<PAGE> 1
Filed pursuant to Rule 424(b)(5)
Registration File No. 333-35471
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<S> <C>
Prospectus Supplement (UNION PLANTERS LOGO)
(To prospectus dated July 19, 2000)
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$121,906,000
UNION PLANTERS MORTGAGE FINANCE CORP.,
Depositor
UNION PLANTERS BANK, NATIONAL ASSOCIATION,
Seller and Master Servicer
MORTGAGE PASS-THROUGH CERTIFICATES, SERIES 2000-1
------------------------
UNION PLANTERS MORTGAGE FINANCE CORP. WILL ESTABLISH A TRUST, CONSISTING
PRIMARILY OF A POOL OF FIXED RATE FHA INSURED AND VA GUARANTEED MORTGAGE LOANS.
FIRST LIENS ON ONE- TO FOUR-FAMILY RESIDENTIAL PROPERTIES SECURE THE MORTGAGE
LOANS. AN ELECTION WILL BE MADE TO TREAT CERTAIN ASSETS OF THE TRUST AS A REAL
ESTATE MORTGAGE INVESTMENT CONDUIT, OR REMIC, UNDER THE INTERNAL REVENUE CODE.
THE CLASS A-1, CLASS X-1, CLASS PO AND CLASS B CERTIFICATES WILL REPRESENT THE
"REGULAR INTERESTS" IN THE REMIC. THE CLASS R CERTIFICATES WILL REPRESENT THE
"RESIDUAL INTEREST" IN THE REMIC.
THE CERTIFICATES WILL REPRESENT OBLIGATIONS OF THE TRUST ONLY AND WILL NOT
REPRESENT INTERESTS IN OR OBLIGATIONS OF UNION PLANTERS MORTGAGE FINANCE CORP.,
UNION PLANTERS BANK, NATIONAL ASSOCIATION, MORGAN STANLEY & CO. INCORPORATED OR
THE BANK OF NEW YORK. THE CERTIFICATES ARE NOT OBLIGATIONS OF A BANK AND ARE NOT
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENTAL
AGENCY.
THIS DOCUMENT OFFERS THE CLASS A-1 CERTIFICATES. THESE CERTIFICATES AND THE
CLASS B-1, CLASS B-2, CLASS B-3, CLASS B-4, CLASS B-5, CLASS B-6, CLASS X-1,
CLASS PO AND CLASS R CERTIFICATES, WHICH THIS DOCUMENT DOES NOT OFFER, REPRESENT
THE ENTIRE BENEFICIAL OWNERSHIP INTEREST IN THE TRUST. THE CLASS A-1
CERTIFICATES EVIDENCE APPROXIMATELY 95.78% OF THE BENEFICIAL INTEREST IN THE
TRUST.
CAREFULLY CONSIDER THE RISK FACTORS STARTING ON PAGE S-4 OF THIS PROSPECTUS
SUPPLEMENT AND ON PAGE 9 OF THE PROSPECTUS. UNLESS YOU UNDERSTAND AND ARE ABLE
TO TOLERATE THESE RISKS, YOU SHOULD NOT INVEST IN THE CERTIFICATES.
------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS
SUPPLEMENT OR THE PROSPECTUS IS ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
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INITIAL PASS-THROUGH
MORTGAGE PASS-THROUGH CERTIFICATES PRINCIPAL BALANCE RATE
---------------------------------- ----------------- ------------
<S> <C> <C>
Class A-1................................................... $121,906,000 7.700%
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------------------------
Morgan Stanley & Co. Incorporated will purchase the offered certificates
from the depositor and will offer them to the public from time to time in
negotiated transactions at prices determined at the time of sale. In exchange
for the offered certificates the depositor will receive approximately 99.0781%
of the initial security principal balance of the class A-1 certificates, plus
accrued interest from July 1, 2000, before deducting expenses payable by the
depositor. The offered certificates are offered subject to prior sale, when, as
and if accepted by Morgan Stanley & Co. Incorporated and subject to its right to
reject orders in whole or in part. Delivery of the certificates will be made
through The Depository Trust Company on or about July 27, 2000 against payment
for them in immediately available funds.
------------------------
MORGAN STANLEY DEAN WITTER
July 19, 2000
<PAGE> 2
IMPORTANT NOTICE ABOUT THE INFORMATION IN THIS PROSPECTUS SUPPLEMENT
You should rely only on the information contained in this document. We have
not authorized anyone to provide you with different information. This document
may only be used where it is legal to sell these securities. The information in
this document may only be accurate on the date of this document.
We provide information to you about the certificates in two separate
documents that progressively provide more detail: the prospectus, which provides
general information, some of which may not apply to your certificates and this
prospectus supplement, which describes the specific terms of your certificates.
If there is a conflict between this prospectus supplement and the prospectus,
you should rely on the information in this prospectus supplement.
We have filed preliminary information regarding the trust's assets and the
certificates with the Securities and Exchange Commission. The information
contained in this document supersedes all of that preliminary information, which
was prepared by the underwriters for prospective investors based on information
provided by the depositor.
We will not apply to list the offered certificates on any trading exchange.
Until October 17, 2000, all dealers that effect transactions in the
certificates, whether or not participating in this offering, may be required to
deliver a prospectus and prospectus supplement. This requirement is in addition
to the dealers' obligation to deliver a prospectus and prospectus supplement
when acting as underwriters with respect to their unsold allotments or
subscriptions.
This prospectus supplement and the prospectus include cross-references to
captions in these materials where you can find further related discussions. The
following table of contents and the table of contents included in the
accompanying prospectus indicate the pages on which these captions are located.
------------------------
TABLE OF CONTENTS
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PAGE
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PROSPECTUS SUPPLEMENT
Summary of Terms...................... S-1
Risk Factors.......................... S-4
Description of The Mortgage Loans..... S-10
The Master Servicer................... S-24
Description of The Certificates....... S-26
Certain Yield, Prepayment And Maturity
Considerations...................... S-34
The Depositor......................... S-37
Pooling And Servicing Agreement....... S-37
The Trustee........................... S-40
The Contract of Insurance Holder;
Claims Administrator................ S-40
Federal Income Tax Consequences....... S-40
Use of Proceeds....................... S-41
Underwriting.......................... S-41
Legal Matters......................... S-42
Ratings............................... S-42
ERISA Considerations.................. S-42
Legal Investment...................... S-44
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PAGE
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PROSPECTUS
Prospectus Supplement................. iii
Available Information................. iii
Incorporation of Certain Information
by Reference........................ iv
Summary of Prospectus................. 1
Risk Factors.......................... 9
Description of the Trust Funds........ 16
Yield Considerations.................. 29
The Depositor......................... 34
Description of the Offered
Securities.......................... 34
Description of the Agreements......... 42
Description of Credit Support......... 62
Insurance Policies on the Mortgage
Loans............................... 65
Certain Legal Aspects of Mortgage
Loans............................... 69
Use of Proceeds....................... 78
Federal Income Tax Consequences....... 78
State Tax Considerations.............. 117
ERISA Considerations.................. 117
Legal Investment...................... 119
Plan of Distribution.................. 120
Legal Matters......................... 120
Experts............................... 120
Financial Information................. 120
Ratings............................... 121
Glossary.............................. 122
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ii
<PAGE> 3
SUMMARY OF TERMS
This summary highlights selected information from this document and does
not contain all of the information that you need to consider in making your
investment decision. To understand all of the terms of an offering of the
certificates, carefully read this entire document and the accompanying
prospectus.
DEPOSITOR
Union Planters Mortgage Finance Corp., a Delaware corporation and a direct,
wholly-owned subsidiary of Union Planters Bank, National Association is the
depositor. Its address is 7130 Goodlett Farms Parkway, Cordova, Tennessee 38018.
Its telephone number is (901) 580-6000. See "The Depositor" in this prospectus
supplement and in the prospectus.
MASTER SERVICER, CONTRACT OF INSURANCE HOLDER AND CLAIMS ADMINISTRATOR
Union Planters Bank, National Association, a national banking association
and wholly-owned subsidiary of Union Planters Corporation is the master
servicer, contract of insurance holder and claims administrator. Its address is
7130 Goodlett Farms Parkway, Cordova, Tennessee 38018. Its telephone number is
(901) 580-6000. See "The Master Servicer" and "The Contract of Insurance Holder;
Claims Administrator" in this prospectus supplement.
TRUSTEE
The Bank of New York, a New York banking corporation, is the trustee. Its
address is 101 Barclay Street, New York, New York 10286. Its telephone number is
(212) 815-8727. See "The Trustee" in this prospectus supplement.
CUT-OFF DATE
July 1, 2000.
CLOSING DATE
On or about July 27, 2000.
RISK FACTORS
Your investment in the offered certificates involves many risks. You should
carefully consider all of the matters discussed in this prospectus supplement
and in the accompanying prospectus, including those under the heading "Risk
Factors," before making any investment decision.
THE TRUST FUND
The trust fund will consist of a pool of fixed-rate FHA insured and VA
guaranteed mortgage loans secured by first liens on one- to four-family
residential properties located in 46 different states, the District of Columbia
and the Virgin Islands.
THE MORTGAGE LOANS
Approximately 75.92% of the mortgage loans are FHA loans and approximately
24.08% of the mortgage loans are VA loans. The mortgage loans will have an
initial aggregate principal balance as of July 1, 2000 of approximately
$127,282,880. The mortgage loans have original terms to maturity of not more
than 42 years. All of the mortgage loans have a history of delinquency and
formerly were in GNMA pools. The pool of mortgage loans is expected to have the
following approximate characteristics as of the cut-off date:
- total principal balance: $127,282,880
- average principal balance: $41,596
- weighted average mortgage rate: 9.283%
- weighted average remaining term to maturity: 214 months
See "Description of the Mortgage Loans" in this prospectus supplement and the
prospectus.
THE CERTIFICATES
This prospectus supplement offers the class A-1 certificates. This
prospectus supplement does not offer the class X-1, class B-1, class B-2, class
B-3, class B-4, class B-5, class B-6, class PO or class R certificates.
The certificates will be issued pursuant to the terms of a pooling and
servicing agreement, dated as of July 1, 2000, among the depositor, the master
servicer, the contract of insurance holder and the trustee and acknowledged by
the claims administrator.
The class A-1 certificates will be available only in book-entry form
through the facilities of the Depository Trust Company. The class A-1 certifi-
S-1
<PAGE> 4
cates will be issued in denominations of $1,000 and integral multiples of $1 in
excess thereof. See "Description of the Certificates" in this prospectus
supplement.
PAYMENT DATES
The 25th day of each month or, if any such 25th day is not a business day,
then on the next succeeding business day, beginning in August 2000.
INTEREST AND PRINCIPAL PAYMENTS
The class A-1, class X-1, class PO and class R certificates are
collectively referred to as senior certificates because they are senior in right
to the class B certificates for receiving distributions. The class B
certificates are collectively referred to as subordinate certificates. The class
X-1 certificates are "interest only" certificates and are entitled only to
distributions of interest and are not entitled to any principal distributions.
The class PO certificates are "principal only" certificates and are entitled
only to distributions of principal and are not entitled to any interest
distributions. The trustee will distribute the monies it receives on the
mortgage loans to make payments on the certificates in the following order of
priority:
- interest on each class of senior certificates other than the class PO
certificates, which receive no interest distributions;
- the principal distribution amount to the senior certificates then
entitled to receive distributions of principal in the manner, amount,
order and priority described in this prospectus supplement, but not to
the class X-1 certificates, which receive no principal distributions;
- any deferred amounts payable to the class PO certificates, as described
in this prospectus supplement; and
- interest on and then principal of each class of subordinate certificates,
paid in sequential order.
Under certain circumstances described later in this prospectus supplement,
distributions that would otherwise be made on the subordinate certificates may
be distributed instead to the senior certificates. See "Description of the
Certificates" in this prospectus supplement.
CREDIT ENHANCEMENT
Credit enhancement for the senior certificates will be provided by the
subordinate certificates. The rights of holders of the subordinate certificates
to receive distributions will be junior to the rights of the holders of the
senior certificates as described in this prospectus supplement. See "Description
of the Certificates -- Allocation of Losses; Subordination" in this prospectus
supplement. In addition, each mortgage loan will be protected against certain
losses by either an FHA insurance policy or a VA guaranty. See "Insurance
Policies on the Mortgage Loans -- FHA Mortgage Insurance" and "-- VA Mortgage
Guaranty" in the prospectus, "Risk Factors -- FHA Insurance Policies and VA
Guaranties Will Not Fully Cover All Losses," and "Description of the Mortgage
Loans -- FHA Loans and VA Loans" in this prospectus supplement.
RATINGS
Before the class A-1 certificates are issued, the class A-1 certificates
must receive a rating of "Aaa" by Moody's Investors Service, Inc. and "AAA" by
Fitch, Inc. A security rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time. See
"Ratings" in this prospectus supplement.
ADVANCES
On or prior to each payment date, the master servicer will advance the
following amount to the trust:
- delinquent scheduled payments of principal of or interest on mortgage
loans;
- delinquent payments of taxes, insurance premiums and other escrowed items
to the extent the master servicer considers those amounts to be
recoverable;
- liquidation-related expenses; and
- foreclosure advances.
