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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 12, 1997
REGISTRATION NO. 333-_____
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------
UNION PLANTERS MORTGAGE
FINANCE CORP.
(Registrant)
(Exact name of registrant as specified in its charter)
DELAWARE
(State of Incorporation)
-----------
Applied For
(I.R.S. Employer Identification Number)
7130 GOODLETT FARMS PARKWAY
CORDOVA, TENNESSEE 38018
(901) 580-6000
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
----------------------------
JAMES K. PLUNKETT Copy to:
VICE PRESIDENT AND SECRETARY KEVIN J. BUCKLEY, ESQUIRE
7130 GOODLETT FARMS PARKWAY HUNTON & WILLIAMS
CORDOVA, TENNESSEE 38018 RIVERFRONT PLAZA, EAST TOWER
(901) 580-6543 951 EAST BYRD STREET
(901) 580-6923 (FAX) RICHMOND, VIRGINIA 23219-4074
(Name, address, including zip code and telephone (804) 788-8616
number, including area code, of agent for service) (804) 788-8218 (FAX)
-----------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
FROM TIME TO TIME AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [X]
CALCULATION OF REGISTRATION FEE
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PROPOSED PROPOSED
MAXIMUM MAXIMUM
TITLE OF SECURITIES AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF
BEING REGISTERED REGISTERED(1) PER UNIT(1) OFFERING PRICE(1) REGISTRATION FEE
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Mortgage Pass-Through Certificates $1,000,000 100% $1,000,000 $303.03
and Collateralized Mortgage Bonds
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(1) Estimated solely for calculating the registration fee.
--------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THE REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
- --------------------------------------------------------------------------------
If the only securities being registered on this Form are being offered pursuant
to dividend or interest reinvestment plans, please check the following box. [ ]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ] ______________________
If this form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ______________________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
<PAGE> 2
PROSPECTUS
MORTGAGE PASS-THROUGH CERTIFICATES
COLLATERALIZED MORTGAGE BONDS
(Issuable in Series)
UNION PLANTERS MORTGAGE FINANCE CORP.
Depositor
The Certificates and the Bonds (collectively, the "Securities") offered
hereby and by Supplements to this Prospectus (together, the "Offered
Securities") will be offered from time to time in one or more series (each, a
"Series"). As specified in the related Prospectus Supplement, each Series of
Certificates will represent in the aggregate the entire beneficial ownership
interest in a trust fund (each, a "Trust Fund") consisting of one or more
segregated pools of various types of one- to four-family first lien residential
mortgage loans (the "Mortgage Loans"), mortgage participation interests,
mortgage pass-through certificates, mortgage-backed securities evidencing
interests in or secured by mortgage loans or other similar participations,
certificates or securities ("MBS"), mortgage related securities issued or
guaranteed by the United States, agencies or instrumentalities thereof or
agencies created thereby (the "Agency Securities") or a combination of Mortgage
Loans, MBS and/or Agency Securities (collectively, "Assets"). As specified in
the related Prospectus Supplement, the Bonds of a Series will be issued pursuant
to and secured by an Indenture and will represent indebtedness of the related
Trust Fund. If so specified in the related Prospectus Supplement, the Trust Fund
for a Series of Securities may include letters of credit, insurance policies,
guarantees, reserve funds or other types of credit support, or any combination
thereof (collectively, "Credit Support"), one or more facilities to enhance the
liquidity of the Securities (each, a "Liquidity Facility"), and currency or
interest rate exchange agreements and other financial assets, or any combination
thereof (collectively, "Cash Flow Agreements"). In addition, if so specified in
the related Prospectus Supplement, the Trust Fund will include monies on deposit
in one or more trust accounts to be established with a Trustee, which may
include a Pre-Funding Account, as described herein, which would be used to
purchase additional Assets for the related Trust Fund during the period
specified in the related Prospectus Supplement. See "Description of the Trust
Funds," "Description of the Offered Securities" and "Description of Credit
Support."
Each Series of Securities will consist of one or more classes (each, a
"Class") of Offered Securities that may (i) provide for the accrual of interest
thereon based on fixed, variable or adjustable rates; (ii) be senior or
subordinate to one or more other Classes of Securities in respect of certain
distributions on the Securities; (iii) be entitled to principal distributions
with disproportionately low, nominal or no interest distributions; (iv) be
entitled to interest distributions, with disproportionately low, nominal or no
principal distributions; (v) provide for distributions of accrued interest
thereon commencing only following the occurrence of certain events, such as the
retirement of one or more other Classes of Securities of such Series; (vi)
provide for distributions of principal sequentially, based on specified payment
schedules or other methodologies; and/or (vii) provide for distributions based
on a combination of two or more components thereof with one or more of the
characteristics described in this paragraph, to the extent of the Available
Distribution Amount, in each case as described in the related Prospectus
Supplement. See "Description of the Offered Securities."
Principal of and interest on the Offered Securities will be
distributable monthly, quarterly, semi-annually or at such other intervals and
on the dates specified in the related Prospectus Supplement. Distributions on
the Offered Securities of any Series will be made only from the Assets of the
related Trust Fund. The Assets will be held in trust for the benefit of the
holders of the related Series of Securities pursuant to a Pooling and Servicing
Agreement, a Trust Agreement or an Indenture (each, an "Agreement"), as more
fully described herein and in the Prospectus Supplement.
The yield on each Class of Securities will be affected by, among other
things, the rate of payment of principal (including prepayments, repurchases and
defaults) on the Assets in the related Trust Fund and the timing of receipt of
such payments as described under the caption "Yield Considerations" herein and
in the related Prospectus Supplement. A Trust Fund may be subject to early
termination or one or more Classes of Securities of a Series may be subject to
redemption under the circumstances described herein and in the related
Prospectus Supplement.
One or more elections may be made to treat the related Trust Fund or a
designated portion thereof as one or more "real estate mortgage investment
conduits" (each, a "REMIC") or one or more financial asset securitization
investment trusts (each, a "FASIT") for federal income tax purposes. See also
"Federal Income Tax Consequences" herein.
THE SECURITIES OF A GIVEN SERIES REPRESENT BENEFICIAL INTERESTS IN, OR
OBLIGATIONS OF, THE RELATED TRUST FUND ONLY AND DO NOT REPRESENT INTERESTS IN OR
OBLIGATIONS OF THE DEPOSITOR, ANY MASTER SERVICER, ANY SUB-SERVICER, THE TRUSTEE
OR ANY OF THEIR RESPECTIVE AFFILIATES, EXCEPT TO THE EXTENT DESCRIBED IN THE
RELATED PROSPECTUS SUPPLEMENT. NEITHER THE SECURITIES NOR THE ASSETS ARE INSURED
OR GUARANTEED BY ANY GOVERNMENTAL AGENCY, EXCEPT TO THE LIMITED EXTENT DESCRIBED
IN THE RELATED PROSPECTUS SUPPLEMENT.
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 OR THE RELATED PROSPECTUS SUPPLEMENT.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
PROSPECTIVE INVESTORS IN THE OFFERED SECURITIES SHOULD CONSIDER, AMONG
OTHER THINGS, CERTAIN RISKS SET FORTH UNDER THE CAPTION "RISK FACTORS"
COMMENCING ON PAGE 10 HEREIN AND IN THE RELATED PROSPECTUS SUPPLEMENT BEFORE
PURCHASING ANY OFFERED SECURITY.
Prior to issuance there will have been no market for the Offered
Securities and there can be no assurance that a secondary market for any Offered
Securities will develop or that, if it does develop, it will continue to provide
investors with liquidity of investment. This Prospectus may not be used to
consummate sales of the Offered Securities unless accompanied by the related
Prospectus Supplement.
Offers of the Offered Securities may be made through one or more
different methods, including offerings through Underwriters, as more fully
described under "Plan of Distribution" herein and in the related Prospectus
Supplement.
September 12, 1997
<PAGE> 3
PROSPECTUS SUPPLEMENT
As described herein, each Prospectus Supplement relating to the Offered
Securities will, among other things, set forth, as applicable: (i) a description
of the Class or Classes of Offered Securities, the payment provisions with
respect to such Offered Securities and the Pass-Through Rate, Interest Rate or
method of determining the Pass-Through Rate or Interest Rate with respect to
such Offered Securities; (ii) the aggregate principal amount and distribution
dates relating to such Offered Securities and the final scheduled distribution
dates; (iii) information as to the Assets comprising the Trust Fund, including
the general characteristics of the Assets included therein, including any Credit
Support, Liquidity Facility, or Cash Flow Agreements (with respect to any
Series, the "Trust Assets"); (iv) the circumstances, if any, under which the
Trust Fund may be subject to early termination; (v) additional information with
respect to the method of distribution of such Offered Securities; (vi) whether
one or more REMIC or FASIT elections will be made and designation of the various
interests thereof; (vii) the aggregate original percentage ownership interest in
the Trust Fund to be evidenced by each Class of Securities and the original
Security Principal Balance of each Class of Securities; (viii) information as to
any Master Servicer, any Sub-Servicer and the Trustee; (ix) the percentage of
Assets comprised of Mortgage Loans, MBS and/or Agency Securities; (x)
information as to the nature and extent of subordination with respect to any
Class of Offered Securities that is subordinate in right of payment to any other
Class and (xi) whether such Offered Securities will be initially issued in
definitive or book-entry form.
AVAILABLE INFORMATION
The Depositor has filed with the Securities and Exchange Commission
(the "Commission") a Registration Statement (of which this Prospectus forms a
part) under the Securities Act of 1933, as amended, with respect to the Offered
Securities. This Prospectus and the Prospectus Supplement relating to each
Series of Offered Securities contain summaries of the material terms of the
documents referred to herein and therein, but do not contain all of the
information set forth in the Registration Statement pursuant to the rules and
regulations of the Commission. For further information, reference is made to
such Registration Statement and the exhibits thereto. Such Registration
Statement and exhibits can be inspected and copied at prescribed rates at the
public reference facilities maintained by the Commission at its Public Reference
Section, 450 Fifth Street, N.W., Washington, D.C. 20549, and at its Regional
Offices located as follows: Midwest Regional Office, Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661-2511; and Northeast Regional
Office, 7 World Trade Center, Suite 1300, New York, New York 10048. In addition,
the Commission maintains a Web site at http://www.sec.gov that contains reports,
proxy and information statements and other information regarding registrants,
including the Depositor, that file electronically with the Commission.
No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus and any Prospectus
Supplement with respect hereto and, if given or made, such information or
representations must not be relied upon. This Prospectus and any Prospectus
Supplement with respect hereto do not constitute an offer to sell or a
solicitation of an offer to buy any securities other than the Offered Securities
or an offer of the Offered Securities to any person in any state or other
jurisdiction in which such offer would be unlawful. The delivery of this
Prospectus at any time does not imply that information herein is correct as of
any time subsequent to its date; however, if any material change occurs while
this Prospectus is required by law to be delivered, this Prospectus will be
amended or supplemented accordingly.
The Depositor will be required to file or cause to be filed periodic
reports with the Commission with respect to each Trust Fund in compliance with
the requirements of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and the rules and regulations of the Commission thereunder. The
Depositor does not intend to file periodic reports under the Exchange Act
following the expiration of the reporting period prescribed by Rule 15d-1 of
Regulation 15D under the Exchange Act. If the Prospectus Supplement for a Series
of Securities provides that one or more Classes of Securities are to be issued
in book-entry form, then unless and until definitive securities are issued, such
reports will be sent on behalf of the related Trust Fund to Cede & Co. ("Cede"),
as nominee of The Depository Trust Company ("DTC") and registered holder of the
Offered Securities, pursuant to the applicable
ii
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Agreement. Such reports may be available to holders of the Offered Securities
(the "Securityholders") upon request to their respective DTC participants. See
"Description of the Offered Securities -- Reports to Securityholders" and
"Description of the Agreements -- Evidence as to Compliance."
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
All documents and reports filed or caused to be filed with the
Commission by the Depositor with respect to a Trust Fund pursuant to Section
13(a), 13(c), 14 or 15(d) of the Exchange Act, after the date of this Prospectus
and prior to the termination of any offering of the Securities issued by such
Trust Fund, shall be deemed to be incorporated by reference into this Prospectus
and to be a part of this Prospectus from the date of such documents. Any
statement contained in a document incorporated or deemed to be incorporated by
reference in any Prospectus Supplement or in this Prospectus shall be deemed to
be modified or superseded for purposes of such Prospectus Supplement and this
Prospectus to the extent that a statement contained in any Prospectus Supplement
or in this Prospectus modifies or supersedes such statement. Any statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute part of any Prospectus Supplement. Upon request, the Depositor
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 Offered Securities, 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 Offered Securities, other than the
exhibits to such documents (unless such exhibits are specifically incorporated
by reference in such documents). Requests to the Depositor should be directed to
Union Planters Mortgage Finance Corp., 7130 Goodlett Farms Parkway, Cordova,
Tennessee 38018, Attention: President, or by telephone at (901) 580-6000.
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Table of Contents
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PROSPECTUS SUPPLEMENT.................................................................................. ii
AVAILABLE INFORMATION.................................................................................. ii
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE......................................................iii
SUMMARY OF PROSPECTUS.................................................................................. 1
RISK FACTORS........................................................................................... 10
DESCRIPTION OF THE TRUST FUNDS......................................................................... 15
Assets........................................................................................ 15
Mortgage Loans................................................................................ 16
MBS........................................................................................... 21
Agency Securities............................................................................. 21
Accounts...................................................................................... 27
Credit Support................................................................................ 27
Liquidity Facilities.......................................................................... 27
Cash Flow Agreements.......................................................................... 27
Pre-Funding................................................................................... 28
YIELD CONSIDERATIONS................................................................................... 28
General....................................................................................... 28
Pass-Through Rate and Interest Rate........................................................... 29
Timing of Payment of Interest................................................................. 29
Payments of Principal; Prepayments............................................................ 29
Prepayments -- Maturity and Weighted Average Life............................................. 30
Other Factors Affecting Weighted Average Life................................................. 31
THE DEPOSITOR.......................................................................................... 32
DESCRIPTION OF THE OFFERED SECURITIES.................................................................. 33
General....................................................................................... 33
Distributions................................................................................. 34
Available Distribution Amount................................................................. 34
Distributions of Interest..................................................................... 35
Distributions of Principal.................................................................... 36
Components.................................................................................... 36
Allocation of Losses and Shortfalls........................................................... 36
Advances in Respect of Delinquencies.......................................................... 36
Reports to Securityholders.................................................................... 37
Termination................................................................................... 39
Book-Entry Registration....................................................................... 40
DESCRIPTION OF THE AGREEMENTS.......................................................................... 41
Assignment of Assets; Repurchases............................................................. 42
Representations and Warranties; Repurchases................................................... 43
Security Account and Other Collection Accounts................................................ 44
Collection and Other Servicing Procedures..................................................... 47
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Table of Contents (cont'd)
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Sub-Servicers................................................................................. 49
Realization Upon Defaulted Mortgage Loans..................................................... 50
Fidelity Bonds and Errors and Omissions Insurance............................................. 52
Due-on-Sale Provisions........................................................................ 52
Retained Interest; Servicing Compensation and Payment of Expenses............................. 52
Evidence as to Compliance..................................................................... 53
Certain Matters Regarding a Master Servicer and the Depositor................................. 53
Special Servicers............................................................................. 54
Events of Default............................................................................. 54
Rights Upon Event of Default.................................................................. 55
Amendment..................................................................................... 55
The Trustee................................................................................... 56
Duties of the Trustee......................................................................... 56
Certain Matters Regarding the Trustee......................................................... 56
Resignation and Removal of the Trustee........................................................ 56
Certain Terms of the Indenture................................................................ 57
DESCRIPTION OF CREDIT SUPPORT.......................................................................... 59
General....................................................................................... 59
Maintenance of Credit Support................................................................. 60
Reduction or Substitution of Credit Support................................................... 60
Subordinate Securities........................................................................ 61
Cross-Support Provisions...................................................................... 61
Insurance or Guarantees with Respect to the Assets............................................ 61
Letter of Credit.............................................................................. 61
Insurance Policies and Surety Bonds........................................................... 61
Special Hazard Insurance Policies............................................................. 61
Mortgagor Bankruptcy Bond..................................................................... 62
Reserve Funds................................................................................. 62
Overcollateralization......................................................................... 62
Credit Support with respect to MBS............................................................ 63
INSURANCE POLICIES ON THE MORTGAGE LOANS............................................................... 63
Primary Mortgage Guaranty Insurance Policies.................................................. 63
Hazard Insurance Policies..................................................................... 64
FHA Mortgage Insurance........................................................................ 65
VA Mortgage Guaranty.......................................................................... 65
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS................................................................ 66
General....................................................................................... 66
Types of Mortgage Instruments................................................................. 66
Interest in Real Property..................................................................... 66
Foreclosure................................................................................... 67
Anti-Deficiency Legislation and Other Limitations on Lenders.................................. 70
Environmental Legislation..................................................................... 71
Due-on-Sale Clauses........................................................................... 72
Prepayment Charges............................................................................ 72
Subordinate Financing......................................................................... 72
Applicability of Usury Laws................................................................... 73
Alternative Mortgage Instruments.............................................................. 73
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Table of Contents (cont'd)
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Soldiers' and Sailors' Civil Relief Act of 1940............................................... 74
Forfeitures in Drug and RICO Proceedings...................................................... 74
Other Legal Considerations.................................................................... 74
USE OF PROCEEDS........................................................................................ 75
FEDERAL INCOME TAX CONSEQUENCES........................................................................ 75
General ...................................................................................... 75
REMIC Securities ............................................................................. 76
Non-REMIC Certificates........................................................................100
Non-REMIC Collateralized Mortgage Bonds.......................................................106
Partnership Trust Funds.......................................................................107
FASIT Securities..............................................................................112
STATE TAX CONSIDERATIONS...............................................................................116
ERISA CONSIDERATIONS...................................................................................116
LEGAL INVESTMENT.......................................................................................117
PLAN OF DISTRIBUTION...................................................................................118
LEGAL MATTERS..........................................................................................119
FINANCIAL INFORMATION..................................................................................119
RATINGS................................................................................................119
GLOSSARY...............................................................................................120
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SUMMARY OF PROSPECTUS
The following summary of certain pertinent information is qualified in
its entirety by reference to the more detailed information appearing elsewhere
in this Prospectus and in the Prospectus Supplement. Capitalized Terms used
herein have the meanings assigned thereto in the Glossary included at the end of
this Prospectus.
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Title of Securities.............. Mortgage Pass-Through Certificates, issuable
in Series (the "Certificates") and
Collateralized Mortgage Bonds, issuable in
Series (the "Bonds" and together with the
Certificates, the "Securities").
Depositor........................ Union Planters Mortgage Finance Corp., a
Delaware corporation, and limited-purpose
wholly-owned financing subsidiary of Union
Planters National Bank. See "The Depositor."
Master Servicer.................. Union Planters National Bank (in such
capacity, the "Master Servicer"), a
wholly-owned subsidiary of Union Planters
Corporation, or such other party specified
in the related Prospectus Supplement.
The Trust Assets................. Each Series of Certificates will represent
in the aggregate the entire beneficial
ownership interest in a Trust Fund. Each
Series of Bonds will represent indebtedness
of either the Depositor or the Trust Fund
and will be secured by a security interest
in the Assets of the Trust Fund. A Trust
Fund will consist primarily of any of the
following assets:
(a) Mortgage Loans......... The Mortgage Loans with respect to each
Series of Securities will consist of a pool
or pools of one- to four-family first lien
residential loans (collectively, the
"Mortgage Loans"). The Mortgage Loans will
not be guaranteed or insured by the
Depositor or any of its affiliates or any
other person. If provided in the Prospectus
Supplement, the Trust Fund may include
Mortgage Loans guaranteed or insured by a
governmental agency or instrumentality,
including the Federal Housing Administration
("FHA"), a division of the United States
Department of Housing and Urban Development
("HUD") or the United States Department of
Veterans Affairs ("VA"). The Mortgage Loans
will be secured by first liens on one- to
four-family residential properties. The
Prospectus Supplement will indicate the
geographic dispersion of the Mortgaged
Properties with respect to the Mortgage
Loans of the related Series. All Mortgage
Loans will have been originated by persons
other than the Depositor, and all Assets,
except for Assets purchased with Pre-Funded
Amounts, will have been purchased, either
directly or indirectly, by the Depositor on
or before the date of issuance of the
related Series of Securities.
Mortgage Loans will provide for accrual of
interest thereon at an interest rate (a
"Mortgage Rate") that is either (i) fixed
over its term, (ii) that adjusts from time
to time, or (iii) that
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may be converted from an adjustable to a
fixed Mortgage Rate, or from a fixed to an
adjustable Mortgage Rate, from time to time
at the related Mortgagor's election.
Adjustable Mortgage Rates may be based on
one or more indices. Mortgage Loans will
provide for either (i) scheduled payments to
maturity, or (ii) payments that adjust from
time to time to accommodate changes in the
Mortgage Rate or to reflect the occurrence
of certain events, and (iii) may provide for
negative amortization or accelerated
amortization. Mortgage Loans will either (i)
be fully amortizing or (ii) require a
balloon payment due on its stated maturity
date. Some Mortgage Loans may contain
prohibitions on prepayment or require
payment of a premium or a yield maintenance
penalty in connection with a prepayment. The
Mortgage Loans will provide for payments of
principal, interest or both, on due dates
that occur monthly, quarterly, semi-annually
or at another interval. The Prospectus
Supplement will provide more detail
regarding the characteristics of the
Mortgage Loans of any Series. See
"Description of the Trust Funds -- Assets."
As specified in the related Prospectus
Supplement, certain Mortgage Loans included
in the Trust Fund may be one or more months
delinquent with regard to payment of
principal and interest at the time of their
deposit into a Trust Fund. The FHA Loans and
VA Loans with respect to any Series, or any
Mortgage Loans with respect to a Series of
Bonds, may include (i) Mortgage Loans that,
as of any date of determination, have more
than 12 scheduled payments of principal and
interest past due under the terms of the
related Mortgage Note (each, a
"Non-Performing Mortgage Loan"), (ii)
Mortgage Loans that, as of any date of
determination have more than three but less
than 12 scheduled payments of principal and
interest past due under the terms of the
related Mortgage Note (each, a
"Sub-Performing Mortgage Loan"), and (iii)
Mortgage Loans that have had more than three
scheduled payments of principal and interest
past due under the terms of the related
Mortgage Note one or more times during the
term of the related Mortgage Loan, but at
the related Cut-off Date for the Series are
current in payment (each, a "Reinstated
Mortgage Loan").
The Mortgage Loans with respect to any
Series may be guaranteed or insured with
respect to payment of interest and/or
principal by the United States, agencies or
instrumentalities thereof or created
thereby, state or local governments,
agencies or instrumentalities, or private
insurance providers. See "Insurance Policies
on the Mortgage Loans -- FHA Mortgage
Insurance" and "-- VA Mortgage Guaranty"
herein.
(b) MBS.................... The MBS included in a Trust Fund will
consist of privately issued mortgage
participation interests, mortgage
pass-through certificates or other
mortgage-backed securities evidencing
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interests in or secured by Mortgage Loans or
other similar participations, certificates
or securities that (a) have been previously
offered and distributed to the public
pursuant to an effective registration
statement; (b) have been previously
purchased in a transaction not involving any
public offering from an entity that is not
an affiliate of the issuer of such
securities at the time of sale (nor an
affiliate thereof at any time during the
three preceding months); provided, a period
of two years has elapsed since the later of
the date the securities were acquired from
the issuer or an affiliate thereof; or (c)
are otherwise eligible to be included as
collateral in a Trust Fund (collectively,
"MBS").
(c) Agency Securities...... The Trust Fund may include real estate
related government securities, issued or
guaranteed by the United States, agencies or
instrumentalities thereof or agencies
created thereby that provide for payment of
interest and/or principal (collectively,
"Agency Securities"). Agency Securities may
include FNMA Certificates, FHLMC
Certificates, GNMA Certificates, VA Vendee
Mortgage Trust Certificates or other
government securities evidencing interests
in real property.
(d) Accounts............... Each Trust Fund will include one or more
accounts established and maintained on
behalf of the Securityholders into which the
person or persons designated in the related
Prospectus Supplement will, to the extent
described herein and in such Prospectus
Supplement, deposit payments and collections
received or advanced with respect to the
Trust Assets. Such an account may be
maintained as an interest bearing or a
non-interest bearing account, and funds held
therein may be held as cash or invested in
certain short-term, investment grade
obligations, in each case as described in
the related Prospectus Supplement. See
"Description of the Agreements -- Security
Account and Other Collection Accounts."
(e) Credit Support......... If so provided in the related Prospectus
Supplement, partial or full protection
against certain defaults and losses on the
Assets in the related Trust Fund may be
provided to one or more Classes of Offered
Securities in the form of subordination of
one or more other Classes of Securities of
such Series, which other Classes may include
one or more Classes of Offered Securities,
or by one or more other types of credit
support, such as a letter of credit,
insurance policy, guarantee, reserve fund or
another type of credit support, or a
combination thereof (collectively, "Credit
Support"). The amount and types of coverage,
the identification of the entity providing
the coverage and related information with
respect to each type of Credit Support will
be described in the related Prospectus
Supplement. The Prospectus Supplement also
will describe the credit support of any
underlying MBS that are included in the
related Trust Fund. See "Risk
Factors -- Availability of Credit Support does
not eliminate risk of loss on Offered
Securities" and "Description of Credit
Support."
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(f) Liquidity Facilities... If so specified in the related Prospectus
Supplement, the Trust Fund with respect to a
Series of Securities may include one or more
Liquidity Facilities, which may be used by
the Trustee to make any required
distributions of principal of, or interest
on, the Securities of the related Series, to
the extent funds are not otherwise
available. See "Description of the Trust
Funds -- Liquidity Facilities."
(g) Cash Flow Agreements... The Trust Fund may include guaranteed
investment contracts pursuant to which
moneys held in the funds and accounts
established for the related Series will be
invested at a specified rate. The Trust Fund
may also include certain other agreements,
such as interest rate exchange agreements,
interest rate cap or floor agreements,
currency exchange agreements or similar
agreements provided to reduce the effects of
interest rate or currency exchange rate
fluctuations on the Trust Assets or on one
or more Classes of Offered Securities. The
principal terms of any such guaranteed
investment contract or other agreement (any
such agreement, a "Cash Flow Agreement"),
including, without limitation, provisions
relating to the timing, manner and amount of
payments thereunder and provisions relating
to the termination thereof, will be
described in the Prospectus Supplement. In
addition, the Prospectus Supplement will
provide certain information with respect to
the obligor under any such Cash Flow
Agreement. The Prospectus Supplement also
will describe any cash flow agreements that
are included as part of the trust fund
evidenced by or providing security for MBS
collateral included in the related Trust
Fund. See "Description of the Trust Funds --
Cash Flow Agreements."
(h) Pre-Funding Accounts... If so specified in the related Prospectus
Supplement, a portion of the issuance
proceeds of the Securities of a particular
Series (such amount, the "Pre-Funded
Amount") may be deposited in an account (the
"Pre-Funding Account") to be established
with the Trustee, which will be used to
acquire additional Assets from time to time
during the period specified in the related
Prospectus Supplement (the "Pre-Funding
Period"). Prior to the investment of the
Pre-Funded Amount in additional Assets, such
Pre-Funded Amount may be invested in one or
more Permitted Investments. Any Permitted
Investment must mature no later than the
Business Day prior to the next Distribution
Date.
During any Pre-Funding Period, the Depositor
will be obligated (subject only to the
availability thereof) to transfer to the
related Trust Fund additional Assets from
time to time during such Pre-Funding Period.
Such additional Assets will be required to
satisfy certain eligibility criteria more
fully set forth in the related Prospectus
Supplement, which eligibility criteria will
be consistent with the eligibility criteria
of the Assets included in the Trust Fund as
of the Cut-off Date, subject to such
exceptions as are expressly stated in such
Prospectus Supplement.
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Use of a Pre-Funding Account with respect to
any Series of Securities will be subject to
the following general conditions: (a) the
Pre-Funding Period will not exceed three
months from the related Closing Date, (b)
the additional Assets to be acquired during
the Pre-Funding Period will be subject to
the same underwriting standards,
representations and warranties as the Assets
included in the related Trust Fund on the
Closing Date (although additional criteria
may also be required to be satisfied, as
described in the related Prospectus
Supplement), (c) the Pre-Funded Amount will
be not exceed 25% of the principal amount of
the Series of Securities issued, (d) the
Pre- Funded Amount will not exceed 25% of
the scheduled principal balance of the
Assets (inclusive of the related Pre- Funded
Amount) as of the Cut-off Date, and (e) the
Pre- Funded Amount shall be invested in
Permitted Investments. See "Description of
the Trust Funds -- Pre-Funding" herein.
Description of the
Offered Securities ............ Each Series of Certificates evidencing an
interest in a Trust Fund will be issued
pursuant to a pooling and servicing
agreement or trust agreement. Each Series of
Bonds secured by Assets pledged to the
Trustee will be issued pursuant to an
indenture. Pooling and servicing agreements,
trust agreements and indentures are referred
to herein as the "Agreements." Each Series
of Certificates will represent in the
aggregate the entire beneficial ownership
interest in the Trust Fund. See "--
Distributions on Securities" and
"Description of the Offered Securities --
General." Each Class of Offered Securities
(other than certain Stripped Interest
Securities, as defined below) will have a
stated principal amount (a "Security
Balance") and (other than certain Stripped
Principal Securities, as defined below),
will accrue interest thereon based on a
fixed, variable or adjustable interest rate
(a "Pass-Through Rate" or an "Interest
Rate"). The Prospectus Supplement will
specify the Security Balance and the
Pass-Through Rate or Interest Rate, if any,
for each Class of Offered Securities or, in
the case of a variable or adjustable
Pass-Through Rate or Interest Rate, the
method for determining the Pass-Through Rate
or Interest Rate.
Distributions on Securities...... A Class of Securities may (i) provide for
the accrual of interest thereon based on
fixed, variable or adjustable rates; (ii) be
senior (collectively, "Senior Securities")
or subordinate (collectively, "Subordinate
Securities") to one or more other Classes of
Securities in respect of certain
distributions; (iii) be entitled to
principal distributions, with
disproportionately low, nominal or no
interest distributions (collectively,
"Stripped Principal Securities"); (iv) be
entitled to interest distributions, with
disproportionately low, nominal or no
principal distributions (collectively,
"Stripped Interest Securities"); (v) provide
for distributions of accrued interest
thereon commencing only following the
occurrence of certain events, such as the
retirement of one or more other Classes of
Securities (collectively, "Accrual
Securities"); (vi) provide for
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distributions of principal sequentially,
based on specified payment schedules or
other methodologies; and/or (vii) provide
for distributions based on a combination of
two or more components thereof with one or
more of the characteristics described in
this paragraph, including a Stripped
Principal Security component and a Stripped
Interest Security component, in the
aggregate to the extent of the Available
Distribution Amount for the related Series.
Distributions on one or more Classes of
Securities may be limited to collections
from a designated portion of the Assets (as
defined herein) (each such portion of
Assets, an "Asset Group"). See "Description
of the Offered Securities -- General."
References herein to Security Balance,
notional amount, Pass-Through Rate and
Interest Rate with respect to Securities
with multiple components refer to the
characteristics for such components.
The Offered Securities will not be
guaranteed or insured by the Depositor or
any of its affiliates, by any governmental
agency or instrumentality or by any other
person, except to the limited extent
specified in the related Prospectus
Supplement. See "Risk Factors --
Securityholders must look solely to the
Trust Assets for distributions of principal
and interest" and "Description of the
Offered Securities."
(a) Interest............... Interest on each Class of Offered Securities
(other than Stripped Principal Securities
will accrue at the applicable Pass- Through
Rate or Interest Rate on the outstanding
Security Balance thereof and will be
distributed to Securityholders as provided
in the related Prospectus Supplement (each
of the specified dates on which
distributions are to be made, a
"Distribution Date"). Distributions with
respect to interest on Stripped Interest
Securities may be made on each Distribution
Date on the basis of a notional amount as
described in the related Prospectus
Supplement. Distributions of interest with
respect to one or more Classes of Offered
Securities may be reduced to the extent of
certain delinquencies, losses, prepayment
interest shortfalls, and other contingencies
described herein and in the related
Prospectus Supplement. See "Risk Factors --
Prepayment timing and frequency may
adversely affect yield of Securityholders,"
"Yield Considerations" and "Description of
the Offered Securities -- Distributions of
Interest."
(b) Principal.............. The Offered Securities of a Series initially
will have an aggregate Security Balance no
greater than the sum of (i) the outstanding
principal balance of the Assets as of the
close of business on the specified day of
the month of formation of the related Trust
Fund (the "Cut-off Date"), after application
of scheduled payments due on or before such
date, whether or not received and (ii)
amounts on deposit in the related
Pre-Funding Account, if any, as of the
Closing Date. The Security Balance of an
Offered Security outstanding from time to
time represents the maximum amount that the
holder thereof
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is then entitled to receive in respect of
principal from future cash flow on the Trust
Assets. Distributions of principal will be
made on each Distribution Date to the
Classes of Offered Securities entitled
thereto until the Security Balances of such
Offered Securities have been reduced to
zero. Distributions of principal of any
Class of Securities will be made as
described in the related Prospectus
Supplement. Stripped Interest Securities
with no Security Balance will not receive
distributions in respect of principal. See
"Description of the Offered Securities --
Distributions of Principal."
Advances......................... The Master Servicer may be obligated as part
of its servicing responsibilities to make
certain advances that in its good faith
judgment it deems recoverable with respect
to delinquent scheduled payments on Mortgage
Loans. The Master Servicer also may be
obligated to advance delinquent payments of
taxes, insurance premiums and escrowed
items, as well as liquidation-related
expenses with respect to Mortgage Loans.
Neither the Depositor nor any of its
affiliates will have any responsibility to
make such advances. Advances made by a
Master Servicer would be reimbursable
generally from subsequent recoveries in
respect of such Mortgage Loans and otherwise
to the extent described herein and in the
related Prospectus Supplement. The
Prospectus Supplement will describe any
advance obligations in connection with MBS
collateral. See "Description of the Offered
Securities -- Advances in Respect of
Delinquencies."
Termination...................... If so specified in the related Prospectus
Supplement, a Series of Securities may be
subject to optional early termination
through the repurchase of the Assets in the
related Trust Fund by the party specified
therein, under the circumstances and in the
manner set forth therein. If so provided in
the related Prospectus Supplement, upon the
reduction of the Security Balance of a
specified Class or Classes of Securities to
a specified percentage or amount or on and
after a date specified in such Prospectus
Supplement, the party specified therein will
solicit bids for the purchase of all of the
Assets of the Trust Fund, or of a sufficient
portion of such Assets to retire such Class
or Classes, or purchase such Assets at a
price set forth in the related Prospectus
Supplement. In addition, if so provided in
the related Prospectus Supplement, the
Securities of a Series may be redeemed prior
to their final Distribution Date at the
option of the Depositor, the Master Servicer
or another party by the purchase of the
outstanding Securities of such Series,
under the circumstances and in the manner
provided therein. See "Description of the
Offered Securities -- Termination."
Book-Entry Securities............ If so provided in the related Prospectus
Supplement, one or more Classes of the
Offered Securities will initially be
represented by one or more certificates or
notes, as applicable, registered in the name
of Cede & Co., as the nominee of DTC. No
person acquiring an interest in Offered
Securities
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so registered will be entitled to receive a
definitive certificate or note, as
applicable, representing such person's
interest except in the event that definitive
certificates or notes, as applicable, are
issued under the limited circumstances
described herein. See "Risk Factors --
Book-Entry Registration" and "Description of
the Securities -- Book-Entry Registration."
Tax Status of the
Offered Securities............. The federal income tax consequences to
Securityholders will vary depending on
whether one or more elections are made to
treat the Trust Fund or specified portions
thereof as one or more REMICs or FASITs
under the provisions of the Code. The
Prospectus Supplement for each Series of
Securities will specify whether such an
election will be made.
If an election is made to treat all or a
portion of the Trust Fund relating to a
Series of Securities as a REMIC, each Class
of Securities of each Series will constitute
"regular interests" in a REMIC or "residual
interests" in a REMIC, as specified in the
related Prospectus Supplement. If an
election is made to treat all or a portion
of the Trust Fund relating to a Series of
Securities as a FASIT, each Class of
Securities of such Series will constitute
"regular interests" in a FASIT or "ownership
interests" in a FASIT, as specified in the
related Prospectus Supplement.
A Series of Offered Securities also may be
issued pursuant to an arrangement to be
classified as a grantor trust under Subpart
E, Part I of Subchapter J of the Code and
not as an association taxable as a
corporation and therefore holders of
Securities will be treated as the owners of
a pro rata undivided interest in each of the
Assets. In other cases, sale of the Offered
Securities will produce a separation in the
ownership of all or a portion of the
principal payments from all or a portion of
the interest payments on the Assets.
If a Trust Fund is classified as a
partnership for federal income tax purposes,
the Trust Fund will not be treated as an
association or a publicly traded partnership
taxable as a corporation as long as all of
the provisions of the applicable Agreement
are complied with and the statutory and
regulatory requirements are satisfied.
If Bonds are issued by such Trust Fund, such
Bonds will be treated as indebtedness for
federal income tax purposes. The holders of
the Certificates issued by such Trust Fund,
if any, will agree to treat the Certificates
as equity interests in a partnership.
Alternatively, if Bonds are issued by the
Depositor, such Bonds will be treated as
indebtedness of the Depositor for federal
income tax purposes.
The material federal income tax consequences
for investors associated with the purchase,
ownership and disposition of the Securities
are set forth herein under "Federal Income
Tax
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Consequences." The material federal income
tax consequences for investors associated
with the purchase, ownership and disposition
of Offered Securities will be set forth
under the heading "Federal Income Tax
Consequences" in the related Prospectus
Supplement. See "Federal Income Tax
Consequences."
ERISA Considerations............. A fiduciary of an employee benefit plan and
certain other retirement plans and
arrangements, including individual
retirement accounts, annuities, Keogh plans,
and collective investment funds and separate
accounts in which such plans, accounts,
annuities or arrangements are invested, that
is subject to the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"),
or Section 4975 of the Code should carefully
review with its legal advisors whether the
purchase or holding of Offered Securities
could give rise to a transaction that is
prohibited or is not otherwise permissible
either under ERISA or Section 4975 of the
Code. See "ERISA Considerations" herein and
in the related Prospectus Supplement.
Legal Investment................. The Prospectus Supplement will specify
which, if any, of the Classes of Offered
Securities will constitute "mortgage related
securities" for purposes of the Secondary
Mortgage Market Enhancement Act of 1984
("SMMEA"). Offered Securities designated as
qualifying as "mortgage related securities"
will continue to qualify as such for so long
as they are rated in one of the two highest
rating categories by at least one nationally
recognized statistical rating organization.
Classes of Offered Securities that qualify
as "mortgage related securities" under SMMEA
will be legal investments for persons,
trusts, corporations, partnerships,
associations, business trusts and business
entities (including depository institutions,
life insurance companies and pension funds)
created pursuant to or existing under the
laws of the United States or of any state
whose authorized investments are subject to
state regulation to the same extent as,
under applicable law, obligations issued by
or guaranteed as to principal and interest
by the United States or any agency or
instrumentality thereof constitute legal
investments for any such entities. Investors
should consult their own legal advisors
regarding applicable investment restrictions
and the effect of such restrictions on the
purchase of any Class of Securities and the
liquidity of any investment in any Class of
Securities. See "Legal Investment" herein
and in the related Prospectus Supplement.
Ratings.......................... It is a condition to the issuance of the
Offered Securities that they be rated in one
of the four highest rating categories
(without regard to modifiers) by at least
one nationally recognized statistical rating
organization (a "Rating Agency").
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RISK FACTORS
Investors should consider, in connection with the purchase of Offered
Securities, among other things, the following factors and certain other factors
as may be set forth in "Risk Factors" in the Prospectus Supplement.
PREPAYMENT TIMING AND FREQUENCY MAY ADVERSELY AFFECT YIELD OF SECURITYHOLDERS
Prepayments (including those caused by defaults) on the Assets in any
Trust Fund likely will result in a faster rate of principal payments on one or
more Classes of the Offered Securities than if payments on such Assets were made
as scheduled. Thus, the prepayment experience on the Assets may affect the
average life of each Class of related Offered Securities. The rate of principal
payments on pools of mortgage loans varies between pools and from time to time
is influenced by a variety of economic, demographic, geographic, tax, legal and
other factors. There can be no assurance as to the rate of prepayment on the
Assets in any Trust Fund or that the rate of payments will conform to any model
described herein or in any Prospectus Supplement. If prevailing interest rates
fall significantly below the applicable mortgage interest rates, principal
prepayments are likely to be higher than if prevailing rates remain at or above
the rates borne by the Mortgage Loans underlying or comprising the Assets in any
Trust Fund. As a result, the actual maturity of any Class of Offered Securities
could occur significantly earlier than expected. A Series of Securities may
include one or more Classes offered at a significant premium or discount. Yields
on such Classes of Offered Securities will be sensitive, and in some cases
extremely sensitive, to prepayments on Assets and, where the amount of interest
payable with respect to a Class is disproportionately high, as compared to the
amount of principal, as with certain Classes of Stripped Interest Securities, a
holder might, in some prepayment scenarios, fail to recoup its original
investment. A Series of Securities may include one or more Classes of Offered
Securities that provide for distribution of principal thereof from amounts
attributable to interest accrued but not currently distributable on one or more
Classes of Accrual Securities and, as a result, yields on such Offered
Securities will be sensitive to (a) the provisions of such Accrual Securities
relating to the timing of distributions of interest thereon and (b) if such
Accrual Securities accrue interest at a variable or adjustable Pass-Through Rate
or Interest Rate, changes in such rate. Additionally, in the case of FHA Loans
and VA Loans, certain events of default may result in delayed payment of
principal and interest for certain Classes of Securities due to particular
aspects of FHA Insurance Policies and VA Guaranties. See "Yield Considerations"
herein and in the related Prospectus Supplement.
SECURITYHOLDERS MUST LOOK SOLELY TO THE TRUST ASSETS FOR DISTRIBUTIONS OF
PRINCIPAL AND INTEREST
The Securities will not represent an interest in or obligation of the
Depositor, the Master Servicer, any Sub-Servicer or any of their affiliates. The
only obligations with respect to the Securities or the Assets will be the
obligations (if any) of the Warrantying Party (as defined herein) pursuant to
certain limited representations and warranties made with respect to the Mortgage
Loans, the Master Servicer's and any Sub-Servicer's servicing obligations under
the related Agreement (including the limited obligation to make certain advances
in the event of delinquencies on the Mortgage Loans, but only to the extent
deemed recoverable) and, if and to the extent expressly described in the related
Prospectus Supplement, certain limited obligations of the Master Servicer in
connection with an agreement to purchase or act as remarketing agent with
respect to a convertible ARM Loan (as defined herein) upon conversion to a fixed
rate. Because certain representations and warranties with respect to the Assets
may have been made and/or assigned in connection with transfers of such Assets
prior to the Closing Date, the rights of the Trustee and the Securityholders
with respect to such representations or warranties will be limited to their
rights as an assignee thereof. None of the Depositor, the Master Servicer or any
affiliate thereof will have any obligation with respect to representations or
warranties made by any other entity. Neither the Offered Securities nor the
underlying Assets will be guaranteed or insured by the Depositor, the Master
Servicer, any Sub-Servicer or any of their affiliates, or, except as may be
specified in the related Prospectus Supplement, by any governmental agency or
instrumentality. Proceeds of the Trust Assets (including the Assets and any form
of Credit Support) will be the sole source of payments on the Offered
Securities, and there will be no recourse to the Depositor or any other entity
in the event that such proceeds are insufficient or otherwise unavailable to
make all payments provided for under the Offered Securities.
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<PAGE> 18
Except to the extent described herein with respect to Covered Trusts, a
Series of Securities will not have any claim against or security interest in the
Trust Funds for any other Series. If the related Trust Fund is insufficient to
make payments on such Securities, no other assets will be available for payment
of the deficiency. Additionally, certain amounts remaining in certain funds or
accounts, including the Security Account and any accounts maintained as Credit
Support, may be withdrawn under certain conditions, as described in the related
Prospectus Supplement. In the event of such withdrawal, such amounts will not be
available for future payment of principal of or interest on the Offered
Securities. If so provided in the Prospectus Supplement for a Series of
Securities containing one or more Classes of Subordinate Securities, on any
Distribution Date in respect of which losses or shortfalls in collections on the
Assets have been incurred, the amount of such losses or shortfalls will be borne
first by one or more Classes of the Subordinate Securities, and, thereafter, by
the remaining Classes of Securities in the priority and manner and subject to
the limitations specified in such Prospectus Supplement.
THERE WILL BE A LIMITED MARKET FOR THE OFFERED SECURITIES
There can be no assurance that a secondary market for the Offered
Securities will develop or, if it does develop, that it will provide holders
with liquidity of investment or will continue while Offered Securities remain
outstanding. The market value of Offered Securities will fluctuate with changes
in prevailing rates of interest. Consequently, sales of Offered Securities by a
Securityholder in any secondary market that may develop may be at a discount
from their purchase price. Except to the extent described herein and in the
Prospectus Supplement, Securityholders will have no redemption rights and the
Offered Securities are subject to early retirement only under certain specified
circumstances described herein and in the Prospectus Supplement. See
"Description of the Offered Securities -- Termination."
NON-PERFORMING MORTGAGE LOANS, SUB-PERFORMING MORTGAGE LOANS AND REINSTATED
MORTGAGE LOANS CREATE RISKS THAT SECURITYHOLDERS MAY NOT RECOVER THEIR INITIAL
INVESTMENT AND MAY ADVERSELY AFFECT YIELD
The Mortgage Assets included in the Trust Fund for any Series may
include Non-Performing Mortgage Loans, Sub-Performing Mortgage Loans and
Reinstated Mortgage Loans. Repayment of the principal amount of the Offered
Securities for such Series would be dependent, in large part, upon the ability
of the Master Servicer to cause such Mortgage Loans to become or remain current
in payment, to sell or foreclose upon such Mortgage Loans or to acquire title to
the Mortgaged Properties by other means and to liquidate the related REO
Properties. There can be no assurance as to whether the Master Servicer will be
successful in such efforts or as to the timing thereof. The ability of the
Master Servicer to sell an REO Property will depend upon its ability to find a
willing purchaser at a price acceptable to the Master Servicer, subject to
certain guidelines. In addition, certain rights of redemption in various states
may limit or prevent the Master Servicer from selling an REO Property at what
would otherwise be an appropriate time for sale. See "Certain Legal Aspects of
Mortgage Loans" herein.
Non-Performing Mortgage Loans, Sub-Performing Mortgage Loans and
Reinstated Mortgage Loans included in a Trust Fund will be insured by a
governmental agency. There is no obligation on the part of the Depositor, the
Master Servicer or any other person to repurchase or replace any Mortgage Loan,
except under the limited circumstances described herein and in the Prospectus
Supplement.
Certain Mortgage Loans may be non-recourse loans or loans for which
recourse may be restricted or unenforceable, or as to which recourse may be had
only against the specific Mortgaged Property and such other assets, if any, as
have been pledged to secure the related Mortgage Loan. With respect to those
Mortgage Loans that provide for recourse against the Mortgagor and his assets
generally, there can be no assurance that such recourse will ensure a recovery
in respect of a defaulted Mortgage Loan greater than the liquidation value, if
any, of the related Mortgaged Property. The ability of the Master Servicer to
liquidate any Mortgaged Property or REO Property, and the liquidation value
thereof, may be adversely affected by risks generally incident to interests in
real property, including changes or weakness in general or local economic
conditions, declines in real estate values, the volume of other similar
properties for sale, adverse changes in interest rates, real estate and personal
property tax rates, energy costs and other expenses, environmental concerns,
acts of God, and other factors that are beyond the Master Servicer's control.
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CREDIT RATINGS PROVIDED BY RATING AGENCIES DO NOT ADDRESS ALL RISKS OF AN
INVESTMENT IN THE OFFERED SECURITIES
The ratings assigned by each Rating Agency to a Class of Offered
Securities will reflect such Rating Agency's assessment solely of the likelihood
that such Securityholders will receive payments to which such Securityholders
are entitled under the related Agreement. Such rating will not constitute an
assessment of the likelihood that principal prepayments (including those caused
by defaults) on the related Assets will be made, the degree to which the rate of
such prepayments might differ from that originally anticipated or the likelihood
of early optional termination of the Trust Fund or redemption of the Offered
Securities. Such rating will not address the possibility that prepayment at
higher or lower rates than anticipated by an investor may cause such investor to
experience a lower than anticipated yield or that an investor purchasing an
Offered Security at a significant premium might fail to recoup its initial
investment under certain prepayment scenarios.
The amount, type and nature of Credit Support, if any, established with
respect to a Series of Securities will be determined on the basis of criteria
established by each Rating Agency. Such criteria generally are based upon an
actuarial analysis of the behavior of mortgage assets. There can be no assurance
that the historical data supporting any such actuarial analysis will accurately
reflect future experience nor any assurance that the data derived from a large
pool of mortgage loans accurately predicts the delinquency, foreclosure or loss
experience of any particular pool of Assets. See "Description of Credit Support"
and "Ratings."
VALUE OF ASSETS IS DEPENDENT ON VARIOUS CONDITIONS
An investment in the Offered Securities, which generally represent
interests in mortgage loans, may be affected by, among other things, a decline
in real estate values and changes in the Mortgagors' financial condition. No
assurance can be given that values of the Mortgaged Properties have remained or
will remain at their levels on the dates of origination of the related Mortgage
Loans. If the residential real estate market experiences an overall decline in
property values such that the outstanding balances of the Mortgage Loans becomes
equal to or greater than the value of the Mortgaged Properties, then the actual
rates of delinquencies, foreclosures and losses could become higher than those
now generally experienced in the mortgage lending industry. In addition, in the
case of Mortgage Loans that are subject to negative amortization, the principal
balances of such Mortgage Loans could be increased to an amount equal to, or in
excess of, the value of the underlying Mortgaged Properties, thereby increasing
the likelihood of default. To the extent that such losses are not covered by the
applicable Credit Support, holders of Securities will bear all risk of loss
resulting from default by Mortgagors. Certain types of Mortgage Loans may
involve additional uncertainties not present in traditional types of loans. For
example, certain of the Mortgage Loans may provide for escalating or variable
payments by the Mortgagor under the Mortgage Loan, as to which the Mortgagor is
generally qualified on the basis of the initial payment amount. In some
instances the Mortgagor's income may not be sufficient to enable him to continue
to make his loan payments as such payments increase and thus the likelihood of
default will increase. In addition to the foregoing, certain geographic regions
of the United States from time to time will experience weaker economic
conditions and housing markets, and consequently generally will experience
higher rates of loss and delinquency than will be experienced on mortgage loans.
The Mortgage Loans underlying certain Series of Securities may be concentrated
in these regions, and such concentration may present particular risks.
Furthermore, the rate of default on Mortgage Loans that are refinanced, limited
documentation mortgage loans, or have high Loan-to-Value Ratios may be higher
than for other types of Mortgage Loans. See "Certain Legal Aspects of Mortgage
Loans" herein.
Some Mortgage Loans may be one or more months delinquent with regard to
payment of principal or interest at the time of their deposit into a Trust Fund.
Certain Mortgage Loans may have incomplete legal files that, as of the time of
deposit into a Trust Fund, may be missing such documents as a Mortgage Note, a
copy of the Mortgage or a title insurance policy, or may contain documents that
are defective because they are incomplete, contain incorrect information, are
unsigned by the appropriate parties or have other defects.
To the extent that losses on any Mortgage Loan are not covered by any
Credit Support, the related Securityholders (or specific Classes thereof) will
bear all risk of loss resulting from default by the related Mortgagors, and will
have to look primarily to the value of the Mortgaged Properties for recovery of
the outstanding
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principal and unpaid interest on the defaulted Mortgage Loans. Specific risks
associated with an investment in the Mortgage Loans underlying a particular
Series of Securities will be discussed in the related Prospectus Supplement.
ASSETS WITH BALLOON PAYMENT PROVISIONS PRESENT PARTICULAR RISKS TO
SECURITYHOLDERS
Certain of the Mortgage Loans that provide for "balloon" payment
provisions (the "Balloon Mortgage Loans") will not be fully amortizing over
their terms to maturity and, thus, will require substantial principal payments
(i.e., balloon payments) at their stated maturity. Mortgage Loans with balloon
payments involve a greater degree of risk because the ability of a Mortgagor to
make a balloon payment typically will depend upon its ability either to
refinance the loan or to sell the related Mortgaged Property in a timely
fashion. The ability of a Mortgagor to accomplish either of these goals
generally will be affected by a number of factors, including the level of
mortgage interest rates at the time of sale or refinancing, the mortgagor's
equity in the related Mortgaged Property, the financial condition of the
mortgagor, tax laws, prevailing general economic conditions and the availability
of credit for single family real properties. Neither the Depositor, the Trustee,
the Master Servicer, any Sub-Servicer nor any of their affiliates will be
required to refinance any Balloon Mortgage Loan.
THE EXTENSION OR MODIFICATION OF MORTGAGE LOANS MAY CREATE RISKS TO
SECURITYHOLDERS
The Master Servicer or a Sub-Servicer may be permitted (within
prescribed parameters) to extend and modify Mortgage Loans that are in default
or as to which a payment default is imminent. While any such Master Servicer or
Sub-Servicer generally will be required to determine that any such extension or
modification is reasonably likely to produce a greater recovery on a present
value basis than liquidation, there can be no assurance that such flexibility
with respect to extensions or modifications will increase the present value of
receipts from or proceeds of Mortgage Loans that are in default or as to which a
payment default is imminent.
AVAILABILITY OF CREDIT SUPPORT DOES NOT ELIMINATE RISK OF LOSS ON OFFERED
SECURITIES
The Prospectus Supplement for a Series of Securities will describe any
Credit Support in the related Trust Fund, which may include letters of credit,
insurance policies, guarantees, reserve funds or other types of credit support,
or combinations thereof. Use of Credit Support will be subject to the conditions
and limitations described herein and in the related Prospectus Supplement, will
not provide protection against all contingencies and will cover certain
contingencies only to a limited extent. Moreover, such Credit Support may not
cover all potential losses or risks; for example, Credit Support may or may not
cover fraud or negligence by a mortgage loan originator or other parties.
SECURITYHOLDERS SUBJECT TO LOSS IF RATE OF DELINQUENCIES AND AMOUNT OF LOSSES
EXCEED CERTAIN LEVELS
A Series of Securities may include one or more Classes of Subordinate
Securities (which may include Offered Securities), if so provided in the related
Prospectus Supplement. Although subordination is intended to reduce the risk to
holders of Senior Securities of delinquent distributions or ultimate losses, the
amount of subordination will be limited and may decline under certain
circumstances. In addition, if principal payments on one or more Classes of
Offered Securities of a Series are made in a specified order of priority, any
limits with respect to the aggregate amount of claims under any related Credit
Support may be exhausted before the principal of the lower priority Classes of
Offered Securities of such Series has been repaid. As a result, significant
losses and shortfalls on the Assets may fall primarily upon those Classes of
Offered Securities having a lower priority of payment. Moreover, if a form of
Credit Support covers more than one Series of Securities (each, a "Covered
Trust"), holders of Offered Securities evidencing an interest in a Covered Trust
will be subject to the risk that such Credit Support will be exhausted by the
claims of other Covered Trusts.
The amount of any applicable Credit Support supporting one or more
Classes of Offered Securities, including the subordination of one or more
Classes of Securities, will be determined on the basis of criteria established
by each Rating Agency rating such Classes of Securities. Such Credit Support
generally will be based on an assumed level of defaults, delinquencies, other
losses or other factors. There can, however, be no assurance
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that the loss experience on the related Assets will not exceed such assumed
levels. See "-- Credit ratings provided by Rating Agencies do not address all
risks in an investment in the Offered Securities," "Description of the Offered
Securities" and "Description of Credit Support."
Regardless of the Credit Support 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. The Master Servicer will generally be
permitted to reduce, terminate or substitute all or a portion of the Credit
Support for any Series of Securities if the applicable Rating Agencies indicate
that the then-current ratings thereof will not be adversely affected. The rating
of any Series of Securities 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 Assets substantially in excess of the levels contemplated by such
Rating Agency at the time of its initial rating analysis. None of the Depositor,
the Master Servicer or any of their affiliates will have any obligation to
replace or supplement any Credit Support, or to take any other action to
maintain any rating of any Series of Securities.
YIELD TO SECURITYHOLDERS MAY BE ADVERSELY AFFECTED BY ACCRUAL PERIODS,
SHORTFALLS AND REALIZED LOSSES
The effective yield to Securityholders may be lower than the yield
otherwise produced by the applicable Pass-Through Rates or Interest Rates and
purchase prices of the Offered Securities because, although interest will accrue
on the Offered Securities from the first day of each month (unless otherwise
specified in the Prospectus Supplement), the distribution of such interest will
not be made until the Distribution Date in the month following the month of such
accrual. In addition, the effective yield on the Offered Securities may be
reduced by any prepayment interest shortfalls and realized losses allocated to
such Offered Securities.
CREDIT RISK FROM SUBORDINATION OF THE SUBORDINATED SECURITIES TO THE SENIOR
SECURITIES
As described herein, payments of principal and interest on the Assets
will be available to make distributions on any Subordinated Securities only
after required distributions have been made on the Senior Securities. Further,
all realized losses on the Assets generally will be allocated to the
Subordinated Securities, if any, prior to being allocated to the Senior
Securities.
OFFERED SECURITIES PURCHASED AT A DISCOUNT OR PREMIUM MAY BE ISSUED WITH
ORIGINAL ISSUE DISCOUNT
Discount Offered Securities generally will be treated as issued with
original issue discount for federal income tax purposes. In addition, certain
Classes of premium Offered Securities (e.g., interest-only Securities) may be
treated by the Trustee under applicable provisions of the Code as stripped
coupons issued with original issue discount. The Trustee will report original
issue discount with respect to such discount and premium Offered Securities on
an accrual basis, which may be prior to the receipt of cash associated with such
income. See "Federal Income Tax Consequences" herein.
SECURITYHOLDERS MAY REALIZE LOSSES IF STATE LAW PROVIDES EXCEPTIONS TO THE
ENFORCEABILITY OF MORTGAGE LOAN DOCUMENTS
Certain of the Mortgages may contain due-on-sale clauses, which permit
the lender to accelerate the maturity of the related Mortgage Loan if the
Mortgagor sells, transfers or conveys the related Mortgaged Property or its
interest in the Mortgaged Property. Mortgages may also include a
debt-acceleration clause, which permits the lender to accelerate the debt upon a
monetary or non-monetary default of the Mortgagor. Such clauses are generally
enforceable subject to certain exceptions. Generally, state courts will enforce
due-on-sale clauses and clauses providing for acceleration in the event of a
material payment default. State equity courts, however, may refuse the
foreclosure of a mortgage or deed of trust when an acceleration of the
indebtedness would be inequitable or unjust or the circumstances would render
the acceleration unconscionable.
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SECURITYHOLDERS MAY BE SUBJECT TO ERISA RESTRICTIONS
Generally, ERISA applies to investments made by employee benefit plans
and transactions involving the assets of such plans. Due to the complexity of
regulations which govern such plans, prospective investors that are subject to
ERISA are urged to consult their own counsel regarding consequences under ERISA
of acquisition, ownership and disposition of the Offered Securities.
THE OFFERED SECURITIES MAY BE REGISTERED IN BOOK-ENTRY FORM
If so provided in the Prospectus Supplement, one or more Classes of the
Offered Securities may be represented initially by one or more certificates
registered in the name of Cede & Co., the nominee for DTC, and will not be
registered in the names of the beneficial owners of the Securities or their
nominees. The Trustee will recognize the registered holder of the book-entry
Securities as the "Securityholder" (as that term is to be used in the related
Agreement). Beneficial owners of Securities will be able to exercise the rights
of Securityholders only indirectly through DTC and its participating
organizations. See "Description of the Offered Securities -- Book-Entry
Registration."
Book-entry registration may reduce the liquidity of the Offered
Securities in the secondary trading market because investors may be unwilling to
purchase Offered Securities for which they cannot obtain physical certificates.
Because transactions in book-entry securities can be effected only through DTC,
participating organization, financial intermediaries and certain banks, the
ability of a Securityholder to pledge a book-entry security to persons or
entities that do not participate in the DTC system may be limited due to lack of
a physical certificate representing such securities.
In addition, Securityholders may experience some delay in their receipt
of distributions of interest and principal on book-entry securities because
distributions are required to be forwarded by the Trustee to DTC and DTC will
thereafter be required to credit such distribution to the accounts of
Participants that thereafter will be required to credit them to the accounts of
Securityholders either directly or indirectly through financial intermediaries.
DESCRIPTION OF THE TRUST FUNDS
ASSETS
The primary assets of each Trust Fund will include (i) one- to
four-family first lien residential mortgage loans (the "Mortgage Loans"), (ii)
mortgage participation interests, pass-through certificates or other
mortgage-backed securities evidencing interests in or secured by one or more
Mortgage Loans or other similar participations, certificates or securities that
(a) have been previously offered and distributed to the public pursuant to an
effective registration statement; (b) have been previously purchased in a
transaction not involving any public offering from an entity that is not an
affiliate of the issuer of such securities at the time of sale (nor an affiliate
thereof at any time during the three preceding months); provided, a period of
two years has elapsed since the later of the date the securities were acquired
from the issuer or an affiliate thereof; or (c) are otherwise eligible to be
included as collateral in a Trust Fund ("MBS"), (iii) mortgage related
securities issued or guaranteed by the United States, agencies or
instrumentalities thereof or agencies created thereby which are not subject to
redemption prior to maturity at the option of the issuer and are (a)
interest-bearing securities, (b) non-interest-bearing securities, (c) originally
interest-bearing securities from which coupons representing the right to payment
of interest have been removed, or (d) interest-bearing securities from which the
right to payment of principal has been removed (the "Agency Securities"), or
(iv) a combination of Mortgage Loans, MBS and Agency Securities (collectively,
the "Assets"). As used herein, "Mortgage Loans" refers to both mortgage loans
held directly by a Trust Fund and mortgage loans underlying MBS and/or Agency
Securities. Mortgage Loans that secure, or interests in which are evidenced by,
MBS are herein sometimes referred to as "Underlying Mortgage Loans." The Assets
will not be guaranteed or insured by any governmental agency or instrumentality
or by any other person except as specified in the related Prospectus Supplement.
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Except to the extent, if any, specified in the related Prospectus
Supplement, the Offered Securities will be entitled to payment only from the
related Trust Assets and will not be entitled to payments in respect of the
Trust Assets of any other Series. The Trust Assets may consist of certificates
representing beneficial ownership interests in another trust fund that contains
the Trust Assets.
MORTGAGE LOANS
General
The Mortgage Loans will be secured by first liens on Mortgaged
Properties consisting of one- to four-family residential properties. The
Mortgaged Properties may include leasehold interests in real properties, the
title to which is held by third party lessors. The term of any such leasehold
shall exceed the term of the related Mortgage Note by at least five years. Each
Mortgage Loan will have been originated by a person (the "Originator") other
than the Depositor. The related Prospectus Supplement will indicate if any
Originator is an affiliate of the Depositor. Generally, the Mortgage Loans will
be evidenced by promissory notes (the "Mortgage Notes") secured by mortgages,
deeds of trust or similar security instruments (the "Mortgages") creating a lien
on the Mortgaged Properties.
The Trust Fund may include Mortgage Loans ("FHA Loans") insured by the
Federal Housing Administration ("FHA"), a division of the United States
Department of Housing and Urban Development ("HUD"), Mortgage Loans ("VA Loans")
partially guaranteed by the Veterans Administration ("VA"), and Mortgage Loans
not insured or guaranteed by the FHA or VA. Certain Mortgage Loans may contain
prohibitions on prepayment (a "Lock-out Period" and, the date of expiration
thereof, a "Lock-out Date") or require payment of a premium or a yield
maintenance penalty (a "Prepayment Premium") in connection with a prepayment, in
each case as described in the related Prospectus Supplement. In the event that
holders of any Class of Offered Securities will be entitled to all or a portion
of any Prepayment Premiums collected in respect of Mortgage Loans, the related
Prospectus Supplement will specify the method or methods by which any such
amounts will be allocated. The Mortgage Loans may have fixed interest rates or
adjustable interest rates ("Mortgage Rates") and may provide for fixed level
payments or may be Mortgage Loans pursuant to which the monthly payments by the
Mortgagor during the early years of the related Mortgage are less than the
amount of interest that would otherwise be payable thereon, with the interest
not so paid added to the outstanding principal balance of such Mortgage Loan
("GPM Loans"), Mortgage Loans subject to temporary buy-down plans ("BuyDown
Mortgage 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, Mortgage Loans that provide for payment
every other week during the term thereof ("Bi-Weekly Loans"), Mortgage Loans
that experience negative amortization, Mortgage Loans that require a larger
payment of principal upon maturity (a "Balloon Amount") that may be all or a
portion of the principal thereof ("Balloon Loans"), or Mortgage Loans with other
payment characteristics as described below or in the related Prospectus
Supplement.
If so specified in the related Prospectus Supplement, the Trust Fund
may include Mortgage Loans that have been modified (each, a "Modified Mortgage
Loan"). Such modifications may include conversions from an adjustable to a fixed
Mortgage Rate (discussed below) or other changes in the related Mortgage Note.
If a Mortgage Loan is a Modified Mortgage Loan, references to origination
generally shall be deemed to be references to the date of modification.
The Mortgaged Properties may consist of detached individual dwellings,
individual condominiums, townhouses, duplexes, row houses, individual units in
planned unit developments, two-to four-family dwellings and other attached
dwelling units. To the extent specified in the related Prospectus Supplement,
the Mortgaged Properties may include vacation homes, second homes and
non-owner-occupied investment properties. Mortgage Loans secured by investment
properties (including two-to four-unit dwellings) may also be secured by an
assignment of leases and rents and operating or other cash flow guarantees
relating to the Mortgage Loans.
The Mortgage Loans may be "equity refinance" Mortgage Loans, as to
which a portion of the proceeds are used to refinance an existing mortgage loan,
and the remaining proceeds may be retained by the Mortgagor or
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used for purposes unrelated to the Mortgaged Property. Alternatively, the
Mortgage Loans may be "rate and term refinance" Mortgage Loans, as to which
substantially all of the proceeds (net of related costs incurred by the
Mortgagor) are used to refinance an existing mortgage loan or loans (which may
include a junior lien) primarily in order to change the interest rate or other
terms thereof. The Mortgage Loans may be mortgage loans that have been
consolidated and/or have had various terms changed, mortgage loans that have
been converted from adjustable rate mortgage loans to fixed rate mortgage loans,
or construction loans which have been converted to permanent mortgage loans. In
addition, a Mortgaged Property may be subject to secondary financing at the time
of origination of the Mortgage Loan or thereafter.
Mortgage Loans that have adjustable Mortgage Rates ("ARM Loans")
generally will provide for a fixed initial Mortgage Rate until the first date on
which such Mortgage Rate is to be adjusted. Thereafter, the Mortgage Rate is
subject to periodic adjustment as described in the related Prospectus
Supplement, subject to the applicable limitations, to a rate based on a
specified index (the "Index") plus a specified percentage (the "Gross Margin"),
as described in the related Prospectus Supplement. The initial Mortgage Rate on
an ARM Loan may be lower than the sum of the then-applicable Index and the Gross
Margin for such ARM Loan.
ARM Loans have features that provide different investment
considerations than fixed-rate mortgage loans. For example, adjustable mortgage
rates can cause payment increases that may exceed some Mortgagors' capacity to
cover such payments. However, to the extent specified in the related Prospectus
Supplement, an ARM Loan may provide that its Mortgage Rate may not be adjusted
to a rate above the applicable maximum Mortgage Rate (the "Maximum Mortgage
Rate") or below the applicable minimum Mortgage Rate (the "Minimum Mortgage
Rate"), if any, for such ARM Loan. In addition, to the extent specified in the
related Prospectus Supplement, certain of the ARM Loans may provide for
limitations on the maximum amount by which their Mortgage Rates may adjust for
any single adjustment period (the "Periodic Cap"). Some ARM Loans provide for
limitations on the amount of scheduled payments of principal and interest
payable by the Mortgagor (a "Payment Cap").
Certain ARM Loans may be subject to negative amortization from time to
time prior to their maturity (such ARM Loans, "Neg-Am ARM Loans"). Such negative
amortization may result from either the adjustment of the Mortgage Rate on a
more frequent basis than the adjustment of the scheduled payment or the
application of a Payment Cap. In the first case, negative amortization results
if an increase in the Mortgage Rate occurs prior to an adjustment of the
scheduled payment on the related Mortgage Loan and such increase causes accrued
monthly interest on the Mortgage Loan to exceed the scheduled payment of
interest on such Distribution Date. In the second case, negative amortization
results if an increase in the Mortgage Rate causes accrued monthly interest on a
Mortgage Loan to exceed the applicable Payment Cap. In the event that the
scheduled payment is not sufficient to pay the accrued monthly interest on a
Neg-Am ARM Loan, the amount of accrued monthly interest that exceeds the
scheduled payment of interest on such Mortgage Loans (the "Deferred Interest")
is added to the principal balance of such ARM Loan and is to be repaid from
future scheduled payments. Neg-Am ARM Loans do not provide for the extension of
their original stated maturity to accommodate changes in their Mortgage Rate.
A Trust Fund may contain ARM Loans that allow the Mortgagors to convert
the adjustable rates on such Mortgage Loans to a fixed rate at one or more
specified periods during the life of such Mortgage Loans (each, a "Convertible
Mortgage Loan"). If specified in the related Prospectus Supplement, upon any
conversion, the Depositor, the Master Servicer or a third party may be required
to purchase the converted Mortgage Loan as and to the extent set forth in the
related Prospectus Supplement. Alternatively, if specified in the related
Prospectus Supplement, the Master Servicer (or another party specified therein)
may agree to act as remarketing agent with respect to such converted Mortgage
Loans and, in such capacity, to use its best efforts to arrange for the sale of
such converted Mortgage Loans under specified conditions. Upon the failure of
any party so obligated to purchase any such converted Mortgage Loan, the
inability of any remarketing agent to arrange for the sale of the converted
Mortgage Loans and the unwillingness of such remarketing agent to exercise any
election to purchase the converted Mortgage Loans for its own account, the
related Converted Mortgage Loan will remain in the Trust Fund as a fixed rate
Mortgage Loan.
If specified in the related Prospectus Supplement, certain of the
Mortgage Loans may be BuyDown Mortgage Loans pursuant to which the payments made
by the Mortgagor during the early years of the Mortgage
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Loan (the "BuyDown Period") will be less than the scheduled payments on the
Mortgage Loan, the resulting difference to be made up from (i) amounts (such
amount, exclusive of investment earnings thereon, being hereinafter referred to
as "BuyDown Funds") contributed by the seller of the Mortgaged Property or
another source and placed in an escrow account, (ii) investment earnings on such
BuyDown Funds or (iii) funds contributed over time by the Mortgagor's employer
or another source.
The related Prospectus Supplement will provide material information
concerning the types and characteristics of the Mortgage Loans included in a
Trust Fund as of the related Cut-off Date. In the event that Mortgage Loans are
added to or deleted from the Trust Fund after the date of the related Prospectus
Supplement and prior to the Closing Date for the related Series of Securities,
the final characteristics of the Mortgage Loans included in the Trust Fund will
be noted on a Form 8-K filed by the Depositor.
Loan-to-Value Ratio
The "Loan-to-Value Ratio" of a Mortgage Loan on any date of
determination is a ratio (expressed as a percentage), the numerator of which is
the then outstanding principal balance of the Mortgage Loan, and the denominator
of which is the Value of the related Mortgaged Property. The "Value" of a
Mortgaged Property, other than with respect to Refinance Loans, is generally the
lesser of (a) the appraised value determined in an appraisal obtained by the
originator at origination of such loan and (b) the sales price for such
property. "Refinance Loans" are loans made to refinance existing loans. The
Value of the Mortgaged Property securing a Refinance Loan is the appraised value
thereof determined in an appraisal obtained at the time of origination of the
Refinance Loan. The Value of a Mortgaged Property as of the related Cut-off Date
may be less than the origination value and will fluctuate from time to time
based upon changes in economic conditions. Certain Mortgage Loans that are
subject to negative amortization will have Loan-to-Value Ratios that will
increase after origination as a result of such negative amortization. In the
case of seasoned Mortgage Loans, the appraisals upon which Loan-to-Value Ratios
have been calculated may no longer be accurate valuations of the related
Mortgaged Properties. Certain Mortgaged Properties may be located in regions
where property values have declined significantly since the time of origination
and the Loan-to-Value Ratio may not be reflective of such decline.
Mortgage Loan Information in Prospectus Supplements
Each Prospectus Supplement will contain information, as of the related
Cut-off Date, with respect to the Mortgage Loans, including (i) the aggregate
outstanding principal balance and the largest, smallest and average outstanding
principal balance of the Mortgage Loans, (ii) the type of property securing the
Mortgage Loans, (iii) the weighted average (by principal balance) of the
original and remaining terms to maturity of the Mortgage Loans, (iv) the
earliest and latest origination date and maturity date of the Mortgage Loans,
(v) the weighted average (by principal balance) of the Loan-to-Value Ratios at
origination of the Mortgage Loans, (vi) the Mortgage Rates or range of Mortgage
Rates and the weighted average Mortgage Rate borne by the Mortgage Loans, (vii)
the jurisdictions in which the Mortgaged Properties are located, (viii)
information with respect to the prepayment provisions, if any, of the Mortgage
Loans, (ix) the weighted average Retained Interest, if any, (x) with respect to
Mortgage Loans with adjustable Mortgage Rates ("ARM Loans"), the index, the
frequency of the adjustment dates, the highest, lowest and weighted average note
margin and pass-through margin, and the maximum Mortgage Rate or monthly payment
variation at the time of any adjustment thereof and over the life of the ARM
Loan and the frequency of such monthly payment adjustments, and (xi) information
regarding the payment characteristics of the Mortgage Loans, including without
limitation balloon payment and other amortization provisions. If specific
information respecting the Mortgage Loans has not been identified in time for
inclusion in a Prospectus Supplement, more general information of the nature
described above will be provided in the Prospectus Supplement, and specific
information will be set forth in a report which will be available to purchasers
of the related Offered Securities at or before the initial issuance thereof and
will be filed as part of a Current Report on Form 8-K with the Securities and
Exchange Commission within fifteen days after such initial issuance.
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Delinquent and Reinstated Mortgage Loans
Certain Mortgage Loans included in the Trust Fund may be one or more
months delinquent with regard to payment of principal or interest at the time of
their deposit into a Trust Fund. The related Prospectus Supplement will set
forth the percentage of Mortgage Loans that are so delinquent. In addition, the
related Prospectus Supplement will set forth the percentage of Mortgage Loans
that have been delinquent more than once during the preceding twelve months.
Delinquent Mortgage Loans may be more likely to result in losses than Mortgage
Loans that have a current payment status.
The FHA Loans and VA Loans with respect to any Series, or any Mortgage
Loans with respect to a Series of Bonds, may contain (i) Mortgage Loans that, as
of any date of determination have more than 12 scheduled payments of principal
and interest past due under the terms of the related Mortgage Note (each, a
"Non-Performing Mortgage Loan"), (ii) Mortgage Loans that, as of any date of
determination, have more than three but less than 12 scheduled payments of
principal and interest past due under the terms of the related Mortgage Note
(each, a "Sub-Performing Mortgage Loan"), and (iii) Mortgage Loans that have had
more than three scheduled payments of principal and interest past due under the
terms of the related Mortgage Note one or more times during the term of the
related Mortgage Loan, but at the related Cut-off Date for the Series is current
in payment (each, a "Reinstated Mortgage Loan"). The Prospectus Supplement for
any Series shall fully set forth the particular characteristics and risks of an
investment in a pool containing such Mortgage Loans.
The VA Loan Program
VA is an Executive Branch Department of the United States, headed by
the Secretary of Veterans Affairs. VA currently administers a variety of federal
assistance programs on behalf of eligible veterans and their dependents and
beneficiaries, including the VA loan guaranty program.
Under the VA loan guaranty program, a VA Loan may be made to any
eligible veteran by an approved private sector mortgage lender. VA guarantees
payment to the holder of that loan of a fixed percentage of the loan
indebtedness, up to a maximum dollar amount, in the event of default by the
veteran borrower. When a delinquency is reported to VA and no realistic
alternative to foreclosure is developed by the loan holder or through VA's
supplemental servicing of the loan, VA determines, through an economic analysis,
whether VA will (a) authorize the holder to convey the property securing the VA
Loan to the Secretary of Veterans Affairs following termination or (b) pay the
loan guaranty amount to the holder. The decision as to disposition of properties
securing defaulted VA Loans is made on a case-by-case basis using the procedures
set forth in 38 U.S.C. Section 3732(c), as amended.
The FHA Loan Program
FHA is an organizational unit within the Department of Housing and
Urban Development. FHA was established to encourage improvement in housing
standards and conditions and to exert a stabilizing influence on the mortgage
market. FHA provides insurance for private lenders against loss on eligible
mortgages.
Under the FHA mortgage insurance program, an FHA home mortgage may be
made to borrowers meeting certain credit standards by an approved mortgage
lender. FHA insures payment to the holder of that loan in the event of default
by the borrower. Upon default, the lender, depending upon the circumstances, may
(a) assign the mortgage to FHA, (b) acquire (through foreclosure or deed in lieu
of forecl sure) and convey title to FHA or (c) work with the borrower to sell
the property before the foreclosure sale. The lender will receive insurance
benefits equal to the unpaid principal balance of the loan, plus approved
expenses.
Underwriting Policies
The Depositor generally expects that the Originator of each of the
Mortgage Loans will have applied, consistent with applicable federal and state
laws and regulations, underwriting procedures intended to evaluate the
borrower's credit standing and repayment ability and/or the value and adequacy
of the related property as collateral. Any FHA Loans or VA Loans will have been
originated in compliance with the underwriting policies of the FHA or VA,
respectively. The underwriting criteria applied by the Originators of the
Mortgage Loans included in a Trust
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Fund may vary significantly. The related Prospectus Supplement will describe
generally certain underwriting criteria to the extent known by the Depositor,
that were applied by the Originators of such Mortgage Loans.
General Standards
Generally, each Mortgagor will have been required to complete an
application designed to provide to the original lender pertinent credit
information concerning the Mortgagor. As part of the description of the
Mortgagor's financial condition, such Mortgagor will have furnished information
which may be supplied solely in such application with respect to its assets,
liabilities, income, credit history, employment history and personal information
and furnished an authorization to apply for a credit report which summarizes the
borrower's credit history with local merchants and lenders and any record of
bankruptcy. The Mortgagor may also have been required to authorize verifications
of deposits at financial institutions where the Mortgagor had demand or savings
accounts. In the case of investment properties, only income derived from the
Mortgaged Properties may have been considered for underwriting purposes, rather
than the income of the Mortgagor from other sources. With respect to Mortgaged
Property consisting of vacation or second homes, no income derived from the
property generally will have been considered for underwriting purposes.
As described in the related Prospectus Supplement, certain Mortgage
Loans may have been originated under "limited documentation" or "no
documentation" programs which require less documentation and verification than
do traditional "full documentation" programs. Generally, under such a program,
minimal investigation into the Mortgagor's credit history and income profile is
undertaken by the originator and such underwriting may be based primarily or
entirely on an appraisal of the Mortgaged Property and the Loan-to-Value Ratio
at origination.
The adequacy of the Mortgaged Property as security for repayment of the
related Mortgage Loan will generally have been determined by appraisal in
accordance with pre-established appraisal procedure guidelines for appraisals
established by or acceptable to the originator. Appraisers may be staff
appraisers employed by the originator or independent appraisers selected in
accordance with pre-established guidelines established by the originator. The
appraisal procedure guidelines generally will have required the appraiser or an
agent on its behalf to personally inspect the property and to verify whether the
property was in good condition and that construction, if new, had been
substantially completed. The appraisal generally will have been based upon a
market data analysis of recent sales of comparable properties and, when deemed
applicable, an analysis based on income generated from the property or a
replacement cost analysis based on the current cost of constructing or
purchasing a similar property.
The underwriting standards applied by an originator generally require
that the underwriting officers be satisfied that the value of the property being
financed, as indicated by an appraisal or other acceptable valuation method,
currently supports and is anticipated to support in the future the outstanding
loan balance. In fact, certain states where the Mortgaged Properties may be
located have "anti-deficiency" laws requiring, in general, that lenders
providing credit on single family property look solely to the property for
repayment in the event of foreclosure. See "Certain Legal Aspects of Mortgage
Loans." Any of these factors could change nationwide or merely could affect a
locality or region in which all or some of the Mortgaged Properties are located.
However, declining values of real estate, as experienced recently in certain
regions, or increases in the principal balances of certain Mortgage Loans, such
as GPM Loans and Neg-Am ARM Loans, could cause the principal balance of some or
all of the Mortgage Loans to exceed the value of the Mortgaged Properties.
Based on the data provided in the application, certain verifications
(if required by the Originator of the Mortgage Loans) and the appraisal or other
valuation of the Mortgaged Property, a determination will have been made by the
original lender that the Mortgagor's monthly income would be sufficient to
enable the Mortgagor to meet its monthly obligations on the Mortgage Loan and
other expenses related to the property (such as property taxes, utility costs,
standard hazard and primary mortgage insurance and other fixed obligations other
than housing expenses. The Originator's guidelines for Mortgage Loans generally
will specify that scheduled payments on a Mortgage Loan during the first year of
its term plus taxes and insurance (including primary mortgage insurance) and all
scheduled payments on obligations that extend beyond one year (including those
mentioned above and other
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fixed obligations) would equal no more than specified percentages of the
prospective Mortgagor's gross income. The Originator may also consider the
amount of liquid assets available to the Mortgagor after origination.
Underwriting standards, employed by Originators, generally include a
set of specific criteria pursuant to which the underwriting evaluation is made.
However, the application of such underwriting standards does not imply that each
specific criterion was satisfied individually. Rather, a Mortgage Loan will be
considered to be originated in accordance with a given set of underwriting
standards if, based on an overall qualitative evaluation, the loan is in
substantial compliance with such underwriting standards. For example, a Mortgage
Loan may be considered to comply with a set of underwriting standards, even if
one or more specific criteria included in such underwriting standards were not
satisfied, if other factors compensated for the criteria that were not satisfied
or if the Mortgage Loan is considered to be in substantial compliance with the
underwriting standards.
MBS
Any MBS will have been issued pursuant to a participation and servicing
agreement, a pooling and servicing agreement, a trust agreement, an indenture or
similar agreement (an "MBS Agreement"). A seller (the "MBS Issuer") and/or
servicer (the "MBS Servicer") of the underlying Mortgage Loans (or Underlying
MBS) will have entered into the MBS Agreement with a trustee or a custodian, if
any, under the MBS Agreement (the "MBS Trustee") or with the original purchaser
of the interest in the underlying Mortgage Loans or MBS evidenced by the MBS.
Distributions of any principal or interest, as applicable, will be made
on MBS on the dates specified in the related Prospectus Supplement. The MBS may
be issued in one or more Classes with characteristics similar to the Classes of
Offered Securities described in this Prospectus. Any principal or interest
distributions will be made on the MBS by the MBS Trustee or the MBS Servicer.
The MBS Issuer or the MBS Servicer or another person specified in the related
Prospectus Supplement may have the right or obligation to repurchase or
substitute assets underlying the MBS after a certain date or under other
circumstances specified in the related Prospectus Supplement.
Credit Support in the form of reserve funds, subordination or other
forms of credit support similar to that described for the Offered Securities
under "Description of Credit Support" may be provided with respect to the MBS.
The type, characteristics and amount of such credit support, if any, will be a
function of certain characteristics of the Mortgage Loans or Underlying MBS
evidenced by or securing such MBS and other factors and generally will have been
established for the MBS on the basis of requirements of either any Rating Agency
that may have assigned a rating to the MBS or the initial purchasers of the MBS.
The Prospectus Supplement for a Series of Offered Securities evidencing
interests in Assets that include MBS will specify, (i) the aggregate approximate
initial and outstanding principal amount or notional amount, as applicable, and
type of the MBS to be included in the Trust Fund, (ii) the original and
remaining term to stated maturity of the MBS, if applicable, (iii) whether such
MBS is entitled only to interest payments, only to principal payments or to
both, (iv) the pass-through or bond rate of the MBS or formula for determining
such rates, if any, (v) the applicable payment provisions for the MBS,
including, but not limited to, any priorities, payment schedules and
subordination features, (vi) the MBS Issuer, MBS Servicer and MBS Trustee, as
applicable, (vii) certain characteristics of the credit support, if any, such as
subordination, reserve funds, insurance policies, letters of credit or
guarantees relating to the related Underlying Mortgage Loans, the Underlying MBS
or directly to such MBS, (viii) the terms on which the related Underlying
Mortgage Loans or Underlying MBS may, or are required to, be purchased prior to
their maturity, (ix) the terms on which Underlying Mortgage Loans or Underlying
MBS may be substituted for those originally underlying the MBS, (x) the
servicing fees payable under the MBS Agreement, (xi) the characteristics of any
cash flow agreements that are included as part of the trust fund evidenced or
secured by the MBS and (xii) whether the MBS is in certificated form, book-entry
form or held through a depository.
AGENCY SECURITIES
The Prospectus Supplement for a Series of Offered Securities evidencing
interests in Assets of a Trust Fund that include Agency Securities will specify,
to the extent available, (i) the aggregate approximate initial and
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outstanding principal amounts or notional amounts, as applicable, and types of
the Agency Securities to be included in the Trust Fund, (ii) the original and
remaining terms to stated maturity of the Agency Securities, (iii) whether such
Agency Securities are entitled only to interest payments, only to principal
payments or to both, (iv) the interest rates of the Agency Securities or the
formula to determine such rates, if any, (v) the applicable payment provisions
for the Agency Securities, (vi) the issuer of the Agency Securities and any
guarantor thereof, (vii) generally, the assets that collateralize the Agency
Securities, and (viii) to what extent, if any, the obligation evidenced thereby
is backed by the full faith and credit of the United States.
Government National Mortgage Association
GNMA is a wholly-owned corporate instrumentality of the United States
within the United States Department of Housing and Urban Development. Section
306(g) of Title II of the National Housing Act of 1934, as amended (the "Housing
Act"), authorizes GNMA to guarantee the timely payment of the principal of and
interest on certificates (the "GNMA Certificates") that represent an interest in
a pool of mortgage loans insured by the FHA under the Housing Act or Title V of
the Housing Act of 1949 ("FHA Loans"), or partially guaranteed by the VA under
the Servicemen's Readjustment Act of 1944, as amended, or Chapter 37 of Title
38, United States Code ("VA Loans").
Section 306(g) of the Housing Act provides that "the full faith and
credit of the United States is pledged to the payment of all amounts which may
be required to be paid under any guaranty under this subsection." In order to
meet its obligations under any such guaranty, GNMA may, under Section 306(d) of
the Housing Act, borrow from the United States Treasury in an unlimited amount
which is at any time sufficient to enable GNMA to perform its obligations under
its guarantee.
GNMA Certificates
Each GNMA Certificate held in a Trust Fund (which may be issued under
either the GNMA I program (each such certificate, a "GNMA I Certificate") or the
GNMA II program (each such certificate, a "GNMA II Certificate")) will be a
"fully modified pass-through" mortgage-backed certificate issued and serviced by
a mortgage banking company or other financial concern ("GNMA Issuer") approved
by GNMA or by FNMA as a seller-servicer of FHA Loans and/or VA Loans. The
mortgage loans underlying the GNMA Certificates will consist of FHA Loans and/or
VA Loans. Each such mortgage loan is secured by a one-to-four-family or
multifamily residential property. GNMA will approve the issuance of each such
GNMA Certificate in accordance with a guaranty agreement (a "Guaranty
Agreement") between GNMA and the GNMA Issuer. Pursuant to its Guaranty
Agreement, a GNMA Issuer will be required to advance its own funds in order to
make timely payments of all amounts due on each such GNMA Certificate if the
payments received by the GNMA Issuer on the FHA Loans or VA Loans underlying
each such GNMA Certificate are less than the amounts due on each such GNMA
Certificate.
The full and timely payment of principal of and interest on each GNMA
Certificate will be guaranteed by GNMA, which obligation is backed by the full
faith and credit of the United States. Each such GNMA Certificate will have an
original maturity of not more than 30 years (but may have original maturities of
substantially less than 30 years). Each such GNMA Certificate will be based on
and backed by a pool of FHA Loans or VA Loans secured by one-to-four-family
residential properties and will provide for the payment by or on behalf of the
GNMA Issuer to the registered holder of such GNMA Certificate of scheduled
monthly payments of principal and interest equal to the registered holder's
proportionate interest in the aggregate amount of the monthly principal and
interest payment on each FHA Loan or VA Loan underlying such GNMA Certificate,
less the applicable servicing and guaranty fee, which together equal the
difference between the interest on the FHA Loan or VA Loan and the pass-through
rate on the GNMA Certificate. In addition, each payment will include
proportionate pass-through payments of any prepayment of principal on the FHA
Loans or VA Loans underlying such GNMA Certificate and liquidation proceeds in
the event of a foreclosure or other disposition of any such FHA Loans or VA
Loans.
If a GNMA Issuer is unable to make the payments on a GNMA Certificate
as it becomes due, it must properly notify GNMA and request GNMA to make such
payment. Upon notification and request, GNMA will make such payments directly to
the registered holder of such GNMA Certificate. In the event no payment is made
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by a GNMA Issuer and the GNMA Issuer fails to notify and request GNMA to make
such payments, the holder of such GNMA Certificate will have recourse only
against GNMA to obtain such payment. The Trustee or its nominee, as registered
holder of the GNMA Certificates held in a Trust Fund, will have the right to
proceed directly against GNMA under the terms of the Guaranty Agreements
relating to such GNMA Certificates for any amounts that are not paid when due.
All mortgage loans underlying a particular GNMA I Certificate must have
the same interest rate (except for pools of mortgage loans secured by
manufactured homes). The interest rate on such GNMA I Certificate will equal the
interest rate on the mortgage loans included in the pool of mortgage loans
underlying such GNMA I Certificate, less one-half percentage point per annum of
the unpaid principal balance of the mortgage loans.
Mortgage loans underlying a particular GNMA II Certificate may have per
annum interest rates that vary from each other by up to one percentage point.
The interest rate on each GNMA II Certificate will be between one-half
percentage point and one and one-half percentage points lower than the highest
interest rate on the mortgage loans included in the pool of mortgage loans
underlying such GNMA II Certificate (except for pools of mortgage loans secured
by manufactured homes).
Regular monthly installment payments on each GNMA Certificate held in a
Trust Fund will be comprised of interest due as specified on such GNMA
Certificate plus the scheduled principal payments on the FHA Loans or VA Loans
underlying such GNMA Certificate due on the first day of the month in which the
scheduled monthly installments on such GNMA Certificate are due. Such regular
monthly installments on each such GNMA Certificate are required to be paid to
the Trustee as registered holder by the 15th day of each month in the case of a
GNMA I Certificate and are required to be mailed to the Trustee by the 20th day
of each month in the case of a GNMA II Certificate. Any principal prepayments on
any FHA Loans or VA Loans underlying a GNMA Certificate held in a Trust Fund or
any other early recovery of principal on such loans will be passed through to
the Trustee as the registered holder of such GNMA Certificate.
Certain GNMA Certificates may be backed by graduated payment mortgage
loans or by Buydown Mortgage Loans for which funds will have been provided (and
deposited into escrow accounts) for application to the payment of a portion of
the borrowers' monthly payments during the early years of such mortgage loan.
Payments due the registered holders of GNMA Certificates backed by pools
containing Buydown Mortgage Loans will be computed in the same manner as
payments derived from other GNMA Certificates and will include amounts to be
collected from both the borrower and the related escrow account. The graduated
payment mortgage loans will provide for graduated interest payments that, during
the early years of such mortgage loans, will be less than the amount of stated
interest on such mortgage loans. The interest not so paid will be added to the
principal of such graduated payment mortgage loans and, together with interest
thereon will be paid in subsequent years. The obligations of GNMA and of a GNMA
Issuer will be the same irrespective of whether the GNMA Certificates are backed
by graduated payment mortgage loans or Buydown Mortgage Loans. No statistics
comparable to the FHA's prepayment experience on level payment, non-"buydown"
mortgage loans are available in respect of graduated payment or Buydown Mortgage
Loans. GNMA Certificates related to a Series of Securities may be held in
book-entry form.
The GNMA Certificates included in a Trust Fund, and the related
underlying mortgage loans, may have characteristics and terms other than those
described above. Any such characteristics and terms will be described in the
related Prospectus Supplement.
Federal Home Loan Mortgage Corporation
FHLMC is a corporate instrumentality of the United States created
pursuant to Title III of the Emergency Home Finance Act of 1970, as amended (the
"FHLMC Act"). The common stock of FHLMC is owned by the Federal Home Loan Banks
and its preferred stock is owned by stockholders of the Federal Home Loan Banks.
FHLMC was established primarily for the purpose of increasing the availability
of mortgage credit for the financing of urgently needed housing. It seeks to
provide an enhanced degree of liquidity for residential mortgage investments
primarily by assisting in the development of secondary markets for conventional
mortgages. The principal activity
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of FHLMC currently consists of the purchase of first lien conventional mortgage
loans or participation interests in such mortgage loans and the sale of the
mortgage loans or participations so purchased in the form of mortgage
securities, primarily FHLMC Certificates. FHLMC is confined to purchasing, so
far as practicable, mortgage loans that it deems to be of such quality, type and
class as to meet generally the purchase standards imposed by private
institutional mortgage investors.
FHLMC Certificates
Each FHLMC Certificate represents an undivided interest in a pool of
mortgage loans that may consist of first lien conventional loans, FHA Loans or
VA Loans. FHLMC Certificates are sold under the terms of a Mortgage
Participation Certificate Agreement. A FHLMC Certificate may be issued under
either FHLMC's Cash Program or Guarantor Program.
Mortgage loans underlying the FHLMC Certificates held by a Trust Fund
will consist of mortgage loans with original terms to maturity of between 10 and
40 years. Each such mortgage loan must meet the applicable standards set forth
in the FHLMC Act. Such mortgage loans will be secured by loans on properties
that would qualify as Mortgaged Properties. A FHLMC Certificate group may
include whole loans, participation interests in whole loans and undivided
interests in whole loans and/or participations comprising another FHLMC
Certificate group. Under the Guarantor Program, any such FHLMC Certificate Group
may include only whole loans or participation interests in whole loans.
FHLMC guarantees to such registered holder of a FHLMC Certificate the
timely payment of interest on the underlying mortgage loans to the extent of the
applicable certificate interest rate on the registered holder's pro rata share
of the unpaid principal balance outstanding on the underlying mortgage loans in
the FHLMC Certificate group represented by such FHLMC Certificate, whether or
not received. FHLMC also guarantees to each registered holder of a FHLMC
Certificate collection by such holder of all principal on the underlying
mortgage loans, without any offset or deduction, to the extent of such holder's
pro rata share thereof, but does not, except if and to the extent specified in
the related Prospectus Supplement for a Series of Securities, guarantee the
timely payment of scheduled principal. Under FHLMC's Gold PC Program, FHLMC
guarantees the timely payment of principal based on the difference between the
pool factor published in the month preceding the month of distribution and the
pool factor published in such month of distribution. Pursuant to its guaranties,
FHLMC indemnifies holders of FHLMC Certificates against any diminution in
principal by reason of charges for property repairs, maintenance and
foreclosure. FHLMC may remit the amount due on account of its guaranty of
collection of principal at any time after default on an underlying mortgage
loan, but not later than (i) 30 days following foreclosure sale, (ii) 30 days
following payment of the claim by any mortgage insurer or (iii) 30 days
following the expiration of any right of redemption, whichever occurs later, but
in any event no later than one year after demand has been made upon the
mortgagor for accelerated payment of principal. In taking actions regarding the
collection of principal after default on the mortgage loans underlying FHLMC
Certificates, including the timing of demand for acceleration, FHLMC reserves
the right to exercise its judgment with respect to the mortgage loans in the
same manner as for mortgage loans that it has purchased but not sold. The length
of time necessary for FHLMC to determine that a mortgage loan should be
accelerated varies with the particular circumstances of each mortgagor, and
FHLMC has not adopted standards which require that the demand be made within any
specified period.
FHLMC Certificates are not guaranteed by the United States or by any
Federal Home Loan Bank and do not constitute debts or obligations of the United
States or any Federal Home Loan Bank. The obligations of FHLMC under its
guaranty are obligations solely of FHLMC and are not backed by, or entitled to,
the full faith and credit of the United States. If FHLMC were unable to satisfy
such obligations, distributions to holders of FHLMC Certificates would consist
solely of payments and other recoveries on the underlying mortgage loans and,
accordingly, monthly distributions to holders of FHLMC Certificates would be
affected by delinquent payments and defaults on such mortgage loans.
