning of
Code Section 860L(c), 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 "--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 Regular Certificates." However, with the apparent
exception of a Stripped Certificate qualifying as a market discount obligation
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
81
<PAGE>
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 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 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.
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
above) 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
82
<PAGE>
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
Non-U.S. 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 Non-U.S. 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 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
83
<PAGE>
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;
(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
IBCA, Inc. ("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
84
<PAGE>
(6) The Plan investing in the Certificates is an "accredited investor" as
defined in Rule 501(a)(1) of Regulation D of the Commission under the
Securities Act.
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.
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.
85
<PAGE>
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.
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, as amended
("SMMEA"), so long as (i) they are rated in one of the two highest rating
categories by at least one Rating Agency, and (ii) are part of a Series
representing interests in a Trust Estate consisting of Mortgage Loans
originated by certain types of originators specified in SMMEA. 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 depository
institutions, insurance companies and pension funds) created pursuant to or
existing under the laws of the United States or of any state (including the
District of Columbia and Puerto Rico) whose authorized investments are subject
to state regulation, to the same extent 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,
86
<PAGE>
on or before the October 3, 1991 cut-off for such enactments, limiting to
varying extents the ability of certain entities (in particular, 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 in mortgage
related securities without limitation as to the percentage of their assets
represented thereby, federal credit unions may invest in such securities, and
national banks may purchase such 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, the Office of the Comptroller of the Currency (the "OCC") has
amended 12 C.F.R. Part 1 to authorize national banks to purchase and sell for
their own account, without limitation as to a percentage of the bank's capital
and surplus (but subject to compliance with certain general standards in 12
C.F.R. (S) 1.5 concerning "safety and soundness" and retention of credit
information), certain "Type IV securities," defined in 12 C.F.R. (S) 1.2(1) to
include certain "residential mortgage-related securities." As so defined,
"residential mortgage-related security" means, in relevant part, "mortgage
related security" within the meaning of SMMEA. The National Credit Union
Administration (the "NCUA") has adopted rules, codified at 12 C.F.R. Part 703,
which permit federal credit unions to invest in "mortgage related securities"
under certain limited circumstances, other than stripped mortgage related
securities, residual interests in mortgage related securities, and commercial
mortgage related securities, unless the credit union has obtained written
approval from the NCUA to participate in the "investment pilot program"
described in 12 C.F.R. (S) 703.140.
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 "1992 Policy
Statement") of the Federal Financial Institutions Examination Council (the
"FFIEC"). The 1992 Policy Statement, which has been adopted by the Board of
Governors of the Federal Reserve System, the Federal Deposit Insurance
Corporation, the OCC 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. Effective May 26, 1998 (October 1, 1998
in the case of federal credit unions), the 1992 Policy Statement has been
superseded by the FFIEC's "Supervisory Policy Statement on Investment
Securities and End-User Derivatives Activities" (the "1998 STATEMENT"). The
1998 Statement deletes the specific "high-risk mortgage securities" tests, and
substitutes general guidelines which depository institutions must follow in
managing risks (including market, credit, liquidity, operational
(transaction), and legal risks) applicable to all securities (including
mortgage pass-through securities and mortgage-derivative products) used for
investment purposes.
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.
87
<PAGE>
Accordingly, all investors whose investment activities are subject to legal
investment laws and regulations, regulatory capital requirements or review by
regulatory authorities should consult with their legal advisors in determining
whether and to what extent the Certificates of any Class constitute legal
investments or are subject to investment, capital or other restrictions and,
if applicable, whether SMMEA has been overridden in any jurisdiction relevant
to such investor.
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
88
<PAGE>
distribution of such Certificates may be deemed to be an "underwriter" within
the meaning of the Securities Act, and any 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.