See "Description of the Certificates -- Advances" in this prospectus supplement.
S-2
<PAGE> 5
OPTIONAL TERMINATION
On any date on which the aggregate principal balance of the mortgage loans
remaining in the trust fund is less than 5% of the original amount, the master
servicer may purchase all of the mortgage loans, terminate the trust fund and
distribute the proceeds of the sale of the mortgage loans on the termination to
the holders of the outstanding certificates in the order and amounts described
in this prospectus supplement. See "Pooling and Servicing
Agreement -- Termination" in this prospectus supplement.
LEGAL INVESTMENT
The offered certificates will constitute "mortgage related securities" for
purposes of the Secondary Mortgage Market Enhancement Act of 1984 for so long as
they are rated in one of the two highest rating categories by one or more
nationally recognized statistical rating organizations. See "Legal Investment"
in this prospectus supplement and in the prospectus.
FEDERAL INCOME TAX CONSEQUENCES
The assets of the trust fund will be treated as a real estate mortgage
investment conduit, or REMIC, for federal income tax purposes. Hunton &
Williams, tax counsel to the depositor, will provide a legal opinion that,
assuming compliance with all provisions of the pooling and servicing agreement,
the assets of the trust fund will qualify as a REMIC under the Internal Revenue
Code. See "Federal Income Tax Consequences" in this prospectus supplement and in
the prospectus.
The class A-1, class X-1, class PO and class B certificates will be regular
interests in the REMIC, taxable as debt obligations under the Internal Revenue
Code. Interest paid or accrued on the class A-1 certificates, including any
original issue discount, will be taxable to you in accordance with the accrual
method of accounting, regardless of your usual method of accounting. The class R
certificates will constitute the "residual interest" in the REMIC. See "Federal
Income Tax Consequences" in this prospectus supplement and in the prospectus.
ERISA CONSIDERATIONS
If you are a fiduciary of employee benefit plans or other retirement plans
and arrangements, you should consult with your counsel to determine whether the
purchase or holding of the offered certificates could give rise to a transaction
that is prohibited under the Employee Retirement Income Security Act of 1974 or
the Internal Revenue Code. Certain prohibited transaction exemptions may be
applicable to your purchase and holding of the offered certificates. You should
note that the duties and obligations of the trustee and the master servicer are
expressly limited in the agreement, and these specified duties and obligations
may not satisfy the provisions of ERISA, which set forth the fiduciary duties of
plan fiduciaries. See "ERISA Considerations" in this prospectus supplement and
in the prospectus.
S-3
<PAGE> 6
RISK FACTORS
The following information, which you should carefully consider, identifies
certain significant sources of risk associated with an investment in the
certificates. You should also consider the information in the prospectus about
risk factors.
The Average Life of your
Certificates is
Uncertain................ The offered certificates are subject to substantial
cashflow uncertainties because the borrowers may
prepay their mortgage loans in part or in full at
any time. Accordingly, the rate and timing of
principal payments on the class A-1 certificates
will depend on how often borrowers make principal
payments on the mortgage loans, and other
prepayments resulting from defaults, liquidations
and repurchases. A variety of factors influence the
rate at which borrowers may make principal
repayments on the mortgage loans, including:
- An increase or decrease in prevailing interest
rates
- Local economic and employment conditions
- General availability of mortgage credit
- Changes in property values in the community
For example, if prevailing mortgage interest rates
fall significantly below the mortgage rates on the
mortgage loans, you would expect that borrowers may
refinance their mortgage loans or pay off current
mortgage loans.
Substantially all of the mortgage loans have
"due-on-sale" provisions, which cause the entire
mortgage debt to become due and payable when the
related mortgaged property is sold. The master
servicer will enforce "due-on-sale" provisions if
enforcement is legal.
Mortgage loan prepayments would result in a shorter
life for your certificates.
The skill and performance of the master servicer
also influences the rate of payment of the
principal of the class A-1 certificates, as
described below. Mortgagors are obligated to make
timely payments on their mortgage loans. If a
mortgage loan becomes delinquent and if the
delinquency is not cured within a specified time,
the master servicer must follow the claims
procedures for the related FHA insurance or VA
guaranties. The master servicer may foreclose upon
mortgage loans or acquire title to the mortgaged
properties by other means. The master servicer's
ability to sell foreclosed properties will depend
upon its ability to find a willing purchaser who
will purchase the foreclosed property at an
acceptable price. In addition, certain rights of
redemption in various states may limit or prevent
the master servicer from selling the property at
what would otherwise be an appropriate time for
sale. See "Description of
Certificates -- Distributions -- Priority" and
"Certain Yield, Prepayment and Maturity
Considerations" in this prospectus supplement and
"Yield Considerations" in the prospectus.
S-4
<PAGE> 7
Circumstances Beyond The
Depositor's Control Will
Affect The Yield on The
Certificates............. The yield to maturity on the certificates will
depend, among other things, on how often the
borrower makes principal payments on the mortgage
loans and the allocation of principal payments to
reduce the principal balance of some classes of
certificates.
Whether you purchase a certificate at a premium or
a discount also affects your yield to maturity. For
example, if you purchase a class A-1 certificate at
a premium and principal distributions occur at a
rate faster than you had anticipated, your actual
yield to maturity will be lower than you had
assumed at the time of purchase. On the other hand,
if you purchase a class A-1 certificate at a
discount and principal distributions occur at a
rate slower than you had anticipated, your actual
yield to maturity will be lower than you had
assumed at the time of purchase.
Some Mortgage Loans Have
Bankrupt Mortgagors...... As of July 1, 2000, approximately 1.66% of the
mortgage loans, by principal balance, are mortgage
loans for which the mortgagor is making payments
pursuant to a personal bankruptcy plan or
proceeding. None of these mortgage loans has been
contractually delinquent more than twice during the
twelve-month period immediately preceding July 1,
2000. You should consider the risk that the
inclusion in the trust fund of bankruptcy plan
mortgage loans may result in an increased rate of
default and prepayments on the mortgage loans,
which may result in an accelerated receipt of
principal on the senior certificates or losses in
excess of available credit enhancement.
The Mortgage Loans Have a
Delinquency History...... All of the mortgage loans have been 90 days or more
delinquent at least once. As of July 1, 2000,
approximately 19.81% of the mortgage loans, by
principal balance, were between 30 and 59 days
delinquent. As of July 1, 2000, no mortgage loan
was more than 59 days delinquent. Given their
historical performance, it is possible that the
future delinquency and loss experience of the
mortgage loans will be greater than you might
expect for a pool of loans with no delinquency
history. Investors should consider the risk that at
any time a substantial number of mortgagors may
cease making monthly payments on their mortgage
loans, which may result in losses in excess of the
available credit enhancement for your certificates
and could affect your yield to maturity.
Reinstated Mortgage Loans
Create Risks That May
Adversely Affect Yield... Each mortgage loan included in the trust fund has
had more than three scheduled payments of principal
and interest past due during its term. Repayment of
the principal amount of the class A-1 certificates
depends, in large part, upon the following:
- the ability of the master servicer to work with
mortgagors to keep the mortgage loans current
in payment
- the master servicer's ability to sell or
foreclose upon the mortgage loans or to acquire
title to the mortgaged properties by other
means
S-5
<PAGE> 8
- the master servicer's ability to liquidate the
related mortgaged properties
The master servicer cannot assure that it will be
successful in liquidating mortgaged properties. Its
ability to sell a property will depend upon its
ability to find a willing purchaser who will
purchase the property at a price acceptable to the
master servicer, subject to applicable FHA and VA
guidelines. See "Certain Legal Aspects of Mortgage
Loans" in the prospectus.
High Loan-to-Value
Ratios................... Some mortgage loans currently have high
loan-to-value ratios, including ratios of more than
100% in some cases. Therefore, a mortgaged property
may not fully secure the related mortgage loan.
Even if a mortgaged property provides adequate
security for its mortgage loan, substantial delays
encountered during liquidation could result in
shortfalls in distributions.
State Law May Limit Your
Recovery on Defaulted
Assets................... Applicable state laws may limit the master
servicer's ability to repossess or foreclose on and
liquidate the mortgaged properties or may limit the
amount realized upon any liquidation to less than
the amount due. See "Certain Legal Aspects of
Mortgage Loans" in the prospectus.
The Mortgaged Properties
Are Concentrated in The
States of Texas,
California and Florida... There is a high concentration of mortgaged
properties in the states of Texas, California and
Florida. See "Description of the Mortgage
Loans -- Certain Characteristics of the Mortgage
Loans -- Geographic Distribution" in this
prospectus supplement. If economic conditions cause
sufficiently high defaults, delinquencies or
liquidation losses to occur in any of these states,
the credit support provided to your certificates by
the subordinate certificates could be reduced or
eliminated and you may experience a loss.
Missing Mortgage Loan
Documents................ Some of the mortgage loan files are incomplete or
may be defective in other respects. In particular,
certain of the mortgage loan files are missing one
or more of the following documents:
- the original mortgage notes
- the original or certified copy of the mortgage
or deed of trust
- evidence of title insurance
- intervening assignments
- a complete chain of endorsements
- evidence of FHA insurance or VA guaranty
The absence of such documents may inhibit the
master servicer's ability to exercise certain
remedies for delinquent or defaulted loans,
including the ability to do the following:
- enforce a borrower's obligations under the
related mortgage loan
- foreclose on defaulted mortgage loans
S-6
<PAGE> 9
- obtain proceeds of the FHA insurance policy or
VA guaranty
However, Union Planters Bank, National Association
is obligated to repurchase a mortgage loan if
certain required documents, such as the original
mortgage note, mortgage, or title insurance policy,
have not been delivered and if a material adverse
effect would result from the failure to deliver
such documents. See "Description of the Mortgage
Loans -- Missing Mortgage Loan Documentation" in
this prospectus supplement.
FHA Insurance Policies and
VA Guaranties Will Not
Fully Cover All Losses... FHA insurance policies and VA guaranties do not
protect against all losses. Moreover, FHA insurance
policies and VA guaranties will not cover all
expenses associated with defaulted FHA loans and VA
loans. See "Description of the Mortgage
Loans -- FHA Loans and VA Loans" in this prospectus
supplement and "Insurance Policies on the Mortgage
Loans -- FHA Mortgage Insurance" and "-- VA
Mortgage Guaranty" in the prospectus.
The master servicer will advance the principal
amount and accrued interest of FHA loans and VA
loans on the date of foreclosure. It will be
reimbursed for such advances out of claims proceeds
from the FHA insurance or VA guaranty, which may
not be disbursed for several months after
foreclosure. We expect that the total amount paid
by HUD or VA in satisfaction of these claims may
not fully reimburse the master servicer for its
advances. Any excess of the amount advanced over
the proceeds received as reimbursement may result
in a realized loss to you. Accordingly, each FHA
loan and VA loan that requires a claims payment
under the FHA insurance or VA guaranty may result
in realized loss to you. See "Description of the
Certificates -- Allocation of Losses;
Subordination" and "-- Advances" in this prospectus
supplement.
FHA Loans...... Several conditions govern the availability of FHA
insurance. For example, the master servicer must
strictly comply with regulations concerning the
servicing and holding of the mortgage loans. Any
failure to comply with all FHA regulations may
result in a denial of FHA insurance claims. Also,
FHA's interpretation of its regulations may change
in the future.
In some circumstances HUD does not cover the full
amount of interest due on a defaulted loan that is
insured by FHA. Under the FHA insurance program,
the trust fund may convey a mortgage loan to HUD
and receive compensation for the interest the trust
fund has not collected. However, HUD calculates the
interest due using a start date that is 60 days
after the date of the last borrower payment.
Accordingly, HUD will not compensate the trust fund
for the first 60 days of defaulted interest.
VA Loans....... Like FHA insurance, the availability of the VA
guaranty is conditioned upon the satisfaction of
several requirements, such as the master servicer's
strict compliance with certain regulations. The VA
guidelines also limit expense reimbursements by
certain "reasonableness" guidelines.
The procedure for foreclosing a VA loan also
involves a risk of loss. When a VA loan is
foreclosed, VA determines whether it will pay the
S-7
<PAGE> 10
full outstanding indebtedness to the trust fund in
return for the property or pay the loan guarantee
amount without taking title to the property. The
trust fund will suffer a monetary loss if VA
chooses the latter option and the indebtedness
under the mortgage loan exceeds the guaranty
benefits plus the net proceeds from the foreclosure
sale. The master servicer is entitled to be
reimbursed for such advances. The advances could
exceed the funds received from the disposition of
the property, resulting in a loss to the trust fund
and possibly to you.
Some Assignments Will Not
be Recorded.............. Union Planters Bank, National Association will
provide the trustee with assignments of the
mortgages in blank but is not required to record
assignments of transfer of the mortgages in the
applicable real property records. If Union Planters
Bank, National Association were to sell or transfer
any mortgage loan to another person before
recording the assignments to the trust fund, the
other person may have rights superior to those of
the trust fund.
Insolvency of Bank May
Cause Payment Delays..... If Union Planters Bank, National Association were
to begin insolvency proceedings before recording
the mortgage assignments, its creditors may be able
to cause delays in the completion of any
foreclosure proceedings for delinquent mortgage
loans. This would result in delays of cash flow,
which would require you to rely on the advance
obligation of the master servicer.