Registered holders of FHLMC Certificates are entitled to receive their
monthly pro rata share of all principal payments on the underlying mortgage
loans received by FHLMC, including any scheduled principal payments, full and
partial prepayments of principal and principal received by FHLMC by virtue of
condemnation,
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insurance, liquidation or foreclosure, and repurchases of the mortgage loans by
FHLMC or the seller thereof. FHLMC is required to remit each registered FHLMC
certificateholder's pro rata share of principal payments on the underlying
mortgage loans, interest at the FHLMC pass-through rate and any other sums such
as prepayment fees, within 60 days of the date on which such payments are deemed
to have been received by FHLMC.
Under FHLMC's Cash Program, there is no limitation on the amount by
which interest rates on the mortgage loans underlying a FHLMC Certificate may
exceed the pass-through rate on the FHLMC Certificate. Under such program, FHLMC
purchases groups of whole mortgage loans from sellers at specified percentages
of their unpaid principal balances, adjusted for accrued or prepaid interest,
which when applied to the interest rate of the mortgage loans and participations
purchased results in the yield (expressed as a percentage) required by FHLMC.
The required yield, which includes a minimum servicing fee retained by the
servicer, is calculated using the outstanding principal balance. The range of
interest rates on the mortgage loans and participations in a FHLMC Certificate
group under the Cash Program will vary since mortgage loans and participations
are purchased and assigned to a FHLMC Certificate group based upon their yield
to FHLMC rather than on the interest rate on the underlying mortgage loans.
Under FHLMC's Guarantor Program, the pass-through rate on a FHLMC Certificate is
established based upon the lowest interest rate on the underlying mortgage
loans, minus a minimum servicing fee and the amount of FHLMC's management and
guaranty income as agreed upon between the seller and FHLMC.
FHLMC Certificates duly presented for registration of ownership on or
before the last Business Day of a month are registered effective as of the first
day of the month. The first remittance to a registered holder of a FHLMC
Certificate will be distributed so as to be received normally by the 15th day of
the second month following the month in which the purchaser became a registered
holder of such FHLMC Certificate. Thereafter, such remittance will be
distributed monthly to the registered holder so as to be received normally by
the 15th day of each month. The Federal Reserve Bank of New York maintains
book-entry accounts with respect to FHLMC Certificates sold by FHLMC on or after
January 2, 1985, and makes payments of principal and interest each month to the
registered holders thereof in accordance with such holders' instructions.
The FHLMC Certificates included in a Trust Fund, and the related
underlying mortgage loans, may have characteristics and terms other than those
described above. Any such characteristics and terms will be described in the
related Prospectus Supplement.
Fannie Mae
Fannie Mae is a federally chartered and privately owned corporation
organized and existing under the Federal National Mortgage Association Charter
Act, as amended. Fannie Mae was originally established in 1938 as a United
States government agency to provide supplemental liquidity to the mortgage
market and was transformed into a stockholder-owned and privately-managed
corporation by legislation enacted in 1968.
Fannie Mae provides funds to the mortgage market primarily by
purchasing mortgage loans from lenders, thereby replenishing their funds for
additional lending. Fannie Mae acquires funds to purchase mortgage loans from
many capital market investors that may not ordinarily invest in mortgages,
thereby expanding the total amount of funds available for housing. Operating
nationwide, Fannie Mae helps to redistribute mortgage funds from capital-surplus
to capital-short areas.
Fannie Mae Certificates
Fannie Mae Certificates are guaranteed mortgage pass-through
certificates representing fractional undivided interests in a pool of mortgage
loans formed by Fannie Mae. Each mortgage loan must meet the applicable
standards of the Fannie Mae purchase program. Mortgage loans comprising a pool
are either provided by Fannie Mae from its own portfolio or purchased pursuant
to the criteria of the Fannie Mae purchase program.
Mortgage loans underlying Fannie Mae Certificates held by a Trust Fund
will consist of conventional mortgage loans, FHA Loans or VA Loans. Original
maturities of substantially all of the conventional, level payment mortgage
loans underlying a Fannie Mae Certificate are expected to be between either 8 to
15 years or 20
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to 40 years. The original maturities of substantially all of the fixed rate,
level payment FHA Loans or VA Loans are expected to be 30 years. Such mortgage
loans will be secured by properties that would qualify as Mortgaged Properties.
Mortgage loans underlying a Fannie Mae Certificate may have annual
interest rates that vary by as much as two percentage points from each other.
The rate of interest payable on a Fannie Mae Certificate is equal to the lowest
interest rate of any mortgage loan in the related pool, less a specified minimum
annual percentage representing servicing compensation and Fannie Mae's guaranty
fee. Under a regular servicing option (pursuant to which the mortgagee or each
other servicer assumes the entire risk of foreclosure losses), the annual
interest rates on the mortgage loans underlying a Fannie Mae Certificate will be
between 50 basis points and 250 basis points greater than its annual
pass-through rate and under a special servicing option (pursuant to which Fannie
Mae assumes the entire risk for foreclosure losses), the annual interest rates
on the mortgage loans underlying a Fannie Mae Certificate will generally be
between 55 basis points and 255 basis points greater than the annual Fannie Mae
Certificate pass-through rate. Fannie Mae Certificates may be backed by
adjustable rate mortgages.
Fannie Mae guarantees to each registered holder of a Fannie Mae
Certificate that it will distribute amounts representing such holder's
proportionate share of scheduled principal and interest payments at the
applicable pass-through rate provided for by such Fannie Mae Certificate on the
underlying mortgage loans, whether or not received, and such holder's
proportionate share of the full principal amount of any foreclosed or other
finally liquidated mortgage loan, whether or not such principal amount is
actually recovered. The obligations of Fannie Mae under its guaranties are
obligations solely of Fannie Mae and are not backed by, or entitled to, the full
faith and credit of the United States. Although the Secretary of the Treasury of
the United States has discretionary authority to lend Fannie Mae up to $2.25
billion outstanding at any time, neither the United States nor any agency
thereof is obligated to finance Fannie Mae's operations or to assist Fannie Mae
in any other manner. If Fannie Mae were unable to satisfy its obligations,
distributions to holders of Fannie Mae Certificates would consist solely of
payments and other recoveries on the underlying mortgage loans and, accordingly,
monthly distributions to holders of Fannie Mae Certificates would be affected by
delinquent payments and defaults on such mortgage loans.
Fannie Mae Certificates evidencing interests in pools of mortgage loans
formed on or after May 1, 1985 (other than Fannie Mae Certificates backed by
pools containing graduated payment mortgage loans or mortgage loans secured by
multifamily projects) are available in book-entry form only. Distributions of
principal and interest on each Fannie Mae Certificate will be made by Fannie Mae
on the 25th day of each month to the persons in whose name the Fannie Mae
Certificate is entered in the books of the Federal Reserve Banks (or registered
on the Fannie Mae Certificate register in the case of fully registered Fannie
Mae Certificates) as of the close of business on the last day of the preceding
month. With respect to Fannie Mae Certificates issued in book-entry form,
distributions thereon will be made by wire, and with respect to fully registered
Fannie Mae Certificates, distributions thereon will be made by check.
The Fannie Mae Certificates included in a Trust Fund, and the related
underlying mortgage loans, may have characteristics and terms other than those
described above. Any such characteristics and terms will be described in the
related Prospectus Supplement.
Stripped Mortgage-Backed Securities
Agency Securities may consist of one or more stripped mortgage-backed
securities, each as described herein and in the related Prospectus Supplement.
Each such Agency Security will represent an undivided interest in all or part of
either the principal distributions (but not the interest distributions) or the
interest distributions (but not the principal distributions), or in some
specified portion of the principal and interest distributions (but not all of
such distributions) on certain FHLMC, Fannie Mae or GNMA Certificates. The
underlying securities will be held under a trust agreement by FHLMC, Fannie Mae
or GNMA, each as trustee, or by another trustee named in the related Prospectus
Supplement. FHLMC, Fannie Mae or GNMA will guarantee each stripped Agency
Security to the same extent as such entity guarantees the underlying securities
backing such stripped Agency Security.
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Other Agency Securities
If specified in the related Prospectus Supplement, a Trust Fund may
include other mortgage pass-through certificates issued or guaranteed by GNMA,
Fannie Mae or FHLMC. The characteristics of any such mortgage pass-through
certificates will be described in such Prospectus Supplement. If so specified, a
combination of different types of Agency Securities may be held in a Trust Fund.
ACCOUNTS
Each Trust Fund will include one or more accounts established and
maintained on behalf of the Securityholders into which the person or persons
designated in the related Prospectus Supplement will, to the extent described
herein and in such Prospectus Supplement deposit all payments and collections
received or advanced with respect to the Trust Assets. Such an account may be
maintained as an interest bearing or a non-interest bearing account, and funds
held therein may be held as cash or invested in certain short-term, investment
grade obligations, in each case as described in the related Prospectus
Supplement. See "Description of the Agreements -- Security Account and Other
Collection Accounts."
CREDIT SUPPORT
If so provided in the related Prospectus Supplement, partial or full
protection against certain defaults and losses on the Trust Assets may be
provided to one or more Classes of Offered Securities in the form of
subordination of one or more other Classes of Securities (including Offered
Securities) in such Series or by one or more other types of credit support, such
as a letter of credit, insurance policy, guarantee, reserve fund or another type
of credit support, or a combination thereof (any such coverage with respect to
the Securities of any Series, "Credit Support"). The amount and types of
coverage, the identification of the entity providing the coverage (if
applicable) and related information with respect to each type of Credit Support,
if any, will be described in the Prospectus Supplement. See "Risk Factors --
Availability of Credit Support does not eliminate risk of loss on Offered
Securities" and "Description of Credit Support."
LIQUIDITY FACILITIES
If so provided in the related Prospectus Supplement, the Depositor will
establish one or more Liquidity Facilities, which may be used by the Trustee to
make certain required distributions of principal of, or interest on, the
Securities of the related Series to the extent funds are not otherwise
available. The Depositor may fund a Liquidity Facility by depositing cash,
certificates of deposit and/or letters of credit therein on the Closing Date, or
a Liquidity Facility may be funded by the Trustee's deposit therein of Available
Distribution Amounts not required to pay servicing or administrative fees or to
make distributions on the Securities on a Distribution Date until amounts on
deposit in the Liquidity Facility equal a required amount. The method of funding
any Liquidity Facility will be described in the related Prospectus Supplement.
Any Liquidity Facility will be maintained in trust but may not constitute a part
of the Trust Fund for the related Series. The Depositor may have certain rights
on any Distribution Date to cause the Trustee to make withdrawals from a
Liquidity Facility for a Series and to pay such amounts in accordance with the
instructions of the Depositor to the extent that such funds are no longer
required to be maintained for the Securityholders.
CASH FLOW AGREEMENTS
A Trust Fund may include guaranteed investment contracts pursuant to
which moneys held in the funds and accounts established for the related Series
will be invested at a specified rate. The Trust Fund may also include certain
other agreements, such as interest rate exchange agreements, interest rate cap
or floor agreements, currency exchange agreements or similar agreements provided
to reduce the effects of interest rate or currency exchange rate fluctuations on
the Assets or on one or more Classes of Offered Securities. (Currency exchange
agreements might be included in the Trust Fund if some or all of the Assets
(such as Mortgage Loans secured by Mortgaged Properties located outside the
United States) were denominated in a non-United States currency.) The principal
terms of any such guaranteed investment contract or other agreement (any such
agreement, a "Cash Flow Agreement"), including, without limitation, provisions
relating to the timing, manner and amount of payments thereunder and provisions
relating to the termination thereof, will be described in the Prospectus
Supplement. In
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addition, the related Prospectus Supplement will provide certain information
with respect to the obligor under any such Cash Flow Agreement.
PRE-FUNDING
If so specified in the related Prospectus Supplement, a portion of the
issuance proceeds of the Securities of a particular Series (such amount, the
"Pre-Funded Amount") will be deposited in an account (the "Pre-Funding Account")
to be established with the Trustee, which will be used to acquire additional
Assets from time to time during the time period specified in the related
Prospectus Supplement (the "Pre-Funding Period"). Prior to the investment of the
Pre-Funded Amount in additional Assets, such Pre-Funded Amount may be invested
in one or more Permitted Investments. Any Permitted Investment must mature no
later than the Business Day prior to the next Distribution Date.
During any Pre-Funding Period, the Depositor will be obligated (subject
only to the availability thereof) to transfer to the related Trust Fund
additional Assets from time to time during such Pre-Funding Period. Such
additional Assets will be required to satisfy certain eligibility criteria more
fully set forth in the related Prospectus Supplement, which eligibility criteria
will be consistent with the eligibility criteria of the Assets included in the
Trust Fund as of the Closing Date, subject to such exceptions as are expressly
stated in such Prospectus Supplement.
Use of a Pre-Funding Account with respect to any Series of Securities
will be subject to the following general conditions: (a) the Pre-Funding Period
will not exceed three months from the related Closing Date, (b) the additional
Assets to be acquired during the Pre-Funding Period will be subject to the same
underwriting standards, representations and warranties as the Assets included in
the related Trust Fund on the Closing Date (although additional criteria may
also be required to be satisfied, as described in the related Prospectus
Supplement), (c) the Pre-Funded Amount will be not exceed 25% of the principal
amount of the Securities issued as a Series, (d) the Pre-Funded Amount will not
exceed 25% of the scheduled principal balance of the Assets (inclusive of the
related Pre-Funded Amount) as of the Cut-off Date, and (e) the Pre-Funded Amount
shall be invested in Permitted Investments.
To the extent that amounts on deposit in the Pre-Funding Account have
not been fully applied to the purchase of additional Assets by the end of the
Pre-Funding Period, the related Securityholders then entitled to receive
distributions of principal will receive a prepayment of principal in an amount
equal to the related Pre-Funded Amount remaining in the Pre-Funding Account on
the first Distribution Date following the end of the Pre-Funding Period. Any
such prepayment of principal would have an adverse effect on the yield to
maturity of Securities purchased at a premium, and would expose Securityholder
to the risk that alternative investments of equivalent value may not be
available at such later time. If specified in the related Prospectus Supplement,
the Depositor may be required to deposit cash into an account maintained by the
Trustee (the "Capitalized Interest Account") for the purpose of assuring the
availability of funds to pay interest with respect to the Securities during the
Pre-Funding Period. Any amount remaining in the Capitalized Interest Account at
the end of the Pre-Funding Period will be remitted as specified in the related
Prospectus Supplement.
A maximum of 5% of the Assets (including Assets acquired after the
Closing Date with Pre-Funded Amounts) included in the Trust Fund will deviate
from the characteristics of the Assets described in the related Prospectus
Supplement. Further, information regarding additional Assets acquired by a Trust
Fund during the Pre-Funding Period comparable to the disclosure regarding the
Assets in the related Prospectus Supplement will be filed on a Current Report on
Form 8-K (in addition to any other reporting requirements of the Trust Fund
under the Exchange Act) within fifteen days following the end of the Pre-Funding
Period.
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YIELD CONSIDERATIONS
GENERAL
The yield on any Offered Security will depend on the price paid by the
Securityholder, the Pass-Through Rate or Interest Rate of the Offered Security,
the receipt and timing of receipt of distributions on the Offered Security and
the weighted average life of the related Trust Assets (which may be affected by
prepayments, defaults, liquidations or repurchases). See "Risk Factors."
PASS-THROUGH RATE AND INTEREST RATE
Offered Securities may have fixed, variable or adjustable Pass-Through
Rates or Interest Rates, which may or may not be based upon the interest rates
borne by the related Trust Assets. The Prospectus Supplement will specify the
Pass-Through Rate or Interest Rate for each Class of Offered Securities or, in
the case of a variable or adjustable Pass-Through Rate or Interest Rate, the
method of determining the Pass-Through Rate or Interest Rate; the effect, if
any, of the prepayment of any Asset on the Pass-Through Rate or Interest Rate of
one or more Classes of Offered Securities; and whether the distributions of
interest on the Offered Securities of any Class will be dependent, in whole or
in part, on the performance of any obligor under a Cash Flow Agreement.
The effective yield to maturity to each holder of Offered Securities
entitled to payments of interest will be less than that otherwise produced by
the applicable Pass-Through Rate or Interest Rate and purchase price of such
Offered Security because, while interest may accrue on each Asset during a
certain period, the distribution of such interest will be made following the
period of accrual.
TIMING OF PAYMENT OF INTEREST
Each payment of interest on the Offered Securities (or addition to the
Security Balance of a Class of Accrual Securities) on a Distribution Date will
include interest accrued during the Interest Accrual Period for such
Distribution Date. As indicated above under "-- Pass-Through Rate and Interest
Rate," if the Interest Accrual Period ends on a date other than a Distribution
Date for the related Series, the yield realized by the holders of such
Securities may be lower than the yield that would result if the Interest Accrual
Period ended on such Distribution Date. In addition, if so specified in the
related Prospectus Supplement, interest accrued for an Interest Accrual Period
for one or more Classes of Offered Securities may be calculated on the
assumption that distributions of principal (and additions to the Security
Balance of Accrual Securities) and allocations of losses on the Assets may be
made on the first day of the Interest Accrual Period for a Distribution Date and
not on such Distribution Date. Such method would produce a lower effective yield
than if interest were calculated on the basis of the actual principal amount
outstanding during an Interest Accrual Period. The Interest Accrual Period for
any Class of Offered Securities will be specified in the related Prospectus
Supplement.
PAYMENTS OF PRINCIPAL; PREPAYMENTS
The yield to maturity on the Offered Securities will be affected by the
rate of principal payments on the Assets (including principal prepayments on
Mortgage Loans resulting from both voluntary prepayments by the mortgagors and
involuntary liquidations). The rate at which principal prepayments occur on the
Assets will be affected by a variety of factors, including, without limitation,
the terms of the Mortgage Loans, the level of prevailing interest rates, the
availability of mortgage credit and economic, demographic, geographic, tax,
legal and other factors. In general, however, if prevailing interest rates fall
significantly below the Mortgage Rates on the Mortgage Loans comprising or
underlying the Trust Assets, such Mortgage Loans are likely to be the subject of
higher principal prepayments than if prevailing rates remain at or above the
rates borne by such Mortgage Loans. In this regard, it should be noted that
certain Assets may consist of Mortgage Loans with different Mortgage Rates and
the stated pass-through or pay-through interest rate of certain MBS may be a
number of percentage points higher or lower than certain of the underlying
Mortgage Loans. The rate of principal payments on some or all of the Classes of
Offered Securities will correspond to the rate of principal payments on the
Trust Assets and is likely to be affected by the existence of Lock-out Periods
and Prepayment Premium provisions of the Mortgage Loans underlying or comprising
such Trust Assets, and by the extent to which the servicer of any such Mortgage
Loan is able to enforce such provisions. Mortgage Loans with a Lock-out Period
or a Prepayment Premium provision, to the extent enforceable, generally would be
expected to experience a lower rate of principal prepayments than
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otherwise identical Mortgage Loans without such provisions, with shorter
Lock-out Periods or with lower Prepayment Premiums.
If the purchaser of an Offered Security sold at a discount calculates
its anticipated yield to maturity based on an assumed rate of distributions of
principal that is faster than that actually experienced on the Assets, the
actual yield to maturity will be lower than that so calculated. Conversely, if
the purchaser of an Offered Security sold at a premium calculates its
anticipated yield to maturity based on an assumed rate of distributions of
principal that is slower than that actually experienced on the Assets, the
actual yield to maturity will be lower than that so calculated. In either case,
the effect of prepayments on yield may be mitigated or exacerbated by provisions
for sequential or selective distribution of principal.
When a full prepayment is made on a Mortgage Loan, the mortgagor is
charged interest on the principal amount of the Mortgage Loan so prepaid for the
number of days in the month actually elapsed up to the date of the prepayment.
The effect of prepayments in full will be to reduce the amount of interest paid
or available to be paid in the following month to holders of Securities entitled
to payments of interest because interest on the principal amount of any Mortgage
Loan so prepaid will be paid only to the date of prepayment rather than for a
full month. Generally, a partial prepayment of principal is applied so as to
reduce the outstanding principal balance of the related Mortgage Loan as of the
Due Date in the month in which such partial prepayment is received. As a result,
the effect of a partial prepayment on a Mortgage Loan will be to reduce the
amount of interest passed through to holders of Securities in the month
following the receipt of such partial prepayment by an amount equal to one
month's interest at the applicable Pass-Through Rate or Interest Rate on the
prepaid amount. Additionally, in the case of FHA Loans and VA Loans, certain
events of default may result in delayed payment of principal and interest for
certain Classes of Securities.
The timing of changes in the rate of principal payments on the Assets
may significantly affect an investor's actual yield to maturity, even if the
average rate of distributions of principal is consistent with an investor's
expectation. In general, the earlier a principal payment is received on the
Assets and distributed on a Security, the greater the effect on such investor's
yield to maturity. The effect on an investor's yield of principal payments
occurring at a rate higher (or lower) than the rate anticipated by the investor
during a given period may not be offset by a subsequent like decrease (or
increase) in the rate of principal payments.
PREPAYMENTS -- MATURITY AND WEIGHTED AVERAGE LIFE
The rates at which principal payments are received on the Trust Assets
and the rate at which payments are made from any Credit Support or Cash Flow
Agreement for a Series of Securities may affect the maturity and the weighted
average life of each related Class of Offered Securities. Prepayments on the
Mortgage Loans will generally accelerate the rate at which principal is paid on
some or all of the related Classes of Securities.
Weighted average life refers to the average amount of time that will
elapse from the date of issue of a Security until each dollar of principal of
such Security will be repaid to the investor. The weighted average life of the
Securities will be influenced by the rate at which principal on the Mortgage
Loans comprising or underlying the Assets is paid to such Class, which may be in
the form of scheduled amortization or prepayments (for this purpose, the term
"Prepayment" includes prepayments, in whole or in part, and liquidations due to
default).
Prepayments on loans are also commonly measured relative to a
prepayment standard or model, such as the Constant Prepayment Rate ("CPR")
prepayment model or the Standard Prepayment Assumption ("SPA") prepayment model,
each as described below. CPR represents a constant assumed rate of prepayment
each month relative to the then outstanding principal balance of a pool of loans
for the life of such loans. SPA represents an assumed rate of prepayment each
month relative to the then outstanding principal balance of a pool of loans. A
prepayment assumption of 100% of SPA assumes prepayment rates of 0.2% per annum
of the then outstanding principal balance of such loans in the first month of
the life of the loans and an additional 0.2% per annum in each month thereafter
until the thirtieth month. Beginning in the thirtieth month and in each month
thereafter during the life of the loans, 100% of SPA assumes a constant
prepayment rate of 6% per annum each month.
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Neither CPR nor SPA nor any other prepayment model or assumption
purports to be a historical description of prepayment experience or a prediction
of the anticipated rate of prepayment of any pool of loans, including the
Mortgage Loans.
In general, if interest rates fall below the Mortgage Rates on
fixed-rate Mortgage Loans, the rate of prepayment is expected to increase.
The Prospectus Supplement may contain tables, if applicable, setting
forth the projected weighted average life of the Offered Securities of such
Series and the percentage of the initial Security Balance thereof that would be
outstanding on specified Distribution Dates based on the assumptions stated
therein, including assumptions that prepayments on the Mortgage Loans are made
at rates corresponding to various percentages of CPR, SPA or at such other rates
specified in such Prospectus Supplement. Such tables and assumptions are
intended to illustrate the sensitivity of weighted average life of the Offered
Securities to various prepayment rates and will not be intended to predict or to
provide information that will enable investors to predict the actual weighted
average life of the Offered Securities. It is unlikely that prepayment of any
Mortgage Loans will conform to any particular level of CPR, SPA or any other
rate specified in the related Prospectus Supplement.
OTHER FACTORS AFFECTING WEIGHTED AVERAGE LIFE
Type of Asset
To the extent specified in the related Prospectus Supplement, Mortgage
Loans may have balloon payments due at maturity. Because the ability of a
mortgagor to make a balloon payment depends upon its ability either to refinance
the loan or to sell the related Mortgaged Property, there is a risk that Balloon
Mortgage Loans will default at maturity. In the case of defaults, recovery of
proceeds may be delayed by, among other things, bankruptcy of the mortgagor or
adverse conditions in the market where the property is located. In order to
minimize losses on defaulted Mortgage Loans, the Master Servicer or Sub-Servicer
may, to the extent and under the circumstances set forth in the related
Prospectus Supplement, be permitted to modify Mortgage Loans that are in default
or as to which a payment default is imminent. Any defaulted balloon payment or
modification that extends the maturity of a Mortgage Loan will tend to extend
the weighted average life of the Offered Securities.
With respect to certain Mortgage Loans (particularly ARM Loans), the
Mortgage Rate at origination may be below the rate that would result if the
index and margin relating thereto were applied at origination. Under certain
underwriting standards, the mortgagor under each Mortgage Loan will be qualified
on the basis of the Mortgage Rate in effect at origination. The repayment of any
such Mortgage Loan may thus be dependent on the ability of the mortgagor to make
larger level monthly payments following the adjustment of the Mortgage Rate. In
addition, Buydown Mortgage Loans provide for a period of time (the "Buydown
Period") during which the monthly payment made by the Mortgagor will be less
than the scheduled monthly payment thereon. The periodic increase in the amount
paid by the mortgagor of a Buydown Mortgage Loan during or at the end of the
applicable Buydown Period may create a greater financial burden for the
mortgagor, who might not have otherwise qualified for a mortgage, and may
accordingly increase the risk of default.
The Mortgage Rates on certain ARM Loans subject to negative
amortization generally adjust monthly and their amortization schedules adjust
less frequently. During a period of rising interest rates as well as immediately
after origination (initial Mortgage Rates are generally lower than the sum of
the applicable index at origination and the related margin over such index at
which interest accrues), the amount of interest accruing on the principal
balance of such Mortgage Loans may exceed the amount of the minimum scheduled
monthly payment thereon. As a result, a portion of the accrued interest on
negatively amortizing Mortgage Loans may be added to the principal balance
thereof and will bear interest at the applicable Mortgage Rate. The addition of
deferred interest to the Security Principal Balance of Offered Securities will
lengthen the weighted average life thereof and may adversely affect yield to
holders thereof, particularly those purchased at a premium from their parity
price. In addition, with respect to certain ARM Loans subject to negative
amortization, during a period of declining interest rates, it might be expected
that each minimum scheduled monthly payment on such a Mortgage Loan would exceed
the amount of scheduled principal and accrued interest on the principal balance
thereof, and because such excess will be applied
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to reduce the Security Principal Balance of the related Class or Classes of
Securities, the weighted average life of such Securities will be reduced and may
adversely affect yield to holders thereof, depending upon the price at which
such Securities were purchased.
Defaults
The rate of defaults on the Mortgage Loans will also affect the rate
and timing of principal payments on the Assets and thus the yield on the Offered
Securities. In general, defaults on mortgage loans are expected to occur with
greater frequency in their early years. The rate of default on Mortgage Loans
which are refinance or limited documentation mortgage loans, and on Mortgage
Loans with high Loan-to-Value Ratios, may be higher than for other types of
Mortgage Loans. Reinstated Mortgage Loans will likely experience a higher rate
of default than Mortgage Loans that have no history of delinquent Mortgagor
payments. Furthermore, the rate and timing of prepayments, defaults and
liquidations on the Mortgage Loans will be affected by the general economic
condition of the geographic region in which the related Mortgaged Properties are
located. The risk of delinquencies and loss is greater and prepayments are less
likely in regions where a weak or deteriorating economy exists, as may be
evidenced by, among other factors, increasing unemployment or falling property
values.
Foreclosures
The number of foreclosures and the principal amount of the Mortgage
Loans that are foreclosed in relation to the number and principal amount of
Mortgage Loans that are repaid in accordance with their terms will affect the
weighted average life of the Mortgage Loans and, accordingly, that of the
related Offered Securities.
Refinancing
At the request of a mortgagor, the Master Servicer or a Sub-Servicer
may allow the refinancing of a Mortgage Loan by accepting prepayments thereon
and permitting a new loan secured by a mortgage on the same property. In the
event of such a refinancing, the new loan would not be included in the related
Trust Fund and, therefore, such refinancing would have the same effect as a
prepayment in full of the related Mortgage Loan. A Sub-Servicer or the Master
Servicer may, from time to time, implement programs designed to encourage
refinancing. Such programs may include, without limitation, modifications of
existing loans, general or targeted solicitations, the offering of pre-approved
applications, reduced origination fees or closing costs, or other financial
incentives. In addition, Sub-Servicers may encourage the refinancing of Mortgage
Loans, including defaulted Mortgage Loans, that would permit creditworthy
borrowers to assume the outstanding indebtedness of such Mortgage Loans.
Due-on-Sale Clauses
Acceleration of mortgage payments as a result of certain transfers of
underlying Mortgaged Property is another factor affecting prepayment rates that
may not be reflected in the prepayment standards or models used in the relevant
Prospectus Supplement. A number of the Mortgage Loans may include "due-on-sale"
clauses that allow the holders of the Mortgage Loans to demand payment in full
of the remaining principal balance of the Mortgage Loans upon sale, transfer or
conveyance of the related Mortgaged Property. With respect to any Mortgage
Loans, the Master Servicer will generally enforce any due-on-sale clause to the
extent it has knowledge of the conveyance or proposed conveyance of the
underlying Mortgaged Property and it is entitled to do so under applicable law;
provided, however, that the Master Servicer will not take any action in relation
to the enforcement of any due-on-sale provision which would adversely affect or
jeopardize coverage under any applicable insurance policy. See "Certain Legal
Aspects of Mortgage Loans -- Due-on-Sale Clauses" and "Description of the
Agreements -- Due-on-Sale Provisions."
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THE DEPOSITOR
Union Planters Mortgage Finance Corp., the Depositor, is a direct
wholly-owned finance subsidiary of Union Planters National Bank and was
incorporated in the State of Delaware on September 5, 1997. The principal
executive offices of the Depositor are located at 7130 Goodlett Farms Parkway,
Cordova, Tennessee, 38018. Its telephone number is (901) 580-6000.
The Depositor does not have, nor is it expected in the future to have,
any significant assets.
DESCRIPTION OF THE OFFERED SECURITIES
GENERAL
Each Series of Bonds will be issued pursuant to an indenture (the
"Indenture") between the Depositor (or a trust established by the Depositor) and
the trustee named in the related Prospectus Supplement as trustee (the
"Trustee") with respect to such Series. A form of Indenture has been filed as an
exhibit to the Registration Statement of which this Prospectus forms a part. The
Certificates will also be issued in Series pursuant to separate agreements
(each, a "Pooling and Servicing Agreement" or a "Trust Agreement") among the
Depositor, the Master Servicer, and the Trustee. A form of each Agreement has
been filed as an exhibit to the Registration Statement of which this Prospectus
forms a part. The Indenture, the Pooling and Servicing Agreement and the Trust
Agreement are herein referred to as the "Agreements." A Series may consist of
both Bonds and Certificates.
The following summaries describe certain provisions in the Agreements
common to each Series of Securities. The summaries do not purport to be complete
and are subject to, and are qualified in their entirety by reference to, the
provisions of the Agreements and the Prospectus Supplement. Where particular
provisions or terms used in the Agreements are referred to, the actual
provisions (including the definitions of terms) are incorporated herein by
reference as part of such summaries.
Each Class of Securities may (i) provide for the accrual of interest
thereon based on fixed, variable or adjustable rates; (ii) be senior
(collectively, "Senior Securities") or subordinate (collectively, "Subordinate
Securities") to one or more other Classes of Securities in respect of certain
distributions; (iii) be entitled to principal distributions, with
disproportionately low, nominal or no interest distributions (collectively,
"Stripped Principal Securities"); (iv) be entitled to interest distributions,
with disproportionately low, nominal or no principal distributions
(collectively, "Stripped Interest Securities"); (v) provide for distributions of
accrued interest thereon commencing only following the occurrence of certain
events, such as the retirement of one or more other Classes of Securities
(collectively, "Accrual Securities"); (vi) provide for payments of principal
sequentially, based on specified payment schedules, from only a portion of the
Assets in such Trust Fund or based on specified calculations; and/or (vii)
provide for distributions based on a combination of two or more components
thereof with one or more of the characteristics described in this paragraph
including a Stripped Principal Security component and a Stripped Interest
Security component, in the aggregate to the extent of the Available Distribution
Amount. Distributions on one or more Classes of Securities may be limited to
collections from a designated portion of the Assets (each such portion of
Assets, an "Asset Group").
Each Class of Offered Securities will be issued in minimum
denominations corresponding to the Security Balances or, in case of Stripped
Interest Securities, notional amounts or percentage interests specified in the
related Prospectus Supplement. The transfer of any Offered Securities may be
registered and such Offered Securities may be exchanged without the payment of
any service charge payable in connection with such registration of transfer or
exchange, but the Depositor or the Trustee or any agent thereof may require
payment of a sum sufficient to cover any tax or other governmental charge. One
or more Classes of Offered Securities may be issued, in definitive form or in
book-entry form ("Book-Entry Securities"), as provided in the related Prospectus
Supplement. See "Risk Factors -- The Offered Securities may be registered in
book-entry form" and "Description of the Offered Securities -- Book-Entry
Registration." Definitive Securities will be exchangeable for other Securities
of the same Class and Series of a like aggregate Security Balance, notional
amount or percentage interest, but of different authorized denominations.
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DISTRIBUTIONS
Distributions on the Offered Securities will be made by or on behalf of
the Trustee on each Distribution Date as specified in the related Prospectus
Supplement from the Available Distribution Amount for such Series and such
Distribution Date. Unless a different date is specified in the related
Prospectus Supplement, distributions (other than the final distribution) will be
made to the persons in whose names the Offered Securities are registered at the
close of business on the last Business Day of the month preceding the month in
which the Distribution Date occurs (the "Record Date"), and the amount of each
distribution will be determined as of the close of business on the date
specified in the related Prospectus Supplement (the "Determination Date"). All
distributions with respect to each Class of Securities on each Distribution Date
will be allocated as described in the related Prospectus Supplement. Payments
will be made either by wire transfer of immediately available funds to the
account of a Securityholder at a bank or other entity having appropriate
facilities therefor, if such Securityholder has so notified the Trustee or other
person required to make such payments no later than the date specified in the
related Prospectus Supplement (and, if so provided in the related Prospectus
Supplement, holds Securities in the requisite amount specified therein), or by
check mailed to the address of the person entitled thereto as it appears on the
Security Register; provided, however, that the final distribution in retirement
of the Securities will be made only upon presentation and surrender of the
Securities at the location specified in the notice to Securityholders of such
final distribution.
AVAILABLE DISTRIBUTION AMOUNT
All distributions on the Offered Securities of each Series on each
Distribution Date will be made from the Available Distribution Amount described
below, in accordance with the terms described in the related Prospectus
Supplement. Generally, the "Available Distribution Amount" for each Distribution
Date will equal the sum of the following amounts:
(i) the total amount of all cash on deposit in the
related Security Account as of the corresponding Determination Date,
exclusive of:
(a) all scheduled payments of principal and interest
collected but due on a date subsequent to the related Due
Period,
(b) all prepayments, together with related payments
of the interest thereon and related Prepayment Premiums,
Liquidation Proceeds, Insurance Proceeds and other unscheduled
recoveries received subsequent to the related Due Period,
(c) all amounts in the Security Account that are due
or reimbursable to the Depositor, the Trustee, an Asset
Seller, a Sub-Servicer, the Master Servicer or any other
entity as specified in the related Prospectus Supplement or
that are payable in respect of certain expenses of the related
Trust Fund, and
(d) all amounts received subsequent to the related
Due Period for a repurchase of an Asset from the Trust Fund
for defective documentation or a breach of representation or
warranty;
(ii) if the related Prospectus Supplement so provides,
interest or investment income on amounts on deposit in the Security
Account, including any net amounts paid under any Cash Flow Agreements;
(iii) all advances made by a Master Servicer, a
Sub-Servicer or any other entity as specified in the related Prospectus
Supplement with respect to such Distribution Date;
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(iv) if and to the extent the related Prospectus
Supplement so provides, amounts paid by a Master Servicer, a
Sub-Servicer or any other entity as specified in the related Prospectus
Supplement with respect to interest shortfalls resulting from
prepayments during the related Prepayment Period; and
(v) to the extent not on deposit in the related Security
Account as of the corresponding Determination Date, any amounts
collected under, from or in respect of any Credit Support or Liquidity
Facilities with respect to such Distribution Date.
As described below, the entire Available Distribution Amount will be
distributed among the related Securities (including any Securities not offered
hereby) on each Distribution Date, and accordingly will be released from the
Trust Fund and will not be available for any future distributions. The related
Prospectus Supplement for a Series of Securities will describe any variation in
the calculation of the Available Distribution Amount for such Series.
DISTRIBUTIONS OF INTEREST
Each Class of Offered Securities (other than Classes of Stripped
Principal Securities that have no Pass-Through Rate or Interest Rate) may have a
different Pass-Through Rate or Interest Rate, which will be a fixed, variable or
adjustable rate at which interest will accrue on such Class or a component
thereof. The related Prospectus Supplement will specify the Pass-Through Rate or
Interest Rate for each Class or component or, in the case of a variable or
adjustable Pass-Through Rate or Interest Rate, the method for determining the
Pass-Through Rate or Interest Rate. Interest on the Offered Securities will be
calculated on the basis of a 360-day year consisting of twelve 30-day months or
on the basis of actual days elapsed, as specified in the related Prospectus
Supplement.
Distributions of interest in respect of the Offered Securities will be
made on each Distribution Date (other than any Class of Accrual Securities,
which will be entitled to distributions of accrued interest commencing only on
the Distribution Date or under the circumstances specified in the related
Prospectus Supplement, and any Class of Stripped Principal Securities that are
not entitled to any distributions of interest) based on the Accrued Security
Interest for such Class and such Distribution Date, subject to the sufficiency
of the portion of the Available Distribution Amount allocable to such Class on
such Distribution Date. Prior to the time interest is distributable on any Class
of Accrual Securities, the amount of Accrued Security Interest otherwise
distributable on such Class will be added to the Security Balance thereof on
each Distribution Date. With respect to each Class of Securities and each
Distribution Date (other than certain Classes of Stripped Interest Securities),
"Accrued Security Interest" will be equal to interest accrued for a specified
period on the outstanding Security Balance thereof immediately prior to the
Distribution Date, at the applicable Pass-Through Rate or Interest Rate, subject
to certain reductions described below or in the related Prospectus Supplement.
Accrued Security Interest on Stripped Interest Securities will be equal to
interest accrued for a specified period on the outstanding notional amount
thereof immediately prior to each Distribution Date, at the applicable
Pass-Through Rate or Interest Rate, subject to certain reductions as described
below, or accrued as otherwise described in the related Prospectus Supplement.
The method of determining the notional amount for any Class of Stripped Interest
Securities will be described in the related Prospectus Supplement. Reference to
notional amount is solely for convenience in certain calculations and does not
represent the right to receive any distributions of principal. Unless otherwise
provided in the related Prospectus Supplement, Accrued Security Interest on a
Series of Securities will be reduced in the event of prepayment interest
shortfalls, which are shortfalls in collections of interest for a full accrual
period resulting from prepayments prior to the due date in such accrual period
on the Mortgage Loans comprising or underlying the Assets in the Trust Fund for
such Series. The particular manner in which such shortfalls are to be allocated
among some or all of the Classes of Securities will be specified in the related
Prospectus Supplement. The related Prospectus Supplement will also describe the
extent to which the amount of Accrued Security Interest that is otherwise
distributable on (or, in the case of Accrual Securities, that may otherwise be
added to the Security Balance of) a Class of Offered Securities may be reduced
as a result of any other contingencies, including delinquencies, losses and
deferred interest on or in respect of the Mortgage Loans comprising or
underlying the Assets in the related Trust Fund. Unless otherwise provided in
the related Prospectus Supplement, any reduction in the amount of Accrued
Security Interest otherwise distributable on a Class of Securities by reason of
the allocation to such Class of a portion of any deferred interest on the
Mortgage Loans comprising or underlying the Assets in the related Trust Fund
will result in a corresponding increase in the
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Security Balance of such Class. See "Risk Factors -- Prepayment timing and
frequency may adversely affect yield of Securityholders" and "Yield
Considerations."
DISTRIBUTIONS OF PRINCIPAL
The Securities of each Series, other than certain Classes of Stripped
Interest Securities, will have a "Security Balance" which, at any time, will
equal the then maximum amount that the holder will be entitled to receive in
respect of principal out of the future cash flow on the Trust Assets. Generally,
the outstanding Security Balance of a Security will be reduced to the extent of
distributions of principal thereon from time to time and, if and to the extent
so provided in the related Prospectus Supplement, by the amount of losses
incurred in respect of the related Assets that are allocated to such Class.
Moreover, Security Balances may be increased through interest deferral on the
related Mortgage Loans and, in the case of Accrual Securities prior to the
Distribution Date on which distributions of interest are required to commence,
Security Balances will be increased by any related Accrued Security Interest.
The initial aggregate Security Balance of all Classes of Securities of a Series
will not be greater than the sum of (i) the outstanding aggregate principal
balance of the Assets as of the Cut-off Date and (ii) amounts on deposit in the
Pre-Funding Account, if any, as of the Closing Date. The initial aggregate
Security Balance of a Series and each Class thereof will be specified in the
related Prospectus Supplement. Distributions of principal will be made on each
Distribution Date to the Class or Classes of Securities entitled thereto in
accordance with the provisions described in such Prospectus Supplement until the
Security Balance of such Class has been reduced to zero. Stripped Interest
Securities with no Security Balance are not entitled to any principal
distributions.
COMPONENTS
To the extent specified in the related Prospectus Supplement,
distribution on a Class of Offered Securities may be based on a combination of
two or more different components as described under "-- General" above. To such
extent, the descriptions set forth under "-- Distributions of Interests" and "
- -- Distributions of Principal" above also relate to components. In such case,
reference in such sections to Security Balance and Pass-Through Rate or Interest
Rate refer to the principal balance, if any, of any such component and the
Pass-Through Rate or Interest Rate, if any, on any such component, respectively.
ALLOCATION OF LOSSES AND SHORTFALLS
If so provided in the Prospectus Supplement for a Series of Securities
consisting of one or more Classes of Subordinate Securities, on any Distribution
Date in respect of which losses or shortfalls in collections on the Assets have
been incurred, the amount of such losses or shortfalls will be borne first by a
Class of Subordinate Securities in the priority and manner and subject to the
limitations specified in such Prospectus Supplement. See "Description of Credit
Support" for a description of the types of protection that may be included in a
Trust Fund against losses and shortfalls on Assets comprising such Trust Fund.
ADVANCES IN RESPECT OF DELINQUENCIES
The Master Servicer (or another entity described in the Prospectus
Supplement) may be required to advance as part of its servicing responsibilities
on or before each Distribution Date its own funds or funds held in a collection
account for the Securities in an amount equal to the aggregate of payments of
principal (other than any balloon payments) and interest (net of related
servicing fees and Retained Interest) that were due on the Mortgage Loans during
the related Due Period but delinquent on the related Determination Date and
delinquent payments of taxes, insurance premiums and escrowed items in respect
of related Assets and liquidation-related expenses, each subject to the Master
Servicer's (or such other entity's) good faith determination that such advances
will be reimbursable from Related Proceeds (as defined below). In the case of
certain Series of Securities that include Subordinate Securities, the Master
Servicer's (or such other entity's) advance obligation may be limited to the
portion of such delinquencies necessary to make the required distributions on
Classes of Senior Securities and/or may be subject to the Master Servicer's (or
such other entity's) good faith determination that such advances will be
reimbursable not only from Related Proceeds but also from collections on Assets
otherwise distributable to other Subordinate Securities. See "Description of
Credit Support."
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Advances are intended to maintain or a regular flow of scheduled
interest and principal payments to holders of Securities entitled thereto,
rather than to guarantee or insure against losses. Advances of the Master
Servicer's (or another entity's) funds will be reimbursable out of recoveries on
related Mortgage Loans (including amounts received under any form of Credit
Support) (as to any Mortgage Loan, "Related Proceeds"). In addition, an advance
will be reimbursable from amounts in the Security Account prior to distributions
being made on the Securities if the Master Servicer (or such other entity)
determines in good faith that such advance (a "Nonrecoverable Advance")
ultimately is not recoverable from Related Proceeds. If advances have been made
by the Master Servicer from excess funds in the Security Account that are
required to be distributed to Securityholders on the related Distribution Date,
the Master Servicer will be required to replace such funds in the Security
Account on any future Distribution Date to the extent that funds in the Security
Account on such Distribution Date are less than payments required to be made to
Securityholders on such date. If so specified in the related Prospectus
Supplement, the obligations of the Master Servicer (or another entity) to make
advances may be secured by a cash advance reserve fund, a surety bond, a letter
of credit or another form of limited guaranty. If applicable, information
regarding the characteristics of, and the identity of any obligor on any such
surety bond will be set forth in the related Prospectus Supplement.
The Prospectus Supplement will describe any corresponding advancing
obligation of any person in connection with MBS included in the Trust Fund.
REPORTS TO SECURITYHOLDERS
With each distribution to holders of any Class of Securities, the
Master Servicer or the Trustee, as provided in the related Prospectus
Supplement, will forward or cause to be forwarded to each such holder, to the
Depositor and to such other parties as may be specified in the related
Agreement, a statement setting forth, in each case to the extent applicable and
available:
(i) the amount of such distribution to holders of
Securities of such Class applied to reduce the Security Balance
thereof;
(ii) the amount of such distribution to holders of
Securities of such Class allocable to Accrued Security Interest;
(iii) the amount of such distribution allocable to
Prepayment Premiums;
(iv) the amount of related servicing compensation received
by a Master Servicer (and, if payable directly out of the related Trust
Fund, by any Sub-Servicer) and such other customary information as any
such Master Servicer or the Trustee deems necessary or desirable, or
that a Securityholder reasonably requests, to enable Securityholders to
prepare their tax returns;
(v) the aggregate amount of advances included in such
distribution, and the aggregate amount of unreimbursed advances at the
close of business on such Distribution Date;
(vi) the aggregate principal balance of the Assets at the
close of business on such Distribution Date;
(vii) the number and aggregate principal balance of
Mortgage Loans in the Trust Fund in respect of which (a) one scheduled
payment is delinquent, (b) two scheduled payments are delinquent, (c)
three or more scheduled payments are delinquent and (d) foreclosure
proceedings have been commenced;
(viii) with respect to any Mortgage Loan in the Trust Fund
liquidated during the related Due Period, (a) the portion of such
liquidation proceeds payable or reimbursable to the Master Servicer (or
any other entity) in respect of such Mortgage Loan and (b) the amount
of any loss to Securityholders;
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(ix) with respect to each REO Property relating to a
Mortgage Loan and included in the Trust Fund as of the end of the
related Due Period, the date of acquisition;
(x) with respect to each REO Property relating to a
Mortgage Loan and included in the Trust Fund as of the end of the
related Due Period, (a) the principal balance of the related Mortgage
Loan immediately following such Distribution Date (calculated as if
such Mortgage Loan were still outstanding taking into account certain
limited modifications to the terms thereof specified in the Agreement),
(b) the aggregate amount of unreimbursed servicing expenses and
unreimbursed advances in respect thereof and (c) if applicable, the
aggregate amount of interest accrued and payable on related servicing
expenses and related advances;
(xi) with respect to any such REO Property sold during the
related Due Period (a) the aggregate amount of sale proceeds, (b) the
portion of such sales proceeds payable or reimbursable to the Master
Servicer in respect of such REO Property or the related Mortgage Loan
and (c) the amount of any loss to Securityholders in respect of the
related Mortgage Loan;
(xii) the aggregate Security Balance or notional amount, as
the case may be, of each Class of Securities (including any Class of
Securities not offered hereby) at the close of business on such
Distribution Date, separately identifying any reduction in such
Security Balance due to the allocation of any loss and increase in the
Security Balance of a Class of Accrual Securities in the event that
Accrued Security Interest has been added to such balance;
(xiii) the aggregate amount of principal prepayments made
during the related Due Period;
(xiv) the amount deposited in the reserve fund, if any, on
such Distribution Date;
(xv) the amount remaining in the reserve fund, if any, as
of the close of business on such Distribution Date;
(xvi) the amount deposited in the liquidity fund, if any,
on such Distribution Date;
(xvii) the amount remaining in the liquidity fund, if any,
as of the close of business on such Distribution Date;
(xviii) the aggregate unpaid Accrued Security Interest, if
any, on each Class of Securities at the close of business on such
Distribution Date;
(ixx) in the case of Securities with a variable
Pass-Through Rate or Interest Rate, the Pass-Through Rate or Interest
Rate applicable to such Distribution Date, and, if available, the
immediately succeeding Distribution Date, as calculated in accordance
with the method specified in the related Prospectus Supplement;
(xx) in the case of Securities with an adjustable
Pass-Through Rate or Interest Rate, for statements to be distributed in
any month in which an adjustment date occurs, the adjustable
Pass-Through Rate or Interest Rate applicable to such Distribution Date
and the immediately succeeding Distribution Date as calculated in
accordance with the method specified in the related Prospectus
Supplement;
(xxi) as to any Series which includes Credit Support, the
amount of coverage of each instrument of Credit Support included
therein and any draws thereon as of the close of business on such
Distribution Date;
(xxii) as to any Series which includes a Liquidity Facility,
the amount of coverage of each Liquidity Facility included therein and
any draws thereon as of the close of business on such Distribution
Date;
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(xxiii) as to any Series which includes any Cash Flow
Agreement, the amount of coverage of any such Cash Flow Agreement
included therein and any draws thereon as of the close of business on
such Distribution Date;
(xiv) during the Pre-Funding Period, the remaining
Pre-Funded Amount and the portion of the Pre-Funding Amount used to
acquire additional Assets since the preceding Distribution Date;
(xxv) during the Pre-Funding Period, the amount remaining
in the related Capitalized Interest Account;
(xxvi) as to any Series that includes Mortgage Loans insured
or guaranteed by any government agency or instrumentality, the amount
of all proceeds from governmental guarantors and insurers paid with
respect to such Mortgage Loans as of the close of business on such
Distribution Date; and
(xxvii) the aggregate amount of payments by the Mortgagors of
(a) default interest, (b) late charges and (c) assumption and
modification fees collected during the related Due Period.
The Master Servicer or the Trustee, as specified in the related
Prospectus Supplement, will forward or cause to be forwarded to each holder, to
the Depositor and to such other parties as may be specified in the Agreement, a
copy of any statements or reports received by the Master Servicer or the
Trustee, as applicable, with respect to any MBS. The Prospectus Supplement for
each Series of Offered Securities will describe any additional information to be
included in reports to the holders of such Offered Securities.
Within a reasonable period of time after the end of each calendar year,
the Master Servicer or the Trustee shall furnish to each Securityholder of
record at any time during the calendar year such information required by the
Code and applicable regulations thereunder to enable Securityholders to prepare
their federal income tax returns. See "-- Book-Entry Registration."
TERMINATION
To the extent and under the circumstances specified in the related
Prospectus Supplement, the Securities of a Series may be redeemed prior to their
final Distribution Date at the option of the Depositor, the Master Servicer or
such other party as may be specified in the related Prospectus Supplement by
purchase of the outstanding Securities of such Series. The right so to redeem
the Securities of a Series may be conditioned upon (1) the passage of a certain
date specified in the Prospectus Supplement and/or (2) (a) the decline of the
aggregate principal balance of the Trust Assets to less than a percentage
(specified in the related Prospectus Supplement) of the aggregate principal
balance of the Trust Assets at the related Cut-off Date or (b) the decline of
the aggregate Security Balance of a specified Class or Classes of Securities to
less than a percentage (specified in the related Prospectus Supplement) of the
aggregate Security Balance of the applicable Class or Classes of Securities at
the Closing Date for the Series. The percentages of the aggregate principal
balance of the Assets and the aggregate Security Balance of a Class referred to
in (2)(a) and (2)(b), respectively, above, may range from 5% to 25%. In the
event the option to redeem the Securities is exercised, the purchase price
distributed with respect to each Security offered hereby and by the related
Prospectus Supplement will equal 100% of its then outstanding principal amount,
plus accrued and unpaid interest thereon at the applicable Pass-Through Rate or
Interest Rate, less any unreimbursed advances and unrealized losses allocable to
such Security. Notice of the redemption of the Securities will be given to
Securityholders as provided in the related Agreement.
In addition, the Depositor, the Master Servicer or such other party as
may be specified in the related Prospectus Supplement may at their respective
options purchase all of the assets of the Trust Fund at a time specified in the
related Prospectus Supplement, which will be when the aggregate principal
balance of such Assets is less than a percentage (specified in the related
Prospectus Supplement, ranging from 5% to 25%) of the aggregate principal
balance of the Assets on the Cut-off Date, or when the aggregate Security
Balance of a specified Class or Classes of Securities is less than a percentage
(specified in the related Prospectus Supplement, ranging from 5% to 25%) of the
aggregate Security Balance of such Class or Classes at the Closing Date. The
termination price for
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a Trust Fund will be specified in the related Agreement, and will generally
equal the sum of (1) any Liquidation Expenses incurred by the Master Servicer in
respect of any Asset that has not yet been liquidated; (2) all amounts required
to be reimbursed or paid in respect of previously unreimbursed advances; and (3)
the greater of (a) the sum of (i) the aggregate unpaid principal balance of the
related Assets, plus accrued and unpaid interest thereon through the Interest
Accrual Period preceding the date of repurchase at the rates borne by such
Assets, plus (ii) the lesser of (A) the aggregate unpaid principal balance of
each Asset that had been secured by any REO Property remaining in the Trust
Fund, plus accrued interest thereon at the rates borne by such Assets through
the Interest Accrual Period preceding such purchase, and (B) the current
appraised value of any such REO Property (net of Liquidation Expenses to be
incurred in connection with the disposition of such property reasonably
estimated in good faith by the Master Servicer), such appraisal to be conducted
by an appraiser mutually agreed upon by the Master Servicer and the Trustee,
plus all previously unreimbursed advances made in respect of such REO Property,
and (b) the aggregate fair market value of the Trust Assets (as reasonably
determined by the Master Servicer as described in the related Agreement), plus
all previously unreimbursed advances made with respect to the related Assets.
The fair market value of the Trust Assets as determined for purposes of a
terminating purchase shall be deemed to include accrued interest through the
Interest Accrual Period preceding the date of such purchase at the applicable
rate on the unpaid principal balance of each Asset (including any Asset that has
become a REO Property, which REO Property has not yet been disposed of by the
Master Servicer). The basis for any such valuation shall be furnished by the
Master Servicer to the Securityholders upon request.
If specified in the related Prospectus Supplement, at the time
specified, the Trustee may be required to solicit bids for the purchase of all
Assets and REO Properties remaining in the Trust Fund. The Trustee would sell
such Assets and REO Properties only if the net proceeds to the Trust Fund from
such sale would be at least equal to the termination price, and the net proceeds
from such sale will be distributed first to the Master Servicer to reimburse it
for all previously unreimbursed Liquidation Expenses paid and advances made by,
and not previously reimbursed to, it with respect to the Assets and second to
the Securityholders in accordance with the distribution priorities set forth in
the Prospectus Supplement. If the net proceeds from such sale would not at least
equal the termination price, the Trustee would decline to sell the Assets and
REO Properties and would not be under any obligation to solicit any further bids
or otherwise negotiate any further sale of the Assets and REO Properties.
On the date set for termination of a Trust Fund, the termination price
shall be distributed (1) first to the Master Servicer to reimburse it for all
previously unreimbursed Liquidation Expenses paid and advances made by the
Master Servicer with respect to the related Assets and (2) second to the
Securityholders in accordance with the payment priorities that apply on each
Distribution Date as described in the related Prospectus Supplement. This will
result in the distribution with respect to each Offered Security of an amount
equal to 100% of its then outstanding principal amount, plus accrued and unpaid
interest thereon at the applicable Pass-Through Rate or Interest Rate, less any
unreimbursed advances and unrealized losses allocable to such Security.
BOOK-ENTRY REGISTRATION
If so provided in the related Prospectus Supplement, one or more
Classes of the Offered Securities of any Series may be issued as Book-Entry
Securities, and each such Class will be represented by one or more single
Securities registered in the name of a nominee for DTC.
DTC is a limited-purpose trust company organized under the laws of the
State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the Uniform Commercial Code ("UCC") and a
"clearing agency" registered pursuant to the provisions of Section 17A of the
Securities Exchange Act of 1934, as amended. DTC was created to hold securities
for its participating organizations ("Participants") and facilitate the
clearance and settlement of securities transactions between Participants through
electronic book-entry changes in their accounts, thereby eliminating the need
for physical movement of certificates. Participants include securities brokers
and dealers, banks, trust companies and clearing corporations and may include
certain other organizations. Indirect access to the DTC system also is available
to others such as banks, brokers, dealers and trust companies that clear through
or maintain a custodial relationship with a Participant, either directly or
indirectly ("Indirect Participants").
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Investors that are not Participants or Indirect Participants but desire
to purchase, sell or otherwise transfer ownership of, or other interests in,
Book-Entry Securities may do so only through Participants and Indirect
Participants. In addition, such investors ("Security Owners") will receive all
distributions on the Book-Entry Securities through DTC and its Participants.
Under a book-entry format, Security Owners will receive payments after the
related Distribution Date because, while payments are required to be forwarded
to Cede, on each such date, DTC will forward such payments to its Participants
which thereafter will be required to forward them to Indirect Participants or
Security Owners. If provided in the related Prospectus Supplement, the only
"Securityholder" (as such term is used in the Agreement) will be Cede, as
nominee of DTC, and the Security Owners will not be recognized by the Trustee as
Securityholders under the Agreement. Security Owners will be permitted to
exercise the rights of Securityholders under the related Agreement only
indirectly through the Participants who in turn will exercise their rights
through DTC.
Under the rules, regulations and procedures creating and affecting DTC
and its operations, DTC is required to make book-entry transfers among
Participants on whose behalf it acts with respect to the Book-Entry Securities
and is required to receive and transmit distributions of principal of and
interest on the Book-Entry Securities. Participants and Indirect Participants
with which Security Owners have accounts with respect to the Book-Entry
Securities similarly are required to make book-entry transfers and receive and
transmit such payments on behalf of their respective Security Owners.
Because DTC can act only on behalf of Participants, who in turn act on
behalf of Indirect Participants and certain banks, the ability of a Security
Owner to pledge its interest in the Book-Entry Securities to persons or entities
that do not participate in the DTC system, or otherwise take actions in respect
of its interest in the Book-Entry Securities, may be limited due to the lack of
a physical certificate evidencing such interest.
DTC has advised the Depositor that it will take any action permitted to
be taken by a Securityholder under an Agreement only at the direction of one or
more Participants to whose account with DTC interests in the Book-Entry
Securities are credited.
Securities initially issued in book-entry form will be issued in fully
registered, certificated form to Security Owners or their nominees ("Definitive
Securities"), rather than to DTC or its nominee only if (i) the Depositor
advises the Trustee in writing that DTC is no longer willing or able to properly
discharge its responsibilities as depository with respect to the Securities and
the Depositor is unable to locate a qualified successor or (ii) the Depositor,
at its option, elects to terminate the book-entry system through DTC.
Upon the occurrence of either of the events described in the
immediately preceding paragraph, DTC is required to notify all Participants of
the availability through DTC of Definitive Securities for the Security Owners.
Upon surrender by DTC of the certificate or certificates representing the
Book-Entry Securities, together with instructions for re-registration, the
Trustee will issue (or cause to be issued) to the Security Owners identified in
such instructions the Definitive Securities to which they are entitled, and
thereafter the Trustee will recognize the holders of such Definitive Securities
as Securityholders under the Agreement.
None of the Depositor, the Master Servicer, any Sub-Servicer, the
Trustee, or any of their affiliates 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 Securities or for maintaining, supervising or
reviewing any records relating to such beneficial ownership interests.
DESCRIPTION OF THE AGREEMENTS
Each Series of Bonds will be issued pursuant to an Indenture between
the Depositor (or a trust established by the Depositor) and the Trustee. Each
Series of Certificates evidencing interests in a Trust Fund including Mortgage
Loans will be issued pursuant to a Pooling and Servicing Agreement among the
Depositor, a Master Servicer (or Master Servicers) and the Trustee. Each Series
of Certificates evidencing interests in a Trust Fund
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not including Mortgage Loans will be issued pursuant to a Trust Agreement
between the Depositor and a Trustee. Any Master Servicer and the Trustee with
respect to any Series of Securities will be named in the related Prospectus
Supplement. In any Series of Securities for which there are multiple Master
Servicers there will be multiple Asset Groups, each corresponding to a
particular Master Servicer, and, if the related Prospectus Supplement so
specifies, the servicing obligations of each Master Servicer will be limited to
the Mortgage Loans in the corresponding Asset Group. Alternatively, a servicer
may be appointed pursuant to the related Agreement for any Trust Fund. Such
servicer may service all or a significant number of Mortgage Loans directly
without a Sub-Servicer. The obligations of any servicer shall be commensurate
with those of the Master Servicer described herein. References in this
prospectus to Master Servicer and its rights and obligations shall be deemed to
also be references to any servicer directly servicing Mortgage Loans. A manager
or administrator may be appointed pursuant to the Trust Agreement for any Trust
Fund. The provisions of each Agreement will vary depending upon the nature of
the Securities to be issued thereunder and the nature of the related Trust Fund.
The following summaries describe certain provisions that may appear in each
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
Agreement for each Trust Fund and the description of such provisions in the
related Prospectus Supplement. As used herein with respect to any Series, the
term "Security" refers to all of the Securities of that Series, whether or not
offered hereby and by the related Prospectus Supplement. Certain provisions that
may appear separately in an Indenture relating to the Bonds of a Series are
summarized under "-- Certain Terms of the Indenture." The Depositor will
provide a copy of the Agreement (without exhibits) relating to any Series of
Securities without charge upon written request of a Securityholder addressed to
Union Planters Mortgage Finance Corp., 7130 Goodlett Farms Parkway, Cordova,
Tennessee 38018, Attention: President.
ASSIGNMENT OF ASSETS; REPURCHASES
At the time of issuance of any Series of Securities, the Depositor will
assign (or cause to be assigned) to the designated Trustee the Trust Assets,
together with all principal and interest to be received on or with respect to
such Trust Assets after the Cut-off Date, other than principal and interest due
on or before the Cut-off Date and other than any Retained Interest. The Trustee
will, concurrently with such assignment, deliver the Securities to the Depositor
in exchange for the Trust Assets. Each Asset will be identified in a schedule
appearing as an exhibit to the related Agreement. Such schedule will include
detailed information (i) in respect of each Mortgage Loan, including without
limitation, the address of the related Mortgaged Property and type of such
property, the Mortgage Rate and, if applicable, the applicable index, margin,
adjustment date and any rate cap information, the original and remaining term to
maturity, the original and outstanding principal balance and balloon payment, if
any, the existence of FHA, VA or other government insurance or guarantees, the
Value and Loan-to-Value Ratio as of the date indicated and payment and
prepayment provisions, if applicable, and (ii) in respect of each MBS, including
without limitation, the MBS Issuer, MBS Servicer and MBS Trustee, the
pass-through or bond rate or formula for determining such rate, the issue date
and original and remaining term to maturity, if applicable, the original and
outstanding principal amount and payment provisions, if applicable.
With respect to each Mortgage Loan, the Depositor will deliver or cause
to be delivered to the Trustee (or to the custodian hereinafter referred to)
certain loan documents, which will include the original Mortgage Note endorsed,
without recourse, in blank or to the order of the Trustee, the original Mortgage
(or a certified copy thereof) with evidence of recording indicated thereon and
an assignment of the Mortgage to the Trustee in recordable form. Notwithstanding
the foregoing, a Trust Fund may include Mortgage Loans where the original
Mortgage Note is not delivered to the Trustee if the Depositor delivers to the
Trustee or the custodian a copy or a duplicate original of the Mortgage Note,
together with an affidavit certifying that the original thereof has been lost or
destroyed. With respect to such Mortgage Loans, the Trustee (or its nominee) may
not be able to enforce the Mortgage Note against the related borrower. The Asset
Seller will be required to repurchase, or substitute for, each such Mortgage
Loan that is subsequently in default if the enforcement thereof or of the
related Mortgage is materially adversely affected by the absence of the original
Mortgage Note. The related Agreement will require the Depositor or another party
specified therein to promptly cause each such assignment of Mortgage to be
recorded in the appropriate public office for real property records, 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 related
Mortgage Loan against the claim of any subsequent
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transferee or any successor to or creditor of the Depositor, the Master
Servicer, the relevant Asset Seller or any other prior holder of the Mortgage
Loan.
The Trustee (or a custodian) will review such Mortgage Loan documents
within a specified period of days after receipt thereof, and the Trustee (or a
custodian) will hold such documents in trust for the benefit of the
Securityholders. If any such document is found to be missing or defective in any
material respect, the Trustee (or such custodian) shall immediately notify the
Master Servicer and the Depositor, and the Master Servicer shall immediately
notify the relevant Asset Seller. If the Asset Seller cannot cure the omission
or defect within a specified number of days after receipt of such notice, then
the Asset Seller will be obligated, within a specified number of days of receipt
of such notice, to repurchase the related Mortgage Loan from the Trustee at the
Purchase Price or substitute for such Mortgage Loan. There can be no assurance
that an Asset Seller will fulfill this repurchase or substitution obligation,
and neither the Master Servicer nor the Depositor will be obligated to
repurchase or substitute for such Mortgage Loan if the Asset Seller defaults on
its obligation. This repurchase or substitution obligation constitutes the sole
remedy available to the Securityholders and the Trustee for omission of, or a
material defect in, a constituent document. To the extent specified in the
related Prospectus Supplement, in lieu of curing any omission or defect in the
Asset or repurchasing or substituting for such Asset, the Asset Seller may agree
to cover any losses suffered by the Trust Fund as a result of such breach or
defect.
With respect to each Agency Security or MBS in certificated form, the
Depositor will deliver or cause to be delivered to the Trustee (or the
custodian) the original certificate or other definitive evidence of such Agency
Security or MBS, as applicable, together with bond power or other instruments,
certifications or documents required to transfer fully such Agency Security or
MBS, as applicable, to the Trustee for the benefit of the Securityholders. With
respect to each Agency Security or MBS in uncertificated or book-entry form or
held through a "clearing corporation" within the meaning of the UCC, the
Depositor and the Trustee will cause such Agency Security or MBS to be
registered directly or on the books of such clearing corporation or of a
financial intermediary in the name of the Trustee for the benefit of the
Securityholders. The related Agreement will require that either the Depositor or
the Trustee promptly cause any MBS and Agency Securities in certificated form
not registered in the name of the Trustee to be re-registered, with the
applicable persons, in the name of the Trustee.
REPRESENTATIONS AND WARRANTIES; REPURCHASES
The Depositor will, with respect to each Mortgage Loan, assign certain
representations and warranties, as of a specified date (the person making such
representations and warranties, the "Warrantying Party") covering, by way of
example, the following types of matters: (i) the accuracy of the information set
forth for such Mortgage Loan on the schedule of Assets appearing as an exhibit
to the related Agreement; (ii) the existence of title insurance insuring the
lien priority of the Mortgage Loan; (iii) the authority of the Warrantying Party
to sell the Mortgage Loan; (iv) the payment status of the Mortgage Loan and the
status of payments of taxes, assessments and other charges affecting the related
Mortgaged Property; (v) the existence of customary provisions in the related
Mortgage Note and Mortgage to permit realization against the Mortgaged Property
of the benefit of the security of the Mortgage; and (vi) the existence of hazard
and extended perils insurance coverage on the Mortgaged Property.
Representations and warranties made in respect of an Asset may have
been made as of a date prior to the applicable Cut-off Date. A substantial
period of time may have elapsed between such date and the date of initial
issuance of the related Series of Securities evidencing an interest in such
Asset. Unless otherwise specified in the related Prospectus Supplement, in the
event of a breach of any such representation or warranty, the Warranting Party
will be obligated to reimburse the Trust Fund for losses caused by any such
breach or either cure such breach or repurchase or replace the affected Asset as
described below. Because the representations and warranties will not address
events that may occur following the date as of which they were made, the
Warranting Party will have no reimbursement, cure, repurchase or substitution
obligation in connection with such subsequent events, even if they occur prior
to the date of the initial issuance of the related Series of Securities. Such
party would have not such obligations if the relevant event that causes such
breach occurs after such date.
Each Warrantying Party, if other than the Depositor, shall be an Asset
Seller or an affiliate thereof or such other person acceptable to the Depositor
and shall be identified in the related Prospectus Supplement.
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Each Agreement will provide that the Master Servicer and/or Trustee
will be required to notify promptly the relevant Warrantying Party of any breach
of any representation or warranty made by it in respect of an Asset that
materially and adversely affects the value of such Asset or the interests
therein of the Securityholders. If such Warrantying Party cannot cure such
breach within a specified period following the date on which such party was
notified of such breach, then such Warrantying Party will be obligated to
repurchase such Asset from the Trustee within a specified period from the date
on which the Warrantying Party was notified of such breach, at the Purchase
Price therefor. As to any Asset, the "Purchase Price" generally is equal to the
sum of the unpaid principal balance thereof, plus unpaid accrued interest
thereon at the applicable coupon rate from the date as to which interest was
last paid to the due date in the Due Period in which the relevant purchase is to
occur, plus certain servicing expenses that are reimbursable to the Master
Servicer. If so provided in the Prospectus Supplement for a Series, a
Warrantying Party, rather than repurchase an Asset as to which a breach has
occurred, will have the option, within a specified period after initial issuance
of such Securities, to cause the removal of such Asset from the Trust Fund and
substitute in its place one or more other Assets, in accordance with the
standards described in the related Prospectus Supplement. If so provided in the
Prospectus Supplement for a Series, a Warrantying Party, rather than repurchase
or substitute an Asset as to which a breach has occurred, will have the option
to reimburse the Trust Fund or the Securityholders for any losses caused by such
breach. This reimbursement, repurchase or substitution obligation will
constitute the sole remedy available to holders of Offered Securities or the
Trustee for a breach of representation by a Warrantying Party.
Neither the Depositor (except to the extent that it is the Warrantying
Party) nor the Master Servicer will be obligated to purchase or substitute for
an Asset if a Warrantying Party defaults on its obligation to do so, and no
assurance can be given that Warrantying Parties will carry out such obligations
with respect to Assets.
A Master Servicer will make certain representations and warranties
regarding its authority to enter into, and its ability to perform its
obligations under, the related Agreement. Generally, a breach of any such
representation of the Master Servicer that materially and adversely affects the
interests of the Securityholders and continues unremedied for thirty days after
the giving of written notice of such breach to the Master Servicer by the
Trustee or the Depositor, or to the Master Servicer, the Depositor and the
Trustee by a percentage of Securityholders evidencing not less than 25% of the
Voting Rights (unless otherwise specified in the related Prospectus Supplement)
will constitute an Event of Default under such Agreement. See "-- Events of
Default" and "-- Rights Upon Event of Default."
SECURITY ACCOUNT AND OTHER COLLECTION ACCOUNTS
General
The Master Servicer and/or the Trustee will, as to each Trust Fund,
establish and maintain or cause to be established and maintained one or more
separate accounts for the collection of payments on the related Trust Assets
(collectively, the "Security Account"), which must be either (i) an account or
accounts the deposits in which are insured by the Bank Insurance Fund or the
Savings Association Insurance Fund of the Federal Deposit Insurance Corporation
("FDIC") (to the limits established by the FDIC) and the uninsured deposits in
which are otherwise secured such that the Securityholders have a claim with
respect to the funds in the Security Account or a perfected first priority
security interest against any collateral securing such funds that is superior to
the claims of any other depositors or general creditors of the institution with
which the Security Account is maintained or (ii) otherwise maintained with a
bank or trust company, and in a manner, satisfactory to the Rating Agencies
rating any Class of Securities of such Series. The collateral eligible to secure
amounts in the Security Account is limited to United States government
securities and other investment grade obligations specified in the Agreement
("Permitted Investments"). A Security Account may be maintained as an interest
bearing or a non-interest bearing account and the funds held therein may be
invested pending each succeeding Distribution Date in certain short-term
Permitted Investments. Any interest or other income earned on funds in the
Security Account will be paid to a Master Servicer or its designee as additional
servicing compensation to the extent provided in the related Prospectus
Supplement. The Security Account may be maintained with an institution that is
an affiliate of the Master Servicer, if applicable, provided that such
institution meets the standards imposed by the Rating Agencies. If specified in
the related Prospectus Supplement, a Security Account may contain funds relating
to more than one Series of Securities
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and may contain other funds respecting payments on mortgage loans belonging to
the Master Servicer or serviced or master serviced by it on behalf of others.
Deposits
A Master Servicer or the Trustee will deposit or cause to be deposited
in the Security Account for one or more Trust Funds on a daily basis, unless
otherwise provided in the related Agreement, the following payments and
collections received, or advances made, by or on behalf of the Master Servicer
or the Trustee subsequent to the Cutoff Date (other than payments due on or
before the Cut-off Date, and exclusive of any amounts representing a Retained
Interest):
(i) all payments of principal, including principal
prepayments, on the Assets;
(ii) all payments of interest on the Assets, including any
default interest collected, in each case net of any portion thereof
retained by a Master Servicer or a Sub-Servicer as its servicing
compensation and net of any Retained Interest;
(iii) all proceeds of the hazard insurance policies, flood
insurance policies and primary mortgage insurance policies, if any, to
be maintained in respect of each Mortgaged Property securing a Mortgage
Loan (to the extent such proceeds are not applied to the restoration of
the property or released to the mortgagor in accordance with the normal
servicing procedures of a Master Servicer or the related Sub-Servicer,
subject to the terms and conditions of the related Mortgage and
Mortgage Note) (collectively, "Insurance Proceeds") and all other
amounts received and retained in connection with the liquidation of
defaulted Mortgage Loans, by foreclosure or otherwise ("Liquidation
Proceeds"), together with the net proceeds on a monthly basis with
respect to any Mortgaged Properties acquired for the benefit of
Securityholders by foreclosure or by deed in lieu of foreclosure or
otherwise;
(iv) any amounts paid under any instrument or drawn from
any fund that constitutes Credit Support for the related Series of
Securities as described under "Description of Credit Support";
(v) any amounts paid under any instrument or drawn from
any fund that constitutes a Liquidity Facility for the related Series
of Securities;
(vi) any advances made as described under "Description of
the Offered Securities -- Advances in Respect of Delinquencies";
(vii) any amounts paid under any Cash Flow Agreement, as
described under "Description of the Trust Funds -- Cash Flow
Agreements";
(viii) all proceeds of any Asset or, with respect to a
Mortgage Loan, property acquired in respect thereof purchased by the
Depositor, any Asset Seller or any other specified person as described
under "Assignment of Assets; Repurchases" and "Representations and
Warranties; Repurchases," all proceeds of any defaulted Mortgage Loan
purchased as described under "Realization Upon Defaulted Mortgage
Loans," and all proceeds of any Asset purchased as described under
"Description of the Offered Securities -- Termination";
(ix) if specified in the related Agreement, any amounts
paid by a Master Servicer to cover interest shortfalls arising out of
the prepayment of Mortgage Loans as described under "Description of the
Agreements -- Retained Interest; Servicing Compensation and Payment of
Expenses";
(x) to the extent that any such item does not constitute
additional servicing compensation to a Master Servicer, any payments on
account of modification or assumption fees, late payment charges or
Prepayment Premiums on the Assets;
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(xi) all payments required to be deposited in the Security
Account with respect to any deductible clause in any blanket insurance
policy described under "Hazard Insurance Policies";
(xii) any amount required to be deposited by a Master
Servicer or the Trustee in connection with losses realized on
investments for the benefit of the Master Servicer or the Trustee, as
the case may be, of funds held in the Security Account;
(xiii) all proceeds of insurance or guarantees with respect
to Mortgage Loans provided by any governmental agency or
instrumentality; and
(xiv) any other amounts required to be deposited in the
Security Account as provided in the related Agreement and described in
the related Prospectus Supplement.
Withdrawals
A Master Servicer or the Trustee may, from time to time, unless
otherwise specified in the related Agreement, make withdrawals from the Security
Account for each Trust Fund for any of the following purposes:
(i) to make distributions to the Securityholders on each
Distribution Date;
(ii) to reimburse a Master Servicer (or other entity) for
unreimbursed advances as described under "Description of the Offered
Securities -- Advances in Respect of Delinquencies," such reimbursement
to be made out of amounts identified and applied by the Master Servicer
(or other entity) as late collections of interest (net of related
servicing fees and Retained Interest) on and principal of the related
Mortgage Loans or out of amounts drawn under any related form of Credit
Support or Liquidity Facilities;
(iii) to reimburse a Master Servicer (or other entity) for
unpaid servicing fees earned and certain unreimbursed servicing
expenses incurred with respect to Mortgage Loans and properties
acquired in respect thereof, such reimbursement made out of Liquidation
Proceeds and Insurance Proceeds collected on related Mortgage Loans and
properties, and net income collected thereon, with respect to which
such fees were earned or such expenses were incurred, or out of amounts
drawn under any related form of Credit Support or Liquidity Facilities;
(iv) to reimburse a Master Servicer (or other entity) for
advances described in clause (ii) above and any servicing expenses
described in clause (iii) above which, in the Master Servicer's (or
such other entity's) good faith judgment, will not be recoverable from
the amounts described in clauses (ii) and (iii), respectively, or, if
and to the extent so provided by the related Agreement and described in
the related Prospectus Supplement, from amounts collected on unrelated
Assets otherwise distributable on Subordinate Securities, if any remain
outstanding, and otherwise any outstanding Class of Securities, of the
related Series;
(v) to reimburse a Master Servicer, the Depositor, or any
of their respective directors, officers, employees and agents, as the
case may be, for certain expenses, costs and liabilities incurred
thereby, as and to the extent described under "Certain Matters
Regarding a Master Servicer and the Depositor";
(vi) if and to the extent described in the related
Prospectus Supplement, to pay (or to transfer to a separate account for
purposes of escrowing for the payment of) the Trustee's fees;
(vii) to reimburse the Trustee or any of its directors,
officers, employees and agents, as the case may be, for certain
expenses, costs and liabilities incurred thereby, as and to the extent
described under "Certain Matters Regarding the Trustee";
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(viii) to pay the person entitled thereto any amounts
deposited in the Security Account that were identified and applied by
the Master Servicer as recoveries of Retained Interest;
(ix) to pay for costs reasonably incurred in connection
with the proper management and maintenance of any Mortgaged Property
acquired for the benefit of Securityholders by foreclosure or by deed
in lieu of foreclosure or otherwise, such payments to be made out of
income received on such property;
(x) if one or more elections have been made to treat the
Trust Fund or designated portions thereof as a REMIC or as a FASIT, to
pay any federal, state or local taxes imposed on the Trust Fund or its
assets or transactions, as and to the extent described under "Federal
Income Tax Consequences" or in the related Prospectus Supplement;
(xi) to pay for the cost of an independent appraiser or
other expert in real estate matters retained to determine a fair sale
price for a defaulted Mortgage Loan or a property acquired in respect
thereof in connection with the liquidation of such Mortgage Loan or
property;
(xii) to pay for the cost of various opinions of counsel
obtained pursuant to the related Agreement for the benefit of
Securityholders;
(xiii) to pay for the costs of recording the related
Agreement if such recordation materially and beneficially affects the
interests of Securityholders, provided that such payment shall not
constitute a waiver with respect to the obligation of the Warrantying
Party to remedy any breach of representation or warranty under the
Agreement;
(xiv) to pay the person entitled thereto any amounts
deposited in the Security Account in error, including amounts received
on any Asset after its removal from the Trust Fund whether by reason of
purchase or substitution as contemplated by "-- Assignment of Assets;
Repurchase" and "-- Representations and Warranties; Repurchases" or
otherwise;
(xv) to make any other withdrawals permitted by the
related Agreement; and
(xvi) to clear and terminate the Security Account at the
termination of the Trust Fund.
Other Collection Accounts
Notwithstanding the foregoing, if so specified in the related
Prospectus Supplement, an Agreement may provide for the establishment and
maintenance of a separate collection account into which the Master Servicer or
any related Sub-Servicer will deposit on a daily basis the amounts described
under "-- Deposits" above. Any amounts on deposit in any such collection
account will be withdrawn therefrom and deposited into the appropriate Security
Account by a time specified in the related Prospectus Supplement. To the extent
specified in the related Prospectus Supplement, any amounts which could be
withdrawn from the Security Account as described under "-- Withdrawals" above,
may also be withdrawn from any such collection account. The Prospectus
Supplement will set forth any restrictions with respect to any such collection
account, including investment restrictions and any restrictions with respect to
financial institutions with which any such collection account may be maintained.
COLLECTION AND OTHER SERVICING PROCEDURES
The Master Servicer, directly or through Sub-Servicers, is required to
make reasonable efforts to collect all scheduled payments under the Mortgage
Loans and will follow or cause to be followed such collection procedures as it
would follow with respect to mortgage loans that are comparable to the Mortgage
Loans and held for its own account, provided such procedures are consistent with
(i) the terms of the related Agreement and any related hazard insurance policy
or instrument of Credit Support or Liquidity Facilities included in the related
Trust Fund described herein, (ii) applicable law and (iii) the general servicing
standard specified in the related Prospectus Supplement or,
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if no such standard is so specified, its normal servicing practices (in either
case, the "Servicing Standard"). In connection therewith, the Master Servicer
will be permitted discretion to waive any late payment charge or penalty
interest in respect of a late Mortgage Loan payment.
The Master Servicer will also be required to perform other customary
functions of a servicer of comparable loans, including maintaining hazard
insurance policies as described herein and in any related Prospectus Supplement,
and filing and settling claims thereunder; maintaining escrow or impoundment
accounts of mortgagors for payment of taxes, insurance and other items required
to be paid by any mortgagor pursuant to the terms of the Mortgage Loan;
processing assumptions or substitutions in those cases where the Master Servicer
has determined not to enforce any applicable due-on-sale clause; attempting to
cure delinquencies; supervising foreclosures; inspecting and managing Mortgaged
Properties under certain circumstances; and maintaining accounting records
relating to the Mortgage Loans. The Master Servicer will be responsible for
filing and settling claims in respect of particular Mortgage Loans under any
applicable instrument of Credit Support. See "Description of Credit Support."
The Master Servicer may agree to modify, waive or amend any term of any
Mortgage Loan in a manner consistent with the Servicing Standard so long as the
modification, waiver or amendment will not (i) affect the amount or timing of
any scheduled payments of principal or interest on the Mortgage Loan or (ii) in
its judgment, materially impair the security for the Mortgage Loan or reduce the
likelihood of timely payment of amounts due thereon. The Master Servicer also
may agree to any modification, waiver or amendment that would so affect or
impair the payments on, or the security for, a Mortgage Loan if, (i) in its
judgment, a material default on the Mortgage Loan has occurred or a payment
default is imminent and (ii) in its judgment, such modification, waiver or
amendment is reasonably likely to produce a greater recovery on a present value
basis than would liquidation. The Master Servicer is required to notify the
Trustee in the event of any modification, waiver or amendment of any Mortgage
Loan.
VA Loan Servicing Procedures
The VA Loans will be serviced pursuant to the related Agreement and
other servicing agreements by the Master Servicer either directly or through
Sub-Servicers. This servicing will be conducted generally in compliance with
FNMA or FHLMC standards and otherwise consistent with prudent residential
mortgage loan servicing standards generally accepted in the servicing industry.
The Master Servicer shall be diligent in abiding by VA collection and default
timetables.
Each Agreement will require the Master Servicer, directly or through
Sub-Servicers, to exercise a degree of skill and care that is generally in
compliance with FNMA or FHLMC standards and consistent with prudent residential
mortgage loan servicing standards generally accepted in the servicing industry.
Consistently with such standards, the Master Servicer in its discretion may
waive late payment charges or assumption fees and arrange with a mortgagor a
schedule for repayment of due and unpaid principal and interest so long as, by
such action, the Master Servicer does not knowingly or intentionally cause the
termination of the REMIC or FASIT status of the related REMIC or FASIT or the
imposition of an entity-level tax on the related Trust Fund. Any such payment
schedule modification will not affect the computation of the amount required to
be distributed for the related Securities.
A notice to VA of intent to begin action need not be given within any
prescribed period of time. This flexibility affords the Master Servicer time to
work with a deserving Mortgagor to avoid liquidation. Barring exceptional
circumstances, the notice should not be given until a default has continued for
90 days. If the Mortgaged Property is in jeopardy, however, the notice should be
filed as soon as the risk becomes known to the Master Servicer. Except upon
express waiver by VA, the Master Servicer may not begin foreclosure until VA has
been notified 30 days in advance of this intent to liquidate. In the case of a
Mortgage Loan assumption, the Master Servicer must make a good faith effort to
notify the original Mortgagor of its intention by certified mail. Failure to
notify the original Mortgagor may result in the loss of the VA Guaranty with
respect to such Mortgaged Property. The Master Servicer must request a
liquidation appraisal at least 30 days prior to the projected foreclosure sale
in addition to furnishing VA with a VA "status of account" form to estimate the
projected claim amount that is necessary to prepare the bid amount.
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The Master Servicer must deliver to VA the lender's "election to
convey" within 15 days of the foreclosure sale or the Master Servicer loses its
right to transfer the Mortgaged Property. Upon receipt of advice that VA elects
not to specify a bid amount, the Master Servicer may waive or satisfy a portion
of the indebtedness on behalf of the related Trust Fund in order to reduce the
amount owing to an amount that would allow VA to specify a bid amount under 38
C.F.R. Section 36.4320.
FHA Loan Servicing Procedures
The FHA Loans will be serviced pursuant to the related Agreement and
other servicing agreements by Master Servicers. The Master Servicer will be
required to be diligent in pursuing claims for defaulted FHA Loans as a lender
and in abiding by FHA collection and default timetables.
Under the FHA mortgage insurance program the lender may accelerate an
insured loan following a default on such loan only after the lender or its agent
has contacted the borrower to discuss the reasons for the default and to seek
its cure. If the borrower does not cure the default or agree to a modification
agreement or repayment plan, the lender will notify the borrower in writing
that, unless within 30 days the default is cured or the borrower enters into a
modification agreement or repayment plan, the loan will be accelerated and that,
if the default persists, the lender will report the default to an appropriate
credit agency. The lender may rescind the acceleration of maturity after full
payment is due and reinstate the loan only if the borrower brings the loan
current, executes a modification agreement or agrees to an acceptable repayment
plan.
Following acceleration of maturity upon a secured FHA Loan, the lender
may either (a) proceed against the property under any security instrument, or
(b) make a claim under the lender's contract of insurance. If the lender chooses
to proceed against the property under a security instrument (or it accepts a
voluntary conveyance or surrender of the property), the lender may file an
insurance claim only with the prior approval of the Secretary of HUD.
When a lender files an insurance claim with the FHA, the FHA reviews
the claim, the complete loan file and documentation of the lender's efforts to
obtain recourse, certification of compliance with applicable state and local
laws in carrying out any foreclosure, and evidence that the lender has properly
filed proofs of claims, where the borrower is bankrupt or deceased. Generally,
an action to initiate foreclosure on any FHA insured mortgage loan must be filed
with the local jurisdiction within nine months after the date of default.
Concurrently with the subsequent filing of the insurance claim for reimbursement
for loss, the lender assigns to the United States of America the lender's entire
interest in the related security instrument and in any claim filed in any legal
proceedings. If, at the time the ownership in the property is conveyed to the
United States, the FHA has reason to believe that the title is not marketable,
the FHA may deny the claim and reconvey the property to the lender. If either
such defect is discovered after the FHA has paid a claim, the FHA may require
the lender to repurchase the paid claim and to accept a reassignment of the loan
note. If the lender subsequently obtains a valid and enforceable judgment
against the borrower, the lender may resubmit a new insurance claim with an
assignment of the judgment. Although the FHA may contest any insurance claim and
make a demand for repurchase of the loan at any time up to two years from the
date the claim was certified for payment and may do so thereafter in the event
of fraud or misrepresentation on the part of the lender, the FHA has expressed
an intention to limit the period of time within which it will take such action
to one year from the date the claim was certified for payment.
The Secretary of HUD may deny a claim for insurance in whole or in part
for any violations of the regulations governing the FHA program; however, the
Secretary of HUD may waive such violations if it determines that enforcement of
the regulations would impose an injustice upon a lender which has substantially
complied with the regulations in good faith.
SUB-SERVICERS
A Master Servicer may delegate its servicing obligations in respect of
the Mortgage Loans to third-party servicers (each, a "Sub-Servicer"), but such
Master Servicer will remain obligated under the related Agreement. Each
sub-servicing agreement between a Master Servicer and a Sub-Servicer (a
"Sub-Servicing Agreement") must
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be consistent with the terms of the related Agreement and must provide that, if
for any reason the Master Servicer is no longer acting in such capacity, the
Trustee or any successor Master Servicer may assume the Master Servicer's rights
and obligations under such Sub-Servicing Agreement.
The Master Servicer will be solely liable for all fees owed by it to
any Sub-Servicer, whether or not the Master Servicer's compensation pursuant to
the related Agreement is sufficient to pay such fees. However, a Sub-Servicer
may be entitled to Retained Interests. Each Sub-Servicer will be reimbursed by
the Master Servicer for certain expenditures that it makes, generally to the
same extent the Master Servicer would be reimbursed under an Agreement. See "--
Retained Interest, Servicing Compensation and Payment of Expenses."
REALIZATION UPON DEFAULTED MORTGAGE LOANS
A Mortgagor's failure to make required payments may reflect inadequate
income or the diversion of that income from payments due under the Mortgage
Loan, and may call into question such Mortgagor's ability to make timely payment
of taxes and to pay for necessary maintenance of the related Mortgaged Property.
The Master Servicer is required to monitor any Mortgage Loan in default, contact
the Mortgagor concerning the default, evaluate whether the causes of the default
can be cured over a reasonable period without significant impairment of the
value of the Mortgaged Property, initiate corrective action in cooperation with
the Mortgagor if cure is likely, inspect the Mortgaged Property and take such
other actions as are consistent with the Servicing Standard. A significant
period of time may elapse before the Master Servicer is able to assess the
success of such corrective action or the need for additional initiatives.
The time within which the Master Servicer makes the initial
determination of appropriate action, evaluates the success of corrective action,
develops additional initiatives, institutes foreclosure proceedings and actually
forecloses (or takes a deed to a Mortgaged Property in lieu of foreclosure) on
behalf of the Securityholders, may vary considerably depending on the particular
Mortgage Loan, the Mortgaged Property, the mortgagor, the presence of an
acceptable party to assume the Mortgage Loan and the laws of the jurisdiction in
which the Mortgaged Property is located. Under federal bankruptcy law, the
Master Servicer in certain cases may not be permitted to accelerate a Mortgage
Loan or to foreclose on a Mortgaged Property for a considerable period of time.
See "Certain Legal Aspects of Mortgage Loans."
Any Agreement relating to a Trust Fund that includes Mortgage Loans may
grant to the Master Servicer and/or the holders of Securities a right of first
refusal to purchase from the Trust Fund at a predetermined purchase price any
Mortgage Loan as to which a specified number of scheduled payments thereunder
are delinquent. Any such right granted to the holder of an Offered Security will
be described in the related Prospectus Supplement. The related Prospectus
Supplement will also describe any such right granted to any person if the
predetermined purchase price is less than the Purchase Price described under "--
Representations and Warranties; Repurchases."
If so specified in the related Prospectus Supplement, the Master
Servicer may offer to sell any defaulted Mortgage Loan described in the
preceding paragraph and not otherwise purchased by any person having a right of
first refusal with respect thereto, if and when the Master Servicer determines,
consistent with the Servicing Standard, that such a sale would produce a greater
recovery on a present value basis than would liquidation through foreclosure or
similar proceeding. The related Agreement will provide that any such offering be
made in a commercially reasonable manner for a specified period and that the
Master Servicer accept the highest cash bid received from any person (including
itself, an affiliate of the Master Servicer or any Securityholder) that
constitutes a fair price for such defaulted Mortgage Loan. In the absence of any
bid determined in accordance with the related Agreement to be fair, the Master
Servicer shall proceed with respect to such defaulted Mortgage Loan as described
below. Any bid in an amount at least equal to the Purchase Price described
herein under "-- Representations and Warranties; Repurchases" will in all cases
be deemed fair.
The Master Servicer, on behalf of the Trustee, may at any time
institute foreclosure proceedings, exercise any power of sale contained in any
mortgage, obtain a deed in lieu of foreclosure, or otherwise acquire title to a
Mortgaged Property securing a Mortgage Loan by operation of law or otherwise, if
such action is consistent with
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the Servicing Standard and a default on such Mortgage Loan has occurred or, in
the Master Servicer's judgment, is imminent.
If title to any Mortgaged Property is acquired by a Trust Fund as to
which a REMIC or FASIT election has been made, the Master Servicer, on behalf of
the Trust Fund, generally will be required to sell the Mortgaged Property by the
end of the third taxable year after the taxable year of acquisition (or, in the
case of a FASIT, such shorter period as shall be established by regulations),
unless (i) the Internal Revenue Service grants an extension of time to sell such
property or (ii) the Trustee receives an opinion of independent counsel to the
effect that the holding of the property by the Trust Fund subsequent to three
years after its acquisition will not result in the imposition of a tax on the
Trust Fund or cause the Trust Fund to fail to qualify as a REMIC or as a FASIT,
as the case may be, under the Code at any time that any Security is outstanding.
Subject to the foregoing, the Master Servicer will be required to (i) solicit
bids for any Mortgaged Property so acquired in such a manner as will be
reasonably likely to realize a fair price for such property and (ii) accept the
first (and, if multiple bids are contemporaneously received, the highest) cash
bid received from any person that constitutes a fair price.
The limitations imposed by the related Agreement and the REMIC
provisions or the FASIT provisions of the Code (if a REMIC election or a FASIT
election has been made with respect to the related Trust Fund) on the ownership
and management of any Mortgaged Property acquired on behalf of the Trust Fund
may result in the recovery of an amount less than the amount that would
otherwise be recovered. See "Certain Legal Aspects of Mortgage Loans --
Foreclosure."
If recovery on a defaulted Mortgage Loan under any related instrument
of Credit Support is not available, the Master Servicer nevertheless will be
obligated to follow or cause to be followed normal practices and procedures
necessary or advisable to realize thereupon. If the reimbursable Liquidation
Proceeds are less than the outstanding principal balance of the defaulted
Mortgage Loan, plus interest accrued thereon at the Mortgage Rate and the
aggregate amount of expenses incurred by the Master Servicer in connection with
such proceedings, the Trust Fund will realize a loss in the amount of such
difference. The Master Servicer may withdraw or cause to be withdrawn from the
Security Account out of Liquidation Proceeds recovered on a defaulted Mortgage
Loan, prior to the distribution of such Liquidation Proceeds to Securityholders,
amounts representing normal servicing compensation, unreimbursed servicing
expenses incurred and any unreimbursed advances of delinquent payments made.
If any property securing a defaulted Mortgage Loan is damaged and
proceeds, if any, from the related hazard insurance policy are insufficient to
restore the damaged property to a condition sufficient to permit recovery under
related Credit Support, if any, the Master Servicer is not required to expend
its own funds to restore the damaged property unless it determines (i) that such
restoration will increase the proceeds to Securityholders on liquidation of the
Mortgage Loan after reimbursement of the Master Servicer for its expenses and
(ii) that such expenses will be recoverable by it from related Insurance
Proceeds or Liquidation Proceeds.
As servicer of the Mortgage Loans, a Master Servicer, on behalf of
itself, the Trustee and the Securityholders, will present claims to the obligor
under each instrument of Credit Support, and will take such reasonable steps as
are necessary to receive payment or to permit recovery thereunder with respect
to defaulted Mortgage Loans.
If a Master Servicer or its designee recovers payments under any
instrument of Credit Support with respect to a defaulted Mortgage Loan, the
Master Servicer will be entitled to withdraw or cause to be withdrawn from the
Security Account out of such payments, prior to distribution thereof to
Securityholders, its normal servicing compensation on such Mortgage Loan,
unreimbursed servicing expenses incurred with respect thereto and any related
unreimbursed advances of delinquent payments. See "-- Hazard Insurance Policies"
and "Description of Credit Support."
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FIDELITY BONDS AND ERRORS AND OMISSIONS INSURANCE
Each Agreement will require that the Master Servicer obtain and
maintain in effect a fidelity bond or similar form of insurance coverage (which
may provide blanket coverage) or any combination thereof insuring against loss
occasioned by fraud, theft or other intentional misconduct of the officers,
employees and agents of the Master Servicer. The related Agreement will allow
the Master Servicer to self-insure against loss occasioned by the errors and
omissions of the officers, employees and agents of the Master Servicer so long
as certain criteria set forth in the Agreement are met.