89
<PAGE>
INDEX OF SIGNIFICANT DEFINITIONS
TERM PAGE
- ---- ----
1986 Act............................................................. 67
1998 Statement....................................................... 87
Accrual Certificates................................................. 29
Additional Collateral................................................ 16
Advances............................................................. 42
ALTA................................................................. 22
Asset Conservation Act............................................... 57
Balloon Loan......................................................... 16
Balloon Period....................................................... 16
Bankruptcy Code...................................................... 55
Bankruptcy Loss...................................................... 31
Bankruptcy Loss Amount............................................... 31
Beneficial Owner..................................................... 26
Book-Entry Certificates.............................................. 9
Buy-Down Fund........................................................ 16
Buy-Down Loans....................................................... 16
Capitol Life......................................................... 17
Cede................................................................. 26
CERCLA............................................................... 57
Certificate Account.................................................. 38
Certificateholder.................................................... 26
Certificates......................................................... Cover
Class................................................................ Cover
Cleanup Costs........................................................ 57
Code................................................................. 10
Commission........................................................... 2
Companion Class...................................................... 32
condotels............................................................ 13
cooperatives......................................................... 13
Contract Underwriters................................................ 18
Correspondents....................................................... 18
Credit Score......................................................... 19
Cut-Off-Date......................................................... 30
DCR.................................................................. 94
Deferred Interest.................................................... 15
Definitive Certificates.............................................. 9
Delegated Underwriting............................................... 19
Department........................................................... 84
Depository........................................................... 38
Detailed Information................................................. 2
Disqualified Organization............................................ 72
Distribution Date.................................................... 8
DTC.................................................................. 9
DTC Participants..................................................... 27
Due Date............................................................. 14
Due on Sale.......................................................... 58
EDGAR................................................................ 2
Eligible Custodial Account........................................... 39
Eligible Investments................................................. 40
ERISA................................................................ 83
Excess Bankruptcy Losses............................................. 31
Excess Fraud Losses.................................................. 31
Excess Special Hazard Losses......................................... 31
Exchange Act......................................................... 3
Fannie Mae........................................................... 17
FDIC................................................................. 38
FFIEC................................................................ 87
FHLBB................................................................ 58
FICO Score........................................................... 19
Fitch................................................................ 84
Fixed Retained Yield................................................. 29
Foreign National Loans............................................... 23
Fraud Loss........................................................... 31
Fraud Loss Amount.................................................... 31
Freddie Mac.......................................................... 17
Garn Act............................................................. 58
GEMICO............................................................... 23
Ginnie Mae........................................................... 17
Government Securities................................................ 61
Graduated Pay Mortgage Loans......................................... 15
Growing Equity Mortgage Loans........................................ 15
Holder............................................................... 26
Indirect DTC Participants............................................ 27
IRA.................................................................. 83
Joint Ventures....................................................... 18
Liquidation Proceeds................................................. 39
Loan Stores.......................................................... 18
Loan-to-Value Ratio.................................................. 21
Mark to Market Regulations........................................... 74
Master Servicer...................................................... Cover
Master Servicing Fee................................................. 29
MERS................................................................. 48
Moody's.............................................................. 84
Mortgage Interest Rate............................................... 29
Mortgage Loans....................................................... Cover
Mortgage Notes....................................................... 13
Mortgaged Properties................................................. 13
Mortgages............................................................ 13
NCUA................................................................. 87
Net Foreclosure Profits.............................................. 29
Net Mortgage Interest Rate........................................... 29
New Regulations...................................................... 76
No Ratio............................................................. 23
No Ratio Loans....................................................... 23
Non-Pro Rata Certificate............................................. 63
Non-U.S. Person...................................................... 76
Norwest Bank......................................................... Cover
Norwest Corporation.................................................. 6
90
<PAGE>
<TABLE>
<CAPTION>
TERM PAGE
- ---- -----
<S> <C>
Norwest Funding.................. 17
Norwest Mortgage................. Cover
Norwest Mortgage Sale Agreement.. 47
OCC.............................. 87
OID Regulations.................. 63
Other Advances................... 41
OTS.............................. 58
PAC.............................. 32
PAC I............................ 32
PAC II........................... 32
Partial Liquidation Proceeds..... 28
Pass-Through Rate................ 7
Pass-Through Entity.............. 72
Paying Agent..................... 41
PCBs............................. 56
Percentage Interest.............. 28
Periodic Advances................ 9
PHMC............................. 17
PHMSC............................ 17
Plans............................ 83
Pledged Asset Mortgage Loans..... 16
Pool Distribution Amount......... 28