Book-Entry Certificates.... The offered certificates are available only in book
entry form. Your transactions can be effected only
through DTC. As a result, your ability to pledge a
certificate to persons or entities that do not
participate in the DTC system may be limited.
Investors may be unwilling to purchase certificates
for which they cannot obtain physical securities,
reducing the liquidity of your certificates in the
secondary trading market.
The trustee will forward the distributions to DTC,
DTC will credit such distributions to the accounts
of its participants, and the participants will
thereafter credit them to your account. Thus, you
may experience delays in receiving distributions of
interest and principal. See "Description of the
Certificates -- Book Entry Registration" in this
prospectus supplement.
You May Collect Payments of
Principal and Interest
Only From The Trust
Fund..................... The offered certificates will not represent an
interest in or obligation of Union Planters Bank,
National Association or Union Planters Mortgage
Finance Corp. The offered certificates will not be
insured or guaranteed by any governmental agency or
instrumentality, the underwriter, or any other
entity.
The Offered Certificates
Are Not Guaranteed....... Distributions on the offered certificates are
payable solely from amounts collected with respect
to the mortgage loans. Although FHA insures or VA
guarantees the mortgage loans, the offered
certificates themselves will not be insured or
guaranteed by FHA, VA, or any other entity.
No Recourse against FHA or
VA....................... You have no rights against HUD or FHA with respect
to FHA insurance policies or against VA with
respect to the VA guaranties. By your
S-8
<PAGE> 11
acceptance of any certificate, you are deemed to
have waived any such rights.
Credit Ratings Address a
Limited Scope of Your
Concerns................. Two rating agencies have rated your certificates in
one of their four highest rating categories. A
rating is not a recommendation to buy or sell the
certificates or a comment concerning the
suitability of the certificates for you. A rating
only addresses the likelihood of the ultimate
payment of principal and stated interest. It does
not address the likelihood of prepayments on the
certificates. These ratings may not remain in
effect for the life of your certificates. See
"Summary of Terms -- Ratings" and "Ratings" in this
prospectus supplement and "Risk Factors -- Credit
Ratings Provided by Rating Agencies Do Not Address
All Risks of an Investment in the Offered
Securities" and "Ratings" in the prospectus.
S-9
<PAGE> 12
DESCRIPTION OF THE MORTGAGE LOANS
GENERAL
The trust fund (the "Trust Fund") will consist primarily of a pool of
fixed-rate FHA insured or fixed-rate VA guaranteed one- to four-family first
lien residential mortgage loans (the "Mortgage Loans").
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"). All of the Mortgage Loans are Reinstated Mortgage
Loans that have been purchased from Government National Mortgage Association
("Ginnie Mae") pools due to a history of delinquent performance. See "Risk
Factors -- Sub-Performing Mortgage Loans, Reinstated Mortgage Loans Create Risks
That Securityholders May Not Recover Their Initial Investments and May Adversely
Affect Yield" and "Description of the Trust Funds -- Delinquent and Reinstated
Mortgage Loans" in the Prospectus and "Risk Factors -- Reinstated Mortgage Loans
Create Risks That May Adversely Affect Yield" herein. 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 Union Planters Bank, National Association (in such
capacity, the "Asset Seller") and will generally 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 "Sales Agreement"), to be dated as of July
1, 2000, between the Asset Seller and the Depositor. The Depositor will cause
the Mortgage Loans to be assigned to the Trustee, pursuant to pooling and
servicing agreement, dated as of July 1, 2000, by and among the Depositor, the
Master Servicer, the Trustee, and the Contract of Insurance Holder (the "Pooling
and Servicing Agreement"). Union Planters Bank, National Association, as master
servicer (in such capacity, the "Master Servicer") will service the Mortgage
Loans, pursuant to the Pooling and Servicing Agreement. Pursuant to the terms of
the Pooling and Servicing Agreement, Union Planters Bank, National Association,
will be reflected as the mortgagee of record with FHA with respect to the FHA
Loans solely for FHA regulatory purposes (in such capacity, the "Contract of
Insurance Holder"), for the benefit of the Certificateholders.
Under the Sales 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 Sales 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 (if such deficiency results in a materially adverse
effect on the Certificateholders) 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 benefit of
Certificateholders. In the event any such representations and warranties with
respect to the Mortgage Loans are materially incorrect, the Asset Seller will
have an obligation to repurchase or substitute for such Mortgage Loans. The
Asset Seller is selling the Mortgage Loans without recourse and, accordingly,
will have no obligations with respect to the Class A-1 Certificates (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-10
<PAGE> 13
MISSING MORTGAGE LOAN DOCUMENTATION
Many of the Mortgage Loan files are incomplete or otherwise deficient. See
"Risk Factors -- Missing Mortgage Loan Documents" herein. In particular, certain
of the Mortgage Loan files may be missing:
- the original Mortgage Note, although a lost note affidavit is
available for each of such Mortgage Loans;
- the original Mortgage or a certified copy thereof evidencing
recordation;
- a title insurance policy, a copy thereof, or similar evidence of title
insurance; or
- a certificate evidencing the FHA Insurance Policy or VA Guaranty, as
applicable.
Certain Mortgage Loan files are also missing other documents or may be
defective in other respects. For example, certain Mortgage Loan files have one
or more missing intervening assignments or lack a complete chain of
endorsements.
The absence of an original Mortgage Note, Mortgage, or certain other
documents may limit the ability of the Master Servicer to enforce a Mortgagor's
obligations under the related Mortgage Loans and to foreclose on defaulted
Mortgage Loans, and may interfere with the Master Servicer's ability to obtain
proceeds of the FHA Insurance Policy or VA Guaranty. Under the Sales Agreement,
the Asset Seller will be obligated to repurchase a Mortgage Loan as to which the
required documents, such as the original Mortgage Note, Mortgage, intervening
assignments or title insurance policy, have not been delivered, or that were
otherwise deficient, but only to the extent a material adverse effect on the
Certificateholders resulted from the failure to deliver such documents.
FHA LOANS AND VA LOANS
GENERAL. Approximately 75.92% of the Mortgage Loans are subject to FHA
insurance as described herein (the "FHA Loans") and approximately 24.08% of the
Mortgage Loans are subject to a VA guaranty as described herein (the "VA
Loans"). All FHA Loans and VA Loans must conform to HUD (as defined herein) or
VA origination guidelines, as the case may be, at the time of origination.
FHA LOANS. The FHA Loans will be insured by the Federal Housing
Administration ("FHA") of the United States Department of Housing and Urban
Development ("HUD") as authorized under the National Housing Act of 1934, as
amended (the "Housing Act"), and the United States Housing Act of 1937, as
amended (the "United States Housing Act"). No FHA Loan may have an original
principal amount exceeding the applicable FHA limits at the time of origination
of such FHA Loan.
HUD has the option, in most cases, to pay insurance claims in cash or in
debentures issued by HUD. If HUD issues debentures to the Master Servicer in
payment of an insurance claim, the Pooling and Servicing Agreement requires the
Master Servicer to purchase promptly such HUD debentures for their par value and
deposit the proceeds of such sale into the Certificate Account. Presently,
claims for most programs are being paid in cash and, for the most part, claims
have not been paid in debentures since 1965. HUD debentures issued in
satisfaction of FHA insurance claims bear interest at an applicable HUD
debenture interest rate (the "Debenture Rate").
S-11
<PAGE> 14
The applicable Debenture Rate, as announced from time to time by HUD is the
rate in effect at the date of the insurance commitment or endorsement for
insurance, whichever rate is higher. The following table shows rates applicable
to FHA Loans committed or endorsed in the periods shown:
HUD DEBENTURE RATES
<TABLE>
<CAPTION>
EFFECTIVE RATE EFFECTIVE DATE
(PERCENT) ON OR AFTER PRIOR TO
-------------- -------------- ------------
<S> <C> <C>
9 1/2 Jan. 1, 1980 July 1, 1980
9 7/8 July 1, 1980 Jan. 1, 1981
11 3/4 Jan. 1, 1981 July 1, 1981
12 7/8 July 1, 1981 Jan. 1, 1982
12 3/4 Jan. 1, 1982 Jan. 1, 1983
10 1/4 Jan. 1, 1983 July 1, 1983
10 3/8 July 1, 1983 Jan. 1, 1984
11 1/2 Jan. 1, 1984 July 1, 1984
13 3/8 July 1, 1984 Jan. 1, 1985
11 5/8 Jan. 1, 1985 July 1, 1985
11 1/8 July 1, 1985 Jan. 1, 1986
10 1/4 Jan. 1, 1986 July 1, 1986
8 1/4 July 1, 1986 Jan. 1, 1987
8 Jan. 1, 1987 July 1, 1987
9 July 1, 1987 Jan. 1, 1988
9 1/8 Jan. 1, 1988 July 1, 1988
9 3/8 July 1, 1988 Jan. 1, 1989
9 1/4 Jan. 1, 1989 July 1, 1989
9 July 1, 1989 Jan. 1, 1990
8 1/8 Jan. 1, 1990 July 1, 1990
</TABLE>
<TABLE>
<CAPTION>
EFFECTIVE RATE EFFECTIVE DATE
(PERCENT) ON OR AFTER PRIOR TO
-------------- -------------- ------------
<S> <C> <C>
9 July 1, 1990 Jan. 1, 1991
8 3/4 Jan. 1, 1991 July 1, 1991
8 1/2 July 1, 1991 Jan. 1, 1992
8 Jan. 1, 1992 July 1, 1992
8 July 1, 1992 Jan. 1, 1993
7 3/4 Jan. 1, 1993 July 1, 1993
7 July 1, 1993 Jan. 1, 1994
6 5/8 Jan. 1, 1994 July 1, 1994
7 3/4 July 1, 1994 Jan. 1, 1995
8 3/8 Jan. 1, 1995 July 1, 1995
7 1/4 July 1, 1995 Jan. 1, 1996
6 1/2 Jan. 1, 1996 July 1, 1996
7 1/4 July 1, 1996 Jan. 1, 1997
6 3/4 Jan. 1, 1997 July 1, 1997
7 1/8 July 1, 1997 Jan. 1, 1998
6 3/8 Jan. 1, 1998 July 1, 1998
6 1/8 July 1, 1998 Jan. 1, 1999
5 1/2 Jan. 1, 1999 July 1, 1999
6 1/8 July 1, 1999 Jan. 1, 2000
6 1/2 Jan. 1, 2000 July 1, 2000
</TABLE>
The amount of insurance benefits generally paid by the FHA is equal to the
entire unpaid principal amount of the defaulted FHA Loan, adjusted to reimburse
the Master Servicer for certain costs and expenses and to deduct certain amounts
received or retained by the Master Servicer after default. When entitlement to
insurance benefits results from foreclosure (or other acquisition of possession)
and conveyance to HUD, the Master Servicer is generally compensated for no more
than two-thirds of its foreclosure costs and attorneys' fees (which costs are
evaluated based upon Fannie Mae state-specific guidelines), and is compensated
for accrued and unpaid mortgage interest for a limited period prior to the
institution of foreclosure or other acquisition, in general only to the extent
it was allowed pursuant to a forbearance plan approved by HUD. Except where
unpaid mortgage interest is recoverable pursuant to an approved forbearance
plan, interest at the Debenture Rate is generally payable from a date 60 days
after the mortgagor's first uncorrected failure to perform any obligation or
make any payment due under the mortgage loan, which results in no recovery of
interest accrued during the first two months of delinquency.
Under certain circumstances, as set forth in the regulations, HUD is
authorized to request or to require the Master Servicer to pursue a deficiency
judgment against any defaulting Mortgagor. In this regard, HUD may request or
require the Master Servicer (as the case may be under the regulations) to pursue
a deficiency judgment in connection with the foreclosure. Under neither case
would the Master Servicer be responsible for collecting on the judgment.
Further, in all cases, HUD may reimburse the Master Servicer for all additional
costs of seeking the judgment.
S-12
<PAGE> 15
VA LOANS. The VA Loans will be partially guaranteed by the United States
Department of Veterans Affairs ("VA") under the Servicemen's Readjustment Act of
1944, as amended. The Servicemen's Readjustment Act of 1944, as amended, permits
a veteran (or in certain instances the spouse of a veteran) to obtain a mortgage
loan guarantee by VA covering mortgage financing of the purchase of a
one-to-four family dwelling unit at interest rates permitted by VA. The program
requires no down payment from the purchaser and permits the guarantee of
mortgage loans of up to 30 years' duration. No VA Loan will have an original
principal amount greater than five times the amount of the related guarantee.
As of the date hereof, the maximum guarantees that may be issued by VA
under a VA Loan are generally as follows: (a) as to loans with an original
principal amount of $45,000 or less, 50% of the unpaid principal balance of such
loan; (b) as to loans with an original principal amount of greater than $45,000
but not more than $56,250, $22,500; (c) as to loans with an original principal
amount of more than $56,250 but not more than $144,000, the lesser of $36,000 or
40% of the unpaid principal balance of the loan; and (d) as to loans with an
original principal amount of more than $144,000 (for owner-occupied,
single-family home or condominium unit), the lesser of $50,750 or 25% of the
unpaid principal balance of the loan. The liability on the guaranty may be
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. The VA, at its option and without regard to the
guaranty, may make full payment to a mortgage holder of unsatisfied indebtedness
on a mortgage upon its assignment to the VA.