DUE-ON-SALE PROVISIONS
Certain Mortgage Loans may contain clauses requiring the consent of the
mortgagee to any sale or other transfer of the related Mortgaged Property, or
due-on-sale clauses entitling the mortgagee to accelerate payment of the
Mortgage Loan upon any sale, transfer or conveyance of the related Mortgaged
Property. The Master Servicer generally will enforce due-on-sale clauses to the
extent it has knowledge of the conveyance or proposed conveyance of the
underlying Mortgaged Property and it is entitled to do so under applicable law;
provided, however, that the Master Servicer will not take any action in relation
to the enforcement of any due-on-sale provision that would adversely affect or
jeopardize coverage under any applicable insurance policy. Fees collected by or
on behalf of the Master Servicer for entering into an assumption agreement will
be retained by or on behalf of the Master Servicer as additional servicing
compensation. See "Certain Legal Aspects of Mortgage Loans -- Due-on-Sale and
Due-on-Encumbrance."
RETAINED INTEREST; SERVICING COMPENSATION AND PAYMENT OF EXPENSES
Each Prospectus Supplement will specify whether there will be any
Retained Interest, and, if so, the initial owner thereof. Retained Interest will
be established on a loan-by-loan basis and will be specified on an exhibit to
the related Agreement. A "Retained Interest" in an Asset represents a specified
portion of the interest payable thereon. The Retained Interest will be deducted
from mortgagor payments as received and will not be part of the related Trust
Fund.
The Master Servicer's and a Sub-Servicer's primary servicing
compensation will come from the periodic payment to it of a portion of the
interest payment on each Asset. Because any Retained Interest and the Master
Servicer's primary compensation are a function of the principal balance of the
Assets, such amounts may decrease with amortization. The Prospectus Supplement
may provide that, as additional compensation, the Master Servicer or the
Sub-Servicers will retain all or a portion of assumption fees, modification
fees, late payment charges or Prepayment Premiums collected from mortgagors and
any interest or other income which may be earned on funds held in the Security
Account or any account established by a Sub-Servicer.
The Master Servicer may, to the extent provided in the related
Prospectus Supplement, pay from servicing compensation expenses incurred in
connection with its servicing and managing of the Assets, including, without
limitation, payment of the fees and disbursements of the Trustee and independent
accountants, payment of expenses incurred in connection with distributions and
reports to Securityholders, and payment of any other expenses described in the
related Prospectus Supplement. Certain other expenses, including certain
expenses relating to defaults and liquidations on the Mortgage Loans and, to the
extent so provided in the related Prospectus Supplement, interest thereon at the
rate specified therein may be borne by the Trust Fund.
If and to the extent provided in the related Prospectus Supplement, the
Master Servicer may be required to apply servicing compensation otherwise
payable to it in respect of any Due Period to cover certain interest shortfalls
resulting from the voluntary prepayment of any Asset in the related Trust Fund
during such period.
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EVIDENCE AS TO COMPLIANCE
Each Agreement with respect to Mortgage Loan collateral will provide
that on or before a specified date in each year, beginning with the first such
date at least six months after the related Cut-off Date, a firm of independent
public accountants will furnish a statement to the Trustee to the effect that,
on the basis of the examination by such firm conducted substantially in
compliance with either the Uniform Single Attestation Program for Mortgage
Bankers, the Audit Program for Mortgages serviced for the Federal Home Loan
Mortgage Corporation ("FHLMC") or such other program used by the Master
Servicer, the servicing by or on behalf of the Master Servicer of mortgage loans
under agreements substantially similar to each other (including the related
Agreement) was conducted in compliance with the terms of such agreements or such
program except for any significant exceptions or errors in records that, in the
opinion of the firm, either the Audit Program for Mortgages serviced for FHLMC,
or paragraph 4 of the Uniform Single Attestation Program for Mortgage Bankers,
or such other program, requires it to report. In rendering its statement such
firm may rely, as to matters relating to the direct servicing of mortgage loans
by Sub-Servicers, upon comparable statements for examinations conducted
substantially in compliance with the Uniform Single Attestation Program for
Mortgage Bankers or the Audit Program for Mortgages serviced for FHLMC (rendered
within one year of such statement) of firms of independent public accountants
with respect to the related Sub-Servicer.
Each such Agreement also will provide for delivery to the Trustee, on
or before a specified date in each year, of an annual statement signed by two
officers of the Master Servicer to the effect that the Master Servicer has
fulfilled its obligations under the Agreement throughout the preceding calendar
year or other specified twelve-month period.
Copies of such annual accountants' statement and such statements of
officers will be obtainable by Securityholders without charge upon written
request to the Master Servicer at the address set forth in the related
Prospectus Supplement.
CERTAIN MATTERS REGARDING A MASTER SERVICER AND THE DEPOSITOR
The Master Servicer, if any, or a servicer for the Mortgage Loans under
each Agreement will be named in the related Prospectus Supplement. The entity
serving as Master Servicer (or as such servicer) may be an affiliate of the
Depositor and may have other normal business relationships with the Depositor or
the Depositor's affiliates. Reference herein to the Master Servicer shall be
deemed to include a servicer, if applicable.
The related Agreement will provide that the Master Servicer may resign
from its obligations and duties thereunder only upon a determination that its
duties under the Agreement are no longer permissible under applicable law or are
in material conflict by reason of applicable law with other activities carried
on thereby at the time the related Series was initially issued, and upon the
appointment of an acceptable successor Master Servicer. No such resignation will
become effective until the Trustee or a successor servicer has assumed the
Master Servicer's obligations under the Agreement.
Each Agreement will further provide that neither the Master Servicer,
the Depositor nor any director, officer, employee, or agent of a Master Servicer
or the Depositor will be liable to the related Trust Fund or Securityholders for
any action taken, or for refraining from the taking of any action, in good faith
pursuant to the Agreement; provided, however, that neither a Master Servicer,
the Depositor nor any such person will be protected against any breach of a
representation, warranty or covenant made in such Agreement, or against any
liability specifically imposed thereby, or against any liability which would
otherwise be imposed by reason of willful misfeasance, bad faith or gross
negligence in the performance of obligations or duties thereunder or by reason
of reckless disregard of obligations and duties thereunder. Each Agreement will
further provide that any Master Servicer, the Depositor and any director,
officer, employee or agent of a Master Servicer or the Depositor will be
entitled to indemnification by the related Trust Fund and will be held harmless
against any loss, liability or expense incurred in connection with any legal
action relating to the Agreement or the Securities; provided, however, that such
indemnification will not extend to any loss, liability or expense (i)
specifically imposed by the Agreement or
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otherwise incidental to the performance of obligations and duties thereunder,
including, in the case of a Master Servicer, the prosecution of an enforcement
action in respect of any specific Mortgage Loan or Mortgage Loans (except as any
such loss, liability or expense shall be otherwise reimbursable pursuant to such
Agreement); (ii) incurred in connection with any breach of a representation,
warranty or covenant made in such Agreement; (iii) incurred by reason of
misfeasance, bad faith or gross negligence in the performance of obligations or
duties thereunder, or by reason of reckless disregard of such obligations or
duties; (iv) incurred in connection with any violation of any state or federal
securities law; or (v) imposed by any taxing authority if such loss, liability
or expense is not specifically reimbursable pursuant to the terms of the
Agreement. In addition, each Agreement will provide that neither the Master
Servicer nor the Depositor will be under any obligation to appear in, prosecute
or defend any legal action not incidental to its respective responsibilities
under the Agreement and that in its opinion may involve an expense or liability.
Any such Master Servicer or the Depositor may, however, in its discretion
undertake any such action which it may deem necessary or desirable with respect
to such Agreement and the rights and duties of the parties thereto and the
interests of the Securityholders 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 Securityholders, and the Master Servicer or the
Depositor, as the case may be, will be entitled to be reimbursed from the
Security Account.
Any person into which the Master Servicer or the Depositor may be
merged or consolidated, or any person resulting from any merger or consolidation
to which the Master Servicer or the Depositor is a party, or any person
succeeding to the business of the Master Servicer or the Depositor, will be the
successor of the Master Servicer or the Depositor, as the case may be, under the
related Agreement.
SPECIAL SERVICERS
If and to the extent specified in the related Prospectus Supplement, a
special servicer (a "Special Servicer") may be a party to the related Agreement
or may be appointed by the Servicer or another specified party to perform
certain specified duties in respect of servicing the related Mortgage Loans that
would otherwise be performed by the Master Servicer (for example, the workout
and/or foreclosure of defaulted Mortgage Loans). The rights and obligations of
any Special Servicer will be specified in the related Prospectus Supplement, and
the Master Servicer will be liable for the performance of a Special Servicer
only if, and to the extent, set forth in such Prospectus Supplement.
EVENTS OF DEFAULT
Events of Default under the related Agreement generally will include
(i) any failure by the Master Servicer to distribute or cause to be distributed
to Securityholders, or to remit to the Trustee for distribution to
Securityholders, any required payment; (ii) any failure by the Master Servicer
duly to observe or perform in any material respect any of its other covenants or
obligations under the Agreement that continues unremedied for thirty days after
written notice of such failure has been given to the Master Servicer by the
Trustee or the Depositor, or to the Master Servicer, the Depositor and the
Trustee by the holders of Securities evidencing not less than 25% of the Voting
Rights; (iii) any breach of a representation or warranty made by the Master
Servicer under the Agreement that materially and adversely affects the interests
of Securityholders and that continues unremedied for thirty days after written
notice of such breach has been given to the Master Servicer by the Trustee or
the Depositor, or to the Master Servicer, the Depositor and the Trustee by the
holders of Securities evidencing not less than 25% of the Voting Rights; and
(iv) certain events of insolvency, readjustment of debt, marshalling of assets
and liabilities or similar proceedings and certain actions by or on behalf of
the Master Servicer indicating its insolvency or inability to pay its
obligations. Material variations to the foregoing Events of Default (other than
to shorten cure periods or eliminate notice requirements) will be specified in
the related Prospectus Supplement. The Trustee shall, not later than the later
of 60 days after the occurrence of any event that constitutes or, with notice or
lapse of time or both, would constitute an Event of Default and five days after
certain officers of the Trustee become aware of the occurrence of such an event,
transmit by mail to the Depositor and all Securityholders notice of such
occurrence, unless such default shall have been cured or waived.
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The manner of determining the "Voting Rights" of a Security or Class or
Classes of Securities will be specified in the related Prospectus Supplement.
RIGHTS UPON EVENT OF DEFAULT
So long as an Event of Default under an Agreement remains unremedied,
the Depositor or the Trustee may, and at the direction of holders of Securities
evidencing not less than 51% of the Voting Rights, the Trustee shall, terminate
all of the rights and obligations of the Master Servicer under the Agreement and
in and to the Assets (other than as a Securityholder or as the owner of any
Retained Interest), whereupon the Trustee will succeed to all of the
responsibilities, duties and liabilities of the Master Servicer under the
Agreement (except that if the Trustee is prohibited by law from obligating
itself to make advances regarding delinquent mortgage loans, or if the related
Prospectus Supplement so specifies, then the Trustee will not be obligated to
make such advances) and will be entitled to similar compensation arrangements.
In the event that the Trustee is unwilling or unable so to act, it may or, at
the written request of the holders of Securities entitled to at least 51% of the
Voting Rights, it shall appoint, or petition a court of competent jurisdiction
for the appointment of, a loan servicing institution acceptable to each Rating
Agency with a net worth at the time of such appointment of at least $15,000,000
to act as successor to the Master Servicer under the Agreement. Pending such
appointment, the Trustee is obligated to act in such capacity. The Trustee and
any such successor may agree upon the servicing compensation to be paid, which
in no event may be greater than the compensation payable to the Master Servicer
under the Agreement.
The holders of Securities representing at least 66 2/3% of the Voting
Rights allocated to the respective Classes of Securities affected by any Event
of Default will be entitled to waive such Event of Default; provided, however,
that an Event of Default involving a failure to distribute a required payment to
Securityholders described in clause (i) under "Events of Default" may be waived
only by all of the Securityholders. Upon any such waiver of an Event of Default,
such Event of Default shall cease to exist and shall be deemed to have been
remedied for every purpose under the Agreement.
No Securityholder will have the right under any Agreement to institute
any proceeding with respect thereto unless such holder previously has given to
the Trustee written notice of default and unless the holders of Securities
evidencing not less than 25% of the Voting Rights 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 sixty
days has neglected or refused to institute any such proceeding. The Trustee,
however, is under no obligation to exercise any of the trusts or powers vested
in it by any Agreement or to make any investigation of matters arising
thereunder or to institute, conduct or defend any litigation thereunder or in
relation thereto at the request, order or direction of any of the holders of
Securities covered by such Agreement, unless such Securityholders have offered
to the Trustee reasonable security or indemnity against the costs, expenses and
liabilities that may be incurred therein or thereby.
AMENDMENT
Each Agreement may be amended by the parties thereto, without the
consent of any of the holders of Securities covered by the Agreement, (i) to
cure any ambiguity, (ii) to correct, modify or supplement any provision therein
that may be inconsistent with any other provision therein, (iii) to make any
other provisions with respect to matters or questions arising under the
Agreement that are not materially inconsistent with the provisions thereof, or
(iv) to comply with any requirements imposed by the Code; provided that such
amendment (other than an amendment for the purpose specified in clause (iv)
above) will not (as evidenced either by an opinion of counsel or by the
confirmation of each Rating Agency that the credit ratings assigned to the
Securities will not be downgraded or withdrawn) adversely affect in any material
respect the interests of any holder of Securities covered by the Agreement. Each
Agreement may also be amended by the Depositor, the Master Servicer, if any, and
the Trustee, with the consent of the holders of Securities affected thereby
evidencing not less than 51% of the Voting Rights, for any purpose; provided,
however, that no such amendment may (i) reduce in any manner the amount of or
delay the timing of, payments received or advanced on Assets that are required
to be distributed on any Security without the consent of the holder of such
Security, (ii) adversely affect in any material respect the interests of the
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holders of any Class of Securities in any additional manner not described in
(i), without the consent of the holders of all Securities of such Class or (iii)
modify the provisions of such Agreement described in this paragraph without the
consent of the holders of all Securities covered by such Agreement then
outstanding. However, with respect to any Series of Securities as to which a
REMIC election or a FASIT election is to be made, the Trustee will not consent
to any amendment of the Agreement unless it shall first have received an opinion
of counsel to the effect that such amendment will not result in the imposition
of a tax on the related Trust Fund or cause the related Trust Fund to fail to
qualify as a REMIC or as a FASIT, as the case may be, at any time that the
related Securities are outstanding.
THE TRUSTEE
The Trustee under each Agreement will be named in the related
Prospectus Supplement. The commercial bank, national banking association,
banking corporation or trust company serving as Trustee may have a banking
relationship with the Depositor and its affiliates and with any Master Servicer
and its affiliates.
The Trustee, and any successor Trustee, with respect to any Series
containing Bonds offered hereunder, each will have a combined capital and
surplus of at least $50,000,000, or will be a member of a bank holding system,
the aggregate combined capital and surplus of which is at least $50,000,000,
provided that such 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 that the Trustee and such
successor Trustee will be subject to supervision or examination by federal or
state authorities and will have an office in the United States.
DUTIES OF THE TRUSTEE
The Trustee will make no representations as to the validity or
sufficiency of any Agreement, the Offered Securities or any Asset or related
document and is not accountable for the use or application by or on behalf of
any Master Servicer of any funds paid to the Master Servicer or its designee in
respect of the Offered Securities or the Trust Assets, or deposited into or
withdrawn from the Security Account or any other account by or on behalf of the
Master Servicer. If no Event of Default has occurred and is continuing, the
Trustee is required to perform only those duties specifically required under the
related Agreement. However, upon receipt of the various certificates, reports or
other instruments required to be furnished to it, the Trustee is required to
examine such documents and to determine whether they conform to the requirements
of the Agreement.
CERTAIN MATTERS REGARDING THE TRUSTEE
The Trustee and any director, officer, employee or agent of the Trustee
shall be entitled to indemnification out of the Security Account for any loss,
liability or expense (including costs and expenses of litigation, and of
investigation, counsel fees, damages, judgments and amounts paid in settlement)
incurred in connection with the Trustee's (i) enforcing its rights and remedies
and protecting the interests, and enforcing the rights and remedies, of the
Securityholders during the continuance of an Event of Default, (ii) defending or
prosecuting any legal action in respect of the related Agreement or Securities,
(iii) being the mortgagee of record with respect to the Mortgage Loans in a
Trust Fund and the owner of record with respect to any Mortgaged Property
acquired in respect thereof for the benefit of Securityholders, or (iv) acting
or refraining from acting in good faith at the direction of the holders of the
related Series of Securities entitled to not less than 25% (or such other
percentage as is specified in the related Agreement with respect to any
particular matter) of the Voting Rights for such Series; provided, however, that
such indemnification will not extend to any loss, liability or expense that
constitutes a specific liability of the Trustee pursuant to the related
Agreement, or to any loss, liability or expense incurred by reason of willful
misfeasance, bad faith or negligence on the part of the Trustee in the
performance of its obligations and duties thereunder, or by reason of its
reckless disregard of such obligations or duties, or as may arise from a breach
of any representation, warranty or covenant of the Trustee made therein.
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RESIGNATION AND REMOVAL OF THE TRUSTEE
The Trustee may at any time resign from its obligations and duties
under an Agreement by giving written notice thereof to the Depositor, the Master
Servicer, if any, and all Securityholders. Upon receiving such notice of
resignation, the Depositor is required promptly to appoint a successor trustee
acceptable to the Master Servicer, if any. If no successor trustee shall have
been so appointed and have accepted appointment within 30 days after the giving
of such notice of resignation, the resigning Trustee may petition any court of
competent jurisdiction for the appointment of a successor trustee.
If at any time the Trustee shall cease to be eligible to continue as
such under the related Agreement, or if at any time the Trustee shall become
incapable of acting, or shall be adjudged bankrupt or insolvent, or a receiver
of the Trustee or of its property shall be appointed, or any public officer
shall take charge or control of the Trustee or of its property or affairs for
the purpose of rehabilitation, conservation or liquidation, then the Depositor
may remove the Trustee and appoint a successor trustee acceptable to the Master
Servicer, if any. Holders of the Securities of any Series entitled to at least
51% of the Voting Rights for such Series may at any time remove the Trustee
without cause and appoint a successor trustee.
Any resignation or removal of the Trustee and appointment of a
successor trustee shall not become effective until acceptance of appointment by
the successor trustee.
CERTAIN TERMS OF THE INDENTURE
General
The following summary describes certain provisions that may appear in
each Indenture. The Prospectus Supplement for a Series of Bonds will describe
any provision of the Indenture relating to such series that materially differs
from the description thereof contained in this Prospectus. The summaries do not
purport to be complete and are subject to, and are qualified in their entirety
by reference to all of the provisions of the Indenture for a Series of Bonds.
Events of Default
Unless otherwise specified in the related Prospectus Supplement, events
of default under the Indenture for each Series of Bonds include: (i) a default
for thirty (30) days (or such other number of days specified in such Prospectus
Supplement) or more in the payment of any principal of or interest on any Bond
of such Series; (ii) failure to perform any other covenant of the Depositor or
the Trust Fund in the Indenture which continues for a period of sixty (60) days
(or such other number of days specified in such Prospectus Supplement) after
notice thereof is given in accordance with the procedures described in the
related Prospectus Supplement; (iii) any representation or warranty made by the
Depositor or the Trust Fund in the Indenture or in any certificate or other
writing delivered pursuant thereto or in connection therewith with respect to or
affecting such Series having been incorrect in a material respect as of the time
made, and such breach is not cured within sixty (60) days (or such other number
of days specified in such Prospectus Supplement) after notice thereof is given
in accordance with the procedures described in the related Prospectus
Supplement; (iv) certain events of bankruptcy, insolvency, receivership or
liquidation of the Depositor or the Trust Fund; or (v) any other event of
default provided with respect to Bonds of the Series.
If an event of default with respect to the Bonds of any Series at the
time outstanding occurs and is continuing, either the Trustee or the
Securityholders of a majority of the then aggregate outstanding amount of the
Bonds of such Series (or only certain Classes of Bonds of such Series) may
declare the principal amount (or, if the Bonds of that Series are Accrual
Securities, such portion of the principal amount as may be specified in the
terms of that Series, as provided in the related Prospectus Supplement) of all
the Bonds of such Series to be due and payable immediately. Such declaration
may, under certain circumstances, be rescinded and annulled by the
Securityholder of a majority in aggregate outstanding amount of the Bonds of
such Series.
If, following an event of default with respect to any Series of Bonds,
the Bonds of such Series have been declared to be due and payable, the Trustee
may, in its discretion, notwithstanding such acceleration, elect to
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maintain possession of the collateral securing the Bonds of such Series and to
continue to apply distribution on such collateral as if there had been no
declaration of acceleration if such collateral continues to provide sufficient
funds for the payment of principal of and interest on the Bonds of such Series
as they would have become due if there had not been such a declaration. In
addition, the Trustee may not sell or otherwise liquidate the collateral
securing the Bonds of a Series following an event of default, other than a
default in the payment of any principal or interest on any Bond of such Series
for thirty (30) or more days, unless (a) the Securityholders of 100% (or such
other percentage specified in the related Prospectus Supplement) of the then
aggregate outstanding amount of the Bonds of such Series consent to such sale,
(b) the proceeds of such sale or liquidation are sufficient to pay in full the
principal of and accrued interest, due and unpaid, on the outstanding Bonds of
such Series at the date of such sale or (c) the Trustee determines that such
collateral would not be sufficient on an ongoing basis to make all payments on
such Bonds as such payments would have become due if such Bonds had not been
declared due and payable, and the Trustee obtains the consent of the
Securityholders of 66 2/3% (or such other percentage specified in the related
Prospectus Supplement) of the then aggregate outstanding amount of the Bonds of
such Series.
In the event that the Trustee liquidates the collateral with an event
of default involving a default for thirty (30) days (or such other number of
days specified in the related Prospectus Supplement) or more in the payment of
principal of or interest on the Bonds of a Series, the Indenture provides that
the Trustee will have a prior lien on the proceeds of any such liquidation for
unpaid fees and expenses. As a result, upon the occurrence of such an event of
default, the amount available for distribution to the Securityholders would be
less than would otherwise be the case. However, the Trustee may not institute a
proceeding for the enforcement of its lien except in connection with a
proceeding for the enforcement of the lien of the Indenture for the benefit of
the Securityholders after the occurrence of such an event of default.
Unless otherwise specified in the related Prospectus Supplement, in the
event the principal of the Bonds of a Series is declared due and payable, as
described above, the Securityholders of any such Bonds issued at a discount from
par may be entitled to receive no more than an amount equal to the unpaid
principal amount thereof less the amount of such discount which is unamortized.
Subject to the provisions of the Indenture relating to the duties of
the Trustee, in case an event of default shall occur and be continuing with
respect to a Series of Bonds, the Trustee shall be under no obligation to
exercise any of the rights or powers under the Indenture at the request or
direction of any of the Securityholders of such Series, unless such holders
offered to the Trustee security or indemnity satisfactory to it against the
costs, expenses and liabilities which might be incurred by it in complying with
such request or direction. Subject to such provisions for indemnification and
certain limitations contained in the Indenture, the Securityholders of a
majority of the then aggregate outstanding amount of the Bonds of such Series
shall have the right to direct the time, method and place of conducting any
proceeding for any remedy available to the Trustee or exercising any trust or
power conferred on the Trustee with respect to the Bonds of such Series, and the
Securityholders of a majority of the then aggregate outstanding amount of the
Bonds of such Series may, in certain cases, waive any default with respect
thereto except a default in the payment of principal or interest or a default in
respect of a covenant or provision of the Indenture that cannot be modified
without the waiver or consent of all the Securityholders of the outstanding
Bonds of such Series affected thereby.
Discharge Indenture
The Indenture will be discharged with respect to a Series of Bonds
(except with respect to certain continuing rights specified in the Indenture)
upon the delivery to the Trustee for cancellation of all the Bonds of such
Series or, with certain limitations, upon deposit with the Trustee of funds
sufficient for the payment in full of all of the Bonds of such Series.
In addition to such discharge with certain limitations, the Indenture
will provide that, if so specified with respect to the Bonds of any Series, the
related Trust Fund will be discharged from any and all obligations in respect of
the Bonds of such Series (except for certain obligations relating to temporary
Bonds and exchange of Bonds to register the transfer of or exchange Bonds of
such Series, to replace stolen, lost or mutilated notes of such Series, to
maintain paying agencies and to hold monies for payment in trust) upon the
deposit with the Trustee, in trust,
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of money and/or direct obligations of or obligations guaranteed by the United
States of America or such other obligation specified in the related Prospectus
Supplement, which through the payment of interest and principal in respect
thereof in accordance with their terms will provide money in an amount
sufficient to pay the principal of and each installment of interest on the Bonds
of such Series on the maturity date for such Bonds and any installment of
interest on such Bonds in accordance with the terms of the Indenture and the
Bonds of such Series. In the event of any such defeasance and discharge of Bonds
of such Series, holders of Bonds of such Series would be able to look only to
such money and/or direct obligations for payment of principal and interest, if
any, on their Bonds until maturity.
Trustee's Annual Report
The Trustee for each Series of Bonds will be required to mail each year
to all related Securityholders a brief report relating to its eligibility and
qualifications to continue as Trustee under the related Indenture, any amount
advanced by it under the Indenture, the amount, interest rate and maturity date
of certain indebtedness owing to the applicable Trustee in its individual
capacity, the property and funds physically held by such Trustee as such and any
action taken by it that materially affects such Bonds and that has not been
previously reported.
The Trustee
The Trustee for a Series of Bonds will be specified in the related
Prospectus Supplement. The Trustee for any Series may resign at any time, in
which even the Depositor will be obligated to appoint a successor trustee for
such Series. The Depositor may also remove any such Trustee if such Trustee
becomes insolvent. In such circumstances the Depositor will be obligated to
appoint a successor trustee for the applicable Series of Bonds. Any resignation
or removal of the Trustee and appointment of a successor trustee for any Series
of Bonds does not become effective until acceptance of the appointment by the
successor trustee for such Series.
The bank or trust company serving as Trustee may have a banking
relationship with the Depositor or any of its affiliates or the Master Servicer
or any of its affiliates.
DESCRIPTION OF CREDIT SUPPORT
GENERAL
For any Series of Securities, Credit Support may be provided with
respect to one or more Classes thereof or the related Assets. Credit Support may
be in the form of the subordination of one or more Classes of Securities,
letters of credit, insurance policies, guarantees, the establishment of one or
more reserve funds or other methods described in the related Prospectus
Supplement, or any combination of the foregoing. If so provided in the related
Prospectus Supplement, any form of Credit Support may be structured so as to be
drawn upon by more than one Series, to the extent described therein.
Credit Support will not provide protection against all risks of loss
and will not guarantee repayment of the entire Security Balance of the Offered
Securities together with interest thereon. If losses or shortfalls occur that
exceed the amount of Credit Support or that are not covered by Credit Support,
Securityholders will bear risk of loss. Moreover, if a form of Credit Support
covers more than one Series of Securities (each, a "Covered Trust"), holders of
Securities evidencing interests in any of such Covered Trusts will be subject to
the risk that such Credit Support will be exhausted by the claims of other
Covered Trusts prior to such Covered Trust receiving any such coverage.
The Prospectus Supplement will include a description of (a) the nature
and amount of coverage under any Credit Support, (b) any conditions to payment
thereunder not otherwise described herein, (c) the conditions (if any) under
which the amount of coverage under such Credit Support may be reduced and under
which such Credit Support may be terminated or replaced and (d) the material
provisions relating to Credit Support. Additionally, the
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Prospectus Supplement will set forth certain information with respect to the
obligor under any instrument of Credit Support, including (i) a brief
description of its principal business activities, (ii) its principal place of
business, place of incorporation and the jurisdiction under which it is
chartered or licensed to do business, (iii) if applicable, the identity of
regulatory agencies that exercise primary jurisdiction over the conduct of its
business and (iv) its total assets, and its stockholders' or policyholders'
surplus, if applicable. See "Risk Factors -- Availability of Credit Support does
not eliminate risk of loss on Offered Securities."
MAINTENANCE OF CREDIT SUPPORT
If Credit Support has been obtained for a Series of Securities, the
Master Servicer, or such other party specified in the related Prospectus
Supplement, will be obligated to exercise its best reasonable efforts to keep or
cause to be kept such Credit Support in full force and effect throughout the
term of the applicable Agreement, unless coverage thereunder has been exhausted
through payment of claims or otherwise, or substitution therefor is made as
described below under "-- Reduction or Substitution of Credit Enhancement." The
Master Servicer or such other party will be required to provide information
required for the Trustee to draw under any applicable Credit Support.
Unless otherwise specified in the related Prospectus Supplement, the
Master Servicer, or such other party specified in the related Prospectus
Supplement, will agree to pay the premiums for any instrument of Credit Support,
if applicable, on a timely basis. In the event the related insurer ceases to be
qualified under applicable law to transact such insurance business (a "Qualified
Insurer") or coverage is terminated for any reason other than exhaustion of such
coverage, the Master Servicer or such other party will use its best reasonable
efforts to obtain from another Qualified Insurer a comparable replacement
insurance policy or bond with a total coverage equal to the then outstanding
coverage of such policy or bond. If the cost of the replacement policy is
greater than the cost of such policy or bond, the coverage of the replacement
policy or bond will, unless otherwise agreed to by the Master Servicer, be
reduced to a level such that its premium rate does not exceed the premium rate
on the original insurance policy.
If any property securing a defaulted Mortgage Loan is damaged and
proceeds, if any, from the related hazard insurance policy or any applicable
special hazard insurance policy are insufficient to restore the damaged property
to a condition sufficient to permit recovery under any instrument of Credit
Support, the Master Servicer is not required to expend its own funds to restore
the damaged property unless it determines (i) that such restoration will
increase the proceeds to one or more Classes of Securityholders on liquidation
of the Mortgage Loan after reimbursement of the Master Servicer for its expenses
and (ii) that such expenses will be recoverable by it through Liquidation
Proceeds or Insurance Proceeds. If recovery under any instrument of Credit
Support or any related Primary Insurance Policy is not available because the
Master Servicer has been unable to make the above determinations, has made such
determinations incorrectly or recovery is not available for any other reason,
the Master Servicer is nevertheless obligated to follow such normal practices
and procedures (subject to the preceding sentence) as it deems necessary or
advisable to realize upon the defaulted Mortgage Loan and in the event such
determination has been incorrectly made, is entitled to reimbursement of its
expenses in connection with such restoration.
REDUCTION OR SUBSTITUTION OF CREDIT SUPPORT
Unless otherwise specified in the Prospectus Supplement, the amount of
Credit Support provided with respect to any Series of Securities may be reduced
under certain specified circumstances. In most cases, the amount available as
Credit Support will be subject to periodic reduction on a non-discretionary
basis in accordance with a schedule or formula set forth in the related
Agreement. Additionally, in the event that the credit rating of any obligor
under any applicable credit enhancement is downgraded, the credit rating of each
Class of the related Securities may be downgraded to a corresponding level, and
the Master Servicer or such other party specified in the Prospectus Supplement
will not be obligated to obtain replacement credit support in order to restore
the rating of the Securities. The Master Servicer or such other party will also
be permitted to replace such credit support with other credit enhancement
instruments issued by obligors whose credit ratings are equivalent to such
downgraded level and in lower amounts which would satisfy such downgraded level,
provided that the then-current rating of each Class of the related Series of
Securities is maintained.
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SUBORDINATE SECURITIES
If so specified in the related Prospectus Supplement, one or more
Classes of Securities of a Series may be Subordinate Securities. To the extent
specified in the related Prospectus Supplement, the rights of the holders of
Subordinate Securities to receive distributions of principal and interest from
the Security Account on any Distribution Date will be subordinated to the rights
of the holders of Senior Securities. If so provided in the related Prospectus
Supplement, subordination may apply only in the event of (or may be limited to)
certain types of losses or shortfalls. The related Prospectus Supplement will
set forth information concerning the amount of subordination of Subordinate
Securities, the circumstances in which such subordination will be applicable and
the manner, if any, in which the amount of subordination will be affected.
CROSS-SUPPORT PROVISIONS
If the Assets are divided into separate groups, each supporting a
separate Class or Classes of Securities, credit support may be provided by
cross-support provisions requiring that distributions be made on Senior
Securities evidencing interests in one group of Assets prior to distributions on
Subordinate Securities evidencing interests in a different group of Assets
within the Trust Fund. The Prospectus Supplement for a Series that includes a
cross-support provision will describe the manner and conditions for applying
such provisions.
INSURANCE OR GUARANTEES WITH RESPECT TO THE ASSETS
If so provided in the Prospectus Supplement, the Assets in the related
Trust Fund will be covered for various default risks by insurance policies or
guarantees. A copy of any such material instrument will be filed with the
Commission as an exhibit to a Current Report on Form 8-K to be filed within 15
days of issuance of the Securities.
LETTER OF CREDIT
If so provided in the Prospectus Supplement, deficiencies in amounts
otherwise payable on Securities will be covered by one or more letters of
credit, issued by a bank or financial institution specified in such Prospectus
Supplement (the "L/C Bank"). Under a letter of credit, the L/C Bank will be
obligated to honor draws thereunder in an aggregate fixed dollar amount, net of
unreimbursed payments thereunder, generally equal to a percentage specified in
the Prospectus Supplement of the aggregate principal balance of the Assets on
the related Cut-off Date or of the initial aggregate Security Balance of one or
more Classes of Securities. If so specified in the Prospectus Supplement, the
letter of credit may permit draws in the event of only certain types of losses
and shortfalls. The amount available under the letter of credit will, in all
cases, be reduced to the extent of the unreimbursed payments thereunder and may
otherwise be reduced as described in the related Prospectus Supplement. A copy
of any such letter of credit will be filed with the Commission as an exhibit to
a Current Report on Form 8-K to be filed within 15 days of issuance of the
Securities.
INSURANCE POLICIES AND SURETY BONDS
If so provided in the Prospectus Supplement, deficiencies in amounts
otherwise payable on the Securities or certain Classes thereof will be covered
by pool insurance policies, other insurance policies and/or surety bonds
provided by one or more insurance companies or sureties. Such instruments may
cover, with respect to one or more Classes of Securities, timely distributions
of interest and/or full distributions of principal on the basis of a schedule of
principal distributions set forth in or determined in the manner specified in
the related Prospectus Supplement. A copy of any such instrument for a Series
will be filed with the Commission as an exhibit to a Current Report on Form 8-K
to be filed within 15 days of issuance of the Securities.
SPECIAL HAZARD INSURANCE POLICIES
If so specified in the related Prospectus Supplement, a special hazard
insurance policy may also be obtained for the related Trust Fund in the amount
set forth in such Prospectus Supplement. The special hazard insurance
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policy will, subject to the limitations described in the related Prospectus
Supplement, protect against certain losses 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 related Prospectus Supplement, losses resulting
from a bankruptcy proceeding relating to a Mortgagor affecting the Mortgage
Loans in a Trust Fund with respect to a Series of Securities may be covered
under a mortgagor bankruptcy bond or any other instrument. 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
Securities of the related Series, which amount will be set forth in the related
Prospectus Supplement. The amount and principal terms of any such coverage will
be set forth in the Prospectus Supplement.
RESERVE FUNDS
If so provided in the Prospectus Supplement, deficiencies in amounts
otherwise payable on the Securities or certain Classes thereof will be covered
by one or more reserve funds in which cash, a letter of credit, Permitted
Investments, a demand note or a combination thereof will be deposited, in the
amounts so specified in such Prospectus Supplement. The reserve funds may also
be funded over time by depositing therein a specified amount of the
distributions received on the related Assets, as specified in the related
Prospectus Supplement.
Amounts on deposit in any reserve fund, together with the reinvestment
income thereon, if any, will be applied for the purposes, in the manner, and to
the extent specified in the related Prospectus Supplement. A reserve fund may be
provided to increase the likelihood of timely distributions of principal of and
interest on the Securities. If so specified in the related Prospectus
Supplement, reserve funds may be established to provide limited protection
against only certain types of losses and shortfalls. Following each Distribution
Date amounts in a reserve fund in excess of any amount required to be maintained
therein may be released from the reserve fund under the conditions and to the
extent specified in the related Prospectus Supplement, and may not be available
for further application to the Securities.
Moneys deposited in any reserve funds will be invested in Permitted
Investments. Reinvestment income or other gain from such investments may be
credited to the related reserve fund for such Series, and any loss resulting
from such investments may be charged to such reserve fund. Such income may be
payable to any related Master Servicer or another service provider as additional
compensation.
Additional information concerning any reserve fund will be set forth in
the related Prospectus Supplement, including the initial balance, the balance
required to be maintained therein, the manner in which such required balance
will decrease over time, the manner of funding, the purposes for which funds may
be applied to make distributions to Securityholders and use of investment
earnings, if any.
OVERCOLLATERALIZATION
If specified in the related Prospectus Supplement, subordination
provisions of a Trust Fund may be used to accelerate to a limited extent the
amortization of one or more Classes of Securities relative to the amortization
of the related Assets. The accelerated amortization is achieved by the
application of certain excess interest to the payment of principal of one or
more Classes of Securities. This acceleration feature creates, with respect to
the Assets or groups thereof, overcollateralization which is the excess of the
aggregate principal balance of the related Assets, or a group thereof, over the
Security Principal Balance of the related Class or Classes of Securities. Such
acceleration may continue for the life of the related Security, or may be
limited. In the case of limited acceleration, once the required level of
overcollateralization is reached, and subject to certain provisions specified in
the related Prospectus Supplement, such limited acceleration feature may cease,
unless necessary to maintain the required level of overcollateralization.
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CREDIT SUPPORT WITH RESPECT TO MBS
If so provided in the Prospectus Supplement, the MBS in the related
Trust Fund and/or the Mortgage Loans underlying such MBS may be covered by one
or more of the types of credit support. The related Prospectus Supplement will
specify each such form of credit support, to the extent such information is
material and available.
INSURANCE POLICIES ON THE MORTGAGE LOANS
Each Mortgage Loan will be required to be covered by a hazard insurance
policy (as described below) and, in certain cases, a Primary Insurance Policy.
In addition, FHA Loans and VA Loans will be covered by the government mortgage
insurance programs described below. The descriptions of any insurance policies
set forth in this Prospectus or any related Prospectus Supplement and the
coverage thereunder do not purport to be complete and are qualified in their
entirety by reference to such forms of policies.
PRIMARY MORTGAGE GUARANTY INSURANCE POLICIES
Unless otherwise specified in the related Prospectus Supplement, (i)
each Mortgage Loan having a Loan-to-Value Ratio at origination of over 80% will
be covered by a primary mortgage guaranty insurance policy (a "Primary Insurance
Policy") insuring against default on such Mortgage Loan as to at least the
principal amount thereof exceeding 75% of the appraised value of the Mortgaged
Property at origination of the Mortgage Loan, unless and until the principal
balance of the Mortgage Loan is reduced to a level that would produce a
Loan-to-Value Ratio equal to or less than 80%, and (ii) the Asset Seller will
represent and warrant that, to the best of such entity's knowledge, such
Mortgage Loans are so covered. Unless otherwise specified in the Prospectus
Supplement, the Master Servicer will have the ability to cancel any Primary
Insurance Policy if the Loan-to-Value Ratio of the Mortgage Loan is reduced
below 80% (or a lesser specified percentage) based on an appraisal of the
Mortgaged Property after the related Closing Date or as a result of principal
payments that reduce the principal balance of the Mortgage Loan after such
Closing Date. Mortgage Loans that are subject to negative amortization will only
be covered by a Primary Insurance Policy if such coverage was so required upon
their origination, notwithstanding that subsequent negative amortization may
cause such Mortgage Loan's Loan-to-Value Ratio (based upon the then-current
balance) to subsequently exceed the limits which would have required such
coverage upon their origination.
While the terms and conditions of the Primary Insurance Policies issued
by one primary mortgage insurer (a "Primary Insurer") will differ from those in
Primary Insurance Policies issued by other Primary Insurers, each Primary
Insurance Policy generally will pay either: (i) the insured percentage of the
loss on the related Mortgaged Property; (ii) the entire amount of such loss,
after receipt by the Primary Insurer of good and merchantable title to, and
possession of, the Mortgaged Property; or (iii) at the option of the Primary
Insurer under certain Primary Insurance Policies, the sum of the delinquent
monthly payments plus any advances made by the insured, both to the date of the
claim payment and, thereafter, monthly payments in the amount that would have
become due under the Mortgage Loan if it had not been discharged plus any
advances made by the insured until the earlier of (a) the date the Mortgage Loan
would have been discharged in full if the default had not occurred or (b) an
approved sale of the related Mortgaged Property. The amount of the loss as
calculated under a Primary Insurance Policy covering a Mortgage Loan will
generally consist of the unpaid principal amount of such Mortgage Loan and
accrued and unpaid interest thereon and reimbursement of certain expenses, less
(i) rents or other payments received by the insured (other than the proceeds of
hazard insurance) that are derived from the related Mortgaged Property, (ii)
hazard insurance proceeds received by the insured in excess of the amount
required to restore such Mortgaged Property and which have not been applied to
the payment of the Mortgage Loan, (iii) amounts expended, but not approved by
the Primary Insurer, (iv) claim payments previously made on such Mortgage Loan
and (v) unpaid premiums and certain other amounts.
As conditions precedent to the filing or payment of a claim under a
Primary Insurance Policy, in the event of default by the Mortgagor, the insured
will typically be required, among other things, to (i) advance or discharge (a)
hazard insurance premiums and (b) as necessary and approved in advance by the
Primary Insurer, real estate taxes, protection and preservation expenses and
foreclosure and related costs; (ii) in the event of any physical loss
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or damage to the Mortgaged Property, have the Mortgaged Property restored to at
least its condition at the effective date of the Primary Insurance Policy
(ordinary wear and tear excepted); and (iii) tender to the Primary Insurer good
and merchantable title to, and possession of, the Mortgaged Property.
The related Agreement for a Series generally will require that the
Master Servicer maintain, or cause to be maintained, coverage under a Primary
Insurance Policy to the extent such coverage was in place on the Cut-off Date.
HAZARD INSURANCE POLICIES
The terms of the Mortgage Loans require each Mortgagor to maintain a
hazard insurance policy providing for such coverage as is required under the
related Mortgage or, if any Mortgage permits the holder thereof to dictate to
the Mortgagor the insurance coverage to be maintained on the related Mortgaged
Property, then such coverage as is consistent with the Servicing Standard. Such
coverage will be in general in an amount equal to the lesser of the principal
balance owing on such Mortgage Loan and the amount necessary to fully compensate
for any damage or loss to the improvements on the Mortgaged Property on a
replacement cost basis, but in either case not less than the amount necessary to
avoid the application of any co-insurance clause contained in the hazard
insurance policy. The ability of the Master Servicer to assure that hazard
insurance proceeds are appropriately applied may be dependent upon its being
named as an additional insured under any hazard insurance policy and under any
other insurance policy referred to below, or upon the extent to which
information in this regard is furnished by Mortgagors. All amounts collected by
the Master Servicer under any such policy (except for amounts to be applied to
the restoration or repair of the Mortgaged Property or released to the Mortgagor
in accordance with the Master Servicer's normal servicing procedures, subject to
the terms and conditions of the related Mortgage and Mortgage Note) will be
deposited in the Security Account. The Agreement will provide that the Master
Servicer may satisfy its obligation to cause each Mortgagor to maintain such a
hazard insurance policy by the Master Servicer's maintaining a blanket policy
insuring against hazard losses on the Mortgage Loans. If such blanket policy
contains a deductible clause, the Master Servicer will be required to deposit in
the Security Account all sums that would have been deposited therein but for
such clause.
In general, the standard form of fire and extended coverage policy
covers physical damage to or destruction of the improvements of the property by
fire, lightning, explosion, smoke, windstorm and hail, and riot, strike and
civil commotion, subject to the conditions and exclusions specified in each
policy. Although the policies relating to the Mortgage Loans will be
underwritten by different insurers under different state laws in accordance with
different applicable state forms, and therefore will not contain identical terms
and conditions, the basic terms thereof are dictated by respective state laws,
and most such policies typically do not cover any physical damage resulting from
war, revolution, governmental actions, floods and other water-related causes,
earth movement (including earthquakes, landslides and mudflows), wet or dry rot,
vermin, domestic animals and certain other risks.
The hazard insurance policies covering the Mortgaged Properties
securing the Mortgage Loans will typically contain a co-insurance clause that in
effect requires the insured at all times to carry insurance of a specified
percentage (generally 80% to 90%) of the full replacement value of the
improvements on the property in order to recover the full amount of any partial
loss. If the insured's coverage falls below this specified percentage, such
clause generally provides that the insurer's liability in the event of partial
loss does not exceed the lesser of (i) the replacement cost of the improvements
less physical depreciation and (ii) such proportion of the loss as the amount of
insurance carried bears to the specified percentage of the full replacement cost
of such improvements.
Each Agreement for a Trust Fund will require the Master Servicer to
cause the Mortgagor on each Mortgage Loan to maintain all such other insurance
coverage with respect to the related Mortgaged Property as is consistent with
the terms of the related Mortgage and the Servicing Standard, which insurance
may include flood insurance (if the related Mortgaged Property was located at
origination in a federally designated flood area or is included in a Federal
Emergency Management Agency remapping at any time during the life of the related
Mortgage Loan).
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Under the terms of the Mortgage Loans, Mortgagors generally will be
required to present claims to insurers under hazard insurance policies
maintained on the related Mortgaged Properties. The Master Servicer, on behalf
of the Trustee and Securityholders, is obligated to present or cause to be
presented claims under any blanket insurance policy insuring against hazard
losses on Mortgaged Properties securing the Mortgage Loans. However, the ability
of the Master Servicer to present or cause to be presented such claims is
dependent upon the extent to which information in this regard is furnished to
the Master Servicer by Mortgagors.
FHA MORTGAGE INSURANCE
The National Housing Act of 1934, as amended (the "Housing Act"),
authorizes various FHA mortgage insurance programs. Some of the Mortgage Loans
may be insured under either Section 203(b), Section 234 or Section 235 of the
Housing Act. Under Section 203(b), FHA insures mortgage loans with original
terms up to 30 years for the purchase of one- to four-family dwelling units.
Mortgage loans for the purchase of condominium units are insured by FHA under
Section 234. Loans insured under these programs must bear interest at a rate not
exceeding the maximum rate in effect at the time the loan is made, as
established by HUD, and may not exceed specified percentages of the lesser of
the appraised value of the property and the sale price, less seller paid closing
costs for the property, up to certain specified maximums. In addition, FHA
imposes initial investment minimums and other requirements on mortgage loans
insured under the Section 203(b) and Section 234 programs.
Under Section 235, assistance payments are paid by HUD to the mortgagee
on behalf of eligible mortgagors for as long as the mortgagors continue to be
eligible for the payments. To be eligible, a mortgagor must have income within
the limits prescribed by HUD at the time of initial occupancy, must occupy the
property and must meet requirements for recertification at least annually.
The regulations governing these programs provide that insurance
benefits are payable either (i) upon foreclosure (or other acquisition of
possession) and conveyance of the mortgaged premises to HUD or (ii) upon
assignment of the defaulted mortgage loan to HUD. The FHA insurance that may be
provided under these programs upon conveyance of the home to HUD is equal to
100% of the outstanding principal balance of the mortgage loan, plus accrued
interest, as described below, and certain additional costs and expenses. When
entitlement to insurance benefits results from assignment of the mortgage loan
to HUD, the insurance payment is computed as of the date of assignment and
includes the unpaid principal amount of the mortgage loan plus mortgage interest
accrued and unpaid at the debenture rate.
When entitlement to insurance benefits results from foreclosure (or
other acquisition of possession) and conveyance, the insurance payment is equal
to the unpaid principal amount of the mortgage loan, adjusted to reimburse the
mortgagee for certain tax, insurance and similar payments made by it and to
deduct certain amounts received or retained by the mortgagee after default, plus
reimbursement not to exceed two-thirds of the mortgagee's foreclosure costs.
VA MORTGAGE GUARANTY
The Servicemen's Readjustment Act of 1944, as amended, permits a
veteran (or, in certain instances, his or her spouse) to obtain a mortgage loan
guaranty by the VA covering mortgage financing of the purchase of a one-to
four-family dwelling unit to be occupied as the veteran's home at an interest
rate not exceeding the maximum rate in effect at the time the loan is made, as
established by HUD. The program has no limit on the amount of a mortgage loan,
requires no down payment from the purchaser and permits the guaranty of mortgage
loans with terms limited by the estimated economic life of the property, up to
30 years. The maximum guaranty that may be issued by the VA under this program
is 50% of the original principal amount of the mortgage loan up to a certain
dollar limit established by the VA. The liability on the guaranty is reduced or
increased pro rata with any reduction or increase in the amount of indebtedness,
but in no event will the amount payable on the guaranty exceed the amount of the
original guaranty. Notwithstanding the dollar and percentage limitations of the
guaranty, a mortgagee will ordinarily suffer a monetary loss only where the
difference between the unsatisfied indebtedness and the proceeds of a
foreclosure sale of mortgaged premises is greater than the original guaranty as
adjusted. The VA
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may, at its option, and without regard to the guaranty, make full payment to a
mortgagee of the unsatisfied indebtedness on a mortgage upon its assignment to
the VA (such procedure, a "VA No-Bid").
Because there is no limit imposed by the VA on the principal amount of
a VA-guaranteed mortgage loan but there is a limit on the amount of the VA
guaranty, additional coverage under a Primary Insurance Policy may be required
by the Depositor for VA loans in excess of certain amounts. The amount of any
such additional coverage will be set forth in the related Prospectus Supplement.
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS
The following discussion contains summaries, necessarily general in
nature, of certain legal aspects of mortgage loans secured by single-family
residential properties. Because such legal aspects are governed primarily by
applicable state law (which may differ substantially), the summaries do not
purport to be complete nor 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. See "Description
of the Trust Funds -- Assets."
GENERAL
All of the Mortgage Loans are loans evidenced by a note or bond and
secured by instruments granting a security interest in real property which may
be mortgages, deeds of trust, security deeds or deeds to secure debt, depending
upon the prevailing practice and law in the state in which the Mortgaged
Property is located. Mortgages, deeds of trust and deeds to secure debt are
herein collectively referred to as "mortgages." Any of the foregoing types of
mortgages will create a lien upon, or grant a title interest in, the subject
property, the priority of which will depend on the terms of the particular
security instrument, as well as separate, recorded, contractual arrangements
with others holding interests in the mortgaged property, the knowledge of the
parties to such instrument, and the order of recordation of the instrument in
the appropriate public recording office. However, recording does not generally
establish priority over governmental claims for real estate taxes and
assessments and other charges imposed under governmental police powers.
TYPES OF MORTGAGE INSTRUMENTS
A mortgage either creates a lien against or constitutes a conveyance of
real property between two parties -- a mortgagor (the borrower and usually the
owner of the subject property) and a mortgagee (the lender). In contrast, a deed
of trust is a three-party instrument, among a trustor (the equivalent of a
mortgagor), a trustee to whom the mortgaged property is conveyed, and a
beneficiary (the lender) for whose benefit the conveyance is made. As used in
this Prospectus, unless the context otherwise requires, "Mortgagor" includes the
trustor under a deed of trust and a grantor under a security deed or a deed to
secure debt. Under a deed of trust, the mortgagor grants the property,
irrevocably until the debt is paid, in trust, generally with a power of sale as
security for the indebtedness evidenced by the related note. A deed to secure
debt typically has two parties. By executing a deed to secure debt, the grantor
conveys title to, as opposed to merely creating a lien upon, the subject
property to the grantee until such time as the underlying debt is repaid,
generally with a power of sale as security for the indebtedness evidenced by the
related mortgage note. In case the mortgagor under a mortgage is a land trust,
there would be an additional party because legal title to the property is held
by a land trustee under a land trust agreement for the benefit of the mortgagor.
At origination of a mortgage loan involving a land trust, the mortgagor executes
a separate undertaking to make payments on the mortgage note. The mortgagee's
authority under a mortgage, the trustee's authority under a deed of trust and
the grantee's authority under a deed to secure debt are governed by the express
provisions of the mortgage, the law of the state in which the real property is
located, certain federal laws (including, without limitation, the Soldiers' and
Sailors' Civil Relief Act of 1940) and, in some cases, in deed of trust
transactions, the directions of the beneficiary.
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INTEREST IN REAL PROPERTY
The real property covered by a mortgage, deed of trust, security deed
or deed to secure debt is most often the fee estate in land and improvements.
However, such an instrument may encumber other interests in real property such
as a tenant's interest in a lease of land or improvements, or both, and the
leasehold estate created by such lease. An instrument covering an interest in
real property other than the fee estate requires special provisions in the
instrument creating such interest or in the mortgage, deed of trust, security
deed or deed to secure debt, to protect the mortgagee against termination of
such interest before the mortgage, deed of trust, security deed or deed to
secure debt is paid. The Depositor or the Asset Seller will make certain
representations and warranties with respect to any Mortgage Loans that are
secured by an interest in a leasehold estate. Such representation and
warranties, if applicable, will be set forth in the Prospectus Supplement.
FORECLOSURE
General
Foreclosure is a legal procedure that allows the mortgagee to recover
its mortgage debt by enforcing its rights and available legal remedies under the
mortgage. If the mortgagor defaults in payment or performance of its obligations
under the note or mortgage, the mortgagee has the right to institute foreclosure
proceedings to sell the mortgaged property at public auction to satisfy the
indebtedness.
Foreclosure procedures with respect to the enforcement of a mortgage
vary from state to state. Two primary methods of foreclosing a mortgage are
judicial foreclosure and non-judicial foreclosure pursuant to a power of sale
granted in the mortgage instrument. There are several other foreclosure
procedures available that are either infrequently used or available only in
certain limited circumstances, such as strict foreclosure.
Judicial Foreclosure
A judicial foreclosure proceeding is conducted in a court having
jurisdiction over the mortgaged property. Generally, the action is initiated by
the service of legal pleadings upon all parties having an interest you record in
the real property. Delays in completion of the foreclosure may occasionally
result from difficulties in locating defendants. When the lender's right to
foreclose is contested, the legal proceedings can be time-consuming. Upon
successful completion of a judicial foreclosure proceeding, the court generally
issues a judgment of foreclosure and appoints a referee or other officer to
conduct a public sale of the mortgaged property, the proceeds of which are used
to satisfy the judgment. Such sales are made in accordance with procedures that
vary from state to state.
Equitable Limitations on Enforceability of Certain Provisions
United States courts have traditionally imposed general equitable
principles to limit the remedies available to a mortgagee in connection with
foreclosure. These equitable principles are generally designed to relieve the
mortgagor from the legal effect of mortgage defaults, to the extent that such
effect is perceived as harsh or unfair. Relying on such principles, a court may
alter the specific terms of a loan to the extent it considers necessary to
prevent or remedy an injustice, undue oppression or overreaching, or may require
the lender to undertake affirmative and expensive actions to determine the cause
of the mortgagor's default and the likelihood that the mortgagor will be able to
reinstate the loan. In some cases, courts have substituted their judgment for
the lender's and have required that lenders reinstate loans or recast payment
schedules in order to accommodate mortgagors who are suffering from a temporary
financial disability. In other cases, courts have limited the right of the
lender to foreclose if the default under the mortgage is not monetary, e.g., the
mortgagor failed to maintain the mortgaged property adequately or the mortgagor
executed a junior mortgage on the mortgaged property. The exercise by the court
of its equity powers will depend on the individual circumstances of each case
presented to it. Finally, some courts have been faced with the issue of whether
federal or state constitutional provisions reflecting due process concerns for
adequate notice require that a mortgagor receive notice in addition to
statutorily-prescribed minimum notice. For the most part, these cases have
upheld the reasonableness of the notice provisions or have found that a public
sale under a mortgage providing for a power of sale does not involve sufficient
state action to afford constitutional protections to the mortgagor.
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Non-Judicial Foreclosure/Power of Sale
Foreclosure of a deed of trust is generally accomplished by a
non-judicial trustee's sale pursuant to the power of sale granted in the deed of
trust. A power of sale is typically granted in a deed of trust. It may also be
contained in any other type of mortgage instrument. A power of sale allows a
non-judicial public sale to be conducted generally following a request from the
beneficiary/lender to the trustee to sell the property upon any default by the
mortgagor under the terms of the mortgage note or the mortgage instrument and
after notice of sale is given in accordance with the terms of the mortgage
instrument, as well as applicable state law. In some states, prior to such sale,
the trustee under a deed of trust must record a notice of default and notice of
sale and send a copy to the mortgagor and to any other party who has recorded a
request for a copy of a notice of default and notice of sale. In addition, in
some states the trustee must provide notice to any other party having an
interest of record in the real property, including junior lienholders. 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. The mortgagor or junior
lienholder may then have the right, during a reinstatement period required in
some states, to cure the default by paying the entire actual amount in arrears
(without acceleration) plus the expenses incurred in enforcing the obligation.
In other states, the mortgagor or the junior lienholder is not provided a period
to reinstate the loan, but has only the right to pay off the entire debt to
prevent the foreclosure sale. Generally, the procedure for public sale, the
parties entitled to notice, the method of giving notice and the applicable time
periods are governed by state law and vary among the states. Foreclosure of a
deed to secure debt is also generally accomplished by a non-judicial sale
similar to that required by a deed of trust, except that the lender or its
agent, rather than a trustee, is typically empowered to perform the sale in
accordance with the terms of the deed to secure debt and applicable law.
Public Sale
A third party may be unwilling to purchase a mortgaged property at a
public sale because of the difficulty in determining the value of such property
at the time of sale, due to, among other things, redemption rights which may
exist and the possibility of physical deterioration of the property during the
foreclosure proceedings. For these reasons, it is common for the lender to
purchase the mortgaged property for an amount equal to or less than the
underlying debt and accrued and unpaid interest plus the expenses of
foreclosure. Generally, state law controls the amount of foreclosure costs and
expenses which may be recovered by a lender. Thereafter, subject to the
mortgagor's right in some states to remain in possession during a redemption
period, if applicable, the lender will become the owner of the property and have
both the benefits and burdens of ownership of the mortgaged property. For
example, the lender will become obligated to pay taxes, obtain casualty
insurance and to make such repairs at its own expense as are necessary to render
the property suitable for sale. The lender will commonly obtain the services of
a real estate broker and pay the broker's commission in connection with the sale
of the property. Depending upon market conditions, the ultimate proceeds of the
sale of the property may not equal the lender's investment in the property.
Moreover, a lender commonly incurs substantial legal fees and court costs in
acquiring a mortgaged property through contested foreclosure and/or bankruptcy
proceedings. Generally, state law controls the amount of foreclosure expenses
and costs, including attorneys' fees, that may be recovered by a lender.
The proceeds received by the referee or trustee from the sale are
applied first to the costs, fees and expenses of sale and then in satisfaction
of the indebtedness secured by the mortgage under which the sale was conducted.
Any proceeds remaining after satisfaction of senior mortgage debt are generally
payable to the holders of junior mortgages and other liens and claims in order
of their priority, whether or not the mortgagor is in default. Any additional
proceeds are generally payable to the mortgagor. The payment of the proceeds to
the holders of junior mortgages may occur in the foreclosure action of the
senior mortgage or a subsequent ancillary proceeding or may require the
institution of separate legal proceedings by such holders.
REO Properties
With respect to Trust Funds for which one or more REMIC or FASIT
elections exist, if title to any Mortgaged Property is acquired by the Trustee
on behalf of the Securityholders, the Master Servicer or any related
Sub-servicer or the Special Servicer, on behalf of such holders, will be
required to sell the Mortgaged Property by the end of the third taxable year
after the taxable year of acquisition, unless (i) the Internal Revenue Service
grants
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an extension of time to sell such property (an "REO Extension") or (ii) it
obtains an opinion of counsel generally to the effect that the holding of the
property for more than three years after its acquisition will not result in the
imposition of a tax on the Trust Fund or cause any REMIC or FASIT created
pursuant to the Agreement to fail to qualify as a REMIC or FASIT under the Code.
Subject to the foregoing, the Master Servicer or any related Sub-servicer will
generally be required to solicit bids for any Mortgaged Property so acquired in
such a manner as will be reasonably likely to realize a fair price for such
property. The Master Servicer or any related Sub-servicer may retain an
independent contractor to operate and manage any REO Property; however, the
retention of an independent contractor will not relieve the Master Servicer or
any related Sub-servicer of its obligations with respect to such REO Property.
In general, the Master Servicer or any related Sub-servicer or an
independent contractor employed by the Master Servicer or any related
Sub-servicer at the expense of the Trust Fund will be obligated to operate and
manage any Mortgaged Property acquired as REO Property in a manner that would,
to the extent commercially feasible, maximize the Trust Fund's net after-tax
proceeds from such property. After the Master Servicer or any related
Sub-servicer reviews the operation of such property and consults with the
Trustee to determine the Trust Fund's federal income tax reporting position with
respect to the income it is anticipated that the Trust Fund would derive from
such property, the Master Servicer or any related Sub-servicer could determine
(particularly in the case of an REO Property that is a hospitality or
residential health care facility) that it would not be commercially feasible to
manage and operate such property in a manner that would avoid the imposition of
a tax on "net income from foreclosure property," within the meaning of Section
857(b)(4)(B) of the Code or a tax on "prohibited transactions" under Sections
860F or 860L of the Code (any such tax referred to herein as an "REO Tax"). To
the extent that income the Trust Fund receives from an REO Property is subject
to a tax on (i) "net income from foreclosure property" such income would be
subject to federal income tax at the highest marginal corporate tax rate
(currently 35%) or (ii) "prohibited transactions," such income would be subject
to federal income tax at a 100% rate. The determination as to whether income
from an REO Property would be subject to an REO Tax will depend on the specific
facts and circumstances relating to the management and operation of each REO
Property. Generally, income from an REO Property that is directly operated by
the Master Servicer or any related Sub-servicer would be apportioned and
classified as "service" or "non-service" income. The "service" portion of such
income could be subject to federal income tax either at the highest marginal
corporate tax rate or at the 100% rate on "prohibited transactions," and the
"non-service" portion of such income could be subject to federal income tax at
the highest marginal corporate tax rate or, although it appears unlikely, at the
100% rate applicable to "prohibited transactions." Any REO Tax imposed on from
an REO Property would reduce the amount available for distribution to
Securityholders. Securityholders are advised to consult their tax advisors
regarding the possible imposition of REO Taxes in connection with the operation
of commercial REO Properties by REMICs or FASITs. See "Federal Income Tax
Consequences" herein.
Rights of Redemption
The purposes of a foreclosure action are to enable the mortgagee to
realize upon its security and to bar the mortgagor, and all persons who have an
interest in the property which is subordinate to the mortgage being foreclosed,
from exercise of their "equity of redemption." The doctrine of equity of
redemption provides that, until the property covered by a mortgage has been sold
in accordance with a properly conducted foreclosure and foreclosure sale, those
having an interest which is subordinate to that of the foreclosing mortgagee
have an equity of redemption and may redeem the property by paying the entire
debt with interest. In addition, in some states, when a foreclosure action has
been commenced, the redeeming party must pay certain costs of such action. Those
having an equity of redemption must generally be made parties and joined in the
foreclosure proceeding in order for their equity of redemption to be cut off and
terminated.
The equity of redemption is a common-law (non-statutory) right which
exists prior to completion of the foreclosure, is not waivable by the mortgagor,
must be exercised prior to foreclosure sale and should be distinguished from the
post-sale statutory rights of redemption. In some states, after sale pursuant to
a deed of trust or foreclosure of a mortgage, the mortgagor and foreclosed
junior lienors are given a statutory period in which to redeem the property from
the foreclosure sale. In some states, statutory redemption may occur only upon
payment
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of the foreclosure sale price. In other states, redemption may be authorized if
the former mortgagor pays only a portion of the sums due. The effect of a
statutory right of redemption is to diminish the ability of the lender to sell
the foreclosed property. The exercise of a right of redemption would defeat the
title of any purchaser from a foreclosure sale 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 expired. In some states, a post-sale statutory right of
redemption may exist following a judicial foreclosure, but not following a
trustee's sale under a deed of trust.
Under the REMIC and FASIT Provisions currently in effect, property
acquired by foreclosure generally must not be held beyond the end of the third
taxable year after the taxable year of foreclosure. With respect to a Series of
Securities for which an election is made to qualify the Trust Fund or a part
thereof as a REMIC or FASIT, the Agreement will permit foreclosed property to be
held for more than three years if the Internal Revenue Service grants an
extension of time within which to sell such property or independent counsel
renders an opinion to the effect that holding such property for such additional
period is permissible under the REMIC or FASIT Provisions.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
Statutes in some states limit the right of a beneficiary under a deed
of trust or a mortgagee under a mortgage to obtain a deficiency judgment against
the mortgagor following foreclosure or sale under a deed of trust. A deficiency
judgment would be a personal judgment against the former mortgagor equal to the
difference between the net amount realized upon the public sale of the real
property and the amount due to the lender. Some states require the lender to
exhaust the security afforded under a mortgage by foreclosure in an attempt to
satisfy the full debt before bringing a personal action against the mortgagor.
In certain other states, the lender has the option of bringing a personal action
against the mortgagor 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. In some cases, a lender
will be precluded from exercising any additional rights under the note or
mortgage if it has taken any prior enforcement action. Consequently, the
practical effect of the election requirement, in those states permitting such
election, is that lenders will usually proceed against the security first rather
than bringing a personal action against the mortgagor. Finally, other statutory
provisions limit any deficiency judgment against the former mortgagor following
a judicial sale to the excess of the outstanding debt over the fair market value
of the property at the time of the public sale. The purpose of these statutes is
generally to prevent a lender from obtaining a large deficiency judgment against
the former mortgagor as a result of low or no bids at the judicial sale.
In addition to laws limiting or prohibiting deficiency judgments,
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 the secured mortgage lender to realize upon collateral
or enforce a deficiency judgment. For example, with respect to federal
bankruptcy law, a court with federal bankruptcy jurisdiction may permit a debtor
through his or her Chapter 11 or Chapter 13 rehabilitative plan to cure a
monetary default in respect of a mortgage loan on a debtor's residence by paying
arrearages within a reasonable time period and reinstating the original mortgage
loan payment schedule even though the lender accelerated the mortgage loan and
final judgment of foreclosure had been entered in state court (provided no sale
of the residence 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 reorganization case, that effected the curing of a
mortgage loan default by paying arrearages over a number of years.
Courts with federal bankruptcy jurisdiction have also indicated that
the terms of a mortgage loan secured by property of the debtor may be modified.
These courts have allowed modifications that include reducing the amount of each
monthly payment, changing the rate of interest, altering the repayment schedule,
forgiving all or a portion of the debt and reducing the lender's security
interest to the value of the residence, thus leaving the lender a general
unsecured creditor for the difference between the value of the residence and the
outstanding balance of the loan. Generally, however, the terms of a mortgage
loan secured only by a mortgage on real property that is
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the debtor's principal residence may not be modified pursuant to a plan
confirmed pursuant to Chapter 11 or Chapter 13 except with respect to mortgage
payment arrearages, which may be cured within a reasonable time period.
Certain tax liens arising under the Internal Revenue Code of 1986, as
amended, may in certain circumstances provide priority over the lien of a
mortgage or deed of trust. In addition, substantive requirements are imposed
upon mortgage lenders in connection with the origination and the servicing of
mortgage loans by numerous federal and some state consumer protection laws.
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. These federal laws impose specific
statutory liabilities upon lenders who originate 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.
ENVIRONMENTAL LEGISLATION
Real property pledged as security to a lender may be subject to certain
environmental risks. Under the laws of certain states, contamination of a
property may give rise to a lien on the property to secure recovery of the costs
of clean-up. In several states, such a lien has priority over the lien of an
existing mortgage against such property. In addition, under the laws of some
states and under the federal Comprehensive Environmental Response, Compensation,
and Liability Act of 1980, as amended ("CERCLA"), a lender may be liable, as an
"owner" or "operator," for costs of addressing releases or threatened releases
of hazardous substances that require remedy at a property securing a mortgage
loan owned by such lender, if agents or employees of the lender have become
sufficiently involved in the operations of the related obligor, regardless of
whether or not the environmental damage or threat was caused by such lender's
obligor or by a prior owner. A lender also risks such liability arising out of
foreclosure of a mortgaged property securing a mortgage loan owned by such
lender. Until recent legislation was adopted, it was uncertain what actions
could be taken by a secured lender in the event of a loan default without it
incurring exposure under CERCLA in the event the property was environmentally
contaminated. The Asset Conservation, Lender Liability and Deposit Insurance Act
of 1996 (the "1996 Lender Liability Act") provides for a safe harbor for secured
lenders from CERCLA liability even though the lender forecloses and sells the
real estate securing the loan, provided the secured lender sells "at the
earliest practicable, commercially reasonable time, at commercially reasonable
terms, taking into account market conditions and legal and regulatory
requirements." Although the 1996 Lender Liability Act provides significant
protection to secured lenders, it has not been construed by the courts, and
there are circumstances in which actions taken could expose a secured lender to
CERCLA liability. And, the transferee from the secured lender is not entitled to
the protections enjoyed by a secured lender. Thus, contamination may decrease
the amount that prospective buyers are willing to pay for a Mortgaged Property
and, thus, decrease the likelihood that the Trust Fund will recover fully on the
Mortgage Loan through foreclosure.
Application of environmental laws other than CERCLA could also result
in the imposition of liability on lenders for costs associated with
environmental hazards. The most significant of these other laws is the Resource
Conservation and Recovery Act of 1976, as amended ("RCRA"), and state regulatory
programs implemented thereunder. Subtitle I of RCRA imposes cleanup liabilities
on owners or operators of underground storage tanks. Some states also impose
similar liabilities on owners and operators of aboveground storage tanks. The
definition of "owner" under RCRA Subtitle I contains a security interest
exemption nearly identical to the CERCLA security interest exemption. However,
as with CERCLA costs, it is possible that such costs, if imposed in connection
with a Mortgage Loan included in a Trust Fund, could become a liability of the
related Trust in certain circumstances.
At the time the Mortgage Loans were originated, it is possible that no
environmental assessment or a very limited environmental assessment of the
related Mortgaged Properties was conducted. No representations or warranties are
made by the Asset Seller or Depositor as to the absence or effect of hazardous
wastes or hazardous substances on any of the related Mortgaged Properties. In
addition, the Master Servicer has not made any representations or warranties or
assumed any liability with respect to the absence or effect of hazardous wastes
or hazardous substances on any Mortgaged Property or any casualty resulting from
the presence or effect of hazardous wastes or hazardous substances on any
Mortgaged Property, and any loss or liability resulting from the presence or
effect of such hazardous wastes or hazardous substances will reduce the amounts
otherwise available to pay to Securityholders.
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Pursuant to the Agreement, the Master Servicer is not required to
foreclose on any Mortgaged Property if one of its principal officers has actual
knowledge that such property is contaminated with or affected by hazardous
wastes or hazardous substances. If the Master Servicer does not foreclose on the
Mortgaged Property underlying a defaulted Mortgage Loan, the amounts otherwise
available to pay to the Securityholders may be reduced. The Master Servicer will
not be liable to the Securityholders if it fails to foreclose on a Mortgaged
Property that it believes may be so contaminated or affected, even if such
Mortgaged Property is, in fact, not so contaminated or affected. Similarly, the
Master Servicer will not be liable to the Securityholders if the Master Servicer
forecloses on a Mortgaged Property and takes title to a Mortgaged Property that
is so contaminated or affected.
DUE-ON-SALE CLAUSES
The Mortgage Loans will contain due-on-sale clauses unless the related
Prospectus Supplement indicates otherwise. These clauses generally provide that
the lender may accelerate the maturity of the loan if the mortgagor sells,
transfers or conveys the related Mortgaged Property. The enforceability of
due-on-sale clauses has been the subject of legislation or litigation in many
states and, in some cases, the enforceability of these clauses was limited or
denied. However, with respect to certain loans the Garn-St Germain Depository
Institutions Act of 1982 (the "Garn-St. Germain Act") preempts state
constitutional, statutory and case law that prohibits the enforcement of
due-on-sale clauses and permits lenders to enforce these clauses in accordance
with their terms, subject to certain limited exceptions. Due-on-sale clauses
contained in mortgage loans originated by federal savings and loan associations
of federal savings banks are fully enforceable pursuant to regulations of the
United States Federal Home Loan Bank Board, as succeeded by the Office of Thrift
Supervision, 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-St. Germain Act also sets forth nine specific instances in
which a mortgage lender covered by the act (including federal savings and loan
associations and federal savings banks) may not exercise a due-on-sale clause,
notwithstanding the fact that a transfer of the property may have occurred.
These include intra-family transfers, certain transfers by operation of law,
leases of fewer than three years and the creation of a junior encumbrance.
Regulations promulgated under the Garn-St Germain Act also prohibit the
imposition of a prepayment penalty upon the acceleration of a loan pursuant to a
due-on-sale clause. The inability to enforce a due-on-sale clause may result in
a mortgage that bears an interest rate below the current market rate being
assumed by a new home buyer rather than being paid off, which may affect the
average life of the Mortgage Loans and the number of Mortgage Loans which may
extend to maturity.
PREPAYMENT CHARGES
Under certain state laws, prepayment charges may not be imposed after a
certain period of time following the origination of mortgage loans secured by
liens encumbering owner-occupied residential properties, if such loans are paid
prior to maturity. Because many of the Mortgaged Properties will be
owner-occupied, it is anticipated that prepayment charges may not be imposed
with respect to many of the Mortgage Loans. The absence of such a restraint on
prepayment, particularly with respect to fixed rate Mortgage Loans having higher
Mortgage Rates, may increase the likelihood of refinancing or other early
retirement of such loans.
SUBORDINATE FINANCING
Where a mortgagor encumbers mortgaged property with one or more junior
liens, the senior lender is subjected to additional risk. First, the mortgagor
may have difficulty servicing and repaying multiple loans. In addition, if the
junior loan permits recourse to the mortgagor (as junior loans often do) and the
senior loan does not, a mortgagor may be more likely to repay sums due on the
junior loan than those on the senior loan. Second, acts of the senior lender
that prejudice the junior lender or impair the junior lender's security may
create a superior equity in favor of the junior lender. For example, if the
mortgagor and the senior lender agree to an increase in the principal amount of
or the interest rate payable on the senior loan, the senior lender may lose its
priority to the extent any existing junior lender is harmed or the mortgagor is
additionally burdened. Third, if the mortgagor
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defaults on the senior loan and/or any junior loan or loans, the existence of
junior loans and actions taken by junior lenders can impair the security
available to the senior lender and can interfere with or delay the taking of
action by the senior lender. Moreover, the bankruptcy of a junior lender may
operate to stay foreclosure or similar proceedings by the senior lender.
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. A similar federal
statute was in effect with respect to mortgage loans made during the first three
months of 1980. The Office of Thrift Supervision 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 that expressly
rejects application of the federal law. In addition, even where Title V is not
so rejected, any state is authorized by the law to adopt a provision limiting
discount points or other charges on mortgage loans covered by Title V. Certain
states have taken action to reimpose interest rate limits and/or to limit
discount points or other charges.
The Depositor believes that a court interpreting Title V would hold
that residential first mortgage loans that are originated on or after January 1,
1980 are subject to federal preemption. Therefore, in a state that has not taken
the requisite action to reject application of Title V or to adopt a provision
limiting discount points or other charges prior to origination of such mortgage
loans, any such limitation under such state's usury law would not apply to such
mortgage loans.
In any state in which application of Title V has been expressly
rejected or a provision limiting discount points or other charges is adopted, no
mortgage loan originated after the date of such state action will be eligible
for inclusion in a Trust Fund unless (i) such mortgage loan provides for such
interest rate, discount points and charges as are permitted in such state or
(ii) such mortgage loan provides that the terms thereof shall be construed in
accordance with the laws of another state under which such interest rate,
discount points and charges would not be usurious and the mortgagor's counsel
has rendered an opinion that such choice of law provision would be given effect.
Statutes differ in their provisions as to the consequences of a
usurious loan. One group of statutes requires the lender to forfeit the interest
due above the applicable limit or impose a specified penalty. Under this
statutory scheme, the mortgagor may cancel the recorded mortgage or deed of
trust upon paying its debt with lawful interest, and the lender may foreclose,
but only for the debt plus lawful interest. A second group of statutes is more
severe. A violation of this type of usury law results in the invalidation of the
transaction, thereby permitting the mortgagor to cancel the recorded mortgage or
deed of trust without any payment or prohibiting the lender from foreclosing.
ALTERNATIVE MORTGAGE INSTRUMENTS
Alternative mortgage instruments, including adjustable rate mortgage
loans and early ownership mortgage loans, originated by non-federally chartered
lenders have historically been subject to a variety of restrictions. Such
restrictions differed from state to state, resulting in difficulties in
determining whether a particular alternative mortgage instrument originated by a
state-chartered lender was in compliance with applicable law. These difficulties
were alleviated substantially as a result of the enactment of Title VIII of the
Garn-St Germain Act ("Title VIII"). Title VIII provides that, notwithstanding
any state law to the contrary, state-chartered banks may originate alternative
mortgage instruments in accordance with regulations promulgated by the
Comptroller of the Currency with respect to origination of alternative mortgage
instruments by national banks; state-chartered credit unions may originate
alternative mortgage instruments in accordance with regulations promulgated by
the National Credit Union Administration with respect to origination of
alternative mortgage instruments by federal credit unions; and all other
non-federally chartered housing creditors, including state-chartered savings and
loan associations, state-chartered savings banks and mutual savings banks and
mortgage banking companies, may originate alternative mortgage instruments in
accordance with the regulations promulgated by the Federal Home Loan Bank Board,
predecessor
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to the Office of Thrift Supervision, with respect to origination of alternative
mortgage instruments by federal savings and loan associations. Title VIII
provides that any state may reject applicability of the provisions of Title VIII
by adopting, prior to October 15, 1985, a law or constitutional provision
expressly rejecting the applicability of such provisions. Certain states have
taken such action.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT OF 1940
Under the terms of the Soldiers' and Sailors' Civil Relief Act of 1940,
as amended (the "Relief Act"), a mortgagor who enters military service after the
origination of such mortgagor's Mortgage Loan (including a mortgagor who was in
reserve status and is called to active duty after origination of the Mortgage
Loan), may not be charged interest (including fees and charges) above an annual
rate of 6% during the period of such mortgagor's active duty status, unless a
court orders otherwise upon application of the lender. The Relief Act applies to
mortgagors who are members of the Army, Navy, Air Force, Marines, National
Guard, Reserves, Coast Guard and officers of the U.S. Public Health Service
assigned to duty with the military. Because the Relief Act applies to mortgagors
who enter military service (including reservists who are called to active duty)
after origination of the related Mortgage Loan, no information can be provided
as to the number of loans that may be affected by the Relief Act. Application of
the Relief Act would adversely affect, for an indeterminate period of time, the
ability of any servicer to collect full amounts of interest on certain of the
Mortgage Loans. Any shortfalls in interest collections resulting from the
application of the Relief Act would result in a reduction of the amounts
distributable to the holders of the related Series of Certificates, and would
not be covered by advances or, if specified in the related Prospectus
Supplement, any form of Credit Support provided in connection with such
Securities. In addition, the Relief Act imposes limitations that would impair
the ability of the servicer to foreclose on an affected Mortgage Loan during the
mortgagor's period of active duty status, and, under certain circumstances,
during an additional three month period thereafter. Thus, in the event that such
a Mortgage Loan goes into default, there may be delays and losses occasioned
thereby.
FORFEITURES IN DRUG AND RICO PROCEEDINGS
Federal law provides that property owned by persons convicted of
drug-related crimes or of criminal violations of the Racketeer Influenced and
Corrupt Organizations ("RICO") statute can be seized by the government if the
property was used in, or purchased with the proceeds of, such crimes. Under
procedures contained in the Comprehensive Crime Control Act of 1984 (the "Crime
Control Act"), the government may seize the property even before conviction. The
government must publish notice of the forfeiture proceeding and may give notice
to all parties "known to have an alleged interest in the property," including
the holders of mortgage loans.
A lender may avoid forfeiture of its interest in the property if it
establishes that: (i) its mortgage was executed and recorded before commission
of the crime upon which the forfeiture is based, or (ii) the lender was, at the
time of execution of the mortgage, "reasonably without cause to believe" that
the property was used in, or purchased with the proceeds of, illegal drug or
RICO activities.
OTHER LEGAL CONSIDERATIONS
The Mortgage Loans are also subject to federal laws, including: (i)
Regulation Z, which requires certain disclosures to the borrowers regarding the
terms of the Mortgage Loans; (ii) the Equal Opportunity Act and Regulation B
promulgated thereunder, which prohibit discrimination on the basis of age, race,
color, sex, religion, marital status, national origin, receipt of public
assistance or the exercise of any right under the Consumer Credit Protection
Act, in the extension of credit; and (iii) the Fair Credit Reporting Act, which
regulates the use and reporting of information related to the borrower's credit
experience. Violations of certain provisions of these federal laws may limit the
ability of persons to collect all or part of the principal of or interest on the
Mortgage Loans and in addition could subject certain persons to damages and
administrative enforcement.
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USE OF PROCEEDS
Substantially all of the net proceeds to be received from the sale of
each Series of Securities will be used to purchase the Assets related to such
Series or to reimburse the amounts previously used to effect such a purchase,
the costs of carrying such Assets until the sale of the related Securities and
other expenses connected with pooling the Assets and issuing the Securities.
FEDERAL INCOME TAX CONSEQUENCES
The following discussion is a summary of the anticipated material
federal income tax consequences of the purchase, ownership, and disposition of
the Securities offered hereunder. The summary is based upon laws, regulations,
rulings, and decisions now in effect, all of which are subject to change.
Because REMIC or FASIT status may be elected with respect to certain Series,
this discussion includes a summary of the federal income tax consequences to
holders of REMIC and FASIT Securities. The discussion does not purport to deal
with the federal income tax consequences to all categories of investors (such as
banks, insurance companies and foreign investors), some of which may be subject
to special rules. The discussion focuses primarily on investors who will hold
the Securities as "capital assets" (generally, property held for investment)
within the meaning of Section 1221 of the Internal Revenue Code, although much
of the discussion is applicable to other investors as well. Investors should
note that, although final regulations under the REMIC provisions of the Code
(the "REMIC Regulations") have been issued by the Treasury, no currently
effective regulations or other administrative guidance has been issued with
respect to certain provisions of the Code that are or may be applicable to
Securityholders, particularly the provisions dealing with market discount and
stripped debt securities. Although the Treasury recently issued final
regulations dealing with original issue discount and premium, those regulations
do not address directly the treatment of REMIC Regular Securities and certain
other types of securities. Furthermore, the REMIC Regulations do not address
many of the issues that arise in connection with the formation and operation of
a REMIC. In addition, no regulations or other administrative guidance has been
issued with respect to the FASIT provisions of the Code, which were enacted in
1996. Hence, definitive guidance cannot be provided with respect to many aspects
of the tax treatment of Securityholders, particularly Residual Securityholders
(as described below). Moreover, this summary and the opinion referred to below
are based on current law, and there can be no assurance that the Service will
not take positions that would be materially adverse to investors. Finally, the
summary does not purport to address the anticipated state income tax
consequences to investors of owning and disposing of the Securities.
Consequently, Investors should consult their own tax advisors in determining the
federal, state, foreign, and any other tax consequences to them of the purchase,
ownership, and disposition of the Securities.
GENERAL
Many aspects of the federal income tax treatment of the Securities of a
particular Series will depend upon whether an election is made to treat the
Trust, or one or more segregated pools of Trust assets, as a REMIC or FASIT. The
Prospectus Supplement for each Series will indicate whether a REMIC or FASIT
election or elections will be made with respect to the related Trust. For each
Series with respect to which one or more REMIC or FASIT elections are to be
made, Hunton & Williams, counsel to the Depositor, will deliver a separate
opinion generally to the effect that, assuming timely filing of a REMIC or FASIT
election or elections and compliance with the relevant Trust Agreement and
certain other documents specified in the opinion, the Trust Fund (or one or more
segregated pools of Trust assets) will qualify as one or more REMICs or FASITs
(each, a "Series REMIC" or "Series FASIT"). For each Series of Mortgage
Pass-Through Certificates with respect to which neither a REMIC nor a FASIT
election is to be made, Hunton & Williams will deliver a separate opinion
generally to the effect that, assuming compliance with the relevant Trust
Agreement and certain other documents, the Trust will be treated as a grantor
trust under subpart E, Part I of subchapter J of the Code or as a partnership
and not as an association or publicly-traded partnership taxable as a
corporation. In addition, for each Series of Collateralized Mortgage Bonds with
respect to which neither a REMIC nor a FASIT election is to be made, Hunton &
Williams will deliver a separate opinion generally to the effect that, assuming
compliance with the relevant Agreement and certain other documents, the Bonds
will be treated for federal income tax purposes as indebtedness, and not as an
ownership interest in the Assets or an equity interest in a separate association
taxable as a corporation. Those opinions will
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be based on existing law, but there can be no assurance that the law will not
change or that contrary positions will not be taken by the Service.
REMIC SECURITIES
REMIC Securities will be classified as either REMIC Regular Securities,
which generally are treated as debt for federal income tax purposes, or Residual
Securities, which generally are not treated as debt for such purposes, but
rather as representing rights and responsibilities with respect to the taxable
income or loss of the related REMIC. The Prospectus Supplement for each Series
of REMIC Securities will indicate which of the Securities of such Series will be
classified as REMIC Regular Securities and which will be classified as Residual
Securities. REMIC Securities held by a thrift institution taxed as a "domestic
building and loan association" will constitute a "regular or residual interest
in a REMIC," as the case may be, within the meaning of Section
7701(a)(19)(C)(xi) of the Code; and REMIC Securities held by a real estate
investment trust ("REIT") will constitute "real estate assets" within the
meaning of Section 856(c)(5)(A) of the Code; and interest on such Securities
will be considered "interest on obligations secured by mortgages on real
property" within the meaning of Section 856(c)(3)(B), all in the same proportion
that the related REMIC's assets would so qualify. If 95 percent or more of the
assets of a given Series REMIC constitute qualifying assets for Thrift
Institutions and REITs, the related REMIC Securities and the income thereon will
be treated entirely as qualifying assets and income for such purposes. REMIC
Regular and Residual Securities held by a financial institution to which Section
585 of the Code applies will be treated as evidences of indebtedness for
purposes of Section 582(c)(1) of the Code. The REMIC Regular Securities
generally will be "qualified mortgages" within the meaning of Section 860G(a)(3)
of the Code with respect to other REMICs. Effective September 1, 1997, REMIC
Regular Securities held by a financial asset securitization investment trust (a
"FASIT") will qualify for treatment as "permitted assets" within the meaning of
Section 860L(c)(1)(G) of the Code. In the case of a Series for which two or more
Series REMICs will be created, all Series REMICs will be treated as a single
REMIC for purposes of determining the extent to which the related Securities and
the income thereon will be treated as qualifying assets and income for such
purposes. However, REMIC Securities will not qualify as government securities
for REITs and regulated investment companies ("RICs") in any case.
Tax Treatment of REMIC Regular Securities
Payments received by holders of REMIC Regular Securities generally
should be accorded the same tax treatment under the Code as payments received on
ordinary taxable corporate debt instruments. Except as described below for REMIC
Regular Securities issued with original issue discount or acquired with market
discount or premium, interest paid or accrued on REMIC Regular Securities will
be treated as ordinary income to the Securityholder and a principal payment on
such Securities will be treated as a return of capital to the extent that the
Securityholder's basis in the Security is allocable to that payment. Holders of
REMIC Regular (or Residual) Securities must report income from such Securities
under an accrual method of accounting, even if they otherwise would have used
the cash receipts and disbursements method. The Trustee or the Master Servicer
will report annually to the Service and to Securityholders of record with
respect to interest paid or accrued and original issue discount, if any, accrued
on the Securities.
Under temporary Treasury regulations, holders of REMIC Regular
Securities issued by "single-class REMICs" who are individuals, trusts, estates,
or pass-through entities in which such investors hold interests may be required
to recognize certain amounts of income in addition to interest and discount
income. A single-class REMIC, in general, is a REMIC that (i) would be
classified as an investment trust in the absence of a REMIC election or (ii) is
substantially similar to an investment trust. Under the temporary Treasury
regulations, each holder of a regular or residual interest in a single-class
REMIC is allocated (i) a share of the REMIC's "allocable investment expenses"
(i.e., expenses normally allowable under Section 212 of the Code, which may
include servicing and administrative fees and insurance premiums) and (ii) a
corresponding amount of additional income. Section 67 of the Code permits an
individual, trust or estate to deduct miscellaneous itemized expenses (including
Section 212 expenses) only to the extent that such expenses, in the aggregate,
exceed 2% of its adjusted gross income. Consequently, an individual, trust or
estate that holds a regular interest in a single-class REMIC (either directly or
through a pass-through entity) will recognize additional income with respect to
such regular interest to
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the extent that its share of allocable investment expenses, when combined with
its other miscellaneous itemized deductions for the taxable year, fails to
exceed 2% of its adjusted gross income. Any such additional income will be
treated as interest income. In addition, Code Section 68 provides that the
amount of itemized deductions otherwise allowable for the taxable year for an
individual whose adjusted gross income exceeds the applicable amount ($100,000,
or $50,000 in the case of a separate return by a married individual within the
meaning of Code Section 7703 for taxable year 1991 and adjusted for inflation
each year thereafter) will be reduced by the lesser of (i) 3% of the excess of
adjusted gross income over the applicable amount, and (ii) 80% of the amount of
itemized deductions otherwise allowable for such taxable year. The amount of
such additional taxable income recognized by holders who are subject to the
limitations of either Section 67 or Section 68 may be substantial and may reduce
or eliminate the after-tax yield to such holders of an investment in the
Securities of an affected Series. Where appropriate, the Prospectus Supplement
for a particular Series REMIC will indicate that the holders of Securities of
such Series may be required to recognize additional income as a result of the
application of the limitations of either Section 67 or Section 68 of the Code.
Non-corporate holders of REMIC Regular Securities evidencing an interest in a
single-class REMIC also should be aware that miscellaneous itemized deductions,
including allocable investment expenses attributable to such REMIC, are not
deductible for purposes of the alternative minimum tax ("AMT").
Original Issue Discount
Certain Classes of REMIC Regular Securities may be issued with
"original issue discount" within the meaning of Section 1273(a) of the Code. In
general, such original issue discount, if any, will equal the difference between
the "stated redemption price at maturity" of the REMIC Regular Security
(generally, its principal amount) and its issue price. Holders of REMIC Regular
Securities as to which there is original issue discount should be aware that
they generally must include original issue discount in income for federal income
tax purposes on an annual basis under a constant yield accrual method that
reflects compounding. In general, original issue discount is treated as ordinary
income and must be included in income in advance of the receipt of the cash to
which it relates.
The amount of original issue discount required to be included in a
REMIC Regular Securityholder's income in any taxable year will be computed in
accordance with Section 1272(a)(6) of the Code, which provides for the accrual
of original issue discount under a constant yield method for certain debt
instruments, such as the REMIC Regular Securities, that are subject to
prepayment by reason of prepayments of underlying obligations. Under Section
1272(a)(6), the amount and rate of accrual of original issue discount on a REMIC
Regular Security generally is to be calculated based on (i) a single constant
yield to maturity and (ii) the prepayment rate for the related mortgage
collateral and the reinvestment rate on amounts held pending distribution that
were assumed in pricing the REMIC Regular Security (the "Pricing Prepayment
Assumptions"). No regulatory guidance currently exists under Code Section
1272(a)(6). Accordingly, until the Treasury issues guidance to the contrary, the
Master Servicer or other person responsible for computing the amount of original
issue discount to be reported to a REMIC Regular Securityholder each taxable
year (the "Tax Administrator") will, except as otherwise provided herein, base
its computations on Code Section 1272(a)(6), final regulations governing the
accrual of original issue discount on debt instruments that were issued by the
Treasury on January 27, 1994, but that do not address directly the treatment of
instruments that are subject to Code Section 1272(a)(6) (the "OID Regulations"),
and certain other guidance, all as described below. However, there can be no
assurance that such methodology represents the correct manner of calculating
original issue discount on the REMIC Regular Securities. The Tax Administrator
will account for income on certain REMIC Regular Securities that provide for one
or more contingent payments as described in "Federal Income Tax Consequences --
Original Issue Discount -- Interest Weighted Securities and Non-VRDI
Securities" herein. Prospective purchasers should be aware that none of the
Depositor, the Master Servicer, any Servicer or the Trustee will make any
representation that the Assets underlying a Series will in fact prepay at a rate
conforming to the related Pricing Prepayment Assumptions or at any other rate.
The amount of original issue discount on a REMIC Regular Security is
the excess, if any, of the Security's "stated redemption price at maturity" over
its "issue price." Under the OID Regulations, a debt instrument's stated
redemption price at maturity is the sum of all payments provided by the
instrument other than "qualified stated interest" ("Deemed Principal Payments").
Qualified stated interest, in general, is stated interest that is
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unconditionally payable in cash or property (other than debt instruments of the
issuer) at least annually at (i) a single fixed rate or (ii) a variable rate
that meets certain requirements set out in the OID Regulations. See "Federal
Income Tax Consequences -- REMIC Securities -- Original Issue Discount --
Variable Rate Securities" below. Thus, in the case of any REMIC Regular
Security, the stated redemption price at maturity will equal the total amount of
all Deemed Principal Payments due on that Security. In the case of any REMIC
Regular Security that does not require unconditional payments of interest at
least annually, the stated redemption price at maturity of such Security will
equal the aggregate of all payments due, whether designated as principal,
accrued interest, or current interest. The issue price of a REMIC Regular
Security generally will equal the initial price at which a substantial amount of
Securities of the same Class is sold to the public.
The OID Regulations contain an aggregation rule (the "Aggregation
Rule") under which two or more debt instruments issued in connection with the
same transaction or related transactions (determined based on all the facts and
circumstances) generally are treated as a single debt instrument for federal
income tax accounting purposes if issued by a single issuer to a single holder.
The Aggregation Rule, however, does not apply if the debt instrument is part of
an issue (i) a substantial portion of which is traded on an established market
or (ii) a substantial portion of which is issued for cash (or property traded on
an established market) to parties who are not related to the issuer or holder
and who do not purchase other debt instruments of the same issuer in connection
with the same transaction or related transactions. In most cases, the
Aggregation Rule will not apply to REMIC Regular Securities of different Classes
because one or both of the exceptions to the Aggregation Rule will have been
met. Although the Tax Administrator currently intends to apply the Aggregation
Rule to all REMIC regular interests in a Series REMIC that are held by a related
Series REMIC, it generally will not apply the Aggregation Rule to REMIC Regular
Securities for purposes of reporting to Securityholders.
Under a de minimis rule, a REMIC Regular Security will be considered to
have no original issue discount if the amount of original issue discount is less
than 0.25% of the Security's stated redemption price at maturity multiplied by
the weighted average maturity ("WAM") of all Deemed Principal Payments. For that
purpose, the WAM of a REMIC Regular Security is the sum of the amounts obtained
by multiplying the amount of each Deemed Principal Payment by a fraction, the
numerator of which is the number of complete years from the Security's issue
date until the payment is made, and the denominator of which is the Security's
stated redemption price at maturity. Although no Treasury regulations have been
issued under the relevant provisions of the 1986 Act, it is expected that the
WAM of a REMIC Regular Security will be computed using the Pricing Prepayment
Assumptions. A REMIC Regular Securityholder will include de minimis original
issue discount in income on a pro rata basis as stated principal payments on the
Security are received or, if earlier, upon disposition of the Security, unless
the Securityholder makes the "All OID Election" (as defined below).
REMIC Regular Securities of certain Series may bear interest under
terms that provide for a teaser rate period, interest holiday, or other period
during which the rate of interest payable on the Securities is lower than the
rate payable during the remainder of the life of the Securities ("Teaser
Securities"). Under certain circumstances, a Teaser Security may be considered
to have a de minimis amount of original issue discount even though the amount of
original issue discount on the Security would be more than de minimis as
determined as described above if the stated interest on a Teaser Security would
be qualified stated interest but for the fact that during one or more accrual
periods its interest rate is below the rate applicable for the remainder of its
term, the amount of original issue discount on such Security that is measured
against the de minimis amount of original issue discount allowable on the
Security is the greater of (i) the excess of the stated principal amount of such
Security over its issue price ("True Discount") and (ii) the amount of interest
that would be necessary to be payable on such Security in order for all stated
interest to be qualified stated interest.
The holder of a REMIC Regular Security generally must include in gross
income the sum, for all days during his taxable year on which he holds the REMIC
Regular Security, of the "daily portions" of the original issue discount on such
Security. In the case of an original holder of a REMIC Regular Security, the
daily portions of original issue discount with respect to such Security
generally will be determined by allocating to each day in any accrual period the
Security's ratable portion of the excess, if any, of (i) the sum of (a) the
present value of all payments under the Security yet to be received as of the
close of such period plus (b) the amount of any Deemed
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Principal Payments received on the Security during such period over (ii) the
Security's "adjusted issue price" at the beginning of such period. The present
value of payments yet to be received on a REMIC Regular Security is to be
computed using the Pricing Prepayment Assumptions and the Security's original
yield to maturity (adjusted to take into account the length of the particular
accrual period), and taking into account Deemed Principal Payments actually
received on the Security prior to the close of the accrual period. The adjusted
issue price of a REMIC Regular Security at the beginning of the first period is
its issue price. The adjusted issue price at the beginning of each subsequent
period is the adjusted issue price of the Security at the beginning of the
preceding period increased by the amount of original issue discount allocable to
that period and reduced by the amount of any Deemed Principal Payments received
on the Security during that period. Thus, an increased (or decreased) rate of
prepayments received with respect to a REMIC Regular Security will be
accompanied by a correspondingly increased (or decreased) rate of recognition of
original issue discount by the holder of such Security.