Pool Insurers.................... 23
Pooling and Servicing Agreement.. 25
Prepayment Assumption............ 63
PTE 83-1......................... 85
Rating Agency.................... 10
RCRA............................. 57
Record Date...................... 8
Regular Certificateholder........ 62
Regular Certificates............. 26
Regulations...................... 84
Relief Act....................... 56
REMIC............................ 2
REMIC Certificates............... 60
REMIC Pool....................... 60
REMIC Regulations................ 60
Remittance Date.................. 39
Reserve Fund..................... 34
Residual Certificates............ 26
Residual Holders................. 68
Restricted Group................. 85
REO Property..................... 50
Rules............................ 27
</TABLE>
<TABLE>
<CAPTION>
TERM PAGE
- ---- -----
<S> <C>
S&P.................................................................. 84
SBJPA of 1996........................................................ 61
Scheduled Principal Balance.......................................... 49
Securities Act....................................................... 2
Seller............................................................... Cover
Senior Certificates.................................................. Cover
Series............................................................... Cover
Servicer............................................................. Cover
Servicer Custodial Account........................................... 38
Servicing Account.................................................... 42
Servicing Fee........................................................ 29
SMMEA................................................................ 86
Special Hazard Loss.................................................. 30
Special Hazard Loss Amounts.......................................... 31
Standard Hazard Insurance Policy..................................... 44
Startup Day.......................................................... 61
Stripped Certificateholder........................................... 81
Stripped Certificates................................................ 77
Subclass............................................................. Cover
Subordinated Certificates............................................ Cover
Subsidy Account...................................................... 15
Subsidy Loans........................................................ 15
Subsidy Payments..................................................... 15
Superliens........................................................... 56
TAC.................................................................. 32
Tiered Payment Mortgage Loans........................................ 15
Title Option Plus.................................................... 22
Title V.............................................................. 59
T.O.P. Loans......................................................... 22
Treasury Regulations................................................. 48
Trust Estate......................................................... Cover
Trustee.............................................................. 52
Trustee Fee.......................................................... 29
U.S. Person.......................................................... 73
UCC.................................................................. 54
UGRIC................................................................ 23
Underlying Servicing Agreements...................................... 6
Underwriter's Exemption.............................................. 84
UST.................................................................. 57
Voting Interests..................................................... 50
Window Period........................................................ 58
Window Period Loans.................................................. 58
Window Period States................................................. 58
</TABLE>
91
<PAGE>
================================================================================
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY IN-
FORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS SUP-
PLEMENT OR THE ACCOMPANYING 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. NEITHER THIS PROSPECTUS SUPPLEMENT NOR THE AC-
COMPANYING PROSPECTUS CONSTITUTES AN OFFER TO SELL OR A SOLICITATION OF AN OF-
FER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO ANY PER-
SON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER IN SUCH JURISDICTION. NEITHER THE
DELIVERY OF THIS PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT
THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF
OR THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE SELLER OR SINCE SUCH
DATE.
------------------
INDEX
PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Table of Contents.......................................................... S-4
Summary Information........................................................ S-5
Risk Factors............................................................... S-18
Description of the Certificates............................................ S-21
Description of the Mortgage Loans.......................................... S-41
Prepayment and Yield Considerations........................................ S-54
Pooling and Servicing Agreement............................................ S-67
Servicing of the Mortgage Loans............................................ S-68
Material Federal Income Tax Consequences................................... S-71
ERISA Considerations....................................................... S-73
Legal Investment........................................................... S-74
Secondary Market........................................................... S-74
Underwriting............................................................... S-75
Legal Matters.............................................................. S-75
Use of Proceeds............................................................ S-75
Ratings.................................................................... S-75
Index of Significant Prospectus Supplement Definitions..................... S-77
</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.................................................. 18
Description of the Certificates............................................. 25
Prepayment and Yield Considerations......................................... 34
Servicing of the Mortgage Loans............................................. 37
Certain Matters Regarding the Master Servicer............................... 46
The Pooling and Servicing Agreement......................................... 47
Certain Legal Aspects of the Mortgage Loans................................. 53
Material Federal Income Tax Consequences.................................... 60
ERISA Considerations........................................................ 83
Legal Investment............................................................ 86
Plan of Distribution........................................................ 88
Use of Proceeds............................................................. 89
Legal Matters............................................................... 89
Rating...................................................................... 89
Index of Significant Definitions............................................ 90
</TABLE>
================================================================================
================================================================================
[LOGO OF NORWEST APPEARS HERE]
$234,707,000
(APPROXIMATE)
NORWEST INTEGRATED STRUCTURED
ASSETS, INC.
[LOGO OF NISTAR/SM/ APPEARS HERE]
SELLER
MORTGAGE ASSET-BACKED
PASS-THROUGH CERTIFICATES,
SERIES 1998-1
------------------
PROSPECTUS SUPPLEMENT
------------------
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
MAY 26, 1998
================================================================================