With respect to a defaulted VA Loan, the Master Servicer, absent
exceptional circumstances, is authorized to announce its intention to foreclose
only when the default has continued for three months. However, notwithstanding
the foregoing, the regulations require the Master Servicer to take immediate
action if it determines that the property to be foreclosed upon has been
abandoned by the debtor or has been or may be subject to extraordinary waste or
if there exist conditions justifying the appointment of a receiver for the
property. Generally, a claim for the guaranty is submitted after liquidation of
the mortgaged property.
The amount payable under the guaranty will be the percentage of the VA Loan
originally guaranteed applied to the indebtedness outstanding as of the
applicable date of computation specified in the VA regulations. Payments under
the guaranty will be equal to the unpaid guaranteed principal amount of the VA
Loan, interest accrued on the unpaid balance thereof to the appropriate date of
computation and limited expenses of the Master Servicer, but in each case only
to the extent that such amounts have not been recovered through liquidation of
the Mortgaged Property. The amount payable under the guaranty may in no event
exceed the amount of the original guaranty. See "Description of the Trust
Funds -- Mortgage Loans -- The VA Loan Program" and "-- The FHA Loan Program"
and "Insurance Policies on the Mortgage Loans -- FHA Mortgage Insurance" and
"-- VA Mortgage Guaranty" in the Prospectus.
UNDERWRITING STANDARDS
All of the Mortgage Loans, each of which is either an FHA Loan or a VA
Loan, were underwritten in conformity with guidelines established by FHA or VA,
respectively, in effect when such Mortgage Loan was originated. The following is
a summary of current FHA and VA underwriting guidelines, which does not purport
to speak as of the date of origination of any particular Mortgage Loan.
FHA LOANS. Each FHA Loan was originated under FHA's underwriting standards
in effect at the time of its origination. The FHA Loans generally are secured by
single family, owner-occupied principal dwellings or units in a condominium or
planned unit development satisfactory to FHA. Generally, the total monthly fixed
debt obligations of an eligible borrower (including the monthly payment on the
Mortgage Loan applied for) must not exceed 41% of such person's monthly gross
income and the proposed Mortgage Loan payment alone must not exceed 29% of such
borrower's monthly gross income. HUD sets the maximum mortgage amounts, the
limits of which vary by geographic field office. The maximum Loan-to-Value Ratio
for FHA Loans may exceed 100%, but is generally between 85% and 98%, depending
upon the loan amount, the property's value, certain closing costs, and other
variables. FHA Loans generally have an original term to maturity of 15, 20, or
30 years' duration. FHA Loan assumptions are permitted according to HUD
guidelines, and mortgagee approval is required in certain circumstances, in
accordance with HUD guidelines. Generally,
S-13
<PAGE> 16
standard state specific notes and security instruments evidence the debt and
serve as the security instrument, but alternative documentation is allowed
provided FHA guidelines are followed. HUD's maximum loan amounts vary according
to geographic region, with the current national single family mortgage loan
ceiling being $219,849. This amount may be higher with respect to Mortgaged
Properties located in Alaska, Hawaii, Guam or the Virgin Islands.
VA LOANS. Each VA Loan was originated under VA's underwriting standards in
effect at the time of its origination. The VA Loans generally are secured by
single family, owner-occupied principal dwellings or units in a condominium or
planned unit development satisfactory to VA. Generally, the total monthly fixed
debt obligations of an eligible veteran (including the monthly payment on the
Mortgage Loan applied for) must not exceed 41% of such veteran's monthly gross
income. VA's current maximum mortgage amounts is $203,000. The maximum
Loan-to-Value Ratio for VA Loans may exceed 100%, but generally is 100% for
amounts up to $203,000, with respect to the purchase of a new home, and, with
respect to refinancings, 100% for rate reductions (non cash-out transactions)
not to exceed a loan balance of $203,000 and 90% not to exceed a loan balance of
$144,000 (cash-out transactions). VA Loans generally have an original term to
maturity of 15, 20, or 30 years' duration. VA Loan assumptions are permitted,
and mortgagee approval is required in certain circumstances, according to VA
guidelines. Generally, standard state specific notes and security instruments
evidence the debt and serve as the security instrument.
CERTAIN CHARACTERISTICS OF THE MORTGAGE LOANS
As of the Cut-off Date, the Mortgage Loans had the following
characteristics: (i) Mortgage Rates ranging from 4.750% per annum to 17.500% per
annum; (ii) a weighted average Mortgage Rate of approximately 9.283% per annum;
(iii) outstanding Principal Balances ranging from $61 to $198,251; (iv) an
average outstanding Principal Balance of approximately $41,596; (v) original
terms to scheduled maturity ranging from 120 months to 496 months; (vi) a
weighted average original term to scheduled maturity of approximately 351
months; (vii) remaining terms to scheduled maturity ranging from 0 months to 349
months; (viii) a weighted average remaining term to scheduled maturity of
approximately 214 months; and (ix) as of the Cut-off Date, approximately 19.81%
of the Mortgage Loans were 30 to 59 days delinquent, and no Mortgage Loan was
more than 59 days delinquent.
With respect to Mortgage Loans as to which appraisals are available, the
Loan-to-Value Ratios ("LTV") at origination range from 6.58% to 143.33%, with a
weighted average LTV at origination of approximately 96.66%. Approximately
29.70% of the Mortgage Loans (by Cut-off Date Principal Balance) do not have
appraisals that are readily available. As a result, such Mortgage Loans are
included in the "not available" category in the LTV table below.
As of the Cut-off Date, the Mortgage Loans have the characteristics set
forth in the following tables. Asterisks (*) in the following tables indicate
values of less than 0.01%. Certain percentage totals may not sum due to
rounding.
LOAN TYPE
<TABLE>
<CAPTION>
PERCENT BY
AGGREGATE AGGREGATE
PRINCIPAL PRINCIPAL
NUMBER OF BALANCE AS OF BALANCE AS OF
LOAN TYPE MORTGAGE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
--------- -------------- ---------------- ----------------
<S> <C> <C> <C>
FHA Loans.................................. 2,184 $ 96,635,799 75.92%
VA Loans................................... 876 30,647,081 24.08
----- ------------ ------
Total............................ 3,060 $127,282,880 100.00%
===== ============ ======
</TABLE>
S-14
<PAGE> 17
PRINCIPAL BALANCES AS OF THE CUT-OFF DATE
<TABLE>
<CAPTION>
PERCENT BY
AGGREGATE AGGREGATE
NUMBER OF PRINCIPAL PRINCIPAL
MORTGAGE BALANCE AS OF BALANCE AS OF
PRINCIPAL BALANCE AS OF THE CUT-OFF DATE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
---------------------------------------- --------- ---------------- ----------------
<S> <C> <C> <C>
$10,000 and below..................................... 385 $ 1,554,226 1.22%
10,001- 20,000....................................... 363 5,544,040 4.36
20,001- 30,000....................................... 341 8,530,126 6.70
30,001- 40,000....................................... 426 14,923,207 11.72
40,001- 50,000....................................... 465 20,886,870 16.41
50,001- 60,000....................................... 369 20,310,275 15.96
60,001- 70,000....................................... 284 18,521,058 14.55
70,001- 80,000....................................... 209 15,607,687 12.26
80,001- 90,000....................................... 92 7,799,937 6.13
90,001-100,000....................................... 57 5,370,272 4.22
100,001-110,000....................................... 29 3,053,883 2.40
110,001-120,000....................................... 24 2,790,289 2.19
120,001-130,000....................................... 4 507,153 0.40
130,001-140,000....................................... 6 811,568 0.64
140,001-150,000....................................... 2 286,674 0.23
190,001-200,000....................................... 4 785,614 0.62
----- ------------ ------
Total........................................ 3,060 $127,282,880 100.00%
===== ============ ======
</TABLE>
Average Principal Balance: approximately $41,596
S-15
<PAGE> 18
MORTGAGE RATES AS OF THE CUT-OFF DATE
<TABLE>
<CAPTION>
PERCENT BY
AGGREGATE AGGREGATE
PRINCIPAL PRINCIPAL
NUMBER OF BALANCE AS OF BALANCE AS OF
MORTGAGE RATE MORTGAGE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
------------- -------------- ---------------- ----------------
<S> <C> <C> <C>
4.501- 5.000%..................................... 1 $ 93,599 0.07%
5.001- 5.500...................................... 2 68,007 0.05
5.501- 6.000...................................... 4 239,887 0.19
6.001- 6.500...................................... 6 268,096 0.21
6.501- 7.000...................................... 235 3,248,903 2.55
7.001- 7.500...................................... 171 8,870,697 6.97
7.501- 8.000...................................... 315 14,077,891 11.06
8.001- 8.500...................................... 521 19,751,179 15.52
8.501- 9.000...................................... 390 16,928,450 13.30
9.001- 9.500...................................... 462 20,995,099 16.49
9.501-10.000...................................... 356 17,047,392 13.39
10.001-10.500...................................... 266 12,914,508 10.15
10.501-11.000...................................... 77 3,669,204 2.88
11.001-11.500...................................... 100 3,777,735 2.97
11.501-12.000...................................... 55 2,008,806 1.58
12.001-12.500...................................... 38 1,344,914 1.06
12.501-13.000...................................... 25 1,007,714 0.79
13.001-13.500...................................... 17 505,155 0.40
13.501-14.000...................................... 7 161,628 0.13
14.001-14.500...................................... 2 97,571 0.08
14.501-15.000...................................... 1 40,500 0.03
15.001-15.500...................................... 8 156,027 0.12
17.001-17.500...................................... 1 9,917 0.01
----- ------------ ------
Total.................................... 3,060 $127,282,880 100.00%
===== ============ ======
</TABLE>
Weighted Average Mortgage Rate: approximately 9.283%
ORIGINAL TERM TO MATURITY IN MONTHS
<TABLE>
<CAPTION>
PERCENT BY
AGGREGATE AGGREGATE
NUMBER OF PRINCIPAL PRINCIPAL
MORTGAGE BALANCE AS OF BALANCE AS OF
ORIGINAL TERM TO MATURITY IN MONTHS LOANS THE CUT-OFF DATE THE CUT-OFF DATE
----------------------------------- -------------- ---------------- ----------------
<S> <C> <C> <C>
61-120............................................ 15 $ 323,702 0.25%
121-180............................................ 172 5,125,016 4.03
181-240............................................ 16 563,358 0.44
241-300............................................ 57 1,650,861 1.30
301-360............................................ 2,785 119,104,030 93.57
Greater than 360................................... 15 515,914 0.41
----- ------------ ------
Total.................................... 3,060 $127,282,880 100.00%
===== ============ ======
</TABLE>
Weighted Average Original Term to Maturity: approximately 351 months
S-16
<PAGE> 19
REMAINING TERM TO MATURITY IN MONTHS
<TABLE>
<CAPTION>
PERCENT BY
AGGREGATE AGGREGATE
REMAINING TERM NUMBER OF PRINCIPAL PRINCIPAL
TO MATURITY MORTGAGE BALANCE AS OF BALANCE AS OF
IN MONTHS LOANS THE CUT-OFF DATE THE CUT-OFF DATE
-------------- --------- ---------------- ----------------
<S> <C> <C> <C>
Less than One.......................................... 4 $ 1,170 *%
1- 12................................................ 68 70,787 0.06
13- 24................................................ 88 307,816 0.24
25- 36................................................ 83 372,769 0.29
37- 48................................................ 42 311,347 0.24
49- 60................................................ 49 469,614 0.37
61- 72................................................ 69 838,012 0.66
73- 84................................................ 97 1,481,192 1.16
85- 96................................................ 126 2,336,349 1.84
97-108................................................ 116 2,736,280 2.15
109-120................................................ 108 2,735,263 2.15
121-132................................................ 114 3,521,546 2.77
133-144................................................ 33 1,354,448 1.06
145-156................................................ 59 2,393,751 1.88
157-168................................................ 45 1,671,829 1.31
169-180................................................ 42 1,876,449 1.47
181-192................................................ 247 11,757,536 9.24
193-204................................................ 479 25,354,407 19.92
205-216................................................ 218 10,724,047 8.43
217-228................................................ 151 7,438,582 5.84
229-240................................................ 127 6,621,839 5.20
241-252................................................ 107 6,269,751 4.93
253-264................................................ 108 6,892,208 5.41
265-276................................................ 222 13,741,597 10.80
277-288................................................ 84 5,210,312 4.09
289-300................................................ 34 2,072,038 1.63
301-312................................................ 65 3,631,457 2.85
313-324................................................ 36 2,131,705 1.67
325-336................................................ 33 2,439,342 1.92
337-348................................................ 5 425,840 0.33
349-360................................................ 1 93,599 0.07
----- ------------ ------
Total........................................ 3,060 $127,282,880 100.00%
===== ============ ======
</TABLE>
Weighted Average Remaining Term to Maturity: approximately 214 months
MORTGAGE LOAN OCCUPANCY TYPE
<TABLE>
<CAPTION>
PERCENT BY
AGGREGATE AGGREGATE
NUMBER OF PRINCIPAL PRINCIPAL
MORTGAGE BALANCE AS OF BALANCE AS OF
MORTGAGE LOAN OCCUPANCY TYPE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
---------------------------- --------- ---------------- ----------------
<S> <C> <C> <C>
Owner Occupied......................................... 2,398 $102,918,447 80.86%
Not Available.......................................... 451 15,169,541 11.92
Non-Owner Occupied..................................... 171 7,474,526 5.87
Other.................................................. 40 1,720,367 1.35
----- ------------ ------
Total........................................ 3,060 $127,282,880 100.00%
===== ============ ======
</TABLE>
S-17
<PAGE> 20
YEAR OF ORIGINATION
<TABLE>
<CAPTION>
PERCENT BY
AGGREGATE AGGREGATE