The yield to maturity of a Regular Security is calculated based on (i)
the Pricing Prepayment Assumptions and (ii) any contingencies not already taken
into account under the Pricing Prepayment Assumptions that, considering all of
the facts and circumstances as of the issue date, are more likely than not to
occur. Contingencies, such as the exercise of "mandatory redemptions," that are
taken into account by the parties in pricing the Regular Security typically will
be subsumed in the Pricing Prepayment Assumptions and thus will be reflected in
the Security's yield to maturity. The Tax Administrator's determination of
whether a contingency relating to a Class of Regular Securities is more likely
than not to occur is binding on each holder of a Regular Security of such Class
unless the holder explicitly discloses on its federal income tax return that its
determination of the yield and maturity of the Security is different from that
of the Tax Administrator.
In many cases, REMIC Regular Securities will be subject to optional
redemption before their stated maturity dates. Under the OID Regulations, the
Depositor will be presumed to exercise its option to redeem for purposes of
computing the accrual of original issue discount if, and only if, by using the
optional redemption date as the maturity date and the optional redemption price
as the stated redemption price at maturity, the yield to maturity of the
Security is lower than it would be if the Security were not redeemed early. If
the Depositor is presumed to exercise its option to redeem the Securities,
original issue discount on such Securities will be calculated as if the
redemption date were the maturity date and the optional redemption price were
the stated redemption price at maturity. In cases in which all of the Securities
of a particular Series are issued at par or at a discount, the Depositor will
not be presumed to exercise its option to redeem the Securities because a
redemption by the Depositor would not lower the yield to maturity of the
Securities. If, however, some Securities of a particular Series are issued at a
premium, the Depositor may be able to lower the yield to maturity of the
Securities by exercising its redemption option. In determining whether the
Depositor will be presumed to exercise its option to redeem Securities when one
or more Classes of the Securities is issued at a premium, the Tax Administrator
will take into account all Classes of Securities that are subject to the
optional redemption to the extent that they are expected to remain outstanding
as of the optional redemption date, based on the Pricing Prepayment Assumptions.
If, determined on a combined weighted average basis, the Securities of such
Classes were issued at a premium, the Tax Administrator will presume that the
Depositor will exercise its option. However, the OID Regulations are unclear as
to how the redemption presumption rules should apply to instruments such as the
Securities, and there can be no assurance that the Service will agree with the
Tax Administrator's position.
A REMIC Regular Security having original issue discount may be acquired
subsequent to its issuance for more than its adjusted issue price. If the
subsequent holder's adjusted basis in such a Security, immediately after its
acquisition, exceeds the sum of all Deemed Principal Payments to be received on
the Security after the acquisition date, the Security will no longer have
original issue discount, and the holder may be entitled to reduce the amount of
interest income recognized on the Security by the amount of amortizable premium.
See "Federal Income Tax Consequences -- REMIC Securities -- Amortizable
Premium." If the subsequent holder's adjusted basis in the Security, immediately
after the acquisition, exceeds the adjusted issue price of the Security, but is
less than or equal to the sum of the Deemed Principal Payments to be received on
the Security after the acquisition date, the amount of original issue discount
on the Security will be reduced by a fraction, the numerator of which is the
excess of the Security's adjusted basis immediately after its acquisition over
the adjusted issue price of the Security and the denominator of which is the
excess of the sum of all Deemed Principal Payments to be received on the
Security after the acquisition date over the adjusted issue price of the
Security. For that purpose, the adjusted basis
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of a REMIC Regular Security generally is reduced by the amount of any qualified
stated interest that is accrued but unpaid as of the acquisition date.
Alternatively, the subsequent holder of a REMIC Regular Security having original
issue discount may make an All OID Election (as defined below) with respect to
the Security.
The OID Regulations provide that a Securityholder generally may make an
election (an "All OID Election") to include in gross income all stated interest,
original issue discount, de minimis original issue discount, market discount (as
described below under "Federal Income Tax Consequences -- REMIC Securities --
Market Discount"), and de minimis market discount that accrues on a REMIC
Regular Security (reduced by any acquisition premium or amortizable premium, as
described below under "Federal Income Tax Consequences -- REMIC Securities --
Amortizable Premium") under the constant yield method used to account for
original issue discount. To make the All OID Election, the holder of the
Security must attach a statement to its timely filed federal income tax return
for the taxable year in which the holder acquired the Security. The statement
must identify the instruments to which the election applies. An All OID Election
is irrevocable unless the holder obtains the consent of the Service. If an All
OID Election is made for a debt instrument with market discount, the holder is
deemed to have made an election to include in income currently the market
discount on all of the holder's other debt instruments with market discount, as
described in "Federal Income Tax Consequences -- REMIC Securities -- Market
Discount" below. In addition, if an All OID Election is made for a debt
instrument with amortizable bond premium, the holder is deemed to have made an
election to amortize the premium on all of the holder's other debt instruments
with amortizable premium under the constant yield method. See "Federal Income
Tax Consequences -- REMIC Securities -- Amortizable Premium." Securityholders
should be aware that the law is unclear as to whether an All OID Election is
effective for a Security that is subject to the contingent payment rules. See
"Federal Income Tax Consequences -- REMIC Securities -- Original Issue Discount
- -- Interest Weighted Securities and Non-VRDI Securities."
If the interval between the issue date of a Current Interest Security
and the first Distribution Date (the "First Distribution Period") contains more
days than the number of days of stated interest that are payable on the first
Distribution Date, the effective interest rate received by the Securityholder
during the First Distribution Period will be less than the Security's stated
interest rate, making such Security a Teaser Security. If the amount of original
issue discount on the Security measured under the expanded de minimis test
exceeds the de minimis amount of original issue discount allowable on the
Security, the amount by which the stated interest on the Security exceeds the
interest that would be payable on the Security at the effective rate of interest
for the First Distribution Period would be treated as part of the Security's
stated redemption price at maturity. Accordingly, the holder of a Teaser
Security may be required to recognize ordinary income arising from original
issue discount in the First Distribution Period in addition to any qualified
stated interest that accrues in that period.
Similarly, if the First Distribution Period is shorter than the
interval between subsequent Distribution Dates, the effective rate of interest
payable on a Security during the First Distribution Period will be higher than
the stated rate of interest if a Securityholder receives interest on the first
Distribution Date based on a full accrual period. Unless the "Pre-Issuance
Accrued Interest Rule" described below applies, such Security (a "Rate Bubble
Security") would be issued with original issue discount unless the amount of
original issue discount is de minimis. The amount of original issue discount on
a Rate Bubble Security attributable to the First Distribution Period would be
the amount by which the interest payment due on the first Distribution Date
exceeds the amount that would have been payable had the effective rate for that
Period been equal to the stated interest rate. However, under the "Pre-Issuance
Accrued Interest Rule," if, (i) a portion of the initial purchase price of a
Rate Bubble Security is allocable to interest that has accrued under the terms
of the Security prior to its issue date ("Pre-Issuance Accrued Interest") and
(ii) the Security provides for a payment of stated interest on the First
Distribution Date within one year of the issue date that equals or exceeds the
amount of the Pre-Issuance Accrued Interest, the Security's issue price may be
computed by subtracting from the issue price the amount of Pre-Issuance Accrued
Interest. If the Securityholder opts to apply the Pre-Issuance Accrued Interest
Rule, the portion of the interest received on the first Distribution Date equal
to the Pre-Issuance Accrued Interest would be treated as a return of such
Interest and would not be treated as a payment on the Security. Thus, where the
Pre-Issuance Accrued Interest Rule applies, a Rate Bubble Security will not have
original issue discount attributable to the First Distribution Period, provided
that the increased effective interest rate for that Period is attributable
solely to Pre-Issuance Accrued Interest, as typically will be the case. The
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Tax Administrator intends to apply the Pre-Issuance Accrued Interest Rule to
each Rate Bubble Security for which it is available if the Security's stated
interest otherwise would be qualified stated interest. If, however, the First
Distribution Period of a Rate Bubble Security is longer than subsequent Payment
Periods, the application of the Pre-Issuance Accrued Interest Rule typically
will not prevent disqualification of the Security's stated interest because its
effective interest rate during the First Distribution Period will be less than
its stated interest rate. Thus, a REMIC Regular Security with a long First
Distribution Period typically will be a Teaser Security, as discussed above. The
Pre-Issuance Accrued Interest Rule will not apply to any amount paid at issuance
for such a Teaser Security that is nominally allocable to interest accrued under
the terms of such Security before its issue date. All amounts paid for such a
Teaser Security at issuance, regardless of how designated, will be included in
the issue price of such Security for federal income tax accounting purposes.
It is not entirely clear how income should be accrued with respect to a
REMIC Regular Security, the payments on which consist entirely or primarily of a
specified nonvarying portion of the interest payable on one or more of the
qualified mortgages held by the REMIC (an "Interest Weighted Security"). Unless
and until the Service provides contrary administrative guidance on the income
tax treatment of an Interest Weighted Security, the Tax Administrator will take
the position that an Interest Weighted Security does not bear qualified stated
interest, and will account for the income thereon as described in "Federal
Income Tax Consequences -- REMIC Securities -- Original Issue Discount --
Interest Weighted Securities and Non-VRDI Securities," herein. Some Interest
Weighted Securities may provide for a relatively small amount of principal and
for interest that can be expressed as qualified stated interest at a very high
fixed rate with respect to that principal ("Superpremium Securities").
Superpremium Securities technically are issued with amortizable premium.
However, because of their close similarity to other Interest Weighted Securities
it appears more appropriate to account for Superpremium Securities in the same
manner as for other Interest Weighted Securities. Consequently, in the absence
of further administrative guidance, the Tax Administrator intends to account for
Superpremium Securities in the same manner as other Interest Weighted
Securities. However, there can be no assurance that the Service will not assert
a position contrary to that taken by the Tax Administrator, and, therefore,
holders of Superpremium Securities should consider making a protective election
to amortize premium on such Securities.
In view of the complexities and current uncertainties as to the manner
of inclusion in income of original issue discount on the REMIC Regular
Securities, each investor should consult his own tax advisor to determine the
appropriate amount and method of inclusion in income of original issue discount
on such Securities for federal income tax purposes.
Variable Rate Securities
A REMIC Regular Security may pay interest at a variable rate (a
"Variable Rate Security"). A Variable Rate Security that qualifies as a
"variable rate debt instrument" as that term is defined in the OID Regulations
(a "VRDI") will be governed by the rules applicable to VRDIs in the OID
Regulations, which are described below. A Variable Rate Security qualifies as a
VRDI under the OID Regulations if (i) the Security is not issued at a premium to
its noncontingent principal amount in excess of the lesser of (a) .015
multiplied by the product of such noncontingent principal amount and the WAM (as
that term is defined above in the discussion of the de minimis rule) of the
Security and (b) 15 percent of such noncontingent principal amount (an "Excess
Premium"); (ii) stated interest on the Security compounds or is payable
unconditionally at least annually at (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"; (iii) the qualified floating rate or the
objective rate in effect during an accrual period is set at a current value of
that rate (i.e., the value of the rate on any day occurring during the interval
that begins three months prior to the first day on which that value is in effect
under the Security and ends one year following that day); and (iv) the Security
does not provide for contingent principal payments.
Under Treasury regulations, a rate is a qualified floating rate if
variations in the rate reasonably can be expected to measure contemporaneous
variations in the cost of newly borrowed funds in the currency in which the debt
instrument is denominated. A qualified floating rate may measure contemporaneous
variations in borrowing
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costs for the issuer of the debt instrument or for issuers in general. A
multiple of a qualified floating rate is considered a qualified floating rate
only if the rate is equal to either (a) the product of a qualified floating rate
and a fixed multiple that is greater than .65 but not more than 1.35 or (b) the
product of a qualified floating rate and a fixed multiple that is greater than
.65 but not more than 1.35, increased or decreased by a fixed rate. If a REMIC
Regular Security provides for two or more qualified floating rates that
reasonably can be expected to have approximately the same values throughout the
term of the Security, the qualified floating rates together will constitute a
single qualified floating rate. Two or more qualified floating rates
conclusively will be presumed to have approximately the same values throughout
the term of a Security if the values of all rates on the issue date of the
Security are within 25 basis points of each other.
A variable rate will be considered a qualified floating rate if it is
subject to a restriction or restrictions on the maximum stated interest rate (a
"Cap"), a restriction or restrictions on the minimum stated interest rate (a
"Floor"), a restriction or restrictions on the amount of increase or decrease in
the stated interest rate (a "Governor"), or other similar restriction only if:
(a) the Cap, Floor, Governor, or similar restriction is fixed throughout the
term of the related Security or (b) the Cap, Floor, Governor, or similar
restriction is not reasonably expected, as of the issue date, to cause the yield
on the Security to be significantly less or significantly more than the expected
yield on the Security determined without such Cap, Floor, Governor, or similar
restriction, as the case may be. Although the OID Regulations are unclear, it
appears that a VRDI, the principal rate on which is subject to a Cap, Floor, or
Governor that itself is a qualified floating rate, bears interest at an
objective rate.
An objective rate is a rate (other than a qualified floating rate) that
(i) is determined using a single fixed formula, (ii) is based on objective
financial or economic information, and (iii) is not based on information that
either is within the control of the issuer (or a related party) or is unique to
the circumstances of the issuer (or related party), such as dividends, profits,
or the value of the issuer's (or related party's) stock. That definition would
include, in addition to a rate that is based on one or more qualified floating
rates or on the yield of actively traded personal property, a rate that is based
on changes in a general inflation index. In addition, a rate would not fail to
be an objective rate merely because it is based on the credit quality of the
issuer. An objective rate is a qualified inverse floating rate if (i) the rate
is equal to a fixed rate minus a qualified floating rate and (ii) the variations
in the rate can reasonably be expected to inversely reflect contemporaneous
variations in the qualified floating rate (disregarding certain Caps, Floors,
and Governors).
If interest on a Variable Rate Security is stated at a fixed rate for
an initial period of less than one year followed by a variable rate that is
either a qualified floating rate or an objective rate for a subsequent period,
and the value of the variable rate on the issue date is intended to approximate
the fixed rate, the fixed rate and the variable rate together constitute a
single qualified floating rate or objective rate. A variable rate conclusively
will be presumed to approximate an initial fixed rate if the value of the
variable rate on the issue date does not differ from the value of the fixed rate
by more than 25 basis points.
All interest payable on a Variable Rate Security that qualifies as a
VRDI and provides for stated interest unconditionally payable in cash or
property at least annually at a single qualified floating rate or a single
objective rate (a "Single Rate VRDI Security") is treated as qualified stated
interest. The amount and accrual of original issue discount on a Single Rate
VRDI Security is determined, in general, by converting such Security into a
hypothetical fixed rate security and applying the rules applicable to fixed rate
securities described under "Federal Income Tax Consequences -- REMIC Securities
- -- Original Issue Discount" above to such hypothetical fixed rate security.
Qualified stated interest or original issue discount allocable to an accrual
period with respect to a Single Rate VRDI Security also must be increased (or
decreased) if the interest actually accrued or paid during such accrual period
exceeds (or is less than) the interest assumed to be accrued or paid during such
accrual period under the related hypothetical fixed rate security.
Except as provided below, the amount and accrual of original issue
discount on a Variable Rate Security that qualifies as a VRDI but is not a
Single Rate VRDI Security (a "Multiple Rate VRDI Security") is determined by
converting such Security into a hypothetical equivalent fixed rate security that
has terms that are identical to those provided under the Multiple Rate VRDI
Security, except that such hypothetical equivalent fixed rate security will
provide for fixed rate substitutes in lieu of the qualified floating rates or
objective rate provided for under the
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Multiple Rate VRDI Security. A Multiple Rate VRDI Security that provides for a
qualified floating rate or rates or a qualified inverse floating rate is
converted to a hypothetical equivalent fixed rate security by assuming that each
qualified floating rate or the qualified inverse floating rate will remain at
its value as of the issue date. A Multiple Rate VRDI Security that provides for
an objective rate or rates is converted to a hypothetical equivalent fixed rate
security by assuming that each objective rate will equal a fixed rate that
reflects the yield that reasonably is expected for the Multiple Rate VRDI
Security. Qualified stated interest or original issue discount allocable to an
accrual period with respect to a Multiple Rate VRDI Security must be increased
(or decreased) if the interest actually accrued or paid during such accrual
period exceeds (or is less than) the interest assumed to be accrued or paid
during such accrual period under the hypothetical equivalent fixed rate
security.
The amount and accrual of original issue discount on a Multiple Rate
VRDI Security that provides for stated interest at either one or more qualified
floating rates or at a qualified inverse floating rate and in addition provides
for stated interest at a single fixed rate (other than an initial fixed rate
that is intended to approximate the subsequent variable rate) is determined
using the method described above for all other Multiple Rate VRDI Securities
except that prior to its conversion to a hypothetical equivalent fixed rate
security, such Multiple Rate VRDI Security is treated as if it provided for a
qualified floating rate (or a qualified inverse floating rate), rather than the
fixed rate. The qualified floating rate (or qualified inverse floating rate)
replacing the fixed rate must be such that the fair market value of the Multiple
Rate VRDI Security as of its issue date would be approximately the same as the
fair market value of an otherwise identical debt instrument that provides for
the qualified floating rate (or qualified inverse floating rate), rather than
the fixed rate.
REMIC Regular Securities of certain Series may provide for interest
based on a weighted average of the interest rates on some or all of the Mortgage
Loans or regular interests in a second REMIC held subject to the related Trust
Agreement ("Weighted Average Securities"). Under the OID Regulations, it appears
that Weighted Average Securities relating to a REMIC whose assets consist
exclusively of ARM Loans bear interest at an "objective rate," provided the ARM
Loans themselves bear interest at qualified floating rates. However, under the
OID Regulations, Weighted Average Securities relating to a REMIC whose assets do
not bear interest at qualified floating rates ("Non-Objective Weighted Average
Securities" or "NOWA Securities") do not bear interest at an objective or a
qualified floating rate and, consequently, do not qualify as VRDIs. Accordingly,
unless and until the Service provides contrary administrative guidance on the
income tax treatment of NOWA Securities, the Tax Administrator intends to
account for the income on such Securities as described in "Federal Income Tax
Consequences -- REMIC Securities -- Original Issue Discount -- Interest Weighted
Securities and Non-VRDI Securities."
REMIC Regular Securities of certain Series may provide for the payment
of interest at a rate determined as the difference between two interest rate
parameters, one of which is a variable rate and the other of which is a fixed
rate or a different variable rate ("Inverse Floater Securities"). Under the OID
Regulations, Inverse Floater Securities generally bear interest at objective
rates, because their rates either constitute "qualified inverse floating rates"
under those Regulations or, although not qualified floating rates themselves,
are based on one or more qualified floating rates. Consequently, if such
Securities are not issued at an Excess Premium and their interest rates
otherwise meet the test for qualified stated interest, the income on such
Securities will be accounted for under the rules applicable to VRDIs described
above. However, an Inverse Floater Security may have an interest rate parameter
equal to the weighted average of the interest rates on some or all of the Assets
(or other interest bearing assets) held by the related REMIC in a case where one
or more of those rates is a fixed rate or otherwise may not qualify as a VRDI.
Unless and until the Service provides contrary administrative guidance on the
income tax treatment of such Inverse Floater Securities, the Tax Administrator
intends to account for the income on such Securities as described in "Federal
Income Tax Consequences -- REMIC Securities -- Original Issue Discount --
Interest Weighted Securities and Non-VRDI Securities" herein.
Interest Weighted Securities and Non-VRDI Securities
The treatment of a NOWA Security, a Variable Rate Security that is
issued at an Excess Premium, any other Variable Rate Security that does not
qualify as a VRDI (each a "Non-VRDI Security") or an Interest Weighted Security
is unclear under current law. The OID Regulations contain provisions (the
"Contingent Payment
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Regulations") that address the federal income tax treatment of debt obligations
that provide for one or more contingent payments ("Contingent Payment
Obligations"). Under the Contingent Payment Regulations, any variable rate debt
instrument that is not a VRDI is classified as a Contingent Payment Obligation.
However, the Contingent Payment Regulations, by their terms, do not apply to
REMIC regular interests and other instruments that are subject to Section
1272(a)(6) of the Code. In the absence of further guidance, the Tax
Administrator will account for Non-VRDI Securities, Interest Weighted
Securities, and other REMIC Regular Securities that are Contingent Payment
Obligations in accordance with Code Section 1272(a)(6) and the accounting
methodology described in this paragraph. Income will be accrued on such
securities based on a constant yield that is derived from a projected payment
schedule as of the Closing Date. The projected payment schedule will take into
account the related Pricing Prepayment Assumptions and the interest payments
that are expected to be made on such Securities based on the value of any
relevant indices on the issue date. To the extent that actual payments differ
from projected payments for a particular taxable year, appropriate adjustments
to interest income and expense accruals will be made for that year. In the case
of a Weighted Average Security, the projected payments schedule will be derived
based on the assumption that the principal balances of the Mortgage Loans that
collateralize the Security pay down pro rata.
The method described in the foregoing paragraph for accounting for
Interest Weighted Securities and Non-VRDI Securities is consistent with Code
section 1272(a)(6) and the legislative history thereof. Because of the
uncertainty with respect to the treatment of such Securities under the OID
Regulations, however, there can be no assurance that the Service will not assert
successfully that a method less favorable to Securityholders will apply. In view
of the complexities and the current uncertainties as to income inclusions with
respect to Non-VRDI Securities and Interest Weighted Securities, particularly
with respect to the method that should be used to account for the income on such
Securities, each investor should consult his or her own tax advisor to determine
the appropriate amount and method of income inclusion on such Securities for
federal income tax purposes.
Anti-Abuse Rule
Concerned that taxpayers might be able to structure debt instruments or
transactions, or to apply the bright-line or mechanical rules of the OID
Regulations, in a way that produce unreasonable tax results, the Treasury issued
regulations containing an anti-abuse rule on the same date as the issuance of
the OID Regulations. The regulations provide that if a principal purpose in
structuring a debt instrument, engaging in a transaction, or applying the OID
Regulations is to achieve a result that is unreasonable in light of the purposes
of the applicable statutes, the Service can apply or depart from the OID
Regulations as necessary or appropriate to achieve a reasonable result. A result
is not considered unreasonable under the regulations, however, in the absence of
a substantial effect on the present value of a taxpayer's tax liability.
Market Discount
A subsequent purchaser of a REMIC Regular Security at a discount from
its outstanding principal amount (or, in the case of a REMIC Regular Security
having original issue discount, its adjusted issue price) will acquire such
Security with "market discount." The purchaser generally will be required to
recognize the market discount (in addition to any original issue discount
remaining with respect to the Security) as ordinary income. A person who
purchases a REMIC Regular Security at a price lower than the remaining
outstanding Deemed Principal Payments but higher than its adjusted issue price
does not acquire the Security with market discount, but will be required to
report original issue discount, appropriately adjusted to reflect the excess of
the price paid over the adjusted issue price. See "Federal Income Tax
Consequences -- REMIC Securities -- Original Issue Discount." A REMIC Regular
Security will not be considered to have market discount if the amount of such
market discount is de minimis, i.e., less than the product of (i) 0.25% of the
remaining principal amount of the Security (or, in the case of a REMIC Regular
Security having original issue discount, the adjusted issue price of such
Security), multiplied by (ii) the weighted average maturity of the Security
(determined as for original issue discount) remaining after the date of
purchase. Regardless of whether the subsequent purchaser of a REMIC Regular
Security with more than a de minimis amount of market discount is a cash-basis
or accrual-basis taxpayer, market discount generally will be taken into income
as principal payments (including, in the case of a REMIC Regular Security having
original issue discount, any Deemed Principal Payments) are received, in an
amount equal to the lesser of (i) the amount
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of the principal payment received or (ii) the amount of market discount that has
"accrued" (as described below), but that has not yet been included in income.
The purchaser may make a special election, which generally applies to all market
discount instruments held or acquired by the purchaser in the taxable year of
election or thereafter, to recognize market discount currently on an uncapped
accrual basis (the "Current Recognition Election"). The Service has set forth in
Revenue Procedure 92-67 the manner in which a Current Recognition Election may
be made. In addition, a purchaser may make an All OID Election with respect to a
REMIC Regular Security purchased with market discount. See "Federal Income Tax
Consequences -- REMIC Securities -- Original Issue Discount" above.
Until the Treasury promulgates applicable regulations, the purchaser of
a REMIC Regular Security with market discount generally may elect to accrue the
market discount either: (i) on the basis of a constant interest rate; (ii) in
the case of a REMIC Regular Security not issued with original issue discount, in
the ratio of stated interest payable in the relevant period to the total stated
interest remaining to be paid from the beginning of such period; or (iii) in the
case of a REMIC Regular Security issued with original issue discount, in the
ratio of original issue discount accrued for the relevant period to the total
remaining original issue discount at the beginning of such period. The Service
indicated in Revenue Procedure 92-67 the manner in which an election may be made
to accrue market discount on a REMIC Regular Security on the basis of a constant
interest rate. Regardless of which computation method is elected, the Pricing
Prepayment Assumptions must be used to calculate the accrual of market discount.
A Securityholder who has acquired any REMIC Regular Security with
market discount generally will be required to treat a portion of any gain on a
sale or exchange of the Security 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 principal payments were received. Moreover, such Securityholder
generally must defer interest deductions attributable to any indebtedness
incurred or continued to purchase or carry the Security to the extent they
exceed income on the Security. Any such deferred interest expense, in general,
is allowed as a deduction not later than the year in which the related market
discount income is recognized. If a Regular Securityholder makes a Current
Recognition Election or an All OID Election, the interest deferral rule will not
apply.
Treasury regulations implementing the market discount rules have not
yet been issued, and uncertainty exists with respect to many aspects of those
rules. For example, the treatment of a REMIC Regular Security subject to
redemption at the option of the Depositor that is acquired at a market discount
is unclear. It appears likely, however, that the market discount rules
applicable in such a case would be similar to the rules pertaining to original
issue discount. Due to the substantial lack of regulatory guidance with respect
to the market discount rules, it is unclear how those rules will affect any
secondary market that develops for a given Class of REMIC Regular Securities.
Prospective investors in REMIC Regular Securities should consult their own tax
advisors as to the application of the market discount rules to those Securities.
Amortizable Premium
A purchaser of a REMIC Regular Security who purchases the Security at a
premium over the total of its Deemed Principal Payments may elect to amortize
such premium under a constant yield method that reflects compounding based on
the interval between payments on the Securities. The legislative history of the
1986 Act indicates that premium is to be accrued in the same manner as market
discount. Accordingly, it appears that the accrual of premium on a REMIC Regular
Security will be calculated using the Pricing Prepayment Assumptions. Under the
Code, except as otherwise provided in Treasury regulations to be issued,
amortized premium would be treated as an offset to interest income on a REMIC
Regular Security and not as a separate deduction item. If a holder makes an
election to amortize premium on a REMIC Regular Security, such election will
apply to all taxable debt instruments (including all REMIC regular interests)
held by the holder at the beginning of the taxable year in which the election is
made, and to all taxable debt instruments acquired thereafter by such holder,
and will be irrevocable without the consent of the Service. Purchasers who pay a
premium for the REMIC Regular Securities should consult their tax advisors
regarding the election to amortize premium and the method to be employed.
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Amortizable premium on a REMIC Regular Security that is subject to
redemption at the option of the Trust generally must be amortized as if the
optional redemption price and date were the Security's principal amount and
maturity date if doing so would result in a smaller amount of premium
amortization during the period ending with the optional redemption date. Thus, a
Securityholder would not be able to amortize any premium on a REMIC Regular
Security that is subject to optional redemption at a price equal to or greater
than the Securityholder's acquisition price unless and until the redemption
option expires. In cases where premium must be amortized on the basis of the
price and date of an optional redemption, the Security will be treated as having
matured on the redemption date for the redemption price and then having been
reissued on that date for that price. Any premium remaining on the Security at
the time of the deemed reissuance will be amortized on the basis of (i) the
original principal amount and maturity date or (ii) the price and date of any
succeeding optional redemption, under the principles described above.
Consequences of Realized Losses
Under section 166 of the Code, both corporate holders of REMIC Regular
Securities and noncorporate holders that acquire REMIC Regular Securities in
connection with a trade or business should be allowed to deduct, as ordinary
losses, any losses sustained during a taxable year in which their REMIC Regular
Securities become wholly or partially worthless as the result of one or more
Realized Losses on the underlying Assets. However, a noncorporate holder that
does not acquire a REMIC Regular Security in connection with its trade or
business will not be entitled to deduct a loss under Code Section 166 until its
REMIC Regular Security becomes wholly worthless (i.e., until its outstanding
Security Principal Balance has been reduced to zero), and the loss will be
characterized as short-term capital loss).
Each holder of a REMIC Regular Security will be required to accrue
original issue discount income with respect to such Certificate without giving
effect to any reduction in distributions attributable to a default or
delinquency on the underlying Assets until a Realized Loss is allocated to such
Security or until such earlier time as it can be established that any such
reduction ultimately will not be recoverable. As a result, the amount of
original issue discount reported in any period by the holder of a REMIC Regular
Security could exceed significantly the amount of economic income actually
realized by the holder in such period. Although the holder of a REMIC Regular
Security eventually will recognize a loss or a reduction in income attributable
to previously included original issue discount that, as a result of a Realized
Loss, ultimately will not be realized, the law is unclear with respect to the
timing and character of such loss or reduction in income. Accordingly, holders
of REMIC Regular Securities should consult with their own tax advisors with
respect to the federal income tax consequences of Realized Losses on original
issue discount.
The Tax Administrator will adjust the accrual of original issue
discount on REMIC Regular Securities in a manner that it believes to be
appropriate to reflect Realized Losses. However, there can be no assurance that
the Service will not contend successfully that a different method of accounting
for the effect of Realized Losses is correct and that such method will not have
an adverse effect upon the holders of REMIC Regular Securities.
Gain or Loss on Disposition
If a REMIC Regular Security is sold, the Securityholder will recognize
gain or loss equal to the difference between the amount realized on the sale and
his adjusted basis in the Security. The adjusted basis of a REMIC Regular
Security generally will equal the cost of the Security to the Securityholder,
increased by any original issue discount or market discount previously
includable in the Securityholder's gross income with respect to the Security,
and reduced by the portion of the basis of the Security allocable to payments on
the Security (other than qualified stated interest) previously received by the
Securityholder and by any amortized premium. Similarly, a Securityholder who
receives a scheduled or prepaid principal payment with respect to a REMIC
Regular Security will recognize gain or loss equal to the difference between the
amount of the payment and the allocable portion of his adjusted basis in the
Security. Except to the extent that the market discount rules apply and except
as provided below, any gain or loss on the sale or other disposition of a REMIC
Regular Security generally will be capital gain or loss. Such gain or loss will
be long-term gain or loss if the Security is held as a capital asset for more
than 12 months.
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If the holder of a REMIC Regular Security is a bank, thrift, or similar
institution described in Section 582 of the Code, any gain or loss on the sale
or exchange of the REMIC Regular Security will be treated as ordinary income or
loss. In the case of other types of holders, gain from the disposition of a
REMIC Regular Security that otherwise would be capital gain will be treated as
ordinary income to the extent that the amount actually includable in income with
respect to the Security by the Securityholder during his holding period is less
than the amount that would have been includable in income if the yield on that
Security during the holding period had been 110% of a specified U.S. Treasury
borrowing rate as of the date that the Securityholder acquired the Security.
Although the legislative history to the 1986 Act indicates that the portion of
the gain from disposition of a REMIC Regular Security that will be
recharacterized as ordinary income is limited to the amount of original issue
discount (if any) on the Security that was not previously includable in income,
the applicable Code provision contains no such limitation.
A portion of any gain from the sale of a REMIC Regular Security that
might otherwise be capital gain may be treated as ordinary income to the extent
that such Security is held as part of a "conversion transaction" within the
meaning of Section 1258 of the Code. A conversion transaction generally is one
in which the taxpayer has taken two or more positions in Securities or similar
property that reduce or eliminate market risk, if substantially all of the
taxpayer's return is attributable to the time value of the taxpayer's net
investment in such transaction. The amount of gain realized in a conversion
transaction that is recharacterized as ordinary income generally will not exceed
the amount of interest that would have accrued on the taxpayer's net investment
at 120% of the appropriate "applicable federal rate" (which rate is computed and
published monthly by the Service) at the time the taxpayer entered into the
conversion transaction, subject to appropriate reduction for prior inclusion of
interest and other ordinary income from the transaction.
Currently, the highest marginal individual income tax bracket is 36%,
and a 10% surtax is imposed on taxpayers whose taxable income for 1993 and later
years exceeds $250,000 (resulting in a 39.6% marginal rate). The alternative
minimum tax ("AMT") rate for individuals is 26% with respect to AMT income up to
$175,000 and 28% with respect to AMT income over $175,000. The recently enacted
Taxpayer Relief Act of 1997 (the "Relief Act") established a three-tier rate
structure with respect to the net capital gain of individuals. Under the
Relief Act, the highest marginal federal tax rate on net capital gains for
individuals with respect to assets held for 18 months or less is 28%, as under
prior law. However, the Relief Act reduces the highest marginal federal tax
rate with respect to net capital gain on assets held by individuals for more
than 18 months from 28% to 20%, and, for taxable years beginning after December
31, 2000 and with respect to assets held for more than 5 years, to 18%.
Accordingly, there can be a significant marginal tax rate differential between
net capital gains and ordinary income for individuals. The highest marginal
corporate tax rate is 35% for corporate taxable income over $10 million, and
the marginal tax rate on corporate net capital gains also is 35%.
Tax Treatment of Residual Securities
Overview
Residual Securities will be considered residual interests in the Series
REMIC to which they relate. A REMIC is an entity for federal income tax purposes
consisting of a fixed pool of mortgages or other mortgage-backed assets in which
investors hold multiple classes of interests. To be treated as a REMIC, the
Trust (or one or more segregated pools of Trust assets) underlying a Series must
meet certain continuing qualification requirements, and a REMIC election must be
in effect. See "REMIC Qualification." A Series REMIC generally will be treated
as a pass-through entity for federal income tax purposes, i.e., as not subject
to entity-level tax. All interests in a Series REMIC other than the Residual
Securities must be regular interests, i.e., REMIC Regular Securities. As
described in "Tax Treatment of Regular Securities" above, a regular interest
generally is an interest whose terms are analogous to those of a debt instrument
and it generally is treated as such an instrument for federal income tax
purposes. REMIC Regular Securities will generate interest and original issue
discount deductions for the REMIC. As a residual interest, a Residual Security
represents the right to (i) stated principal and interest on such Security, if
any, and (ii) the income generated by the REMIC assets in excess of the amount
necessary to service the regular interests and pay the REMIC's expenses. In a
manner similar to that employed in the taxation of partnerships, REMIC taxable
income or loss will be determined at the REMIC level, but passed through to the
Residual Securityholders. Thus, REMIC taxable income or loss will be allocated
pro rata to the Residual Securityholders, and each Residual Securityholder will
report his share of REMIC taxable income or loss on his own federal income tax
return. Prospective investors in Residual Securities should be aware that the
obligation to account for the REMIC's income or loss will continue until all of
the REMIC Regular Securities have been retired,
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which may not occur until well beyond the date on which the last payments on
Residual Securities are made. In addition, because of the way in which REMIC
taxable income is calculated, a Residual Securityholder may recognize "phantom"
income (i.e., income recognized for tax purposes in excess of income as
determined under financial accounting or economic principles) which will be
matched in later years by a corresponding tax loss or reduction in taxable
income, but which could lower the yield to Residual Securityholders due to the
lower present value of such loss or reduction.
A portion of the income of Residual Securityholders in certain Series
REMICs will be treated unfavorably in three contexts: (i) it may not be offset
by current or net operating loss deductions; (ii) it will be considered
unrelated business taxable income ("UBTI") to tax-exempt entities; and (iii) it
is ineligible for any statutory or treaty reduction in the 30 percent
withholding tax otherwise available to a foreign Residual Securityholder.
The concepts presented in this overview are discussed more fully below.
Taxation of Residual Securityholders
A Residual Securityholder will recognize his share of REMIC taxable
income or loss for each day during his taxable year on which he holds the
Residual Security. The amount so recognized will be characterized as ordinary
income or loss and generally will not be taxed separately to the REMIC. If a
Residual Security is transferred during a calendar quarter, REMIC taxable income
or loss for that quarter will be prorated between the transferor and the
transferee on a daily basis.
A REMIC generally determines its taxable income or loss in a manner
similar to that of an individual using a calendar year and the accrual method of
accounting. REMIC taxable income or loss will be characterized as ordinary
income or loss and will consist of the REMIC's gross income, including interest,
original issue discount, and market discount income, if any, on the REMIC's
assets (including temporary cash flow investments) premium amortization on the
REMIC Regular Securities, income from foreclosure property, and any cancellation
of indebtedness income due to the allocation of realized losses to REMIC Regular
Securities, reduced by the REMIC's deductions, including deductions for interest
and original issue discount expense on the REMIC Regular Securities, premium
amortization and servicing fees on such assets, the administration expenses of
the REMIC and the REMIC Regular Securities, any tax imposed on the REMIC's
income from foreclosure property, and any bad debt deductions with respect to
the Mortgage Loans. However, the REMIC may not take into account any items
allocable to a "prohibited transaction." See "Federal Income Tax Consequences --
REMIC Securities -- REMIC-Level Taxes." The deduction of REMIC expenses by
Residual Securityholders who are individuals is subject to certain limitations
as described below in "Federal Income Tax Consequences -- REMIC Securities --
Special Considerations for Certain Types of Investors -- Individuals and
Pass-Through Entities."
The amount of the REMIC's net loss with respect to a calendar quarter
that may be deducted by a Residual Securityholder is limited to such
Securityholder's adjusted basis in the Residual Security as of the end of that
quarter (or time of disposition of the Residual Security, if earlier),
determined without taking into account the net loss for that quarter. A Residual
Securityholder's basis in its Residual Security initially is equal to the price
paid for such Security. Such basis is increased by the amount of income
recognized with respect to the Residual Security and decreased (but not below
zero) by the amount of distributions made and the amount of net losses
recognized with respect to that Security. The amount of the REMIC's net loss
allocable to a Residual Securityholder that is disallowed under the basis
limitation may be carried forward indefinitely, but may be used only to offset
income with respect to the related Residual Security. The ability of Residual
Securityholders to deduct net losses with respect to a Residual Security may be
subject to additional limitations under the Code, as to which Securityholders
should consult their tax advisors. A distribution with respect to a Residual
Security is treated as a non-taxable return of capital up to the amount of the
Residual Securityholder's adjusted basis in his Residual Security. If a
distribution exceeds the adjusted basis of the Residual Security, the excess is
treated as gain from the sale of such Residual Security.
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Although the law is unclear in certain respects, a Residual
Securityholder effectively should be able to recover some or all of the basis in
his Residual Security as the REMIC recovers the basis of its assets through
either the amortization of premium on such assets or the allocation of basis to
principal payments received on such assets. The REMIC's initial aggregate basis
in its assets will equal the sum of the issue prices of all Residual Securities
and REMIC Regular Securities. In general, the issue price of a REMIC Regular
Security of a particular Class is the initial price at which a substantial
amount of the Securities of such Class is sold to the public. In the case of a
REMIC Regular Security of a Class not offered to the public, the issue price is
either the price paid by the first purchaser of such Security or the fair market
value of the property received in exchange for such Security, as appropriate.
The REMIC's aggregate basis will be allocated among its assets in proportion to
their respective fair market values.
The assets of certain Series REMICs may have bases that exceed their
principal amounts. Except as indicated in "Federal Income Tax Consequences --
REMIC Securities -- Treatment by the REMIC of Original Issue Discount, Market
Discount, and Amortizable Premium," the premium on such assets will be
amortizable under the constant yield method and the same prepayment assumptions
used in pricing the Securities. The amortized premium will reduce the REMIC's
taxable income or increase its tax loss for each year which will offset a
corresponding amount of the stated interest or other residual cash flow, if any,
allocable to the Residual Securityholders. It should be noted, however, that the
law concerning the amortization of premium on mortgage loans and Mortgage
Certificates is unclear in certain respects. If the Service were to contend
successfully that part or all of the premium on the REMIC's assets underlying
certain Series REMICs is not amortizable, the Residual Securityholders would
recover the basis attributable to the unamortizable premium only as principal
payments are received on such assets or upon the disposition or worthlessness of
their Residual Securities. The inability to amortize part or all of the premium
could give rise to timing differences between the REMIC's income and deductions,
creating phantom income. Because phantom income arises from timing differences,
it will be matched by a corresponding loss or reduction in taxable income in
later years, during which economic or financial income will exceed REMIC taxable
income. Any acceleration of taxable income, however, could lower the yield to a
Residual Securityholder, since the present value of the tax paid on that income
will exceed the present value of the corresponding tax reduction in the later
years. The amount and timing of any phantom income are dependent upon (i) the
structure of the particular Series REMIC and (ii) the rate of prepayment on the
mortgage loans comprising or underlying the REMIC's assets and, therefore,
cannot be predicted without reference to a particular Series REMIC.
The assets of certain Series REMICs may have bases that are less than
their principal amounts. In such a case, a Residual Securityholder will recover
the basis in his Residual Security as the REMIC recovers the portion of its
basis in the assets that is attributable to the residual interest. The REMIC's
basis in the assets is recovered as it is allocated to principal payments
received by the REMIC.
A portion of the REMIC's taxable income may be subject to special
treatment. That portion ("excess inclusion income") generally is any taxable
income beyond that which the Residual Securityholder would have recognized had
the Residual Security been a conventional debt instrument bearing interest at
120 percent of the applicable long-term federal rate (based on quarterly
compounding) as of the date on which the Residual Security was issued. Excess
inclusion income generally is intended to approximate phantom income and may
result in unfavorable tax consequences for certain investors. See "Federal
Income Tax Consequences -- REMIC Securities -- Taxation of Residual
Securityholders Limitations on Offset or Exemption of REMIC Income" and "Federal
Income Tax Consequences -- REMIC Securities -- Special Considerations for
Certain Types of Investors."
Limitations on Offset or Exemption of REMIC Income
Generally, a Residual Securityholder's taxable income for any taxable
year may not be less than such Securityholder's excess inclusion income for that
taxable year. Excess inclusion income is equal to the excess of REMIC taxable
income for the quarterly period for the Residual Securities over the product of
(i) 120% of the long-term applicable federal rate that would have applied to the
Residual Securities if they were debt instruments for federal income tax
purposes on the date of their issuance and (ii) the adjusted issue price of such
Residual Securities at the beginning of such quarterly period. For this purpose,
the adjusted issue price of a Residual Security at the beginning of a quarter is
the issue price of the Residual Security, increased by the amount of the daily
accruals of
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REMIC income for all prior quarters, decreased by any distributions made with
respect to such Residual Security prior to the beginning of such quarterly
period. If the Residual Securityholder is an organization subject to the tax on
UBTI imposed by Code Section 511, the Residual Securityholder's excess inclusion
income will be treated as UBTI. In addition, under Treasury regulations yet to
be issued, if a REIT or a RIC owns a Residual Security that generates excess
inclusion income, a pro rata portion of the dividends paid by the REIT or the
RIC generally will constitute excess inclusion income for its shareholders.
Finally, Residual Securityholders that are foreign persons will not be entitled
to any exemption from the 30% withholding tax or a reduced treaty rate with
respect to their excess inclusion income from the REMIC. See "Federal Income Tax
Consequences -- REMIC Securities -- Taxation of Certain Foreign Holders of REMIC
Securities -- Residual Securities" below.
Non-Recognition of Certain Transfers for Federal Income Tax Purposes
In addition to the limitations specified above, the REMIC Regulations
provide that the transfer of a "noneconomic residual interest" to a United
States person will be disregarded for tax purposes unless no significant purpose
of the transfer was to impede the assessment or collection of tax. A Residual
Security will constitute a noneconomic residual interest unless, at the time the
interest is transferred, (i) the present value of the expected future
distributions with respect to the Residual Security equals or exceeds the
product of the present value of the anticipated excess inclusion income and the
highest corporate tax rate for the year in which the transfer occurs, and (ii)
the transferor reasonably expects that the transferee will receive distributions
from the REMIC in amounts sufficient to satisfy the taxes on excess inclusion
income as they accrue. If a transfer of a residual interest is disregarded, the
transferor would continue to be treated as the owner of the Residual Security
and thus would continue to be subject to tax on its allocable portion of the net
income of the related REMIC. 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, (i.e., the
transferor has "improper knowledge"). Under the REMIC Regulations, a transferor
is presumed not to have such improper knowledge if (i) the transferor conducted,
at the time of the transfer, a reasonable investigation of the financial
condition of the transferee and, as a result of the investigation, the
transferor found that the transferee had historically 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 come due and (ii) the transferee
represents to the transferor that it understands that, as the holder of a
noneconomic residual interest, it may incur tax liabilities in excess of any
cash flows generated by the interest and that it intends to pay the taxes
associated with holding the residual interest as they become due. A similar
limitation exists with respect to transfers of certain residual interests to
foreign investors. See "Federal Income Tax Consequences -- REMIC Securities --
Taxation of Certain Foreign Holders of REMIC Securities -- Residual Securities"
herein.
Ownership of Residual Interests by Disqualified Organizations
The Code contains three sanctions that are designed to prevent or
discourage the direct or indirect ownership of a REMIC residual interest (such
as a Residual Security) by the United States, any state or political subdivision
thereof, any foreign government, any international organization, any agency or
instrumentality of any of the foregoing, any tax-exempt organization (other than
a farmers' cooperative described in section 521 of the Code) that is not subject
to the tax on UBTI, or any rural electrical or telephone cooperative (each a
"Disqualified Organization"). A corporation is not treated as an instrumentality
of the United States or any state or political subdivision thereof if all of its
activities are subject to tax and, with the exception of FHLMC, a majority of
its board of directors is not selected by such governmental unit.
First, the REMIC status of any REMIC created after March 31, 1988 is
dependent upon the presence of reasonable arrangements designed to prevent a
Disqualified Organization from acquiring record ownership of a residual
interest. Residual interests in Series REMICs (including Residual Securities)
are not offered for sale to Disqualified Organizations. Furthermore, (i)
residual interests in Series REMICs will be registered as to both principal and
any stated interest with the Trustee (or its agent) and transfer of a residual
interest may be effected only (A) by surrender of the old residual interest
instrument and reissuance by the Trustee of a new residual interest instrument
to the new holder or (B) through a book entry system maintained by the Trustee,
(ii) the applicable Trust
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Agreement will prohibit the ownership of residual interests by Disqualified
Organizations, and (iii) each residual interest instrument will contain a legend
providing notice of that prohibition. Consequently, each Series REMIC should be
considered to have made reasonable arrangements designed to prevent the
ownership of residual interests by Disqualified Organizations.
Second, the Code imposes a one-time tax on the transferor of a residual
interest (including a Residual Security or an interest therein) to a
Disqualified Organization. The one-time tax equals the product of (i) the
present value of the total anticipated excess inclusions with respect to the
transferred residual interest for periods after the transfer and (ii) the
highest marginal federal income tax rate applicable to corporations. Under the
REMIC Regulations, the anticipated excess inclusions with respect to a
transferred residual interest must be based on (i) both actual prior prepayment
experience and the prepayment assumptions used in pricing the related REMIC's
interests and (ii) any required or permitted clean up calls or required
qualified liquidation provided for in the REMIC's organizational documents. The
present value of anticipated excess inclusions is determined using a discount
rate equal to the applicable federal rate that would apply to a debt instrument
that was issued on the date the Disqualified Organization acquired the residual
interest and whose term ends on the close of the last quarter in which excess
inclusions are expected to accrue with respect to the residual interest. Where a
transferee is acting as an agent for a Disqualified Organization, the transferee
is subject to the one-time tax. Upon the request of such transferee or the
transferor, the REMIC must furnish to the requesting party and to the Service
information sufficient to permit the computation of the present value of the
anticipated excess inclusions. For that purpose, the term "agent" includes a
broker, nominee, or other middleman. The transferor of a residual interest
(including a Residual Security or interest therein) will not be liable for the
one-time tax if the transferee furnishes to the transferor an affidavit that
states, under penalties of perjury, 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 one-time tax must be paid by
the later of March 24, 1993 and April 15th of the year following the calendar
year in which the residual interest is transferred to a Disqualified
Organization. The one-time tax may be waived by the Secretary of the Treasury
if, upon discovery that a transfer is subject to the one-time tax, the
Disqualified Organization promptly disposes of the residual interest and the
transferor pays such amounts as the Secretary may require.
Third, the Code imposes an annual tax on any pass-through entity (i.e.,
RIC, REIT, common trust fund, partnership, trust, estate or cooperative
described in Code section 1381) that owns a direct or indirect interest in a
residual interest (including a Residual Security), if record ownership of an
interest in the pass-through entity is held by one or more Disqualified
Organizations. The tax imposed equals the highest corporate rate multiplied by
the share of any excess inclusion income of the pass-through entity for the
taxable year that is allocable to the interests in the pass-through entity held
by Disqualified Organizations. The same tax applies to a nominee who acquires an
interest in a residual interest (including a Residual Security) on behalf of a
Disqualified Organization. For example, a broker that holds an interest in a
Residual Security in "street name" for a Disqualified Organization is subject to
the tax. The tax due must be paid by the later of March 24, 1993 and the
fifteenth day of the fourth month following the close of the taxable year of the
pass-through entity in which the Disqualified Organization is a record holder.
Any such tax imposed on a pass-through entity would be deductible against that
entity's ordinary income in determining the amount of its required
distributions. In addition, dividends paid by a RIC or a REIT are not considered
preferential dividends within the meaning of Section 562(c) of the Code solely
because the RIC or REIT allocates such tax expense only to the shares held by
Disqualified Organizations. A pass-through entity will not be liable for the
annual tax if the record holder of the interest in the pass-through entity
furnishes to the pass-through entity an affidavit that states, under penalties
of perjury, that the record holder is not a Disqualified Organization, and the
pass-through entity does not have actual knowledge that such affidavit is false.
The Code and the REMIC Regulations also require that reasonable
arrangements be made with respect to each REMIC to enable the REMIC to provide
the Treasury and the transferor with information necessary for the application
of the one-time tax described above. Consequently, the applicable Trust
Agreement will provide for an affiliate to perform such information services as
may be required for the application of the one-time tax. If a Residual
Securityholder transfers an interest in a Residual Security in violation of the
relevant transfer restrictions and triggers the information requirement, the
affiliate may charge such Residual Securityholder a reasonable fee for providing
the information.
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Special Considerations for Certain Types of Investors
Dealers in Securities. Residual Securityholders that are dealers in
securities should be aware that under Treasury regulations (the "Mark-to-Market
Regulations") relating to the requirement under section 475 of the Code that
dealers in securities use mark-to-market accounting for federal income tax
purposes, dealers in securities are not permitted to mark to market any REMIC
residual interests acquired on or after January 4, 1995. Prospective purchasers
of Residual Securities should consult with their tax advisors regarding the
possible application of the Mark-to-Market Regulations.
Tax-Exempt Entities. Any excess inclusion income with respect to a
Residual Security held by a tax-exempt entity, including a qualified
profit-sharing, pension, or other employee benefit plan, will be treated as
UBTI. Although the legislative history and statutory provisions imply otherwise,
the Treasury conceivably could take the position that, under pre-existing Code
provisions, substantially all income on a Residual Security (including
non-excess inclusion income) is to be treated as UBTI. See "Federal Income Tax
Consequences -- REMIC Securities -- Taxation of Residual Securityholders."
Individuals and Pass-Through Entities. A Residual Securityholder who is
an individual, trust, or estate will be able to deduct its allocable share of
the fees or expenses relating to servicing the assets assigned to a Trust or
administering the Series REMIC under Section 212 of the Code only to the extent
that the amount of such fees or expenses, when combined with the
Securityholder's other miscellaneous itemized deductions for the taxable year,
exceeds 2% of the holder's adjusted gross income. That same limitation will
apply to individuals, trusts, or estates that hold Residual Securities
indirectly through a grantor trust, a partnership, an S corporation, a common
trust fund, a REMIC, or a nonpublicly offered RIC. A nonpublicly offered RIC is
a RIC other than one whose shares are (i) continuously offered pursuant to a
public offering, (ii) regularly traded on an established securities market, or
(iii) held by no fewer than 500 persons at all times during the taxable year. In
addition, that limitation will apply to individuals, trusts, or estates that
hold Residual Securities through any other person (i) that is not generally
subject to federal income tax and (ii) the character of whose income may affect
the character of the income generated by that person for its owners or
beneficiaries. In addition, Code Section 68 provides that the amount of itemized
deductions otherwise allowable for the taxable year for an individual whose
adjusted gross income exceeds the applicable amount ($100,000, or $50,000 in the
case of a separate return by a married individual within the meaning of Code
Section 7703 for taxable year 1991 and adjusted for inflation each year
thereafter) will be reduced by the lesser of (i) 3% of the excess of adjusted
gross income over the applicable amount, or (ii) 80% of the amount of itemized
deductions otherwise allowable for such taxable year. In some cases, the amount
of additional income that would be recognized as a result of the foregoing
limitations by a Residual Securityholder who is an individual, trust, or estate
could be substantial. Non-corporate holders of REMIC Residual Securities also
should be aware that miscellaneous itemized deductions, including allocable
investment expenses attributable to a REMIC, are not deductible for purposes of
the AMT. Finally, persons holding an interest in a Residual Security indirectly
through an interest in a RIC, common trust fund or one of certain corporations
doing business as a cooperative generally will recognize a share of any excess
inclusion allocable to that Residual Security.
Employee Benefit Plans. See "Federal Income Tax Consequences --
Residual Securities -- Special Considerations for Certain Types of Investors --
Tax-exempt entities" and "ERISA Considerations."
REITs and RICs. If the Residual Securityholder is a REIT and the REMIC
generates excess inclusion income, a portion of REIT dividends will be treated
as excess inclusion income for the REIT's shareholders, in a manner to be
provided by regulations. Thus, shareholders in a REIT that invests in Residual
Securities could face unfavorable treatment of a portion of their REIT dividend
income for purposes of (i) using current deductions or NOL carryovers or
carrybacks, (ii) UBTI in the case of tax-exempt shareholders, and (iii)
withholding tax in the case of foreign shareholders (see "Federal Income Tax
Consequences -- Residual Securities -- Special Considerations for Certain Types
of Investors -- Foreign Residual Securityholders" below). Moreover, because
Residual Securityholders may recognize phantom income (see "Federal Income Tax
Consequences -- REMIC Securities -- Taxation of Residual Securityholders"), a
REIT contemplating an investment in Residual Securities should consider
carefully the effect of any phantom income upon its ability to meet its income
distribution
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requirements under the Code. The same rules regarding excess inclusion will
apply to a Residual Securityholder that is a RIC, common trust fund, or one of
certain corporations doing business as a cooperative.
A Residual Security held by a REIT will be treated as a real estate
asset for purposes of the REIT qualification requirements in the same proportion
that the REMIC's assets would be treated as real estate assets if held directly
by the REIT, and interest income derived from such Residual Security will be
treated as qualifying interest income for REIT purposes ("Qualifying REIT
Interest") to the same extent. If 95% or more of a REMIC's assets qualify as
real estate assets for REIT purposes, 100% of that REMIC's regular and residual
interests (including Residual Securities) will be treated as real estate assets
for REIT purposes, and all of the income derived from such interests will be
treated as Qualifying REIT Interest. The REMIC Regulations provide that payments
of principal and interest on Mortgage Loans that are reinvested pending
distribution to the holders of the REMIC Securities constitute real estate
assets for REIT purposes. Two REMICs that are part of a tiered structure will be
treated as one REMIC for purposes of determining the percentage of assets of
each REMIC that constitutes real estate assets. It is expected that at least 95
percent of the assets of a Series REMIC will be real estate assets throughout
the REMIC's life. The amount treated as a real estate asset in the case of a
Residual Security apparently is limited to the REIT's adjusted basis in the
Security. REITs should be aware that 100% of the interest income derived by a
REIT from a residual interest in such REMIC may not be treated as Qualifying
REIT Interest if the REMIC holds Mortgage Loans that provide for interest that
is contingent on mortgagor profits or property appreciation.
Significant uncertainty exists with respect to the treatment of a
Residual Security for purposes of the various asset composition requirements
applicable to RICs. A Residual Security should be treated as a "security," but
probably will not be considered a "government security" for purposes of section
851(b)(4) of the Code. Moreover, it is unclear whether a Residual Security will
be treated as a "voting security" under that Code section. Finally, because the
REMIC will be treated as the "issuer" of the Residual Security for purposes of
that section, a RIC would be unable to invest more than 25% of the value of its
total assets in Residual Securities.
Partnerships. Partners in a partnership that acquires a Residual
Security generally must take into account their allocable share of any income,
including excess inclusion income, that is produced by the Residual Security.
The partnership itself is not subject to tax on income from the Residual
Security other than excess inclusion income that is allocable to partnership
interests owned by Disqualified Organizations.
Foreign Residual Securityholders. Certain adverse tax consequences may
be associated with the holding of certain Residual Securities by a foreign
person or with the transfer of such Securities to or from a foreign person. See
"Federal Income Tax Consequences -- REMIC Securities -- Taxation of Certain
Foreign Holders of REMIC Securities -- Residual Securities" herein.
Thrift Institutions, banks, and certain other financial institutions.
Residual Securities will be treated as qualifying assets for Thrift Institutions
in the same proportion that the assets of the REMIC would be so treated.
However, if 95% or more of the assets of a given Series REMIC are qualifying
assets for Thrift Institutions, 100% of that REMIC's regular and residual
interests (including Residual Securities) would be treated as qualifying assets.
In addition, the REMIC Regulations provide that payments of principal and
interest on Mortgage Loans that are reinvested pending their distribution to the
holders of the REMIC Securities will be treated as qualifying assets for Thrift
Institutions. Moreover, two REMICs that are part of a tiered structure will be
treated as one REMIC for purposes of determining the percentage of assets of
each REMIC that constitutes qualifying assets for Thrift Institution purposes.
It is expected that at least 95% of the assets of any Series REMIC will be
qualifying assets for Thrift Institutions throughout the REMIC's life. The
amount of a Residual Security treated as a qualifying asset for Thrift
Institutions, however, cannot exceed the holder's adjusted basis in that
Residual Security.
Generally, gain or loss arising from the sale or exchange of Residual
Securities held by certain financial institutions will give rise to ordinary
income or loss, regardless of the length of the holding period for the Residual
Securities. Those financial institutions include banks, mutual savings banks,
cooperative banks, domestic building and loan institutions, savings and loan
institutions, and similar institutions.
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Disposition of Residual Securities
A Residual Securityholder will recognize gain or loss on the
disposition of his Residual Security equal to the difference between the amount
of proceeds (or the fair market value of any property) received and his adjusted
basis in the Residual Security. If the holder has held the Residual Security for
more than 12 months, such gain or loss generally will be characterized as
long-term capital gain or loss. In the case of banks, thrifts, and certain other
financial institutions, however, gain or loss on the disposition of a Residual
Security will be treated as ordinary gain or loss, regardless of the length of
the holding period. See "Federal Income Tax Consequences -- REMIC Securities --
Special Considerations for Certain Types of Investors."
A special version of the wash sale rules will apply to dispositions of
Residual Securities. Under that version, losses on dispositions of Residual
Securities generally will be disallowed where, within six months before or after
the disposition, the seller of such Securities acquires any residual interest in
a REMIC or any interest in a taxable mortgage pool. Regulations providing for
appropriate exceptions to the application of the wash sale rules have been
authorized, but have not yet been promulgated.
Liquidation of the REMIC
A REMIC may liquidate without the imposition of entity-level tax only
in a qualified liquidation. A liquidation is considered qualified if the REMIC
(i) adopts a plan of complete liquidation, (ii) sells all of its non-cash assets
within 90 days of the date on which it adopts the plan, and (iii) distributes in
liquidation all sale proceeds plus its cash (other than amounts retained to meet
claims against it) to Securityholders within the 90-day period. Under the REMIC
Regulations, a plan of liquidation need not be in any special form. Furthermore,
if a REMIC specifies the first day in the 90-day liquidation period in a
statement attached to its final tax return, the REMIC will be considered to have
adopted a plan of liquidation on that date.
Treatment by the REMIC of Original Issue Discount, Market Discount, and
Amortizable Premium
Original Issue Discount. Generally, the REMIC's deductions for original
issue discount expense on its REMIC Regular Securities will be determined in the
same manner as for determining the original issue discount income of the holders
of such Securities, as described in "Federal Income Tax Consequences -- REMIC
Securities -- Original Issue Discount" above, without regard to the de minimis
rule described therein.
Market Discount. In general, the REMIC will have market discount income
with respect to its qualified mortgages if the basis of the REMIC in such
mortgages is less than the adjusted issue prices of such mortgages. The REMIC's
aggregate initial basis in its qualified mortgages (and any other assets
transferred to the REMIC on the startup day) equals the aggregate of the issue
prices of the regular and residual interests in the REMIC. That basis is
allocated among the REMIC's qualified mortgages based on their relative fair
market values. Any market discount that accrues on the REMIC's qualified
mortgages will be recognized currently as an item of REMIC ordinary income. The
amount of market discount income to be recognized in any period is determined in
a manner generally similar to that used in the determination of original issue
discount, as if the qualified mortgages had been issued (i) on the date they
were acquired by the REMIC and (ii) for a price equal to the REMIC's initial
basis in the qualified mortgages. The Pricing Prepayment Assumptions are used to
compute the yield to maturity of the REMIC's qualified mortgages.
Premium. Generally, if the basis of the REMIC in its qualified
mortgages exceeds the unpaid principal balances of those mortgages the REMIC
will be considered to have acquired such mortgages at a premium equal to the
amount of such excess. As stated above, the REMIC's initial basis in its
qualified mortgages equals the aggregate of the issue prices of the regular and
residual interests in the REMIC. As described above under "Federal Income Tax
Consequences -- REMIC Securities -- Amortizable Premium," a REMIC that holds a
qualified mortgage as a capital asset generally may elect under Code Section 171
to amortize premium on such mortgage under a constant interest method, to the
extent such mortgages were originated, or treated as originated, after September
27, 1985. The legislative history to the 1986 Act indicates that, while the
deduction for amortization
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of premium will not be subject to the limitations on miscellaneous itemized
deductions of individuals, it will be treated as interest expense for purposes
of other provisions in the 1986 Act limiting the deductibility of interest for
non-corporate taxpayers. Because substantially all of the mortgagors on the
mortgage loans that comprise or underlie the qualified mortgages are expected to
be individuals, Section 171 will not be available for the amortization of
premium on such mortgage loans to the extent they were originated on or prior to
September 27, 1985. Such premium may be amortizable under more general
provisions and principles of federal income tax law in accordance with a
reasonable method regularly employed by the holder of such mortgage loans. The
allocation of such premium pro rata among principal payments should be
considered a reasonable method; however, the 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.
REMIC-Level Taxes
Income from certain transactions by the REMIC, called prohibited
transactions, will not be part of the calculation of the REMIC's income or loss
that is includable in the federal income tax returns of Residual
Securityholders, but rather will be taxed directly to the REMIC at a 100% rate.
In addition, net income from one prohibited transaction may not be offset by
losses from other prohibited transactions. Prohibited transactions generally
include: (i) the disposition of qualified mortgages other than pursuant to (a)
the repurchase of a defective mortgage, (b) the substitution for a defective
mortgage within two years of the closing date, (c) a substitution for any
qualified mortgage within three months of the closing date, (d) the foreclosure,
default, or imminent default of a qualified mortgage, (e) the bankruptcy or
insolvency of the REMIC, (f) the sale of a convertible mortgage loan upon its
conversion for an amount equal to the mortgage loan's current principal balance
plus accrued but unpaid interest (and provided that certain other requirements
are met) or (g) a qualified liquidation of the REMIC; (ii) the receipt of income
from assets that are not the type of mortgages or investments that the REMIC is
permitted to hold; (iii) the receipt of compensation for services by the REMIC;
and (iv) the receipt of gain from disposition of cash-flow investments other
than pursuant to a qualified liquidation of the REMIC. A disposition of a
qualified mortgage or cash flow investment will not give rise to a prohibited
transaction, however, if the disposition was (i) required to prevent default on
a regular interest resulting from a default on one or more of the REMIC's
qualified mortgages or (ii) made to facilitate a clean-up call. The REMIC
Regulations define a clean-up call as the redemption of a class of regular
interests when, by reason of prior payments with respect to those interests, the
administrative costs associated with servicing the class outweigh the benefits
of maintaining the class. Under those regulations, the redemption of a class of
regular interests with an outstanding principal balance of no more than 10% of
the original principal balance qualifies as a clean-up call. The REMIC
Regulations also provide that the modification of a mortgage loan generally will
not be treated as a disposition of that loan if it is occasioned by a default or
a reasonably foreseeable default, an assumption of the mortgage loan, the waiver
of a due-on-sale or encumbrance clause, or the conversion of an interest rate by
a mortgagor pursuant to the terms of a convertible adjustable rate mortgage
loan.
In addition, a REMIC generally will be taxed at a 100% rate on any
contribution to the REMIC after the closing date unless such contribution is a
cash contribution that (i) takes place within the three-month period beginning
on the closing date, (ii) is made to facilitate a clean-up call (as described in
the preceding paragraph) or a qualified liquidation (as defined in "Federal
Income Tax Consequences -- REMIC Securities -- Liquidation of the REMIC" above),
(iii) is a payment in the nature of a guarantee, (iv) constitutes a contribution
by the holder of the Residual Securities in the REMIC to a qualified reserve
fund, or (v) is otherwise permitted by Treasury regulations yet to be issued.
The structure and operation of Series REMICs generally will be designed to avoid
the imposition of both the 100% tax on contributions and the 100% tax on
prohibited transactions.
To the extent that a REMIC derives certain types of income from
foreclosure property (generally, income relating to dealer activities of the
REMIC), it will be taxed on such income at the highest corporate income tax
rate. It is not anticipated that any Series REMIC will receive significant
amounts of such income, although the relevant law is unclear.
The organizational documents governing the REMIC Regular and Residual
Securities will be designed to prevent the imposition of the foregoing taxes on
the related Series REMIC in any material amounts. If any of the
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foregoing taxes is imposed on a Series REMIC, the Trustee will seek to place the
burden thereof on the person whose action or inaction gave rise to such taxes.
To the extent that the Trustee is unsuccessful in doing so, the burden of such
taxes will be borne by any outstanding subordinated Class of Securities before
it is borne by a more senior Class of Securities.
REMIC Qualification
The Trust underlying a Series (or one or more designated pools of
assets held by the Trust) will qualify under the Code as a REMIC in which the
REMIC Regular Securities and Residual Securities will constitute the "regular
interests" and "residual interests," respectively, if a REMIC election is in
effect and certain tests concerning (i) the composition of the REMIC's assets
and (ii) the nature of the Securityholders' interests in the REMIC are met on a
continuing basis.
Asset Composition
In order for a Trust (or one or more designated pools of assets held by
a Trust) to be eligible for REMIC status, substantially all of the assets of the
Trust (or the designated pool) must consist of "qualified mortgages" and
"permitted investments" as of the close of the third month beginning after the
closing date and at all times thereafter (the "Asset Qualification Test"). A
REMIC will be deemed to satisfy the Asset Qualification Test if no more than a
de minimis amount of its assets (i.e., assets with an aggregate adjusted basis
that is less than 1 percent of the aggregate adjusted basis of all the REMIC's
assets) are assets other than qualified mortgages and permitted investments. A
qualified mortgage is any obligation that is principally secured by an interest
in real property, including a regular interest in another REMIC, that is either
transferred to the REMIC on the closing date or purchased by the REMIC pursuant
to a fixed price contract within a three-month period thereafter. A qualified
mortgage also 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 on the closing date and that is received either in exchange for a
defective mortgage within a two-year period beginning on the closing date or in
exchange for any qualified mortgage within a three-month period beginning on
that date. The Assets of each Series REMIC will be treated as qualified
mortgages.
Permitted investments include cash flow investments, qualified reserve
assets, and foreclosure property. Cash flow investments are investments of
amounts received with respect to qualified mortgages for a temporary period (not
to exceed thirteen months) before distribution to holders of regular or residual
interests in the REMIC. Qualified reserve assets are intangible investment
assets (other than REMIC residual interests) that are part of a reasonably
required reserve (a "Qualified Reserve Fund") maintained by the REMIC to provide
for full payment of expenses of the REMIC or amounts due on the regular
interests in the event of defaults or delinquencies on qualified mortgages,
lower than expected returns on cash-flow investments, or interest shortfalls on
qualified mortgages caused by prepayments of those mortgages. A Qualified
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 of property held for
less than three months, unless such sale was required to prevent a default on
the regular interests caused by a default on one or more qualified mortgages. To
the extent that the amount in a Qualified Reserve Fund exceeds a reasonably
required amount, it must be reduced "promptly and appropriately". Foreclosure
property generally is property acquired by the REMIC in connection with the
default or imminent default of a qualified mortgage. Property so acquired by the
REMIC, however, will not be qualifying foreclosure property if the foreclosure
was anticipated at the time that the related qualified mortgage was transferred
to the REMIC. Furthermore, foreclosure property may not be held for more than
three taxable years after the taxable year of acquisition, unless it is
established to the satisfaction of the Secretary of the Treasury that an
extension of the three-year period is necessary for the orderly liquidation of
the foreclosure property. The Secretary of the Treasury may grant an extension,
but any such extension shall not extend the grace period beyond the date which
is six years after the date such foreclosure property is acquired.
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Investors' Interests
In addition to the foregoing asset qualification requirements, the
various interests in a REMIC also must meet certain requirements. All of the
interests in a REMIC must be issued on the closing date (or within a specified
10-day period) and belong to either of the following: (i) one or more classes of
regular interests or (ii) a single class of residual interests on which
distributions are made pro rata. In the case of Series that include Residual
Securities, the residual interest will be represented by the Residual
Securities.
If the interest payable on any REMIC regular interest is
disproportionately high relative to the specified principal amount of the
interest, that interest may be treated, in whole or in part, as a second
residual interest, which could result in the disqualification of the REMIC.
Under the REMIC Regulations, interest payments (or similar amounts) are
considered disproportionately high if the issue price of the REMIC regular
interest exceeds 125% of the specified principal amount of the regular interest.
Under the REMIC Regulations, however, interest payable at a disproportionately
high rate will not cause a REMIC Regular Security to be recharacterized as a
residual interest if interest payments on the Security consist of a specified
portion of the interest payments on qualified mortgages and such portion does
not vary during the period that the Security is outstanding. None of the REMIC
Regular Securities, will have an issue price that exceeds 125% of their
respective specified principal amounts unless interest payments on those
Securities consist of a specified nonvarying portion of the interest payments on
one or more of the REMIC's qualified mortgages.
A REMIC interest qualifies as a regular interest if (i) it is issued on
the startup day with fixed terms, (ii) it is designated as a regular interest,
(iii) it entitles its holder to a specified principal amount, and (iv) if it
pays interest, such interest either (a) constitutes a specified nonvarying
portion of the interest on one or more of the REMIC's qualified mortgages, (b)
is payable at a fixed rate with respect to the principal amount of the regular
interest, or (c) to the extent permitted under the REMIC Regulations, is payable
at a variable rate with respect to such principal amount. Pursuant to the REMIC
Regulations, the following rates are permissible variable rates for REMIC
regular interests: (i) a qualified floating rate set at a current value as
described in "Federal Income Tax Consequences -- REMIC Securities -- Original
Issue Discount -- Variable Rate Securities" herein, without regard to the rules
in the OID Regulations limiting the use of Caps, Floors, and Governors with
respect to such a rate, (ii) a rate equal to the highest, lowest, or average of
two or more qualified floating rates (e.g., a rate based on the average cost of
funds of one or more financial institutions), or (iii) a rate equal to the
weighted average of the interest rates on some or all of the qualified mortgages
held by the REMIC provided, however, that the qualified mortgages taken into
account in determining the weighted average rate bear interest at a fixed rate
or a rate that would be a permissible variable rate for a REMIC regular interest
as described in this sentence. Under the REMIC Regulations, the presence of a
ceiling or floor on the interest payable on a variable rate interest will not
prevent such interest from qualifying as a regular interest. In addition, a
qualifying variable rate may be expressed as a multiple of, or a constant number
of basis points more or less than, one of the permissible types of variable
rates described above. Finally, a limitation on the amount of interest to be
paid on a variable rate regular interest based on the total amount available for
distribution is permissible, provided that it is not designed to avoid the
restrictions on qualifying variable rates. The REMIC Regulations also provide
that the specified principal amount of a REMIC regular interest may be zero if
the interest associated with such regular interest constitutes a specified
nonvarying portion of the interest on one or more of the REMIC's qualified
mortgages.
The Code requires that certain arrangements be made with respect to all
REMICs. Those arrangements, which are intended to prevent acquisitions of REMIC
residual interests (including REMIC Residual Securities) by certain
organizations that are not subject to federal income tax, are described in
"Federal Income Tax Consequences -- REMIC Securities -- Taxation of Residual
Securityholders -- Ownership of Residual Interests by Disqualified
Organizations." Series REMICs will be structured to provide for such
arrangements.
Consequences of Disqualification
If a Series REMIC fails to comply with one or more of the Code's
ongoing requirements for REMIC status during any taxable year, the Code provides
that its REMIC status may be lost for that year and thereafter. If
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REMIC status is lost, the treatment of the former REMIC and the interests
therein for federal income tax purposes is uncertain. The former REMIC might be
entitled to treatment as a grantor trust under Subpart E, Part 1 of Subchapter J
of the Code or as a partnership, in which case no entity-level tax would be
imposed on the former REMIC. Alternatively, the REMIC Regular Securities may
continue to be treated as debt instruments for federal income tax purposes, but
the arrangement could be treated as a Taxable Mortgage Pool, as described in
"Federal Income Tax Consequences -- REMIC Securities -- Taxable Mortgage Pools"
below. If a Series REMIC were treated as a Taxable Mortgage Pool, any residual
income of the REMIC (i.e., interest and discount income from the Mortgage Loans
less interest and original issue discount expense allocable to the REMIC Regular
Securities and any administrative expenses of the REMIC) would be subject to
corporate income tax at the Taxable Mortgage Pool level. On the other hand, the
arrangement could be treated under Treasury regulations as a separate
association taxable as a corporation and the REMIC Regular Securities would be
treated as stock interests therein, rather than debt instruments. In that case,
none of the payments made with respect to the REMIC Regular Securities would be
deductible by the former REMIC. In the latter two cases, the Residual Securities
also would be treated as stock interests in such Taxable Mortgage Pool or
association, respectively. The Code authorizes the Treasury to issue regulations
that address situations where a failure to meet the requirements for REMIC
status occurs inadvertently and in good faith. Such regulations have not yet
been issued. The conference report accompanying the 1986 Act indicates that
disqualification relief may be accompanied by sanctions, such as the imposition
of a corporate tax on all or a portion of the REMIC's income for the period of
time in which the requirements for REMIC status are not satisfied.
Taxable Mortgage Pools
Corporate income tax can be imposed on the net income of certain
entities issuing non-REMIC debt obligations secured by real estate mortgages
("Taxable Mortgage Pools"). Any entity other than a REMIC or a REIT will be
considered to be a Taxable Mortgage Pool if (i) substantially all of the assets
of the entity consist of debt obligations and more than 50% of such obligations
consist of real estate mortgages, (ii) such entity is the obligor under debt
obligations with two or more maturities, and (iii) under the terms of the debt
obligations on which the entity is the obligor, payments on such obligations
bear a relationship to payment on the obligations held by the entity.
Furthermore, a group of assets held by an entity can be treated as a separate
Taxable Mortgage Pool if the assets are expected to produce significant cash
flow that will support one or more of the entity's issues of debt obligations.
The Depositor generally will structure offerings of non-REMIC Bonds to avoid the
application of the Taxable Mortgage Pool rules.
Taxation of Certain Foreign Holders of REMIC Securities
REMIC Regular Securities
Interest, including original issue discount, paid on a REMIC Regular
Security to a nonresident alien individual, foreign corporation, or other
non-United States person ("Foreign Person") generally will be treated as
"portfolio interest" and, therefore, will not be subject to any United States
withholding tax, provided that (i) such interest is not effectively connected
with a trade or business in the United States of the Securityholder, and (ii)
the Trustee (or other person who would otherwise be required to withhold tax) is
provided with appropriate certification that the beneficial owner of the
Security is a Foreign Person ("Foreign Person Certification"). If Foreign Person
Certification is not provided, interest (including original issue discount) paid
on such a Security may be subject to either a 30 percent withholding tax or 31
percent backup withholding. See "Federal Income Tax Consequences -- REMIC
Securities -- Backup Withholding."
Residual Securities
Amounts paid to Residual Securityholders who are Foreign Persons are
treated as interest for purposes of the 30 percent (or lower treaty rate) United
States withholding tax. Under temporary Treasury Regulations, non-excess
inclusion income received by Residual Securityholders who are Foreign Persons
generally qualifies as "portfolio interest" exempt from the 30 percent
withholding tax only to the extent that (i) the assets of the Trust
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REMIC are Mortgage Certificates that are issued in registered form and (ii) the
Mortgage Loans underlying the Mortgage Certificates were originated after July
18, 1984. Because Mortgage Loans are not issued in registered form, amounts
received by Residual Securityholders who are Foreign Persons will not be exempt
from the 30 percent withholding tax to the extent such amounts relate to
Mortgage Loans held directly (rather than indirectly through Mortgage
Certificates) by the related REMIC. If the portfolio interest exemption is
unavailable, such amounts generally will be subject to United States withholding
tax when paid or otherwise distributed (or when the Residual Security is
disposed of) under rules similar to those for withholding on debt instruments
that have original issue discount. However, the Code grants the Treasury
authority to issue regulations requiring that those amounts be taken into
account earlier than otherwise provided where necessary to prevent avoidance of
tax (i.e., where the Residual Securities, as a Class, do not have significant
value). Further, a Residual Securityholder will not be entitled to any exemption
from the 30 percent withholding tax or a reduced treaty rate on excess inclusion
income.
Under the REMIC Regulations, a transfer of a Residual Security that has
"tax avoidance potential" will be disregarded for federal income tax purposes if
the transferee is a Foreign Person. A Residual Security is deemed to have tax
avoidance potential unless, at the time of the transfer, the transferor
reasonably expects that, for each accrual of excess inclusion, the REMIC will
distribute to the transferee an amount that will equal at least 30% of the
excess inclusion, and that each such amount will be distributed no later than
the close of the calendar year following the calendar year of accrual (the "30%
Test"). A transferor of a Residual Security to a Foreign Person will be presumed
to have had a reasonable expectation that the Residual Security satisfies the
30% Test if that test would be satisfied for all Mortgage Loan prepayment rates
between 50% and 200% of the Pricing Prepayment Assumption. See "Federal Income
Tax Consequences -- REMIC Securities -- Original Issue Discount," above. If a
Foreign Person transfers a Residual Security to a United States person and the
transfer, if respected, would permit avoidance of withholding tax on accrued
excess inclusion income, the transfer will be disregarded for federal income tax
purposes and distributions with respect to the Residual Security will continue
to be subject to 30% withholding as though the Foreign Person still owned the
Residual Security. Investors who are Foreign Persons should consult their own
tax advisors regarding the specific tax consequences to them of owning and
disposing of a Residual Security.
Backup Withholding
Under federal income tax law, a Securityholder may be subject to
"backup withholding" under certain circumstances. Backup withholding may apply
to a Securityholder who is a United States person if the Securityholder, among
other things, (i) fails to furnish his social security number or other taxpayer
identification number ("TIN") to the Trustee, (ii) furnishes the Trustee an
incorrect TIN, (iii) fails to report properly interest and dividends, or (iv)
under certain circumstances, fails to provide the Trustee or the
Securityholder's securities broker with a certified statement, signed under
penalties of perjury, that the TIN provided to the Trustee is correct and that
the Securityholder is not subject to backup withholding. Backup withholding may
apply, under certain circumstances, to a Securityholder who is a foreign person
if the Securityholder fails to provide the Trustee or the Securityholder's
securities broker with a Foreign Person Certification. Backup withholding
applies to "reportable payments," which include interest payments and principal
payments to the extent of accrued original issue discount, as well as
distributions of proceeds from the sale of REMIC Regular Securities or REMIC
Residual Securities. The backup withholding rate is 31% for payments made on or
after January 1, 1993. Backup withholding, however, does not apply to payments
on a Security made to certain exempt recipients, such as tax-exempt
organizations, and to certain Foreign Persons. Securityholders should consult
their tax advisors for additional information concerning the potential
application of backup withholding to payments received by them with respect to a
Security.
Reporting and Tax Administration
REMIC Regular Securities
Reports will be made at least annually to holders of record of REMIC
Regular Securities (other than those with respect to whom reporting is not
required) and to the Internal Revenue Service as may be required by statute,
regulation, or administrative ruling with respect to (i) interest paid or
accrued on the Securities, (ii) original issue
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discount, if any, accrued on the Securities, and (iii) information necessary to
compute the accrual of any market discount or the amortization of any premium on
the Securities.
Residual Securities
For purposes of federal income tax reporting and administration, a
Series REMIC generally will be treated as a partnership, and the related
Residual Securityholders as its partners. A Series REMIC will file an annual
return on Form 1066 and will be responsible for providing information to
Residual Securityholders sufficient to enable them to report properly their
shares of the REMIC's taxable income or loss, although it is anticipated that
such information actually will be supplied by the Trustee or the Master
Servicer. The REMIC Regulations require reports to be made by a REMIC to its
Residual Securityholders each calendar quarter in order to permit such
Securityholders to compute their taxable income accurately. A person that holds
a Residual Security as a nominee for another person is required to furnish those
quarterly reports to the person for whom it is a nominee within 30 days of
receiving such reports. A REMIC is required to file all such quarterly reports
for a taxable year with the Service as an attachment to the REMIC's income tax
return for that year. As required by the Code, a Series REMIC's taxable year
will be the calendar year.
Residual Securityholders should be aware that their responsibilities as
holders of the residual interest in a REMIC, including the duty to account for
their shares of the REMIC's income or loss on their returns, continue for the
life of the REMIC, even after the principal and interest on their Residual
Securities have been paid in full.
Under the REMIC Regulations, a Residual Securityholder must be
designated as the REMIC's tax matters person ("TMP"). The TMP generally has
responsibility for overseeing and providing notice to the other Residual
Securityholders of certain administrative and judicial proceedings regarding the
REMIC's tax affairs, although other holders of the Residual Securities of the
same Series would be able to participate in such proceedings in appropriate
circumstances. If indicated in the related Prospectus Supplement, the Depositor,
Master Servicer or an affiliate thereof either will acquire a portion of the
residual interest in each Series REMIC in order to permit it to be designated as
TMP for the REMIC or will obtain from the Residual Securityholders an
irrevocable appointment to perform the functions of the REMIC's TMP and will
prepare and file the REMIC's federal and state income tax and information
returns.
Treasury regulations provide that a Holder of a Residual Security is
not required to treat items on its return consistently with their treatment on
the REMIC's return if a Holder owns 100% of the Residual Securities for the
entire calendar year. Otherwise, each Holder of a Residual Security is required
to treat items on its returns consistently with their treatment on the REMIC's
return, unless the Holder of a Residual Security either files a statement
identifying the inconsistency or establishes that the inconsistency resulted
from incorrect information received from the REMIC. The Service may assess a
deficiency resulting from a failure to comply with the consistency requirement
without instituting an administrative proceeding at the REMIC level. A Series
REMIC typically will not register as a tax shelter pursuant to Code section 6111
because it generally will not have a net loss for any of the first five taxable
years of its existence. Any person that holds a Residual Security as a nominee
for another person may be required to furnish the REMIC, in a manner to be
provided in Treasury regulations, with the name and address of such person and
other specified information.
NON-REMIC CERTIFICATES
Treatment of the Trust Fund for Federal Income Tax Purposes
In the case of Series of Mortgage Pass-Through Certificates with
respect to which no REMIC election is made ("Non-REMIC Certificates"), the Trust
Fund will be classified as a grantor trust under Subpart E, Part I of subchapter
J of the Code and not as an association taxable as a corporation. For federal
income tax purposes, the owner of a Non-REMIC Certificate will be treated as the
beneficial owner of an appropriate portion of the principal and interest
payments (according to the characteristics of the Certificate in question) to be
received on the Assets assigned to a Trust Fund for federal income tax purposes.
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Treatment of the Non-REMIC Certificates for Federal Income Tax Purposes
Generally
The types of Non-REMIC Certificates offered in a Series may include:
(i) securities evidencing ownership interests only in the interest payments on
the Assets assigned to a Trust Fund, net of certain fees, ("IO Securities");
(ii) securities evidencing ownership interests in the principal, but not the
interest, payments on the Assets ("PO Securities"); (iii) securities evidencing
ownership interests in differing percentages of both the interest payments and
the principal payments on the Assets ("Ratio Securities"); and (iv) securities
evidencing ownership in equal percentages of the principal and interest payments
on the Assets ("Pass-Through Securities"). The federal income tax treatment of
Non-REMIC Securities other than Pass-Through Securities ("Strip Securities")
will be determined in part by Section 1286 of the Code. Little administrative
guidance has been issued under that section and, thus, many aspects of its
operation are unclear, particularly the interaction between that section and the
rules pertaining to discount and premium. Hence, significant uncertainty exists
with respect to the federal income tax treatment of the Strip Securities, and
potential investors should consult their own tax advisors concerning such
treatment.
Several Code Sections provide beneficial treatment to certain taxpayers
that invest in certain types of mortgage assets. For purposes of those Code
Sections, Pass-Through Securities will be characterized with reference to the
Assets in the Trust, but it is not clear whether the Strip Securities will be so
characterized. The Service could take the position that the character of the
Assets is not attributable to the Strip Securities for purposes of those
Sections. However, because the Strip Securities represent sole ownership rights
in the principal and interest payments on the Assets, the Strip Securities, like
the Pass-Through Securities, should be considered to represent "real estate
assets" within the meaning of Section 856(c)(5)(A) of the Code, and "loans
secured by an interest in real property" within the meaning of Section
7701(a)(19)(C)(v) of the Code, and interest income attributable to the
Securities should be considered to represent "interest on obligations secured by
mortgages on real property" within the meaning of Section 856(c)(3)(B) of the
Code, to the extent that the Trust assets would qualify for such treatment.
One or more Classes of Certificates may be subordinated to one or more
other Classes of Certificates of the same Series. In general, such subordination
should not affect the federal income tax treatment of either the Subordinated or
Senior Certificates. However, to the extent indicated in the relevant Prospectus
Supplement, holders of the Subordinated Certificates will be allocated losses
that otherwise would have been borne by the holders of the more senior
Certificates. Holders of the Subordinated Certificates should be able to
recognize any such losses no later than the taxable year in which they become
Realized Losses. Employee benefit plans subject to ERISA should consult their
own tax advisors before purchasing any Subordinated Security. See "ERISA
Considerations" herein and in the Prospectus Supplement.
Treatment of Pass-Through Securities
The holder of a Pass-Through Security generally will be treated as
owning a pro rata undivided interest in each of the Assets of the Trust Fund.
Accordingly, each Pass-Through Securityholder will be required to include in
income its pro rata share of the entire income from the Trust assets, including
interest and discount income, if any. Such Securityholder generally will be able
to deduct from its income its pro rata share of the administrative fees and
expenses incurred with respect to the Trust assets (provided that such fees and
expenses represent reasonable compensation for the services rendered). An
individual, trust, or estate that holds a Pass-Through Security directly or
through a pass-through entity will be entitled to deduct such fees and expenses
under Section 212 only to the extent that the amount of the fees and expenses,
when combined with its other miscellaneous itemized deductions for the taxable
year in question, exceeds 2% of its adjusted gross income. In addition, Code
Section 68 provides that the amount of itemized deductions otherwise allowable
for the taxable year for an individual whose adjusted gross income exceeds the
applicable amount ($100,000, or $50,000 in the case of a separate return by a
married individual within the meaning of Code Section 7703 for taxable year 1991
and adjusted for inflation each year thereafter) will be reduced by the lesser
of (i) 3% of the excess of adjusted gross income over the applicable amount, and
(ii) 80% of the amount of itemized deductions otherwise allowable for such
taxable year. Non-corporate holders of Pass-Through Securities also should be
aware that miscellaneous itemized deductions, including allocable investment
expenses attributable to such REMIC, are not deductible for purposes of the AMT.
Each Pass-Through Securityholder generally will determine its net income or loss
with respect to the Trust in accordance with its own method of accounting,
although income arising from original issue discount must be taken
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into account under the accrual method even though the Securityholder otherwise
would use the cash receipts and disbursements method.
The Code provisions concerning original issue discount, market
discount, and amortizable premium will apply to the Trust assets. The rules
regarding discount and premium that are applicable to Non-REMIC Certificates
generally are the same as those that apply to REMIC Regular Securities. See the
discussions under "Federal Income Tax Consequences -- REMIC Securities --
Original Issue Discount -- Variable Rate Securities" and "Federal Income Tax
Consequences -- REMIC Securities -- Market Discount" and " -- Amortizable
Premium" above.
For instruments to which it applies, Code Section 1272(a)(6) requires
the use of an income tax accounting methodology that utilizes (i) a single
constant yield to maturity and (ii) the Pricing Prepayment Assumptions. Unlike
in the case of REMIC Regular Securities, Code Section 1272(a)(6) technically
does not apply to Non-REMIC Securities. Although the Treasury has authority to
apply that Section to securities such as the Non-REMIC Securities, it has not
yet done so. Nonetheless, unless and until administrative guidance to the
contrary is released, the Tax Administrator intends to account for the Non-REMIC
Certificates as though Section 1272(a)(6) applied to them. Thus, the Tax
Administrator will account for a Class of Non-REMIC Certificates in the same
manner as it would account for a Class of REMIC Regular Securities with the same
terms. There can be no assurance, however, that the Service ultimately will
sanction the Tax Administrator's position.
It is anticipated that most or all of the Assets securing any Series
will be subject to the original issue discount, market discount, and amortizable
premium rules. Although most mortgage loans nominally are issued at their
original principal amounts, original issue discount could arise from the payment
of points or certain other origination charges by the Borrower if the discount
attributable to such payments exceeds the de minimis amount. If the Trust
contains Assets purchased for a price below its outstanding principal amount,
Pass-Through Securityholders generally will be required to take into account
original issue discount not previously accrued to the prior holder of such
Assets. Moreover, if such Assets were purchased for less than their adjusted
issue prices, Pass-Through Securityholders generally will be required to take
into account market discount, unless the amount of such market discount is de
minimis under the market discount rules. Finally, Pass-Through Securityholders
generally may elect to amortize any premium paid for Assets over their
outstanding principal amounts. For a more complete elaboration of the rules
pertaining to original issue discount, market discount, and acquisition premium,
see the discussion under "Federal Income Tax Consequences -- REMIC Securities --
Tax Treatment of REMIC Regular Securities."
Treatment of Strip Securities
Many aspects of the federal income tax treatment of the Strip
Securities are uncertain. The discussion below describes the treatment that
Counsel believes is appropriate, but there can be no assurance that the Service
will not take a contrary position. Potential investors, therefore, should
consult their own tax advisors with respect to the federal income tax treatment
of the Strip Securities.
Under Section 1286 of the Code, the separation of ownership of the
right to receive some or all of the interest payments on an obligation from
ownership of the right to receive some or all of the principal payments on such
obligation results in the creation of "stripped coupons" with respect to the
separated rights to interest payments and "stripped bonds" with respect to the
principal and any unseparated interest payments associated with that principal.
The issuance of IO or PO Securities effects a separation of the ownership of the
interest and principal payments on some or all of the Assets in the Trust. In
addition, the issuance of Ratio Securities effectively separates and reallocates
the proportionate ownership of the interest and principal payments on the
Assets. Therefore, Strip Securities will be subject to Section 1286.
For federal income tax accounting purposes, section 1286 treats a
stripped bond or a stripped coupon as a new debt instrument issued (i) on the
date that the stripped interest is purchased and (ii) at a price equal to its
purchase price or, if more than one stripped interest is purchased, the share of
the purchase price allocable to such stripped interest. Each stripped bond or
coupon generally will have original issue discount equal to the excess of
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its stated redemption price at maturity (or, in the case of a stripped coupon,
the amount payable on the due date of such coupon) over its issue price.
Treasury regulations under Section 1286 (the "Stripping Regulations"), however,
provide that the original issue discount on a stripped bond or stripped coupon
is zero if the amount of the original issue discount would be de minimis under
rules generally applicable to debt instruments. For purposes of the
determination whether such amount would be de minimis, (i) the number of
complete years to maturity is measured from the date the stripped bond or
stripped coupon is purchased, (ii) an aggregation approach similar to the
Aggregation Rule (as described in "Federal Income Tax Consequences -- REMIC
Securities -- Original Issue Discount" above) may be applied, and (iii)
unstripped coupons may be treated as stated interest with respect to the related
bonds and, therefore, may be excluded from stated redemption price at maturity
in appropriate circumstances. In addition, the Stripping Regulations provide
that, in certain circumstances, the excess of a stripped bond's stated
redemption price at maturity over its issue price is treated as market discount,
rather than as original issue discount. See "Federal Income Tax Consequences --
Non-REMIC Certificates -- Treatment of Strip Securities -- Determination of
Income With Respect to Strip Securities."
The application of Section 1286 to the Strip Securities is not entirely
clear under current law. That section could be interpreted as causing: (i) in
the case of an IO Security, each interest payment due on the Assets to be
treated as a separate debt instrument; (ii) in the case of a Ratio Security
entitled to a disproportionately high share of principal, each excess principal
amount (i.e., the portion of each principal payment on such assets that exceeds
the amount to which the Ratio Securityholder would have been entitled if he had
held an undivided interest in the Assets) to be treated as a separate debt
instrument; and (iii) in the case of a Ratio Security entitled to a
disproportionately high share of interest, each excess interest amount to be
treated as a separate debt instrument. In addition, Section 1286 requires the
purchase price of a Strip Security to be allocated among each of the rights to
payment on the Assets to which the Securityholder is entitled that are treated
as separate debt instruments. Despite the foregoing, it may be appropriate to
treat stripped coupons and stripped bonds issued to the same holder in
connection with the same transaction as a single debt instrument, depending on
the facts and circumstances surrounding the issuance. Facts and circumstances
considered relevant for this purpose should include the likelihood of the debt
instruments trading as a unit and the difficulty of allocating the purchase
price of the unit among the individual payments. Strip Securities are designed
to trade as whole investment units and, to the extent that any Underwriter
develops a secondary market for the Strip Securities, it anticipates that the
Strip Securities would trade in such market as whole units. In addition, because
no market exists for individual payments on Assets, the proper allocation of the
Security's purchase price to each separate payment on the Assets in the Trust
would be difficult and burdensome to determine. Based on those facts and
circumstances, it appears that all payments of principal and interest to which
the holder of a Strip Security is entitled should be treated as a single
installment obligation. Although the OID Regulations do not refer directly to
debt instruments that are governed by Section 1286 of the Code, the application
of the OID Regulations to such instruments is consistent with the overall
statutory and regulatory scheme. Therefore, the Tax Administrator intends to
treat each Strip Security as a single debt instrument for income tax accounting
purposes.
Determination of Income With Respect to Strip Securities
For purposes of determining the amount of income on a Strip Security
that accrues in any period, the rules described above under "Federal Income Tax
Consequences -- REMIC Securities -- Original Issue Discount -- Variable Rate
Securities," " -- Interested Weighted Securities and Non-VRDI Securities," and
"-- Anti-Abuse Rule" and "Federal Income Tax Consequences -- REMIC Securities --
Market Discount" and " -- Amortizable Premium" will apply. PO Securities, and
certain Classes of Ratio Securities, will be issued at a price that is less than
their stated principal amount and thus generally will be issued with original
issue discount. A Strip Security that would meet the definition of an Interest
Weighted Security or a Weighted Average Security if it were a REMIC Regular
Security is subject to the same tax accounting considerations applicable to the
REMIC Regular Security to which it corresponds. Thus, as described in "Federal
Income Tax Consequences -- REMIC Securities -- Original Issue Discount --
Interest Weighted Securities and Non-VRDI Securities" above, certain aspects of
the tax accounting treatment of such a Strip Security are unclear. Unless and
until the Service provides administrative guidance to the contrary, the Tax
Administrator will account for such a Strip Security in the manner
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described for the corresponding REMIC Regular Security. See "Federal Income Tax
Consequences -- REMIC Securities -- Original Issue Discount -- Interest Weighted
Securities and Non-VRDI Securities" above.
If a PO Security or a Ratio Security that is not considered a
Contingent Payment Obligation (an "Ordinary Ratio Security") subsequently is
sold, the purchaser apparently would be required to treat the difference between
the purchase price and the stated redemption price at maturity as original issue
discount. The holders of such securities generally will be required to include
such original issue discount in income as described in "Federal Income Tax
Consequences -- REMIC Securities -- Original Issue Discount" above. PO
Securities and Ordinary Ratio Securities issued at a price less than their
stated principal amount will be treated as issued with market discount rather
than with original issue discount if, after the most recent disposition of the
related Security, either (i) the amount of original issue discount on the
Security is considered to be de minimis under the Stripping Regulations or (ii)
the annual stated rate of interest payable on the Security is no more than one
percent lower than the annual stated rate of interest payable on the Mortgage
Loan from which the Security was stripped. The holders of such Securities
generally would be required to include market discount in income in the manner
described above in "Federal Income Tax Consequences -- REMIC Securities --
Market Discount." Some Classes of Ordinary Ratio Securities may be issued at
prices that exceed their stated principal amounts. Subject to the discussion of
Superpremium Securities in "Federal Income Tax Consequences -- REMIC Securities
- -- Original Issue Discount," holders of such Ordinary Ratio Securities generally
will be able to amortize that premium as described in "Federal Income Tax
Consequences -- REMIC Securities -- Amortizable Premium."
Purchase of Complementary Classes of Strip Securities
Strip Securities of certain Classes of the same Series ("Complementary
Securities"), when held in combination, may provide an aggregate economic effect
equivalent to that of a Pass-Through Security based upon the same Assets in the
Trust. When an investor purchases Complementary Securities, it appears that, for
federal income tax purposes, each Security should be treated separately and
should be subject to the rules described above. The Service could assert,
however, that Complementary Securities held in combination should be treated as
a single pass-through type instrument, with the result that the rules governing
stripped bonds and stripped coupons under Section 1286 of the Code would not be
applied. Consequently, investors who acquire Complementary Securities should
consult their own tax advisors as to the proper treatment of such Securities.
Possible Alternative Characterizations
The Service could assert that the Strip Securities should be
characterized for tax purposes in a manner different from that described above.
For example, the Service could contend that each Ratio Security whose interest
rate is higher than the net interest rate distributed from the Trust Fund taking
into account all of the Securities of that Series (the "Net Series Rate") is to
be treated as being composed of two securities: (i) a Pass-Through Security of
the same principal amount as the Ratio Security but generating interest at the
Net Series Rate; and (ii) an IO Security representing the excess of the rate on
the Ratio Security over the Net Series Rate. Similarly, a Ratio Security whose
interest rate is lower than the Net Series Rate could be treated as composed of
a Pass-Through Security with an interest rate equal to the Net Series Rate and a
PO Security. Alternatively, the Service could interpret Section 1286 to require
that each individual interest payment with respect to an IO Security or a Ratio
Security be treated as a separate debt instrument for original issue discount
purposes. The Service also might challenge the manner in which original issue
discount is calculated, contending that (i) the stated maturity should be used
to calculate yield on the Non-REMIC Certificates, (ii) the Contingent Payment
Regulations should not apply to the IO Securities, or (iii) the Contingent
Payment Regulations should apply to the Ordinary Ratio Securities. Given the
variety of alternative treatments of the Non-REMIC Certificates and the
different federal income tax consequences that could result from each
alternative, a potential investor is urged to consult its own tax advisor
regarding the proper treatment of the Non-REMIC Securities for federal income
tax purposes.
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Limitations on Deductions With Respect to Strip Securities
The holder of a Strip Security will be treated as owning an interest in
each of the Assets of the related Trust and will recognize an appropriate share
of the income and expenses associated with those Assets. Accordingly, an
individual, trust, or estate that holds a Strip Security directly or through a
pass-through entity will be subject to the same limitations on deductions with
respect to such Security as are applicable to holders of Pass-Through
Securities. See "Federal Income Tax Consequences -- Non-REMIC Certificates --
Treatment of Pass-Through Securities" above.
Sale of a Non-REMIC Certificate
A sale of a Non-REMIC Certificate prior to its maturity will result in
gain or loss equal to the difference, if any, between the amount received and
the holder's adjusted basis in such Certificate. The rules for computing the
adjusted basis of a Non-REMIC Certificate are the same as in the case of a REMIC
Regular Security. See "Federal Income Tax Consequences -- REMIC Securities --
Gain or Loss on Disposition." Gain or loss from the sale or other disposition of
a Non-REMIC Certificate generally will be capital gain or loss to a
Certificateholder if the Certificate is held as a "capital asset" within the
meaning of Section 1221 of the Code, and will be long-term or short-term
depending on whether the Certificate has been held for the longterm capital gain
holding period (currently, more than twelve months). Ordinary income treatment,
however, will apply to the extent mandated by the original issue discount and
market discount rules or if the Certificateholder is a financial institution
described in Section 582 of the Code. See "Federal Income Tax Consequences --
REMIC Securities -- Gain or Loss on Disposition."
Taxation of Certain Foreign Holders of Non-REMIC Certificates
Interest, including original issue discount, paid on a Non-REMIC
Certificate to a Foreign Person generally is treated as "portfolio interest"
and, therefore, is not subject to any United States tax, provided that (i) such
interest is not effectively connected with a trade or business in the United
States of the Securityholder, and (ii) the Trustee (or other person who would
otherwise be required to withhold tax) is provided with Foreign Person
Certification. If Foreign Person Certification is not provided, interest
(including original issue discount) paid on a Non-REMIC Certificate may be
subject to either a 30 percent withholding tax or 31 percent backup withholding.
In the case of certain Series, portfolio interest treatment will not be
available for interest paid with respect to certain classes of Non-REMIC
Certificates. Interest on debt instruments issued on or before July 18, 1984
does not qualify as "portfolio interest" and, therefore, is subject to United
States withholding tax at a 30 percent rate (or lower treaty rate, if
applicable). IO Securities and PO Securities generally are treated, and Ratio
Securities generally should be treated, as having been issued when they are sold
to an investor. In the case of Pass-Through Securities, however, the issuance
date of the Security is determined by the issuance date of the mortgage loans
underlying the Trust. Thus, to the extent that the interest received by a holder
of a Pass-Through Security is attributable to mortgage loans issued on or before
July 18, 1984, such interest will be subject to the 30 percent withholding tax.
Moreover, to the extent that a Ratio Security is characterized as a pass-through
type security and the underlying mortgage loans were issued on or before July
18, 1984, interest generated by the Security may be subject to the withholding
tax. See "Federal Income Tax Consequences -- Non-REMIC Certificates -- Possible
Alternative Characterizations." Although recently enacted tax legislation denies
portfolio interest treatment to certain types of contingent interest, that
legislation generally applies only to interest based on the income, profits, or
property values of the debtor. Accordingly, it is not anticipated that such
legislation will apply to deny portfolio interest to Certificateholders who are
Foreign Persons. However, because the scope of the new legislation is not
entirely clear, investors who are Foreign Persons should consult their own tax
advisors regarding the potential application of the legislation before
purchasing a Certificate.
Backup Withholding
The application of backup withholding to Non-REMIC Certificates
generally is the same as in the case of REMIC Securities. See "Federal Income
Tax Consequences -- REMIC Securities -- Backup Withholding."
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Reporting and Tax Administration
For purposes of reporting and tax administration, the holders of
Non-REMIC Certificates will be treated in the same fashion as the holders of
REMIC Regular Securities. See "Federal Income Tax Consequences -- REMIC
Securities -- Reporting and Tax Administration" above.
NON-REMIC COLLATERALIZED MORTGAGE BONDS
For each Series of Non-REMIC Collateralized Mortgage Bonds, Counsel to
the Depositor will advise the Depositor that, based upon the facts as they exist
at closing, in Counsel's opinion, the Bonds will be treated for federal income
tax purposes as indebtedness, and not as an ownership interest in the Assets or
an equity interest in a separate association taxable as a corporation. However,
there are no regulations, published rulings or judicial decisions involving the
characterization for federal income tax purposes of securities with terms
substantially the same as the Bonds. Accordingly, although that opinion will be
based on existing law, there can be no assurance that the law will not change or
that contrary positions will not be taken by the Internal Revenue Service (the
"Service"). If the Service were to make and prevail upon the contention that the
Bonds did not constitute indebtedness for federal income tax purposes, the Bonds
could be treated as equity interests in an association taxable as a corporation,
which would result in the imposition of a federal income tax at the entity
level. The imposition of such a tax could result in a delay or shortfall in
payments on the Bonds.
Because in Counsel's opinion, the Bonds will be treated as evidence of
indebtedness for federal income tax purposes and not as ownership interests in
the Assets, Securityholders should be aware that (i) Bonds held by a domestic
building and loan association will not constitute qualifying assets for such
building and loan association; (ii) Bonds held by a REIT will not constitute
"real estate assets" or "government securities" within the meaning of Code
Section 856(c)(5)(A); and (iii) income derived from the Bonds will not 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).
Bonds held by a regulated investment company (a "RIC") will not constitute
"government securities" within the meaning of Code Section 851(b)(4)(A)(i).
Payments received by Bondholders on the Bonds generally should be
accorded the same tax treatment under the Code as payments received on other
taxable corporate bonds. Original issue discount will accrue on the Bonds and
will be taxable to Bondholders in advance of receipt of the cash attributable to
such accruals in the same manner in which such original issue discount accrues
on REMIC Regular Securities. See "Federal Income Tax Consequences -- REMIC
Securities -- Original Issue Discount" above. The Trustee will report annually
to the Service and to Bondholders of record with respect to accruals of original
issue discount on the Bonds. The rules regarding market discount and premium
that are applicable to Non-REMIC Bonds generally are the same as those that
apply to REMIC Regular Securities. See the discussions under "Federal Income Tax
Consequences -- REMIC Securities -- Original Issue Discount -- Variable Rate
Securities" and "Federal Income Tax Consequences -- REMIC Securities -- Market
Discount" and " -- Amortizable Premium" above.
Sale of a Non-REMIC Bond
A sale of a Non-REMIC Bond prior to its maturity will result in gain or
loss equal to the difference, if any, between the amount received and the
holder's adjusted basis in such Bond. The rules for computing the adjusted basis
of a Non-REMIC Bond are the same as in the case of a REMIC Regular Security. See
"Federal Income Tax Consequences -- REMIC Securities -- Gain or Loss on
Disposition."
Taxation of Certain Foreign Holders of Non-REMIC Bonds
Interest, including original issue discount, paid on a Non-REMIC Bond
to a Foreign Person generally is treated as "portfolio interest" and, therefore,
is not subject to any United States tax, provided that (i) such interest is not
effectively connected with a trade or business in the United States of the
Bondholder, and (ii) the Trustee (or other person who would otherwise be
required to withhold tax) is provided with Foreign Person Certification. If
Foreign Person Certification is not provided, interest (including original
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issue discount) paid on a Non-REMIC Bond may be subject to either a 30 percent
withholding tax or 31 percent backup withholding. Interest (including original
issue discount) paid on Bonds to Bondholders who are Foreign Persons will not be
subject to withholding if such interest is effectively connected with a United
States business conducted by the Bondholder. Such interest (including original
issue discount) will, however, generally be subject to the regular United States
income tax.
Backup Withholding
The application of backup withholding to Non-REMIC Bonds generally is
the same as in the case of REMIC Securities. See "Federal Income Tax
Consequences -- REMIC Securities -- Backup Withholding."
Reporting and Tax Administration
For purposes of reporting and tax administration, the holders of
Non-REMIC Bonds will be treated in the same fashion as the holders of REMIC
Regular Securities. See "Federal Income Tax Consequences -- REMIC Securities --
Reporting and Tax Administration" above.
PARTNERSHIP TRUST FUNDS
Classification of Partnership Trust Funds
With respect to each Series of Partnership Certificates or Partnership
Bonds, Hunton & Williams will deliver its opinion that the Trust Fund will not
be a taxable mortgage pool or an association (or publicly traded partnership)
taxable as a corporation for federal income tax purposes. This opinion generally
will be based on the assumption that the terms of the related Agreement and
related documents will be complied with and on counsel's conclusion that the
nature of the income of the Trust Fund will except it from the rule that certain
publicly traded partnerships are taxable as corporations.
Characterization of Investments in Partnership Certificates and
Partnership Bonds
For federal income tax purposes, (i) Partnership Certificates and
Partnership Bonds held by a thrift institution taxed as a domestic building and
loan association will not constitute "loans ... secured by an interest in real
property which is ... residential real property" within the meaning of Code
Section 7701(a)(19)(C)(v), (ii) interest on Partnership Bonds held by a real
estate investment trust will not be treated as "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), (iii) Partnership Bonds held by a real
estate investment trust will not constitute "real estate assets" within the
meaning of Code Section 856(c)(5)(A), and (iv) (A) interest on Partnership
Certificates held by a real estate investment trust will qualify as "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), and (B) Partnership
Certificates will constitute "real estate assets" within the meaning of Code
section 856(c)(5)(A), in each case based on the real estate investments trust's
proportionate interest in the assets of the Partnership Trust Fund, determined
based on capital accounts.
Taxation of Partnership Bondholders
Treatment of the Partnership Bonds as Indebtedness
The Depositor will agree, and the Bondholders will agree by their
purchase of Partnership Bonds, to treat the Partnership Bonds as debt for
federal income tax purposes. No regulations, published rulings, or judicial
decisions exist that discuss the characterization for federal income tax
purposes of securities with terms substantially the same as the Partnership
Bonds. However, with respect to each Series of Partnership Bonds, Hunton &
Williams will deliver its opinion that the Partnership Bonds will be classified
as indebtedness for federal income tax purposes. The discussion below assumes
this characterization of the Partnership Bonds is correct.
If, contrary to the opinion of counsel, the IRS successfully asserted
that the Partnership Bonds were not debt for federal income tax purposes, the
Partnership Bonds might be treated as equity interests in the Partnership
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Trust Fund. In that event, the timing and amount of income allocable to holders
of such Partnership Bonds may be different than as described in the following
paragraph. In addition, if the Partnership Bonds are publicly offered or
otherwise readily tradeable, the Partnership Trust Fund could be treated as a
publicly traded partnership taxable as a corporation for federal income tax
purposes.
Partnership Bonds generally will be subject to the same rules of
taxation as Regular Securities issued by a REMIC, as described above, except
that (i) income reportable on Partnership Bonds is not required to be reported
under the accrual method unless the holder otherwise uses the accrual method and
(ii) the special rule treating a portion of the gain on sale or exchange of a
Regular Security as ordinary income is inapplicable to Partnership Bonds. See
"Federal Income Tax Consequences -- REMIC Securities Gain or Loss on
Disposition."
Taxation of Owners of Partnership Certificates
Treatment of the Partnership Trust Fund as a Partnership
If so specified in the applicable Prospectus Supplement, the Depositor
will agree, and the Partnership Bondholders and Certificateholders will agree by
their purchase of Partnership Certificates or Partnership Bonds to treat the
Partnership Trust Fund as a partnership for purposes of federal and state income
tax, franchise tax and any other tax measured in whole or in part by income,
with the assets of the partnership being the assets held by the Partnership
Trust Fund, the partners of the partnership being the holders of the Partnership
Certificates (including the Depositor), and the Partnership Bonds (if any) being
debt of the partnership. However, the proper characterization of the arrangement
involving the Partnership Trust Fund, the Partnership Certificates, the
Partnership Bonds, and the Depositor is not clear, because there is no authority
on transactions closely comparable to that contemplated herein.
A variety of alternative characterizations are possible. For example,
if one or more of the classes of Partnership Certificates have certain features
characteristic of debt, the Partnership Certificates might be considered debt of
the Depositor of the Partnership Trust Fund. Any such characterization would not
result in materially adverse tax consequences to Certificateholders as compared
to the consequences from treatment of the Partnership Certificates as equity in
a partnership, described below. The following discussion assumes that the
Partnership Certificates represent equity interests in a partnership.
Partnership Taxation
As a partnership, the Partnership Trust Fund will not be subject to
federal income tax. Rather, each Certificateholder will be required to
separately take into account such holder's allocated share of income, gains,
losses, deductions and credits of the Partnership Trust Fund. It is anticipated
that the Partnership Trust Fund's income will consist primarily of interest
earned on the Trust Fund's assets (including appropriate adjustments for market
discount, original issue discount and bond premium) and any gain upon collection
or disposition of Trust Fund's assets. The Partnership Trust Fund's deductions
will consist primarily of interest accruing with respect to the Partnership
Bonds, servicing and other fees, and losses or deductions upon collection or
disposition of Partnership Bonds.
The tax items of a partnership are allocable to the partners in
accordance with the Code, Treasury regulations and the partnership agreement
(here, the Agreement and related documents). The Agreement will provide, in
general, that the Certificateholders will be allocated taxable income of the
Partnership Trust Fund for each Due Period equal to the sum of (i) the interest
that accrues on the Partnership Certificates in accordance with their terms for
such Due Period, including interest accruing at the applicable pass-through rate
for such Due Period and interest on amounts previously due on the Partnership
Certificates but not yet distributed; (ii) any Partnership Trust Fund income
attributable to discount on the Trust Fund's assets that corresponds to any
excess of the principal amount of the Partnership Certificates over their
initial issue price; and (iii) any other amounts of income payable to the
Certificateholders for such Due Period. Such allocation will be reduced by any
amortization by the Partnership Trust Fund of premium on the Trust Fund's assets
that corresponds to any excess of the issue price of the Partnership
Certificates over their principal amount. All remaining taxable income of the
Partnership Trust Fund
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will be allocated to the Depositor. Based on the economic arrangement of the
parties, this approach for allocating Partnership Trust Fund income should be
permissible under applicable Treasury regulations, although no assurance can be
given that the IRS would not require a greater amount of income to be allocated
to Certificateholders. Moreover, even under the foregoing method of allocation,
Certificateholders may be allocated income equal to the entire pass-through rate
plus the other items described above even through the Trust Fund might not have
sufficient cash to make current cash distributions of such amount. Thus, cash
basis holders will in effect be required to report income from the Partnership
Certificates on the accrual basis and Certificateholders may become liable for
taxes on Partnership Trust Fund income even if they have not received cash from
the Partnership Trust Fund to pay such taxes.
Part or all of the taxable income allocated to a Certificateholder that
is a pension, profit sharing or employee benefit plan or other tax-exempt entity
(including an individual retirement account) may constitute "unrelated business
taxable income" generally taxable to such a holder under the Code.
A share of expenses of the Partnership Trust Fund (including fees of
the Master Servicer but not interest expense) allocable to an individual, estate
or trust Certificateholder would be miscellaneous itemized deductions subject to
the limitations described above under "Federal Income Tax Consequences --
Non-REMIC Certificates -- Treatment of Pass-Through Securities." Accordingly,
such deductions might be disallowed to the individual in whole or in part and
might result in such holder being taxed on an amount of income that exceeds the
amount of cash actually distributed to such holder over the life of the
Partnership Trust Fund.
Discount income or premium amortization with respect to the Trust
Fund's assets would be calculated in a manner similar to the description above
under "Federal Income Tax Consequences -- Non-REMIC Certificates -- Treatment of
Pass-Through Securities" and "-- Premium and Discount." Notwithstanding such
description, it is intended that the Partnership Trust Fund will make all tax
calculations relating to income and allocations to Certificateholders on an
aggregate basis with respect to the Trust Fund's assets rather than on an
asset-by-asset basis. If the IRS were to require that such calculations be made
separately for each asset, the Partnership Trust Fund might be required to incur
additional expense, but it is believed that there would not be a material
adverse effect on Certificateholders.
Discount and Premium
Unless indicated otherwise in the applicable Prospectus Supplement, it
is not anticipated that the Trust Fund's assets will have been issued with
original issue discount and, therefore, the Partnership Trust Fund should not
have original issue discount income. However, the purchase price paid by the
Partnership Trust Fund for the assets may be greater or less than the remaining
principal balance of the assets at the time of the purchase. If so, assets will
have been acquired at a premium or discount, as the case may be. See "Federal
Income Tax Consequences -- Non-REMIC Certificates -- Treatment of Pass-Through
Securities." (As indicated above, the Partnership Trust Fund will make this
calculation on an aggregate basis, but might be required to recompute it on a
Mortgage Loan-by-Mortgage Loan basis).
If the Partnership Trust Fund acquires assets at a market discount or
premium, the Partnership Trust Fund will elect to include any such discount in
income currently as it accrues over the life of the assets or to offset any such
premium against interest income on the assets. As indicated above, a portion of
such market discount income or premium deduction may be allocated to
Certificateholders.
Section 708 Termination
Under Section 708 of the Code, the Partnership Trust Fund will be
deemed to terminate for federal income tax purposes if 50% or more of the
capital and profits interests in the Partnership Trust Fund are sold or
exchanged within a 12-month period. If such a termination occurs, it would cause
a deemed contribution of the assets of a Partnership Trust Fund (the "old
partnership") to a new Partnership Trust Fund (the "new partnership") in
exchange for interests in the new partnership. Such interests would be deemed
distributed to the partners of the old
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partnership in liquidation thereof, which would not constitute a sale or
exchange. The Partnership Trust Fund will not comply with certain technical
requirements that might apply when such a constructive termination occurs. As a
result, the Partnership Trust Fund may be subject to certain tax penalties and
may incur additional expenses if it is required to comply with those
requirements. Furthermore, the Partnership Trust Fund might not be able to
comply due to lack of data.
Disposition of Partnership Certificates
Generally, capital gain or loss will be recognized on a sale of
Partnership Certificates in an amount equal to the difference between the amount
realized and the seller's tax basis in the Partnership Certificates sold. A
Certificateholder's tax basis in a Partnership Certificate will generally equal
the holder's cost increased by the holder's share of Partnership Trust Fund
income (includible in income) and decreased by any distributions received with
respect to such Partnership Certificate. In addition, both the tax basis in the
Partnership Certificates and the amount realized on a sale of a Partnership
Certificate would include the holder's share of the Partnership Bonds and other
liabilities of the Partnership Trust Fund. A holder acquiring Partnership
Certificates at different prices may be required to maintain a single aggregate
adjusted tax basis in such Partnership Certificates, and, upon sale or other
disposition of some of the Partnership Certificates, allocate a portion of such
aggregate tax basis to the Partnership Certificates sold (rather than
maintaining a separate tax basis in each Partnership Certificate for purposes of
computing gain or loss on a sale of that Partnership Certificate).
Any gain on the sale of a Partnership Certificate attributable to the
holder's share of unrecognized accrued market discount on the Trust Fund assets
would generally be treated as ordinary income to the holder and would give rise
to special tax reporting requirements. The Partnership Trust Fund does not
expect to have any other assets that would give rise to such special reporting
considerations. Thus, to avoid those special reporting requirements, it is
anticipated that a Partnership Trust Fund will elect to include market discount
in income as it accrues.
If a Certificateholder is required to recognize an aggregate amount of
income (not including income attributable to disallowed itemized deductions
described above) over the life of the Partnership Certificates that exceeds the
aggregate cash distributions with respect thereto, such excess will generally
give rise to a capital loss upon the retirement of the Partnership Certificates.
Allocations Between Transferors and Transferees
In general, the Partnership Trust Fund's taxable income and losses will
be determined each Due Period and the tax items for a particular Due Period will
be apportioned among the Certificateholders in proportion to the principal
amount of Partnership Certificates owned by them as of the close of the last day
of such Due Period. As a result, a holder purchasing Partnership Certificates
may be allocated tax items (which will affect its tax liability and tax basis)
attributable to periods before the accrual transaction.
The use of such a Due Period convention may not be permitted by
existing regulations. If a Due Period convention is not allowed (or only applies
to transfers of less than all of the partner's interest), taxable income or
losses of the Partnership Trust Fund might be reallocated among the
Certificateholders. The Depositor will be authorized to revise the Partnership
Trust Fund's method of allocation between transferors and transferees to conform
to a method permitted by future regulations.
Section 731 Distributions
In the case of any distribution to a Certificateholder, no gain will be
recognized to that Certificateholder to the extent that the amount of any money
distributed with respect to such Certificate does not exceed the adjusted basis
of such Certificateholder's interest in the Certificates. To the extent that the
amount of money distributed exceeds such Certificateholder's adjusted basis,
gain will be currently recognized. In the case of any distribution to a
Certificateholder, no loss will be recognized except upon a distribution in
liquidation of a Certificateholder's interest. Any gain or loss recognized by a
Certificateholder will be capital gain or loss.
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Section 754 Election
In the event that a Certificateholder sells its Partnership
Certificates at a profit (loss), the purchasing Certificateholder will have a
higher (lower) basis in the Partnership Certificates than the selling
Certificateholder had. The tax basis of the Partnership Trust Fund's assets
would not be adjusted to reflect that higher (or lower) basis unless the
Partnership Trust Fund were to file an election under Section 754 of the Code.
In order to avoid the administrative complexities that would be involved in
keeping accurate accounting records, as well as potentially onerous information
reporting requirements, the Partnership Trust Fund will not make such an
election. As a result, Certificateholders might be allocated a greater or lesser
amount of Partnership Trust Fund income than would be appropriate based on their
own purchase price for Partnership Certificates.
Administrative Matters
The Trustee is required to keep or have kept complete and accurate
books of the Partnership Trust Fund. Such books will be maintained for financial
reporting and tax purposes on an accrual basis and the fiscal year of the
Partnership Trust Fund will be the calendar year. The Trustee will file a
partnership information return (IRS Form 1065) with the IRS for each taxable
year of the Partnership Trust Fund and will report each Certificateholder's
allocable share of items of Partnership Trust Fund income and expense to holders
and the IRS on Schedule K-1. The Trustee will provide for Schedule K-1
information to nominees that fail to provide the Partnership Trust Fund with the
information statement described below and such nominees will be required to
forward such information to the beneficial owners of the Partnership
Certificates. Generally, holders must file tax returns that are consistent with
the information return filed by the Partnership Trust Fund or be subject to
penalties unless the holder notifies the IRS of all such inconsistencies.
Under Section 6031 of the Code, any person that holds Partnership
Certificates as a nominee at any time during a calendar year is required to
furnish the Partnership Trust Fund with a statement containing certain
information on the nominee, the beneficial owners and the Partnership
Certificates so held. Such information includes (i) the name, address and
taxpayer identification number of the nominee and (ii) as to each beneficial
owner (x) the name, address and identification number of such person, (y)
whether such person is a United States person, a tax-exempt entity or a foreign
government, an international organization, or any wholly-owned agency or
instrumentality of either of the foregoing, and (z) certain information on
Partnership Certificates that were held, brought or sold on behalf of such
person throughout the year. In addition, brokers and financial institutions that
hold Partnership Certificates through a nominee are required to furnish directly
to the Trustee information as to themselves and their ownership of Partnership
Certificates. A clearing agency registered under Section 17A of the Exchange Act
is not required to furnish any such information statement to the Partnership
Trust Fund. The information referred to above for any calendar year must be
furnished to the Partnership Trust Fund on or before the following January 31.
Nominees, brokers and financial institutions that fail to provide the
Partnership Trust Fund with the information described above may be subject to
penalties.
The Depositor will be designated as the tax matters partner in the
Pooling and Servicing Agreement and, as such, will be responsible for
representing the Certificateholders in any dispute with the IRS. The Code
provides for administrative examination of a partnership as if the partnership
were a separate and distinct taxpayer. Generally, the statute of limitations for
partnership items does not expire until three years after the date on which the
partnership information return is filed. Any adverse determination following an
audit of the return of the Partnership Trust Fund by the appropriate taxing
authorities could result in an adjustment of the returns of the
Certificateholders, and, under certain circumstances, a Certificateholder may be
precluded from separately litigating a proposed adjustment to the items of the
Partnership Trust Fund. An adjustment could also result in an audit of a
Certificateholder's returns and adjustments of items not related to the income
and losses of the Partnership Trust Fund.
Tax Consequences to Foreign Certificateholders
It is not clear whether the Partnership Trust Fund would be considered
to be engaged in a trade or business in the United States for purposes of
federal withholding taxes with respect to Non-U.S. Persons, because there is
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no clear authority dealing with that issue under facts substantially similar to
those described herein. Although it is not expected that the Partnership Trust
Fund would be engaged in a trade or business in the United States for such
purposes, the Partnership Trust Fund will withhold as if it were so engaged in
order to protect the Partnership Trust Fund from possible adverse consequences
of a failure to withhold. The Partnership Trust Fund expects to withhold on the
portion of its taxable income that is allocable to Certificateholders who are
Non-U.S. Persons pursuant to Section 1446 of the Code, as if such income were
effectively connected to a U.S. trade or business, at a rate of 35% for Non-U.S.
Persons that are taxable as corporations and 39.6% for all other foreign
holders. Amounts withheld will be deemed distributed to the Non-U.S. Persons
Certificateholders. Subsequent adoption of Treasury regulations or the issuance
of other administrative pronouncements may require the Partnership Trust Fund to
change its withholding procedures. In determining a holder's withholding status,
the Partnership Trust Fund may rely on IRS Form W-8, IRS Form W-9 or the
holder's certification of nonforeign status signed under penalties of perjury.
Each Non-U.S. Person holder might be required to file a U.S. individual
or corporate income tax return (including, in the case of a corporation, the
branch profits tax) on its share of the Partnership Trust Fund's income. Each
Non-U.S. Person holder must obtain a taxpayer identification number from the IRS
and submit that number to the Partnership Trust Fund on Form W-8 in order to
assure appropriate crediting of the taxes withheld. A Non-U.S. Person holder
generally would be entitled to file with the IRS a claim for refund with respect
to taxes withheld by the Partnership Trust Fund, taking the position that no
taxes were due because the Partnership Trust Fund was not engaged in a U.S.
trade or business. However, interest payments made (or accrued) to a
Certificateholder who is a Non-U.S. Person generally will be considered
guaranteed payments to the extent such payments are determined without regard to
the income of the Partnership Trust Fund. If these interest payments are
properly characterized as guaranteed payments, then the interest will not be
considered "portfolio interest." As a result, Certificateholders who are
Non-U.S. Persons will be subject to United States federal income tax and
withholding tax at a rate of 30 percent, unless reduced or eliminated pursuant
to an applicable treaty. In such case, a Non-U.S. Person holder would only be
entitled to claim a refund for that portion of the taxes in excess of the taxes
that should be withheld with respect to the guaranteed payments.
Backup Withholding
Distributions made on the Partnership Certificates and proceeds from
the sale of the Partnership Certificates will be subject to a "backup"
withholding tax of 31% if, in general, the Certificateholder fails to comply
with certain identification procedures, unless the holder is an exempt recipient
under applicable provisions of the Code.
FASIT SECURITIES
General
The FASIT provisions of the Code were enacted by the Small Business Job
Protection Act of 1996 and create a new elective statutory vehicle for the
issuance of mortgage-backed and asset-backed securities. Although the FASIT
provisions of the Code became effective on September 1, 1997, no Treasury
regulations or other administrative guidance has been issued with respect to
those provisions. Accordingly, definitive guidance cannot be provided with
respect to many aspects of the tax treatment of FASIT Securityholders. Investors
also should note that the FASIT discussion contained herein constitutes only a
summary of the federal income tax consequences to holders of FASIT Securities.
With respect to each Series of FASIT Securities, the related Prospectus
Supplement will provide a detailed discussion regarding the federal income tax
consequences associated with the particular transaction.
FASIT Securities will be classified as either FASIT Regular Securities,
which generally will be treated as debt for federal income tax purposes, or
FASIT Ownership Securities, which generally are not treated as debt for such
purposes, but rather as representing rights and responsibilities with respect to
the taxable income or loss of the related Series FASIT. The Prospectus
Supplement for each Series of Securities will indicate whether one or more FASIT
elections will be made for that Series and which Securities of such Series will
be designated as Regular Securities, and which, if any, will be designated as
Ownership Securities.
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Qualification as a FASIT
The Trust Fund underlying a Series (or one or more designated pools of
assets held in the Trust Fund) will qualify under the Code as a FASIT in which
the FASIT Regular Securities and the FASIT Ownership Securities will constitute
the "regular interests" and the "ownership interests," respectively, if (i) a
FASIT election is in effect, (ii) certain tests concerning (A) the composition
of the FASIT's assets and (B) the nature of the Securityholders' interests in
the FASIT are met on a continuing basis, and (iii) the Trust Fund is not a
regulated investment company as defined in Section 851(a) of the Code.
Asset Composition
In order for a Trust Fund (or one or more designated pools of assets
held by a Trust Fund) to be eligible for FASIT status, substantially all of the
assets of the Trust Fund (or the designated pool) must consist of "permitted
assets" as of the close of the third month beginning after the closing date and
at all times thereafter (the "FASIT Qualification Test"). Permitted assets
include (i) cash or cash equivalents, (ii) debt instruments with fixed terms
that would qualify as REMIC regular interests if issued by a REMIC (generally,
instruments that provide for interest at a fixed rate, a qualifying variable
rate, or a qualifying interest-only ("IO") type rate), (iii) foreclosure
property, (iv) certain hedging instruments (generally, interest and currency
rate swaps and credit enhancement contracts) that are reasonably required to
guarantee or hedge against the FASIT's risks associated with being the obligor
on FASIT interests, (v) contract rights to acquire qualifying debt instruments
or qualifying hedging instruments, (vi) FASIT regular interests, and (vii) REMIC
regular interests. Permitted assets do not include any debt instruments issued
by the holder of the FASIT's ownership interest or by any person related to such
holder.
Interests in a FASIT
In addition to the foregoing asset qualification requirements, the
interests in a FASIT also must meet certain requirements. All of the interests
in a FASIT must belong to either of the following: (i) one or more classes of
regular interests or (ii) a single class of ownership interest that is held by a
fully taxable domestic C corporation. In the case of Series that include FASIT
Ownership Securities, the ownership interest will be represented by the FASIT
Ownership Securities.
A FASIT interest generally qualifies as a regular interest if (i) it is
designated as a regular interest, (ii) it has a stated maturity no greater than
thirty years, (iii) it entitles its holder to a specified principal amount, (iv)
the issue price of the interest does not exceed 125% of its stated principal
amount, (v) the yield to maturity of the interest is less than the applicable
Treasury rate published by the Service plus 5%, and (vi) if it pays interest,
such interest is payable at either (a) a fixed rate with respect to the
principal amount of the regular interest or (b) a permissible variable rate with
respect to such principal amount. Permissible variable rates for FASIT regular
interests are the same as those for REMIC regular interests (i.e., certain
qualified floating rates and weighted average rates). See "Federal Income Tax
Consequences -- REMIC Securities -- Original Issue Discount -- Variable Rate
Securities" and "Certain Federal Income Tax Consequences -- REMIC Securities --
Investors' Interests" herein.
If a FASIT Security fails to meet one or more of the requirements set
out in clauses (iii), (iv), or (v) above, but otherwise meets the above
requirements, it may still qualify as a type of regular interest known as a
"High-Yield Interest." In addition, if a FASIT Security fails to meet the
requirement of clause (vi), but the interest payable on the Security consists of
a specified portion of the interest payments on permitted assets and that
portion does not vary over the life of the Security, the Security also will
qualify as a High-Yield Interest. A High-Yield Interest may be held only by
domestic C corporations that are fully subject to corporate income tax
("Eligible Corporations"), other FASITs, and dealers in securities who acquire
such interests as inventory, rather than for investment. In addition, holders of
High-Yield Interests are subject to limitations on offset of income derived from
such interest. See "Federal Income Tax Consequences -- FASIT Securities -- Tax
Treatment of FASIT Regular Securities -- Treatment of High-Yield Interests."
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Consequences of Disqualification
If a Series FASIT fails to comply with one or more of the Code's
ongoing requirements for FASIT status during any taxable year, the Code provides
that its FASIT status may be lost for that year and thereafter. If FASIT status
is lost, the treatment of the former FASIT and the interests therein for federal
income tax purposes is uncertain. The former FASIT might be treated as a grantor
trust, as a separate association taxation as a corporation, or as a partnership.
The FASIT Regular Securities could be treated as debt instruments for federal
income tax purposes or as equity interests, as described in "Federal Income Tax
Consequences -- REMIC Securities -- Consequences of Disqualification" and "--
Taxable Mortgage Pools" herein. Although the Code authorizes the Treasury to
issue regulations that address situations where a failure to meet the
requirements for FASIT status occurs inadvertently and in good faith, such
regulations have not yet been issued. It is possible that disqualification
relief might be accompanied by sanctions, such as the imposition of a corporate
tax on all or a portion of the FASIT's income for the period of time in which
the requirements for FASIT status are not satisfied.
Tax Treatment of FASIT Regular Securities
General. Payments received by holders of FASIT Regular Securities
generally should be accorded the same tax treatment under the Code as payments
received on other taxable corporate debt instruments and on REMIC Regular
Securities. As in the case of holders of REMIC Regular Securities, holders of
FASIT Regular Securities must report income from such Securities under an
accrual method of accounting, even if they otherwise would have used the cash
receipts and disbursements method. Except in the case of FASIT Regular
Securities issued with original issue discount or acquired with market discount
or premium, interest paid or accrued on a FASIT Regular Security generally will
be treated as ordinary income to the Securityholder and a principal payment on
such Security will be treated as a return of capital to the extent that the
Securityholder's basis is allocable to that payment. FASIT Regular Securities
issued with original issue discount or acquired with market discount or premium
generally will treat interest and principal payments on such Securities in the
same manner described for REMIC Regular Securities. See "Federal Income Tax
Consequences -- REMIC Securities -- Original Issue Discount," "-- Market
Discount," and "-- Amortizable Premium" above. High-Yield Securities may be held
only by Eligible Corporations, other FASITs, and certain securities dealers.
Holders of High-Yield Securities are subject to limitations on their ability to
use current losses or net operating loss carryforwards or carrybacks to offset
any income derived from those Securities.
If a FASIT Regular Security is sold, the Securityholder generally will
recognize gain or loss upon the sale in the manner described above for REMIC
Regular Securities. See "Federal Income Tax Consequences -- REMIC Securities --
Tax Treatment of REMIC Regular Securities -- Gain or Loss on Disposition." In
addition, if a FASIT Regular Security becomes wholly or partially worthless as a
result of Realized Losses on the underlying Assets, the holder of such Security
should be allowed to deduct the loss sustained. See "Federal Income Tax
Consequences - - REMIC Securities -- Tax Treatment of REMIC Regular Securities
- -- Consequences of Realized Losses."
FASIT Regular Securities held by a REIT will qualify as "real estate
assets" within the meaning of section 856(c)(5) of the Code, and interest on
such Securities will be considered Qualifying REIT Interest to the same extent
that REMIC Securities would be so considered. See "Federal Income Tax
Consequences --- REMIC Securities" herein. FASIT Regular Securities held by a
Thrift Institution taxed as a "domestic building and loan association" will
represent qualifying assets for purposes of the qualification requirements set
forth in Code Section 7701(a)(19) to the same extent that REMIC Securities would
be so considered. See "Federal Income Tax Consequences --- REMIC Securities." In
addition, FASIT Regular Securities held by a financial institution to which
Section 585 of the Code applies will be treated as evidences of indebtedness for
purposes of Section 582(c)(1) of the Code. FASIT Securities will not qualify as
"Government securities" for either REIT or RIC qualification purposes.
Treatment of High-Yield Interests
High-Yield Interests are subject to special rules regarding the
eligibility of holders of such interests, and the ability of such holders to
offset income derived from their FASIT Security with losses. High-Yield
Interests may be held only by Eligible Corporations, other FASITs, and dealers
in securities who acquire such interests as inventory. If a securities dealer
(other than an Eligible Corporation) initially acquires a High-Yield Interest as
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inventory, but later begins to hold it for investment, the dealer will be
subject to an excise tax equal to the income from the High-Yield Interest
multiplied by the highest corporate income tax rate. In addition, transfers of
High-Yield Interests to disqualified holders will be disregarded for federal
income tax purposes, and the transferor will continue to be treated as the
holder of the High-Yield Interest.
The holder of a High-Yield Interest may not use non-FASIT current
losses or net operating loss carryforwards or carrybacks to offset any income
derived from the High-Yield Interest, for either regular federal income tax
purposes or for alternative minimum tax purposes. In addition, the FASIT
provisions contain an anti-abuse rule that imposes corporate income tax on
income derived from a FASIT Regular Security that is held by a pass-through
entity (other than another FASIT) that issues debt or equity securities backed
by the FASIT Regular Security and that have the same features as High-Yield
Interests.
Tax Treatment of FASIT Ownership Securities
A FASIT Ownership Security represents the residual equity interest in a
FASIT. As such, the holder of a FASIT Ownership Security determines its taxable
income by taking into account all assets, liabilities, and items of income,
gain, deduction, loss, and credit of a FASIT. In general, the character of the
income to the holder of a FASIT Ownership Interest will be the same as the
character of such income to the FASIT, except that any tax-exempt interest
income taken into account by the holder of a FASIT Ownership Interest is treated
as ordinary income. In determining that taxable income, the holder of a FASIT
Ownership Security must determine the amount of interest, original issue
discount, market discount, and premium recognized with respect to the FASIT's
assets and the FASIT Regular Securities issued by the FASIT according to a
constant yield methodology and under an accrual method of accounting. In
addition, holders of FASIT Ownership Securities are subject to the same
limitations on their ability to use losses to offset income from their FASIT
Securities as are holders of High-Yield Interests. See "Federal Income Tax
Consequences -- FASIT Securities -- Tax Treatment of FASIT Regular Securities --
Treatment of High-Yield Interests."
Rules similar to the wash sale rules applicable to REMIC Residual
Securities also will apply to FASIT Ownership Securities. Accordingly, losses on
dispositions of a FASIT Ownership Security generally will be disallowed where,
within six months before or after the disposition, the seller of such Security
acquires any other FASIT Ownership Security or, in the case of a FASIT holding
mortgage assets, any interest in a Taxable Mortgage Pool, that is economically
comparable to a FASIT Ownership Security. In addition, if any security that is
sold or contributed to a FASIT by the holder of the related FASIT Ownership
Security was required to be marked-to-market under Code section 475 by such
holder, then section 475 will continue to apply to such securities, except that
the amount realized under the mark-to-market rules will be the greater of the
securities' value under the marked-to-market rules or the securities' value
after applying special valuation rules contained in the FASIT provisions. Those
special valuation rules generally require that the value of debt instruments
that are not traded on an established securities market be determined by
calculating the present value of the reasonably expected payments under the
instrument using a discount rate of 120% of the applicable Federal rate,
compounded semiannually.
The holder of a FASIT Ownership Security will be subject to a tax equal
to 100% of the net income derived by the FASIT from any "prohibited
transactions." Prohibited transactions include (i) the receipt of income derived
from assets that are not permitted assets, (ii) certain dispositions of
permitted assets, (iii) the receipt of any income derived from any loan
originated by a FASIT, and (iv) in certain cases, the receipt of income
representing a servicing fee or other compensation. Any Series for which a FASIT
election is made generally will be structured in order to avoid application of
the prohibited transaction tax.
Backup Withholding, Reporting and Tax Administration
Holders of FASIT Securities will be subject to backup withholding to
the same extent holders of REMIC Securities would be subject. See "Federal
Income Tax Consequences -- REMIC Securities -- Backup Withholding." For purposes
of reporting and tax administration, holders of record of FASIT Securities
generally will be treated in the same manner as holders of REMIC Securities. See
"Federal Income Tax Consequences -- REMIC Securities -- Reporting and Tax
Administration" above.
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DUE TO THE COMPLEXITY OF THE FEDERAL INCOME TAX RULES APPLICABLE TO
SECURITYHOLDERS AND THE CONSIDERABLE UNCERTAINTY THAT EXISTS WITH RESPECT TO
MANY ASPECTS OF THOSE RULES, POTENTIAL INVESTORS SHOULD CONSULT THEIR OWN TAX
ADVISORS REGARDING THE TAX TREATMENT OF THE ACQUISITION, OWNERSHIP, AND
DISPOSITION OF THE SECURITIES.
STATE TAX CONSIDERATIONS
In addition to the federal income tax consequences described in
"Federal Income Tax Consequences," potential investors should consider the state
income tax consequences of the acquisition, ownership, and disposition of the
Securities. State income tax law may differ substantially from the corresponding
federal law, and this discussion does not purport to describe any aspect of the
income tax laws of any state. Therefore, potential investors should consult
their own tax advisors with respect to the various state tax consequences of an
investment in the Securities.
ERISA CONSIDERATIONS
In considering an investment in a Security of the assets of an employee
benefit plan, a fiduciary should consider, among other things, (i) the purposes,
requirements, and liquidity needs of such plan; (ii) the definition of plan
assets under the Employee Retirement Income Security Act of 1974 ("ERISA"), and
the U.S. Department of Labor ("DOL") regulations regarding the definition of
plan assets; (iii) whether the investment satisfies the diversification
requirements of Section 404(a)(1)(C) of ERISA; and (iv) whether the investment
is prudent, considering the nature of an investment in a Security and the fact
that no market in which such fiduciary can sell or otherwise dispose of
Securities is expected to arise. The prudence of a particular investment must be
determined by the responsible fiduciary (usually the trustee or investment
manager) with respect to each employee benefit plan taking into account all of
the facts and circumstances of the investment.
Section 403 of ERISA requires that all plan assets be held in trust.
However, under regulations that became effective on June 17, 1982, even if the
underlying assets of an issuer of securities are deemed to be plan assets of an
employee benefit plan investing in the Securities, the "holding in trust"
requirement of Section 403 of ERISA will be satisfied if the Securities are held
in trust on behalf of the plan.
Section 406 of ERISA and Section 4975 of the Code prohibit certain
transactions that involve (i) an employee benefit plan subject to ERISA or
Section 4975 of the Code, including individual retirement accounts and certain
Keogh Plans (each a "Plan") and any party in interest or disqualified person
with respect to the Plan, and (ii) plan assets. Regulations of the DOL set forth
in 29 C.F.R. 2510.3-101 (the "Plan Asset Regulations") define "plan assets" to
include not only securities (such as the Securities) held by a Plan but also the
underlying assets of the issuer of any equity securities, unless one or more
exceptions specified in the regulations are satisfied. Thus, under the Plan
Asset Regulations, a Plan that acquires a Security could be treated for ERISA
purposes as having acquired a direct interest in some or all of the assets in
the Trust. Such treatment could cause certain transactions with respect to such
assets to be deemed prohibited transactions under ERISA and, in addition, could
result in a finding of an improper delegation by the plan fiduciary of its duty
to manage plan assets. The Plan Asset Regulations will not apply, however, if
(i) the security is registered under the Exchange Act, is freely transferrable
and is part of a class of securities that is held by more than 100 unrelated
investors (the "publicly offered exception") or (ii) immediately after the most
recent acquisition of an equity interest, benefit plan investors do not own 25%
or more of the value of any class of equity interests in the trust (the
"insignificant participation exception"). Prior to purchasing a Security, a Plan
should consult with its counsel to determine whether the publicly offered
exception, the insignificant participation exception, or any other exception to
the Plan Asset Regulations would apply to the purchase of the Security.
The DOL has issued several exemptions from certain of the prohibited
transaction rules of ERISA and the related excise tax provisions of Section 4975
of the Code. Those exemptions include, but are not limited to: (a)
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Prohibited Transaction Class Exemption ("PTCE") 95-60, regarding investments by
insurance company general accounts; (b) PTCE 91-38, regarding investments by
bank collective investment funds; (c) PTCE 90-1, regarding investments by
insurance company pooled separate accounts; (d) PTCE 83-1, regarding
acquisitions by Plans of interests in mortgage pools; and (e) various
underwriter exemptions. Before purchasing any Securities, a Plan subject to the
fiduciary responsibility provisions of ERISA or described in Section 4975(e)(1)
of the Code should consult with its counsel to determine whether the conditions
of any exemption would be met. A purchaser of Securities should be aware,
however, that certain of the exemptions do not apply to the purchase, sale, and
holding of subordinated securities. Moreover, a purchaser of Securities also
should be aware that even if the conditions specified in one or more exemptions
are met, the scope of the relief provided by an exemption might not cover all
acts that might be construed as prohibited transactions.
Because the purchase or holding of Securities may result in unfavorable
consequences for a Plan or its fiduciaries under the Plan Asset Regulations or
the prohibited transaction provisions of ERISA or the Code, certain classes of
Securities will not be offered for sale to, and are not transferable to, any
benefit plan investor unless such benefit plan investor provides the Depositor
with a "Benefit Plan Opinion." A Benefit Plan Opinion is an opinion of Counsel
satisfactory to the Depositor (and upon which the Depositor, Trustee, TMP, and
their respective counsel are authorized to rely) that the ownership of a
Security of such class (A) will not be treated as a prohibited transaction under
Sections 406 and 407 of ERISA or Section 4975 of the Code and (B) either (i)
will not cause any of the assets in the Trust (or in the case of a REMIC Series,
the REMIC's assets) to be regarded as plan assets for purposes of the Plan Asset
Regulation or (ii) will not give rise to any fiduciary duty under ERISA on the
part of the Depositor, the Trustee, the Master Servicer or the TMP. The
Prospectus Supplement for an affected Series will indicate which classes of
Securities are restricted in their availability to benefit plan investors.
In considering the possible application of the Plan Asset Regulations,
potential Plan investors should be aware that, with respect to certain Series
and under certain circumstances, the Depositor may have a right to redeem the
Securities of such Series, at its option. In such cases, the Depositor's purpose
for the retention of such a redemption right is to enable the Depositor to
terminate its administration obligations with respect to the Securities in the
event such obligations become unprofitable. The Depositor undertakes no
obligation to consider the interests of Securityholders in deciding whether to
exercise any redemption right.
As described in "Federal Income Tax Consequences," an investment in a
Security may produce unrelated business taxable income for tax-exempt employee
benefit plans. Potential investors also should be aware that ERISA requires that
the assets of a Plan be valued at their fair market value as of the close of the
plan year. Neither the Depositor nor the Underwriters currently intend to
provide valuations to Securityholders. Plans contemplating the acquisition of
Securities should consult their legal advisors with respect to the ERISA, Code,
and other consequences of an investment in the Securities.
ANY PLAN FIDUCIARY CONSIDERING WHETHER TO PURCHASE A SECURITY ON BEHALF
OF A PLAN SHOULD CONSULT WITH ITS COUNSEL REGARDING THE APPLICABILITY OF THE
FIDUCIARY RESPONSIBILITY AND PROHIBITED TRANSACTION PROVISIONS OF ERISA AND THE
CODE TO SUCH INVESTMENT.
THE SALE OF SECURITIES TO A PLAN IS IN NO RESPECT A REPRESENTATION BY
THE DEPOSITOR OR ANY 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
The Prospectus Supplement will specify which, if any, of the Classes of
Offered Securities will constitute "mortgage related securities" for purposes of
the Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA"). If so, Offered
Securities designated as qualifying as "mortgage related securities" will
continue to qualify as such for so long as they are rated in one of the two
highest categories by at least one nationally recognized statistical rating
agency. Classes of Offered Securities that qualify as "mortgage related
securities" under
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SMMEA will be legal investments for persons, trusts, corporations, partnerships,
associations, business trusts and business entities (including depository
institutions, life insurance companies and pension funds) created pursuant to or
existing under the laws of the United States or of any state whose authorized
investments are subject to state regulation to the same extent as, under
applicable law, obligations issued by or guaranteed as to principal and interest
by the United States or any agency or instrumentality thereof constitute legal
investments for any such entities. Certain states have enacted legislation
specifically limiting, to varying degrees, the legal investment authority of
such entities with respect to "mortgage related securities," in most cases
requiring investors to rely solely upon existing state law and not SMMEA. In any
case in which any such legislation is applicable, the Offered Securities will
constitute legal investments for entities subject to such legislation only to
the extent provided in such state 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 "mortgage
related securities"; and national banks may purchase "mortgage related
securities" for their own account without regard to the limitations generally
applicable to investment securities set forth in 12 U.S.C. Section 24 (Seventh),
subject in each case to such regulations as the applicable federal regulatory
authority may prescribe.
The Federal Financial Institutions Examination Council, The Federal
Deposit Insurance Corporation, the Office of Thrift Supervision, the Office of
the Comptroller of the Currency and the National Credit Union Administration
have proposed or adopted guidelines regarding investment in various types of
mortgage-backed securities. In addition, certain state regulators have taken
positions that may prohibit regulated institutions subject to their jurisdiction
from holding securities representing residual interests, including securities
previously purchased. There may be other restrictions on the ability of certain
investors, including depository institutions, either to purchase Offered
Securities or to purchase Offered Securities representing more than a specified
percentage of the investor's assets. Investors should consult their own legal
advisors in determining whether and to what extent any particular Offered
Securities constitute legal investments for such investors.
Offered Securities that do not constitute "mortgage related securities"
under SMMEA will require registration, qualification or an exemption under
applicable state securities laws, and all Offered Securities will require
registration, qualification or an exemption under applicable state securities
laws in those states that have enacted legislation overriding SMMEA's provisions
preempting state "blue sky" laws. In addition, such Offered Securities may not
be "legal investments" to the same extent as "mortgage related securities" under
SMMEA. The appropriate characterization under various legal investment
restrictions of the Classes of Offered Securities that do not qualify as
"mortgage related securities" under SMMEA and thus the ability of investors
subject to these restrictions to purchase such Classes of Offered Securities,
may be subject to significant interpretive uncertainties. All investors whose
investment authority is subject to legal restrictions should consult their own
legal advisors to determine whether, and to what extent, the Classes of Offered
Securities that do not qualify as "mortgage related securities" will constitute
legal investments for them.
PLAN OF DISTRIBUTION
The Depositor may sell the Offered Securities either directly or
through one or more Underwriters or underwriting syndicates. The Prospectus
Supplement with respect to each Series of Offered Securities will set forth the
terms of the offering of such Series of Securities and each Class within such
Series, including the name or names of the Underwriter(s), the proceeds to and
their intended use by the Depositor, and either the initial public offering
price, the discounts and commissions to the Underwriter(s) and any discounts or
concessions allowed or reallowed to certain dealers, or the method by which the
price at which the related Underwriter(s) will sell the Offered Securities will
be determined.
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The Offered Securities may be acquired by 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 determined at the time of sale. The obligations of any
Underwriters will be subject to certain conditions precedent, and such
Underwriters will be severally obligated to purchase all the Offered Securities
of a Series offered pursuant to the related Prospectus Supplement, if any are
purchased. If Offered Securities of a Series are offered otherwise than through
Underwriters, the related Prospectus Supplement will contain information
regarding the nature of such offering and any agreements to be entered into
between the Depositor and purchasers of the Offered Securities of such Series.
The place and time of delivery for the Offered Securities of a Series
in respect of which this Prospectus is delivered will be set forth in the
related Prospectus Supplement.
LEGAL MATTERS
Certain legal matters in connection with the Offered Securities,
including certain federal income tax consequences, will be passed upon for the
Depositor by Hunton & Williams, Richmond, Virginia.
FINANCIAL INFORMATION
A separate Trust Fund will be formed with respect to each Series of
Securities and no Trust Fund will engage in any business activities or have any
assets or obligations prior to the issuance of the related Series of Securities.
Accordingly, no financial statements with respect to any Trust Fund will be
included in this Prospectus or in the related Prospectus Supplement.
RATINGS
It is a condition to the issuance of the Securities of each Series
offered hereby and by the Prospectus Supplement that they shall have been rated
in one of the four highest rating categories by the nationally recognized
statistical rating organization or organizations specified in the related
Prospectus Supplement.
Ratings on Securities address the likelihood of receipt by
Securityholders of all distributions on the underlying Assets. These ratings
address the structural, legal and issuer-related aspects associated with such
Securities, the nature of the underlying Assets and the credit quality of the
credit enhancer or guarantor, if any. Ratings on Securities do not represent any
assessment of the likelihood of principal prepayments by obligors or of the
degree by which such prepayments might differ from those originally anticipated.
As a result, certificateholders might suffer a lower than anticipated yield,
and, in addition, holders of stripped pass-through certificates in extreme cases
might fail to recoup their underlying investments.
A security rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating organization. Each security rating should be evaluated
independently of any other security rating.
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GLOSSARY
"Accretion Directed" means a Class of Securities that receives
principal payments from the interest from specified Accrual Classes. An
Accretion Directed Class also may receive principal payments from principal paid
on the underlying Assets or other Trust Assets for the related Series.
"Accrual Securities" means Securities that accrete the amount of
accrued interest otherwise distributable on such Securities, which amount will
be added as principal to the Security Principal Balance of such Securities on
each applicable Distribution Date. Such accretion may continue until some
specified event has occurred or until such Accrual Securities are retired.
"Accrued Security Interest" means, with respect to each Class of
Securities, interest accrued for a specified period on the outstanding Security
Balance thereof immediately prior to the related Distribution Date, at the
applicable Pass-Through Rate or Interest Rate, as the case may be, reduced as
described in the Prospectus Supplement.
"Advance" means payments made by the Master Servicer as part of its
servicing function that in its good faith judgment it deems recoverable with
respect to (i) delinquent scheduled payments on Mortgage Loans, and (ii)
delinquent payments of taxes, insurance premiums and escrowed items, as well as
liquidation-related expenses with respect to Mortgage Loans, each of which are
reimbursable generally from subsequent recoveries in respect of such Mortgage
Loans.
"Agency Securities" means mortgage related securities issued or
guaranteed by the United States, agencies or instrumentalities thereof or
agencies created thereby.
"Aggregation Rule" means two or more debt instruments issued in
connection with the same transaction or related transactions (determined based
on all the facts and circumstances) generally are treated as a single debt
instrument for federal income tax accounting purposes if issued by a single
issuer to a single holder.
"Agreements" means Pooling and Servicing Agreements, Trust Agreements
and Indentures, as the case may be.
"All OID Election" means to include in gross income all stated
interest, original issue discount, de minimis original issue discount, market
discount, and de minimis market discount that accrues on a REMIC Regular
Security (reduced by any acquisition premium or amortizable premium under the
constant yield method used to account for original issue discount.
"AMT" means alternative minimum tax.
"ARM Loans" means Mortgage Loans providing for periodic adjustments to
the Mortgage Rate thereon to equal the sum (which may be rounded) of a Gross
Margin and an Index.
"Assets" means, with respect to any Series of Securities, any
combination of Mortgage Loans, MBS and/or Agency Securities.
"Asset Rate" means, with respect to any Asset, either the related
Mortgage Rate or the stated rate of interest payable under the terms of the
related MBS or Agency Security.
"Asset Seller" means Union Planters National Bank, a national banking
association, or another party that transfers the Assets of a Series to the
Depositor.
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"Available Distribution Amount" means the amount available for
distribution to the Securityholders on any Distribution Date, as further
described herein under "Description of the Offered Securities - Available
Distribution Amount".
"Balloon Mortgage Loans" are Mortgage Loans as to which only interest
is payable until maturity and Mortgage Loans that provide for amortization of
the principal amount over a certain period, although all remaining principal is
due at the end of a shorter period.
"Benefit Plan Opinion" means an opinion of counsel satisfactory to the
Depositor and the Master Servicer (and upon which the Depositor, the Master
Servicer, the Trustee, the TMP and their respective counsel are authorized to
rely) generally to the effect that the proposed transfer of a Security will not
(1) cause any of the Assets in the related Trust Fund to be regarded as "plan
assets" for purposes of the Plan Asset Regulations; (2) give rise to any
fiduciary duty under ERISA on the part of the Depositor, the Trustee, the Master
Servicer, or the TMP; or (3) be treated as, or result in, a prohibited
transaction under section 406 or section 407 of ERISA or section 4975 of the
Code.
"Bonds" means Collateralized Mortgage Bonds, issuable in Series.
"Book-Entry Securities" means a Class of Securities held in book-entry
form through a depository.
"Business Day" means any day that is not a Saturday, Sunday, holiday or
other day on which commercial banking institutions in the city and state in
which the Trustee's corporate trust office is located are authorized or
obligated by law or executive order to be closed.
"Buydown Mortgage Loans" means a Mortgage Loan as to which funds have
been provided to reduce the Borrower's Monthly Payments during the early period
of such Mortgage Loan.
"Buydown Period" means the early years of a Buydown Mortgage Loan
during which time the monthly payments made by the Mortgagor will be less than
the scheduled monthly payments thereon.
"Cap" means any restriction on a maximum stated interest rate on an
instrument.
"Cash Flow Agreement" means a guaranteed investment contract, currency
or interest rate exchange agreement, other similar financial assets, or any
combination thereof.
"Cede" means Cede & Co, DTC's nominee.
"Certificates" means any mortgage pass-through certificate issued
pursuant to an Agreement.
"Class" means any class of the Securities of a Series, as specified in
the related Prospectus Supplement.
"Closing Date" means the date of initial issuance with respect to a
Series of Securities.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commission" means the United States Securities and Exchange
Commission.
"Complementary Securities" means Strip Securities of certain Classes of
the same Series.
"Component Securities" means a Class of Securities that have different
principal and/or interest payment characteristics but together constitute a
single Class.
"Covered Trust" means a trust issuing a Series of Securities that is
covered by Credit Support that also covers another Series of Securities.
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"CPR" means Constant Prepayment Rate prepayment model.
"Credit Support" means letters of credit, insurance policies,
guarantees, reserve funds or other similar types of credit enhancement with
respect to any Security, or any combination thereof.
"Crime Control Act" means the Comprehensive Crime Control Act of 1984,
as amended.
"Cut-off Date" means the date specified in the Prospectus Supplement,
after which payments of interest and principal due on the Assets will accrue and
be payable to holders of the Securities.
"Deemed Principal Payments" means payments from a debt instrument's
stated redemption price at maturity that equal the sum of all payments provided
by the instrument other than qualified stated interest.
"Definitive Securities" means Securities issued in fully registered,
certificated form.
"Depositor" means Union Planters Mortgage Finance Corp., a Delaware
corporation and a wholly-owned limited-purpose finance subsidiary of Union
Planters National Bank, a national banking association.
"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, any
tax-exempt organization (other than a farmers' cooperative described in section
521 of the Code) that is not subject to the tax on UBTI, or any rural electrical
or telephone cooperative.
"Distribution Date" means, in the case of Certificates, that date each
month, commencing on the date specified in the Prospectus Supplement, on which
the Available Distribution Amount will be paid to Securityholders. In the case
of a Series of Notes, the related Prospectus Supplement and Agreement will
define this term as the "Payment Date."
"DOL" means the United States Department of Labor.
"DTC" means The Depository Trust Company.
"Due Period" means (unless a different period is specified in the
related Prospectus Supplement), with respect to any Distribution Date, the
period commencing on the second day of the month in which the immediately
preceding Distribution Date occurs, or the day after the Cut-off Date in the
case of the first Due Period, and will end on the first day of the month of the
related Distribution Date.
"Eligible Account" means, as to any Series, an account which is
maintained (1) at a depository institution organized under the laws of the
United States or any state, the deposits of which are insured to the full extent
permitted by law by the Federal Deposit Insurance Corporation (the "FDIC"),
whose commercial paper or long-term unsecured debt has a rating, as specified in
the related Agreement, sufficient to support the ratings requested on the
Securities of the related Series, and which institution is subject to
examination by federal or state authorities, (2) in the corporate trust
department of the Trustee or (3) at an institution otherwise acceptable to each
applicable Rating Agency.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Fannie Mae" means Fannie Mae, a federally chartered and privately
owned corporation organized and existing under the Federal National Mortgage
Association Charter Act, as amended.
"Fannie Mae Certificate" means guaranteed mortgage pass-through
certificates representing fractional undivided interests in pools of mortgage
loans formed by Fannie Mae.
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"FASIT" means a Financial Asset Securitization Investment Trust, as
more fully described in the Code.
"FDIC" means the Federal Deposit Insurance Corporation.
"FHA" means the Federal Housing Administration.
"FHA Insurance Policies" means insurance policies that cover Mortgage
Loans insured by HUD and administered by FHA.
"FHA Loans" means Mortgage Loans insured by FHA Insurance Policies.
"FHLMC" means the Federal Home Loan Mortgage Corporation.
"FHLMC Act" means Title III of the Emergency Home Finance Act of 1970,
as amended.
"FHLMC Certificate" means a certificate issued by the FHLMC
representing an undivided interest in a pool of mortgage loans that may consist
of first lien conventional loans, FHA Loans or VA Loans.
"First Distribution Period" means the interval between the issue date
of a Current Interest Security and the first Distribution Date.
"Fixed Rate" means a Class with a Pass-Through Rate or an Interest
Rate, as the case may be, that is fixed throughout the life of the Class.
"Floating Rate" means a Class with a Pass-Through Rate or an Interest
Rate, as the case may be, that resets periodically based upon a designated index
and that varies directly with changes in such index.
"Floor" means a restriction or restrictions on the minimum stated
interest rate of an instrument.
"Foreign Person" means any nonresident alien individual, foreign
corporation, or other non-United States person.
"Foreign Person Certification" means appropriate documentation,
provided to the person required to withhold tax, proving that the beneficial
owner of a Security is a Foreign Person.
"GNMA" means the Government National Mortgage Association.
"GNMA Certificate" means certificates, guaranteed as to the timely
payment of principal and interest by GNMA, issued by GNMA that represent an
interest in a pool of FHA Loans or VA Loans.
"GNMA Issuer" means a mortgage banking company or other financial
concern that issued GNMA Certificates.
"Housing Act" means the National Housing Act of 1934, as amended.
"HUD" means the United States Department of Housing and Urban
Development.
"Indenture" means the indenture between the Depositor and the trustee
named in the related Prospectus Supplement, pursuant to which a Series of Bonds
is issued.
"Index" means, with respect to any adjustable rate Asset, the index
specified in the related debt instrument that is added to the related gross
margin on each related interest adjustment date to determine the new
Pass-Through Rate or Interest Rate, as the case may be, for such adjustable rate
asset.
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"Indirect Participants" means organizations which have indirect access
to a clearing agency, such as banks, brokers, dealers and trust companies that
clear through or maintain a custodial relationship with a Participant, either
directly or indirectly.
"Insurance Proceeds" means the proceeds paid by any insurer pursuant to
an insurance policy covering a Mortgaged Property securing a Mortgage Loan, net
of expenses.
"Interest Accrual Period" means the period in which interest on
Securities of a Series accrues, as detailed in the related Prospectus
Supplement.
"Interest Only" means a Class that receives some or all of the interest
payments made on the underlying Assets or other assets of the Trust Fund and
little or no principal.
"Interest Rate" means the applicable fixed, variable or adjustable
coupon rate, specified in the Indenture for a Class of Bonds.
"L/C Bank" means a bank or financial institution which issues one or
more letters of credit to cover deficiencies in amounts otherwise payable on
Securities.
"Liquidated Asset" means a defaulted Asset as to which all amounts that
the Master Servicer expects to recover through the date of disposition of the
related property have been received.
"Liquidation Proceeds" means all amounts received and retained in
connection with the liquidation of defaulted Mortgage Loans, by foreclosure or
otherwise.
"Liquidity Facility" means a fund or account with respect to any Series
of Securities used by the Trustee to make any required distributions of
principal or interest on the Securities of the Series to the extent funds are
not otherwise available.
"Loan-to-Value Ratio" means the ratio (expressed as a percentage), the
numerator of which is the then outstanding principal balance of the Mortgage
Loan and the denominator of which is the Value of the related Mortgaged
Property.
"Lock-out Date" means the date that a Lock-out Period expires.
"Lock-out Period" means, as to any prepayment on Mortgage Loans, the
period during which no prepayments can be made.
"Mark-to-Market Regulations" means Treasury regulations under section
475 of the Code relating to dealers in securities.
"Master Servicer" means, unless otherwise specified in the Prospectus
Supplement, Union Planters National Bank, a national banking association and a
wholly-owned subsidiary of Union Planters Corporation, a Tennessee corporation.
"MBS" means privately issued mortgage participation interests, mortgage
pass-through certificates or other mortgage-backed securities evidencing
interests in or secured by Mortgage Loans or other similar participations,
certificates or securities that (a) have been previously offered and distributed
to the public pursuant to an effective registration statement; (b) have been
previously purchased in a transaction not involving any public offering from an
entity that is not an affiliate of the issuer of such securities at the time of
sale (nor an affiliate thereof at any time during the three preceding months);
provided, a period of two years has elapsed since the later of the date the
securities were acquired from the issuer or an affiliate thereof; or (c) are
otherwise eligible to be included as collateral in a Trust Fund.
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"MBS Agreement" means a pooling and servicing agreement, a trust
agreement, an indenture or similar agreement pursuant to which MBS were issued.
"MBS Issuer" means the issuer of MBS included in a Trust Fund.
"MBS Servicer" means the servicer of MBS included in a Trust Fund.
"MBS Trustee" means the trustee or a custodian under an MBS Agreement.
"Mortgage Loans" means one- to four-family first lien residential
mortgage loans, and includes both mortgage loans held directly by a Trust Fund
and mortgage loans included in underlying MBS or Agency Securities.
"Mortgage Notes" means promissory notes related to a Mortgage Loan and
secured by mortgages or deeds of trust creating a lien on the Mortgaged
Properties.
"Mortgage Rate" means the stated rate of interest payable under the
terms of a related Mortgage Note.
"Mortgaged Property" means the real property directly securing a
Mortgage Note.
"Mortgage" means the mortgage or deed of trust creating a lien on the
related Mortgaged Property.
"Mortgagor" means the obligor on a Mortgage Note.
"Non-Performing Mortgage Loan" means a FHA Loan or a VA Loan with
respect to a Series of Certificates, or any Mortgage Loan with respect to a
Series of Bonds, that, as of any date of determination, has more than twelve
scheduled monthly payments of principal and interest past due under the terms of
the related Mortgage Note.
"Nonrecoverable Advance" means any portion of an advance made by the
Master Servicer (or such other entity), which in the good faith judgment of the
Master Servicer, ultimately is not recoverable from Related Proceeds, or if
applicable, ultimately is not recoverable from collections on unrelated Assets
otherwise distributable on Subordinate Securities.
"Notional Amount Securities" means Securities having no Security
Principal Balance and bearing interest on the related notional amount. The
notional amount is used for purposes of the determination of interest
distributions.
"Notional Principal Amount" means a fictional Security Principal
Balance that may be assigned to a Security or a Class of Securities that is to
be used solely for purposes of determining the amount of interest distributions
and certain other rights and obligations of the holder(s) of such Securities or
Class and does not represent any beneficial interest in principal payments on
the Assets in the related Trust Fund.
"Offered Securities" means the Securities offered pursuant to this
Prospectus and a related Prospectus Supplement.
"OID" means original issue discount, which is the excess, if any, of a
Security's stated redemption price at maturity over its issue price.
"OID Regulations" means final regulations governing the accrual of
original issue discount on debt instruments that were issued by the Treasury on
January 27, 1994, but that do not address directly the treatment of instruments
that are subject to Code Section 1272(a)(6).
"Ordinary Ratio Security" means a PO Security or a Ratio Security that
is not considered a Contingent Payment Obligation.
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"Originator" means, with respect to each Mortgage Loan, the person,
other than the Depositor, that originated such Mortgage Loan.
"Partial Accrual" means a Class of Securities that accretes a portion
of the amount of accrued interest thereon, which amount will be added to the
Security Principal Balance of such Class on each applicable Distribution Date,
with the remainder of such accrued interest to be distributed currently as
interest on such Class.
"Participants" means the participating organizations that utilize the
services of DTC, including securities brokers and dealers, banks and trust
companies and clearing corporations and may include certain other organizations.
"Pass-Through Rate" means the applicable fixed, variable or adjustable
coupon rates, specified in the Agreement for a Series of Certificates.
"Payment Date" means, in the case of a Series of Bonds, that date each
month, commencing on the date specified in the Prospectus Supplement, on which
the Available Distribution Amount will be paid to Securityholders. In the case
of a Series of Certificates, the related Prospectus Supplement and Agreement
will define this term as the "Distribution Date."
"Percentage Interest" means, with respect to a Security to which an
initial principal amount is assigned as of the Closing Date, the portion of the
Class of which such Security is a part evidenced by such Security, expressed as
a percentage, the numerator of which is the denomination represented by such
Security and the denominator of which is the initial Security Principal Balance
of such Class. With respect to a Security to which an initial Security Principal
Balance is not assigned as of the Closing Date, the portion of the Class of
which such Security is a part evidenced by such Security, expressed as a
percentage stated on the face of such Security.
"Permitted Investments" means United States government securities and
other investment grade obligations specified in the related Agreement.
"Plan" means an employee benefit plan subject to ERISA or Section 4975
of the Code, including individual retirement accounts and certain Keogh Plans.
"Plan Asset Regulations" means Regulations of the DOL set forth in 29
C.F.R. 2510.3-101.
"Planned Principal Class" or "PAC" means 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 Assets.
These two rates are the endpoints for the "structuring range" for the Planned
Principal Class. The Planned Principal Classes in any Series of Securities may
be subdivided into different categories (e.g., Primary Planned Principal
Classes, Secondary Planned Principal Classes and so forth) having different
effective structuring ranges and different principal payment priorities. The
structuring range for the Secondary Planned Principal Class of a Series of
Securities will be narrower than that for the Primary Planned Principal Class of
such Series.
"PO Securities" means securities evidencing ownership interests in the
principal, but not the interest, payments on the Assets.
"Pooling and Servicing Agreement" means an agreement among the
Depositor, the master servicer named therein and the Trustee pursuant to which
Certificates are issued in Series.
"Pre-Funded Amount" means the amount initially deposited into a
Pre-Funding Account for a Series.
"Pre-Funding Account" means an account established for the purpose of
enabling a Trust Fund to purchase additional Assets after the Cut-off Date
during the applicable Pre-Funding Period, as described herein under "Description
of the Trust Funds -- Pre-Funding".
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"Pre-Funding Period" means any period specified as such in a Prospectus
Supplement, during which the related Trust Fund may acquire additional Assets
using funds on deposit in a related Pre-Funding Account, as described herein
under "Description of the Trust Funds -- Pre-Funding".
"Pre-Issuance Accrued Interest Rule" means, with respect to a Rate
Bubble Security, the formula used to calculate such Security's issue price as
defined in the Prospectus Supplement.
"Prepayment Interest Shortfall" means, for any month and any Asset, the
amount by which the amount of interest due on such Asset for such month exceeds
the amount of interest collected or advanced in respect of such Asset.
"Prepayment Premium" means a premium or a yield maintenance penalty in
connection with a prepayment.
"Principal Balance" means, with respect to any Asset, the principal
balance thereof.
"Pricing Prepayment Assumptions" means the amount of OID required to be
included in a REMIC Regular Securityholder's income in any taxable year,
computed in accordance with Section 1272(a)(6) of the Code.
"Principal Only" means a Class that does not bear interest and is
entitled to receive only distributions in respect of principal.
"PTCE" means Prohibited Transaction Class Exemption.
"Purchase Price" means, with respect to any Asset, the sum of the
unpaid principal balance thereof, plus unpaid accrued interest thereon at the
Asset Rate from the date as to which interest was last paid to the due date in
the Due Period in which the relevant purchase is to occur, plus certain
servicing expenses that are reimbursable to the Master Servicer.
"Rate Bubble Security" means a Security whereby the First Distribution
Period is shorter than the interval between subsequent Distribution Dates, thus
making the effective rate of interest payable on the Security during the First
Distribution Period higher than the stated rate of interest based on a full
accrual period.
"Ratio Securities" means securities evidencing ownership interests in
differing percentages of both the interest payments and the principal payments
on the Assets.
"Record Date" means, for any Distribution Date, the date on which the
identities of the Securityholders entitled to distributions on the related
Securities on such Distribution Date are fixed, which shall be the last day of
the preceding calendar month, or an alternative date specified in the related
Prospectus Supplement.
"Refinance Loans" means loans made to refinance existing loans.
"Reinstated Mortgage Loan" means a FHA Loan or a VA Loan with respect
to a Series of Certificates, or any Mortgage Loan with respect to a Series of
Bonds, that, as of any date of determination has had more than three scheduled
payments of principal and interest past due under the terms of the related
Mortgage Note one or more times during the term of the related Mortgage Loan,
but at the related Cut-off Date for the Series is current in payment.
"REIT" means a real estate investment trust, as defined in the Code.
"Related Proceeds" means, with respect to any Asset in respect of which
an Advance has been or is to be made, future collections in respect of such
Asset (including collections of or from Insurance Proceeds or Liquidation
Proceeds relating to such Asset).
"Relief Act" means the Soldiers' and Sailors' Civil Relief Act of 1940,
as amended.
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"REMIC Regulations" means final regulations under the REMIC provisions
of the Code that have been issued by the Treasury.
"REO Property" means a Mortgaged Property acquired by the Master
Servicer on behalf of a Trust Fund pursuant to a foreclosure or other similar
proceeding in respect of a related Mortgage Loan.
"REO Extension" means an extension of time to sell REO property, as
granted by the Internal Revenue Service to the Trustee (or other entity) on
behalf of the Securityholders with respect to Mortgaged Property.
"REO Tax" means a tax on "net income from foreclosure property," within
the meaning of Section 857(b)(4)(B) of the Code or a tax on "prohibited
transactions" under Section 860F of the Code.
"Retained Interest" means a specified portion of interest payable on a
Security that is deducted from Mortgagor payments and is not made a part of the
related Trust Fund.
"RIC" means regulated investment company.
"RICO" means the Racketeer Influenced and Corrupt Organizations.
"Scheduled Principal Class" means a Class that is designed to receive
principal payments using a predetermined Security Principal Balance schedule but
is not designated as a Planned Principal Class or Targeted Principal Class. In
many cases, the schedule is derived by assuming two constant prepayment rates
for the underlying Assets. These two rates are the endpoints for the
"structuring range" for the Scheduled Principal Class.
"Securities" means Certificates and Bonds.
"Security Account" means, with respect to any Series, one or more
separate accounts for the collection of payments on the related Assets.
"Security Balance" means the stated principal amount of a Class of
Offered Securities.
"Security Owners" means Investors that are not Participants or Indirect
Participants but desire to purchase, sell or otherwise transfer ownership of, or
other interests in, Book-Entry Securities.
"Security Principal Balance" means the outstanding principal balance of
a Security or Class of Securities.
"Securityholder" means a holder of a Security.
"Senior Securities" means any Class of Securities entitled to
preferential rights to distributions and that provides for the accrual of
interest thereon based on fixed, variable or adjustable rates.
"Sequential Pay" means classes that receive principal payments in a
prescribed sequence, that do not have predetermined Security Principal Balance
schedules and that under all circumstances receive payments of principal
continuously from the first Distribution Date on which they receive principal
until they are retired. A single Class that receives principal payments before
or after all other classes in the same Series of Securities may be identified as
a Sequential Pay Class.
"Series" means a series of Securities offered pursuant to this
Prospectus and a Prospectus Supplement hereto.
"Series REMIC" means, with respect to a particular Series, an election
to treat the Trust Fund or one or more segregated pools of Trust Assets as a
REMIC.
"Service" means the Internal Revenue Service.
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"Servicing Standard" means collection procedures followed by a Master
Servicer or Sub-Servicer to make reasonable efforts to collect all scheduled
payments due under the Mortgage Loans.
"SMMEA" means the Secondary Mortgage Market Enhancement Act of 1984, as
amended.
"SPA" means the Standard Prepayment Assumption prepayment model.
"Strip" means a Class that receives a constant proportion, or "strip,"
of the principal payments on the underlying Trust Assets.
"Strip Securities" means the federal income tax treatment of Non-REMIC
Securities other than Pass-Through Securities, as defined in Section 1286 of the
Code.
"Stripped Interest Securities" means any Class of Securities entitled
to interest distributions, with disproportionately low, nominal or no principal
distributions.
"Stripped Principal Securities" means any Class of Securities entitled
to principal distributions, with disproportionately low, nominal or no interest
distributions.
"Stripping Regulations" means Treasury regulations under Section 1286,
as amended.
"Sub-Performing Mortgage Loan" means a FHA Loan or a VA Loan with
respect to a Series of Certificates, or any Mortgage Loan with respect to a
Series of Bonds, that, as of any date of determination has more than three but
less than twelve scheduled payments of principal and interest past due under the
terms of the related Mortgage Note.
"Sub-Servicer" means a third-party servicer who is delegated its
servicing obligations by a Master Servicer.
"Sub-Servicing Agreement" means an agreement between a Master Servicer
and a Sub-Servicer.
"Subordinate Securities" means any Class of Securities as to which the
right to receive distributions with respect to the Assets is subordinate to the
rights of holders of Senior Securities.
"Superpremium Securities" means Securities that provide for a
relatively small amount of principal and for interest that can be expressed as
qualified stated interest at a very high fixed rate with respect to that
principal.
"Support Class" or "Companion Class" means a Class that receives
principal payments on any Distribution Date only if scheduled payments have been
made on specified Planned Principal Classes, Targeted Principal Classes and/or
Scheduled Principal Classes.
"Targeted Principal Class" or "TAC" means a Class that is designed to
receive principal payments using a predetermined Security Principal Balance
schedule derived by assuming a single constant prepayment rate for the
underlying Assets.
"Tax Administrator" means the Master Servicer or other person
responsible for computing the amount of original issue discount to be reported
to a REMIC Regular Securityholder each taxable year.
"Taxable Mortgage Pools" means any entity other than a REMIC or a REIT
if (i) substantially all of the assets of the entity consist of debt obligations
and more than 50% of such obligations consist of "real estate mortgages" (which
term, for purposes of this definition, includes Mortgage Loans), (ii) such
entity is the obligor under debt obligations with two or more maturities, and
(iii) under the terms of the debt obligations on which the entity is the
obligor, payments on such obligations bear a relationship to payment on the
obligations held by the entity.
129
<PAGE> 137
"TIN" means taxpayer identification number.
"Title V" means Title V of the Depository Institutions Deregulation and
Monetary Control Act of 1980, enacted in March 1980.
"Title VIII" means Title VIII of the Garn-St Germain Act.
"TMP" means the holder of a residual interest in a REMIC that is
designated as the tax matters person of such REMIC.
"Trust Agreement" means an Agreement pursuant to which a Series of
Certificates are issued, and the Assets of which may include MBS and/or Agency
Securities but not Mortgage Loans.
"Trust Assets" means, with respect to any Series, Assets, Collection
Accounts, Credit Support, Liquidity Facilities, Cash Flow Agreements and
Pre-Funding Accounts.
"Trust Fund" means a trust created pursuant to the terms of a related
Agreement that issues a Series of Securities.
"Trustee" means the bank, trust company or other fiduciary named in the
related Prospectus Supplement for each Series of Securities as the trustee under
the Agreement pursuant to which such Series is issued.
"UCC" means the Uniform Commercial Code.
"Underlying MBS" means any mortgage participation interests,
pass-through certificates or other asset-backed certificates in which an MBS
evidences an interest or which secure an MBS.
"Underwriter" means any firm that underwrites the purchase of the
Securities of a Series.
"VA" means the United States Department of Veterans Affairs.
"VA Guaranty" means the obligation of VA to guarantee a VA Loan, up to
a maximum dollar amount, in the event of a default by the Mortgagor.
"VA Loan" means a Mortgage Loan that is guaranteed by the VA.
"VA No-Bid" means, with respect to any VA Loan, the option of the VA,
without regard to the VA Guaranty, to make full payment to a mortgagee of the
unsatisfied indebtedness on a VA Loan upon its assignment to the VA.
"VA Vendee Mortgage Trust Certificates" means mortgage certificates
issued and guaranteed by the United States Department of Veterans Affairs
pursuant to its Vendee Mortgage Trust program.
"Variable Rate" means a Class with an interest rate that resets
periodically and is calculated by reference to the rate or rates of interest
applicable to specified assets or instruments (e.g., the Mortgage Rates borne by
the underlying Mortgage Loans).
"Variable Rate Security" means a REMIC Regular Security that pays
interest at a variable rate.
"VRDI" means a "variable rate debt instrument" as defined in section
1.1275-5 of the OID Regulations.
"VRDI Security" means a variable rate Security that qualifies as a VRDI
under the OID Regulations.
"WAM" means weighted average maturity.
130
<PAGE> 138
"Warrantying Party" means the person making certain representations and
warranties as of a specified date with respect to the Assets.
"Weighted Average Securities" means Securities of certain Series that
provide for interest based on a weighted average of the interest rates on some
or all of the Assets or regular interests in a second REMIC or FASIT held
subject to the related Agreement.
131
<PAGE> 139
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the estimated expenses in connection
with the offering of $1,000,000 of the Mortgage Pass-Through Certificates and
Collateralized Mortgage Bonds being registered under this Registration
Statement, other than underwriting discounts and commission:
<TABLE>
<S> <C>
SEC Registration Fee....................................... $303.03
Blue Sky Fees and Expenses................................. *
Printing and Engraving Expenses............................ *
Legal Fees and Expenses.................................... *
Trustee Fees and Expenses.................................. *
Rating Agency Fees......................................... *
Miscellaneous.............................................. *
-------
TOTAL....................................... $ *
</TABLE>
- ---------------------------
* To be filed by Amendment.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Registrant is incorporated under the laws of Delaware. Section 145
of the Delaware General Corporation Law provides that a Delaware corporation may
indemnify any persons, including officers and directors, who are, or are
threatened to be made, parties to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of such corporation, by reason of the
fact that such person was an officer, director, employee or agent of such
corporation, or is or was serving at the request of such corporation as a
director, employee or agent of such corporation, or is or was serving at the
request of such corporation as a director, officer, employee or agent of another
corporation or enterprise). The indemnity may include expenses (including
attorneys' fees), judgements, fines and amounts paid in settlement actually and
reasonably incurred by such person in connection with such action, suit or
proceeding, provided such person acted in good faith and in a manner he
reasonably believed to be in or not opposed to the corporation's best interests
and, for criminal proceedings, had no reasonable cause to believe that his
conduct was illegal. A Delaware corporation may indemnify officers and directors
in an action by or in the right of the corporation under the same conditions,
except that no indemnification is permitted without judicial approval if the
officer or director is adjudged to be liable to the corporation. Where an
officer or director is successful on the merits or otherwise in the defense of
any action referred to above, the corporation must indemnify him against the
expense which such officer or director actually and reasonably incurred.
The Certificate of Incorporation and Bylaws of the Registrant provide,
in effect, that, subject to certain limited exceptions, such corporation will
indemnify its officers and directors to the extent permitted by the Delaware
General Corporation Law.
The Company, either directly or through its direct or indirect parents,
maintains a directors' and officers' insurance policy.
Pursuant to the form of Underwriting Agreement, the Underwriters will
agree, subject to certain conditions, to indemnify the Company, its directors,
certain of its officers and any person who "controls" the Company, within the
meaning of the Securities Act of 1933, as amended, against certain liabilities.
II - 1
<PAGE> 140
ITEM 16. EXHIBITS.
1.1 Underwriting Agreement Standard Provisions, together with Form of
Underwriting Agreement*
3.1 Certificate of Incorporation of Registrant
3.2 Bylaws of Registrant
4.1 Standard Terms to Pooling and Servicing Agreement*
4.2 Form of Indenture between Registrant and Trustee*
4.3 Form of Trust Agreement*
5.1 Opinion of Hunton & Williams
8.1 Tax Opinion of Hunton & Williams
23.1 Consent of Hunton & Williams (included in Exhibits 5.1 and 8.1)
24.1 Power of Attorney (included on the signature page of this Registration
Statement)
99.1 Form of Prospectus Supplement for Transactions Involving Mortgage
Pass-Through Certificates
99.2 Form of Prospectus Supplement for Transactions Involving Collateralized
Mortgage Bonds
99.3 Form of Sales Agreement between the Registrant, as Purchaser, and the
Seller*
99.4 Standard Provisions to Servicing Agreement*
99.5 Form of Supplemental Servicing Agreement*
- ----------------------------
* To be filed by Amendment.
ITEM 17. UNDERTAKINGS.
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section
10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the Prospectus any facts or events
arising after the effective date of the Registration Statement (or the
most recent post-effective amendment thereof) which, individually or in
the aggregate, represent a fundamental change in the information set
forth in the Registration Statement. Notwithstanding the foregoing, any
increase or decrease in the volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high and of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20 percent change in
the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the Registration Statement;
(iii) To include any material information with respect to
the plan of distribution not previously disclosed in the Registration
Statement or any material change of such information in the
Registration Statement;
provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not
apply if the information required to be included in the post-effective
amendment by those paragraphs is contained in periodic reports filed by
the Registrant pursuant to Section 13 or Section 15(d) of the
Securities Exchange Act of 1934 that are included by reference in the
Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities
II - 2
<PAGE> 141
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof;
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
(b) The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(c) The undersigned Registrant hereby undertakes to file an application for
the purpose of determining the eligibility of the trustee to act under
subsection (a) of Section 310 of the Trust Indenture Act in accordance with the
rules and regulations prescribed by the Commission under Section 305(b)(2) of
the Act.
(d) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
II - 3
<PAGE> 142
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Cordova, State of Tennessee, on September 12, 1997.
UNION PLANTERS MORTGAGE
FINANCE CORP.
(Registrant)
By: /s/ Joel R. Katz
-------------------------------------
Name: Joel R. Katz
Title: President
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints
James K. Plunkett, William H. Abney, Esquire, and Kevin J. Buckley, Esquire his
true and lawful attorneys-in-fact and agents, each acting alone, with full
powers of substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities, to sign any and all amendments (including
post-effective amendments) to this Registration Statement, and to file the same,
with all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, each acting alone, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, each acting alone, or his substitute or substitutes, may lawfully do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Capacity Date
--------- -------- ----
<S> <C> <C>
/s/ Joel R. Katz Director and President September 12, 1997
- ------------------------------ (Principal Executive Officer)
Joel R. Katz
/s/ James K. Plunkett Director, Secretary and Vice September 12, 1997
- ------------------------------ President (Principal Financial Officer)
James K. Plunkett
/s/ Leslie M. Stratton Director September 12, 1997
- ------------------------------
Leslie M. Stratton
</TABLE>
II - 4
<PAGE> 1
CERTIFICATE OF INCORPORATION EXHIBIT 3.1
OF
UNION PLANTERS MORTGAGE FINANCE CORP.
Article FIRST: The name of the corporation (the "Corporation") is:
UNION PLANTERS MORTGAGE FINANCE CORP.
Article SECOND: The address of the registered office of the Corporation
in the State of Delaware is The Corporation Trust Company, 1209 Orange Street,
in the City of Wilmington, County of New Castle. The name of its registered
agent at that address is The Corporation Trust Company.
Article THIRD: For all purposes of this Certificate of Incorporation,
the following terms have the meanings assigned to them in this Article THIRD and
such definitions extend to the plural as well as the singular forms of the
defined terms.
"Affiliate" means any Person directly or indirectly
controlling or controlled by or under direct or indirect common control
with any holder of common stock of the Corporation.
"Independent Director" means a Person (i) who, except in his
or her capacity as a director and/or officer of the Corporation, is not
an employee, director or officer, or a former employee, director or
officer, of Union Planters Corporation or any Affiliate; provided,
however, that such person may have formerly served as an Independent
Director of an Affiliate of Union Planters Corporation, (ii) who is not
a direct, indirect or beneficial holder of 5% or more of the
outstanding stock or any other equity interest in Union Planters
Corporation or any Affiliate, (iii) who is not a spouse, parent, child,
grandchild or sibling of any individual encompassed within clause (i)
or clause (ii) above, (iv) who is not a trustee in bankruptcy of Union
Planters Corporation or any Affiliate, and (v) who has not received,
and was not a member or employee of a firm or business that received,
in any year within the five years immediately preceding or any years
during such person's incumbency as a director or officer of the
Corporation, fees or other income from Union Planters Corporation or
any Affiliate in the aggregate in excess of 10% of the gross income,
for any applicable year, of such person, firm or business (not
including any fees received by such person for his or her service as a
Director or officer of the Corporation).
"Person" means any individual, corporation, association,
company, limited liability company, joint-stock company, business
trust, partnership, joint venture, unincorporated organization or
government or any agency or political subdivision thereof.
<PAGE> 2
Article FOURTH: The purposes for which the Corporation is formed are
limited solely as follows:
(a) To purchase or otherwise acquire, own, hold, pledge,
finance, transfer, assign and otherwise deal in or with mortgage loans,
mortgage-backed securities, mortgage collateralized obligations, other
interests in real estate, United States government securities and
securities of any agency or instrumentality of the United States, and
any combination of the foregoing, including, but not limited to, (1)
mortgage loans secured by senior or subordinate liens on residential
property, (2) participation interests in mortgage loans, (3)
pass-through, mortgage-backed certificates as to which the Fannie Mae
guarantees the timely payment of interest at the pass-through rate and
the timely payment of principal, (4) pass-through, mortgage-backed
certificates as to which the Federal Home Loan Mortgage Corporation
guarantees timely payment at the participation certificate rate and the
ultimate collection of all principal, (5) pass-through, mortgage-backed
certificates as to which the Government National Mortgage Association
guarantees timely payment of principal installments and interest fixed
on the certificate, (6) pass-through, mortgage-backed certificates as
to which the United States Department of Veterans Affairs guarantees
the timely payment of interest at the pass-through rate and the timely
payment of principal, (7) regular or residual interests in real estates
mortgage investment conduits or regular or ownership interests in
financial assets securitization investment trusts, (8) any other
mortgage pass-through certificates or mortgage-collateralized
obligations, (9) entitlements to payments on or other interests in such
mortgage loans, certificates, or obligations (collectively, "Mortgage
Collateral"), and (10) other securities issued or guaranteed by the
United States government or any agency, subdivision or instrumentality
thereof ("Government Securities").
(b) To (1) issue and sell from time to time one or more series
of certificates, bonds, notes or other securities and to incur other
indebtedness, including the issuance and sale of certificates
representing interests in trusts established by the Corporation
(collectively the "Securities"), which Securities shall (A) represent
interests in or be secured by the Mortgage Collateral, Government
Securities or other assets pledged or sold to secure payment of such
Securities (together with the Mortgage Collateral and Government
Securities, the "Collateral"), (B) be nonrecourse to the Corporation
and its assets other than the Collateral and (C) not constitute a claim
against the Corporation to the extent that funds produced by the
Collateral are insufficient to allow full and/or timely payments or
distributions to be made on such Securities or to allow full and/or
timely payment of principal and interest thereon in accordance with the
terms thereof and (2) incur, assume or guaranty indebtedness to the
extent not prohibited under paragraph (b) of Article FIFTH below;
(c) To (1) acquire, own, hold, sell, transfer, assign, pledge,
finance, refinance and otherwise deal in or with Securities, (2)
acquire, own, hold, sell, transfer, assign, pledge, finance, refinance
and otherwise deal in or with Collateral,
-3-
<PAGE> 3
and (3) acquire, own, hold, sell, transfer, assign, pledge and
otherwise deal in or with any or all of the ownership interests in
trusts established by the Corporation or other entities, institutions
or individuals.
(d) To use the proceeds of the sale of the Securities to
purchase or otherwise acquire Collateral or to loan the proceeds of the
sale of the Securities to entities that may or may not be affiliated
with the Corporation or to make dividend payments to the extent
permitted by law;
(e) To invest cash balances, from time to time, as provided in
any trust agreement, pooling and servicing agreement, indenture or
similar document to which the Corporation may be a party in connection
with the issuance of the Securities; and
(f) Subject to the limitations contained in Article FIFTH of
this Certificate of Incorporation, to engage in any activity and to
exercise any power that is incidental to or that renders convenient the
accomplishment of any or all of the foregoing and that is permitted to
corporations under the laws of the State of Delaware and that is not
required to be set forth specifically in this Certificate of
Incorporation.
Article FIFTH: Notwithstanding any other provision in this Certificate
of Incorporation and any provision of law that otherwise so empowers the
Corporation, until such time as all indebtedness of the Corporation evidenced by
Securities shall be indefeasibly paid in full and all liens and security
interests securing such indebtedness shall be indefeasibly released and
discharged, the Corporation shall not perform any act in contravention of any of
the following clauses of this Article FIFTH without the express prior written
unanimous consent of the Board of Directors, including each Independent
Director; provided, however, the Corporation shall not perform any act in
contravention of any of the following clauses of this Article FIFTH if such act
would cause a reduction or withdrawal of any credit rating assigned by any
nationally recognized statistical rating organization to any Security at the
request of the Corporation:
(a) The Corporation shall not engage in any business or
activity other than as authorized in Article FOURTH hereof.
(b) The Corporation shall not incur, assume or guaranty any
indebtedness except for (1) such indebtedness as (A) may be incurred by
the Corporation in connection with the issuance of the Securities and
(B) provides for recourse solely to the Collateral pledged to secure
such indebtedness or to entities other than the Corporation, and (2)
indebtedness that by its terms (A) is subordinated to indebtedness of
the Corporation evidenced by Securities and (B) provides that the
holder thereof may not cause the filing of a petition in bankruptcy or
take any similar action against the Corporation until at least 91 days
after every indebtedness of the Corporation evidenced by the Securities
is indefeasibly paid in full.