NUMBER OF PRINCIPAL PRINCIPAL
MORTGAGE BALANCE AS OF BALANCE AS OF
YEAR OF ORIGINATION LOANS THE CUT-OFF DATE THE CUT-OFF DATE
------------------- --------- ---------------- ----------------
<S> <C> <C> <C>
1960................................................... 3 $ 34,929 0.03%
1965................................................... 1 130 *
1968................................................... 1 6,463 0.01
1970................................................... 24 16,155 0.01
1971................................................... 80 115,946 0.09
1972................................................... 69 195,555 0.15
1973................................................... 48 232,258 0.18
1974................................................... 35 216,769 0.17
1975................................................... 42 331,793 0.26
1976................................................... 62 696,765 0.55
1977................................................... 120 1,762,689 1.38
1978................................................... 97 1,690,385 1.33
1979................................................... 123 2,907,473 2.28
1980................................................... 75 1,962,993 1.54
1981................................................... 21 526,630 0.41
1982................................................... 19 667,540 0.52
1983................................................... 70 2,541,806 2.00
1984................................................... 27 1,010,409 0.79
1985................................................... 113 5,137,379 4.04
1986................................................... 396 20,087,656 15.78
1987................................................... 379 18,803,415 14.77
1988................................................... 186 9,308,088 7.31
1989................................................... 187 8,597,770 6.75
1990................................................... 97 5,395,599 4.24
1991................................................... 108 6,457,802 5.07
1992................................................... 158 9,571,479 7.52
1993................................................... 188 11,853,080 9.31
1994................................................... 66 3,677,665 2.89
1995................................................... 43 2,169,837 1.70
1996................................................... 159 7,306,048 5.74
1997................................................... 37 2,259,551 1.78
1998................................................... 19 1,205,337 0.95
1999................................................... 7 535,487 0.42
----- ------------ ------
Total........................................ 3,060 $127,282,880 100.00%
===== ============ ======
</TABLE>
S-18
<PAGE> 21
YEAR OF SCHEDULED MATURITY
<TABLE>
<CAPTION>
PERCENT BY
AGGREGATE AGGREGATE
NUMBER OF PRINCIPAL PRINCIPAL
MORTGAGE BALANCE AS OF BALANCE AS OF
YEAR OF MATURITY LOANS THE CUT-OFF DATE THE CUT-OFF DATE
---------------- --------- ---------------- ----------------
<S> <C> <C> <C>
2000................................................... 19 $ 7,419 0.01%
2001................................................... 97 189,902 0.15
2002................................................... 83 337,580 0.27
2003................................................... 64 356,635 0.28
2004................................................... 42 337,960 0.27
2005................................................... 50 496,310 0.39
2006................................................... 89 1,176,719 0.92
2007................................................... 124 2,171,425 1.71
2008................................................... 112 2,313,839 1.82
2009................................................... 121 3,018,617 2.37
2010................................................... 82 2,197,739 1.73
2011................................................... 98 3,248,742 2.55
2012................................................... 27 1,103,962 0.87
2013................................................... 72 2,841,974 2.23
2014................................................... 35 1,303,849 1.02
2015................................................... 104 4,562,747 3.58
2016................................................... 357 18,425,440 14.48
2017................................................... 390 20,295,477 15.95
2018................................................... 186 9,273,501 7.29
2019................................................... 162 7,750,236 6.09
2020................................................... 98 5,552,841 4.36
2021................................................... 99 6,153,703 4.83
2022................................................... 143 8,642,382 6.79
2023................................................... 189 12,372,111 9.72
2024................................................... 56 3,302,847 2.59
2025................................................... 45 2,267,328 1.78
2026................................................... 64 3,895,325 3.06
2027................................................... 29 1,831,577 1.44
2028................................................... 19 1,446,903 1.14
2029................................................... 4 407,789 0.32
----- ------------ ------
Total........................................ 3,060 $127,282,880 100.00%
===== ============ ======
</TABLE>
S-19
<PAGE> 22
ORIGINAL LTV RATIOS (1)
<TABLE>
<CAPTION>
PERCENT BY
AGGREGATE AGGREGATE
NUMBER OF PRINCIPAL PRINCIPAL
MORTGAGE BALANCE AS OF BALANCE AS OF
ORIGINAL LOAN-TO-VALUE RATIO(%) LOANS THE CUT-OFF DATE THE CUT-OFF DATE
------------------------------- --------- ---------------- ----------------
<S> <C> <C> <C>
00.01- 10.00.......................................... 6 $ 182,203 0.14%
10.01- 20.00.......................................... 1 31,556 0.02
30.01- 40.00.......................................... 3 96,470 0.08
40.01- 50.00.......................................... 5 141,982 0.11
50.01- 60.00.......................................... 8 173,363 0.14
60.01- 70.00.......................................... 15 462,732 0.36
70.01- 80.00.......................................... 53 2,108,409 1.66
80.01- 90.00.......................................... 202 8,918,046 7.01
90.01- 95.00.......................................... 177 8,234,228 6.47
95.01-100.00.......................................... 968 37,921,610 29.79
100.01-105.00.......................................... 585 30,099,482 23.65
105.01-110.00.......................................... 21 875,268 0.69
110.01-115.00.......................................... 5 106,873 0.08
115.01-120.00.......................................... 1 50,049 0.04
Greater than 120....................................... 2 79,861 0.06
Not Available.......................................... 1,008 37,800,748 29.70
----- ------------ ------
Total........................................ 3,060 $127,282,880 100.00%
===== ============ ======
</TABLE>
Weighted Average Original LTV Ratio: approximately 96.66%(1)
------------
(1) "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 generally 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. The
Loan-to-Value Ratios ("LTV") at origination range from 6.58% to 143.33%,
with a weighted average LTV at origination of approximately 96.66%.
Approximately 29.70% of the Mortgage Loans by Cut-off Date Principal Balance
do not have appraisals that are readily available and are not included in
the Weighted Average Original LTV calculation.
S-20
<PAGE> 23
GEOGRAPHIC DISTRIBUTION
<TABLE>
<CAPTION>
PERCENT BY
AGGREGATE AGGREGATE
NUMBER OF PRINCIPAL PRINCIPAL
MORTGAGE BALANCE AS OF BALANCE AS OF
STATE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
----- --------- ---------------- ----------------
<S> <C> <C> <C>
Alabama................................................ 89 $ 3,076,401 2.42%
Alaska................................................. 2 167,440 0.13
Arizona................................................ 76 3,513,708 2.76
Arkansas............................................... 112 2,183,848 1.72
California............................................. 277 16,936,486 13.31
Colorado............................................... 29 1,417,013 1.11
Connecticut............................................ 3 308,178 0.24
Delaware............................................... 3 150,425 0.12
District of Columbia................................... 4 153,935 0.12
Florida................................................ 252 12,824,641 10.08
Georgia................................................ 149 6,962,623 5.47
Hawaii................................................. 1 67,412 0.05
Idaho.................................................. 1 44,601 0.04
Illinois............................................... 54 2,939,038 2.31
Indiana................................................ 28 1,020,865 0.80
Iowa................................................... 10 341,474 0.27
Kansas................................................. 22 675,971 0.53
Kentucky............................................... 4 146,157 0.11
Louisiana.............................................. 155 5,022,163 3.95
Maryland............................................... 60 3,635,700 2.86
Massachusetts.......................................... 3 215,027 0.17
Michigan............................................... 21 757,402 0.60
Minnesota.............................................. 38 1,827,956 1.44
Mississippi............................................ 368 8,909,826 7.00
Missouri............................................... 39 1,794,922 1.41
Montana................................................ 2 42,620 0.03
Nebraska............................................... 27 858,830 0.67
Nevada................................................. 10 525,273 0.41
New Hampshire.......................................... 2 126,796 0.10
New Jersey............................................. 61 2,780,471 2.18
New Mexico............................................. 6 345,854 0.27
New York............................................... 101 4,453,992 3.50
North Carolina......................................... 47 2,516,768 1.98
Ohio................................................... 38 1,134,201 0.89
Oklahoma............................................... 47 1,815,167 1.43
Oregon................................................. 7 297,905 0.23
Pennsylvania........................................... 52 1,864,125 1.46
Rhode Island........................................... 2 143,238 0.11
South Carolina......................................... 21 880,695 0.69
South Dakota........................................... 1 25,726 0.02
Tennessee.............................................. 255 9,971,289 7.83
Texas.................................................. 475 19,509,605 15.33
Utah................................................... 5 248,091 0.19
Virginia............................................... 68 3,320,015 2.61
Virgin Islands......................................... 1 53,390 0.04
Washington............................................. 25 1,050,375 0.83
Wisconsin.............................................. 5 147,866 0.12
Wyoming................................................ 2 77,378 0.06
----- ------------ ------
Total........................................ 3,060 $127,282,880 100.00%
===== ============ ======
</TABLE>
No more than approximately 0.93% of the Mortgage Loans are secured by Mortgaged
Properties located in any one zip code.
S-21
<PAGE> 24
GEOGRAPHIC DISTRIBUTION -- FHA LOANS
<TABLE>
<CAPTION>
PERCENT BY
AGGREGATE AGGREGATE
NUMBER OF PRINCIPAL PRINCIPAL
MORTGAGE BALANCE AS OF BALANCE AS OF
STATE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
----- -------------- ---------------- ----------------
<S> <C> <C> <C>
Alabama............................................ 58 $ 2,031,067 2.10%
Arizona............................................ 57 2,618,606 2.71
Arkansas........................................... 62 1,366,616 1.41
California......................................... 214 13,076,984 13.53
Colorado........................................... 19 969,465 1.00
Connecticut........................................ 3 308,178 0.32
Delaware........................................... 3 150,425 0.16
District of Columbia............................... 3 121,881 0.13
Florida............................................ 201 10,303,113 10.66
Georgia............................................ 111 5,360,255 5.55
Hawaii............................................. 1 67,412 0.07
Illinois........................................... 44 2,476,345 2.56
Indiana............................................ 19 767,526 0.79
Iowa............................................... 4 105,004 0.11
Kansas............................................. 16 476,997 0.49
Kentucky........................................... 2 123,028 0.13
Louisiana.......................................... 117 3,927,342 4.06
Maryland........................................... 52 3,257,801 3.37
Massachusetts...................................... 3 215,027 0.22
Michigan........................................... 20 706,686 0.73
Minnesota.......................................... 28 1,415,548 1.46
Mississippi........................................ 249 6,842,354 7.08
Missouri........................................... 27 1,269,971 1.31
Montana............................................ 1 21,166 0.02
Nebraska........................................... 17 530,550 0.55
Nevada............................................. 9 426,867 0.44
New Hampshire...................................... 1 64,324 0.07
New Jersey......................................... 46 2,265,657 2.34
New Mexico......................................... 6 345,854 0.36
New York........................................... 89 4,089,658 4.23
North Carolina..................................... 31 1,787,552 1.85
Ohio............................................... 27 932,569 0.97
Oklahoma........................................... 27 1,097,605 1.14
Oregon............................................. 7 297,905 0.31
Pennsylvania....................................... 41 1,542,785 1.60
Rhode Island....................................... 2 143,238 0.15
South Carolina..................................... 9 460,064 0.48
South Dakota....................................... 1 25,726 0.03
Tennessee.......................................... 184 7,410,104 7.67
Texas.............................................. 309 14,238,743 14.73
Utah............................................... 3 112,964 0.12
Virginia........................................... 43 2,169,582 2.25
Virgin Islands..................................... 1 53,390 0.06
Washington......................................... 13 544,329 0.56
Wisconsin.......................................... 3 73,022 0.08
Wyoming............................................ 1 44,515 0.05
----- ----------- ------
Total: 2,184 $96,635,799 100.00%
===== =========== ======
</TABLE>
No more than approximately 0.89% of the FHA Loans will be secured by Mortgaged
Properties located in any one zip code.