-4-
<PAGE> 4
(c) The Corporation shall not consolidate or merge with or
into any other entity or convey or transfer its properties and assets
substantially as an entirety to any entity, unless:
(1) the entity (if other than the Corporation) formed
in or surviving such consolidation or merger or that acquires
by conveyance or transfer the properties and assets of the
Corporation substantially as an entirety (A) shall be
organized and existing under the laws of the United States of
America or any state or the District of Columbia, and (B)
shall expressly assume the obligations, if any, of the
Corporation under, by amendment or supplement to any
indentures, trust agreements or pooling and servicing
agreements (collectively, the "Indentures") pursuant to which
the Securities that are then outstanding may have been issued
by the Corporation or by trusts established by the
Corporation, which amendments and/or supplements must be
executed and delivered to the appropriate trustees under such
Indentures (the "Trustees"), in form satisfactory to such
Trustees;
(2) immediately after giving effect to such
transaction, no default or event of default under the
Indentures shall have occurred and be continuing;
(3) the Corporation shall have delivered to the
Trustees an officers' certificate and an opinion of counsel
each stating that such consolidation, merger, conveyance or
transfer and such supplemental indentures are not prohibited
under the terms of the Indentures and that all conditions
precedent provided for in the Indentures relating to such
transaction have been complied with; and
(4) the Corporation shall have received written
confirmation from each rating agency that has rated any of the
outstanding Securities at the request of the Corporation that
such consolidation, merger, conveyance or transfer will not
adversely affect such rating agency's ratings of the
outstanding Securities;
provided, however, that the provisions of Article FIFTH shall not limit
the ability of the Corporation to sell the Collateral securing an
outstanding series of Securities, subject to the lien in favor of such
Securities, to a limited-purpose trust, limited liability company,
partnership or corporation.
-5-
<PAGE> 5
Upon any consolidation or merger with respect to the
Corporation, or any conveyance or transfer of the properties and assets
of the Corporation substantially as an entirety as provided above, the
entity formed by or surviving such consolidation or merger (if other
than the Corporation) or the entity to which such conveyance or
transfer is made shall succeed to, and be substituted for, and may
exercise every right and power of, the Corporation under the Indentures
with the same effect as if such entity had been an original party to
each such Indenture. In the event of any such conveyance or transfer,
the Corporation may be dissolved, wound-up and liquidated at any time
thereafter, and the Corporation thereafter shall be released from its
liabilities and its obligations under the Indentures.
(d) The Corporation shall not amend, alter, change or repeal
any provision contained in Article THIRD, FOURTH, FIFTH, SIXTH, TENTH,
ELEVENTH OR THIRTEENTH of this Certificate of Incorporation.
(e) The Corporation shall not issue any additional Securities
if such issuance would result in the downgrading or withdrawal of any
ratings assigned to the outstanding Securities by any
nationally-recognized statistical rating organization that rated such
outstanding Securities at the request of the Corporation.
(f) For so long as any Securities issued by the Corporation
are outstanding, the Corporation shall not dissolve or liquidate in
whole or in part except in connection with a merger, consolidation or
sale of assets as provided in this Article FIFTH.
(g) The Corporation shall not engage in transactions with
Affiliates except on a commercially reasonable basis.
(h) For so long as any Securities issued by the Corporation
are outstanding, the Corporation shall not take any action that is
reasonably likely to cause the Corporation to become insolvent in
either the balance-sheet or equity sense.
Article SIXTH: Notwithstanding any other provision in this Certificate
of Incorporation and any provision of law that otherwise so empowers the
Corporation, until such time as all indebtedness of the Corporation evidenced by
Securities shall be indefeasibly paid in full and all liens and security
interests securing such indebtedness shall be indefeasibly released and
discharged, for so long as any Securities issued either by the Corporation are
outstanding, the Corporation shall not, without the express prior written
unanimous consent of the Board of Directors, including each Independent
Director, file a voluntary or involuntary petition for relief under any chapter
of the United States Bankruptcy Code, 11 U.S.C. Sections 101-1330, institute
proceedings for the Corporation to be adjudicated bankrupt or insolvent, or
consent to the institution of bankruptcy or insolvency proceedings against the
Corporation, or file a petition or consent to a petition seeking reorganization
or relief under any applicable federal or state law relating to bankruptcy or
insolvency, or consent to the appointment of a receiver, liquidator, assignee,
trustee, sequestrator (or other
-6-
<PAGE> 6
similar official) of the Corporation, or a substantial part of the property of
the Corporation, or make any assignment for the benefit of creditors for itself,
or, except as required by law, admit in writing it's inability to pay its debts
generally as they become due, or take any corporate action in furtherance of any
such action.
Article SEVENTH: The total number of shares of stock which the
Corporation shall have authority to issue is 1,000 shares of Common Stock, par
value $0.01 per share.
Article EIGHTH: The name and mailing address of the Sole Incorporator
is as follows:
Name Mailing Address
---- ---------------
David B. Rich, III, Esquire Hunton & Williams
951 East Byrd Street
Richmond Virginia 23219
Article NINTH: The following provisions are inserted for the management
of the business and the conduct of the affairs of the Corporation, and for
further definition, limitation and regulation of the powers of the Corporation,
its Directors and holders of its capital stock:
(a) The business and affairs of the Corporation shall be
managed by or under the direction of the Board of Directors of the
Corporation.
(b) The Directors of the Corporation shall have concurrent
power with the common stockholders to make, alter, amend, change, add
to or repeal the By-Laws of the Corporation.
(c) The number of Directors of the Corporation shall be as
from time to time fixed by, or set in the manner provided in, the
By-Laws of the Corporation. Election of Directors need not be by
written ballot unless the By-Laws so provide. The number of Directors
constituting the initial Board of Directors shall be three (3), and the
names and addresses of the persons who are to serve as the initial
Directors are as follows:
Name Address
---- -------
Joel R. Katz, Esquire 7130 Goodlett Farms Parkway
Cordova, Tennessee 38018
Mr. James K. Plunkett 7130 Goodlett Farms Parkway
Cordova, Tennessee 38018
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<PAGE> 7
Mr. Leslie M. Stratton 7593 Fairway Forest Drive North
Cordova, Tennessee 38018
(d) No Director shall be personally liable to the Corporation
or any of its stockholders for monetary damages for breach of fiduciary
duty as a Director, except for liability (1) for any breach of the
Director's duty of loyalty to the Corporation or its stockholders, (2)
for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law, (3) pursuant to Section 174
of the Delaware General Corporation Law, relating to dividends, stock
purchases and redemptions, or (4) for any transaction from which the
Director derived an improper personal benefit. Any repeal or
modification of this Article NINTH by the stockholders of the
Corporation shall not adversely affect any right or protection of a
Director of the Corporation existing at the time of such repeal or
modification with respect to acts or omissions occurring prior to such
repeal or modification.
(e) In addition to the powers and authority hereinbefore or by
statute expressly conferred upon them, the Directors are hereby
empowered to exercise all such powers and do all such acts and things
as may be exercised or done by the Corporation, subject, nevertheless,
to the provisions of the Delaware General Corporation Law, this
Certificate of Incorporation, and any By-Laws adopted by the
stockholders or the Board of Directors; provided, however, that no
By-Laws hereafter adopted by the stockholders or the Board of Directors
shall invalidate any prior act of the Directors which would have been
valid if such By-Laws had not been adopted. The Corporation's Board of
Directors will duly authorize all of the Corporation's actions.
Article TENTH: Notwithstanding any other provision in this Certificate
of Incorporation and any other provision of law to the contrary, until such time
as all indebtedness of the Corporation evidenced by Securities shall be
indefeasibly paid in full and all liens and security interests securing such
indebtedness shall be indefeasibly released and discharged, the Corporation at
all times shall:
(a) maintain its books, records and bank accounts separate and
apart from those of all other Persons;
(b) not commingle any of its assets with those of any other
Person;
(c) pay the salaries of its own employees, if any, and
maintain a sufficient number of employees in light of its contemplated
business operations
(d) pay its own liabilities out of its own funds;
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(e) maintain financial statements separate and apart from
those of all other Persons;
(f) observe all corporate formalities, organizational
formalities and other applicable or customary formalities;
(g) not guarantee or become obligated for the debts of any
other Person except as provided in Article FIFTH or hold out its credit
as being available to satisfy the obligations of any other Person;
(h) not pledge its assets for the benefit of any other Person
or make any loans or advances to any other Person;
(i) not acquire the direct obligations of, or securities
issued by, its shareholders or any Affiliate;
(j) allocate fairly and reasonably any overhead for expenses
that are shared with an Affiliate, including paying for the office
space and services performed by any employee of any Affiliate;
(k) use stationery, invoices and checks bearing its own name;
(l) conduct business in its own name, promptly correct any
known misunderstandings regarding its separate identity, and not
identify itself as a division of any other Person;
(m) maintain adequate capital in light of its contemplated
business operations;
(n) maintain arm's length relationships with all Affiliates
and enter into transactions with Affiliates only on commercial
reasonable bases; and
(o) not have any employees other than employees necessary to
perform authorized activities.
Article ELEVENTH: The Board of Directors of the Corporation shall
include at least one Independent Director at all times when any Securities are
outstanding. When voting on matters subject to the vote of the Board of
Directors, notwithstanding that the Corporation is not then insolvent in either
the equity or balance-sheet sense, the Independent Director shall take into
account the interests of the creditors of the Corporation, including, but not
limited to, the interests of all holders of Securities rated by any nationally
recognized statistical ratings organization that has rated the Securities at the
request of the Corporation.
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<PAGE> 9
Article TWELFTH: Meetings of stockholders may be held within or without
the State of Delaware, as the By-Laws may provide. The books of the Corporation
may be kept (subject to any provision contained in the Delaware General
Corporation Law) outside the State of Delaware at such place or places as may be
designated from time to time by the Board of Directors or in the By-Laws of the
Corporation.
Article THIRTEENTH: The Corporation is to have perpetual existence.
Article FOURTEENTH: The Corporation shall indemnify, to the full extent
permitted by the Delaware General Corporation Law, as amended from time to time,
all persons who may be indemnified pursuant thereto. As part of such
indemnification, the Corporation shall advance the expenses of such indemnified
persons to the full extent permitted by the Delaware General Corporation Law, as
amended from time to time. Notwithstanding any other provision in this Article
FOURTEENTH, (a) the Corporation's indemnification and advance obligations shall
be fully subordinate to all indebtedness of the Corporation evidenced by
Securities and (b) none of the Corporation's indemnification and advance
obligations shall constitute a "claim" against the Corporation within the
meaning of 11 U.S.C. Section 101(5) until all indebtedness of the Corporation
evidenced by Securities is indefeasibly paid in full.
The Corporation and any Affiliate may purchase and maintain insurance
on behalf of any Person who is or was a director or officer of the Corporation
against any liability asserted against such Person and incurred by such Person
in any such capacity, or arising out of such Person's status as such, regardless
of whether the Corporation would have the power to indemnify such Person against
such liability under the provisions of this Article or applicable law.
Article FIFTEENTH: Except as provided in Articles FIFTH and SIXTH, the
Corporation reserves the right to amend, alter, change or repeal any provision
contained in this Certificate of Incorporation in the manner now or hereafter
prescribed by statute, and all rights conferred upon stockholders herein are
granted subject to this reservation.
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IN WITNESS WHEREOF, I, THE UNDERSIGNED, being the sole incorporator of
the Corporation hereinbefore named, do hereby declare and certify that the
Corporation has duly authorized this Certificate of Incorporation and the facts
herein stated are true, and accordingly have hereunto set my hand as of this 5th
day of September, 1997.
By: /s/ David B. Rich, III
--------------------------------
Sole Incorporator
David B. Rich, III
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<PAGE> 1
EXHIBIT 3.2
BYLAWS
OF
UNION PLANTERS MORTGAGE FINANCE CORP.
ARTICLE I
OFFICES
Union Planters Mortgage Finance Corp. (the "Corporation") may
have offices at such places both within and without the State of Delaware as the
Board of Directors may from time to time determine or as the business of the
Corporation may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 1. Place. All meetings of the stockholders for the
election of directors and for any other purpose or purposes shall be held either
within or without the State of Delaware, as shall be stated in the notice of the
meeting or in a duly executed waiver of notice.
Section 2. Date of Annual Meeting. The annual meeting of
stockholders shall be held on the date and at the time fixed, from time to time,
by the Board of Directors, provided that the first annual meeting shall be held
on a date within thirteen months after the organization of the Corporation, and
each successive annual meeting shall be held on a date within thirteen months
after the date of the preceding annual meeting, at which they shall elect by a
plurality vote a Board of Directors, and transact such other business as may
properly be brought before the meeting. If the day so designated shall be a
legal holiday, then such meeting shall be held on the first business day
thereafter that is not a legal holiday. A failure to hold an annual meeting of
stockholders at the designated time or to elect a sufficient number of directors
to conduct the business of the Corporation shall not affect otherwise valid
corporate acts or work a forfeiture or dissolution of the Corporation except as
may be otherwise specifically provided in the Delaware General Corporation Law.
Section 3. Notice of Annual Meeting. Subject to Article IV
hereof, written notice of the annual meeting shall be given to each stockholder
entitled to vote thereat at least three days before the date of the meeting.
Section 4. Call of Special Meeting. Special meetings of the
stockholders, for any purpose or purposes, unless otherwise prescribed by
statute or by the certificate of incorporation, may be called by the President
or, in his absence, the Secretary, and shall be called by the President or
Secretary at the request in writing of a majority of the Board of Directors, or
at the request in writing of stockholders owning a majority in amount of the
entire capital stock of the Corporation issued and outstanding and entitled to
vote. Such request shall state the purpose or purposes of the proposed meeting.
Section 5. Notice of Special Meeting. Subject to Article IV
hereof, written notice of a special meeting of stockholders, stating the time,
place and object thereof, shall be given to each stockholder entitled to vote
thereat, at least three days before the date fixed for the meeting. Business
transacted at any special meeting of stockholders shall be limited to the
purposes stated in the notice.
<PAGE> 2
Section 6. Quorum. The holders of a majority of the stock
issued and outstanding and entitled to vote thereat, present in person or
represented by proxy, shall constitute a quorum at all meetings of the
stockholders for the transaction of business except as otherwise provided by
statute or by the Corporation's certificate of incorporation. If, however, such
quorum shall not be present or represented at any meeting of the stockholders,
the stockholders entitled to vote thereat, present in person or represented by
proxy, shall have power to adjourn the meeting from time to time, without notice
other than announcement at the meeting, until a quorum shall be present or
represented. At such adjourned meeting at which a quorum shall be present or
represented any business may be transacted that might have been transacted at
the meeting as originally called.
When a quorum is present at any meeting, the vote of the
holders of a majority of the stock having voting power present in person or
represented by proxy shall decide any question brought before such meeting,
unless the question is one upon which by express provision of the Delaware
General Corporation Law or of the Corporation's certificate of incorporation, a
different vote is required in which case such express provision shall govern and
control the decision of such question.
Section 7. Stockholder List. The officer who has charge of the
stock ledger of the Corporation shall prepare and make, at least ten days before
every election of directors, a complete list of the stockholders entitled to
vote at said election, arranged in alphabetical order, showing the address of
and the number of shares registered in the name of each stockholder. Such list
shall be open to the examination of any stockholder, during ordinary business
hours, for a period of at least ten days prior to the election, at a place
within the city, town or village where the election is to be held (which place
shall be specified in the notice of the meeting), and the list shall be produced
and kept at the time and place of the election during the whole time thereof,
and shall be subject to the inspection of any stockholder who may be present.
Section 8. Voting. At every meeting of the stockholders, each
stockholder shall be entitled to one vote in person or by proxy for each share
of the capital stock having voting power held by such stockholder, but no proxy
shall be voted on after three years from its date, unless the proxy provides for
a longer period. Except where the transfer books of the Corporation have been
closed or a date has been fixed as a record date for the determination of its
stockholders entitled to vote, no share of stock shall be voted on at any
election for directors which has been transferred on the books of the
Corporation within twenty days preceding such election of directors.
Section 9. Proxies. At a meeting of the shareholders, every
shareholder having the right to vote will be entitled to vote in person, or by
proxy appointed by an instrument in writing signed by the shareholder or by his
duly authorized attorney in fact, bearing a date not more than eleven (11)
months prior to the meeting unless the instrument provides for a longer period.
All proxies shall be filed with the Secretary of the Corporation prior to or at
the meeting.
Section 10. Stockholder Action Without Meetings. Any action
required by the Delaware General Corporation Law, the certificate of
incorporation of the Corporation or these Bylaws to be taken, or any action that
may be taken, at any annual or special meeting of stockholders may be taken
without a meeting, without prior notice and without a vote, if a consent in
writing, setting forth the action so taken, shall be signed by the holders of
outstanding stock having not less than the minimum number of votes that would
have been necessary to authorize or take such action at a meeting at which all
shares entitled to vote thereon were present and voted. Prompt notice of the
taking of the corporate action without a meeting by less than unanimous written
consent shall be given to those stockholders who have not consented in writing.
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ARTICLE III
DIRECTORS
Section 1. Functions. The business of the Corporation shall be
managed by its Board of Directors, which may exercise all such powers of the
Corporation and do all such lawful acts and things as are not by statute or by
the Corporation's certificate of incorporation or by these Bylaws directed or
required to be exercised or done by the stockholders.
Section 2. Qualification and Number. The number of directors
may be fixed from time to time by action of the stockholders or of the
directors, with a minimum of 1 and a maximum of 15; but if the number is not so
fixed, the number shall be 3. The directors shall be elected at annual meetings
of the stockholders, except as provided in Section 4 of this Article, and each
director elected shall hold office until his successor is elected and qualified.
A director need not be a stockholder or a citizen or resident of the United
States or the State of Delaware.
Section 3. Place of Meeting. The Board of Directors of the
Corporation may hold meetings, both regular and special, either within or
without the State of Delaware.
Section 4. Election, Term and Vacancies. The first meeting of
each newly elected Board of Directors shall be held at such time and place as
shall be fixed by the vote of the stockholders at the annual meeting and
provision of notice of such meeting to the newly elected directors shall not be
necessary in order legally to constitute the meeting, provided a quorum shall be
present. In the event of the failure of the stockholders to fix the time or
place of such first meeting of the newly elected Board of Directors, or in the
event such meeting is not held at the time and place so fixed by the
stockholders, the meeting may be held at such time and place as shall be
specified in a notice given as hereinafter provided for special meetings of the
Board of Directors, or as shall be specified in a written waiver signed by all
of the directors. Vacancies and newly created directorships resulting from any
increase in the authorized number of directors may be filled by a majority of
the directors then in office, though less than a quorum, and the directors so
chosen shall hold office until the next annual election and until their
successors are duly elected and shall qualify, unless sooner displaced.
Section 5. Call of Special Meeting. Special meetings of the
Board may be called by the President or, in his absence, the Secretary, on two
days' notice to each director; special meetings shall be called by the President
or Secretary in like manner and on like notice on the written request of two or
more directors.
Section 6. Notice; Actual or Constructive Waiver. No notice
shall be required for regular meetings for which the time and place have been
fixed by these Bylaws or by Board action taken at, or prior to, the immediately
preceding meeting of the Board.
Notice of the time and place of each special meeting of the
Board of Directors shall be sent to each director by mail, telegraph, wireless
telegraph, radio, cable, telex, facsimile or other method of electronic
communication then generally accepted for business use, or messenger, or any
combination thereof, addressed to such director at his address as it appears on
the records of the Corporation, or telephoned or delivered to him personally, at
least two days before the meeting, or, if the person calling the meeting is the
President, and the notice is given by one of the methods specified above other
than mail, such shorter period as the person calling the meeting may deem
appropriate in the circumstances.
Notice need not be given to any director or to any member of a
committee of directors who submits a written waiver of notice signed by him
before or after the time for the meeting stated therein. Attendance of any
director at a meeting shall constitute a waiver of notice of such meeting,
except when he attends a meeting for the express purpose of objecting at the
beginning of the meeting to the transaction of any business because the meeting
is not lawfully called or convened.
Neither the business to be transacted at, nor the purpose of,
any regular or special meeting of the directors need be specified in any written
waiver of notice, except as otherwise provided in these Bylaws.
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Section 7. Quorum and Action. At all meetings of the Board a
majority of the directors then in office shall constitute a quorum for the
transaction of business and the act of a majority of the directors present at
any meeting at which there is a quorum shall be the act of the Board of
Directors, except as may be otherwise specifically provided by statute or by the
Corporation's certificate of incorporation. If a quorum shall not be present at
any meeting of the Board of Directors, the directors present thereat may adjourn
the meeting from time to time, without notice other than announcement at the
meeting, until a quorum shall be present.
Section 8. Removal of Directors. Except as may otherwise be
provided by the Delaware General Corporation Law, any director or the entire
Board of Directors may be removed, with or without cause, by the holders of a
majority of the shares then entitled to vote at an election of directors.
Section 9. Written Consent. Unless otherwise restricted by the
Corporation's certificate of incorporation or these Bylaws, any action required
or permitted to be taken at any meeting of the Board of Directors or of any
committee thereof may be taken without a meeting, if prior to such action a
written consent thereto is signed by all members of the Board or of such
committee, as the case may be, and such written consent is filed with the
minutes of proceedings of the Board or of such committee.
Section 10. Committees. The Board of Directors may, by
resolution passed by a majority of the whole Board, designate one or more
committees, each committee to consist of two or more of the directors of the
Corporation, which, to the extent provided in the resolution, shall have and may
exercise the powers of the Board of Directors in the management of the business
and affairs of the Corporation, with the exception of any authority the
delegation of which is prohibited by Section 141 of the Delaware General
Corporation Law, and may authorize the affixation of the Corporation's seal to
all papers that may require such affixation. Such committee or committees shall
have such name or names as may be determined from time to time by resolution
adopted by the Board of Directors. Each committee shall keep regular minutes of
its meetings and report the same to the Board of Directors when required.
Section 11. Electronic Communication. Any member or members of
the Board of Directors or of any committee thereof may participate in a meeting
of the Board, or such committee, as the case may be, by means of conference
telephone or similar communications equipment by means of which all persons
participating in the meeting can hear each other at the same time.
Section 12. Compensation. The Corporation may pay the
directors their expenses, if any, for attendance at each meeting of the Board of
Directors, and a fixed sum for attendance at each meeting of the Board of
Directors or a stated salary as director. No such payment shall preclude any
director from serving the Corporation in any other capacity and receiving
compensation therefor. Members of special or standing committees may be allowed
like compensation for attending committee meetings.
ARTICLE IV
WAIVER OF NOTICE
Whenever any notice is required to be given under the
provisions of any statute or of the Corporation's certificate of incorporation
or of these Bylaws, a waiver thereof in writing, signed by the person or persons
entitled to said notice, whether before or after the time stated therein, shall
be deemed equivalent to the receipt by such person or persons of such notice.
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ARTICLE V
OFFICERS
Section 1. Officers. The officers of the Corporation shall be
chosen by the Board of Directors and shall include a President and a Secretary.
The President may also appoint a Treasurer, one or more Vice Presidents and one
or more Assistant Secretaries and Assistant Treasurers. Two or more offices may
be held by the same person.
Section 2. Appointment of Officers. The Board of Directors at
its first meeting after each annual meeting of stockholders shall choose a
President from among the directors, and shall choose a Secretary, who need not
be a member of the Board.
Section 3. Appointment of Additional Officers and Agents. The
President may appoint such other officers and agents as he shall deem necessary.
Such other officers and agents shall hold their offices for such terms and shall
exercise such powers and perform such duties as shall be determined from time to
time by the President.
Section 4. Salaries. The salaries, if any, of all officers and
agents of the Corporation shall be fixed by the Board of Directors.
Section 5. Term of Office. The officers of the Corporation
shall hold office until their successors are chosen and qualify. Any officer
elected or appointed by the Board of Directors may be removed at any time by the
affirmative vote of a majority of the Board of Directors. Any officer may resign
at any time by giving written notice thereof to the President or to the Board of
Directors. Any such resignation will take effect as of the date. The acceptance
of such resignation shall not be necessary to make it effective. Any vacancy
occurring in any office of the Corporation shall be filled by the Board of
Directors.
Section 6. President. The President shall be the chief
executive officer of the Corporation, shall preside at all meetings of the
stockholders and the Board of Directors, shall have general and active
management of the business of the Corporation and shall see that all orders and
resolutions of the Board of Directors are carried into effect.
The President shall execute bonds, mortgages and other
contracts requiring a seal, under the seal of the Corporation, except where
otherwise required or permitted by law to be signed and executed and except
where the signing and execution thereof shall be expressly delegated by the
Board of Directors to some other officer or agent of the Corporation.
Section 7. Vice President. The Vice President, or if there
shall be more than one, the Vice Presidents in the order determined by the Board
of Directors, shall, in the absence or disability of the President, perform the
duties and exercise the powers of the President and shall perform such other
duties and have such other powers as the Board of Directors may from time to
time prescribe.
Section 8. Secretary and Assistant Secretaries. The Secretary
shall attend all meetings of the Board of Directors and all meetings of the
stockholders and record all the proceedings of the meetings of the Corporation
and of the Board of Directors in a book to be kept for that purpose and shall
perform like duties for the standing committees when required. He shall give, or
cause to be given, notice of all meetings of the stockholders and special
meetings of the Board of Directors, and shall perform such other duties as may
be prescribed by the Board of Directors or President, under whose supervision he
shall be. He shall have custody of the corporate seal of the Corporation and he,
or an Assistant Secretary, shall have authority to affix the same to any
instrument requiring it and when so affixed, it may be attested by his signature
or by the signature of such Assistant
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<PAGE> 6
Secretary. The Board of Directors may give general authority to any other
officer to affix the seal of the Corporation and to attest the affixing by his
signature.
The Assistant Secretary, or if there be more than one, the
Assistant Secretaries in the order determined by the Board of Directors, shall,
in the absence or disability of the Secretary, perform the duties and exercise
the powers of the Secretary and shall perform such other duties and have such
other powers as the Board of Directors may from time to time prescribe.
Section 9. Treasurer and Assistant Treasurers. The Treasurer
shall have the custody of the corporate funds and securities and shall keep full
and accurate accounts of receipts and disbursements in books belonging to the
Corporation and shall deposit all moneys and other valuable effects in the name
and to the credit of the Corporation in such depositories as may be designated
by the Board of Directors.
The Treasurer shall disburse the funds of the Corporation as
may be ordered by the Board of Directors, taking proper vouchers for such
disbursements, and shall render to the President and the Board of Directors, at
its regular meetings, or when the Board of Directors so requires, an account of
all his transactions as Treasurer and of the financial condition of the
Corporation.
Section 10. Action of President to Make Certain Appointments.
The President shall, in addition to the powers and responsibilities included
within Section 6 of this Article V, also have the power from time to time, by
action in writing, to appoint employees of the Corporation who have
responsibility for the performance and supervision of certain special functions
as may be assigned to them from time to time in the corporation, and who may
have or include the title of "Vice President"; and to appoint Assistant
Secretaries and Assistant Treasurers. Any employee so appointed may have other
duties and other titles, subject to limitations prescribed by applicable law.
Any such employee so appointed shall perform in the particular capacity at the
will of the Board of Directors or the President; and he shall not be deemed, by
virtue of such appointment, to be an officer of the Corporation.
ARTICLE VI
CERTIFICATES OF STOCK
Section 1. Execution of Stock Certificates. Every holder of
stock in the Corporation shall be entitled to have a certificate, signed by, or
in the name of the Corporation by, the President or a Vice President and the
Treasurer or an Assistant Treasurer, or the Secretary or an Assistant Secretary
of the Corporation, certifying the number of shares owned by him in the
Corporation.
Where a certificate is signed (1) by a transfer agent or an
assistant transfer agent or (2) by a transfer clerk acting on behalf of the
Corporation and registrar, the signature of any such President, Vice President,
Treasurer, Assistant Treasurer, Secretary or Assistant Secretary may be affixed
to the certificate by facsimile. In case any officer or officers who have
signed, or whose facsimile signature or signatures have been used on, any such
certificate or certificates shall cease to hold the office or offices indicated
by their signatures, whether because of death, resignation or otherwise, before
such certificate or certificates have been delivered by the Corporation, such
certificate or certificates may nevertheless be adopted by the Corporation and
be issued and delivered as though the person or persons who signed such
certificate or certificates or whose facsimile signature or signatures have been
used thereon had not ceased to be such officer or officers of the Corporation.
Section 2. Lost Certificates. The Board of Directors may
direct a new certificate or certificates to be issued in place of any
certificate or certificates theretofore issued by the Corporation alleged to
have been lost, stolen or destroyed, upon the delivery to the Board of Directors
of an affidavit of the person claiming the certificate of stock to have been
lost, stolen or destroyed certifying to such loss, theft or destruction. When
authorizing the
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issue of any new certificate in lieu of a certificate alleged to have been lost,
stolen or destroyed, the Board of Directors may, in its discretion and as a
condition precedent to the issuance thereof, require the owner of such lost,
stolen or destroyed certificate, or his legal representative, to give to the
Corporation a bond in such sum as the Board of Directors may require as
indemnity against any claim that may be made against the Corporation with
respect to the certificate alleged to have been lost, stolen or destroyed.
Section 3. Transfer of Stock. Upon surrender to the
Corporation or to the transfer agent for the Corporation of a certificate for
shares duly endorsed or accompanied by proper evidence of succession or
assignment, it shall be the duty of the Corporation to issue a new certificate
registered in the name of the designated transferee, successor or assignee, and
to record the transfer in the Corporation's stock ownership records.
Section 4. Record Dates. The Board of Directors is authorized
to fix a time in accordance with the provisions of the Delaware General
Corporation Law as the record date for determining the stockholders entitled to
notice of or to vote at any meeting of stockholders or adjournment thereof, to
consent or dissent in writing for any corporate action without a meeting, to
receive payment of any dividend or other distribution or allotment of any rights
or to exercise any rights in respect of any change, conversion or exchange of
stock, or for any other lawful action; provided, that if as to any particular
determination no such record date is so fixed by the Board of Directors, the
record date for such determination shall be the date prescribed by the Delaware
General Corporation Law for that purpose.
Section 5. Registered Stockholders. The Corporation shall be
entitled to recognize the exclusive right of a person registered on its books as
the owner of shares to receive dividends and to vote as such owner, and to hold
liable for calls and assessments a person registered on its books as the owner
of shares, and shall not be bound to recognize any equitable or other claim to
or interest in such shares on the part of any other person, regardless of
whether it shall have received actual or other notice thereof, except as
otherwise provided by the laws of the State of Delaware.
ARTICLE VII
GENERAL PROVISIONS
Section 1. Dividends. Dividends upon the capital stock of the
Corporation, subject to the provisions of the Corporation's certificate of
incorporation, if any, may be declared by the Board of Directors at any regular
or special meeting, pursuant to law. Dividends may be paid in cash, in property,
or in shares of the Corporation's capital stock, subject to the provisions of
the Corporation's certificate of incorporation.
Before payment of any dividend, there may be set aside out of
any funds of the Corporation available for dividends such sum or sums as the
Board of Directors from time to time, in its absolute discretion, deems proper
as a reserve or reserves to meet contingencies, or for equalizing dividends, or
for repairing or maintaining any property of the Corporation, or for such other
purpose as the Board of Directors shall deem conducive to the interests of the
Corporation, and the Board of Directors may modify or abolish any such reserve
in the manner in which it was created.
Section 2. Fiscal Year. The fiscal year of the Corporation
shall be the calendar year, unless otherwise fixed by resolution of the Board of
Directors.
Section 3. Corporate Seal. The corporate seal shall have
inscribed thereon the name of the Corporation, the year of its organization and
the words "Corporate Seal, Delaware". The seal may be used by causing it or a
facsimile thereof to be impressed or affixed or reproduced or otherwise.
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ARTICLE VIII
AMENDMENTS
These Bylaws may be altered or repealed at any regular meeting
of the stockholders or of the Board of Directors or at any special meeting of
the stockholders or of the Board of Directors if notice of such alteration or
repeal be contained in the notice of such special meeting.
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[Hunton & Williams Letterhead]
EXHIBIT 5.1
September 12, 1997
Union Planters Mortgage Finance Corp.
7130 Goodlett Farms Parkway
Cordova, Tennessee 38018
Dear Sirs:
We have acted as counsel to Union Planters Mortgage Finance Corp., a
Delaware corporation (the "Company"), in connection with the Company's
registration statement on Form S-3 (the "Registration Statement") filed with the
Securities and Exchange Commission under the Securities Act of 1933, as amended,
with respect to the proposed sale by the Company of Mortgage Pass-Through
Certificates and/or Collateralized Mortgage Bonds, issuable by separate trusts
from time to time in one or more series (the "Securities"). In this capacity, we
have examined the Registration Statement, the Company's Certificate of
Incorporation and Bylaws, and such other materials as we have deemed necessary
to the issuance of this opinion. Capitalized terms used but not defined herein
shall have the definitions assigned to such terms in the Registration Statement.
On the basis of the foregoing, we are of the opinion that:
1. The Company has been duly incorporated and is validly existing as a
corporation under the laws of the State of Delaware.
2. When each Agreement has been duly authorized by all necessary
corporate action and has been duly executed and delivered by the parties
thereto, it will constitute a valid, legal and binding agreement of the Company,
enforceable against the Company in accordance with its terms, subject to
bankruptcy, insolvency, reorganization, moratorium or other similar laws
affecting the enforcement of creditors' rights generally and to general
principles of equity, regardless of whether enforcement is sought in a
proceeding in equity or at law.
3. When the Securities have been duly authorized for sale by all
necessary action (corporate and other), and when the Securities have been duly
issued, executed and authenticated in accordance
<PAGE> 2
Union Planters Mortgage Finance Corp.
September 12, 1997
Page 2
with the provisions of the related Agreement and delivered to and paid for by
the purchasers thereof, the Securities will be legally and validly issued, and
the holders of the Securities will be entitled to the benefits provided by the
Agreement pursuant to which such Securities were issued.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement. In giving this consent, we do not admit that we are
within the category of persons whose consent is required by Section 7 of the
Securities Act of 1933, as amended, or the rules and regulations promulgated
thereunder by the Securities and Exchange Commission.
Very truly yours,
/s/ Hunton & Williams
<PAGE> 1
EXHIBIT 8.1
[Hunton & Williams Letterhead]
September 12, 1997
Union Planters Mortgage Finance Corp.
7130 Goodlett Farms Parkway
Cordova, Tennessee 38018
Ladies and Gentlemen:
We have acted as counsel to Union Planters Mortgage Finance Corp., a
Delaware corporation (the "Depositor"), in connection with the preparation of a
Registration Statement on Form S-3 (the "Registration Statement"), which has
been filed with the Securities and Exchange Commission under the Securities Act
of 1933, as amended (the "Act"), for the registration under the Act of
Securities (as such term is defined in the Registration Statement) in one or
more series ("Series"). As set forth in the Registration Statement, each Series
of Securities will be issued under and pursuant to the conditions of a separate
pooling and servicing agreement, trust agreement or indenture (each, an
"Agreement") among the parties thereto, each to be identified in the prospectus
supplement for such Series of Securities.
We have examined the prospectus and forms of prospectus supplement
related thereto contained in the Registration Statement (each, a "Prospectus")
and such other documents, records and instruments as we have deemed necessary
for the purposes of this opinion.
In arriving at the opinion expressed below, we have assumed that each
Agreement will be duly authorized by all necessary corporate action on the part
of the parties thereto for such Series of Securities and will be duly executed
and delivered by the parties thereto substantially in the applicable form filed
or incorporated by reference as an exhibit to the Registration Statement, that
each Series of Securities will be duly executed and delivered in substantially
the forms set forth in the related Agreement filed or incorporated by reference
as an exhibit to the Registration Statement, and that Securities will be sold as
described in the Registration Statement, and that the parties to the
transactions involving the issuance of Securities comply (without waiver) with
all of the provisions of the related Agreements and the other documents prepared
and executed in connection with such transactions.
Based on the foregoing, we are of the opinion that the legal
conclusions contained in each Prospectus forming a part of the Registration
Statement under the caption "Federal Income Tax Consequences" are correct in all
material respects, and the discussion thereunder
<PAGE> 2
Union Planters Mortgage Finance Corp.
September 12, 1997
Page 2
does not omit any material provision with respect to the matters covered. You
should be aware that this opinion represents our conclusions as to the
application of existing law to a transaction as described above. There can be no
assurance that contrary positions will not be taken by the Internal Revenue
Service or that the law will not change.
This opinion is based on the facts and circumstances set forth in the
Registration Statement and in the other documents reviewed by us. Our opinion as
to the matters set forth herein could change with respect to a particular Series
of Securities as a result of changes in facts or circumstances, changes in the
terms of the documents reviewed by us, or changes in the law subsequent to the
date hereof. Because the Prospectuses contemplate Series of Securities with
numerous different characteristics, you should be aware that the particular
characteristics of each Series of Securities must be considered in determining
the applicability of this opinion to a particular Series of Securities.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement. We also consent to the references to Hunton & Williams
under the caption "Federal Income Tax Consequences" in the Prospectus. In giving
this consent, we do not admit that we are in the category of persons whose
consent is required by Section 7 of the Act or the rules and regulations
promulgated thereunder by the Securities and Exchange Commission.
No opinion has been sought and none has been given concerning the tax
treatment of the issuance and sale of the Securities under the laws of any
state.
Very truly yours,
/s/ Hunton & Williams
<PAGE> 1
EXHIBIT 99.1
PROSPECTUS SUPPLEMENT
(To Prospectus dated September __, 1997)
$----------------
UNION PLANTERS MORTGAGE FINANCE CORP.
Depositor
MORTGAGE PASS-THROUGH CERTIFICATES, SERIES 199_-_
The Union Planters Mortgage Finance Corp. Series 199_-_ Mortgage
Pass-Through Certificates (the "Certificates") will consist of ____ Classes of
Certificates, designated as the Class __ Certificates, the Class __
Certificates, the Class __ Certificates and the Class __ Certificates (the
______ Certificates, collectively, the "Offered Certificates, the Class __
Certificates and the Class __ Certificates, collectively, the "Senior
Certificates, and the ______ Certificates, collectively, the "Subordinate
Certificates"). It is a condition of the issuance of the Offered Certificates
that they be rated [not lower than] "_______________" by _________________. The
Class __ Certificates will evidence approximately an initial ___% undivided
interest in the Trust Fund, the Class __ Certificates will evidence
approximately an initial ___% undivided interest in the Trust Fund and the Class
__ Certificates will evidence approximately an initial ___% undivided interest
in the Trust Fund. Only the Offered Certificates are being offered hereby.
The Certificates will represent in the aggregate the entire beneficial
interest in a trust fund (the "Trust Fund") to be established by Union Planters
Mortgage Finance Corp. (the "Depositor"). The Trust Fund will consist primarily
of [a pool (the "Asset Pool") of [conventional], [fixed rate] [adjustable rate]
[FHA insured] [VA guaranteed] mortgage loans, with terms to maturity of not more
than ___ years (the "Mortgage Loans"), secured by first liens on one-to
four-family residential properties,] [mortgage participations, mortgage
pass-through certificates, mortgage-backed securities evidencing interests
therein or secured thereby (the "MBS"),] [and] [certain direct obligations of
the United States, agencies thereof or agencies created thereby (the "Agency
Securities", together with the Mortgage Loans, MBS, and certain other assets of
the Trust Fund, the "Assets")]. The Assets were originated or acquired by
___________ (the "Asset Seller") and will be sold to the Depositor on or prior
to the date of initial issuance of the Certificates.
Prospective investors in the Offered Certificates should consider,
among other things, certain risks set forth under the caption "Risk Factors"
herein on page __ and in the Prospectus on page __.
THESE CERTIFICATES ARE NOT DEPOSITS OR OTHER OBLIGATIONS OF A BANK AND ARE
NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER
GOVERNMENTAL AGENCY.
-----------
PROCEEDS OF THE ASSETS IN THE TRUST FUND ARE THE SOLE SOURCE OF PAYMENTS ON THE
CERTIFICATES. THE CERTIFICATES DO NOT REPRESENT AN INTEREST IN OR OBLIGATION OF
THE DEPOSITOR, THE MASTER SERVICER, THE TRUSTEE OR ANY OF THEIR RESPECTIVE
AFFILIATES. NEITHER THE CERTIFICATES NOR THE ASSETS ARE INSURED OR GUARANTEED BY
ANY GOVERNMENTAL AGENCY OR INSTRUMENTALITY OR BY THE DEPOSITOR, THE MASTER
SERVICER, THE TRUSTEE OR ANY OF THEIR AFFILIATES[, EXCEPT TO THE LIMITED EXTENT
DESCRIBED HEREIN].
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
[THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR
i
<PAGE> 2
ENDORSED THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY
IS UNLAWFUL.]
----------------
<TABLE>
<CAPTION>
Proceeds to
Initial Principal Price to Public Underwriting Depositor (1)(2)
Amount (1) Discount
<S> <C> <C> <C> <C>
Class __ $ % % %
Class __ $ % % %
Class __ $ % % %
Class __ $ % % %
</TABLE>
(1) Per Certificate, plus accrued interest, if any, at the applicable
Pass-Through Rate from __________ 1, 19__.
(2) Before deducting expenses payable by the Depositor, estimated to be
$___________.
[An election will be made to treat the Trust Fund as a ["real estate
mortgage investment conduit" (a "REMIC")]["financial asset securitization
investment trust (a "FASIT")] for federal income tax purposes. [The Offered
Certificates will constitute ["regular interests"] in the [REMIC] [FASIT].] See
"Federal Income Tax Consequences" in the Prospectus.]
The yield to maturity on the Offered Certificates will depend on the
rate and timing of principal payments (including prepayments, defaults and
liquidations) on the Assets. See "Risk Factors" herein and "Risk Factors --
Prepayment timing and frequency may adversely affect yield of Securityholders"
and "Yield Considerations" in the Prospectus. As further described herein,
losses on the Assets will be allocated to the Subordinate Certificates prior to
allocation to the Class __ or Class __ Certificates. See "Description of the
Certificates -- Distributions -- Priority" herein.
[The Offered Certificates offered hereby will be purchased by the
Underwriter from the Depositor 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 at the time of sale. Proceeds to the Depositor from the sale of
the Offered Certificates will be ___% of the initial aggregate Security
Principal Balance thereof as of ____________ 1, 199_ (the "Cut-off Date") plus
accrued interest from the Cut-off Date, before deducting expenses payable by the
Depositor, estimated to be
$ .]
-------------
The Offered Certificates are offered subject to prior sale, when, as
and if accepted by the Underwriter, and subject to approval of certain legal
matters by __________, counsel for the Underwriter. It is expected that delivery
of the Offered Certificates [in book-entry form] [in registered, certified form]
will be made on or about ___________, 199_, [through the facilities of The
Depository Trust Company] [at the offices of the Underwriter, New York, New
York] against payment therefor in immediately available funds.
[UNDERWRITER]
, 199
- -------------
ii
<PAGE> 3
[Certain of the Assets continue to be in an initial fixed interest rate
period and have not experienced the first adjustment to their respective Asset
Rates.] The characteristics of the Assets are more fully described herein under
"Description of the Assets."
Distributions on the Offered Certificates will be made, to the extent of
the Available Distribution Amount, on the __th day of each [month] or, if any
such day is not a Business Day, on the next succeeding Business Day, beginning
in __________ (each, a "Distribution Date"). [As more fully described herein,
distributions allocable to interest, if any, on the Offered Certificates on each
Distribution Date will be based on the [applicable] [then-applicable variable]
pass-through rate (the "Pass-Through Rate") and the aggregate principal balance
(the "Security Principal Balance")] [notional balance (the "Notional Balance")
of such Class outstanding immediately prior to such Distribution Date. [The
Pass-Through Rate applicable to the Offered Certificates from time to time will
equal the [sum of __% and the applicable Index (as defined herein) subject to
certain limitations] [weighted average of the Class __ Remittance Rates (as
defined herein) on the Assets. The Pass-Through Rate for the Offered
Certificates on the first Distribution Date will be _% per annum and is expected
to change thereafter [because the weighted average of the Class __ Remittance
Rates is expected to change for succeeding Distribution Dates.] Distributions in
respect of principal, if any, of the Offered Certificates will be made as
described herein under "Description of the Certificates -- Distributions --
Priority" and "--Calculations of Principal".]
THE CERTIFICATES OFFERED BY THIS PROSPECTUS SUPPLEMENT CONSTITUTE PART
OF A SEPARATE SERIES OF CERTIFICATES ISSUED BY THE DEPOSITOR AND ARE BEING
OFFERED PURSUANT TO ITS PROSPECTUS DATED SEPTEMBER __, 1997, OF WHICH THIS
PROSPECTUS SUPPLEMENT IS A PART AND WHICH ACCOMPANIES THIS PROSPECTUS
SUPPLEMENT. THE PROSPECTUS CONTAINS IMPORTANT INFORMATION REGARDING THIS
OFFERING WHICH IS NOT CONTAINED HEREIN, AND PROSPECTIVE INVESTORS ARE URGED TO
READ THE PROSPECTUS AND THIS PROSPECTUS SUPPLEMENT IN FULL. SALES OF THE OFFERED
CERTIFICATES MAY NOT BE CONSUMMATED UNLESS THE PURCHASER HAS RECEIVED BOTH THIS
PROSPECTUS SUPPLEMENT AND THE PROSPECTUS.
[The yield to investors in the [Interest Only][High-Yield] Certificates
will be [extremely] sensitive to the rate and timing of principal payments
(including prepayments, repurchases, defaults and liquidations) in the Assets
which may fluctuate significantly over time. An [extremely] rapid rate of
principal payments on the Assets could result in the failure of investors in the
[Interest Only][High-Yield] Certificates to recover their initial investments.]
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
Prospectus Supplement
<S> <C>
Summary.................................................................... S-
Risk Factors............................................................... S-
Description of the Assets.................................................. S-
Description of the Certificates............................................ S-
Certain Yield, Payment and Maturity Considerations......................... S-
The Depositor.............................................................. S-
Pooling and Servicing Agreement............................................ S-
The Trustee................................................................ S-
Use of Proceeds............................................................ S-
Underwriting............................................................... S-
ERISA Considerations....................................................... S-
Legal Investment........................................................... S-
Legal Matters.............................................................. S-
Ratings.................................................................... S-
Prospectus
Prospectus Supplement......................................................
Available Information......................................................
Incorporation of Certain Information by Reference..........................
Summary of Prospectus......................................................
</TABLE>
iii
<PAGE> 4
<TABLE>
<S> <C>
Risk Factors...............................................................
Description of the Trust Funds.............................................
Yield Considerations.......................................................
The Depositor..............................................................
Description of the Offered Securities......................................
Description of the Agreements..............................................
Description of Credit Support..............................................
Insurance Policies on the Mortgage Loans...................................
Certain Legal Aspects of Mortgage Loans....................................
Use of Proceeds............................................................
Federal Income Tax Consequences............................................
State Tax Considerations...................................................
ERISA Considerations.......................................................
Legal Investment...........................................................
Plan of Distribution.......................................................
Legal Matters..............................................................
Financial Information......................................................
Ratings....................................................................
Glossary...................................................................
</TABLE>
------------------
UNTIL NINETY DAYS FROM THE DATE OF THIS PROSPECTUS SUPPLEMENT, ALL
DEALERS EFFECTING TRANSACTIONS IN THE OFFERED CERTIFICATES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS
SUPPLEMENT AND THE PROSPECTUS TO WHICH IT RELATES. THIS DELIVERY REQUIREMENT 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.
------------------
No dealer, salesman, or any other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus Supplement and the accompanying Prospectus in connection with the
offer contained in this Prospectus Supplement and the accompanying Prospectus,
and, if given, such information or representations must not be relied upon as
having been authorized by the Depositor or the Underwriter. This Prospectus
Supplement and the accompanying Prospectus shall not constitute an offer to sell
or a solicitation of an offer to buy any of the securities offered hereby in any
jurisdiction to any person to whom it is unlawful to make such offer or
solicitation in such jurisdiction. The delivery of this Prospectus Supplement
and the accompanying Prospectus at any time does not imply that the information
herein is correct as of any time subsequent to the date hereof.
There will be no application to list the Offered Certificates on any
exchange, although the Underwriter intends to make a secondary market in the
Offered Certificates, it has no obligation to do so. There is currently no
secondary market for the Offered Certificates and there can be no assurance that
a secondary market for the Offered Certificates will develop, or if it does
develop, that it will continue to exist or provide sufficient liquidity.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN
TRANSACTIONS THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE
OFFERED CERTIFICATES. FOR A DESCRIPTION OF THESE ACTIVITIES. SEE "UNDERWRITING"
HEREIN.
iv
<PAGE> 5
[The Class __ Certificateholders will have the benefit of a [PARTICULAR
ITEM OF CREDIT SUPPORT] provided by [PROVIDER]. The ____________ will [not] be
available to support other Classes of Offered Certificates. See "Description of
the Certificates - Credit Support" herein.]
The Depositor may sell from time to time under this Prospectus
Supplement and the Prospectus and other related prospectus supplements up to
$______________ in aggregate principal amount of Securities, issuable in Series.
As of the date of this Prospectus Supplement, the Depositor has publicly sold or
committed to sell $___________ in aggregate principal amount of Securities,
including the Offered Certificates.
----------------------
[The Depositor has filed with the Securities and Exchange Commission
certain materials relating to the Assets and the Offered Certificates on Form
8-K. Such materials have been prepared by the Underwriter for certain
prospective investors, and the information included in such materials is subject
to, and superseded by, the information set forth in this Prospectus Supplement.]
v
<PAGE> 6
SUMMARY
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus Supplement and in
the accompanying Prospectus. Certain capitalized terms used in this Summary are
defined elsewhere in this Prospectus Supplement or in the Glossary in the
Prospectus.
<TABLE>
<S> <C>
Title of Certificates............................................ Mortgage Pass-Through Certificates, Series
199_-_, (the "Certificates").
Depositor........................................................ Union Planters Mortgage Finance Corp., a
Delaware corporation and a direct, wholly-owned
subsidiary of Union Planters National Bank. See
"The Depositor" in the Prospectus.
Master Servicer.................................................. [Union Planters National Bank, a national
banking association and wholly-owned subsidiary
of Union Planters Corporation]. See "Pooling
and Servicing Agreement -- The Master
Servicer" herein.
[Sub-Servicers................................................... _______________, a ________________]
Trustee.......................................................... _____________, a ____________________.
Cut-off Date..................................................... ____________ 1, 199_.
Closing Date..................................................... ______________ __, 199_.
Distribution Dates............................................... Distributions on the Certificates will be made by
the Trustee, to the extent of the Available
Distribution Amount, on the __ day of each
[month] or, if any such __ day is not a Business
Day, then on the next succeeding Business Day,
beginning in ________ 19__ (each, a
"Distribution Date"), to the holders of record as
of the close of business on the [last Business Day
of the month preceding the month] of each such
distribution (each, a "Record Date").
Notwithstanding the above, the final distribution
on any Certificate will be made after due notice
by the Trustee of the pendency of such
distribution and only upon presentation and
surrender of such Certificates at the location to
be specified in such notice.
[Registration of the Certificates................................ The Class __ Certificates will be represented by
one or more global certificates registered in the
</TABLE>
<PAGE> 7
<TABLE>
<S> <C>
name of Cede & Co., as nominee of The
Depository Trust Company ("DTC"). No
person acquiring an interest in the
Class __ Certificates (any such person,
a "Class __ Certificate Owner") will be
entitled to receive a Certificate of
such class in fully registered,
certificated form (a "Definitive Class
___ Certificate"), except under the
limited circumstances described in the
Prospectus under "Description of the
Offered Securities -- Book-Entry
Registration." Instead, DTC will effect
payments and transfers in respect of the
Class __ Certificates by means of its
electronic record-keeping services,
acting through certain participating
organizations ("Participants"). This may
result in certain delays in receipt of
payments by an investor and may restrict
an investor's ability to pledge its
securities. Unless and until Definitive
Class __ Certificates are issued, all
references herein to the rights of
holders of a Class __ Certificate are to
the rights of Class __ Certificate
Owners of such class as they may be
exercised through DTC and its
Participants, except as otherwise
specified herein. See "Description of
the Certificates -- General" herein and
"Description of the Offered Securities
-- Book-Entry Registration" in the
Prospectus.]
Denominations................... The Class __ Certificates will be
issuable [on the book-entry records of
DTC and its Participants] [in
registered, certificated form] in
denominations of $_______ and integral
multiples of $_____________ in excess
thereof[, with one Certificate of such
Class evidencing an additional amount
equal to the remainder of the Security
Principal Balance thereof].
Assets.......................... The Trust Fund will consist of
[[conventional], [fixed rate]
[adjustable rate] Mortgage Loans secured
by first liens on one- to four-family
residential properties (the "Mortgaged
Properties") located in __ different
states,] [mortgage participations,
mortgage pass-through certificates,
mortgage-backed securities evidencing
interests therein or secured thereby
(the "MBS"),] [and] [certain direct
obligations of the United States,
agencies thereof or agencies created
thereby (the "Agency Securities",
together with the Mortgage Loans, MBS,
and certain other assets of the Trust
Fund, the
</TABLE>
S-2
<PAGE> 8
<TABLE>
<S> <C>
"Assets")]. [The Assets will have an
aggregate Principal Balance as of the
Cut-off Date of $_________ and
individual Principal Balances at
origination of at least $______________
but not more than $__________, with an
average Principal Balance at origination
of approximately $_________. The Assets
will have terms to maturity from the
date of origination or modification of
not more than ____ years, and a weighted
average remaining term to maturity of
approximately _____ months as of the
Cut-off Date. The Assets will bear
interest at Asset Rates of at least
_____% per annum but not more than
_____% per annum, with a weighted
average Asset Rate of approximately
____% per annum as of the Cut-off Date.
The Assets will be acquired by the
Depositor on or before the Closing Date.
In connection with its acquisition of
the Assets, the Depositor will be
assigned (and will in turn assign to the
Trustee for the benefit of the holders
of the Certificates) certain rights in
respect of representations and
warranties described herein that were
made by the Asset Seller.]
[_____ of the Assets, representing
_____% of the Assets by aggregate
Principal Balance as of the Cut-off
Date, provide for scheduled payments of
principal and/or interest ("Payments")
to be due on the _____ day of each
month; the remainder of the Assets
provide for Payments to be due on
[identify day or days] of each month
(the date in any month on which a
Payment on an Asset is first due, the
"Due Date"). [The rate per annum at
which interest accrues on each Asset is
subject to adjustment on specified Due
Dates (each such date, an "Interest Rate
Adjustment Date") by adding a fixed
percentage amount (a "Gross Margin") to
the value of the then-applicable Index
(as described below) subject, in the
case of substantially all of the Assets,
to limitations on the periodic
adjustment of the related Asset Rate,
and to maximum and minimum lifetime
Asset Rates, as described herein. ___ of
the Assets, representing ___% of the
Assets by aggregate Principal Balance as
of the Cut-off Date, provide for
Interest Rate Adjustment Dates to occur
[monthly]; the remainder of the Assets
provide for adjustments to the Asset
Rate to occur quarterly, semi-
</TABLE>
S-3
<PAGE> 9
annually or annually. [Each of the
Assets provides for an initial fixed
interest rate period;] of the Assets,
representing _____% of the Assets by
aggregate Principal Balance as of the
Cut-off Date, have not yet experienced
their first Interest Rate Adjustment
Date. The latest initial Interest Rate
Adjustment Date for any Asset is
scheduled to occur on ________.]]
[The amount of the Payment on each Asset
is also subject to adjustment on
specified Due Dates (each such date, a
"Payment Adjustment Date") to an amount
that would amortize the outstanding
Principal Balance of the Asset over its
then remaining amortization schedule and
pay interest at the applicable Asset
Rate, subject, in the case of several
Assets, to payment caps, which limit the
amount by which the Payment may adjust
on any Payment Adjustment Date as
described herein. _______ of the Assets,
representing __% of the Assets (by
aggregate Principal Balance as of the
Cut-off Date, provide for Payment
Adjustment Dates to occur annually,
while the remainder of the Assets
provide for adjustments of the Payment
to occur monthly, quarterly or
semi-annually.]
[__ Assets, representing ____% of the
Assets by aggregate Principal Balance as
of the Cut-off Date, provide for monthly
payments of principal based on
amortization schedules significantly
longer than the remaining term of such
Assets, thereby leaving substantial
outstanding principal amounts due and
payable (each such payment, a "Balloon
Payment") on their respective maturity
dates, unless prepaid prior thereto.]
[Assets included in the Trust Fund may
be one or more months delinquent with
regard to payment of principal and
interest at the time of their deposit
into the Trust Fund.] [The FHA Loans and
VA Loans contain [(i) __ Mortgage Loans,
representing ____% of the Assets by
aggregate Principal Balance as of the
Cut-off Date, that, as of the Cut-off
Date, have more than 12 scheduled
payments of principal and interest past
due under the terms of the related
Mortgage Note (each, a "Non-Performing
Mortgage Loan"), (ii)] __ Mortgage
Loans, representing ____% of the Assets
by aggregate
S-4
<PAGE> 10
Principal Balance as of the Cut-off
Date, that, as of the Cut-off Date, have
more than three but less than 12
scheduled payments of principal and
interest past due under the terms of the
related Mortgage Note (each, a
"Sub-Performing Mortgage Loan"), and
[(iii]) __ Mortgage Loans, representing
____% of the Assets by aggregate
Principal Balance as of the Cut-off
Date, that have had more than three
scheduled payments of principal and
interest past due under the terms of the
related Mortgage Note one or more times
during the term of the related Mortgage
Loan, but at the related Cut-off Date
for the Series is current in payment
(each, a "Reinstated Mortgage Loan").]
The Assets with respect to any Series
may be guaranteed or insured with
respect to payment of interest and/or
principal by the United States, agencies
or instrumentalities thereof or created
thereby, state or local governments,
agencies or instrumentalities, or
private insurance providers.
[Title and issuer of underlying MBS and
Agency Securities, amount deposited or
pledged, amount originally issued,
maturity date, interest rate,
[redemption provisions], description of
other material terms.]
For a further description of the Assets,
see "Description of the Assets" herein.
[Indices.......................... As of any Interest Rate Adjustment Date,
the applicable Index used to determine
the Asset Rate on each Asset will be the
____________. See "Description of the
Assets -- Indices" herein.]
[Conversion of Mortgage Loans..... Approximately __% of the Assets (by
aggregate Principal Balance as of the
Cut-off Date) (the "Convertible Mortgage
Loans") provide that, at the option of
the related Mortgagors, the adjustable
interest rate on such Mortgage Loans may
be converted to a fixed interest rate,
provided that certain conditions have
been satisfied. Upon notification from a
Mortgagor of such Mortgagor's intent to
convert from an adjustable interest rate
to a fixed interest rate, and prior to
the conversion of any such Mortgage
Loan, the related Warrantying Party
S-5
<PAGE> 11
(as defined herein) will be obligated to
purchase the Converting Mortgage Loan
(as defined herein) at the Conversion
Price (as defined herein). [In the event
of a failure by a Sub-Servicer to
purchase a "Converting Mortgage Loan"],
the Master Servicer is required to use
its best efforts to purchase such
Converted Mortgage Loan (as defined
herein) from the Trust Fund at the
Conversion Price during the one-month
period following the date of
conversion.] [In the event that neither
the related Warrantying Party nor the
Master Servicer purchases a Converted
Mortgage Loan, the Trust Fund will
thereafter include both fixed-rate and
adjustable-rate Mortgage Loans.] See
"Certain Yield, Prepayment and Maturity
Considerations" herein.]
The Offered Certificates.......... The Offered Certificates will be issued
pursuant to a Pooling and Servicing
Agreement, dated as of the Cut-off Date,
among the Depositor, the Master Servicer
and the Trustee, which incorporates by
reference the Depositors Standard Terms
to Pooling and Servicing Agreement
(September 1997 Edition) (the "Pooling
and Servicing Agreement"). The Class __
Certificates have an initial Security
Principal Balance of $_______ (the
initial "Class __ Security Principal
Balance"), representing an initial
interest of approximately ___% in the
Trust Fund, the Class __ Certificates
have an initial Security Principal
Balance of $_______ (the initial "Class
__ Security Principal Balance"),
representing an initial interest of
approximately ___% in the Trust Fund and
the Class __ Certificates have an
initial Security Principal Balance of
$_______ (the initial "Class __ Security
Principal Balance"), representing an
initial interest of approximately ___%
in the Trust Fund. [The Class __
Certificates will not have a Security
Principal Balance.]
Distributions on the Offered
Certificates will be made on the ____
day of each [month] or, if such day is
not a Business Day, on the succeeding
Business Day, beginning on ____________
__, 199_ (each, a "Distribution Date").
Distributions on each Distribution Date
will be made by check or wire transfer
of immediately available funds, as
provided in the
S-6
<PAGE> 12
Pooling and Servicing Agreement, to the
Offered Certificateholders of record as
of the [last Business Day of the month
preceding the month] of such
Distribution Date (each, a "Record
Date"), except that the final
distribution on the Offered Certificates
will be made only upon presentation and
surrender of the Certificates at the
office or agency specified in the
Pooling and Servicing Agreement. [As
more specifically described herein, the
Security Principal Balance of each Class
of Certificates will be adjusted from
time to time on each Distribution Date.
As further described herein, interest
shall accrue on the Offered Certificates
at the Pass-Through Rate thereon.
Pass-Through Rate on the
Offered Certificates............ [The Pass-Through Rate on the Offered
Certificates [other than the [Interest
Only][High-Yield] Certificates] is
fixed and is set forth on the cover
hereof.] [The Pass-Through Rate on the
Offered Certificates [other than the
[Interest Only][High-Yield]
Certificates] will be equal to the
weighted average of the Remittance Rates
in effect from time to time. The
Remittance Rate in effect for any date
of determination [is equal to the excess
of the Asset Rates on the Assets over
__% per annum] [The Class __
Certificates will not be entitled to
distributions of interest and will not
have a Pass-Through Rate.] [The
[Interest Only][High-Yield] Certificates
will be entitled to receive interest at
a per annum rate equal to [the
difference, if any, between the weighted
average of the Remittance Rates and the
weighted average of the Pass-Through
Rates on the Class __ and the Class __
Certificates][specify alternative
formula][Describe any other method used
to calculate the Pass-Through Rate.][The
Pass- Through Rate on the Offered
Certificates will be computed on the
basis of a 360 day year consisting of 12
months of 30 days each.] [The
Pass-Through Rate on the Offered
Certificates will be calculated on the
basis of the actual number of days in
each Interest Accrual Period divided by
360.]
Distributions
on the Offered Certificates..... Distributions on a Class of Certificates
will be allocated among the Certificates
of such Class in
S-7
<PAGE> 13
proportion to their respective
Percentage Interests.
As more fully described herein under
"Description of the Certificates -
Distributions", distributions of
principal and interest to
Certificateholders generally will be
applied first to the distribution of
interest and interest shortfalls, second
to the distribution of any unpaid
principal and third, if any principal is
due, to the distribution of principal,
in each case to the related Class or
Classes of Certificates.
Advances.......................... The Master Servicer is obligated as part
of its servicing responsibilities to
make certain advances that in its good
faith judgment it deems recoverable with
respect to delinquent scheduled payments
on Assets. [The Master Servicer also is
obligated to advance delinquent payments
of taxes, insurance premiums and
escrowed items, as well as
liquidation-related expenses with
respect to Assets.] Neither the
Depositor nor any of its affiliates has
any responsibility to make such
advances. Advances made by a Master
Servicer are reimbursable generally from
subsequent recoveries in respect of such
Assets. [The Trustee is obligated to
make any such Advance if the Master
Servicer fails in its obligation to do
so, to the extent provided in the
Pooling and Servicing Agreement. See
"Description of the Certificates -
Advances" herein and "Description of the
Offered Securities -- Advances in
Respect of Delinquencies" in the
Prospectus.
Subordination .................... The rights of holders of the Subordinate
Certificates to receive distributions of
amounts collected on the Assets will be
subordinate, to the extent described
herein, to the rights of holders of the
Senior Certificates. This subordination
is intended to enhance the likelihood of
receipt by the holders of the Senior
Certificates of the full amount of the
Distributable Certificate Interest and
the [ultimate receipt of principal equal
to the initial Security Principal
Balance]. The protection afforded to the
holders of the Senior Certificates by
means of the subordination, to the
extent provided herein, will be
accomplished by the application of the
Available Distribution Amount to the
S-8
<PAGE> 14
Senior Certificates prior to the
application thereof to the Subordinate
Certificates. See "Description of the
Certificates -- Subordination" herein.
Optional Termination.............. Pursuant to the terms of the Pooling and
Servicing Agreement, the Master Servicer
may purchase all of the Assets, and
thereby effect termination of the Trust
Fund and early retirement of the then
outstanding Certificates, on any
Distribution Date on which the aggregate
Principal Balance of the Assets
remaining in the Trust Fund is less than
__% of the aggregate Principal Balance
of such Assets as of the Cut-off Date.
[The Master Servicer may also purchase
any Class of Certificates on any
Distribution Date on which the Security
Principal Balance of such Class is less
than ___% of the original balance
thereof.] See "Pooling and Servicing
Agreement -- Termination" herein and
"Description of the Offered Certificates
-- Termination" in the Prospectus.
Credit Support.................... [Disclose Credit Support, if any.]
Liquidity Facility................ [Disclose Liquidity Facility, if any.]
Federal Income Tax
Consequences.................... [An election will be made to treat the
Trust Fund as a [real estate mortgage
investment conduit ("REMIC")][financial
asset securitization investment trust
("FASIT")] for federal income tax
purposes. Upon the issuance of the
Certificates, Hunton & Williams, counsel
to the Depositor, will deliver its
opinion generally to the effect that
assuming compliance with all provisions
of the Pooling and Servicing Agreement,
for federal income tax purposes, the
Trust Fund will qualify as a [REMIC
under Sections 860A through 860G of]
[FASIT under Sections 860H through 860L]
the Internal Revenue Code of 1986 (the
"Code").
For federal income tax purposes, the
Offered Certificates will be the
"regular interests" in the REMIC and
will be treated as debt instruments of
the REMIC][the Offered Certificates will
be the "regular interests" in the FASIT
and will be treated as debt instruments
of the FASIT].
S-9
<PAGE> 15
[The Class __ Certificates will
represent High-Yield Interests in a
FASIT and, accordingly, will be subject
to special rules regarding the
eligibility of holders of such
interests, and the ability of such
holders to offset income derived from
their Class __ Certificate with losses.
See "Federal Income Tax Consequences ---
FASIT Securities --- Tax Treatment of
FASIT Regular Securities --- High-Yield
Interests" in the Prospectus.]
[Because the Offered Certificates will
be considered REMIC regular interests,
they will be taxable debt obligations
under the Code, and interest paid or
accrued on such Certificates, including
original issue discount, will be taxable
to the holders of such Certificates in
accordance with the accrual method of
accounting, regardless of such
Certificateholder's usual method of
accounting.] [Because the Offered
Certificates will be considered FASIT
regular interests, they will be taxable
debt obligations under the Code.
Interest paid or accrued on such
Certificates generally will be taxable
to a holder of such Certificates in
accordance with such holder's usual
method of accounting. Original issue
discount, however, will be taxable to
the holder of a Certificate in
accordance with the accrual method of
accounting, regardless of such
Certificateholder's usual method of
accounting.] [The [IO Certificates]
[High-Yield Certificates] will be
treated as [Interest-Weighted
Securities] [High-Yield Interests], and
therefore will be treated as issued with
original issue discount as described in
"Federal Income Tax Consequences ---
[REMIC Securities --- Interest Weighted
Securities and Non-VRDI Securities]
[FASIT Securities --- Tax Treatment of
FASIT Regular Securities]" in the
Prospectus.]
The Class __ Certificates will [not] be
treated as having been issued with
original issue discount for federal
income tax purposes. The prepayment
assumption that will be used for
purposes of computing the accrual of
original issue discount, market discount
and premium, if any, for federal income
tax purposes will be equal to a
[constant prepayment rate ("CPR")]
[standard prepayment assumption ("SPA")]
of ____%. However, no representation is
made
S-10
<PAGE> 16
that the Assets will prepay at that rate
or at any other rate.]
For federal income tax purposes, the
Offered Certificates generally will be
treated as "regular interests in a
[REMIC] [FASIT]" for domestic building
and loan associations and "real estate
assets" for real estate investment
trusts ("REITs"), subject to the
limitations described in "Federal Income
Tax Consequences" in the Prospectus.
Similarly, interest on the Offered
Certificates will be considered
"interest on obligations secured by
mortgages on real property" for REITs,
subject to the limitations described in
"Federal Income Tax Consequences" in the
Prospectus.
For further information regarding the
federal income tax consequences of
investing in the Certificates, see
"Federal Income Tax Consequences" in the
Prospectus.
ERISA Considerations.............. Fiduciaries of employee benefit plans
and certain other retirement plans and
arrangements, including individual
retirement accounts and annuities, Keogh
plans, and collective investment funds
in which such plans, accounts, annuities
or arrangements are invested, that are
subject to the Employee Retirement
Income Security Act of 1974, as amended
("ERISA"), or corresponding provisions
of the Code (any of the foregoing, a
"Plan"), persons acting on behalf of a
Plan, or persons using the assets of a
Plan ("Plan Investors") should consult
with their own counsel to determine
whether the purchase or holding of the
Offered Certificates could give rise to
a transaction that is prohibited either
under ERISA or the Code. Certain
prohibited transaction exemptions may be
applicable to the purchase and holding
of the Class __ and Class __
Certificates as described herein.
Nevertheless, any Plan Investor
contemplating an investment in Offered
Certificates should note that the duties
and obligations of the Trustee, the
Servicer, and the Master Servicer are
expressly limited to those set forth in
the [Agreement], and such specified
duties and obligations may not comport
with or satisfy the provisions of ERISA
setting forth the fiduciary duties of
Plan fiduciaries.
S-11
<PAGE> 17
BECAUSE THE SUBORDINATE CERTIFICATES ARE
SUBORDINATED SECURITIES, THEY WILL NOT
SATISFY THE REQUIREMENTS OF CERTAIN
PROHIBITED TRANSACTION EXEMPTIONS. AS A
RESULT, THE PURCHASE OR HOLDING OF ANY
SUBORDINATE CERTIFICATES BY A PLAN
INVESTOR MAY CONSTITUTE A NON-EXEMPT
PROHIBITED TRANSACTION OR RESULT IN THE
IMPOSITION OF EXCISE TAXES OR CIVIL
PENALTIES. [ACCORDINGLY, NONE OF THE
OFFERED SUBORDINATE CERTIFICATES ARE
OFFERED FOR SALE OR ARE TRANSFERABLE TO
A PLAN INVESTOR][ACCORDINGLY, EACH
PURCHASER OF ANY SUBORDINATE
CERTIFICATE, BY VIRTUE OF SUCH
PURCHASER'S RECEIPT OF SUCH CERTIFICATE,
WILL BE DEEMED TO HAVE REPRESENTED
[EITHER (I)] THAT IT IS NOT A PLAN
INVESTOR [OR (II) THAT AN EXEMPTION FROM
THE PROHIBITED TRANSACTION PROVISIONS OF
ERISA AND THE CODE APPLY TO SUCH
PURCHASE],] UNLESS SUCH PURCHASER
PROVIDES THE MASTER SERVICER AND THE
TRUSTEE WITH A BENEFIT PLAN OPINION (AS
DEFINED IN "ERISA CONSIDERATIONS"
HEREIN). SEE "ERISA CONSIDERATIONS"
HEREIN AND IN THE PROSPECTUS.
Rating............................ It is a condition to the issuance of the
Offered Certificates that each Class of
the Offered Certificates receive the
ratings specified for such Class on the
cover page hereof. A security rating is
not a recommendation to buy, sell or
hold securities and may be subject to
revision or withdrawal at any time by
the assigning rating organization. A
security rating does not represent any
assessment of the likelihood of
principal prepayments on the Assets or
of the degree to which the rate of such
prepayments might differ from those
originally anticipated. Also, a security
rating does not represent any assessment
of the yield to maturity that investors
may experience.
The Depositor has not requested a rating
of the Offered Certificates from any
rating agency other than ______________
[and __________________]. However, there
can be no assurance as to whether any
other rating agency will rate the
Offered Certificates, or if one does,
what rating would be assigned by such
rating agency.
S-12
<PAGE> 18
Legal Investment ................. The Class __ and Class __ Certificates
will constitute "mortgage related
securities" for purposes of the
Secondary Mortgage Market Enhancement
Act of 1984 ("SMMEA") for so long as
they are rated in one of the two highest
rating categories by one or more
nationally recognized statistical rating
organizations. Accordingly, the Class __
and Class __ Certificates will be legal
investments for certain entities to the
extent provided in SMMEA, subject to
state laws overriding SMMEA. A number of
states have enacted legislation
overriding the legal investment
provisions of SMMEA. See "Legal
Investment" herein and in the
Prospectus.
[THE SUBORDINATE CERTIFICATES WILL NOT
CONSTITUTE "MORTGAGE RELATED SECURITIES"
FOR PURPOSES OF SMMEA BECAUSE SUCH
CLASSES ARE NOT RATED IN ONE OF THE TWO
HIGHEST RATING CATEGORIES BY A
NATIONALLY RECOGNIZED STATISTICAL RATING
ORGANIZATION.]
The Depositor makes no representations
as to the proper characterization of any
Class of the Offered Certificates for
legal investment or other purposes, or
as to the legality of investment by
particular investors in any Class of the
Offered Certificates under applicable
legal investment restrictions. These
uncertainties may adversely affect the
liquidity of any Class of Offered
Certificates. Accordingly, all
institutions whose investment activities
are subject to legal investment laws and
regulations, regulatory capital
requirements or review by regulatory
authorities should consult with their
own legal advisors in determining to
what extent the Offered Certificates are
subject to investment, capital or other
restrictions. See "Legal Investment"
herein and in the Prospectus.
S-13
<PAGE> 19
RISK FACTORS
Prospective investors should consider, among other things, the following
factors in connection with an investment in any of the Offered Certificates:
The Weighted Average Life of The Offered Certificates Is Uncertain. The
rate and timing of principal payments on the Offered Certificates will depend,
among other things, on the rate and timing of principal payments (including
prepayments, defaults, liquidations and purchases of Assets due to a breach of
representation and warranty) on the Assets. The rate at which principal
prepayments occur on the Assets will be affected by a variety of factors,
including, without limitation, the terms of the Assets, the level of prevailing
interest rates, the availability of mortgage credit and economic, geographic,
tax, legal and other factors. In general, however, if prevailing interest rates
fall significantly below the Asset Rates on the Assets, such Assets are likely
to be the subject of higher principal prepayments than if prevailing rates
remain at or above the rates borne by such Assets. [The rate of principal
payments on the Offered Certificates will correspond to the rate of principal
payments on the Assets and is likely to be affected by the Lock-out Periods and
Prepayment Premium provisions applicable to the Assets and by the extent to
which the Master Servicer is able to enforce such provisions. Assets with a
Lock-out Period or a Prepayment Premium provision, to the extent enforceable,
generally would be expected to experience a lower rate of principal prepayments
than otherwise identical mortgage loans without such provisions, with shorter
lock-out periods or with lower prepayment premiums.] [As is the case with
mortgage-backed securities generally, the Offered Certificates are subject to
substantial inherent cashflow uncertainties because the Mortgage Loans may be
prepaid at any time.]
See "Description of the Certificates -- Distributions -- Priority" and
"Certain Yield, Prepayment and Maturity Considerations" herein and "Yield
Considerations" in the Prospectus.
The Yield of the Offered Certificates will be Affected by Circumstances
beyond the Depositor's Control. The yield to maturity on the Offered
Certificates will depend, among other things, on the rate and timing of
principal payments (including prepayments, defaults, liquidations and purchases
of Assets due to a breach of representation and warranty) on the Assets and the
allocation thereof to reduce the Security Principal Balance of such Classes.
[The yield to maturity on the Class __ Certificates will also depend on changes
in the applicable Index and the effect of any maximum lifetime Asset Rate,
minimum lifetime Asset Rate, Payment Cap and Periodic Rate Cap, as applicable.]
The yield to investors on the Class __ Certificates will be adversely affected
by any allocation thereto of Prepayment Interest Shortfalls on the Assets, which
are expected to result from the distribution of interest only to the date of
prepayment (rather than a full month's interest) in connection with prepayments
in full, and the lack of any distribution of interest on the amount of any
partial prepayments.
In general, if a Certificate is purchased at a premium and principal
distributions thereon generally occur at a rate faster than anticipated at the
time of purchase, the investor's actual yield to maturity will be lower than
that assumed at the time of purchase. Conversely, if a Certificate is purchased
at a discount and principal distributions thereon generally occur at a rate
slower than that assumed at the time of purchase, the investor's actual yield to
maturity will be lower than assumed at the time of purchase.
[Because [certain of] the Assets are adjustable rate instruments, the
Asset Rates and periodic payments can be expected to increase in a rising
interest rate environment, perhaps without a corresponding increase in the
related Mortgagors' income. In such event, the Mortgagor's ability to make
payments may be impaired, and a Mortgagor payment default would be more likely
to occur.]
S-14
<PAGE> 20
Certificateholders Subject to Loss if Rate of Delinquencies and Amount
of Realized Losses Exceed Certain Levels. The geographic dispersion of the
Assets, which is heavily concentrated in [DISCLOSE MAJOR GEOGRAPHIC
CONCENTRATIONS BY STATE], is set forth herein under "Description of the Assets".
Sufficiently high defaults and realized losses on the Assets will have the
effect of reducing, and could eliminate, the protection against losses afforded
the Senior Certificates by the subordination of the Subordinate Certificates. If
such protection is eliminated, the Senior Certificateholders will bear the risk
of losses on the Assets. Sufficiently high delinquencies and liquidation losses
on the Assets will have the effect of reducing, and could eliminate, the
protection against loss afforded the Senior Certificates by the subordination of
the Subordinate Certificates.
Certificateholders Must Look Solely to The Trust Fund for Distributions
of Principal and Interest. The Certificates will not represent an interest in or
obligation of the Depositor or the Master Servicer. The Certificates will not be
insured or guaranteed by any government agency or instrumentality, by the
Underwriter or the Depositor. The Certificates will be payable only from amounts
collected with respect to the Assets.
[[Non-Performing Mortgage Loans,] Sub-Performing Mortgage Loans and
Reinstated Mortgage Loans Create Risks That Securityholders May Not Recover
Their Initial Investment And May Adversely Affect Yield. The Assets include
[Non- Performing Mortgage Loans,] Sub-Performing Mortgage Loans and Reinstated
Mortgage Loans. Repayment of the principal amount of the Offered Securities is
dependent, in large part, upon the ability of the Master Servicer to cause such
Mortgage Loans to become or remain current in payment, to sell or foreclose upon
such Mortgage Loans or to acquire title to the Mortgaged Properties by other
means and to liquidate the related REO Properties. There can be no assurance as
to whether the Master Servicer will be successful in such efforts or as to the
timing thereof. The ability of the Master Servicer to sell an REO Property will
depend upon its ability to find a willing purchaser at a price acceptable to the
Master Servicer, subject to certain guidelines. In addition, certain rights of
redemption in various states may limit or prevent the Master Servicer from
selling an REO Property at what would otherwise be an appropriate time for sale.
All [Non-Performing Mortgage Loans,] Sub-Performing Mortgage Loans and
Reinstated Mortgage Loans are insured by a governmental agency. There is no
obligation on the part of the Depositor, the Master Servicer or any other person
to repurchase or replace any Mortgage Loan
Certain Mortgage Loans may be non-recourse loans or loans for which
recourse may be restricted or unenforceable, or as to which recourse may be had
only against the specific Mortgaged Property and such other assets, if any, as
have been pledged to secure the related Mortgage Loan. With respect to those
Mortgage Loans that provide for recourse against the Mortgagor and his assets
generally, there can be no assurance that such recourse will ensure a recovery
in respect of a defaulted Mortgage Loan greater than the liquidation value, if
any, of the related Mortgaged Property. The ability of the Master Servicer to
liquidate any Mortgaged Property or REO Property, and the liquidation value
thereof, may be adversely affected by risks generally incident to interests in
real property, including changes or weakness in general or local economic
conditions, declines in real estate values, the volume of other similar
properties for sale, adverse changes in interest rates, real estate and personal
property tax rates, energy costs and other expenses, environmental concerns,
acts of God, and other factors that are beyond the Master Servicer's control.]
Credit Risk from Subordination of the Subordinate Certificates to the
Senior Certificates. Payments of principal and interest on the Assets will be
available to make distributions on the Subordinate Certificates only after
required distributions have been made on the Senior Certificates. Further, all
realized losses on the Assets generally will be allocated to the Subordinate
Certificates prior to being allocated to the Senior Certificates. Realized
losses on the Assets in excess of the available Credit Support will adversely
affect the yield on the Certificates.
The Master Servicer's Ability to Realize on Assets May Be Limited by
Applicable State Law. A variety of factors may limit the Master Servicer's
ability to repossess or foreclose on and liquidate the Mortgaged Properties
securing the
S-15
<PAGE> 21
Assets or may limit the amount realized upon any such liquidation to less than
the amount due under the related Asset. See "Certain Legal Aspects of Mortgage
Loans" in the Prospectus.
[The following two paragraphs will be included in the event any of the Mortgage
Loans are acquired from the Resolution Trust Corporation:]
[Troubled Mortgage Loan Originators Create Risks to Certificateholders.
[Certain][The] Mortgage Loans were originated or purchased by the [Originating
Institutions], each of which is subject to an RTC receivership. It is possible
that the financial difficulties experienced by the [Originating Institutions]
may have adversely affected either or both of (i) the standards and procedures
pursuant to which the Mortgage Loans were originated or purchased by such
[Originating Institutions] and (ii) the manner in which such Mortgage Loans have
been serviced prior to assumption of servicing responsibilities by the Master
Servicer. The Mortgage Loans will be acquired by the Depositor on or before the
Closing Date from the Asset Seller, which acquired the Mortgage Loans from the
RTC in its capacity as receiver of each of the associations pursuant to a
certain mortgage loan sale agreement, dated ______, 199_ (as amended, the "Loan
Sale Agreement"). Pursuant to the Loan Sale Agreement, the RTC as receiver of
the [Originating Institutions], has made certain representations and warranties
regarding the Mortgage Loans and is obligated to cure such breaches or
repurchase those Mortgage Loans as to which there is a breach of such
representations and warranties. The RTC repurchase price for the Mortgage Loans
is par plus accrued interest at the related Mortgage Rate[,except in the case of
Mortgage Loans as to which a repurchase for a breach of the representation and
warranty relating to certain environmental matters would be accomplished at a
price that initially is discounted but increases to par over approximately __
years]. The RTC, acting in its corporate capacity, has guaranteed such
obligations of the RTC, acting in its capacity as receiver. The agreement
pursuant to which such guarantee was made by the RTC is hereinafter referred to
as the "Guarantee Agreement".]
[Limited Information is Available with respect to Certain Mortgage
Loans. The information set forth in this Prospectus Supplement with respect to
the Mortgage Loans is derived from books and records of the [Originating
Institutions], as well as a limited review of the credit and legal files
relating to the Mortgage Loans. Accordingly, available information does not
permit the Depositor to determine fully the origination, credit appraisal and
underwriting practices of the originators of the Mortgage Loans. Furthermore, it
is possible that this Prospectus Supplement does not contain material
information regarding the Mortgage Loans that would have been disclosed if the
structure and personnel of the [Originating Institutions] had not been affected
by such institutions having been placed in receivership. While the Depositor has
undertaken a limited review of the records and files related to the Mortgage
Loans in connection with the issuance of the Offered Certificates, the Mortgage
Loans have not been "re-underwritten" or subjected to the type of review that
would typically be made in respect of a newly originated mortgage loan.]
Certificates Issued in Book-Entry Form May Create Liquidity Risks to
Certificateholders. Issuance of the Offered Certificates in book-entry form may
reduce the liquidity of such Certificates in the secondary trading market
because investors may be unwilling to purchase Certificates for which they
cannot obtain physical securities. See "Description of the Certificates --
Book-Entry Registration" herein.
Because transactions in the Bonds can be effected only through DTC,
participating organizations, indirect participants and certain banks, the
ability of a Certificateholder to pledge a Certificate to persons or entities
that do not participate in the DTC system or otherwise to take actions in
respect of such Certificates, may be limited due to lack of a physical security
representing the Certificates. See "Description of the Certificates --
Book-Entry Registration" herein.
Certificateholders may experience some delay in their receipt of
distributions of interest and principal on the Certificates because such
distributions will be forwarded by the Trustee to DTC and DTC will credit such
distributions to the accounts of its Participants (as defined herein) which will
thereafter credit them to the accounts of Certificateholders
S-16
<PAGE> 22
either directly or indirectly through indirect participants. See "Description of
the Certificates -- Book-Entry Registration" herein.
DESCRIPTION OF THE ASSETS
GENERAL
The Trust Fund will consist primarily of [___ [conventional], [fixed
interest] [adjustable interest] rate Mortgage Loans with an aggregate Principal
Balance as of the Cut-off Date, after deducting payments of principal due on
such date, of $____________,] [mortgage participations, mortgage pass-through
certificates, mortgage-backed securities evidencing interests therein or secured
thereby that have been previously (a) offered and distributed to the public
pursuant to an effective registration statement or (b) purchased in a
transaction not involving any public offering from an entity that is not an
affiliate of the issuer of such securities at the time of sale (nor an affiliate
thereof at any time during the three preceding months); provided, a period of
two years has elapsed since the later of the date the securities were acquired
from the issuer or an affiliate thereof (the "MBS"),] [certain direct
obligations of the United States, agencies thereof or agencies created thereby
(the "Agency Securities", together with the Mortgage Loans, MBS, and certain
other assets of the Trust Fund, the "Assets"))].
[MORTGAGE LOANS
Each Mortgage Loan is evidenced by a promissory note (a "Mortgage Note")
and secured by a mortgage, deed of trust or other similar security instrument (a
"Mortgage") creating a first lien on a one-to four-family residential property
(a "Mortgaged Property"). The Mortgaged Properties consist of [description of
one-to four-family residential properties]. [Because no evaluation of any
mortgagor's financial condition has been conducted, investors should consider
all of the Mortgage Loans to be non-recourse loans so that, in the event of
mortgagor default, recourse may be had only against the specific property and
such limited other assets as have been pledged to secure a Mortgage Loan, and
not against the mortgagor's other assets.] All percentages of the Mortgage Loans
described herein are approximate percentages (except as otherwise indicated) by
aggregate Principal Balance as of the Cut-off Date.]
[The Mortgage Loans to be included in the Trust Fund will have been
originated or acquired by ________________ (the "Asset Seller") and will comply
with the underwriting criteria described herein. The Depositor will purchase the
Mortgage Loans to be included in the Mortgage Pool on or before the Closing Date
from the Asset Seller pursuant to an agreement (the "Seller's Agreement"), to be
dated as of _____, 199_ between the Asset Seller and the Depositor. The
Depositor will cause the Mortgage Loans to be assigned to _______________, as
Trustee, pursuant to the Pooling and Servicing Agreement. The Master Servicer
will service the Mortgage Loans pursuant to the Pooling and Servicing Agreement.
Under the Seller's Agreement, the Asset Seller will make certain
representations, warranties and covenants to the Depositor relating to, among
other things, the due execution and enforceability of the Seller's Agreement and
certain characteristics of the Mortgage Loans, and will be obligated to
repurchase or substitute for any Mortgage Loans as to which there exists
deficient documentation or an uncured material breach of any such
representation, warranty or covenant. Under the Pooling and Servicing Agreement
the Depositor will assign all its right, title and interest in such
representations, warranties and covenants (including the Asset Seller's
repurchase or substitution obligation) to the Trustee for the Trust Fund. The
Depositor will make [no] representations or warranties with respect to the
Mortgage Loans and will have no obligation to repurchase or substitute for
Mortgage Loans with deficient documentation [or which are otherwise defective].
The Asset Seller is selling the Mortgage Loans without recourse and,
accordingly, in such capacity, will have no obligations with respect to the
Offered Certificates other than pursuant to such representations, warranties,
covenants and repurchase obligations. See "Description of the Agreements --
Representations and Warranties; Repurchases" in the Prospectus.]
S-17
<PAGE> 23
[The Mortgage Loans include FHA Loans and VA Loans. The FHA Loans and
VA Loans include [Non-Performing Mortgage Loans,] Sub-Performing Mortgage Loans
and Reinstated Mortgage Loans. [Identify particular characteristics of FHA
Loans, VA Loans, [Non-Performing Mortgage Loans,] Sub-Performing Mortgage Loans
and Reinstated Mortgage Loans] See "Description of the Trust Funds - Mortgage
Loans", " -- The VA Loan Program" and " -- The FHA Loan Program" in the
Prospectus.
[MBS
[Provide title and issuer of underlying MBS, amount deposited or
pledged, amount originally issued, maturity date, interest rate, redemption
provisions, together with description of other material terms.]
[Description of principal and interest distributions on the MBS.]
[Description of advances by the servicer of the assets underlying the
[MBS.]
[Description of effect on the MBS of allocation of losses on the
underlying assets.]
As to each series of MBS included in the Trust Fund, the various
classes of certificates from such series [(including classes not in the Trust
Fund but from the same series as classes that are in the Trust Fund] are listed,
together with the related pass-through rates and certain other information
applicable thereto].
[AGENCY SECURITIES
[Provide title and issuer of underlying Agency Securities, amount
deposited or pledged, amount originally issued, maturity date, interest rate,
redemption provisions, together with description of other material terms.]
[Description of principal and interest distributions on the Agency
Securities.]
[Description of advances by the servicer of the assets underlying the
Agency Securities.]
[Description of effect on the Agency Securities of allocation of losses
on the underlying Assets.]
As to each series of Agency Securities included in the Trust Fund, the
various classes of certificates from such series [(including classes not in the
Trust Fund but from the same series as classes that are in the Trust Fund] are
listed, together with the related pass-through rates and certain other
information applicable thereto].
[CONVERTIBLE MORTGAGE LOANS
____% of the Mortgage Loans ("Convertible Mortgage Loans") provide
that, at the option of the related Mortgagors, the adjustable interest rate on
such Mortgage Loans may be converted to a fixed interest rate. The first month
in which any of the Mortgage Loans may convert is ____________, and the last
month in which any of the Mortgage Loans may convert is _____________. Upon
conversion, the Mortgage Rate will be converted to a fixed interest rate
determined in accordance with the formula set forth in the related Mortgage Note
which formula is intended to result in a Mortgage Rate which is not less than
the then current market interest rate (subject to applicable usury laws). After
such conversion, the monthly payments of principal and interest will be adjusted
to provide for full amortization over the remaining term to scheduled maturity.
Upon notification from a Mortgagor of such Mortgagor's intent to convert from an
adjustable interest rate to a fixed interest rate and prior to the conversion of
any such Mortgage Loan (a "Converting Mortgage Loan"), the related Warrantying
Party will be obligated to purchase the Converting Mortgage Loan at a price
equal to the outstanding Principal Balance thereof plus accrued interest thereon
net of any subservicing fees (the "Conversion Price"). In the event of a failure
by a Warrantying Party to purchase a converting Mortgage Loan, the
S-18
<PAGE> 24
Master Servicer is required to use its best efforts to purchase such Mortgage
Loan following its conversion (a "Converted Mortgage Loan") during the one-month
period following the date of conversion at the Conversion Price.
In the event that the related Warrantying Party fails to purchase a
Converting Mortgage Loan and the Master Servicer does not purchase a Converted
Mortgage Loan, neither the Depositor nor any of its affiliates nor any other
entity is obligated to purchase or arrange for the purchase of any Converted
Mortgage Loan. Any such Converted Mortgage Loan will remain in the Mortgage Pool
as a fixed-rate Mortgage Loan and will result in the Mortgage Pool's having both
fixed rate and adjustable rate Mortgage Loans. See "Certain Yield and Prepayment
Considerations" herein.
Following the purchase of any Converted Mortgage Loan as described
above, the purchaser will be entitled to receive an assignment from the Trustee
of such Mortgage Loan and the purchaser will thereafter own such Mortgage Loan
free of any further obligation to the Trustee or the Certificateholders with
respect thereto.]
[INDICES
As of any Payment Adjustment Date, the Index applicable to the
determination of the related Asset Rate will be a per annum rate equal to
______________, as most recently available as of the date days prior to the
Payment Adjustment Date (each, an "Index"). In the event that the Index is no
longer available, an index reasonably acceptable to the Trustee that is based on
comparable information will be selected by the Master Servicer.
Each Index is currently calculated based on information reported in
___________. Listed below are the weekly average yields on actively traded
______________ as reported in ____________ on the date that would have been
applicable to mortgage loans having the following adjustment dates for the
indicated years. Such average yields may fluctuate significantly from week to
week as well as over longer periods and may not increase or decrease in a
constant pattern from period to period. The following does not purport to be
representative of future average yields. No assurance can be given as to the
average yields on such _______________ on any Payment Adjustment Date or during
the life of any Asset.]
[Index]
<TABLE>
<CAPTION>
Adjustment Date 1992 1993 1994 1995 1996 1997
- --------------- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
January......................
February ....................
March........................
April........................
May..........................
June.........................
July.........................
August.......................
September....................
October......................
November.....................
December.....................
</TABLE>
CERTAIN CHARACTERISTICS OF THE ASSETS
[Approximately ___% of the Assets have Due Dates that occur on the ___
day of each month; approximately ___% of the Assets have Due Dates that occur on
the ___ day of each month; approximately _____% of the Assets have Due
S-19
<PAGE> 25
Dates that occur on the ___ day of each month; and the remainder of the Assets
have Due Dates that occur on the fifteenth day of each month.]
[As of the Cut-off Date, the Assets had the following characteristics:
(i) Asset Rates ranging from _____% per annum to _______% per annum; (ii) a
weighted average Asset Rate of ______% per annum; (iii) Gross Margins ranging
from ____ basis points to ______ basis points; (iv) a weighted average Gross
Margin of ____ basis points; (v) Principal Balances ranging from $_______ to
$______; (vi) an average Principal Balance of $_________; (vii) original terms
to scheduled maturity ranging from _____ months to _________ months; (viii) a
weighted average original term to scheduled maturity of _____ months; (ix)
remaining terms to scheduled maturity ranging from ____ months to _____ months;
(x) a weighted average remaining term to scheduled maturity of ________ months;
(xi) Cut-off Date Loan-to-Value ("LTV") Ratios ranging from ______% to
________%; (xii) a weighted average Cut-off Date LTV Ratio of _____%; (xiii) as
to the _______% of the Assets to which such characteristic applies, (A) minimum
lifetime Asset Rates ranging from ____% per annum to ______ % per annum and (B)
a weighted average minimum lifetime Asset Rate of _______% per annum; and (xiv)
as to the__________% of Assets to which such characteristic applies and for
which it may be currently calculated, (A) maximum lifetime Asset Rate ranging
from _______% per annum to ________% per annum and (B) a weighted average
maximum lifetime Asset Rate of _________% per annum.]
[___% of the Mortgage Loans provide for Balloon Payments on their
respective maturity dates. Loans providing for Balloon Payments involve a
greater degree of risk than self-amortizing loans. See "Risk Factors -- Assets
with balloon payment provisions present particular risks to Securityholders" in
the Prospectus.]
[The Mortgage Loans contain [(i) __ Mortgage Loans, representing ____%
of the Assets by aggregate Principal Balance as of the Cut-off Date, that, as of
the Cut-off Date, have more than 12 scheduled payments of principal and interest
past due under the terms of the related Mortgage Note (each, a "Non-Performing
Mortgage Loan"), (ii)] __ Mortgage Loans, representing ____% of the Assets by
aggregate Principal Balance as of the Cut-off Date, that, as of the Cut-off
Date, have more than three but less than 12 scheduled payments of principal and
interest past due under the terms of the related Mortgage Note (each, a
"Sub-Performing Mortgage Loan"), and [(iii)] __ Mortgage Loans, representing
____% of the Assets by aggregate Principal Balance as of the Cut-off Date, that
have had more than three scheduled payments of principal and interest past due
under the terms of the related Mortgage Note one or more times during the term
of the related Mortgage Loan, but at the related Cut-off Date for the Series is
current in payment (each, a "Reinstated Mortgage Loan").]
[The Asset Rate on each Asset is subject to adjustment on each Interest
Rate Adjustment Date by adding the related Gross Margin to the value of the
Index as most recently announced a specified number of days prior to such
Interest Rate Adjustment Date, subject, in the case of substantially all of the
Assets, to minimum and maximum lifetime Asset Rates, with ranges specified
below. The Asset Rates on the Assets generally are adjusted monthly; however,
certain of the Assets provide for Interest Rate Adjustment Dates to occur
quarterly (___% of the Assets), semi-annually ( % of the Assets) or annually
(____% of the Assets). Each of the Assets provided for an initial fixed interest
rate period; Assets, representing ___% of the Assets, have not experienced their
first Interest Rate Adjustment Dates. The latest initial Interest Rate
Adjustment Date for any Asset is to occur in .]
[Subject to the Payment Caps described below, the amount of the Payment
on each Asset adjusts periodically on each Payment Adjustment Date to an amount
that would fully amortize the Principal Balance of the Asset over its then
remaining amortization schedule and pay interest at the Asset Rate in effect
during the one month period preceding such Payment Adjustment Date.