S-22
<PAGE> 25
GEOGRAPHIC DISTRIBUTION -- VA LOANS
<TABLE>
<CAPTION>
PERCENT BY
AGGREGATE AGGREGATE
NUMBER OF PRINCIPAL PRINCIPAL
MORTGAGE BALANCE AS OF BALANCE AS OF
STATE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
----- --------- ---------------- ----------------
<S> <C> <C> <C>
Alabama................................................ 31 $ 1,045,335 3.41%
Alaska................................................. 2 167,440 0.55
Arizona................................................ 19 895,102 2.92
Arkansas............................................... 50 817,233 2.67
California............................................. 63 3,859,502 12.59
Colorado............................................... 10 447,549 1.46
District of Columbia................................... 1 32,054 0.10
Florida................................................ 51 2,521,528 8.23
Georgia................................................ 38 1,602,368 5.23
Idaho.................................................. 1 44,601 0.15
Illinois............................................... 10 462,693 1.51
Indiana................................................ 9 253,340 0.83
Iowa................................................... 6 236,470 0.77
Kansas................................................. 6 198,973 0.65
Kentucky............................................... 2 23,130 0.08
Louisiana.............................................. 38 1,094,820 3.57
Maryland............................................... 8 377,899 1.23
Michigan............................................... 1 50,717 0.17
Minnesota.............................................. 10 412,407 1.35
Mississippi............................................ 119 2,067,472 6.75
Missouri............................................... 12 524,951 1.71
Montana................................................ 1 21,455 0.07
Nebraska............................................... 10 328,280 1.07
Nevada................................................. 1 98,406 0.32
New Hampshire.......................................... 1 62,472 0.20
New Jersey............................................. 15 514,814 1.68
New York............................................... 12 364,334 1.19
North Carolina......................................... 16 729,216 2.38
Ohio................................................... 11 201,632 0.66
Oklahoma............................................... 20 717,562 2.34
Pennsylvania........................................... 11 321,341 1.05
South Carolina......................................... 12 420,632 1.37
Tennessee.............................................. 71 2,561,184 8.36
Texas.................................................. 166 5,270,862 17.20
Utah................................................... 2 135,127 0.44
Virginia............................................... 25 1,150,433 3.75
Washington............................................. 12 506,046 1.65
Wisconsin.............................................. 2 74,844 0.24
Wyoming................................................ 1 32,863 0.11
--- ----------- ------
Total:....................................... 876 $30,647,081 100.00%
=== =========== ======
</TABLE>
No more than approximately 1.09% of the VA Loans will be secured by Mortgaged
Properties located in any one zip code.
S-23
<PAGE> 26
ADDITIONAL INFORMATION
The description in this Prospectus Supplement of the Mortgage Loans is
based upon the Trust Fund as expected to be constituted at the close of business
on the Cut-off Date. Prior to the issuance of the Offered Certificates, a
Mortgage Loan may be prepaid or may be removed from the Trust Fund as a result
of incomplete documentation or otherwise, if the Depositor deems such removal
necessary or appropriate. A limited number of other assets may be included in
the Trust Fund prior to the issuance of the Offered Certificates unless
including such Mortgage Loans 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 certain Exhibits, with the
Securities and Exchange Commission within fifteen days after the initial
issuance of the Offered Certificates. In the event Mortgage Loans 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.
THE MASTER SERVICER
General. Union Planters Bank, National Association, a national banking
association, will act as master servicer (in such capacity, the "Master
Servicer") for the Mortgage Loans 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 7130 Goodlett
Farms Parkway, Cordova, Tennessee 38018, telephone number (901) 580-6000.
Delinquency and Foreclosure Experience. The following tables set forth
certain information concerning the delinquency and loss experience (including
pending foreclosures) on one- to four-family residential mortgage loans included
in the Master Servicer's servicing portfolio. 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.
DELINQUENCY EXPERIENCE*
<TABLE>
<CAPTION>
AS OF AS OF AS OF AS OF AS OF
DECEMBER 31, DECEMBER 31, DECEMBER 31, MARCH 31, MARCH 31,
1999 1998 1997 2000 1999
BY NO. OF BY NO. OF BY NO. OF BY NO. OF BY NO. OF
LOANS LOANS LOANS LOANS LOANS
------------ ------------ ------------ --------- ---------
<S> <C> <C> <C> <C> <C>
Total portfolio........................ 251,020 267,090 193,516 249,417 263,219
Period of delinquency
31 to 59 days........................ 10,938 13,858 12,431 8,832 10,003
Percent of portfolio.............. 4.36% 5.19% 6.42% 3.54% 3.80%
60 to 89 days........................ 1,137 1,462 2,800 820 1,050
Percent of portfolio.............. 0.45% 0.55% 1.45% 0.33% 0.40%
90 days or more...................... 639 1,274 4,205 484 810
Percent of portfolio.............. 0.25% 0.48% 2.17% 0.19% 0.31%
------- ------- ------- ------- -------
Total delinquent loans................. 12,714 16,594 19,436 10,136 11,863
Percent of portfolio................. 5.06% 6.21% 10.04% 4.06% 4.51%
Bankruptcies........................... 5,651 6,332 5,730 5,385 6,280
Percent of portfolio................. 2.25% 2.37% 2.96% 2.16% 2.39%
Foreclosures........................... 7,749 8,846 8,491 7,297 8,498
Percent of portfolio................. 3.09% 3.31% 4.39% 2.93% 3.23%
</TABLE>
------------
* Percentages are presented on the basis of the number of mortgage loans
serviced.
S-24
<PAGE> 27
There can be no assurance that the delinquency and foreclosure experience
of the Mortgage Loans 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 Mortgage Loans comprising the Trust Fund will
depend on the results obtained over the life of the Trust Fund.
LOAN LOSS EXPERIENCE
<TABLE>
<CAPTION>
AT OR FOR THE TWELVE MONTHS ENDED AT OR FOR THE THREE MONTHS
DECEMBER 31, ENDED MARCH 31,
----------------------------------------- --------------------------
1999 1998 1997 2000(7) 1999
------------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Number of mortgage
loans(1)(3)................... 251,020 267,090 193,516 249,417 263,219
Average number of mortgage loans
during period(3).............. 256,909 225,968 200,829 250,151 264,164
Number of mortgage loans
foreclosed.................... 1,479 2,169 2,644 407 388
Mortgage loans foreclosed as a
percentage of total Master
Servicer-serviced mortgage
loans(2)...................... 0.59% 0.81% 1.37% 0.16%(6) 0.15%(6)
Mortgage loans foreclosed as a
percentage of average number
of mortgage loans............. 0.58% 0.96% 1.32% 0.16%(6) 0.15%(6)
Average outstanding principal
balance of mortgage
loans(3)...................... $13,631,896 $11,934,509 $10,072,000 $13,732,105 $13,801,286
Net losses from mortgage loan
foreclosures(4):
Total dollars(3)....... $ 5,176 $ 9,870 $ 6,403 $ 837 $ 1,084
As a percentage of
average principal
balance of mortgage
loans(3)(5).......... 0.04% 0.08% 0.06% 0.01%(6) 0.01%(6)
</TABLE>
------------
(1) As of period end.
(2) Total mortgage loans foreclosed during the applicable period expressed as a
percentage of the number of mortgage loans serviced at the end of the
applicable period. Mortgage loans foreclosed include liquidated mortgage
loans for which both partial and final claims proceeds have been received.
(3) Includes mortgage loans originated or acquired by Master Servicer for its
own account and serviced by Master Servicer for others.
(4) Net losses represent the amounts charged by the Master Servicer against its
loss reserves for the periods indicated. Such amounts include estimates of
net losses with respect to certain foreclosures for which both partial and
final claims proceeds have been received. Charges to the loss reserves in
respect of a foreclosed mortgage loan generally are made before the
foreclosed mortgage loan becomes liquidated. The length of the accrual
period for the amount of accrued and unpaid interest included in the
calculation of the net loss varies depending upon the period in which the
loss was charged and whether the mortgage loan was owned by an entity other
than the Master Servicer.
(5) Total net losses incurred on mortgage loans foreclosed during the applicable
period expressed as a percentage of the average principal balance of all
mortgage loans at the end of the applicable period.
(6) Annualized.
(7) For the three month period ended March 31, 2000 the Master Servicer charged
a total of 988 foreclosed mortgage loans with a net loss of approximately
$4,855,000 against its loss reserve. This total includes 407 mortgage loans
for which both partial and final claims proceeds have been received, an
another 581 mortgage loans for which only partial claims proceeds have been
received. In all prior periods, mortgage loans were charged against the loss
reserve only after the Master Servicer had received both partial and final
claims proceeds. The Master Servicer adopted this change to its policies and
procedures regarding when mortgage loans are charged against the loss
reserve beginning on January 1, 2000. This change was effected by the Master
Servicer in order to accelerate the write-off of estimated losses against
the loss reserve, which previously had not occurred until receipt of final
claims proceeds. For purposes of consistent presentation, however, the
amounts reported for foreclosed loans for the three-month period ended March
31, 2000 have been calculated using the method that the Master Servicer had
employed prior to January 1, 2000 (charging only mortgage loans as to which
partial and final claims proceeds have been received).
The data presented in the foregoing tables are for illustrative purposes
only, and there is no assurance that the delinquency and loan loss experience of
the Mortgage Loans will be similar to that set forth above. The delinquency and
loan loss experience of mortgage loans historically has been sharply affected by
downturns in
S-25
<PAGE> 28
regional or local economic conditions. For instance, such a downturn was
experienced in areas dependent on the oil and gas industry in the 1980s, causing
increased levels of delinquencies and loan losses on mortgage loans in affected
areas. Regional and local economic conditions are often volatile, and no
predictions can be made regarding their effects on future economic losses upon
mortgage loan losses. Information regarding the geographic location, at
origination, of the Mortgaged Properties is set forth under "Description of the
Mortgage Loans" herein.
In particular, the foregoing data generally represents the Master
Servicer's experience servicing mortgage loans underwritten pursuant to
particular underwriting standards, which may differ from the underwriting
standards used to originate the Mortgage Loans. Further, this data reflects the
Master Servicer's experience servicing mortgage loans during certain historic
economic conditions that may not reflect future conditions. Accordingly, the
performance of the Mortgage Loans and the Master Servicer's servicing experience
with respect thereto may differ materially from the historical servicing data
presented herein.
DESCRIPTION OF THE CERTIFICATES
GENERAL
The certificates will be issued pursuant to the Pooling and Servicing
Agreement and will consist of 10 Classes (the "Certificates") to be designated
as the Class A-1 Certificates, the Class X-1 Certificates, the Class PO
Certificates (the "Class PO Certificates"), the Class B-1 Certificates, the
Class B-2 Certificates, the Class B-3 Certificates, the Class B-4 Certificates,
the Class B-5 Certificates, the Class B-6 Certificates (collectively, the "Class
B Certificates" or the "Subordinate Certificates") and the Class R Certificates.
The Class A-1 Certificates are referred to as the "Offered Certificates," and
the Class A-1 Certificates, the Class X-1 Certificates, the Class PO
Certificates and Class R Certificates are referred to collectively as the
"Senior Certificates." The Offered Certificates will be issued in book-entry
form only, and will be issued in denominations of $1,000 and integral multiples
of $1 in excess thereof. The Offered Certificates will be freely transferable
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 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 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, including the FHA Insurance Policies and VA Guaranties
(collectively, the "Assets"). Only the Class A-1 Certificates are offered
hereby.
The Class A-1 Certificates have an aggregate initial Security Principal
Balance of $121,906,000, representing an initial beneficial ownership interest
of approximately 95.78% in the Trust Fund, the Class R Certificates have an
aggregate initial Security Principal Balance of $100, representing an initial
beneficial ownership interest of approximately 0.000079% in the Trust Fund, the
Class PO Certificates have an aggregate initial Security Principal Balance of
$2,001,684, representing an initial beneficial ownership interest of
approximately 1.57% in the Trust Fund, the Class B-1 Certificates have an
initial Security Principal Balance of $1,145,000, representing an initial
beneficial ownership interest of approximately 0.90% in the Trust Fund, the
Class B-2 Certificates have an initial Security Principal Balance of $318,207,
representing an initial beneficial ownership interest of approximately 0.25% in
the Trust Fund, the Class B-3 Certificates have an initial Security Principal
Balance of $318,207, representing an initial beneficial ownership interest of
approximately 0.25% in the Trust Fund, the Class B-4 Certificates have an
initial Security Principal Balance of $318,207, representing an initial
beneficial ownership interest of approximately 0.25% in the Trust Fund, the
Class B-5 Certificates have an initial Security Principal Balance of $318,207,
representing an initial beneficial ownership interest of approximately 0.25% in
the Trust Fund and the Class B-6 Certificates have an initial Security Principal
Balance of $957,268, representing an initial beneficial ownership interest of
approximately
S-26
<PAGE> 29
0.75% in the Trust Fund. The Class X-1 Certificates will not have a Security
Principal Balance. The Class X-1 Certificates have a Notional Principal Amount
for any Distribution Date equal to the aggregate of the Principal Balances of
the Non-Discount Mortgage Loans at the beginning of the related Due Period (or
as of the Cut-off Date in the case of the first Distribution Date). The Security
Principal Balance of any Class of Certificates outstanding at any time
represents the maximum amount that the holders thereof are entitled to receive
as distributions allocable to principal from the cash flow on the Mortgage
Loans. The respective Security Principal Balances of the Classes of Certificates
will in each case be reduced by the sum of amounts actually distributed on such
Class that are allocable to principal, and Realized Losses, if any, allocated
thereto.