Approximately __% of the Assets provide that an adjustment of the amount of the
Payment on a Payment Adjustment Date may not result in a Payment that increases
by more than ___% (nor, in some cases, decreases by more than ____%) of the
amount of the Payment in effect immediately prior to such Payment Adjustment
Date (each such provision, a "Payment Cap").
S-20
<PAGE> 26
[No Mortgage Loan currently prohibits principal prepayments; however,
certain of the Mortgage Loans impose fees or penalties ("Prepayment Premiums")
in connection with full or partial prepayments. Although Prepayment Premiums are
payable to the Master Servicer as additional servicing compensation, the Master
Servicer may waive the payment of any Prepayment Premium only in connection with
a principal prepayment that is proposed to be made during the three month period
prior to the scheduled maturity of the related Mortgage Loan, or under certain
other limited circumstances.]
The following table sets forth the range of Asset Rates on the Assets
as of the Cut-off Date:
Asset Rates as of the Cut-off Date
<TABLE>
<CAPTION>
Percent by
Aggregate Aggregate
Percent Principal Principal
Number of by Balance as of Balance as of
Asset Rate Assets Number the Cut-off Date the Cut-off Date
- ---------- -------- -------- ---------------- ----------------
<S> <C> <C> <C> <C>
Total 100.00% $ 100.00%
======= ====== =========== ======
Weighted Average
Asset Rate:
</TABLE>
Note: Percentage totals may not add due to rounding.
S-21
<PAGE> 27
The following table sets forth the types of Mortgaged Properties
securing the Mortgage Loans:
Property Type
<TABLE>
<CAPTION>
Percent by
Aggregate Aggregate
Number of Percent of Principal Principal
Mortgage Assets by Balance as of Balance as of
Type Loans Number the Cut-off Date the Cut-off Date
- ---- ------- ---------- ---------------- ----------------
<S> <C> <C> <C> <C>
Total 100.00% $ 100.00%
====== ====== =========== ======
</TABLE>
Note: Percentage totals may not add due to rounding.
[The following table sets forth the range of Gross Margins for the Assets:]
[Gross Margins]
<TABLE>
<CAPTION>
Percent by
Aggregate Aggregate
Percent Principal Principal
Number of by Balance as of Balance as of
Asset Rate Assets Number the Cut-off Date the Cut-off Date
- ---------- -------- -------- ---------------- ----------------
<S> <C> <C> <C> <C>
Total 100.00% $ 100.00%
====== ====== =========== ======
</TABLE>
Weighted Average
Gross Margin:
Note: Percentage totals may not add due to rounding.
S-22
<PAGE> 28
[The following table sets forth the frequency of adjustments to the
Asset Rates on the Assets as of the Cut-off Date:]
[Frequency of Adjustments to Asset Rates]
<TABLE>
<CAPTION>
Percent by
Aggregate Aggregate
Percent Principal Principal
Number of by Balance as of Balance as of
Frequency(A) Assets Number the Cut-off Date the Cut-off Date
- ------------- -------- -------- ---------------- ----------------
<S> <C> <C> <C> <C>
Total 100.00% $ 100.00%
====== ====== =========== ======
</TABLE>
Weighted Average
Frequency of
Adjustments to
Asset Rate:
Note: Percentage totals may not add due to rounding.
(A) _______ or ___% of Assets have not experienced their first Interest Rate
Adjustment Date.
[The following table sets forth the frequency of adjustments to the
Payments on the Assets as of the Cut-off Date:]
[Frequency of Adjustments to Payments]
<TABLE>
<CAPTION>
Percent by
Aggregate Aggregate
Percent Principal Principal
Number of by Balance as of Balance as of
Frequency (A) Assets Number the Cut-off Date the Cut-off Date
- ------------- -------- -------- ---------------- ----------------
<S> <C> <C> <C> <C>
Total 100.00% $ 100.00%
====== ====== =========== ======
</TABLE>
Weighted Average
Frequency of
Adjustments to
Payments:
Note: Percentage totals may not add due to rounding.
S-23
<PAGE> 29
[The following table sets forth the range of maximum lifetime Asset
Rates for the Assets:]
[Maximum Lifetime Asset Rates]
<TABLE>
<CAPTION>
Percent by
Aggregate Aggregate
Maximum Percent Principal Principal
Lifetime Number of by Balance as of Balance as of
Asset Rate Assets Number the Cut-off Date the Cut-off Date
---------- -------- -------- ---------------- ----------------
<S> <C> <C> <C> <C>
Total 100.00% $ 100.00%
====== ====== =========== ======
</TABLE>
Weighted Average
Maximum Lifetime
Asset Rate:
Note: Percentage totals may not add due to rounding.
(A) Represents Assets without a lifetime rate cap.
(B) The lifetime rate caps for these Assets are based upon the Index as
determined at a future point in time plus a fixed percentage. Therefore,
the rate is not determinable as of the Cut-off Date.
(C) This calculation does not include the ____ Assets without a lifetime
rate cap or the Assets with lifetime rate caps which are currently not
determinable.
[The following table sets forth the range of minimum lifetime
Asset Rates on the Assets:]
[Minimum Lifetime Asset Rates]
<TABLE>
<CAPTION>
Percent by
Aggregate Aggregate
Minimum Percent Principal Principal
Lifetime Number of by Balance as of Balance as of
Asset Rate Assets Number the Cut-off Date the Cut-off Date
---------- -------- -------- ---------------- ----------------
<S> <C> <C> <C> <C>
Total 100.00% $ 100.00%
====== ====== =========== ======
</TABLE>
Weighted Average
Minimum Lifetime
Asset Rate:
Note: Percentage totals may not add due to rounding.
S-24
<PAGE> 30
(A) Represents Assets without interest rate floors.
(B) This calculation does not include the Assets without interest rate floors.
The following table sets forth the range of Principal Balances of the
Assets as of the Cut-off Date:
Principal Balances as of the Cut-off Date
<TABLE>
<CAPTION>
Percent by
Principal Aggregate Aggregate
Balance Percent Principal Principal
as of the Number of by Balance as of Balance as of
Cut-off Date Assets Number the Cut-off Date the Cut-off Date
------------ ------ ------ ---------------- ----------------
<S> <C> <C> <C> <C>
Total 100.00% $ 100.00%
====== ====== =========== ======
</TABLE>
Average Principal Balance
as of the
Cut-off Date:
Note: Percentage totals may not add due to rounding.
The following tables set forth the original and remaining terms to
maturity (in months) of the Assets:
Original Term to Maturity in Months
<TABLE>
<CAPTION>
Percent by
Aggregate Aggregate
Original Percent Principal Principal
Term in Number of by Balance as of Balance as of
Months Assets Number the Cut-off Date the Cut-off Date
------- -------- -------- ---------------- ----------------
<S> <C> <C> <C> <C>
Total 100.00% $ 100.00%
====== ====== =========== ======
</TABLE>
Weighted Average
Original Term to Maturity:
Note: Percentage totals may not add due to rounding.
S-25
<PAGE> 31
The following tables set forth the purpose for which the Mortgage Loan
was originated, [the type of program under which it was originated and the
occupancy type].
Mortgage Loan Purpose
<TABLE>
<CAPTION>
Percent by
Aggregate Aggregate
Remaining Number of Percent of Principal Principal
Term in Mortgage Assets by Balance as of Balance as of
Months Loans Number the Cut-off Date the Cut-off Date
------ ----- ------ ---------------- ----------------
<S> <C> <C> <C> <C>
Total 100.00% $ 100.00%
====== ====== =========== ======
</TABLE>
Weighted Average
Original Term to Maturity:
Note: Percentage totals may not add due to rounding.
[Mortgage Loan Documentation Program]
<TABLE>
<CAPTION>
Percent by
Aggregate Aggregate
Remaining Number of Percent of Principal Principal
Term in Mortgage Assets by Balance as of Balance as of
Months Loans Number the Cut-off Date the Cut-off Date
------ ----- ------ ---------------- ----------------
<S> <C> <C> <C> <C>
Total 100.00% $ 100.00%
====== ====== =========== ======
</TABLE>
Weighted Average
Original Term to Maturity:
Note: Percentage totals may not add due to rounding.
S-26
<PAGE> 32
Mortgage Loan Occupancy Type
<TABLE>
<CAPTION>
Percent by
Aggregate Aggregate
Remaining Number of Percent of Principal Principal
Term in Mortgage Assets by Balance as of Balance as of
Months Loans Number the Cut-off Date the Cut-off Date
------ ----- ------ ---------------- ----------------
<S> <C> <C> <C> <C>
Total 100.00% $ 100.00%
====== ====== =========== ======
</TABLE>
Weighted Average
Original Term to Maturity:
Note: Percentage totals may not add due to rounding.
Remaining Term to Maturity in Months
<TABLE>
<CAPTION>
Percent by
Aggregate Aggregate
Remaining Percent Principal Principal
Term in Number of by Balance as of Balance as of
Months Assets Number the Cut-off Date the Cut-off Date
------ ------ ------ ---------------- ----------------
<S> <C> <C> <C> <C>
Total 100.00% $ 100.00%
====== ====== =========== ======
</TABLE>
Weighted Average Remaining
Term to Maturity:
Note: Percentage totals may not add due to rounding.
S-27
<PAGE> 33
The following tables set forth the respective years in which the Assets
were originated and are scheduled to mature:
Year of Origination
<TABLE>
<CAPTION>
Percent by
Aggregate Aggregate
Percent Principal Principal
Number of by Balance as of Balance as of
Year Assets Number the Cut-off Date the Cut-off Date
---- ------ ------ ---------------- ----------------
<S> <C> <C> <C> <C>
Total 100.00% $ 100.00%
====== ====== =========== ======
</TABLE>
Note: Percentage totals may not add due to rounding.
Year of Scheduled Maturity
<TABLE>
<CAPTION>
Percent by
Aggregate Aggregate
Percent Principal Principal
Number of by Balance as of Balance as of
Year Assets Number the Cut-off Date the Cut-off Date
---- ------ ------ ---------------- ----------------
<S> <C> <C> <C> <C>
Total 100.00% $ 100.00%
====== ====== =========== ======
</TABLE>
Note: Percentage totals may not add due to rounding.
The following table sets forth the range of Original LTV Ratios of the
Mortgage Loans. An "Original LTV Ratio" is a fraction, expressed as a
percentage, the numerator of which is the Principal Balance of a Mortgage Loan
on the date of its origination, and the denominator of which is [in general] the
lesser of (i) the appraised value of the related Mortgaged Property as
determined by an appraisal thereof obtained in connection with the origination
of such Mortgage Loan and (ii) the sale price of such Mortgaged Property at the
time of such origination. There can be no assurance that the value (determined
through an appraisal or otherwise) of a Mortgaged Property determined after
origination of the related Mortgage Loan will be equal to or greater than the
value thereof (determined through an appraisal or otherwise) obtained in
connection with the origination. As a result, there can be no assurance that the
loan-to-value ratio for any Mortgage Loan determined at any time following
origination thereof will be lower than the Original LTV Ratio, notwithstanding
any positive amortization of such Mortgage Loan.
S-28
<PAGE> 34
Original LTV Ratios
<TABLE>
<CAPTION>
Percent by
Aggregate Aggregate
Number of Percent of Principal Principal
Original Mortgage Assets by Balance as of Balance as of
LTV Ratio Loans Number the Cut-off Date the Cut-off Date
--------- ----- ------ ---------------- ----------------
<S> <C> <C> <C>> <C>
Total 100.00% $ 100.00%
====== ====== =========== =======
</TABLE>
Weighted Average Original
LTV Ratio:
Note: Percentage totals may not add due to rounding.
The Mortgage Loans are secured by Mortgaged Properties in different ___
states. The table below sets forth the states in which the Mortgaged Properties
are located:
Geographic Distribution
<TABLE>
<CAPTION>
Percent by
Aggregate Aggregate
Number of Percent of Principal Principal
Mortgage Assets by Balance as of Balance as of
State Loans Number the Cut-off Date the Cut-off Date
----- ----- ------ ---------------- ----------------
<S> <C> <C> <C> <C>
Total 100.00% $ 100.00%
====== ====== =========== ======
</TABLE>
Note: Percentage totals may not add due to rounding.
[regional breakdown to be provided as appropriate]
No more than ___% of the Mortgage Loans will be secured by Mortgaged
Properties located in any one zip code.
[___% of the Mortgage Loans provide that upon any principal prepayment
of a Mortgage Loan, whether made voluntarily or involuntarily, the related
Mortgagor will be required to pay a prepayment premium or yield maintenance
Penalty (a "Prepayment Premium") in the amount set forth in the following
table.]
S-29
<PAGE> 35
[Mortgage Loan Prepayment Premiums]
<TABLE>
<CAPTION>
Percent by
Aggregate Aggregate
Number of Percent of Principal Principal
Prepayment Mortgage Assets by Balance as of Balance as of
Premium Loans Number the Cut-off Date the Cut-off Date
------- ----- ------ ---------------- ----------------
<S> <C> <C> <C> <C>
Total 100.00% $ 100.00%
====== ====== =========== ======
</TABLE>
Note: Percentage totals may not add due to rounding.
[FHA Loans]
<TABLE>
<CAPTION>
Percent by
Aggregate Aggregate
Number of Percent of Principal Principal
Mortgage Assets by Balance as of Balance as of
FHA Loans Loans Number the Cut-off Date the Cut-off Date
--------- ------- -------- ---------------- ----------------
<S> <C> <C> <C> <C>
Total 100.00% $ 100.00%
====== ====== =========== ======
</TABLE>
Note: Percentage totals may not add due to rounding.
[VA Loans]
<TABLE>
<CAPTION>
Percent by
Aggregate Aggregate
Number of Percent of Principal Principal
Mortgage Assets by Balance as of Balance as of
VA Loans Loans Number the Cut-off Date the Cut-off Date
-------- ------- -------- ---------------- ----------------
<S> <C> <C> <C> <C>
Total 100.00% $ 100.00%
====== ====== =========== ======
</TABLE>
Note: Percentage totals may not add due to rounding.
S-30
<PAGE> 36
[Non-Performing Mortgage Loans]
<TABLE>
<CAPTION>
Non- Percent by
Performing Aggregate Aggregate
Mortgage Number of Percent of Principal Principal
-------- Mortgage Assets by Balance as of Balance as of
Loans Loans Number the Cut-off Date the Cut-off Date
----- ----- ------ ---------------- ----------------
<S> <C> <C> <C> <C>
Total 100.00% $ 100.00%
====== ====== =========== ======
</TABLE>
Note: Percentage totals may not add due to rounding.
[Sub-Performing Mortgage Loans]
<TABLE>
<CAPTION>
Sub- Percent by
Performing Aggregate Aggregate
Mortgage Number of Percent of Principal Principal
-------- Mortgage Assets by Balance as of Balance as of
Loans Loans Number the Cut-off Date the Cut-off Date
----- ----- ------ ---------------- ----------------
<S> <C> <C> <C> <C>
Total 100.00% $ 100.00%
====== ====== =========== ======
</TABLE>
Note: Percentage totals may not add due to rounding.
[Reinstated Mortgage Loans]
<TABLE>
<CAPTION>
Percent by
Reinstated Aggregate Aggregate
Mortgage Number of Percent of Principal Principal
-------- Mortgage Assets by Balance as of Balance as of
Loans Loans Number the Cut-off Date the Cut-off Date
----- ----- ------ ---------------- ----------------
<S> <C> <C> <C> <C>
Total 100.00% $ 100.00%
====== ====== =========== ======
</TABLE>
Note: Percentage totals may not add due to rounding.
S-31
<PAGE> 37
UNDERWRITING STANDARDS
All of the Mortgage Loans were originated or acquired by _______,
generally in accordance with the underwriting criteria described herein.
[Description of underwriting standards.]
[CERTAIN CHARACTERISTICS OF MBS]
[Particular textual and table disclosure for all MBS collateral]
[CERTAIN CHARACTERISTICS OF THE AGENCY SECURITIES]
[Particular textual and table disclosure for all Agency Securities
collateral]
ADDITIONAL INFORMATION
The description in this Prospectus Supplement of the Assets is based
upon the Trust Fund as expected to be constituted at the close of business on
the Cut-off Date, as adjusted for the scheduled principal payments due on or
before such date. Prior to the issuance of the Offered Certificates, an Asset
may be removed from the Trust Fund as a result of incomplete documentation or
otherwise, if the Depositor deems such removal necessary or appropriate and may
be prepaid at any time. A limited number of other assets may be included in the
Trust Fund prior to the issuance of the Offered Certificates unless including
such assets would materially alter the characteristics of the Trust Fund as
described herein. The Depositor believes that the information set forth herein
will be representative of the characteristics of the Trust Fund as it will be
constituted at the time the Offered Certificates are issued.
A Current Report on Form 8-K will be available to purchasers of the
Offered Certificates and will be filed, together with Exhibits, with the
Securities and Exchange Commission within fifteen days after the initial
issuance of the Offered Certificates. In the event Assets are removed from or
added to the Trust Fund as set forth in the preceding paragraph, such removal or
addition will be noted on a Form 8-K.
DESCRIPTION OF THE CERTIFICATES
GENERAL
The Certificates will be issued pursuant to the Pooling and Servicing
Agreement and will consist of ____ Classes to be designated as the Class __
Certificates, the Class __ Certificates, the Class __ Certificates and the Class
__ Certificates. The Class __ Certificates (the "Subordinate Certificates") will
be subordinate to the Class __ Certificates and the Class __ Certificates (the
"Senior Certificates"), as described herein. The Offered Certificates will be
issued in [book-entry][fully registered, certificated] form only. The Offered
Certificates will be issued in denominations of $_______ and integral multiples
of $_____________ in excess thereof[, with one Certificate of each Class
evidencing an additional amount equal to the remainder of the Security Principal
Balance thereof]. The Offered Certificates will be freely transferrable and
exchangeable at the corporate trust office of the Trustee.
The Certificates represent in the aggregate the entire beneficial
ownership interest in a Trust Fund consisting of: (i) [the Mortgage Loans] [the
MBS] [the Agency Securities] and all payments under and proceeds in respect
thereof received after the Cut-off Date (exclusive of payments of principal and
interest due on or before the Cut-off Date); (ii) any Mortgaged Property
acquired on behalf of the Trust Fund through foreclosure or deed in lieu of
foreclosure (upon
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<PAGE> 38
acquisition, "REO Property"); (iii) such funds or assets as from time to time
are deposited in the Certificate Account and any account established in
connection with REO Property (the "REO Account"); and (iv) the rights of the
mortgagee under all insurance policies with respect to the Mortgage Loans. Only
the Class __ Certificates, the Class __ Certificates and the Class __
Certificates (together, the "Offered Certificates") are offered hereby.
The Class __ Certificates will have an initial [Security Principal
Balance] [Notional Balance of] $__________. The Class __ Certificates represent
___% of the aggregate Principal Balance of the Assets as of the Cut-off Date.
The Class __ Certificates will have an initial Security Principal Balance of
$__________, representing ___% of the aggregate Principal Balance of the Assets
as of the Cut-off Date. The Class __ Certificates will have an initial Security
Principal Balance of $__________, representing ___% of the aggregate Principal
Balance of the Assets as of the Cut-off Date. The initial Security Principal
Balance of the Class __ Certificates will be [zero]. The Security Principal
Balance of any Class of Certificates outstanding at any time represents the
maximum amount which the holders thereof are entitled to receive as
distributions allocable to principal from the cash flow on the Assets. The
respective Security Principal Balances of the Class __, Class __, Class __ and
Class ___ Certificates (respectively, the "Class __ Balance", "Class __
Balance", "Class __ Balance" and "Class __ Balance") will in each case be
reduced by amounts actually distributed on such Class that are allocable to
principal. [The Security Principal Balance of the Class __ Certificates (the
"Class __ Balance") will at any time equal the aggregate Principal Balance of
the Assets minus the sum of the Class __ Balance, Class __ Balance and Class __
Balance.] The Principal Balance of any Asset at any date of determination will
equal (a) the Cut-off Date Balance of such Asset, minus (b) the sum of (i) the
principal portion of each Payment due on such Asset after the Cut-off Date, to
the extent received from the Mortgagor or advanced by the Master Servicer and
distributed to holders of the Certificates before such date of determination,
(ii) all principal prepayments and other unscheduled collections of principal
received with respect to such Asset, to the extent distributed to holders of the
Certificates before such date of determination, and (iii) any reduction in the
outstanding Principal Balance of such Asset resulting out of a bankruptcy
proceeding for the related Mortgagor.
[None of the Class __ Certificates are offered hereby.]
[BOOK-ENTRY REGISTRATION
If so provided in the related Prospectus Supplement, one or more Classes
of the Offered Certificates will be issued as Book-Entry securities (the
"Book-Entry Securities"), and each such Class will be represented by one or more
single Certificates registered in the name of a nominee for DTC.
DTC is a limited-purpose trust company organized under the laws of the
State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the Uniform Commercial Code ("UCC") and a
"clearing agency" registered pursuant to the provisions of Section 17A of the
Securities Exchange Act of 1934, as amended. DTC was created to hold securities
for its participating organizations ("Participants") and facilitate the
clearance and settlement of securities transactions between Participants through
electronic book-entry changes in their accounts, thereby eliminating the need
for physical movement of certificates. Participants include securities brokers
and dealers, banks, trust companies and clearing corporations and may include
certain other organizations. Indirect access to the DTC system also is available
to others such as banks, brokers, dealers and trust companies that clear through
or maintain a custodial relationship with a Participant, either directly or
indirectly ("Indirect Participants").
Investors that are not Participants or Indirect Participants but desire
to purchase, sell or otherwise transfer ownership of, or other interests in,
Book-Entry Securities may do so only through Participants and Indirect
Participants. In addition, such investors ("Security Owners") will receive all
distributions on the Book-Entry Securities through DTC and its Participants.
Under a book-entry format, Security Owners will receive payments after the
related Payment Date because, while payments are required to be forwarded to
Cede, on each such date, DTC will forward such payments to its Participants
which thereafter will be required to forward them to Indirect Participants or
Security Owners. The only "Securityholder" (as such term is used in the Pooling
and Servicing Agreement) will be Cede, as nominee of DTC, and
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the Security Owners will not be recognized by the Trustee as Securityholders
under the Pooling and Servicing Agreement. Security Owners will be permitted to
exercise the rights of Securityholders under the Pooling and Servicing Agreement
only indirectly through the Participants who in turn will exercise their rights
through DTC.
Under the rules, regulations and procedures creating and affecting DTC
and its operations, DTC is required to make book-entry transfers among
Participants on whose behalf it acts with respect to the Book-Entry Securities
and is required to receive and transmit distributions of principal of and
interest on the Book-Entry Securities. Participants and Indirect Participants
with which Security Owners have accounts with respect to the Book-Entry
Securities similarly are required to make book-entry transfers and receive and
transmit such payments on behalf of their respective Security Owners.
Because DTC can act only on behalf of Participants, who in turn act on
behalf of Indirect Participants and certain banks, the ability of a Security
Owner to pledge its interest in the Book-Entry Securities to persons or entities
that do not participate in the DTC system, or otherwise take actions in respect
of its interest in the Book-Entry Securities, may be limited due to the lack of
a physical certificate evidencing such interest.
DTC has advised the Depositor that it will take any action permitted to
be taken by the holders of the Book-Entry Securities under the Pooling and
Servicing Agreement only at the direction of one or more Participants to whose
account with DTC interests in the Book-Entry Securities are credited.
Offered Certificates initially issued in book-entry form will be issued
in fully registered, certificated form to Security Owners or their nominees
("Definitive Securities"), rather than to DTC or its nominee only if (i) the
Depositor advises the Trustee in writing that DTC is no longer willing or able
to properly discharge its responsibilities as depository with respect to the
Offered Certificates and the Depositor is unable to locate a qualified successor
or (ii) the Depositor, at its option, elects to terminate the book-entry system
through DTC.
Upon the occurrence of either of the events described in the immediately
preceding paragraph, DTC is required to notify all Participants of the
availability through DTC of Definitive Securities for the Security Owners. Upon
surrender by DTC of the certificate or certificates representing the Book-Entry
Securities, together with instructions for re-registration, the Trustee will
issue (or cause to be issued) to the Security Owners identified in such
instructions the Definitive Securities to which they are entitled, and
thereafter the Trustee will recognize the holders of such Definitive Securities
as Certificateholders under the Pooling and Servicing Agreement.
None of the Depositor, the Master Servicer, any Sub-Servicer, the
Trustee, or any of their affiliates 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 Securities or for maintaining, supervising or
reviewing any records relating to such beneficial ownership interests.]
Distributions
Method, Timing and Amount. Distributions on the Certificates will be
made on the ____ day of each month or, if such ____ day is not a Business Day,
then on the next succeeding Business Day, commencing in ____________________
199_ (each, a "Distribution Date"). All distributions (other than the final
distribution on any Certificate) will be made by the [Master Servicer][Trustee]
to the persons in whose names the Certificates are registered at the close of
business on each Record Date, which will be the [last Business Day of the month]
preceding the month in which the related Distribution Date occurs. Such
distributions will be made by wire transfer in immediately available funds to
the account specified by the Certificateholder at a bank or other entity having
appropriate facilities therefor, if such Certificateholder will have provided
the [Master Servicer][Trustee] with wiring instructions no less than five
Business Days prior to the related Record Date and is the registered owner of
Certificates the aggregate initial principal amount
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<PAGE> 40
of which is at least $__________, or otherwise by check mailed to such
Certificateholder. The final distribution on any Certificate will be made in
like manner, but only upon presentment or surrender of such Certificate at the
location specified in the notice to the holder thereof of such final
distribution. All distributions made with respect to a Class of Certificates on
each Distribution Date will be allocated pro rata among the outstanding
Certificates of such Class based on their respective Percentage Interests. The
Percentage Interest evidenced by any Class __ Certificate is equal to the
initial denomination thereof as of the Closing Date, divided by the initial
Security Principal Balance for such Class. The aggregate distribution to be made
on the Certificates on any Distribution Date shall equal the Available
Distribution Amount.
The "Available Distribution Amount" for any Distribution Date is an
amount equal to (a) the sum of (i) the amount on deposit in the Certificate
Account as of the close of business on the related Determination Date, (ii) the
aggregate amount of any Advances made by the Master Servicer in respect of such
Distribution Date and (iii) the aggregate amount deposited by the Master
Servicer in the Certificate Account in respect of such Distribution Date in
connection with Prepayment Interest Shortfalls incurred during the related Due
Period, net of (b) the portion of the amount described in clause (a)(i) hereof
that represents (i) Payments due on a Due Date subsequent to the end of the
related Due Period, (ii) any voluntary principal prepayments and other
unscheduled recoveries on the Assets received after the end of the related Due
Period or (iii) any amounts payable or reimbursable therefrom to any person.
Priority. On each Distribution Date the Available Distribution Amount
will be distributed in the following amounts in the following order of priority:
(1) to the holders of the Class __ Certificates, the amount of all
Distributable Certificate Interest in respect of the Class __
Certificates for such Distribution Date, and, to the extent not
previously distributed, for all preceding Distribution Dates;
(2) to the holders of the Class __ Certificates, the amount of all
Distributable Certificate Interest in respect of the Class __
Certificates for such Distribution Date, and, to the extent not
previously distributed, for all preceding Distribution Dates;
(3) to the holders of the Class __ Certificates, the amount, not to
exceed the Class __ Security Principal Balance outstanding
immediately prior to such Distribution Date, equal to the sum of
the then Class __ Scheduled Principal Distribution Percentage of
(A) the Scheduled Principal Distribution Amount for such
Distribution Date and (B) the Unscheduled Principal Distribution
Amount for such Distribution Date;
(4) to the holders of the Class __ Certificates, the amount, not to
exceed the Class __ Security Principal Balance outstanding
immediately prior to such Distribution Date, equal to the sum of
the then Class __ Scheduled Principal Distribution Percentage of
(A) the Scheduled Principal Distribution Amount for such
Distribution Date and (B) the Unscheduled Principal Distribution
Amount for such Distribution Date;
(5) to the holders of the Subordinate Certificates, the amount of all
Distributable Certificate Interest in respect of the Subordinate
Certificates for such Distribution Date, and, to the extent not
previously distributed, for all preceding Distribution Dates;
(6) to the holders of the Subordinate Certificates, the amount, not
to exceed the Subordinate Security Principal Balance outstanding
immediately prior to such Distribution Date, equal to the sum of
the then Class __ Scheduled Principal Distribution Percentage of
(A) the Scheduled Principal Distribution Amount for such
Distribution Date and (B) the Unscheduled Principal Distribution
Amount for such Distribution Date;
(7) [Liquidity Facility, if any];
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<PAGE> 41
(8) [Credit Support, if any];
(9) [Interest Only Security, if any]; and
(10) any remainder to the holders of the Class __ Certificates.
Calculations of Interest. The "Distributable Certificate Interest" in
respect of any Class of Certificates for any Distribution Date represents that
portion of the Accrued Certificate Interest in respect of such Class of
Certificates for such Distribution Date that is net of such Class' pro-rata
share of the aggregate portion of any Prepayment Interest Shortfalls resulting
from voluntary principal prepayments on the Assets during the related Due Period
[that are not covered by the application of servicing compensation of the Master
Servicer for the related Due Period (such uncovered aggregate portion, as to
such Distribution Date,] the "Net Aggregate Prepayment Interest Shortfall").
The "Accrued Certificate Interest" in respect of each Class of
Certificates for any Distribution Date is equal to thirty days' interest accrued
during the related Interest Accrual Period at the Pass-Through Rate applicable
to such Class of Certificates for such Distribution Date accrued on the related
Security Principal Balance outstanding immediately prior to such Distribution
Date. The Pass-Through Rate applicable to the Class __ Certificates for any
Distribution Date [is fixed and is set forth on the cover hereof] [will equal
the weighted average of the Class __ Remittance Rates in effect for the Assets
as of the commencement of the related Due Period (as to such Distribution Date,
the "Weighted Average Class __ Remittance Rate"). The "Class __ Remittance Rate"
in effect for any Asset as of any date of determination (a) prior to its first
Interest Rate Adjustment Date, is equal to the related Asset Rate then in effect
minus basis points and (b) from and after its first Interest Rate Adjustment
Date, is equal to the related Asset Rate then in effect minus the excess of the
related Gross Margin over basis points. The "Interest Accrual Period" for the
Certificates is the calendar month preceding the month in which the Distribution
Date occurs.] [is equal to the excess of the Asset Rate thereon over ____% per
annum.]
The portion of Net Aggregate Prepayment Interest Shortfall for any
Distribution Date that will be allocated to the Class __ Certificates on such
Distribution Date will be equal to the then applicable Class __ Interest
Allocation Percentage. The "Class __ Interest Allocation Percentage" for any
Distribution Date will equal a fraction, expressed as a percentage, the
numerator of which is equal to the product of (a) the Class __ Balance [(net of
any Uncovered Portion thereof)] outstanding immediately prior to such
Distribution Date, multiplied by (b) the Pass-Through Rate for the Class __
Certificates for such Distribution Date, and the denominator of which is the
product of (x) the aggregate Principal Balance of the Assets outstanding
immediately prior to such Distribution Date, multiplied by (y) the Weighted
Average Net Asset Rate for such Distribution Date. The "Net Asset Rate" in
effect for any Asset as of any date of determination is equal to the related
Asset Rate then in effect minus basis points. [The "Uncovered Portion" of the
Class __ Balance, as of any date of determination, is the portion thereof
representing the excess, if any, of (a) the Class __ Balance then outstanding,
over (b) the aggregate Principal Balance of the Assets then outstanding.]
[The Pass-Through Rate on the Offered Certificates will be computed on
the basis of a 360 day year consisting of 12 months of 30 days each.] [The
Pass-Through Rate on the Offered Certificates will be calculated on the basis of
the actual number of days in each Interest Accrual Period divided by 360.]
[The Class __ Certificates will not be entitled to distributions of
interest and will not have a Pass-Through Rate.]
Calculations of Principal. The "Scheduled Principal Distribution
Amount" for any Distribution Date is equal to the aggregate of the principal
portions of all Payments, including Balloon Payments, due during or, if and to
the extent not previously received or advanced and distributed to
Certificateholders on a preceding Distribution Date, prior to the related Due
Period, in each case to the extent paid by the related mortgagor or advanced by
the Master Servicer and included in the Available Distribution Amount for such
Distribution Date. The principal portion of any Advances in
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respect of a Assets delinquent as to its Balloon Payment will constitute
advances in respect of the principal portion of such Balloon Payment.
The "Unscheduled Principal Distribution Amount" for any Distribution
Date is equal to the sum of: (a) all voluntary principal prepayments received on
the Assets during the related Due Period; and (b) the excess, if any, of (i) all
unscheduled recoveries received on the Assets during the related Due Period,
whether in the form of liquidation proceeds, condemnation proceeds, insurance
proceeds or amounts paid in connection with the purchase of an Asset out of the
Trust Fund, exclusive in each case of any portion thereof payable or
reimbursable to the Master Servicer in connection with the related Asset, over
(ii) the respective portions of the net amounts described in the immediately
preceding clause (i) needed to cover interest (at the applicable Net Asset Rate
in effect from time to time) on the related Asset from the date to which
interest was previously paid or advanced through the Due Date for such Asset in
the related Due Period.
[The "Class __ Scheduled Principal Distribution Percentage" for any
Distribution Date will equal the lesser of (a) 100% and (b) a fraction,
expressed as a percentage, the numerator of which is the Class __ Security
Principal Balance outstanding immediately prior to such Distribution Date, and
the denominator of which is the lesser of (i) the sum of the Class __ Balance,
the Class __ Balance and the Class __ Balance and (ii) the aggregate Principal
Balance of the Assets, in either case outstanding immediately prior to such
Distribution Date. The "Class __ Scheduled Principal Distribution Percentage"
for any Distribution Date will equal (a) if the Security Principal Balance of
the Class __ Certificates has been reduced to zero, 100%, (b) otherwise, the
lesser of (i) 100% and (ii) a fraction, expressed as a percentage, the numerator
of which is the Class __ Security Principal Balance outstanding immediately
prior to such Distribution Date, and the denominator of which is the lesser of
(1) the sum of the Class __ Balance, the Class __ Balance and the Class __
Balance and (2) the aggregate Principal Balance of the Assets, in either case
outstanding immediately prior to such Distribution Date. The "Class __ Scheduled
Principal Distribution Percentage" for any Distribution Date will equal (a)
prior to _____, 20__, 0%, (b) if the Security Principal Balance of the Class __
Certificates and the Class __ Certificates have been reduced to zero, 100%, and
(c) at any other time, the lesser of (i) 100% and (ii) a fraction, expressed as
a percentage, the numerator of which is the Class __ Security Principal Balance
outstanding immediately prior to such Distribution Date, and the denominator of
which is the lesser of (1) the sum of the Class __ Balance, the Class __ Balance
and the Class __ Balance and (2) the aggregate Principal Balance of the Assets,
in either case outstanding immediately prior to such Distribution Date.]
SUBORDINATION
In order to maximize the likelihood of distribution in full of the
Class __ Interest Distribution Amount and the Class __ Interest Distribution
Amount, and the Class __ Scheduled Principal Distribution Amount and the Class
__ Scheduled Principal Distribution Amount, on each Distribution Date, holders
of the Senior Certificates have a right to distributions of the Available
Distribution Amount that is prior to the rights of the holders of the
Subordinate Certificates, to the extent necessary to satisfy the Class __
Interest Distribution Amount and Class __ Interest Distribution Amount, and the
Class __ Scheduled Principal Distribution Amount and the Class __ Scheduled
Principal Distribution Amount.
[The principal portion of any Realized Losses will be allocated first
in reduction of the Subordinate Certificates [in the order specified here] and
then to the Senior Certificates [in the order specified here]. Any losses
realized on an Asset that is finally liquidated equal to the excess of the
Principal Balance of such Asset remaining, if any, plus interest thereon
through the last day of the month in which such Asset was finally liquidated,
after application of all amounts received (net of amounts reimbursable to the
Master Servicer or any Sub-Servicer for Advances and expenses, including
attorneys' fees) towards interest and principal owing on the Asset, is referred
to herein as a "Realized Loss."]
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<PAGE> 43
ADVANCES
On or prior to the Business Day immediately preceding each Distribution
Date, the Master Servicer will either (1) deposit from its own funds the related
Advance into the Certificate Account; (2) cause appropriate entries to be made
in the records of the Certificate Account that funds in the Certificate Account
that are not part of the Available Distribution Amount for the related
Distribution Date have been used to make the Advance; (3) if the Certificate
Account is maintained by the Trustee, instruct the Trustee to use investment
earnings on the Certificate Account to defray the Master Servicer's Advance
obligation; or (4) make (or cause to be made) the aggregate Advance through any
combination of the methods described in clauses (1), (2) and (3) above. Any
funds held for future distribution and used in accordance with clause (2) above
must be restored by the Master Servicer from its own funds or from early
payments collected on the Assets when they become part of a future Available
Distribution Amount. The aggregate Advance for a Distribution Date is the sum of
delinquent scheduled Payments due in the related Due Period, exclusive of all
Nonrecoverable Advances.
Advances are intended to maintain a regular flow of scheduled interest
and principal payments to Certificateholders rather than to guarantee or insure
against losses.
[The Master Servicer will also be obligated to make Advances to the
extent the Master Servicer deems such Advances recoverable out of Liquidation
Proceeds or from collections on the related Asset, in respect of Liquidation
Expenses and certain taxes and insurance premiums not paid by a Mortgagor on a
timely basis.
The Master Servicer will reimburse itself for Advances out of
collections of the late payments in respect of which such Advances were made. In
addition, upon the determination that a Nonrecoverable Advance has been made in
respect of an Asset or upon an Asset becoming a Liquidated Asset, the Master
Servicer will reimburse itself out of funds in the Certificate Account for
unreimbursed amounts advanced by it in respect of such Asset.]
CREDIT SUPPORT
[Disclose particular Credit Support, if any]
LIQUIDITY FACILITIES
[Disclose particular Liquidity Facilities, if any]
CERTAIN YIELD, PREPAYMENT AND MATURITY CONSIDERATIONS
The yield to maturity on the Offered Certificates will be affected by
the rate of principal payments on the Assets including, for this purpose,
prepayments, which may include amounts received by virtue of repurchase,
condemnation, insurance or foreclosure. The yield to maturity on the Offered
Certificates will also be affected by the level of any Index. The rate of
principal payments on the Offered Certificates will correspond to the rate of
principal payments (including prepayments) on the related Assets.
[Description of factors affecting yield, prepayment and maturity of the
Assets and Class __ Certificates depending upon characteristics of the Assets.]
WEIGHTED AVERAGE LIFE OF THE OFFERED CERTIFICATES
Weighted average life refers to the average amount of time from the date
of issuance of a security until each dollar of principal of such security will
be repaid to the investor. The weighted average life of the Offered Certificates
will be influenced by the rate at which principal payments (including scheduled
payments, principal prepayments and payments
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<PAGE> 44
made pursuant to any applicable policies of insurance) on the Assets are made.
Principal payments on the Assets may be in the form of scheduled amortization or
prepayments (for this purpose, the term "prepayment" includes prepayments and
liquidations due to a default or other dispositions of the Assets).
The table of Percent of initial Security Principal Balance Outstanding
for the Offered Certificates at the respective percentages of [CPR] [SPA] set
forth below indicates the weighted average life of such Certificates and sets
forth the percentage of the initial principal amount of such Certificates that
would be outstanding after each of the dates shown at the indicated percentages
of [CPR][SPA]. The table has been prepared on the basis of the following
assumptions regarding the characteristics of the Assets: (i) an outstanding
Principal Balance of $_________, a remaining amortization term of ___ months and
a term to balloon of ___ months: (ii) an interest rate equal to ____% per annum
until the Due Date and thereafter an interest rate equal to % per annum (at an
assumed Index of ____%) and Payments that would fully amortize the remaining
balance of the Asset over its remaining amortization term; (iii) the Assets
prepay at the indicated percentage of [CPR][SPA]; (iv) the maturity date of each
of the Balloon Mortgage Loans is not extended; (v) distributions on the Offered
Certificates are received in cash, on the 25th day of each month, commencing
in_____________; (vi) no defaults or delinquencies in, or modifications, waivers
or amendments respecting, the payment by the mortgagors of principal and
interest on the Assets occur; (vii) the initial Security Principal Balance of
the Offered Certificates is $________; (viii) prepayments represent payment in
full of individual Assets and are received on the respective Due Dates and
include 30 days' interest thereon; (ix) there are no repurchases of Assets due
to breaches of any representation and warranty or otherwise; (x) the Offered
Certificates are purchased on ________; (xi) the Servicing Fee is ____% per
annum; and (xii) the Index on each Interest Rate Adjustment Date is ________%
per annum.
Based on the foregoing assumptions, the table indicates the weighted
average life of the Offered Certificates and sets forth the percentages of the
initial Security Principal Balance of the Offered Certificates that would be
outstanding after the Distribution Date in ___________ of each of the years
indicated, at various percentages of [CPR][SPA]. Neither [CPR][SPA] nor any
other prepayment model or assumption purports to be a historical description of
prepayment experience or a prediction of the anticipated rate of prepayment of
any pool of mortgage loans, including the Assets included in the Trust Fund.
Variations in the actual prepayment experience and the balance of the Assets
that prepay may increase or decrease the percentage of initial Security
Principal Balance (and weighted average life) shown in the following table. Such
variations may occur even if the average prepayment experience of all such
Assets is the same as any of the specified assumptions.
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<PAGE> 45
Percent of Initial Class [ ] Security Principal Balance Outstanding
at the Following Percentages of [CPR][SPA]
Distribution Date
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Initial Percent................. ___% __% __% __% __% __%
____________ 25, 19__...........
____________ 25, 19__...........
____________ 25, 19__...........
____________ 25, 19__...........
____________ 25, 19__...........
____________ 25, 19__...........
____________ 25, 19__...........
____________ 25, 20__...........
____________ 25, 20__...........
____________ 25, 20__...........
____________ 25, 20__...........
Weighted Average Life
(Years) ( . . . . . . . .
</TABLE>
The weighted average life of the Class [ ] Certificates is determined by
(i) multiplying the amount of each distribution of principal by the
number of years from the date of issuance to the related Distribution
Date, (ii) adding the results and (iii) dividing the sum by the total
principal distributions on such class of Certificates.
[Class [ ] Yield Consideration]
[Will describe assumption for various scenarios showing sensitivity of
certain classes to prepayment and default risks and set forth resulting yield.]
[THE CREDIT SUPPORT ISSUER, if any]
[Description of Credit Support Issuer]
[THE LIQUIDITY FACILITY ISSUER, if any]
[Description of Liquidity Facility Issuer]
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<PAGE> 46
THE DEPOSITOR
Union Planters Mortgage Finance Corp. (the "Depositor") was incorporated
in the State of Delaware on September 5, 1997. As of the date hereof, the
Depositor is a direct, wholly-owned limited purpose finance subsidiary of Union
Planters National Bank, a national banking association. Neither Union Planters
National Bank nor the Depositor, nor any affiliate of the foregoing, has
guaranteed or is otherwise obligated with respect to the Bonds. The principal
executive offices of the Depositor are located at 7130 Goodlett Farms Parkway,
Cordova, Tennessee 38018 (Telephone: (901) 580-6000). See "The Depositor" in the
Prospectus.
POOLING AND SERVICING AGREEMENT
GENERAL
The Certificates will be issued pursuant to a Pooling and Servicing
Agreement to be dated as of ____________ 1, 199_ (the "Pooling and Servicing
Agreement"), by and among the Depositor, the Master Servicer and the Trustee,
which incorporates by reference the Depositor's Standard Terms to Pooling and
Servicing Agreement (September 1997 Edition).
Reference is made to the Prospectus for important information in
addition to that set forth herein regarding the terms and conditions of the
Pooling and Servicing Agreement and the Offered Certificates. The Depositor will
provide to a prospective or actual Certificateholder, without charge, upon
written request, a copy (without exhibits) of the Pooling and Servicing
Agreement. Requests should be addressed to Union Planters Mortgage Finance
Corp., 7130 Goodlett Farms Parkway, Cordova, Tennessee 38018, Attention:
President.
ASSIGNMENT OF THE MORTGAGE LOANS
On or prior to the Closing Date, the Depositor will assign or cause to
be assigned the Assets, without recourse, to the Trustee for the benefit of the
Certificateholders. Prior to the Closing Date, the Depositor will, as to each
Mortgage Loan, deliver to the Trustee (or the custodian hereinafter referred
to), among other things, the following documents (collectively, as to such
Mortgage Loan, the "Mortgage File"): (i) the original or, if accompanied by a
"lost note" affidavit, a copy of the Mortgage Note, duly endorsed, which
transferred such Mortgage Loan, without recourse, in blank or to the order of
Trustee; (ii) the original Mortgage or a certified copy thereof, and any
intervening assignments thereof, or certified copies of such intervening
assignments, in each case with evidence of recording thereon; (iii) an
assignment of the Mortgage, duly executed, which transferred such Mortgage Loan,
in blank or to the order of the Trustee, in recordable form; (iv) assignments of
any related assignment of leases, rents and profits and any related security
agreement (if, in either case, such item is a document separate from the
Mortgage), which transferred such Mortgage Loan, in blank or to the order of the
Trustee; (v) originals or certified copies of all assumption, modification and
substitution agreements in those instances where the terms or provisions of the
Mortgage or Mortgage Note have been modified or the Mortgage or Mortgage Note
has been assumed; and (vi) the originals or certificates of a lender's title
insurance policy issued on the date of the origination of such Mortgage Loan or,
with respect to each Mortgage Loan not covered by a lender's title insurance
policy, an attorney's opinion of title given by an attorney licensed to practice
law in the jurisdiction where the Mortgaged Property is located. The Pooling and
Servicing Agreement will require the Depositor promptly (and in any event within
120 days of the Closing Date) to cause each assignment of the Mortgage described
in clause (iii) above to be submitted for recording in the real property records
of the jurisdiction in which the related Mortgaged Property is located. Any such
assignment delivered in blank will be completed to the order of the Trustee
prior to recording. The Pooling and Servicing Agreement will also require the
Depositor to cause the endorsements on the Mortgage Notes delivered in blank to
be completed to the order of the Trustee. [Delivery of MBS and Agency
Securities, if applicable.]
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THE MASTER SERVICER
General. [Union Planters National Bank, a national banking association,
will act as Master Servicer (in such capacity, the "Master Servicer") for the
Certificates pursuant to the Pooling and Servicing Agreement. The Master
Servicer, a wholly-owned banking subsidiary of Union Planters Corporation, is
engaged, among other things, in the mortgage banking business and, as such,
originates, purchases, sells and services mortgage loans.]
The executive offices of the Master Servicer are located at
_______________, telephone number (__)__________.
Delinquency and Foreclosure Experience. The following tables set forth
certain information concerning the delinquency experience (including pending
foreclosures) on one- to four- family residential mortgage loans included in the
Master Servicer's servicing portfolio (which includes mortgage loans that are
subserviced by others). The indicated periods of delinquency are based on the
number of days past due on a contractual basis. No mortgage loan is considered
delinquent for these purposes until 31 days past due on a contractual basis.
<TABLE>
<CAPTION>
As of December 31, 19 As of December 31, 19 As of , 19
---------------------- ---------------------- ----------
By Dollar By Dollar By Dollar
By No. of Amount of By No. of Amount of By No. of Amount of
Loans Loans Loans Loans Loans Loans --
----- ----- ----- ----- ----- -----
(Dollar Amount in Thousands)
<S> <C> <C> <C> <C> <C>
Total Portfolio ________ ________ $______ ________ $________
$________
Period of
Delinquency
31 to 59 days ( %) ( %) ( %)
60 to 89 days ( %) ( %) ( %)
90 days or more ( %) _________ ( %) ________ ( %) _________
________ _______ _________
Total Delinquent ________ $________ _______ $_______ _________
Loans $ ________
Percent of Portfolio % % % % %
%
Foreclosures
pending (1)
Percent of Portfolio % % % % %
%
Foreclosures
Percent of Portfolio % % % % %
%
</TABLE>
- --------------------
S-42
<PAGE> 48
(1) Includes bankruptcies which preclude foreclosure.
There can be no assurance that the delinquency and foreclosure
experience of the Assets comprising the Trust Fund will correspond to the
delinquency and foreclosure experience of the Master Servicer's mortgage
portfolio set forth in the foregoing tables. The aggregate delinquency and
foreclosure experience on the Assets comprising the Trust Fund will depend on
the results obtained over the life of the Trust Fund.
CERTIFICATE ACCOUNT
The Master Servicer is required to deposit on a daily basis all amounts
received with respect to the Assets of the Trust Fund, net of its servicing
compensation, into a separate Certificate Account maintained with ____________.
Interest or other income earned on funds in the Certificate Account will be paid
to the Master Servicer as additional servicing compensation. See "Description of
the Trust Funds -- Assets" and "Description of the Agreements -- Security
Account and Other Collection Accounts" in the Prospectus.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
[Disclose Servicing Standard]
The principal compensation to be paid to the Master Servicer in respect
of its master servicing activities will be the Servicing Fee. The Servicing Fee
will be payable monthly only from amounts received in respect of interest on
each Asset, will accrue at the Servicing Fee Rate and will be computed on the
basis of the same principal amount and for the same period respecting which any
related interest payment on such Asset is computed. The Servicing Fee Rate [with
respect to each Asset equals % per annum] [equals the weighted average of the
excesses of the Asset Rates over the respective Net Asset Rates].
As additional servicing compensation, the Master Servicer is entitled to
retain all assumption fees, prepayment penalties and late payment charges, to
the extent collected from mortgagors, together with any interest or other income
earned on funds held in the Certificate Account and any escrow accounts. The
Servicing Standard requires the Master Servicer to, among other things,
diligently service and administer the Assets on behalf of the Trustee and in the
best interests of the Certificateholders, but without regard to the Master
Servicer's right to receive such additional servicing compensation. The Master
Servicer is obligated to pay certain ongoing expenses associated with the Trust
Fund and incurred by the Master Servicer in connection with its responsibilities
under the Pooling and Servicing Agreement. See "Description of the Agreements --
Retained Interest; Servicing Compensation and Payment of Expenses" in the
Prospectus for information regarding other possible compensation payable to the
Master Servicer and for information regarding expenses payable by the Master
Servicer [and "Certain Federal Income Tax Consequences" herein regarding certain
taxes payable by the Master Servicer].
REPORTS TO CERTIFICATEHOLDERS
On each Distribution Date the Master Servicer shall furnish to each
Certificateholder, to the Depositor, to the Trustee and to the Rating Agency a
statement setting forth certain information with respect to the Assets and the
Certificates required pursuant to the Pooling and Servicing Agreement. In
addition, within a reasonable period of time after each calendar year, the
Master Servicer shall furnish to each person who at any time during such
calendar year was the holder of a Certificate a statement containing certain
information with respect to the Certificates required pursuant to the Pooling
and Servicing Agreement, aggregated for such calendar year or portion thereof
during which such person was a Certificateholder. See "Description of the
Offered Securities -- Reports to Securityholders in the Prospectus.
S-43
<PAGE> 49
VOTING RIGHTS
At all times during the term of the Pooling and Servicing Agreement, the
Voting Rights shall be allocated among the Classes of Certificateholders in
proportion to the respective Security Principal Balances of their Certificates
[(net, in the case of the Class __, Class __ and Class __ Certificates, of any
Uncovered Portion of the related Security Principal Balance)]. Voting Rights
allocated to a class of Certificateholders shall be allocated among such
Certificateholders in proportion to the Percentage Interests evidenced by their
respective Certificates.
TERMINATION
The obligations created by the Pooling and Servicing Agreement will
terminate following the earliest of (i) the final payment or other liquidation
of the last Asset or REO Property subject thereto, and (ii) the purchase of all
of the assets of the Trust Fund by the Master Servicer. Written notice of
termination of the Pooling and Servicing Agreement will be given to each
Certificateholder, and the final distribution will be made only upon surrender
and cancellation of the Certificates at the office of the Certificate Registrar
specified in such notice of termination.
Any such purchase by the Master Servicer of all the Assets and other
assets in the Trust Fund is required to be made at a price equal to the greater
of (1) the aggregate fair market value of all the Assets and REO Properties then
included in the Trust Fund, as mutually determined by the Master Servicer and
the Trustee, and (2) the excess of (a) the sum of (i) the aggregate Purchase
Price of all the Assets then included in the Trust Fund and (ii) the fair market
value of all REO Properties then included in the Trust Fund, as determined by an
appraiser mutually agreed upon by the Master Servicer and the Trustee, over (b)
the aggregate of amounts payable or reimbursable to the Master Servicer under
the Pooling and Servicing Agreement. Such purchase will effect early retirement
of the then outstanding Offered Certificates, but the right of the Master
Servicer to effect such termination is subject to the requirement that the
aggregate Principal Balance of the Assets then in the Trust Fund is less than
__% of the aggregate Principal Balance of the Assets as of the Cut-off Date. [In
addition, the Master Servicer may at its option purchase any Class or Classes of
Offered Certificates with a Security Principal Balance less than __% of the
original balance thereof at a price equal to such Security Principal Balance
plus accrued interest through _________.]
THE TRUSTEE
_______________ is the Trustee under the Pooling and Servicing
Agreement. The mailing address of the Trustee is _________________, Attention:
Corporate Trust Department.
USE OF PROCEEDS
Substantially all of the net proceeds to be received from the sale of
the Certificates will be used to purchase the Assets simultaneously and to pay
other expenses connected with pooling the Assets and issuing the Certificates.
UNDERWRITING
The Depositor has entered into an underwriting agreement dated ________
__, 19__ (the "Underwriting Agreement") with _________________ (the
"Underwriter"). Subject to the terms and conditions set forth in the
Underwriting Agreement, the Depositor has agreed to sell to the Underwriter and
the Underwriter has agreed to purchase the Offered Certificates set forth below
opposite its name.
<TABLE>
<CAPTION>
Class __ Class __ Class __
<S> <C> <C> <C>
[Underwriter] $__________ $__________ $________
</TABLE>
S-44
<PAGE> 50
The Underwriting Agreement provides that the obligations of the
Underwriter are subject to certain conditions precedent and that the Underwriter
will be obligated to purchase all of the Offered Certificates if any of the
Offered Certificates are purchased.
The Depositor has been advised that the Underwriter proposes to offer
the Offered Certificates to the public initially at the respective public
offering prices set forth on the cover page of this Prospectus Supplement, and
to certain dealers at such prices less a concession not in excess of the amount
set forth below for each Class. The Underwriter and such dealers may allow a
discount not in excess of the amount set forth below for each Class to certain
other dealers. After the initial public offering of the Offered Certificates,
the public offering prices and concessions and discounts to dealers may be
changed by the Underwriter.
<TABLE>
<CAPTION>
Concession Discount
(Percent of (Percent of
Principal Amount) Principal Amount)
<S> <C> <C>
Class __ _____% _____%
Class __ _____% _____%
Class __ _____% _____%
</TABLE>
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, concessions or commissions received by them, and any profit
on the resale of the Offered Certificates purchased by them, may be deemed to be
underwriting discounts and commissions under the Securities Act of 1933, as
amended (the "Act").
The Depositor has agreed to indemnify the Underwriter against certain
civil liabilities, including liabilities under the Act, to the extent and under
the circumstances set forth in the Underwriting Agreement.
[Until the distribution of the Offered Certificates is completed, rules
of the Securities and Exchange Commission may limit the ability of the
Underwriters and certain selling group members to bid for and purchase the
Offered Certificates. As an exception to these rules, the Underwriters are
permitted to engage in certain transactions that stabilize the price of the
Offered Certificates. Such transactions consist of bids or purchases for the
purpose of pegging, fixing or maintaining the price of the Offered Certificates.
In general, purchases of a security for the purpose of stabilization
could cause the price of the security to be higher than it might be in the
absence of such purchases.
Neither the Depositor or any of its affiliates nor any of the
Underwriters makes any representation or prediction as to the direction or
magnitude of any effect that the transactions described above may have on the
price of the Offered Certificates. In addition, neither the Depositor nor any of
its affiliates nor any of the Underwriters makes any representation that the
Underwriters will engage in such transactions or that such transactions, once
commenced, will not be discontinued without notice.]
S-45
<PAGE> 51
ERISA CONSIDERATIONS
Fiduciaries of employee benefit plans and certain other retirement
plans and arrangements, including individual retirement accounts and annuities,
Keogh plans, and collective investment funds in which such plans, accounts,
annuities or arrangements are invested (collectively, "Plans"), that are subject
to ERISA or corresponding provisions of the Code should carefully review with
their legal advisors whether the purchase or holding of any Certificates could
result in unfavorable consequences for the Plan or its fiduciaries under the
Plan Asset Regulations (as defined in the Prospectus) or the prohibited
transaction rules of ERISA or the Code. Prospective investors should be aware
that, although certain exceptions from the application of the Plan Asset
Regulations and the prohibited transaction rules exist, there can be no
assurance that any such exception will apply with respect to the acquisition of
a Certificate. See "ERISA Considerations" in the Prospectus.
Sections 406 and 407 of ERISA and Section 4975 of the Code prohibit
certain transactions that involve (1) a Plan that is subject to ERISA and any
party in interest or disqualified person with respect to the Plan and (2) plan
assets. The Plan Asset Regulations define "plan assets" to include not only
securities (such as the Certificates) held by a Plan but also the underlying
assets of the issuer of any equity securities (the "Look-Through Rule"), unless
one or more exceptions specified in the regulations are satisfied. The Offered
Certificates are treated as equity securities for purposes of the Plan Asset
Regulations. Nonetheless, the Look-Through Rule will not apply to the Offered
Certificates as long as one or more of the exceptions specified in the Plan
Asset Regulations are satisfied. One exception to the Look-Through Rule will
apply if the security is registered under the Securities Exchange Act of 1934,
as amended, is freely transferable and is part of a class of securities that is
held by more than 100 unrelated investors (the "Publicly Offered Exception").
Another exception will apply if, immediately after the most recent acquisition
of an equity interest, "benefit plan investors," within the meaning of the Plan
Asset Regulations, do not own 25% or more of the value of any class of equity
interests in the related trust (the "Insignificant Participation Exception").
Based on the information available to the Underwriters at the time of the
printing of the Prospectus, there can be no assurance that either the Publicly
Offered Exception or the Insignificant Participation Exception will apply to
either the initial or subsequent purchases of the Offered Certificates.
[The U.S. Department of Labor has granted an administrative exemption
to the Underwriter (Prohibited Transaction Exemption __-___; Exemption
Application No. ______, __ Fed. Reg.______ (19__))(referred to herein as the
"Exemption") from certain of the prohibited transaction rules of ERISA and the
related excise tax provisions of Section 4975 of the Code with respect to the
initial purchase, the holding and the subsequent resale by Plans of certificates
in pass-through trusts that consist of certain receivables, loans, and other
obligations and that meet the conditions and requirements of the Exemption. The
receivables covered by the Exemption include assets such as the Assets.
Among the general conditions that must be satisfied for the Exemption
to apply are the following:
(1) the acquisition of the certificates by a Plan is on terms
(including the price for the certificates) that are at least as
favorable to the Plan as they would be in an arm's-length transaction
with an unrelated party;
(2) the rights and interests evidenced by the certificates
acquired by the Plan are not subordinate to the rights and interests
evidenced by other certificates of the related trust;
(3) the certificates acquired by the Plan have received a
rating at the time of such acquisition that is in one of the three
highest generic rating categories from either Standard & Poor's Ratings
Services, a division of The McGraw-Hill Companies, Inc. ("S&P"), Fitch
Investors Service, L.P. ("Fitch"), Moody's Investors Service, Inc.
("Moody's") or Duff & Phelps Inc. ("D&P");
(4) the trustee of the related trust must not be an affiliate
of any other member of the Restricted Group (as defined below);
S-46
<PAGE> 52
(5) the sum of all payments made to and retained by the
Underwriter in connection with the distribution of the certificates
represents not more than reasonable compensation for underwriting the
certificates;
(6) the sum of all payments made to and retained by the
Depositor pursuant to the assignment of the loans to the trust
represents not more than the fair market value of such loans; and
(7) the sum of all payments made to and retained by the Master
Servicer represents not more than reasonable compensation for such
person's services under any servicing agreement and reimbursement of
the Master Servicer's reasonable expenses in connection therewith.
The Exemption defines the term "reasonable compensation" by reference to DOL
Regulation Sec 2550.408c-2, 29 C.F.R. Sec. 2550.480c-2, which states that
whether compensation is reasonable depends upon the particular facts and
circumstances of each case. Each fiduciary of a Plan considering the purchase
of an Offered Certificate should satisfy itself that all amounts paid to or
retained by the Underwriters, the Depositor and the Master Servicer of the
Assets represent reasonable compensation for purposes of the Exemption. In
addition, it is a condition of the Exemption that the Plan investing in the
certificates is an "accredited investor" as defined in Rule 501(a)(1) of
Regulation D of the Securities and Exchange Commission under the Securities Act
of 1933, as amended. Furthermore, in order for its certificates to qualify
under the Exemption, a trust must meet the following requirements: (a) the
corpus of the trust must consist solely of assets of the type that have been
included in other investment pools; (b) certificates in such other investment
pools must have been rated in one of the three highest rating categories of
S&P, Moody's, D&P or Fitch for at least one year prior to the Plan's
acquisition of certificates; and (c) certificates evidencing interests in such
other investment pools must have been purchased by investors other than Plans
for at least one year prior to any Plan's acquisition of certificates.
The Exemption does not apply to Plans sponsored by the Depositor, the
Underwriter, the Trustee, the Master Servicer and any obligor with respect to
Assets included in the Trust constituting more than five percent of the
aggregate unamortized principal balance of the assets in the trust, or any
affiliate of such parties (the "Restricted Group"). Moreover, the Exemption
provides certain Plan fiduciaries relief from certain self-dealing/conflict of
interest prohibited transactions only if, among other requirements, (a) in the
case of an acquisition in connection with the initial issuance of certificates,
at least 50% of each class of certificates in which Plans have invested is
acquired by persons independent of the Restricted Group and at least 50% of the
aggregate interest in the trust is acquired by persons independent of the
Restricted Group; (b) such fiduciary (or its affiliate) is an obligor with
respect to five percent or less of the fair market value of the obligations
contained in the trust; (c) the Plan's investment in certificates of any class
does not exceed 25% of all of the certificates of that class outstanding at the
time of the acquisition; and (d) immediately after the acquisition, no more than
25% of the assets of the Plan with respect to which such person is a fiduciary
is invested in certificates representing an interest in one or more trusts
containing assets sold or serviced by the same entity.]
[The Exemption may apply to the acquisition and holding of the Class __
and Class __ Certificates by Plans provided that all conditions of the Exemption
are met. Prospective investors should be aware, however, that even if the
conditions specified in the Exemption are met, the scope of the relief provided
by the Exemption might not cover all acts that might be construed as prohibited
transactions. In addition, one or more alternative exemptions may be available
with respect to certain prohibited transactions to which the Exemption is not
applicable, depending in part upon the Class of Certificate to be acquired, the
type of Plan fiduciary that is making the decision to acquire such Certificate
and the circumstances under which such decision is made, including, but not
limited to, (a) PTCE 91-38, regarding investments by bank collective investment
funds; (b) PTCE 90-1, regarding investments by insurance company pooled separate
accounts; or (c) PTCE 83-1, regarding acquisitions by Plans of interests in
mortgage pools. Before purchasing Class __ or Class __ Certificates, a Plan
subject to the fiduciary responsibility provisions of ERISA or described in
Section 4975(e)(1) of the Code should consult with its counsel to determine
whether the conditions of the Exemption or any other exemptions would be met. A
purchaser of Class __ or Class __ Certificates should be aware, however, that
even if the conditions specified in one or more exemptions are met, the scope of
the relief provided by an exemption might not cover all acts that might be
construed as prohibited transactions. In addition, any Plan Investor
contemplating an investment
S-47
<PAGE> 53
in the Senior Certificates should note that the duties and obligations of the
Trustee and the Master Servicer are limited to those expressly set forth in the
Pooling and Servicing Agreement, and such specified duties and obligations may
not comport with or satisfy the provisions of ERISA setting forth the fiduciary
duties of Plan fiduciaries.]
[BECAUSE THE SUBORDINATE CERTIFICATES ARE SUBORDINATED SECURITIES, THEY
WILL NOT SATISFY THE REQUIREMENTS OF CERTAIN PROHIBITED TRANSACTION EXEMPTIONS.
AS A RESULT, THE PURCHASE OR HOLDING OF ANY SUBORDINATE CERTIFICATES BY A PLAN
INVESTOR MAY CONSTITUTE A NON-EXEMPT PROHIBITED TRANSACTION OR RESULT IN THE
IMPOSITION OF EXCISE TAXES OR CIVIL PENALTIES. [ACCORDINGLY, NONE OF THE OFFERED
SUBORDINATE CERTIFICATES ARE OFFERED FOR SALE OR ARE TRANSFERABLE TO A PLAN
INVESTOR][ACCORDINGLY, EACH PURCHASER OF ANY SUBORDINATE CERTIFICATE, BY VIRTUE
OF SUCH PURCHASER'S RECEIPT OF SUCH CERTIFICATE, WILL BE DEEMED TO HAVE
REPRESENTED [EITHER (I)] THAT IT IS NOT A PLAN INVESTOR [OR (II) THAT AN
EXEMPTION FROM THE PROHIBITED TRANSACTION PROVISIONS OF ERISA AND THE CODE APPLY
TO SUCH PURCHASE],] UNLESS SUCH PURCHASER PROVIDES THE MASTER SERVICER AND THE
TRUSTEE WITH A BENEFIT PLAN OPINION.]
LEGAL INVESTMENT
The Class __ and Class __ Certificates will constitute "mortgage related
securities" for purposes of the Secondary Mortgage Market Enhancement Act of
1984 ("SMMEA") for so long as they are rated in one of the two highest rating
categories by one or more nationally recognized statistical rating
organizations. As such, the Class __ and Class __ Certificates will be legal
investments for certain entities to the extent provided in SMMEA, subject to
state laws overriding SMMEA. A number of states have enacted legislation
overriding the legal investment provisions of SMMEA. See "Legal Investment" in
the Prospectus. THE SUBORDINATE CERTIFICATES WILL NOT CONSTITUTE "MORTGAGE
RELATED SECURITIES" FOR PURPOSES OF SMMEA BECAUSE SUCH SECURITIES WILL NOT BE
RATED IN ONE OF THE TWO HIGHEST RATING CATEGORIES BY A NATIONALLY RECOGNIZED
STATISTICAL RATING ORGANIZATION.
The appropriate characterization of the Subordinate Certificates under
various legal investment restrictions, and thus the ability of investors subject
to such restrictions to purchase such Certificates, is subject to significant
interpretative uncertainties.
Any financial institution that is subject to the jurisdiction of the
Comptroller of the Currency, the Board of Governors of the Federal Reserve
System, the Federal Deposit Insurance Corporation, the Office of Thrift
Supervision, the National Credit Union Administration, any state insurance
commission, or any other federal or state agencies with similar authority should
review any applicable rules, guidelines and regulations prior to purchasing any
Certificates. Financial institutions should review and consider the
applicability of the Federal Financial Institutions Examination Counsel
Supervisory Policy Statement on the Selection of Securities Dealers and
Unsuitable Investment Practices (to the extent adopted by their respective
federal regulators), which, among other things, sets forth guidelines for
investing in certain types of mortgage related securities and prohibits
investment in certain "high-risk" mortgage securities.
The Depositor makes no representations as to the proper characterization
of any Class of the Offered Certificates for legal investment or other purposes,
or as to the legality of investment by particular investors in any Class of the
Offered Certificates under applicable legal investment restrictions. The
uncertainties may adversely affect the liquidity of any Class of Offered
Certificates. Accordingly, all institutions whose investment activities are
subject to legal investment laws and regulations, regulatory capital
requirements or review by regulatory authorities should consult with their own
legal advisors in determining whether and to what extent the Offered
Certificates constitute legal investments under SMMEA or are subject to
investment, capital or other restrictions. See "Legal Investment" in the
Prospectus.
S-48
<PAGE> 54
LEGAL MATTERS
Certain legal matters will be passed upon for the Depositor by Hunton &
Williams, Richmond, Virginia, and for the Underwriter by ____________, New York,
New York. The material federal income tax consequences of the Offered
Certificates will be passed upon for the Depositor by Hunton & Williams.
RATING
It is a condition to their issuance that each Class of Offered
Certificates obtain the ratings specified on the cover page hereof from the
Rating Agencies specified on the cover page hereof.
[INSERT LANGUAGE DESCRIBING EACH APPLICABLE RATING CATEGORY]
The ratings on asset-backed pass-through certificates address the
likelihood of the receipt by certificateholders of all distributions on the
underlying assets to which they are entitled. Rating opinions address the
structural, legal and issuer-related aspects associated with the securities,
including the nature of the underlying assets. Ratings on pass-through
certificates do not represent any assessment of the likelihood that principal
prepayments will be made by borrowers with respect to the underlying assets or
of the degree to which the rate of such prepayments might differ from that
originally anticipated. As a result, the ratings do not address the possibility
that holders of the Offered Certificates might suffer a lower than anticipated
yield in the event of rapid prepayments of the Assets or in the event that the
Trust is terminated prior to the latest final scheduled Distribution Date for
the Certificates. In addition, the ratings of the Offered Certificates do not
address the possibility that, in the event of the bankruptcy of the Depositor,
the issuance and sale of the Offered Certificates might be recharacterized as a
financing and that, as a result of such recharacterization, distributions on the
Offered Certificates may be delayed or altered.
A security rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating organization. Each security rating should be evaluated
independently of any other security rating.
The Depositor will request _______________ and ________________ to rate
the Offered Certificates. There can be no assurance as to whether any rating
agency not requested to rate the Offered Certificates will nonetheless issue a
rating and, if so, what such rating would be. A rating assigned to the Offered
Certificates by a rating agency that has not been requested by the Depositor to
do so may be lower than the rating assigned by a Rating Agency pursuant to the
Depositor's request.
S-49
<PAGE> 1
EXHIBIT 99.2
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED SEPTEMBER __, 1997)
$-------------
UNION PLANTERS MORTGAGE FINANCE CORP.
COLLATERALIZED MORTGAGE BONDS, SERIES 199_-_
Union Planters Mortgage Finance Corp. (the "Depositor") will issue
$___________ aggregate principal amount of Collateralized Mortgage Bonds,
Series 199_-_, designated as the Class __ Bonds, the Class __ Bonds and the
Class __ Bonds (collectively, the "Bonds"). The Bonds will be issued pursuant
to an indenture dated as of ______________ 1, 199_ (the "Indenture") between
the Depositor and ___________, as Trustee (the "Trustee"). [Trust Agreement,
Owner Trustee if Owner Trust structure]
The Trust Fund will consist of certain [adjustable rate] [fixed rate]
first lien residential loans made or to be made in the future (the "Mortgage
Loans") secured by first deeds of trust or mortgages on one- to four-family
residential properties, the collections in respect of such Mortgage Loans,
mortgage participation interests or other mortgage-backed securities evidencing
interests in or secured by Mortgage Loans ("MBS"), and/or mortgage-related
securities issued or guaranteed by the United States, agencies or
instrumentalities thereof or agencies created thereby (the "Agency Securities")
or a combination of Mortgage Loans, MBS and/or Agency Securities (collectively,
the "Assets"). [The Bonds will represent indebtedness of the [Depositor][Trust
Fund].] [Credit Support, if any.]
Payments of principal of and interest on the Bonds will be made on the
_________ day of each month or, if such date is not a Business Day, then on the
succeeding Business Day (each a "Payment Date"), commencing on ________, 199_
to the extent described herein. Interest will accrue on the Class __ and Class
__ Bonds at a rate (the "Interest Rate") equal to ___% per annum from the
Closing Date to the first Payment Date and at [a floating rate equal to [Index]
(as defined herein) plus ___% per annum, subject to a cap of __% per annum]
[___% per annum] thereafter.
Prospective investors in the Bonds should consider, among other things,
certain risks set forth under the caption "Risk Factors" herein on page __ and
in the Prospectus on page __.
THESE BONDS ARE NOT DEPOSITS OR OTHER OBLIGATIONS OF A BANK
AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY
OTHER GOVERNMENTAL AGENCY.
--------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
[THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR
ENDORSED THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY
IS UNLAWFUL.]
----------------------------
It is a condition to the issuance of the Bonds that [Rating Agencies] rate
(i) the Class __ Bonds at least "___," (ii) the Class __ Bonds at least "__,"
and (iii) the Class __ Bonds at least "___."
S-2
<PAGE> 2
<TABLE>
<CAPTION>
Original Class Weighted Stated
Principal Interest Average Life at Maturity
Amount (1) Rate Pricing Speed Date
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class __ years
Class __ years
Class __ years
</TABLE>
- ---------------------
(1) Subject to a permitted variance of plus or minus 5% for each Class,
depending on the Mortgage Loans actually pledged to secure the Bonds.
The Bonds offered hereby will be purchased by ____________________ [and ]
([collectively,] the "Underwriter") from the Depositor and will, in each case,
be offered by the Underwriter from time to time to the public in negotiated
transactions or otherwise at varying prices to be determined at the time of
sale. The aggregate proceeds to the Depositor from the sale of the Bonds are
expected to be $_____________ before deducting expenses payable by the
Depositor in the amount of $_______.
The Bonds are offered subject to prior sale and subject to the
Underwriter's right to reject orders in whole or in part. [It is expected that
the Bonds will be delivered in book-entry form through the facilities of the
Depository Trust Company on or about _______, 199_.]
--------------------
Each Series of Bonds offered hereby constitute part of a separate Series
of Securities being offered by Union Planters Mortgage Finance Corp. from time
to time pursuant to its Prospectus dated September __, 1997. This Prospectus
Supplement does not contain complete information about the offering of the
Bonds. Additional information is contained in the Prospectus and investors are
urged to read both this Prospectus Supplement and the Prospectus in full. Sales
of the Bonds may not be consummated unless the purchaser has received both this
Prospectus Supplement and the Prospectus.
--------------------
[UNDERWRITER]
_______________, 199_
S-3
<PAGE> 3
THE BONDS OFFERED BY THIS PROSPECTUS SUPPLEMENT CONSTITUTE PART OF A
SEPARATE SERIES OF BONDS ISSUED BY THE DEPOSITOR AND ARE BEING OFFERED PURSUANT
TO ITS PROSPECTUS DATED SEPTEMBER __, 1997, OF WHICH THIS PROSPECTUS SUPPLEMENT
IS A PART AND WHICH ACCOMPANIES THIS PROSPECTUS SUPPLEMENT. THE PROSPECTUS
CONTAINS IMPORTANT INFORMATION REGARDING THIS OFFERING WHICH IS NOT CONTAINED
HEREIN, AND PROSPECTIVE INVESTORS ARE URGED TO READ THE PROSPECTUS AND THIS
PROSPECTUS SUPPLEMENT IN FULL. SALES OF THE BONDS MAY NOT BE CONSUMMATED UNLESS
THE PURCHASER HAS RECEIVED BOTH THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS.
<TABLE>
<CAPTION>
TABLE OF CONTENTS
PAGE
PROSPECTUS SUPPLEMENT
<S> <C>
Summary..........................................................................................................S-
Risk Factors.....................................................................................................S-
Description of the Assets........................................................................................S-
Description of the Servicing Agreement...........................................................................S-
Description of the Bonds.........................................................................................S-
Certain Yield, Prepayment and Maturity
Considerations.................................................................................................S-
The Depositor....................................................................................................S-
The Indenture....................................................................................................S-
The Trustee......................................................................................................S-
Use of Proceeds..................................................................................................S-
Underwriting ...............................................................................................S-
ERISA Considerations.............................................................................................S-
Legal Investment.................................................................................................S-
Legal Matters....................................................................................................S-
Rating...........................................................................................................S-
PROSPECTUS
Prospectus Supplement..............................................................................................
Available Information..............................................................................................
Incorporation of Certain Information by Reference..................................................................
Summary of Prospectus ........................................................................................
Risk Factors.......................................................................................................
Description of the Trust Funds.....................................................................................
Yield Considerations...............................................................................................
The Depositor......................................................................................................
Description of the Offered Securities..............................................................................
Description of the Agreements......................................................................................
Description of Credit Support......................................................................................
Insurance Policies on the Mortgage Loans...........................................................................
Certain Legal Aspects of Mortgage Loans............................................................................
Use of Proceeds .................................................................................................
Federal Income Tax Consequences....................................................................................
State Tax Considerations...........................................................................................
ERISA Considerations...............................................................................................
Legal Investment...................................................................................................
Plan of Distribution...............................................................................................
</TABLE>
S-4
<PAGE> 4
<TABLE>
<S> <C>
Legal Matters......................................................................................................
Financial Information..............................................................................................
Ratings............................................................................................................
Glossary...........................................................................................................
</TABLE>
----------------------
UNTIL NINETY DAYS FROM THE DATE OF THIS PROSPECTUS SUPPLEMENT, ALL DEALERS
EFFECTING TRANSACTIONS IN THE OFFERED BONDS, WHETHER OR NOT PARTICIPATING IN
THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS SUPPLEMENT AND THE
PROSPECTUS TO WHICH IT RELATES. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE
OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS SUPPLEMENT AND PROSPECTUS WHEN
ACTING AS UNDERWRITER AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
No dealer, salesman, or any other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus Supplement and the accompanying Prospectus in connection with the
offer contained in this Prospectus Supplement and the accompanying Prospectus,
and, if given, such information or representations must not be relied upon as
having been authorized by the Depositor or the Underwriter. This Prospectus
Supplement and the accompanying Prospectus shall not constitute an offer to
sell or a solicitation of an offer to buy any of the securities offered hereby
in any jurisdiction to any person to whom it is unlawful to make such offer or
solicitation in such jurisdiction. The delivery of this Prospectus Supplement
and the accompanying Prospectus at any time does not imply that the information
herein is correct as of any time subsequent to the date hereof.
There will be no application to list the Bonds on any exchange, although
the Underwriter intends to make a secondary market in the Bonds, it has no
obligation to do so. There is currently no secondary market for the Bonds and
there can be no assurance that a secondary market for the Bonds will develop,
or if it does develop, that it will continue to exist or provide sufficient
liquidity.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE BONDS. FOR A
DESCRIPTION OF THESE ACTIVITIES. SEE "UNDERWRITING" HEREIN.
[The Class __ Bondholders will have the benefit of a [PARTICULAR ITEM OF
CREDIT SUPPORT] provided by [PROVIDER]. The ____________ will [not] be
available to support other Classes of Bonds. See "Description of the Bonds -
Credit Support" herein.]
The Depositor may sell from time to time under this Prospectus Supplement
and the Prospectus and other related prospectus supplements up to
$______________ in aggregate principal amount of Securities, issuable in
Series. As of the date of this Prospectus Supplement, the Depositor has
publicly sold or committed to sell $___________ in aggregate principal amount
of Securities, including the Bonds.
----------------------
[The Depositor has filed with the Securities and Exchange Commission
certain materials relating to the Assets and the Bonds on Form 8-K. Such
materials have been prepared by the Underwriter for certain prospective
investors, and the information included in such materials is subject to, and
superseded by, the information set forth in this Prospectus Supplement.]
S-5
<PAGE> 5
SUMMARY
The following summary of certain pertinent information is qualified in its
entirety by reference to the detailed information appearing elsewhere in this
Prospectus Supplement and in the accompanying Prospectus. Certain capitalized
terms used in this Summary are defined elsewhere in this Prospectus Supplement
or in Glossary in the Prospectus.
Depositor............................. Union Planters Mortgage Finance Corp., a
Delaware corporation (the "Depositor"),
a direct, wholly-owned finance
subsidiary of Union Planters National
Bank, a national banking association.
The principal executive offices of the
Depositor are located at 7130 Goodlett
Farms Parkway, Cordova, Tennessee 38018.
See "The Depositor" herein and in the
Prospectus.
Securities Offered..................... Collateralized Mortgage Bonds, Series
199_-_ (the "Bonds"). Each Bond
represents the right to receive payments
of interest at the Interest Rate
described below, payable [monthly], and
payments of principal at such time and
to the extent provided herein.
<TABLE>
<CAPTION>
Interest Original
Rate Principal Amount
----------------------------------
<S> <C> <C>
Class __ Bonds
Class __ Bonds
Class __ Bonds
</TABLE>
Master Servicer........................ [Union Planters National Bank, a
national banking association] (the
"Master Servicer"). The Master Servicer
will service the Assets pursuant to a
Servicing Agreement dated _________1,
199_ between the Depositor and the
Master Servicer (the "Servicing
Agreement").
Indenture.............................. The Bonds will be issued pursuant to an
indenture dated as of __________ 1, 199_
(the "Indenture") between the Depositor
and the Trustee.
[Trust Agreement....................... The [Owner Notes] will be issued
pursuant to a Trust Agreement dated as
of __________ 1, 199_ (the "Trust
Agreement") between ____________ and the
Owner Trustee.]
Trustee................................ ___________________ (in such capacity,
the "Trustee").
[Owner Trustee......................... ___________________ (in such capacity,
the "Owner Trustee").]
The Assets............................. The Trust Fund securing the Bonds will
include: a pool of [adjustable] [fixed]
rate first lien residential loans (the
"Mortgage Loans"), and secured primarily
by first [deeds of trust] [mortgages] on
one- to four-family residential
properties (the "Mortgaged Properties");
the collections in respect of the
S-6
<PAGE> 6
Mortgage Loans received after the
Cut-Off Date; property securing the
Mortgag Loans that has been acquired by
foreclosure or deed in lieu of
foreclosure; [Credit Support, if
any][Liquidity Facilities, if any]; a
pledge of the Depositor's rights under
the Purchase Agreement; rights under
certain hazard insurance policies
covering the Mortgaged Properties;
[mortgage participation interests or
other mortgage-backed securities
evidencing interests in or secured by
Mortgage Loans ("MBS")], [and/or
mortgage-related securities issued or
guaranteed by the United States,
agencies or instrumentalities thereof or
agencies created thereby (the "Agency
Securities")][or a combination of
Mortgage Loans, MBS and/or Agency
Securities] (collectively, the
"Assets").
The Trust Fund will include the unpaid
principal balance of each Asset as of
the Cut-Off Date (the "Cut-Off Date
Principal Balance") [plus any additions
thereto as a result of new advances made
pursuant to the applicable Loan
Agreement (the "Additional Balances")
during the life of the Trust Fund]. With
respect to any date, the "Pool Balance"
will be equal to the aggregate of the
principal balances of all Assets as of
such date. The "Principal Balance" of an
Asset (other than a Liquidated Asset) on
any day is equal to its Cut-Off Date
Principal Balance[, plus (i) any
Additional Balances in respect of such
Assets], minus [(ii)] all collections
credited against the Principal Balance
of such Asset in accordance with the
related Loan Agreement prior to such
day. The Principal Balance of a
Liquidated Asset after the final
recovery of related Liquidation Proceeds
shall be zero.
[The Assets will have an aggregate
principal balance as of the Cut-off Date
of $_________ and individual principal
balances at origination of at least
$______________ but not more than
$__________, with an average principal
balance at origination of approximately
$_________. The Assets will have terms
to maturity from the date of origination
or modification of not more than ____
years, and a weighted average remaining
term to maturity of approximately _____
months as of the Cut-off Date. The
Assets will bear interest at Asset Rates
of at least _____% per annum but not
more than _____% per annum, with a
weighted average Asset Rate of
approximately ____% per annum as of the
Cut-off Date. The Assets will be
acquired by the Depositor on or before
the Closing Date [Pre-Funding, if any].
In connection with its acquisition of
the Assets, the Depositor will be
assigned (and will in turn assign to the
Trustee for the benefit of the holders
of the Bonds) certain rights in respect
of representations and warranties
described herein that were made by the
Asset Seller.]
[_____ of the Assets, representing
_____% of the Assets by aggregate
principal balance as of the Cut-off
Date, provide for scheduled payments of
principal and/or interest ("Payments")
S-7
<PAGE> 7
to be due on the _____ day of [each
month]; the remainder of the Assets
provide for Payments to be due on
[identify day or days] of [each month]
(the date in [any month] on which a
Payment on an Asset Loan is first due,
the "Due Date"). [The rate per annum at
which interest accrues on each Asset is
subject to adjustment on specified Due
Dates (each such date, an "Interest Rate
Adjustment Date") by adding a fixed
percentage amount (a "Gross Margin") to
the value of the then-applicable Index
(as described below) subject, in the
case of substantially all of the Assets,
to limitations on the periodic
adjustment of the related Asset Rate,
and to maximum and minimum lifetime
Asset Rates, as described herein. ___ of
the Assets, representing ___% of the
Assets by aggregate principal balance as
of the Cut-off Date, provide for
Interest Rate Adjustment Dates to occur
[monthly]; the remainder of the Assets
provide for adjustments to the Asset
Rate to occur quarterly, semi-annually
or annually. [Each of the Assets
provides for an initial fixed interest
rate period;] of the Assets,
representing _____% of the Assets by
aggregate principal balance as of the
Cut-off Date, have not yet experienced
their first Interest Rate Adjustment
Date. The latest initial Interest Rate
Adjustment Date for any Asset is
scheduled to occur on ________.]]
[The amount of the Payment on each Asset
is also subject to adjustment on
specified Due Dates (each such date, a
"Payment Adjustment Date") to an amount
that would amortize the outstanding
principal balance of the Assets over its
then remaining amortization schedule and
pay interest at the applicable Asset
Rate, subject, in the case of several
Assets, to payment caps, which limit the
amount by which the Payment may adjust
on any Payment Adjustment Date as
described herein. _______ of the Assets,
representing __% of the Assets (by
aggregate principal balance as of the
Cut-off Date, provide for Payment
Adjustment Dates to occur annually,
while the remainder of the Assets
provide for adjustments of the Payment
to occur monthly, quarterly or
semi-annually.]
[__ Assets, representing ____% of the
Assets by aggregate principal balance as
of the Cut-off Date, provide for monthly
payments of principal based on
amortization schedules significantly
longer than the remaining term of such
Assets, thereby leaving substantial
outstanding principal amounts due and
payable (each such payment, a "Balloon
Payment") on their respective maturity
dates, unless prepaid prior thereto.]
[Assets included in the Trust Fund may
be one or more months delinquent with
regard to payment of principal and
interest at the time of their deposit
into the Trust Fund.] [The Mortgage
Loans contain (i) __ Mortgage Loans,
representing ____% of the Assets by
aggregate principal balance as of the
S-8
<PAGE> 8
Cut-off Date, that, as of the Cut-off
Date, have more than 12 scheduled
payments of principal and interest past
due under the terms of the related
Mortgage Note (each, a "Non-Performing
Mortgage Loan"), (ii) __ Mortgage Loans,
representing ____% of the Assets by
aggregate principal balance as of the
Cut-off Date, that, as of the Cut-off
Date, have more than three but less than
twelve 12 scheduled payments of
principal and interest past due under
the terms of the related Mortgage Note
(each, a "Sub-Performing Mortgage
Loan"), and (iii) __ Mortgage Loans,
representing ____% of the Assets by
aggregate principal balance as of the
Cut-off Date, that have had more than
three scheduled payments of principal
and interest past due under the terms of
the related Mortgage Note one or more
times during the term of the related
Mortgage Loan, but at the related
Cut-off Date for the Series is current
in payment (each, a "Reinstated Mortgage
Loan").]
The Assets with respect to any Series
may be guaranteed or insured with
respect to payment of interest and/or
principal by the United States, agencies
or instrumentalities thereof or created
thereby, state or local governments,
agencies or instrumentalities, or
private insurance providers. [Disclose
particular insurance providers]
[Title and issuer of underlying MBS and
Agency Securities, if any, including
amount deposited or pledged, amount
originally issued, maturity date,
interest rate, [redemption provisions],
description of other material terms.]
For a further description of the Assets,
see "Description of the Assets" herein.
[The Indices........................... As of any Interest Rate Adjustment
Date, the Index used to determine the
Asset Rate on [each][identify certain]
Asset will be the ____________. See
"Description of the Assets -- The
Indices" herein.]
[Conversion of Mortgage Loans.......... Approximately __% of the Mortgage
Loans (by aggregate principal balance as
of the Cut-off Date) (the "Convertible
Mortgage Loans") provide that, at the
option of the related Mortgagors, the
adjustable interest rate on such
Mortgage Loans may be converted to a
fixed interest rate, provided that
certain conditions have been satisfied.
Upon notification from a Mortgagor of
such Mortgagor's intent to convert from
an adjustable interest rate to a fixed
interest rate, and prior to the
conversion of any such Mortgage Loan,
the related Warrantying Party (as
defined herein) will be obligated to
purchase the Converting Mortgage Loan
(as defined herein) at the Conversion
Price (as defined herein). [In the event
of a failure by a Sub-Servicer to
purchase a "Converting Mortgage Loan"],
the Master Servicer is required to use
its
S-9
<PAGE> 9
best efforts to purchase such Converted
Mortgage Loan (as defined herein) from
the Trust Fund at the Conversion Price
during the one-month period following
the date of conversion.] In the event
that neither the related Warrantying
Party nor the Master Servicer purchases
a Converting or Converted Mortgage Loan,
the Trust Fund will thereafter include
both fixed-rate and adjustable-rate
Mortgage Loans. See "Certain Yield and
Prepayment Considerations" herein.]
Collections............................ All collections on the Assets will be
allocated by the Master Servicer in
accordance with the Loan Agreements
between amounts collected in respect of
interest ("Interest Collections") and
amounts collected in respect of
principal ("Principal Collections" and
collectively with Interest Collections,
the "Collections"). The Master Servicer
will generally deposit Collections
distributable to the Bondholders in an
account established for such purpose
under the Servicing Agreement (the
"Collection Account"). See "Description
of the Bonds -- Payments on Assets;
Deposits to Collection Account" herein.
Description of the Bonds
A. Principal Payments
on the Bonds................ On each Payment Date, the Principal
Distribution Amount will be applied, to
the extent of the Available Distribution
Amount, to pay principal on the Bonds
until they are paid in full. The
allocation of the Principal Distribution
Amount for each Payment Date to each
Class of Bonds is described herein under
"Description of the Bonds -
Distributions." Principal payments to a
Class will be made to the Holders of the
Bonds of such Class pro rata in the
proportion that the aggregate
outstanding Security Principal Balance
of each Bond of such Class bears to the
aggregate outstanding Security Principal
Balance of all Bonds of such Class. See
"Description of the Bonds" herein.
[Payments of principal to the Holders of
the Subordinate Bonds on any Payment
Date are subordinate to and will be made
only after the payment in full of (i)
all interest and principal due on the
Senior Bonds and (ii) all interest due
on the Subordinate Bonds.]
As to any Payment Date, the "Due Period"
is the calendar month preceding the
month of such Payment Date.
"Liquidation Loss Amount" means with
respect to any Liquidated Asset, the
unrecovered Principal Balance thereof at
the end of the related Due Period in
which such Asset became liquidated after
giving effect to the Net Liquidation
Proceeds in connection therewith.
B. Interest Payments on
S-10
<PAGE> 10
the Bonds and
Interest Rate............... Interest will accrue on the unpaid
Security Principal Balance of the Bonds
at the per annum rate (the "Interest
Rate") equal to ___% per annum from the
Closing Date to the first Payment Date
and thereafter interest will accrue on
the Bonds from and including the
preceding Payment Date to but excluding
such current Payment Date (each, an
"Interest Accrual Period") at [a
floating rate equal to [Index] plus
___%, subject to a cap of __% per annum]
[___%]. [Interest will be computed on
the basis of a 360 day year consisting
of 12 months of 30 days each.] [Interest
will be calculated on the basis of the
actual number of days in each Interest
Accrual Period divided by 360.] A
failure to pay interest on any Bonds on
any Payment Date that continues for five
days constitutes an Event of Default
under the Indenture. See "Description of
the Bonds -- Interest" herein.
C. Payment Date.................. The ____ day of each month or, if such
day is not a Business Day, the next
succeeding Business Day, commencing with
_______, 199_.
D. Record Date................... The Record Date for each Payment Date
is [the last Business Day of the month
preceding the month in which the related
Payment Date occurs ](each, a "Record
Date"). See "Description of the Bonds"
herein.
E. Final Scheduled
Payment Dates............... To the extent not previously paid, the
Security Principal Balance of the Bonds
will be due on the Payment Date in
_______, 20__. Failure to pay the full
Security Principal Balance of Bonds on
or before the applicable final scheduled
payment dates constitutes an Event of
Default under the Indenture.
F. Form and Registration......... The Bonds will initially be delivered
in book-entry form ("Book-Entry Bonds").
Holders of the Bonds may elect to hold
their interests through The Depository
Trust Company ("DTC"). Transfers within
DTC will be in accordance with the usual
rules and operating procedures of the
relevant system. So long as the Bonds
are Book-Entry Bonds, such Bonds will be
evidenced by one or more securities
registered in the name of Cede & Co.
("Cede"), as the nominee of DTC. The
Bonds will initially be registered in
the name of Cede. The interests of such
Holders will be represented by book
entries on the records of DTC and
participating members thereof. No Holder
of a Bond will be entitled to receive a
definitive note representing such
person's interest, except in the event
that Bonds in fully registered,
certificated form ("Definitive Bonds")
are issued under the limited
circumstances described in "Description
of the Offered Securities" in the
Prospectus. All references in this
Prospectus Supplement to Bonds reflect
the rights of Holders
S-11
<PAGE> 11
of such Bonds only as such rights may be
exercised through DTC and its
participating organizations for so long
as such Bonds are held by DTC.
G. Denominations................. The Bonds will be issued [on the book-
entry records of DTC and its
Participants] [in registered, certified
form] in minimum denominations of
$_______ and integral multiples of
$_____ in excess thereof[, with one Bond
of such class evidencing an additional
amount equal to the remainder of the
Bond Balance thereof].
Servicing.............................. The Master Servicer will be responsible
for servicing, managing and making
collections on the Assets. On the
________ Business Day, but no later than
the ________ calendar day, of each month
(the "Determination Date"), the Master
Servicer will calculate, and instruct
the Trustee regarding, the amounts to be
paid, as described herein, with respect
to the related Due Period to the
Holders. See "Description of the Bonds"
herein. The Master Servicer will receive
a monthly servicing fee in the amount of
____% per annum (the "Servicing Fee
Rate"), of the related Pool Balance and
certain other amounts, as servicing
compensation from the Trust Fund. See
"Servicing of Assets -- Servicing
Compensation and Payment of Expenses"
herein. In certain limited
circumstances, the Master Servicer may
resign or be removed, in which event
either the Trustee or a third-party
servicer will be appointed as successor
Master Servicer. See "Servicing of the
Loans --Certain Matters Regarding the
Master Servicer" and "Description of the
Agreements -- Events of Default" and "--
Rights Upon Event of Default" in the
Prospectus.
[Advances.............................. The Master Servicer is obligated as
part of its servicing responsibilities
to make certain advances that in its
good faith judgment it deems recoverable
with respect to delinquent scheduled
payments on Assets. [The Master Servicer
also is obligated to advance delinquent
payments of taxes, insurance premiums
and escrowed items, as well as
liquidation-related expenses with
respect to Assets.] Neither the
Depositor nor any of its affiliates has
any responsibility to make such
advances. Advances made by a Master
Servicer are reimbursable generally from
subsequent recoveries in respect of such
Assets. [The Trustee is obligated to
make any such Advance if the Master
Servicer fails in its obligation to do
so, to the extent provided in the
Pooling and Servicing Agreement. See
"Description of the Bonds - Advances"
herein and "Description of the Offered
Certificates - Advances in Respect of
Delinquencies" in the Prospectus.]
Optional Termination................... The Depositor may, at its option,
redeem a Class or Classes of Bonds in
whole, but not in part, on any Payment
Date (i) on or after _________________,
or (ii) on the date on which,
S-12
<PAGE> 12
after taking into account payments of
principal to be made on such Payment
Date, the aggregate outstanding
principal balance of the Bonds is less
than [35]% of the initial aggregate
Security Principal Balance of the Bonds.
Such redemption will be paid in cash at
a price equal to 100% of the aggregate
outstanding Security Principal Balance
of the Class of Bonds so redeemed, plus
accrued and unpaid interest through the
day preceding the final Payment Date. At
the option of the Depositor, an optional
redemption of a Class of Bonds can be
effected without retiring such Class of
Bonds so that the Depositor has the
ability to own or resell such Class of
Bonds. Upon redemption and retirement of
all of the Bonds, the Assets securing
those Bonds may be released from the
lien of the Indenture. See "Description
of the Bonds -- Optional Termination"
herein and "Description of the Offered
Securities -- Termination" in the
Prospectus.
Credit Support......................... [Disclose Credit Support, if any.]
Liquidity Facility..................... [Disclose Liquidity Facility, if any.]
Federal Income Tax
Consequences......................... Based on the facts as they currently
exist, the Bonds will be taxable debt
obligations under the Internal Revenue
Code of 1986, as amended (the "Code")
and interest paid or accrued thereon,
including any original issue discount,
will be taxable to Bondholders. No
election will be made to treat the
Depositor, the Trust Fund, the Assets,
or the arrangement by which the Bonds
are issued as a real estate mortgage
investment conduit or a financial asset
securitization investment trust.