The Subordinate Certificates, the Class X-1 Certificates, the Class PO
Certificates and the Class R Certificates are not offered by this Prospectus
Supplement.
BOOK-ENTRY REGISTRATION
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 Cede, as 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 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.
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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, 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.
AVAILABLE DISTRIBUTION AMOUNT
The "AVAILABLE DISTRIBUTION AMOUNT" for any Distribution Date will be equal
to the sum of (i) the aggregate amount of scheduled payments on the Mortgage
Loans due on the related Due Date and received on or prior to the related
Determination Date, after deduction of the Servicing Fee and the Trustee Fee,
(ii) certain unscheduled payments, including Mortgagor prepayments on the
Mortgage Loans, Insurance Proceeds, Liquidation Proceeds and proceeds from
repurchases of and substitution for the Mortgage Loans occurring during the
preceding calendar month and (iii) all Advances of scheduled principal and
interest made for such Distribution Date, in each case net of amounts
reimbursable therefrom to the Master Servicer, including reimbursement of
previously unreimbursed Advances. With respect to any Distribution Date, (i) the
"DUE DATE" is deemed to be the first day of the month in which such Distribution
Date occurs and (ii) the "DETERMINATION DATE" is the 15th day of the month in
which such Distribution Date occurs or, if such day is not a Business Day, the
immediately succeeding Business Day.
Except as provided herein and to the extent of the Available Distribution
Amount, on each Distribution Date distributions on the Certificates will be
applied in the following order of priority: (i) to interest on each Class of
Senior Certificates (other than the Class PO Certificates); (ii) to principal on
the Classes of Senior Certificates (other than the Class X-1 Certificates) then
entitled to receive distributions of principal, in the order and subject to the
priorities set forth herein under "-- Principal Distributions," in each case in
an aggregate amount up to the maximum amount of principal to be distributed on
such Classes on such Distribution Date; (iii) to the Class PO Certificates in
the amount of any Class PO Deferred Amount (as defined under "-- Allocation of
Losses; Subordination" herein), but only from amounts that would otherwise be
distributable on such Distribution Date as principal of the Subordinate
Certificates; and (iv) to interest on and then principal of each Class of
Subordinate Certificates, in the order of their numerical Class designations,
beginning with the Class B-1 Certificates, subject to the limitations set forth
in the Pooling and Servicing Agreement.
Under certain circumstances described herein, distributions from the
Available Distribution Amount for a Distribution Date that would otherwise be
made on the Subordinate Certificates may be distributed instead on the Senior
Certificates. See "-- Allocation of Losses; Subordination" herein.
INTEREST DISTRIBUTIONS
On each Distribution Date, to the extent of funds available therefor, each
Class of Certificates (other than the Class PO Certificates) will be entitled to
receive an amount allocable to interest (as to each such Class, the "Interest
Distribution Amount") with respect to the related Interest Accrual Period. The
Interest Distribution Amount for any Class of Certificates (other than the PO
Certificates) will be equal to the sum of
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(i) interest at the applicable Pass-Through Rate accrued on the related Security
Principal Balance or Notional Principal Amount, as the case may be, during the
related Interest Accrual Period, subject to certain reductions described herein,
and (ii) the sum of the amounts, if any, by which the amount described in clause
(i) above on each prior Distribution Date exceeded the amount actually
distributed as interest on such prior Distribution Dates and not subsequently
distributed ("Unpaid Interest Amounts").
The interest entitlement described in clause (i) above for each Class of
Certificates (other than the Class PO Certificates) will be reduced by the
amount of Net Interest Shortfall for such Distribution Date. With respect to any
Distribution Date, the "NET INTEREST SHORTFALL" is equal to the sum of (i) the
amount of interest which would otherwise have been received with respect to any
Mortgage Loan that was subject of a Relief Act Reduction and (ii) any Net
Prepayment Interest Shortfall. Net Interest Shortfall on any Distribution Date
will be allocated pro rata among all Classes of Certificates entitled to receive
distributions of interest on such Distribution Date, based on the amount of
interest each such Class of Certificates would otherwise be entitled to receive
on such Distribution Date before taking into account any reduction in such
amounts resulting for such Net Interest Shortfall. A "RELIEF ACT REDUCTION" is a
reduction in the amount of monthly interest payment on a Mortgage Loan pursuant
to the Soldiers' and Sailors' Civil Relief Act of 1940. See "Certain Legal
Aspects of the Mortgage Loans -- Soldiers' and Sailors' Civil Relief Act" in the
Prospectus. With respect to any Distribution Date, the "NET PREPAYMENT INTEREST
SHORTFALL" is the aggregate amount of Prepayment Interest Shortfalls during the
calendar month preceding the month of such Distribution Date that are not offset
by the Master Servicer. A "PREPAYMENT INTEREST SHORTFALL" is the amount by which
interest paid by a borrower in connection with a prepayment in full of principal
on a Mortgage Loan is less than one month's interest at the related Mortgage
Rate (net of the Servicing Fee Rate and the Trustee Fee Rate) on the Principal
Balance of such Mortgage Loan.
The Class PO Certificates are principal only securities, and are not
entitled to distributions of interest.
The "INTEREST ACCRUAL PERIOD" for all Classes of Certificates (other than
the Class PO Certificates) is the calendar month preceding the month in which
the Distribution Date occurs. Interest on the Offered Certificates will be
calculated on the basis of a 360-day year consisting of twelve 30-day months.
If on any Distribution Date the Available Distribution Amount is less than
the full interest entitlement on the Senior Certificates for such Distribution
Date, the shortfall will be allocated among the holders of all Classes of Senior
Certificates (other than the Class PO Certificates) in proportion to the
respective amounts of their interest entitlement for such Distribution Date.
Such shortfalls could occur, for example, if delinquencies on the Mortgage Loans
were exceptionally high and were concentrated in a particular month and Advances
by the Master Servicer did not cover the shortfall. Any such shortfall will be
carried forward and added to the amount holders of each such Class will be
entitled to receive on the next Distribution Date. Any such amounts so carried
forward will not bear interest.
The Pass-Through Rate on the Class A-1 Certificates is set forth on the
cover hereof. The Pass-Through Rate on the Class X-1 Certificates on each
Distribution Date will equal the excess of (i) the weighted average, as of the
first day of the related Due Period, of the Net Mortgage Rates on each of the
Non-Discount Mortgage Loans over (ii) 7.700%.
The "NET MORTGAGE RATE" on each Mortgage Loan is equal to the Mortgage Rate
thereon minus the Servicing Fee Rate and the Trustee Fee Rate. The Servicing Fee
Rate is (a) 1.00% per annum with respect to each Mortgage Loan with a Mortgage
Rate greater than 8.625% per annum, (b) 0.75% per annum with respect to each
Mortgage Loan with a Mortgage Rate less than or equal to 8.625% per annum, but
greater than 8.000% per annum, and (c) 0.50% per annum with respect to each
Mortgage Loan with a Mortgage Rate less than or equal to 8.000% per annum. The
Trustee Fee Rate is 0.012% per annum.
As described herein, the Interest Distribution Amount allocable to each
Class of Certificates (other than the Class PO Certificates) is based on the
Security Principal Balance thereof or, in the case of the Class X-1
Certificates, on the Notional Principal Amount thereof.
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PRINCIPAL DISTRIBUTIONS
All payments and other amounts received in respect of principal of the
Mortgage Loans will be allocated between (i) the Senior Certificates (other than
the Class X-1 Certificates and the Class PO Certificates) and the Subordinate
Certificates and (ii) the Class PO Certificates, in each case based on the
applicable Non-PO Percentage and the applicable PO Percentage, respectively, of
such amounts.
Holders of the Senior Certificates (other than the Class X-1 Certificates)
will be entitled to receive on each Distribution Date, in the priority set forth
herein, a distribution allocable to principal and equal to the Senior Principal
Distribution Amount.
The "SENIOR PRINCIPAL DISTRIBUTION AMOUNT" with respect to any Distribution
Date is the sum of the Senior Non-PO Principal Distribution Amount and the Class
PO Principal Distribution Amount, each with respect to such Distribution Date.
With respect to any Distribution Date, if the Available Distribution Amount
remaining after the distribution of interest to the Senior Certificates (other
than the Class PO Certificates) is insufficient to distribute the full Senior
Principal Distribution Amount, the Senior Non-PO Principal Distribution Amount
and the Class PO Principal Distribution Amount will be reduced in proportion to
the Non-PO Percentages and the PO Percentages, respectively, of the Mortgage
Loans responsible for such shortfall.
The "SENIOR NON-PO PRINCIPAL DISTRIBUTION AMOUNT" with respect to any
Distribution Date is equal to the sum of the following:
(i) the product of (A) the then-applicable Senior Percentage (as
defined below) and (B) the sum of the Non-PO Percentages of the principal
portions of all scheduled monthly payments on the Mortgage Loans due on the
related Due Date, whether or not received on or prior to the related
Determination Date; plus
(ii) the product of (A) the then-applicable Senior Accelerated
Distribution Percentage and (B) the sum of the Non-PO Percentages of all of
the unscheduled payments or collections of principal in respect of the
Mortgage Loans received during the preceding calendar month (including the
Non-PO Percentages of the principal portion of proceeds of the repurchase
of a Mortgage Loan, full and partial Mortgagor prepayments, Foreclosure
Advances and Net Liquidation Proceeds).
The "CLASS PO DISTRIBUTION AMOUNT" with respect to any Distribution Date is
equal to the sum of (i) the sum of the PO Percentages of the principal portions
of all scheduled monthly payments on the Mortgage Loans due on the related Due
Date, whether or not received on or prior to the related Determination Date plus
(ii) the sum of the PO Percentages of all unscheduled payments or collections of
principal in respect of the Mortgage Loans received during the preceding
calendar month (including the PO Percentages of the principal portion of
proceeds of the repurchase of a Mortgage Loan, full and partial Mortgagor
prepayments, Foreclosure Advances and Net Liquidation Proceeds).
A "DISCOUNT MORTGAGE LOAN" is any Mortgage Loan with a Net Mortgage Rate
less than 7.700%.
A "NON-DISCOUNT MORTGAGE LOAN" is any Mortgage Loan with a Net Mortgage
Rate equal to or greater than 7.700%.
The "NON-PO PERCENTAGE" with respect to any Discount Mortgage Loan is equal
to its Net Mortgage Rate divided by 7.700%. The "Non-PO Percentage" for any
Non-Discount Mortgage Loan is equal to 100%.
The "PO PERCENTAGE" with respect to any Discount Mortgage Loan is equal to
(i) 7.700% minus its Net Mortgage Rate (ii) divided by 7.700%. The "PO
Percentage" with respect to any Non-Discount Mortgage Loan is 0%.
The "PRINCIPAL BALANCE" of any Mortgage Loan as of any Due Date is equal to
the unpaid principal balance thereof as of the Cut-off Date reduced by all
payments in respect of principal received or advanced from the Cut-off Date
through such Due Date.
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The "SENIOR PERCENTAGE," which initially will equal approximately 97.31%
and will in no event exceed 100%, will be recalculated for each Distribution
Date to be the percentage equal to the aggregate Security Principal Balance of
the Senior Certificates (other than the Class X-1 and Class PO Certificates)
immediately prior to such Distribution Date divided by the sum of the aggregate
Security Principal Balance of all of the Senior Certificates (other than the
Class X-1 and Class PO Certificates) and the Subordinate Certificates
immediately prior to the Distribution Date.
The "SUBORDINATE PERCENTAGE" as of any date of determination is equal to
100% minus the Senior Percentage as of such date.
The "SENIOR ACCELERATED DISTRIBUTION PERCENTAGE" for any Distribution Date
occurring prior to the Distribution Date in August 2005 will equal 100%. The
Senior Accelerated Distribution Percentage for any Distribution Date occurring
on or after the August 2005 Distribution Date will be as follows:
(i) for any Distribution Date from August 2005 through July 2006, the
Senior Percentage for such Distribution Date plus 70% of the Subordinate
Percentage for such Distribution Date;
(ii) for any Distribution Date from August 2006 through July 2007, the
Senior Percentage for such Distribution Date plus 60% of the Subordinate
Percentage for such Distribution Date;
(iii) for any Distribution Date from August 2007 through July 2008,
the Senior Percentage for such Distribution Date plus 40% of the
Subordinate Percentage for such Distribution Date;
(iv) for any Distribution Date from August 2008 through July 2009, the
Senior Percentage for such Distribution Date plus 20% of the Subordinate
Percentage for such Distribution Date; and
(v) for any Distribution Date after July 2009, the Senior Percentage
for such Distribution Date;
provided, however, that on any Distribution Date on which the Senior Percentage
exceeds the initial Senior Percentage, the Senior Accelerated Distribution
Percentage for such Distribution Date will once again equal 100%.
Any scheduled reduction to the Senior Accelerated Distribution Percentage
described above shall not be made as of any Distribution Date unless (i) the
average monthly percentage of Mortgage Loans delinquent 90 days or more over the
last six months (calculated as the arithmetic mean of the percentage values for
each of the preceding six months determined by dividing the aggregate
outstanding Principal Balance of Mortgage Loans 90 days or more delinquent in
that month by the aggregate outstanding Security Principal Balance of the
Subordinate Certificates in that month, after giving effect to distributions in
such month) is less than 200%, and (ii) aggregate Realized Losses on the
Mortgage Loans to date for such Distribution Date, if occurring during the
sixth, seventh, eighth, ninth or tenth year (or any year thereafter) after the
Closing Date, are less than 15%, 20%, 25%, 30% or 35%, respectively, of the sum
of the initial Security Principal Balances of the Subordinate Certificates.