Interest income (including original
issue discount and market discount) will
accrue on the Bonds as described in
"Federal Income Tax Consequences" in the
Prospectus. The Bonds may be issued with
original issue discount for federal
income tax purposes. See "Federal Income
Tax Consequences --- Original Issue
Discount" in the Prospectus. In
determining the rate of accrual of
original issue discount and market
discount, if any, on the Bonds,
Bondholders should use a prepayment
assumption of [ %] [CPR] [SPA]. No
representation is made, however, as to
the rate at which prepayments on the
Assets actually will occur.
Legal Investment....................... The Class __ and Class __ Bonds will
constitute "mortgage related securities"
for purposes of the Secondary Mortgage
Market Enhancement Act of 1984 ("SMMEA")
for so long as they are rated in one of
the two highest rating categories by one
or more nationally recognized
statistical rating organizations.
Accordingly, the Class __ and Class __
Bonds will be legal investments for
certain entities to the extent provided
in SMMEA, subject to state laws
overriding SMMEA. A number of states
have enacted legislation
S-13
<PAGE> 13
overriding the legal investment
provisions of SMMEA. See "Legal
Investment" herein and in the
Prospectus.
[THE SUBORDINATE BONDS WILL NOT
CONSTITUTE "MORTGAGE RELATED SECURITIES"
FOR PURPOSES OF SMMEA BECAUSE SUCH
CLASSES ARE NOT RATED IN ONE OF THE TWO
HIGHEST RATING CATEGORIES BY A
NATIONALLY RECOGNIZED STATISTICAL RATING
ORGANIZATION.]
The Depositor makes no representations
as to the proper characterization of any
Class of the Bonds for legal investment
or other purposes, or as to the legality
of investment by particular investors in
any Class under applicable legal
investment restrictions. These
uncertainties may adversely affect the
liquidity of any Class. Accordingly, all
institutions whose investment activities
are subject to legal investment laws and
regulations, regulatory capital
requirements or review by regulatory
authorities should consult with their
own legal advisors in determining to
what extent the Bonds are subject to
investment, capital or other
restrictions. See "Legal Investment"
herein and in the Prospectus.
ERISA.................................. It is anticipated that the Bonds will
be treated as debt for state law
purposes. Accordingly, a purchaser
subject to the Employee Retirement
Income Security Act of 1974, as amended
("ERISA"), should not be treated as
having acquired a direct interest in the
Assets by reason of its purchase of a
Bond. However, fiduciaries of employee
benefit plans and certain other
retirement plans and arrangements,
including individual retirement accounts
and annuities, Keogh plans, and
collective investment funds in which
such plans, accounts, annuities or
arrangements are invested, that are
subject to ERISA, or corresponding
provisions of the Code ("Plans") should
review carefully with their legal
advisors whether the purchase or holding
of the Bonds still could give rise to a
transaction that is prohibited under
ERISA or the Code. Certain prohibited
transaction exemptions may be applicable
to certain Classes of the Bonds as
described herein. See "ERISA
Considerations" herein and in the
Prospectus.
Rating................................. It is a condition to the issuance of
the Bonds that each Class of Bonds
receive the ratings specified for such
Class on the cover page hereof. A
security rating is not a recommendation
to buy, sell or hold securities and may
be subject to revision or withdrawal at
any time by the assigning rating
organization. A security rating does not
represent any assessment of the
likelihood of principal prepayments on
the Assets or of the degree to which the
rate of such prepayments might differ
from those originally anticipated. Also,
a
S-14
<PAGE> 14
security rating does not represent any
assessment of the yield to maturity that
investors may experience.
The Depositor has not requested a rating
of the Bonds from any rating agency
other than _________________ [and
__________________]. However, there can
be no assurance as to whether any other
rating agency will rate the Bonds, or if
one does, what rating would be assigned
by such rating agency.
S-15
<PAGE> 15
RISK FACTORS
Prospective investors should consider, among other things, the following
factors in connection with an investment in any of the Bonds:
Bondholders Have Recourse Only to Trust Assets Pledged to Secure the
Bonds. The Bonds will not be insured or guaranteed by any governmental entity
or by the Depositor, the Master Servicer, the Trustee or any affiliate of the
foregoing or by any other person. The Bondholders will have no recourse to the
Depositor in the event of a default on the Bonds, and each Bondholder will be
deemed to have agreed by the acceptance of its Bond not to file a bankruptcy
petition or commence similar proceedings in respect of the Depositor. The Trust
Assets pledged to secure the Bonds will be the only source for payments on the
Bonds.
The Weighted Average Life of The Bonds Is Uncertain. The rate and timing
of principal payments on the Bonds will depend, among other things, on the rate
and timing of principal payments (including prepayments, defaults, liquidations
and purchases of Assets due to a breach of representation and warranty) on the
Assets. The rate at which principal prepayments occur on the Assets will be
affected by a variety of factors, including, without limitation, the terms of
the Assets, the level of prevailing interest rates, the availability of
mortgage credit and economic, geographic, tax, legal and other factors. In
general, however, if prevailing interest rates fall significantly below the
Asset Rates on the Assets, such Assets are likely to be the subject of higher
principal prepayments than if prevailing rates remain at or above the rates
borne by such Assets. [The rate of principal payments on the Bonds will
correspond to the rate of principal payments on the Assets and is likely to be
affected by the Lock-out Periods and Prepayment Premium provisions applicable
to the Assets and by the extent to which the Master Servicer is able to enforce
such provisions. Assets with a Lock-out Period or a Prepayment Premium
provision, to the extent enforceable, generally would be expected to experience
a lower rate of principal prepayments than otherwise identical mortgage loans
without such provisions, with shorter lock-out periods or with lower prepayment
premiums.] [As is the case with mortgage-backed securities generally, the Bonds
are subject to substantial inherent cashflow uncertainties because the Mortgage
Loans may be prepaid at any time.]
The Yield of the Bonds will be Affected by Circumstances beyond the
Depositor's Control. The yield to maturity on the Bonds will depend, among
other things, on the rate and timing of principal payments (including
prepayments, defaults, liquidations and purchases of Assets due to a breach of
representation and warranty) on the Assets and the allocation thereof to reduce
the Security Principal Balance of such Classes. [The yield to maturity on the
Class __ Bonds will also depend on changes in the applicable Index and the
effect of any maximum lifetime Asset Rate, minimum lifetime Asset Rate, Payment
Cap and Periodic Rate Cap, as applicable.] The yield to investors on the Class
__ Bonds will be adversely affected by any allocation thereto of Prepayment
Interest Shortfalls on the Assets, which are expected to result from the
distribution of interest only to the date of prepayment (rather than a full
month's interest) in connection with prepayments in full, and the lack of any
distribution of interest on the amount of any partial prepayments.
In general, if a Bond is purchased at a premium and principal
distributions thereon generally occur at a rate faster than anticipated at the
time of purchase, the investor's actual yield to maturity will be lower than
that assumed at the time of purchase. Conversely, if a Bond is purchased at a
discount and principal distributions thereon generally occur at a rate slower
than that assumed at the time of purchase, the investor's actual yield to
maturity will be lower than assumed at the time of purchase.
[Because [certain of] the Assets are adjustable rate instruments, the
Asset Rates and periodic payments can be expected to increase in a rising
interest rate environment, perhaps without a corresponding increase in the
related Mortgagors' income. In such event, the Mortgagor's ability to make
payments may be impaired, and a Mortgagor payment default would be more likely
to occur.]
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<PAGE> 16
[Non-Performing Mortgage Loans, Sub-Performing Mortgage Loans and
Reinstated Mortgage Loans Create Risks That Bondholders May Not Recover Their
Initial Investment And May Adversely Affect Yield. The Assets include
Non-Performing Mortgage Loans, Sub-Performing Mortgage Loans and Reinstated
Mortgage Loans. Repayment of the principal amount of the Offered Securities is
dependent, in large part, upon the ability of the Master Servicer to cause such
Mortgage Loans to become or remain current in payment, to sell or foreclose
upon such Mortgage Loans or to acquire title to the Mortgaged Properties by
other means and to liquidate the related REO Properties. There can be no
assurance as to whether the Master Servicer will be successful in such efforts
or as to the timing thereof. The ability of the Master Servicer to sell an REO
Property will depend upon its ability to find a willing purchaser at a price
acceptable to the Master Servicer, subject to certain guidelines. In addition,
certain rights of redemption in various states may limit or prevent the Master
Servicer from selling an REO Property at what would otherwise be an appropriate
time for sale.
All Non-Performing Mortgage Loans, Sub-Performing Mortgage Loans and
Reinstated Mortgage Loans are insured by a governmental agency. There is no
obligation on the part of the Depositor, the Master Servicer or any other
person to repurchase or replace any Mortgage Loan.
Certain Mortgage Loans may be non-recourse loans or loans for which
recourse may be restricted or unenforceable, or as to which recourse may be had
only against the specific Mortgaged Property and such other assets, if any, as
have been pledged to secure the related Mortgage Loan. With respect to those
Mortgage Loans that provide for recourse against the Mortgagor and his assets
generally, there can be no assurance that such recourse will ensure a recovery
in respect of a defaulted Mortgage Loan greater than the liquidation value, if
any, of the related Mortgaged Property. The ability of the Master Servicer to
liquidate any Mortgaged Property or REO Property, and the liquidation value
thereof, may be adversely affected by risks generally incident to interests in
real property, including changes or weakness in general or local economic
conditions, declines in real estate values, the volume of other similar
properties for sale, adverse changes in interest rates, real estate and
personal property tax rates, energy costs and other expenses, environmental
concerns, acts of God, and other factors that are beyond the Master Servicer's
control.]
[Credit Risk from Subordination of the Subordinate Bonds to the Senior
Bonds. Payments of principal of and interest on the Assets will be available to
make distributions on the Subordinate Bonds only after required distributions
have been made on the Senior Bonds. Further, all realized losses on the Assets
generally will be allocated to the Subordinate Bonds prior to being allocated
to the Senior Bonds. Realized losses on the Assets in excess of the available
Credit Support will adversely affect the yield on the Bonds.]
The Master Servicer's Ability to Realize on Assets May Be Limited by
Applicable State Law. A variety of factors may limit the Master Servicer's
ability to repossess or foreclose on and liquidate the Mortgaged Properties
securing the Assets or may limit the amount realized upon any such liquidation
to less than the amount due under the related Asset. See "Certain Legal Aspects
of Mortgage Loans" in the Prospectus.
[The following two paragraphs will be included in the event any of the Mortgage
Loans are acquired from the Resolution Trust Corporation:]
[Troubled Mortgage Loan Originators Create Risks to Bondholders.
[Certain][The] Mortgage Loans were originated or purchased by the [Originating
Institutions], each of which is subject to an RTC receivership. It is possible
that the financial difficulties experienced by the [Originating Institutions]
may have adversely affected either or both of (i) the standards and procedures
pursuant to which the Mortgage Loans were originated or purchased by such
[Originating Institutions] and (ii) the manner in which such Mortgage Loans
have been serviced prior to assumption of servicing responsibilities by the
Master Servicer. The Mortgage Loans will be acquired by the Depositor on or
before the Closing Date from the Asset Seller, which acquired the Mortgage
Loans from the RTC in its capacity as receiver of each of the associations
pursuant to a certain mortgage loan sale agreement, dated ______, 199_ (as
amended, the "Loan Sale Agreement"). Pursuant to the Loan Sale Agreement, the
RTC as receiver of the [Originating Institutions], has made certain
S-17
<PAGE> 17
representations and warranties regarding the Mortgage Loans and is obligated to
cure such breaches or repurchase those Mortgage Loans as to which there is a
breach of such representations and warranties. The RTC repurchase price for the
Mortgage Loans is par plus accrued interest at the related Mortgage
Rate[,except in the case of Mortgage Loans as to which a repurchase for a
breach of the representation and warranty relating to certain environmental
matters would be accomplished at a price that initially is discounted but
increases to par over approximately __ years]. The RTC, acting in its corporate
capacity, has guaranteed such obligations of the RTC, acting in its capacity as
receiver. The agreement pursuant to which such guarantee was made by the RTC is
hereinafter referred to as the "Guarantee Agreement".]
[Limited Information is Available with respect to Certain Mortgage Loans.
The information set forth in this Prospectus Supplement with respect to the
Mortgage Loans is derived from books and records of the [Originating
Institutions], as well as a limited review of the credit and legal files
relating to the Mortgage Loans. Accordingly, available information does not
permit the Depositor to determine fully the origination, credit appraisal and
underwriting practices of the originators of the Mortgage Loans. Furthermore,
it is possible that this Prospectus Supplement does not contain material
information regarding the Mortgage Loans that would have been disclosed if the
structure and personnel of the [Originating Institutions] had not been affected
by such institutions having been placed in receivership. While the Depositor
has undertaken a limited review of the records and files related to the
Mortgage Loans in connection with the issuance of the Bonds, the Mortgage Loans
have not been "re-underwritten" or subjected to the type of review that would
typically be made in respect of a newly originated mortgage loan.]
[Concentration of Mortgage Loans May Create Risks to Bondholders.
Approximately ___% of the Mortgage Loans are secured by properties located in
the State of ____________. Accordingly, for a large percentage of the Mortgage
Loans, a Mortgagor's ability to make mortgage payments and residential housing
prices are more dependent on the local economy in ______________. As a
consequence, Losses on the Mortgage Loans may exceed those that might be
incurred were the pool of Mortgage Loans more geographically dispersed.]
Bonds Issued in Book-Entry Form May Create Liquidity Risks to Bondholders.
Issuance of the Bonds in book-entry form may reduce the liquidity of such Bonds
in the secondary trading market because investors may be unwilling to purchase
Bonds for which they cannot obtain physical securities. See "Description of the
Bonds --Book-Entry Registration" herein.
Because transactions in the Bonds can be effected only through DTC,
participating organizations, indirect participants and certain banks, the
ability of a Bondholder to pledge a Bond to persons or entities that do not
participate in the DTC system or otherwise to take actions in respect of such
Bonds, may be limited due to lack of a physical security representing the
Bonds. See "Description of the Bonds--Book-Entry Registration" herein.
Bondholders may experience some delay in their receipt of distributions of
interest and principal on the Bonds because such distributions will be
forwarded by the Trustee to DTC and DTC will credit such distributions to the
accounts of its Participants (as defined herein) which will thereafter credit
them to the accounts of Bondholders either directly or indirectly through
indirect participants. See "Description of the Bonds -- Book-Entry
Registration" herein.
S-18
<PAGE> 18
DESCRIPTION OF THE ASSETS
GENERAL
The Trust Fund will consist primarily of [___ [conventional], [fixed
interest] [adjustable interest] rate Mortgage Loans with an aggregate Principal
Balance as of the Cut-off Date, after deducting payments of principal due on
such date, of $____________,] [mortgage participations, mortgage pass-through
certificates, mortgage-backed securities evidencing interests therein or
secured thereby that have been previously (a) offered and distributed to the
public pursuant to an effective registration statement or (b) purchased in a
transaction not involving any public offering from an entity that is not an
affiliate of the issuer of such securities at the time of sale (nor an
affiliate thereof at any time during the three preceding months); provided, a
period of two years has elapsed since the later of the date the securities were
acquired from the issuer or an affiliate thereof (the "MBS"),] [and] [certain
direct obligations of the United States, agencies thereof or agencies created
thereby (the "Agency Securities", and Mortgage Loans, MBS and/or Agency
Securities collectively referred to herein as the "Assets")].
[MORTGAGE LOANS
Each Mortgage Loan is evidenced by a promissory note (a "Mortgage Note")
and secured by a mortgage, deed of trust or other similar security instrument
(a "Mortgage" creating a first lien on a one- to four-family residential
property (a "Mortgaged Property"). The Mortgaged Properties consist of
[description of one- to four-family residential properties]. [Because no
evaluation of any Mortgagor's financial condition has been conducted, investors
should consider all of the Mortgage Loans to be non-recourse loans so that, in
the event of mortgagor default, recourse may be had only against the specific
property and such limited other assets as have been pledged to secure a
Mortgage Loan, and not against the mortgagor's other assets.] All percentages
of the Assets described herein are approximate percentages (except as otherwise
indicated) by aggregate Principal Balance as of the Cut-off Date.]
[The Mortgage Loans to be included in the Trust Fund will have been
originated or acquired by ________________ (the "Asset Seller") and will comply
with the underwriting criteria described herein. The Depositor will purchase
the Mortgage Loans to be included in the Trust Fund on or before the Closing
Date from the Asset Seller pursuant to a seller's agreement (the "Seller's
Agreement"), to be dated as of ____________ 1, 199_ between the Asset Seller
and the Depositor.
Under the Seller's Agreement, the Asset Seller will make certain
representations, warranties and covenants to the Depositor relating to, among
other things, the due execution and enforceability of the Seller's Agreement
and certain characteristics of the Mortgage Loans, and will be obligated to
repurchase or substitute for any Mortgage Loan as to which there exists
deficient documentation or an uncured material breach of any such
representation, warranty or covenant. Under the Indenture, the Depositor will
pledge all its right, title and interest in such representations, warranties
and covenants (including ____________________'s repurchase or substitution
obligation) to the Trustee for the Trust Fund. The Depositor will make [no]
representations or warranties with respect to the Mortgage Loans and will have
no obligation to repurchase or substitute for Mortgage Loans with deficient
documentation [or which are otherwise defective]. _____________, as seller of
the Assets to the Depositor, is selling such Mortgage Loans without recourse
and, accordingly, in such capacity, will have no obligations with respect to
the certificates other than pursuant to such representations, warranties,
covenants and repurchase obligations. See "Description of the Agreements --
Representations and Warranties; Repurchases" in the Prospectus.]
[The Mortgage Loans include FHA Loans and VA Loans. The FHA Loans and VA
Loans include Non-Performing Mortgage Loans, Sub-Performing Mortgage Loans and
Reinstated Mortgage Loans. [Identify particular characteristics of FHA Loans,
VA Loans, Non-Performing Mortgage Loans, Sub-Performing
S-19
<PAGE> 19
Mortgage Loans and Reinstated Mortgage Loans] See "Description of the Trust
Funds - Mortgage Loans", " -- The VA Loan Program" and " -- The FHA Loan
Program" in the Prospectus.]
[THE MBS
[Title and issuer of underlying securities, amount deposited or pledged,
amount originally issued, maturity date, interest rate, [redemption
provisions], together with description of other material terms.]
[Description of principal and interest distributions on the MBS.]
[Description of advances by the servicer of the mortgage loans underlying
the MBS.]
[Description of effect on the MBS of allocation of losses on the
underlying mortgage loans.]
As to each series of MBS included in the Trust Fund, the various classes
of certificates from such series [(including classes not in the Trust Fund but
from the same series as classes that are in the Trust Fund] are listed,
together with the related pass-through rates and certain other information
applicable thereto].
[AGENCY SECURITIES
[Provide title and issuer of underlying Agency Securities, amount
deposited or pledged, amount originally issued, maturity date, interest rate,
redemption provisions, together with description of other material terms.]
[Description of principal and interest distributions on the Agency
Securities.]
[Description of advances by the servicer of the assets underlying the
Agency Securities.]
[Description of effect on the Agency Securities of allocation of losses on
the underlying Assets.]
As to each series of Agency Securities included in the Trust Fund, the
various classes of certificates from such series [(including classes not in the
Trust Fund but from the same series as classes that are in the Trust Fund] are
listed, together with the related pass-through rates and certain other
information applicable thereto].
[CONVERTIBLE MORTGAGE LOANS
____% of the Mortgage Loans ("Convertible Mortgage Loans") provide that,
at the option of the related Mortgagors, the adjustable interest rate on such
Mortgage Loans may be converted to a fixed interest rate. The first month in
which any of the Mortgage Loans may convert is ____________, and the last month
in which any of the Mortgage Loans may convert is _____________. Upon
conversion, the Mortgage Rate will be converted to a fixed interest rate
determined in accordance with the formula set forth in the related Mortgage
Note which formula is intended to result in a Mortgage Rate which is not less
than the then current market interest rate (subject to applicable usury laws).
After such conversion, the monthly payments of principal and interest will be
adjusted to provide for full amortization over the remaining term to scheduled
maturity. Upon notification from a Mortgagor of such Mortgagor's intent to
convert from an adjustable interest rate to a fixed interest rate and prior to
the conversion of any such Mortgage Loan (a "Converting Mortgage Loan"), the
related Warrantying Party will be obligated to purchase the Converting Mortgage
Loan at a price equal to the outstanding Principal Balance thereof plus accrued
interest thereon net of any subservicing fees (the "Conversion Price"). In the
event of a failure by a Warrantying Party to purchase a converting Mortgage
Loan, the Master Servicer is required to use its best efforts to purchase such
Mortgage
S-20
<PAGE> 20
Loan following its conversion (a "Converted Mortgage Loan") during the
one-month period following the date of conversion at the Conversion Price.
In the event that the related Warrantying Party fails to purchase a
Converting Mortgage Loan and the Master Servicer does not purchase a Converted
Mortgage Loan, neither the Depositor nor any of its affiliates nor any other
entity is obligated to purchase or arrange for the purchase of any Converted
Mortgage Loan. Any such Converted Mortgage Loan will remain in the Trust Fund
as a fixed-rate Mortgage Loan and will result in the Trust Fund's having both
fixed rate and adjustable rate Mortgage Loans. See "Certain Yield, Prepayment
and Maturity Considerations" herein.
Following the purchase of any Converted Mortgage Loan as described above,
the purchaser will be entitled to receive an assignment from the Trustee of
such Mortgage Loan and the purchaser will thereafter own such Mortgage Loan
free of any further obligation to the Trustee or the Bondholders with respect
thereto.]
[THE INDICES
As of any Payment Adjustment Date, the Index applicable to the
determination of the related Asset Rate will be a per annum rate equal to
______________, as most recently available as of the date days prior to the
Payment Adjustment Date (the "Index"). Such average yields reflect the yields
for the week prior to that week in which the information is reported. In the
event that the Index is no longer available, an index reasonably acceptable to
the Trustee that is based on comparable information will be selected by the
Master Servicer.
The Index is currently calculated based on information reported in
___________. Listed below are the weekly average yields on actively traded
______________ as reported in ____________ on the date that would have been
applicable to mortgage loans having the following adjustment dates for the
indicated years. Such average yields may fluctuate significantly from week to
week as well as over longer periods and may not increase or decrease in a
constant pattern from period to period. The following does not purport to be
representative of future average yields. No assurance can be given as to the
average yields on such _______________ on any Payment Adjustment Date or during
the life of any Asset.]
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<PAGE> 21
<TABLE>
<CAPTION>
[Index]
Adjustment Date 1992 1993 1994 1995 1996 1997
- --------------- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
January.................
February ...............
March...................
April...................
May.....................
June....................
July....................
August..................
September...............
October.................
November................
December................
</TABLE>
CERTAIN CHARACTERISTICS OF THE ASSETS
[Approximately ___% of the Assets have Due Dates that occur on the ___ day
of each month; approximately ___% of the Assets have Due Dates that occur on
the ___ day of each month; approximately _____% of the Assets have Due Dates
that occur on the ___ day of each month; and the remainder of the Assets have
Due Dates that occur on the fifteenth day of each month.]
[As of the Cut-off Date, the Assets had the following characteristics: (i)
Asset Rates ranging from _____% per annum to _______% per annum; (ii) a
weighted average Asset Rate of ______% per annum; (iii) Gross Margins ranging
from ____ basis points to ______ basis points; (iv) a weighted average Gross
Margin of ____ basis points; (v) Principal Balances ranging from $_______ to
$______; (vi) an average Principal Balance of $_________; (vii) original terms
to scheduled maturity ranging from _____ months to _________ months; (viii) a
weighted average original term to scheduled maturity of _____ months; (ix)
remaining terms to scheduled maturity ranging from ____ months to _____ months;
(x) a weighted average remaining term to scheduled maturity of ________ months;
(xi) Cut-off Date Loan-to-Value ("LTV") Ratios ranging from ______% to
________%; (xii) a weighted average Cut-off Date LTV Ratio of _____%; (xiii) as
to the _______% of the Assets to which such characteristic applies, (A) minimum
lifetime Asset Rates ranging from ____% per annum to ______ % per annum and (B)
a weighted average minimum lifetime Asset Rate of _______% per annum; and (xiv)
as to the__________% of Assets to which such characteristic applies and for
which it may be currently calculated, (A) maximum lifetime Asset Rate ranging
from _______% per annum to ________% per annum and (B) a weighted average
maximum lifetime Asset Rate of _________% per annum.]
[___% of the Mortgage Loans provide for Balloon Payments on their
respective maturity dates. Loans providing for Balloon Payments involve a
greater degree of risk than self-amortizing loans. See "Risk Factors -- Assets
with balloon payment provisions present particular risks to Bondholders" in the
Prospectus.]
[The Mortgage Loans contain (i) __ Mortgage Loans, representing ____% of
the Assets by aggregate Principal Balance as of the Cut-off Date, that, as of
the Cut-off Date, have more than 12 scheduled payments of principal and
interest past due under the terms of the related Mortgage Note (each, a
"Non-Performing Mortgage Loan"), (ii) __ Mortgage Loans, representing ____% of
the Assets by aggregate Principal Balance as of the Cut-off Date, that, as of
the Cut-off Date, have more than three but less than 12 scheduled payments of
principal and interest past due under the terms of the related Mortgage Note
(each, a "Sub-Performing Mortgage Loan"), and (iii) __ Mortgage Loans,
representing ____% of the Assets by aggregate Principal Balance as of the
Cut-off Date, that have had more than three scheduled payments of principal and
interest
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<PAGE> 22
past due under the terms of the related Mortgage Note one or more times during
the term of the related Mortgage Loan, but at the related Cut-off Date for the
Series is current in payment (each, a "Reinstated Mortgage Loan").]
[The Asset Rate on each Asset is subject to adjustment on each Interest
Rate Adjustment Date by adding the related Gross Margin to the value of the
Index (described below) as most recently announced a specified number of days
prior to such Interest Rate Adjustment Date, subject, in the case of
substantially all of the Assets, to minimum and maximum lifetime Asset Rates,
with ranges specified below. The Asset Rates on the Assets generally are
adjusted monthly; however, certain of the Assets provide for Interest Rate
Adjustment Dates to occur quarterly (___% of the Assets), semi-annually (% of
the Assets) or annually (____% of the Assets). Each of the Assets provided for
an initial fixed interest rate period; Assets, representing ___% of the Assets,
have not experienced their first Interest Rate Adjustment Dates. The latest
initial Interest Rate Adjustment Date for any Asset is to occur in .]
[Subject to the Payment Caps described below, the amount of the Payment on
each Asset adjusts periodically on each Payment Adjustment Date to an amount
that would fully amortize the Principal Balance of the Asset over its then
remaining amortization schedule and pay interest at the Asset Rate in effect
during the one month period preceding such Payment Adjustment Date.
Approximately __% of the Assets provide that an adjustment of the amount of the
Payment on a Payment Adjustment Date may not result in a Payment that increases
by more than ___% (nor, in some cases, decreases by more than ____%) of the
amount of the Payment in effect immediately prior to such Payment Adjustment
Date (each such provision, a "Payment Cap").
[No Mortgage Loan currently prohibits principal prepayments; however,
certain of the Mortgage Loans impose fees or penalties ("Prepayment Premiums")
in connection with full or partial prepayments. Although Prepayment Premiums
are payable to the Master Servicer as additional servicing compensation, the
Master Servicer may waive the payment of any Prepayment Premium only in
connection with a principal prepayment that is proposed to be made during the
three month period prior to the scheduled maturity of the related Mortgage
Loan, or under certain other limited circumstances.]
The following table sets forth the range of Asset Rates on the Assets as
of the Cut-off Date:
Asset Rates as of the Cut-off Date
<TABLE>
<CAPTION>
Percent by
Aggregate Aggregate
Percent Principal Principal
Number of by Balance as of Balance as of
Asset Rate Assets Number the Cut-off Date the Cut-off Date
- ---------- --------- -------- ---------------- ----------------
<S> <C> <C> <C> <C>
Total 100.00% $ 100.00%
========= ====== ================ ======
</TABLE>
Weighted Average
Asset Rate:
Note: Percentage totals may not add due to rounding.
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<PAGE> 23
The following table sets forth the types of Mortgaged Properties securing
the Mortgage Loans:
Property Type
<TABLE>
<CAPTION>
Percent by
Aggregate Aggregate
Number of Percent Principal Principal
Mortgage by Balance as of Balance as of
Type Loans Number the Cut-off Date the Cut-off Date
- ---- --------- ------ ---------------- ----------------
<S> <C> <C> <C> <C>
Total 100.00% $ 100.00%
========= ====== ================ ======
</TABLE>
Note: Percentage totals may not add due to rounding.
[The following table sets forth the range of Gross Margins for the
Assets:]
S-24
<PAGE> 24
[Gross Margins]
<TABLE>
<CAPTION>
Percent by
Aggregate Aggregate
Percent Principal Principal
Number of by Balance as of Balance as of
Asset Rate Assets Number the Cut-off Date the Cut-off Date
- ---------- --------- -------- ---------------- ----------------
<S> <C> <C> <C> <C>
Total 100.00% $ 100.00%
========= ====== ================ ======
</TABLE>
Weighted Average
Gross Margin:
Note: Percentage totals may not add due to rounding.
[The following table sets forth the frequency of adjustments to the
Asset Rates on the Assets as of the Cut-off Date:]
[Frequency of Adjustments to Asset Rates]
<TABLE>
<CAPTION>
Percent by
Aggregate Aggregate
Percent Principal Principal
Number of by Balance as of Balance as of
Frequency(A) Assets Number the Cut-off Date the Cut-off Date
- ------------ --------- --------- ---------------- ----------------
<S> <C> <C> <C> <C>
Total 100.00% $ 100.00%
========= ====== ================= ======
</TABLE>
Weighted Average
Frequency of
Adjustments to
Asset Rate:
Note: Percentage totals may not add due to rounding.
(A) _______ or ___% of Assets have not experienced their first Interest Rate
Adjustment Date.
[The following table sets forth the frequency of adjustments to the
Payments on the Assets as of the Cut-off Date:]
S-25
<PAGE> 25
[Frequency of Adjustments to Payments]
<TABLE>
<CAPTION>
Percent by
Aggregate Aggregate
Percent Principal Principal
Frequency Number of by Balance as of Balance as of
(A) Assets Number the Cut-off Date the Cut-off Date
- ---------- --------- -------- ---------------- ----------------
<S> <C> <C> <C> <C>
Total 100.00% $ 100.00%
========= ====== ================ ======
</TABLE>
Weighted Average
Frequency of
Adjustments to
Payments:
Note: Percentage totals may not add due to rounding.
[The following table sets forth the range of maximum lifetime Asset Rates
for the Assets:]
[Maximum Lifetime Asset Rates]
<TABLE>
<CAPTION>
Percent by
Aggregate Aggregate
Maximum Percent Principal Principal
Lifetime Number of by Balance as of Balance as of
Asset Rate Assets Number the Cut-off Date the Cut-off Date
---------- --------- -------- ---------------- ----------------
<S> <C> <C> <C> <C>
Total 100.00% $ 100.00%
========= ====== ================ ======
</TABLE>
Weighted Average
Maximum Lifetime
Asset Rate:
Note: Percentage totals may not add due to rounding.
(A) Represents Assets without a lifetime rate cap.
(B) The lifetime rate caps for these Assets are based upon the Index as
determined at a future point in time plus a fixed percentage. Therefore,
the rate is not determinable as of the Cut-off Date.
(C) This calculation does not include the ____ Assets without a lifetime rate
cap or the Assets with lifetime rate caps which are currently not
determinable.
[The following table sets forth the range of minimum lifetime Asset Rates
on the Assets:]
S-26
<PAGE> 26
[Minimum Lifetime Asset Rates]
<TABLE>
<CAPTION>
Percent by
Aggregate Aggregate
Minimum Percent Principal Principal
Lifetime Number of by Balance as of Balance as of
Asset Rate Assets Number the Cut-off Date the Cut-off Date
---------- --------- -------- ---------------- ----------------
<S> <C> <C> <C> <C>
Total 100.00% $ 100.00%
========= ====== ================ ======
</TABLE>
Weighted Average
Minimum Lifetime
Asset Rate:
Note: Percentage totals may not add due to rounding.
(A) Represents Assets without interest rate floors.
(B) This calculation does not include the Assets without interest rate floors.
The following table sets forth the range of Principal Balances of the
Assets as of the Cut-off Date:
Principal Balances as of the Cut-off Date
<TABLE>
<CAPTION>
Percent by
Principal Aggregate Aggregate
Balance Percent Principal Principal
as of the Number of by Balance as of Balance as of
Cut-off Date Assets Number the Cut-off Date the Cut-off Date
------------ --------- ------- ---------------- ----------------
<S> <C> <C> <C> <C>
Total 100.00% $ 100.00%
========= ====== ================ ======
</TABLE>
Average Principal Balance
as of the
Cut-off Date:
Note: Percentage totals may not add due to rounding.
The following tables set forth the original and remaining terms to
maturity (in months) of the Assets:
S-27
<PAGE> 27
Mortgage Loan Purpose
<TABLE>
<CAPTION>
Percent by
Aggregate Aggregate
Remaining Number of Percent of Principal Principal
Term in Mortgage Assets by Balance as of Balance as of
Months Loans Number the Cut-off Date the Cut-off Date
---------- --------- ---------- ---------------- ----------------
<S> <C> <C> <C> <C>
Total 100.00% $ 100.00%
========== ====== ================ ======
</TABLE>
Weighted Average
Original Term to Maturity:
Note: Percentage totals may not add due to rounding.
The following tables set forth the purpose for which each Mortgage Loan
was originated, [the type of program under which it was originated and the
occupancy type].
Original Term to Maturity in Months
<TABLE>
<CAPTION>
Percent by
Aggregate Aggregate
Original Percent Principal Principal
Term in Number of by Balance as of Balance as of
Months Assets Number the Cut-off Date the Cut-off Date
------- -------- -------- ---------------- ----------------
<S> <C> <C> <C> <C>
Total 100.00% $ 100.00%
========= ====== ================ ======
</TABLE>
Weighted Average
Original Term to Maturity:
Note: Percentage totals may not add due to rounding.
S-28
<PAGE> 28
[Mortgage Loan Documentation Program]
<TABLE>
<CAPTION>
Percent by
Aggregate Aggregate
Remaining Number of Percent of Principal Principal
Term in Mortgage Assets by Balance as of Balance as of
Months Loans Number the Cut-off Date the Cut-off Date
---------- --------- ---------- ---------------- ----------------
<S> <C> <C> <C> <C>
Total 100.00% $ 100.00%
========= ====== ================ ======
</TABLE>
Weighted Average
Original Term to Maturity:
Note: Percentage totals may not add due to rounding.
Mortgage Loan Occupancy Type
<TABLE>
<CAPTION>
Percent by
Aggregate Aggregate
Remaining Number of Percent of Principal Principal
Term in Mortgage Assets by Balance as of Balance as of
Months Loans Number the Cut-off Date the Cut-off Date
---------- --------- -------- ---------------- ----------------
<S> <C> <C> <C> <C>
Total 100.00% $ 100.00%
========= ====== ================ ======
</TABLE>
Weighted Average
Original Term to Maturity:
Note: Percentage totals may not add due to rounding.
S-29
<PAGE> 29
Remaining Term to Maturity in Months
<TABLE>
<CAPTION>
Percent by
Aggregate Aggregate
Remaining Percent Principal Principal
Term in Number of by Balance as of Balance as of
Months Assets Number the Cut-off Date the Cut-off Date
---------- --------- -------- ---------------- ----------------
<S> <C> <C> <C> <C>
Total 100.00% $ 100.00%
========= ====== ================ ======
</TABLE>
Weighted Average Remaining
Term to Maturity:
Note: Percentage totals may not add due to rounding.
The following tables set forth the respective years in which the Assets
were originated and are scheduled to mature:
Year of Origination
<TABLE>
<CAPTION>
Percent by
Aggregate Aggregate
Percent Principal Principal
Number of by Balance as of Balance as of
Year Assets Number the Cut-off Date the Cut-off Date
---------- --------- -------- ---------------- ----------------
<S> <C> <C> <C> <C>
Total 100.00% $ 100.00%
======== ====== ================ ======
</TABLE>
Note: Percentage totals may not add due to rounding.
S-30
<PAGE> 30
Year of Scheduled Maturity
<TABLE>
<CAPTION>
Percent by
Aggregate Aggregate
Percent Principal Principal
Number of by Balance as of Balance as of
Year Assets Number the Cut-off Date the Cut-off Date
---------- --------- -------- ---------------- ----------------
<S> <C> <C> <C> <C>
Total 100.00% $ 100.00%
========= ====== ================ ======
</TABLE>
Note: Percentage totals may not add due to rounding.
The following table sets forth the range of Original LTV Ratios of the
Mortgage Loans. An "Original LTV Ratio" is a fraction, expressed as a
percentage, the numerator of which is the Principal Balance of a Mortgage Loan
on the date of its origination, and the denominator of which is [in general]
the lesser of (i) the appraised value of the related Mortgaged Property as
determined by an appraisal thereof obtained in connection with the origination
of such Mortgage Loan and (ii) the sale price of such Mortgaged Property at the
time of such origination. There can be no assurance that the value (determined
through an appraisal or otherwise) of a Mortgaged Property determined after
origination of the related Mortgage Loan will be equal to or greater than the
value thereof (determined through an appraisal or otherwise) obtained in
connection with the origination. As a result, there can be no assurance that
the loan-to-value ratio for any Mortgage Loan determined at any time following
origination thereof will be lower than the Original LTV Ratio, notwithstanding
any positive amortization of such Mortgage Loan.
Original LTV Ratios
<TABLE>
<CAPTION>
Percent by
Aggregate Aggregate
Number of Percent of Principal Principal
Original Mortgage Assets by Balance as of Balance as of
LTV Ratio Loans Number the Cut-off Date the Cut-off Date
--------- --------- ---------- ---------------- ----------------
<S> <C> <C> <C> <C>
Total 100.00% $ 100.00%
========= ====== ================ ======
</TABLE>
Weighted Average Original
LTV Ratio:
Note: Percentage totals may not add due to rounding.
The Mortgage Loans are secured by Mortgaged Properties in ________
different states. The table below sets forth the states in which the Mortgaged
Properties are located:
S-31
<PAGE> 31
Geographic Distribution
<TABLE>
<CAPTION>
Percent by
Aggregate Aggregate
Number of Percent of Principal Principal
Mortgage Assets by Balance as of Balance as of
State Loans Number the Cut-off Date the Cut-off Date
---------- --------- ---------- ---------------- ----------------
<S> <C> <C> <C> <C>
Total 100.00% $ 100.00%
========= ====== ================ ======
</TABLE>
Note: Percentage totals may not add due to rounding.
[regional breakdown to be provided as appropriate]
No more than ___% of the Mortgage Loans will be secured by Mortgaged
Properties located in any one zip code.
[___% of the Mortgage Loans provide that upon any principal prepayment of
a Mortgage Loan, whether made voluntarily or involuntarily, the related
Mortgagor will be required to pay a prepayment premium or yield maintenance
Penalty (a "Prepayment Premium") in the amount set forth in the following
table.]
[Mortgage Loan Prepayment Premiums]
<TABLE>
<CAPTION>
Percent by
Aggregate Aggregate
Number of Percent of Principal Principal
Prepayment Mortgage Assets by Balance as of Balance as of
Premium Loans Number the Cut-off Date the Cut-off Date
---------- --------- ---------- ---------------- ----------------
<S> <C> <C> <C> <C>
Total 100.00% $ 100.00%
========= ====== ================ ======
</TABLE>
Note: Percentage totals may not add due to rounding.
S-32
<PAGE> 32
[FHA Loans]
<TABLE>
<CAPTION>
Percent by
Aggregate Aggregate
Number of Percent of Principal Principal
Mortgage Assets by Balance as of Balance as of
FHA Loans Loans Number the Cut-off Date the Cut-off Date
--------- --------- ---------- ---------------- ----------------
<S> <C> <C> <C> <C>
Total 100.00% $ 100.00%
========= ====== ================ ======
</TABLE>
Note: Percentage totals may not add due to rounding.
[VA Loans]
<TABLE>
<CAPTION>
Percent by
Aggregate Aggregate
Number of Percent of Principal Principal
Mortgage Assets by Balance as of Balance as of
VA Loans Loans Number the Cut-off Date the Cut-off Date
-------- --------- ---------- ---------------- ----------------
<S> <C> <C> <C> <C>
Total 100.00% $ 100.00%
======= ====== =============== ======
</TABLE>
Note: Percentage totals may not add due to rounding.
[Non-Performing Mortgage Loans]
<TABLE>
<CAPTION>
Percent by
Non- Aggregate Aggregate
Performing Number of Percent of Principal Principal
Mortgage Mortgage Assets by Balance as of Balance as of
Loans Loans Number the Cut-off Date the Cut-off Date
---------- ---------- ---------- ---------------- ----------------
<S> <C> <C> <C> <C>
Total 100.00% $ 100.00%
========= ====== ================ ======
</TABLE>
Note: Percentage totals may not add due to rounding.
S-33
<PAGE> 33
[Sub-Performing Mortgage Loans]
<TABLE>
<CAPTION>
Percent by
Sub- Aggregate Aggregate
Performing Number of Percent of Principal Principal
Mortgage Mortgage Assets by Balance as of Balance as of
Loans Loans Number the Cut-off Date the Cut-off Date
---------- --------- ---------- ---------------- ----------------
<S> <C> <C> <C> <C>
Total 100.00% $ 100.00%
========= ====== ================ ======
</TABLE>
Note: Percentage totals may not add due to rounding.
[Reinstated Mortgage Loans]
<TABLE>
<CAPTION>
Percent by
Aggregate Aggregate
Reinstated Number of Percent of Principal Principal
Mortgage Mortgage Assets by Balance as of Balance as of
Loans Loans Number the Cut-off Date the Cut-off Date
---------- --------- ---------- ---------------- ----------------
<S> <C> <C> <C> <C>
Total 100.00% $ 100.00%
========= ====== ================ ======
</TABLE>
Note: Percentage totals may not add due to rounding.
UNDERWRITING STANDARDS
All of the Mortgage Loans were originated or acquired by _______,
generally in accordance with the underwriting criteria described herein.
[Description of underwriting standards.]
[CERTAIN CHARACTERISTICS OF MBS]
[Particular textual and table disclosure for all MBS collateral]
[CERTAIN CHARACTERISTICS OF THE AGENCY SECURITIES]
[Particular textual and table disclosure for all Agency Securities
collateral]
ADDITIONAL INFORMATION
The description in this Prospectus Supplement of the Assets and the
Mortgaged Properties is based upon the Trust Fund as expected to be constituted
at the close of business on the Cut-off Date, as adjusted for the scheduled
principal payments due on or before such date. Prior to the issuance of the
Bonds, an Asset may
S-34
<PAGE> 34
be removed from the Trust Fund as a result of incomplete documentation or
otherwise, if the Depositor deems such removal necessary or appropriate and may
be prepaid at any time. A limited number of other assets may be included in the
Trust Fund prior to the issuance of the Bonds unless including such assets
would materially alter the characteristics of the Trust Fund as described
herein. The Depositor believes that the information set forth herein will be
representative of the characteristics of the Trust Fund as it will be
constituted at the time the Bonds are issued, although the range of Asset Rates
and maturities and certain other characteristics of the Assets in the Trust
Fund may vary.
A Current Report on Form 8-K will be available to purchasers of the Bonds
and will be filed, together with Exhibits, with the Securities and Exchange
Commission within fifteen days after the initial issuance of the Bonds. In the
event Assets are removed from or added to the Trust Fund as set forth in the
preceding paragraph, such removal or addition will be noted on a Form 8-K.
DESCRIPTION OF THE SERVICING AGREEMENT
SERVICING OF ASSETS
[Union Planters National Bank, a national banking association, will act as
Master Servicer (in such capacity, the "Master Servicer") for the Bonds
pursuant to the Servicing Agreement. The Master Servicer, a wholly-owned
banking subsidiary of Union Planters Corporation, is engaged, among other
things, in the mortgage banking business and, as such, originates, purchases,
sells and services mortgage loans.]
The executive offices of the Master Servicer are located at _____________,
telephone number(__)__________.
The Master Servicer will be responsible for servicing the Assets, in
accordance with the Master Servicer's policies and procedures and in accordance
with the terms of the Servicing Agreement. See "Description of the Agreements
- -- Collection and Other Servicing Procedures" in the Prospectus.
The Master Servicer shall establish and maintain on behalf of the Trustee
an account (the "Collection Account") for the benefit of the Bondholders. The
Collection Account will be an Eligible Account. Subject to the investment
provision described in the following paragraphs, upon receipt by the Master
Servicer of amounts in respect of the Assets (excluding amounts representing
administrative charges, annual fees, taxes, assessments, credit insurance
charges, insurance proceeds to be applied to the restoration or repair of a
Mortgaged Property or similar items), the Master Servicer will deposit such
amounts in the Collection Account. Amounts so deposited may be invested in
Eligible Investments maturing no later than one Business Day prior to the date
on which the amount on deposit therein is required to be deposited in the
Payment Account or on such Payment Date. Not later than the fifth Business Day
prior to each Payment Date (the "Determination Date"), the Master Servicer will
notify the Trustee of the amount of such deposit to be included in funds
available for the related Payment Date.
The Trustee will establish one or more accounts (the "Payment Account")
into which will be deposited amounts withdrawn from the Collection Account for
distribution to Bondholders on a Payment Date. The Payment Account will be an
Eligible Account. Amounts on deposit therein will be invested in Eligible
Investments maturing on or before the Business Day prior to the related Payment
Date.
Eligible Investments are specified in the Servicing Agreement and are
limited to investments which meet the criteria of the Rating Agencies from time
to time as being consistent with their then current ratings of the Bonds.
THE MASTER SERVICER
Delinquency and Foreclosure Experience. The following tables set forth
certain information concerning the delinquency experience (including pending
foreclosures) on one- to four- family residential mortgage loans included in
the Master Servicer's servicing portfolio (which includes mortgage loans that
are subserviced by others). The
S-35
<PAGE> 35
indicated periods of delinquency are based on the number of days past due on a
contractual basis. No mortgage loan is considered delinquent for these purposes
until 31 days past due on a contractual basis.
<TABLE>
<CAPTION>
As of December 31, 19 As of December 31, 19 As of , 19
---------------------- ---------------------- ----------
By Dollar By Dollar By Dollar
By No. of Amount of By No. of Amount of By No. of Amount of
Loans Loans Loans Loans Loans Loans
--------- --------- --------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
(Dollar Amount in Thousands)
Total Portfolio $ $
------- $ -------- -------- -------- --------
Period of -------
Delinquency
31 to 59 days ( %) ( %) ( %)
60 to 89 days ( %) ( %) ( %)
90 days or more ( %) ( %) ( %)
------- -------- -------- -------- -------- --------
Total Delinquent $ $
Loans ------- ------- -------- ------ -------- $
--------
Percent of Portfolio % % % % %
%
Foreclosures
pending (1)
Percent of Portfolio % % % % %
%
Foreclosures
Percent of Portfolio % % % % %
%
</TABLE>
- --------------------
(1) Includes bankruptcies which preclude foreclosure.
There can be no assurance that the delinquency and foreclosure experience
of the Assets comprising the Trust Fund will correspond to the delinquency and
foreclosure experience of the Master Servicer's mortgage portfolio set forth in
the foregoing tables. The aggregate delinquency and foreclosure experience on
the Assets comprising the Trust Fund will depend on the results obtained over
the life of the Trust Fund.
[HAZARD INSURANCE
The Servicing Agreement provides that the Master Servicer maintain certain
hazard insurance on the Mortgaged Properties relating to the Mortgage Loans.
The Servicing Agreement also requires the Master Servicer to maintain for any
Mortgaged Property relating to a Mortgage Loan acquired upon foreclosure of a
Mortgage Loan, or by deed in lieu of such foreclosure, hazard insurance with
extended coverage in an amount equal to the lesser of (a) the maximum insurable
value of such Mortgaged Property or (b) the outstanding balance of such
Mortgage Loan plus the outstanding balance on any mortgage loan senior to such
Mortgage Loan at the time of foreclosure or deed in lieu of foreclosure, plus
accrued interest and the Servicer's good faith estimate of the related
liquidation expenses to be incurred in connection therewith. The Servicing
Agreement provides that the Master Servicer may satisfy its
S-36
<PAGE> 36
obligation to cause hazard policies to be maintained by maintaining a blanket
policy insuring against losses on such Mortgaged Properties. If such blanket
policy contains a deductible clause, the Master Servicer will be obligated to
deposit in the Collection Account the sums which would have been deposited
therein but for such clause. The Master Servicer will initially satisfy these
requirements by maintaining a blanket policy. As set forth above, all amounts
collected by the Master Servicer (net of any reimbursements to the Master
Servicer) under any hazard policy (except for amounts to be applied to the
restoration or repair of the Mortgaged Property) will ultimately be deposited
in the Collection Account.
In general, the standard form of fire and extended coverage policy covers
physical damage to or destruction of the improvements on the property by fire,
lightning, explosion, smoke, windstorm and hail, and the like, strike and civil
commotion, subject to the conditions and exclusions specified in each policy.
Although the policies relating to the Mortgage Loans will be underwritten by
different insurers and therefore will not contain identical terms and
conditions, the basic terms thereof are dictated by state laws and most of such
policies typically do 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 reactions, wet or dry rot, vermin, rodents, insects or
domestic animals, theft and, in certain cases vandalism. The foregoing list is
merely indicative of certain kinds of uninsured risks and is not intended to be
all-inclusive or an exact description of the insurance policies relating to the
Mortgaged Properties.]
[REALIZATION UPON DEFAULTED MORTGAGE LOANS
The Master Servicer will foreclose upon or otherwise comparably convert to
ownership Mortgaged Properties securing such of the Mortgage Loans as come into
default when in accordance with applicable servicing procedures under the
Servicing Agreement, no satisfactory arrangements can be made for the
collection of delinquent payments. In connection with such foreclosure or other
conversion, the Servicer will follow such practices as it deems necessary or
advisable and as are in keeping with its general subordinate mortgage servicing
activities, provided the Master Servicer will not be required to expend its own
funds in connection with foreclosure or other conversion, correction of default
on a related senior mortgage loan or restoration of any property unless, in its
sole judgment, such foreclosure, correction or restoration will increase net
Liquidation Proceeds. The Master Servicer will be reimbursed out of Liquidation
Proceeds for advances of its own funds as liquidation expenses before any Net
Liquidation Proceeds are distributed to Bondholders. "Net Liquidation Proceeds"
with respect to a Mortgage Loan is the amount received upon liquidation of such
Mortgage Loan reduced by related expenses, up to the unpaid Principal Balance
of the Mortgage Loan plus accrued and unpaid interest thereon.]
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
With respect to each Due Period, other than the first Due Period, the
Master Servicer will receive from interest collections in respect of the
Mortgage Loan a portion of such interest collections as a monthly Servicing Fee
in the amount equal to ___% per annum ("Servicing Fee Rate") on the aggregate
Principal Balances of the Mortgage Loans as of the first day of each such Due
Period. All assumption fees, late payment charges and other fees and charges,
to the extent collected from borrowers, will be retained by the Master Servicer
as additional servicing compensation.
The Master Servicer will pay certain ongoing expenses associated with the
Trust Fund and incurred by it in connection with its responsibilities under the
Servicing Agreement, including, without limitation, payment of the fees and
disbursements of the Trustee, any custodian appointed by the Trustee, and any
paying agent. In addition, the Master Servicer will be entitled to
reimbursement for certain expenses incurred by it in connection with defaulted
Mortgage Loans and in connection with the restoration of Mortgaged Properties,
such right of reimbursement being prior to the rights of Bondholders to receive
any related Net Liquidation Proceeds
S-37
<PAGE> 37
DESCRIPTION OF THE BONDS
GENERAL
The Bonds will be issued pursuant to the Indenture, and will consist of
____ Classes to be designated as the Class __ Bonds, the Class __ Bonds, the
Class __ Bonds and the Class __ Bonds. [The Class __ Bonds (the "Subordinate
Bonds") will be subordinate to the Class __ Bonds and the Class __ Bonds (the
"Senior Bonds"), as described herein.] The following summaries describe certain
provisions of the Bonds and the Indenture. The summaries do not purport to be
complete and are subject to, and qualified in their entirety by reference to,
the provisions of the applicable agreement. The Bonds will be issued in
[book-entry][fully registered, certificated] form only. The Bonds will be
issued denominations of $_______ and integral multiples of $_____ in excess
thereof[, with one Bond of such class evidencing an additional amount equal to
the remainder of the Security Principal Balance thereof]. The Bonds will be
freely transferrable and exchangeable at the corporate trust office of the
Trustee.
The Bonds [are non-recourse obligations of the Depositor and] are secured
by the Trust Fund, which consists of: (i) [the Mortgage Loans] [the MBS] [the
Agency Securities] and all payments under and proceeds in respect thereof
received after the Cut-off Date (exclusive of payments of principal and
interest due on or before the Cut-off Date); (ii) any Mortgaged Property
acquired on behalf of the Trust Fund through foreclosure or deed in lieu of
foreclosure (upon acquisition, "REO Property"); (iii) such funds or assets as
from time to time are deposited in the Payment Account and any account
established in connection with REO Property (the "REO Account"); and (iv) the
rights of the mortgagee under all insurance policies with respect to the
Mortgage Loans. Only the Class __ Bonds, the Class __ Bonds and the Class __
Bonds (together, the "Offered Bonds") are offered hereby.
The Class __ Bonds will have an initial [Security Principal Balance]
[Notional Balance of] $__________, the Class __ Bonds will have an initial
Security Principal Balance of $__________, and the Class __ Bonds will have an
initial Security Principal Balance of $__________. [The initial Security
Principal Balance of the Class __ Bonds will be zero]. The Security Principal
Balance of any Class of Bonds outstanding at any time represents the maximum
amount which the holders thereof are entitled to receive as payments allocable
to principal from the Assets. The respective Security Principal Balances of the
Class __, Class __, Class __ and Class ___ Bonds (respectively, the "Class __
Balance", "Class __ Balance", "Class __ Balance" and "Class __ Balance") will
in each case be (i) reduced by amounts actually paid on such Class that are
allocable to principal and [(ii) increased by amounts allocated to such Class
in respect of negative amortization on the Assets [Describe Notional Balance.]]
[The Security Principal Balance of the Class __ Bonds (the "Class __ Balance")
will at any time equal the aggregate Principal Balance of the Assets minus the
sum of the Class __ Balance, Class __ Balance and Class __ Balance.] The
Principal Balance of any Asset at any date of determination will equal (a) the
Cut-off Date Balance of such Asset, plus [(b) any negative amortization added
to the Principal Balance of such Asset on any Due Date after the Cut-off Date
to and including the Due Date in the Due Period for the most recently preceding
Payment Date], minus (c) the sum of (i) the principal portion of each Payment
due on such Asset after the Cut-off Date, to the extent received from the
Mortgagor or advanced by the Master Servicer and paid to holders of the Bonds
before such date of determination, (ii) all principal prepayments and other
unscheduled collections of principal received with respect to such Asset, to
the extent distributed to holders of the Bonds before such date of
determination, and (iii) any reduction in the outstanding Principal Balance of
such Asset resulting out of a bankruptcy proceeding for the related Mortgagor.
[None of the Class __ Bonds are offered hereby.]
[BOOK-ENTRY REGISTRATION
If so provided in the related Prospectus Supplement, one or more Classes
of the Bonds will be issued as Book- Entry securities (the "Book-Entry
Securities"), and each such Class will be represented by one or more single
Bonds registered in the name of a nominee for DTC.
S-38
<PAGE> 38
DTC is a limited-purpose trust company organized under the laws of the
State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the Uniform Commercial Code ("UCC") and a
"clearing agency" registered pursuant to the provisions of Section 17A of the
Securities Exchange Act of 1934, as amended. DTC was created to hold securities
for its participating organizations ("Participants") and facilitate the
clearance and settlement of securities transactions between Participants
through electronic book-entry changes in their accounts, thereby eliminating
the need for physical movement of certificates. Participants include securities
brokers and dealers, banks, trust companies and clearing corporations and may
include certain other organizations. Indirect access to the DTC system also is
available to others such as banks, brokers, dealers and trust companies that
clear through or maintain a custodial relationship with a Participant, either
directly or indirectly ("Indirect Participants").
Investors that are not Participants or Indirect Participants but desire to
purchase, sell or otherwise transfer ownership of, or other interests in,
Book-Entry Securities may do so only through Participants and Indirect
Participants. In addition, such investors ("Security Owners") will receive all
distributions on the Book-Entry Securities through DTC and its Participants.
Under a book-entry format, Security Owners will receive payments after the
related Payment Date because, while payments are required to be forwarded to
Cede, on each such date, DTC will forward such payments to its Participants
which thereafter will be required to forward them to Indirect Participants or
Security Owners. The only "Securityholder" (as such term is used in the
Agreement) will be Cede, as nominee of DTC, and the Security Owners will not be
recognized by the Trustee as Bondholders under the Agreement. Security Owners
will be permitted to exercise the rights of Bondholders under the Agreement
only indirectly through the Participants who in turn will exercise their rights
through DTC.
Under the rules, regulations and procedures creating and affecting DTC and
its operations, DTC is required to make book-entry transfers among Participants
on whose behalf it acts with respect to the Book-Entry Securities and is
required to receive and transmit distributions of principal of and interest on
the Book-Entry Securities. Participants and Indirect Participants with which
Security Owners have accounts with respect to the Book-Entry Securities
similarly are required to make book-entry transfers and receive and transmit
such payments on behalf of their respective Security Owners.
Because DTC can act only on behalf of Participants, who in turn act on
behalf of Indirect Participants and certain banks, the ability of a Security
Owner to pledge its interest in the Book-Entry Securities to persons or
entities that do not participate in the DTC system, or otherwise take actions
in respect of its interest in the Book-Entry Securities, may be limited due to
the lack of a physical certificate evidencing such interest.
DTC has advised the Depositor that it will take any action permitted to be
taken by the holders of the Book-Entry Securities under the Agreement only at
the direction of one or more Participants to whose account with DTC interests
in the Book-Entry Securities are credited.
Bonds initially issued in book-entry form will be issued in fully
registered, certificated form to Security Owners or their nominees ("Definitive
Securities"), rather than to DTC or its nominee only if (i) the Depositor
advises the Trustee in writing that DTC is no longer willing or able to
properly discharge its responsibilities as depository with respect to the Bonds
and the Depositor is unable to locate a qualified successor or (ii) the
Depositor, at its option, elects to terminate the book-entry system through
DTC.
Upon the occurrence of either of the events described in the immediately
preceding paragraph, DTC is required to notify all Participants of the
availability through DTC of Definitive Securities for the Security Owners. Upon
surrender by DTC of the certificate or certificates representing the Book-Entry
Securities, together with instructions for re-registration, the Trustee will
issue (or cause to be issued) to the Security Owners identified in such
instructions the Definitive Securities to which they are entitled, and
thereafter the Trustee will recognize the holders of such Definitive Securities
as Bondholders under the Agreement.
None of the Depositor, the Master Servicer, any Sub-Servicer, the Trustee,
or any of their affiliates will have any responsibility for any aspect of the
records relating to or payments made on account of beneficial ownership
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interests of the Book-Entry Securities or for maintaining, supervising or
reviewing any records relating to such beneficial ownership interests.]
PAYMENTS OF PRINCIPAL AND INTEREST
PAYMENT DATES
The Payment Dates for the Bonds will be the __th day of each month (or, if
such day is not a Business Day, then the next succeeding Business Day),
commencing _______________________.
AVAILABLE DISTRIBUTION AMOUNT
Payments of interest on and principal of the Bonds on each Payment Date
will be made by the Trustee from the "Available Distribution Amount," which
will generally equal (A) the sum of the following:
(i) all payments of interest and principal with respect to
the Assets and any REO Property (including Liquidation
Proceeds and Insurance Proceeds) collected during the
related Due Period and deposited in the Collection
Account;
(ii) any Advance by the Master Servicer; and
(iii) any Payments due during, but collected prior to, the
related Due Period;
less (B) the sum of the following:
(i) all amounts due the Master Servicer as the Servicing
Fee [(out of which will be paid the fees and expenses
of the Trustee)], including late charges, assumption
fees, prepayment premiums and similar charges and
fees;
(ii) any Payments collected but due on a date subsequent to
the related Due Period;
(iii) all amounts required to reimburse the Master Servicer
for any Advances on an Asset upon the Liquidation or
modification of such Asset; and
(iv) all amounts required to reimburse the Master Servicer
for any Non-recoverable Advances.
On each Payment Date, the Available Distribution Amount will be paid by or
on behalf of the Trustee in the order of priority described under "- Priority
of Payments" below. All payments or allocations with respect to a Class of
Bonds will be made pro rata within such Class on the basis of the outstanding
Security Principal Balance of such Class.
INTEREST PAYMENTS
Interest will accrue on the unpaid Security Principal Balance of the Bonds
at the per annum rate (the "Interest Rate") equal to __% per annum [from the
Closing Date to the first Payment Date and thereafter interest will accrue on
the Bonds from and including the preceding Payment Date to but excluding such
current Payment Date (each, an "Interest Accrual Period") at [a floating rate
equal to [Index] plus __%, subject to a cap of __% per annum] [__%]]. [Interest
will be computed on the basis of a 360 day year consisting of 12 months of 30
days each.] [Interest will be calculated on the basis of the actual number of
days in each Interest Accrual Period divided by 360.] A failure to pay interest
on any Bonds on any Payment Date that continues for five days constitutes an
Event of Default under the Indenture.
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<PAGE> 40
PRINCIPAL PAYMENTS
"Principal Distribution Amount" means, with respect to a Payment Date for
a Series of Bonds, the amount, if any, by which (i) the aggregate value of the
Assets as of the most recent Payment Date (or, in regard to the first Payment
Date, the Closing Date) exceeds (ii) the aggregate value of the Assets as of
the current Payment Date, less the amount of any losses incurred in the related
Due Period. The value of each Asset (or REO Property to the extent of a
foreclosure of a Mortgage Loan) will be equal to its Principal Balance.
On each Payment Date the Principal Distribution Amount will be applied, to
the extent of the Available Distribution Amount, to pay principal first on the
Class __ Bonds until they are paid in full, second to pay principal on the
Class __ Bonds until they are paid in full, and finally to pay principal on the
Class __ Bonds until they are paid in full.
Principal payments on the Bonds will be made on each Payment Date as
described below until the Bonds are paid in full. Principal payments allocated
to a Class of Bonds will be paid to the holders of the Bonds of such Class pro
rata in the proportion that the outstanding Security Principal Balance of each
Bond of such Class bears to the aggregate outstanding Security Principal
Balance of all Bonds of such Class.
PRIORITY OF PAYMENTS
On each Payment Date, unless the Bonds have been declared due and payable
following an Event of Default or there is an optional redemption of all of the
Bonds, the Available Distribution Amount will be applied for the following
purposes and in the following order of priority, in each case to the extent of
the remaining funds:
(i) to pay to the holders of the Class __ Bonds all unpaid
interest accrued in respect of the Class __ Bonds for such
Payment Date, and, to the extent not previously
distributed, for all preceding Payment Dates;
(ii) to pay to the holders of the Class __ Bonds, the Principal
Distribution Amount in reduction of the Security Principal
Balance of the Class __ Bonds, until reduced to zero;
(iii) to pay to the holders of the Class __ Bonds all unpaid
interest accrued in respect of the Class __ Bonds for such
Payment Date, and, to the extent not previously
distributed, for all preceding Payment Dates;
(iv) to pay to the holders of the Class __ Bonds (after the
Class __ Bonds have been paid in full), the Principal
Distribution Amount in reduction of the Security Principal
Balance of the Class __ Bonds, until reduced to zero;
(v) to pay to the holders of the Class __ Bonds all unpaid
interest accrued in respect of the Class __ Bonds for such
Payment Date, and, to the extent not previously
distributed, for all preceding Payment Dates;
(vi) to pay to the holders of the Class __ Bonds (after the
Class __ Bonds have been paid in full), the Principal
Distribution Amount in reduction of the Security Principal
Balance of the Class __ Bonds, until reduced to zero;
(vii) to pay to the Depositor or its designee, any portion of
the Available Distribution Amount remaining.
In the event the Bonds have been declared due and payable following an
Event of Default, the Available Distribution Amount will be applied to pay
accrued and unpaid interest on and the outstanding Security Principal Balance
of the Class __ Bonds, the Class __ Bonds, the Class __ Bonds, and the
Depositor, in that order.
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As to any Payment Date, the "Due Period" is the calendar month preceding
the month of such Payment Date.
"Liquidation Loss Amount" means with respect to any Liquidated Asset, the
unrecovered Principal Balance thereof at the end of the Due Period in which
such Asset became a Liquidated Asset after giving effect to the Net Liquidation
Proceeds in connection therewith.
LOSSES; SUBORDINATION
For any Payment Date, the amount of the Available Distribution Amount will
be dependent in part upon whether any losses have been incurred by the Trust
Fund during the most recent Due Period. Losses will be caused by (i) any
realized losses on a defaulted Mortgage Loan, and (ii) any reduction by a
bankruptcy court of either the unpaid Principal Balance or Asset Rate of a
Mortgage Loan subject to a bankruptcy proceeding.
The Class __ Bonds are senior to the Class __ Bonds, which are senior to
the Class __ Bonds. The subordination of the Class __ and Class __ Bonds to the
Class __ Bonds is designed to enhance the likelihood of timely receipt by the
Class __ Bondholders of the full amount of interest and principal due to them
and to decrease the likelihood that the Class __ Bondholders will experience
any loss of principal or interest caused by losses. The right of the Class __
Bondholders to receive distributions of interest and principal is expressly
subordinate to the rights of the Class __ Bondholders to receive distributions
of interest and principal. This subordination is designed to enhance the
likelihood of timely receipt by the Class __ Bondholders of the full amount of
interest and principal due to them and to decrease the likelihood that the
Class __ Bondholders will experience any loss of principal or interest caused
by losses. The credit enhancement afforded to the Class __ Bondholders by the
subordination of the Class __ and Class __ Bonds will be accomplished by (i)
the priority of the different Classes to receive the Available Distribution
Amount on any Payment Date prior to any distributions to Holders of a less
senior Class or the Depositor and (ii) the priority afforded the different
Classes on liquidations of the Trust Fund following an Event of Default.
[ADVANCES
On or prior to the Business Day immediately preceding each Payment Date,
the Master Servicer will either (1) deposit from its own funds the related
Advance into the Payment Account; (2) cause appropriate entries to be made in
the records of the Payment Account that such funds have been used to make the
Advance; (3) if the Payment Account is maintained by the Trustee, instruct the
Trustee to use investment earnings on the Payment Account to defray the Master
Servicer's Advance obligation; or (4) make (or cause to be made) the aggregate
Advance through any combination of the methods described in clauses (1), (2)
and (3) above. Any funds held for future payment and used in accordance with
clause (2) above must be restored by the Master Servicer from its own funds or
from early payments collected on the Assets. The aggregate Advance for a
Payment Date is the sum of delinquent scheduled Payments due in the related Due
Period, exclusive of all Nonrecoverable Advances.
Advances are intended to maintain a regular flow of scheduled interest and
principal payments to Bondholders rather than to guarantee or insure against
losses.
[The Master Servicer will also be obligated to make Advances to the extent
the Master Servicer deems such Advances recoverable out of Liquidation Proceeds
or from collections on the related Asset, in respect of Liquidation Expenses
and certain taxes and insurance premiums not paid by a Mortgagor on a timely
basis.
The Master Servicer will reimburse itself for Advances out of collections
of the late payments in respect of which such Advances were made. In addition,
upon the determination that a Nonrecoverable Advance has been made in respect
of an Asset or upon an Asset becoming a Liquidated Asset, the Master Servicer
will reimburse itself out of funds in the Payment Account for unreimbursed
amounts advanced by it in respect of such Asset.]
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OPTIONAL TERMINATION
The Depositor may, at its option, redeem any Class of Bonds in whole but
not in part, on any Payment Date (i) on or after ____________________, or (ii)
on which, after taking into account payments of principal to be made on such
Payment Date, the aggregate outstanding Security Principal Balance of the Bonds
is less than [35]% of the initial aggregate Security Principal Balance of the
Bonds. Any redemption will be at a price equal to 100% of the aggregate
outstanding Security Principal Balance of the Class of Bonds so redeemed, plus
accrued and unpaid interest through the day preceding the final Payment Date
and such price will be payable solely in cash. At the option of the Depositor,
an optional redemption of a Class of Bonds can be effected without retiring
such Class of Bonds so that the Depositor has the ability to own or resell such
Bonds. Upon redemption and retirement of the Bonds, the Assets securing those
Bonds may be released from the lien of the Indenture. See "Description of the
Offered Securities -- Termination" in the Prospectus.
Any redemption of a Class of Bonds would have an adverse effect on the
yield of such Class, because such redemption would have the same effect as a
prepayment in full of the Assets. As a result of any such redemption, investors
in such Bonds might not fully recoup their initial investment.
CREDIT SUPPORT
[Disclose particular Credit Support, if any]
LIQUIDITY FACILITIES
[Disclose particular Liquidity Facilities, if any]
CERTAIN YIELD, PREPAYMENT AND MATURITY CONSIDERATIONS
The yield to maturity on the Bonds will be affected by the rate of
principal payments on the Assets including, for this purpose, prepayments,
which may include amounts received by virtue of repurchase, condemnation,
insurance or foreclosure. The yield to maturity on the Bonds will also be
affected by the level of the Index. The rate of principal payments on the Bonds
will correspond to the rate of principal payments (including prepayments) on
the related Assets.
[Description of factors affecting yield, prepayment and maturity of the
Assets and Bonds depending upon characteristics of the Assets.]
WEIGHTED AVERAGE LIFE OF THE BONDS
Weighted average life refers to the average amount of time from the date
of issuance of a security until each dollar of principal of such security will
be repaid to the investor. The weighted average life of the Class [ ] Bonds
will be influenced by the rate at which principal payments (including scheduled
payments, principal prepayments and payments made pursuant to any applicable
policies of insurance) on the Assets are made. Principal payments on the Assets
may be in the form of scheduled amortization or prepayments (for this purpose,
the term "prepayment" includes prepayments and liquidations due to a default or
other dispositions of the Assets).
The table of Percent of Initial Bond Balance Outstanding for the Bonds at
the respective percentages of [CPR] [SPA] set forth below indicates the
weighted average life of such Bonds and sets forth the percentage of the
initial principal amount of such Bonds that would be outstanding after each of
the dates shown at the indicated percentages of [CPR][SPA]. The table has been
prepared on the basis of the following assumptions regarding the
characteristics of the Assets: (i) an outstanding Principal Balance of
$_________, a remaining amortization term of ___ months and a term to balloon
of ___ months: (ii) an interest rate equal to ____% per annum until the Due
Date and thereafter an interest rate equal to % per annum (at an assumed Index
of ____%) and Payments that would fully amortize the remaining balance of the
Asset over its remaining amortization term; (iii) the Assets
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<PAGE> 43
prepay at the indicated percentage of [CPR][SPA]; (iv) the maturity date of
each of the Balloon Mortgage Loans is not extended; (v) distributions on the
Class [ ] Bonds are received in cash, on the 25th day of each month, commencing
in_____________; (vi) no defaults or delinquencies in, or modifications,
waivers or amendments respecting, the payment by the Mortgagors of principal
and interest on the Assets occur; (vii) the initial Bond Balance of the Class [
] Bonds is $________; (viii) prepayments represent payment in full of
individual Assets and are received on the respective Due Dates and include 30
days' interest thereon; (ix) there are no repurchases of Assets due to breaches
of any representation and warranty or otherwise; (x) the Class [ ] Bonds are
purchased on ________; (xi) the Servicing Fee is ____% per annum; and (xii) the
Index on each Interest Rate Adjustment Date is ________% per annum.
Based on the foregoing assumptions, the table indicates the weighted
average life of the Class [ ] Bonds and sets forth the percentages of the
initial Bond Balance of the Class [ ] Bonds that would be outstanding after the
Payment Date in ___________ of each of the years indicated, at various
percentages of [CPR][SPA]. Neither [CPR][SPA] nor any other prepayment model or
assumption purports to be a historical description of prepayment experience or
a prediction of the anticipated rate of prepayment of any pool of mortgage
assets, including the Asset included in the Trust Fund. Variations in the
actual prepayment experience and the balance of the Assets that prepay may
increase or decrease the percentage of initial Bond Balance (and weighted
average life) shown in the following table. Such variations may occur even if
the average prepayment experience of all such Assets is the same as any of the
specified assumptions.
Percent of Initial Bond Balance Outstanding
at the Following Percentages of [CPR][SPA]
<TABLE>
<CAPTION>
Payment Date
<S> <C> <C> <C> <C> <C> <C>
Initial Percent........................ ___% __% __% __% __% __%
____________ __, 19__..................
____________ __, 19__..................
____________ __, 20__..................
____________ __, 20__..................
____________ __, 20__..................
____________ __, 20__..................
____________ __, 20__..................
____________ __, 20__..................
____________ __, 20__..................
____________ __, 20__..................
____________ __, 20__..................
</TABLE>
Weighted Average Life
(Years) (+). . . . . . . . . . . .
+ The weighted average life of the Bonds is determined by (i) multiplying
the amount of each distribution of principal by the number of years from
the date of issuance to the related Payment Date, (ii) adding the results
and (iii) dividing the sum by the total principal distributions on such
Class of Bonds.
[Yield Consideration]
[Will describe assumption for various scenarios showing sensitivity of
certain classes to prepayment and default risks and set forth resulting yield.]
[THE CREDIT SUPPORT ISSUER, IF ANY]
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<PAGE> 44
[Description of Credit Support Issuer]
[THE LIQUIDITY FACILITY ISSUER, IF ANY]
[Description of Liquidity Facility Issuer]
THE DEPOSITOR
Union Planters Mortgage Finance Corp. (the "Depositor") was incorporated
in the State of Delaware on September 5, 1997. As of the date hereof, the
Depositor is a direct, wholly-owned limited purpose finance subsidiary of Union
Planters National Bank, a national banking association. Neither Union Planters
National Bank nor the Depositor, nor any affiliate of the foregoing, has
guaranteed or is otherwise obligated with respect to the Bonds. The principal
executive offices of the Depositor are located at 7130 Goodlett Farms Parkway,
Cordova, Tennessee 38018 (Telephone: (901) 580-6000). See "The Depositor" in
the Prospectus.
THE INDENTURE
The following summary describes certain terms of the Indenture. The
summary does not purport to be complete and is subject to, and qualified in its
entirety by reference to, the provisions of the Indenture. Whenever particular
sections or defined terms of the Indenture are referred to, such sections or
defined terms are thereby incorporated herein by reference. See "Description of
the Bonds" herein for a summary of certain additional terms of the Indenture.
REPORTS TO BONDHOLDERS
The Trustee will mail to each Bondholder, at such Bondholder's request, at
its address listed on the Bond Register maintained with the Trustee a report
setting forth certain amounts relating to the Bonds.
EVENTS OF DEFAULT; RIGHTS UPON EVENT OF DEFAULT
With respect to the Bonds, "Events of Default" under the Indenture will
consist of: (i) a default for five days or more in the payment of any interest
on any Bond; (ii) a default in the payment of the principal of or any
installment of the principal of any Bond when the same becomes due and payable;
(iii) a default in the observance or performance of any covenant or agreement
of the Depositor made in the Indenture and the continuation of any such default
for a period of 30 days after notice thereof is given to the Depositor by the
Trustee or to the Depositor and the Trustee by the holders of at least 25% in
principal amount of the Bonds then outstanding; (iv) any representation or
warranty made by the Depositor in the Indenture or in any certificate delivered
pursuant thereto or in connection therewith having been incorrect in a material
respect as of the time made, and such breach not having been cured within 30
days after notice thereof is given to the Depositor by the Trustee or to the
Depositor and the Trustee by the holders of at least 25% in principal amount of
Bonds then outstanding; or (v) certain events of bankruptcy, insolvency,
receivership or liquidation of the Depositor. [The amount of principal required
to be paid to Bondholders under the Indenture will generally be limited to
amounts available to be deposited in the Collection Account. Therefore, the
failure to pay principal on the Bonds generally will not result in the
occurrence of an Event of Default until the final scheduled Payment Date for
such Bonds.] If there is an Event of Default with respect to a Bond due to late
payment or nonpayment of interest due on a Bond, additional interest will
accrue on such unpaid interest at the interest rate on the Bond (to the extent
lawful) until such interest is paid. Such additional interest on unpaid
interest shall be due at the time such interest is paid. If there is an Event
of Default due to late payment or nonpayment of principal on a Bond, interest
will continue to accrue on such principal at the interest rate on the Bond
until such principal is paid. If an Event of Default should occur and be
continuing with respect to the Bonds, the Trustee or holders of a majority in
principal amount of Bonds then outstanding may declare the principal of such
Bonds to be immediately due and payable. Such declaration may, under certain
circumstances, be rescinded by the holders of a majority in principal amount of
the Bonds then outstanding. If the Bonds are due and payable following an Event
of Default with respect thereto, the Trustee may institute proceedings to
collect amounts due or foreclose on the Depositor's property or exercise
remedies as a secured party. If an Event of Default occurs and
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<PAGE> 45
is continuing with respect to the Bonds, the Trustee will be under no
obligation to exercise any of the rights or powers under the Indenture at the
request or direction of any of the holders of the Bonds, if the Trustee
reasonably believes it will not be adequately indemnified against the costs,
expenses and liabilities which might be incurred by it in complying with such
request. Subject to the provisions for indemnification and certain limitations
contained in the Indenture, the holders of a majority in principal amount of
the outstanding Bonds will have the right to direct the time, method and place
of conducting any proceeding or any remedy available to the Trustee, and the
holders of a majority in principal amount of the Bonds then outstanding may, in
certain cases, waive any default with respect thereto, except a default in the
payment of principal or interest or a default in respect of a covenant or
provision of the Indenture that cannot be modified without the waiver or
consent of all the holders of the outstanding Bonds. No holder of a Bond will
have the right to institute any proceeding with respect to the Indenture,
unless (i) such holder previously has given the Trustee written notice of a
continuing Event of Default, (ii) the holders of not less than 25% in principal
amount of the outstanding Bonds have made written request to the Trustee to
institute such proceeding in its own name as Trustee, (iii) such holder or
holders have offered the Trustee reasonable indemnity, (iv) the Trustee has for
60 days failed to institute such proceeding and (v) no direction inconsistent
with such written request has been given to the Trustee during the 60-day
period by the holders of a majority in principal amount of the Bonds. In
addition, the Trustee and the Bondholders, by accepting the Bonds, will
covenant that they will not at any time institute against the Depositor any
bankruptcy, reorganization or other proceeding under any federal or state
bankruptcy or similar law. With respect to the Depositor, neither the Trustee,
in its individual capacity, nor any of its owners, beneficiaries, agents,
officers, directors, employees, affiliates, successors or assigns will, in the
absence of an express agreement to the contrary, be personally liable for the
payment of the principal of or interest on the Bonds or for the agreements of
the Depositor contained in the Indenture.
CERTAIN COVENANTS
The Indenture will provide that the Depositor may not consolidate with or
merge into any other entity, unless (i) the entity formed by or surviving such
consolidation or merger is organized under the laws of the United States, any
state or the District of Columbia, (ii) such entity expressly assumes the
Depositor's obligation to make due and punctual payments upon the Bonds and the
performance or observance of any agreement and covenant of the Depositor under
the Indenture, (iii) no Event of Default shall have occurred and be continuing
immediately after such merger or consolidation, (iv) the Depositor has been
advised that the ratings of the Bonds then in effect would not be reduced or
withdrawn by any Rating Agency as a result of such merger or consolidation and
(v) the Depositor has received an opinion of counsel to the effect that such
consolidation or merger would have no material adverse tax consequence to the
Depositor or to any Bondholder. The Depositor will not, among other things, (i)
except as expressly permitted by the Indenture, sell, transfer, exchange or
otherwise dispose of any of the assets of the Depositor, (ii) claim any credit
on or make any deduction from the principal and interest payable in respect of
the Bonds (other than amounts withheld under the Code or applicable state law)
or assert any claim against any present or former holder of Bonds because of
the payment of taxes levied or assessed upon the Depositor, (iii) dissolve or
liquidate in whole or in part, (iv) permit the validity or effectiveness of the
Indenture to be impaired or permit any person to be released from any covenants
or obligations with respect to the Bonds under the Indenture except as may be
expressly permitted thereby or (v) permit any lien, charge excise, claim,
security interest, mortgage or other encumbrance to be created on or extent to
or otherwise arise upon or burden the assets of the Depositor or any part
thereof, or any interest therein or the proceeds thereof. The Depositor will
not incur, assume or guarantee any indebtedness other than indebtedness
incurred pursuant to the Bonds and the Indenture.
TRUSTEE'S ANNUAL REPORT
The Trustee will be required to mail each year to all Bondholders a report
relating to any change in its eligibility and qualification to continue as
Trustee under the Indenture, any amounts advanced by it under the Indenture,
the amount, interest rate and maturity date of any indebtedness owing by the
Trust Fund to the Trustee in its individual capacity, any change in the
property and funds physically held by the Trustee as such and any action taken
by it that materially affects the Bonds and that has not been previously
reported, but if no such changes have occurred, then no report shall be
required.
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SATISFACTION AND DISCHARGE OF INDENTURE
The Indenture will be discharged with respect to the collateral securing
the Bonds upon the delivery to the Trustee for cancellation of all the Bonds
or, with certain limitations, upon deposit with the Trustee of funds sufficient
for the payment in full of all the Bonds.
MODIFICATION OF INDENTURE
With the consent of the holders of a majority of the outstanding Bonds,
the Depositor and the Trustee may execute a supplemental indenture to add
provisions to, change in any manner or eliminate any provisions of, the
Indenture, or modify (except as provided below) in any manner the rights of the
Bondholders. Without the consent of the holder of each outstanding Bonds
affected thereby, however, no supplemental indenture will: (i) change the due
date of any installment of principal of or interest on any Bond or reduce the
principal amount thereof, the interest rate specified thereon or the redemption
price with respect thereto or change any place of payment where or the coin or
currency in which any Bond or any interest thereon is payable; (ii) impair the
right to institute suit for the enforcement of certain provisions of the
Indenture regarding payment; (iii) reduce the percentage of the aggregate
amount of the outstanding Bonds, the consent of the holders of which is
required for any supplemental indenture or the consent of the holders of which
is required for any waiver of compliance with certain provisions of the
Indenture or of certain defaults thereunder and their consequences as provided
for in the Indenture; (iv) modify or alter the provisions of the Indenture
regarding the voting of Bonds held by the Depositor or an affiliate thereof;
(v) decrease the percentage of the aggregate principal amount of Bonds required
to amend the sections of the Indenture which specify the applicable percentage
of aggregate principal amount of the Bonds necessary to amend the Indenture or
certain other related agreements; or (vi) permit the creation of any lien
ranking prior to or on a parity with the lien of the Indenture with respect to
any of the collateral for the Bonds or, except as otherwise permitted or
contemplated in the Indenture, terminate the lien of the Indenture on any such
collateral or deprive the holder of any Bond of the security afforded by the
lien of the Indenture. The Depositor and the Trustee may also enter into
supplemental indentures, without obtaining the consent of the Bondholders, for
the purpose of, among other things, adding any provisions to or changing in any
manner or eliminating any of the provisions of the Indenture or of modifying in
any manner the rights of the Bondholders; provided that such action will not
materially and adversely affect the interest of any Bondholder.
VOTING RIGHTS
At all times, the voting rights of Bondholders under the Indenture will be
allocated among the Bonds pro rata in accordance with their outstanding
Security Principal Balances.
CERTAIN MATTERS REGARDING THE TRUSTEE AND THE DEPOSITOR
Neither the Depositor, the Trustee nor any director, officer or employee
of the Depositor or the Trustee will be under any liability to the Trust Fund
or the related Bondholders for any action taken or for refraining from the
taking of any action in good faith pursuant to the Indenture or for errors in
judgment; provided, however, that none of the Trustee, the Depositor and any
director, officer or employee thereof will be protected against any liability
which would otherwise be imposed by reason of willful malfeasance, bad faith or
negligence in the performance of duties or by reason of reckless disregard of
obligations and duties under the Indenture. Subject to certain limitations set
forth in the Indenture, the Trustee and any director, officer, employee or
agent of the Trustee shall be indemnified by the Trust Fund and held harmless
against any loss, liability or expense incurred in connection with
investigating, preparing to defend or defending any legal action, commenced or
threatened, relating to the Indenture other than any loss, liability or expense
incurred by reason of willful malfeasance, bad faith or gross negligence in the
performance of its duties under such Indenture or by reason of reckless
disregard of its obligations and duties under the Indenture. Any such
indemnification by the Trust Fund will reduce the amount payable to the
Bondholders. All persons into which the Trustee may be merged or with which it
may be consolidated or any person resulting from such merger or consolidation
shall be the successor of the Trustee under the Indenture.
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<PAGE> 47
REPORTS TO HOLDERS
Concurrently with each payment to the Bondholders of the Bonds, the Master
Servicer will forward to the Trustee for mailing to such Bondholder a statement
setting forth other items:
(i) the amount of interest included in such payment and the
related Interest Rate;
(ii) the amount, if any, of overdue accrued interest
included in such payment (and the amount of interest thereon);
(iii) the amount, if any, of the remaining overdue
accrued interest after giving effect to such payment;
(iv) the amount, if any, of principal included in such
payment;
(v) the amount, if any, of the reimbursement of
previous Liquidation Loss Amounts included in such payment;
(vi) the amount, if any, of the aggregate unreimbursed
Liquidation Loss Amounts after giving effect to such distribution;
(vii) the Servicing Fee for such Payment Date;
(viii) the Pool Balance as of the end of the preceding
Due Period;
(ix) the number and aggregate Principal Balances of
the Assets as to which the minimum monthly payment is
delinquent for 30-59 days, 60-89 days and 90 or more days,
respectively, as of the end of the preceding Due Period;
and
(x) the book value of any real estate which is
acquired by the Trust Fund through foreclosure or grant of deed in
lieu of foreclosure.
In the case of information furnished pursuant to clauses (iii), (iv) and
(v) above, the amounts shall be expressed as a dollar amount per Bond with a
$1,000 denomination.
Within 60 days after the end of each calendar year, the Master Servicer
will be required to forward to the Trustee a statement containing the
information set forth in clauses (iii) and (viii) above aggregated for such
calendar year.
[THE TRUST AGREEMENT]
[Disclosure of Trust Agreement if Owner Trust Structure]
THE TRUSTEE
_______________ is the Trustee under the Indenture. The mailing address of
the Trustee is _________________, Attention: Corporate Trust Department.
[THE OWNER TRUSTEE]
[Disclosure of Owner Trustee if Owner Trust Structure]
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<PAGE> 48
USE OF PROCEEDS
Substantially all of the net proceeds to be received from the sale of the
Bonds will be used to purchase the Assets simultaneously and to pay other
expenses connected with acquiring the Assets and issuing the Bonds.
UNDERWRITING
The Depositor has entered into an underwriting agreement dated ________
__, 19__ (the "Underwriting Agreement") with _________________ (the
"Underwriter"). Subject to the terms and conditions set forth in the
Underwriting Agreement, the Depositor has agreed to sell to the Underwriter and
the Underwriter has agreed to purchase the Bonds set forth below opposite its
name.
<TABLE>
<CAPTION>
Class __ Class __ Class __
<S> <C> <C> <C>
[Underwriter] $__________ $__________ $________
- ----------------
</TABLE>
The Underwriting Agreement provides that the obligations of the
Underwriter are subject to certain conditions precedent and that the
Underwriter will be obligated to purchase all of the Bonds if any of the Bonds
are purchased.
The Depositor has been advised that the Underwriter proposes to offer the
Bonds to the public initially at the respective public offering prices set
forth on the cover page of this Prospectus Supplement, and to certain dealers
at such prices less a concession not in excess of the amount set forth below
for each Class. The Underwriter and such dealers may allow a discount not in
excess of the amount set forth below for each Class to certain other dealers.
After the initial public offering of the Bonds, the public offering prices and
concessions and discounts to dealers may be changed by the Underwriter.
<TABLE>
<CAPTION>
Concession Discount
(Percent of (Percent of
Principal Amount) Principal Amount)
<S> <C> <C>
Class __ _____% _____%
Class __ _____% _____%
Class __ _____% _____%
</TABLE>
The Underwriter and any dealers that participate with the Underwriter in
the distribution of the Bonds may be deemed to be underwriters, and any
discounts, concessions or commissions received by them, and any profit on the
resale of the Bonds purchased by them, may be deemed to be underwriting
discounts and commissions under the Securities Act of 1933, as amended (the
"Act").
The Depositor has agreed to indemnify the Underwriter against certain
civil liabilities, including liabilities under the Act, to the extent and under
the circumstances set forth in the Underwriting Agreement.
[Until the distribution of the Bonds is completed, rules of the Securities
and Exchange Commission may limit the ability of the Underwriter and certain
selling group members to bid for and purchase the Bonds. As an exception to
these rules, the Underwriter are permitted to engage in certain transactions
that stabilize the price of the Bonds. Such transactions consist of bids or
purchases for the purpose of pegging, fixing or maintaining the price of the
Bonds.
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<PAGE> 49
In general, purchases of a security for the purpose of stabilization could
cause the price of the security to be higher than it might be in the absence of
such purchases.
Neither the Depositor or any of its affiliates nor the Underwriter makes
any representation or prediction as to the direction or magnitude of any effect
that the transactions described above may have on the price of the Bonds. In
addition, neither the Depositor nor any of its affiliates nor the Underwriter
makes any representation that the Underwriter will engage in such transactions
or that such transactions, once commenced, will not be discontinued without
notice.]
ERISA CONSIDERATIONS
Fiduciaries of employee benefit plans and certain other retirement plans
and arrangements, including individual retirement accounts and annuities, Keogh
plans, and collective investment funds in which such plans, accounts, annuities
or arrangements are invested (collectively, "Plans"), that are subject to
ERISA, or corresponding provisions of the Code should carefully review with
their legal advisors whether the purchase or holding of any Bonds could result
in unfavorable consequences for the Plan or its fiduciaries under the Plan
Asset Regulations (as defined in the Prospectus) or the prohibited transaction
rules of ERISA or the Code. Prospective investors should be aware that,
although certain exceptions from the application of the Plan Asset Regulations
and the prohibited transaction rules exist, there can be no assurance that any
such exception will apply with respect to the acquisition of a Bond. See "ERISA
Considerations" in the Prospectus.
The Depositor believes that the Bonds should be treated as debt
obligations without substantial equity features for purposes of the Plan Asset
Regulations of ERISA. Accordingly, a Plan that acquires a Bond should not be
treated as having acquired a direct interest in the Assets. There can be no
complete assurance, however, that all Classes of the Bonds will be treated as
debt for ERISA purposes. If a Class of Bonds is treated as equity for purposes
of ERISA, the purchaser could be treated as having acquired a direct interest
in the Assets securing the Bonds. In that event, the purchase, holding, or
resale of a Bond could result in a transaction that is prohibited under ERISA
or the Code. Furthermore, regardless of whether the Bonds are treated as equity
for purposes of ERISA, the acquisition or holding of the Bonds by or on behalf
of a Plan still could be considered to give rise to a prohibited transaction if
the Depositor, the Trustee, the Underwriter, the Master Servicer, the Servicers
or any of their respective affiliates is or becomes a party in interest or a
disqualified person with respect to such Plan. Nevertheless, one or more
exemptions may be available with respect to certain prohibited transaction
rules of ERISA that might apply in connection with the initial purchase,
holding and resale of the Bonds, depending in part upon the type of Plan
fiduciary making the decision to acquire Bonds and the circumstances under
which such decision is made. Those exemptions include, but are not limited to:
(i) Prohibited Transaction Class Exemption ("PTCE") 95-60, regarding
investments by insurance company general accounts; (ii) PTCE 91-38, regarding
investments by bank collective investment funds; (iii) PTCE 90-1, regarding
investments by insurance company pooled separate accounts; or (iv) PTCE 84-14,
regarding transactions negotiated by professional asset managers. Before
purchasing Bonds, a Plan subject to the fiduciary responsibility provisions of
ERISA or described in Section 4975(e) (and not exempt under Section 4975(g)) of
the Code should consult with its counsel to determine whether the conditions of
any exemption would be met. A purchaser of a Bond should be aware, however,
that even if the conditions specified in one or more exemptions are met, the
scope of the relief provided by an exemption might not cover all acts that
might be construed as prohibited transactions. See "ERISA Considerations" in
the Prospectus.
LEGAL INVESTMENT
The Class __ and Class __ Bonds will constitute "mortgage related
securities" for purposes of the Secondary Mortgage Market Enhancement Act of
1984 ("SMMEA") for so long as they are rated in one of the two highest rating
categories by one or more nationally recognized statistical rating
organizations. As such, the Class __ and Class __ Bonds will be legal
investments for certain entities to the extent provided in SMMEA, subject to
state laws overriding SMMEA. A number of states have enacted legislation
overriding the legal investment provisions of SMMEA. See "Legal Investment" in
the Prospectus. [THE SUBORDINATE BONDS WILL NOT CONSTITUTE
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<PAGE> 50
"MORTGAGE RELATED SECURITIES" FOR PURPOSES OF SMMEA BECAUSE SUCH SECURITIES
WILL NOT BE RATED IN ONE OF THE TWO HIGHEST RATING CATEGORIES BY A NATIONALLY
RECOGNIZED STATISTICAL RATING ORGANIZATION.]
[The appropriate characterization of the Subordinate Bonds under various
legal investment restrictions, and thus the ability of investors subject to
such restrictions to purchase such Bonds, is subject to significant
interpretative uncertainties.]
Any financial institution that is subject to the jurisdiction of the
Comptroller of the Currency, the Board of Governors of the Federal Reserve
System, the Federal Deposit Insurance Corporation, the Office of Thrift
Supervision, the National Credit Union Administration, any state insurance
commission, or any other federal or state agencies with similar authority
should review any applicable rules, guidelines and regulations prior to
purchasing any Bonds. Financial institutions should review and consider the
applicability of the Federal Financial Institutions Examination Counsel
Supervisory Policy Statement on the Selection of Securities Dealers and
Unsuitable Investment Practices (to the extent adopted by their respective
federal regulators), which, among other things, sets forth guidelines for
investing in certain types of mortgage related securities and prohibits
investment in certain "high-risk" mortgage securities.
The Depositor makes no representations as to the proper characterization
of any Class of the Bonds for legal investment or other purposes, or as to the
legality of investment by particular investors in any Class of the Bonds under
applicable legal investment restrictions. The uncertainties may adversely
affect the liquidity of any Class of Bonds. Accordingly, all institutions whose
investment activities are subject to legal investment laws and regulations,
regulatory capital requirements or review by regulatory authorities should
consult with their own legal advisors in determining whether and to what extent
the Bonds constitute legal investments under SMMEA or are subject to
investment, capital or other restrictions. See "Legal Investment" in the
Prospectus.
LEGAL MATTERS
Certain legal matters will be passed upon for the Depositor by Hunton &
Williams, Richmond, Virginia, and for the Underwriter by ____________, New
York, New York. The material federal income tax consequences of the Bonds will
be passed upon for the Depositor by Hunton & Williams.
RATING
It is a condition to their issuance that each Class of Bonds obtain the
ratings specified on the cover page hereof from the Rating Agencies specified
on the cover page hereof.
[INSERT LANGUAGE DESCRIBING EACH APPLICABLE RATING CATEGORY]
The ratings on asset-backed pass-through certificates address the
likelihood of the receipt by certificateholders of all payments on the
underlying assets to which they are entitled. Rating opinions address the
structural, legal and issuer-related aspects associated with the securities,
including the nature of the underlying assets. Ratings on pass-through
certificates do not represent any assessment of the likelihood that principal
prepayments will be made by borrowers with respect to the underlying assets or
of the degree to which the rate of such prepayments might differ from that
originally anticipated. As a result, the ratings do not address the possibility
that holders of the Bonds might suffer a lower than anticipated yield in the
event of rapid prepayments of the Assets or in the event that the Trust Fund is
terminated prior to the latest final scheduled Payment Date for the Bonds. In
addition, the ratings of the Bonds do not address the possibility that, in the
event of the bankruptcy of the Depositor, the issuance and sale of the Bonds
might be recharacterized as a financing and that, as a result of such
recharacterization, payments on the Bonds may be delayed or altered.
A security rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the assigning
rating organization. Each security rating should be evaluated independently of
any other security rating.
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<PAGE> 51
The Depositor will request _______________ and ________________ to rate
the Bonds. There can be no assurance as to whether any rating agency not
requested to rate the Bonds will nonetheless issue a rating and, if so, what
such rating would be. A rating assigned to the Bonds by a rating agency that
has not been requested by the Depositor to do so may be lower than the rating
assigned by a Rating Agency pursuant to the Depositor's request.
S-52