Notwithstanding the foregoing, upon reduction of the Security Principal Balances
of the Class A-1 Certificates to zero, the Senior Accelerated Distribution
Percentage will equal 0%.
Distributions of principal on the Senior Certificates (other than the Class
X-1 Certificates) on each Distribution Date will be made concurrently (after
distribution of interest on the Senior Certificates as described under
"-- Interest Distributions"), as follows:
(a) the Senior Non-PO Principal Distribution Amount shall be
distributed sequentially to the Class R and the Class A-1 Certificates, in
that order, in reduction of the Security Principal Balance of each such
Class until reduced to zero;
provided, however, that, on any Distribution Date on which (A) the
aggregate Principal Balance of all of the Mortgage Loans is less than the
aggregate Security Principal Balance of the Senior Certificates immediately
prior to such Distribution Date or (B) the Credit Support Depletion Date
has occurred, the Senior Non-PO Principal Distribution Amount will be
allocated among the Senior Certificates (other than the Class PO and Class
X-1 Certificates) pro rata based upon their respective Security Principal
Balances.
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(b) the Class PO Principal Distribution Amount (as defined herein) for
such Distribution Date, to the Class PO Certificates, in reduction of the
Security Principal Balance of such Class until reduced to zero;
(c) the Class PO Deferred Amount for such Distribution Date, to the
Class PO Certificates; provided that (i) on any Distribution Date,
distributions pursuant to this clause, shall not exceed the excess, if any,
of (x) the Available Distribution Amount remaining after giving effect to
distributions in clause (b) above over (y) the aggregate of the Interest
Distribution Amount payable to the Subordinate Certificates then
outstanding, (ii) such distributions shall not reduce the Security
Principal Balance of the Class PO Certificates and (iii) no distribution
will be made in respect of the Class PO Deferred Amount after the Credit
Support Depletion Date.
(d) After the reduction of the Security Principal Balances of the
Senior Certificates (other than the Class X-1 Certificates) to zero, the
Senior Certificates (other than the Class X-1 Certificates) will be
entitled to no further distributions of principal thereon and, except with
respect to any Class PO Deferred Amounts, the Available Distribution Amount
will be paid solely to the holders of the Class B Certificates.
The "CREDIT SUPPORT DEPLETION DATE" is the first Distribution Date on which
the Security Principal Balance of each Class of Subordinate Certificates has
been reduced to zero.
After the distribution of interest on and principal of the Senior
Certificates described above, the holders of the Subordinate Certificates will
be entitled to distributions of interest on and principal of each such Class of
Subordinate Certificates to the extent and in the priorities set forth in the
Pooling and Servicing Agreement.
ALLOCATION OF LOSSES; SUBORDINATION
The subordination provided to the Senior Certificates by the Subordinate
Certificates is intended to cover the Non-PO Percentage of any Realized Losses.
The Non-PO Percentage of any Realized Losses will be allocated to each Class of
Subordinate Certificates in the reverse order of their numerical designations in
each case until the Security Principal Balance of such Class of Certificates has
been reduced to zero; and thereafter to the Class A-1 and Class R Certificates
on a pro rata basis.
On each Distribution Date, the applicable PO Percentage of any Realized
Loss will be allocated to the Class PO Certificates until the Security Principal
Balance thereof is reduced to zero. The amount of any such Realized Loss
allocated on or prior to the Credit Support Depletion Date to the Class PO
Certificates will be treated as a "CLASS PO DEFERRED AMOUNT."
Any allocation of a Realized Loss to a Certificate will be made by reducing
the Security Principal Balance thereof, in each case until the Security
Principal Balance of such Class has been reduced to zero. In addition, any
allocation of a Realized Loss to a Subordinate Certificate may be made by
operation of the payment priority to the Senior Certificates set forth under
"-- Principal Distributions" and any Class of Subordinate Certificates with a
higher payment priority.
The holders of the Offered Certificates will not be entitled to any
additional payments with respect to Realized Losses from amounts otherwise
distributable to any Classes of Certificates subordinate thereto. However, the
allocation of Realized Losses to the Subordinate Certificates on any
Distribution Date will increase the Senior Percentage applicable to determining
the amount of future distributions of principal of the remaining Mortgage Loans
to be distributed on the Senior Certificates.
The Senior Certificates (other than the Class X-1 and the Class PO
Certificates) will bear the Non-PO Percentage of the entire amount of Realized
Losses that are not allocated to the Subordinate Certificates, which losses will
be allocated among all Classes of Senior Certificates (other than the Class X-1
and the Class PO Certificates) on a pro rata basis. Classes entitled to later
distributions of principal may bear a larger share of such Realized Losses.
"REALIZED LOSS" shall mean the sum of (a) with respect to each defaulted
Mortgage Loan for which a Foreclosure Advance has been made, the excess, if any,
of the aggregate of all Advances made with respect to such Mortgage Loan over
all recoveries, including recoveries in respect of the related FHA Insurance
Policy
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or VA Guaranty, as applicable, made in respect of such Mortgage Loan, (b) with
respect to VA No-Bids or any other liquidation of a Mortgage Loan or related REO
Property other than in connection with a claim for FHA Insurance Policy or VA
Guaranty coverage, the excess, if any, of the Principal Balance plus accrued
interest through the last day of the month of liquidation over Net Liquidation
Proceeds in respect of such Mortgage Loan or REO Property, and (c) the excess,
if any, of (i) the aggregate Security Principal Balance of the Class A-1, Class
PO, Class R and Subordinate Certificates after giving effect to distributions of
principal on a Distribution Date and after taking into account preceding clauses
(a) and (b) over (ii) the aggregate Principal Balance of the Mortgage Loans at
the end of the related Due Period.
In order to maximize the likelihood of distribution in full of the Interest
Distribution Amount for the Senior Certificates, and Senior Principal
Distribution Amount, on each Distribution Date, holders of 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 Interest Distribution Amount for the Senior
Certificates and Senior Principal Distribution Amount.
The application of the Senior Accelerated Distribution Percentage (when it
exceeds the Senior Percentage) to determine the Senior Principal Distribution
Amount will accelerate the amortization of the Senior Certificates (other than
the Class PO Certificates), in the aggregate, relative to the actual
amortization of the Mortgage Loans. To the extent that the Senior Certificates
(other than the Class PO Certificates) are amortized faster than the Mortgage
Loans, in the absence of offsetting Realized Losses allocated to the Subordinate
Certificates and the Class PO Certificates, the percentage interest evidenced by
such Senior Certificates (other than the Class PO Certificates) in the Trust
Fund will be decreased (with a corresponding increase in the interest in the
Trust Fund evidenced by the Subordinate Certificates and the Class PO
Certificates), thereby increasing, relative to their respective Security
Principal Balances, the subordination afforded the Senior Certificates by the
Subordinate Certificates.
ADJUSTMENT TO SERVICING FEE IN CONNECTION WITH CERTAIN PREPAID MORTGAGE LOANS
When a borrower prepays a Mortgage Loan between Due Dates, the borrower may
be required to pay interest on the amount prepaid only to the date of prepayment
and not thereafter. Full and partial principal prepayments by borrowers received
during a calendar month will be distributed to Certificateholders on the
Distribution Date in the month following the month of receipt. The Servicing Fee
for any month will be reduced by an amount with respect to each Mortgage Loan
prepaid in full sufficient to pass through to Certificateholders the full amount
of interest to which they would be entitled in respect of such Mortgage Loan on
the related Distribution Date. If shortfalls in interest as a result of
prepayments in any month exceed the amount of the Servicing Fee for such month,
the amount of interest available to be distributed to Certificateholders will be
reduced by the amount of such excess. See "Description of the Certificates --
Interest Distributions" herein.
ADVANCES
The Master Servicer is obligated to make the following advances (each, an
"Advance"): (a) delinquent scheduled payments of principal or interest on
Mortgage Loans to the extent that the Master Servicer determines, in its good
faith judgment, that such amounts are recoverable (except that the Master
Servicer will advance delinquent interest on FHA Loans notwithstanding that FHA
generally does not reimburse the first 60 days of delinquent interest); (b)
delinquent payments of taxes, insurance premiums and other escrowed items, to
the extent deemed recoverable; (c) liquidation-related expenses with respect to
defaulted Mortgage Loans, to the extent deemed recoverable; and (d) upon
completion of foreclosure of any defaulted Mortgage Loan as to which a claim has
or will be filed for payment under the related FHA Insurance Policy or VA
Guaranty, the remaining Principal Balance of the defaulted Mortgage Loan plus
accrued interest thereon (a "Foreclosure Advance"). Advances made by the Master
Servicer are reimbursable generally from subsequent recoveries in respect of the
related Mortgage Loan and, if such recoveries are not sufficient to fully
reimburse the Master Servicer, from amounts received in respect of other
Mortgage Loans.
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At least two Business Days prior to 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 are to be
used to make the Advance; (3) instruct the Trustee to use certain 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 Mortgage Loans when they become part of a future
Available Distribution Amount.
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 reimburse itself for Advances out of collections
of the late payments in respect of which such Advances were made, proceeds from
FHA and VA or other Liquidation Proceeds or Insurance Proceeds. In addition,
upon the determination that a Nonrecoverable Advance has been made in respect of
a Mortgage Loan or upon a Mortgage Loan 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 Mortgage Loan.
CERTAIN YIELD, PREPAYMENT AND MATURITY CONSIDERATIONS
The effective yields to the holders of the Offered Certificates will be
lower than the yields otherwise produced by the applicable rate at which
interest is passed through to such holders and the purchase price of such
Certificates because monthly distributions will not be payable to such holders
until the 25th day (or, if such date is not a Business Day, the following
Business Day) of the month following the month in which interest accrues on the
Mortgage Loans (without any additional distribution of interest or earnings in
respect of such delay).
Delinquencies on the Mortgage Loans that are not advanced by or on behalf
of the Master Servicer (because amounts, if advanced, would be nonrecoverable)
will adversely affect the yield on the Offered Certificates. Because of the
priority of distributions, the Non-PO Percentage of shortfalls resulting from
delinquencies not so advanced will be borne first by the Subordinate
Certificates (in reverse order of their numerical Class designations), and then
by the Senior Certificates.
Net Interest Shortfalls will adversely affect the yields on the Offered
Certificates. In addition, although the Non-PO Percentage of all losses
initially will be borne by the Subordinate Certificates in the reverse order of
their numerical Class designations, the Non-PO Percentage of losses will be
allocated to the Class A-1 Certificates in the event that such losses exceed the
aggregate Security Principal Balance of the Subordinate Certificates. As a
result, the yields on the Offered Certificates will depend on the rate and
timing of Realized Losses.
PREPAYMENT CONSIDERATIONS AND RISKS
The rate of principal payments on the Class A-1 Certificates, the aggregate
amount of distributions on the Class A-1 Certificates and the yields to maturity
of the Class A-1 Certificates will be related to the rate and timing of payments
of principal on the Mortgage Loans. The rate of principal payments on the
Mortgage Loans will in turn be affected by the rate of principal prepayments
(including for this purpose prepayments resulting from refinancing, liquidations
of the Mortgage Loans due to defaults, casualties, condemnations and repurchases
by the Asset Seller or Master Servicer). The Mortgage Loans may be prepaid by
the Mortgagors at any time. Certain Mortgage Loans may be subject to prepayment
penalties. Prepayment penalties may have the effect of reducing the amount or
the likelihood of prepayment on the related Mortgage Loans. Generally, FHA
insured and VA guaranteed mortgage loans are assumable. However, certain
Mortgage Loans may be
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subject to "due-on-sale" provisions included therein, and the Master Servicer
will enforce "due-on-sale" clauses to the extent enforcement is legally
permissible.
Prepayments, liquidations, and purchases of the Mortgage Loans (including
any optional purchase by the Master Servicer of a defaulted Mortgage Loan and
any optional repurchase of the remaining Mortgage Loans in connection with the
termination of the Trust Fund, in each case as described herein) will result in
distributions on the Class A-1 Certificates of principal amounts that would
otherwise be distributed over the remaining terms of the Mortgage Loans. Because
the rate of payment of principal on the Mortgage Loans will depend on future
events and a variety of other factors, no assurance can be given as to such rate
or the rate of principal prepayments. The extent to which the yield to maturity
of the Class A-1 Certificates may vary from the anticipated yield will depend
upon the degree to which the timing of payments thereon is sensitive to
prepayments, liquidations, and purchases of the Mortgage Loans. Further, an
investor should consider the risk that, in the case of any Class A-1 Certificate
purchased at a discount, a slower than anticipated rate of principal payments
(including prepayments, repurchases, defaults, and liquidations) on the Mortgage
Loans could result in an actual yield to such investor that is lower than the
anticipated yield and, in the case of any Class A-1 Certificates purchased at a
premium, a faster than anticipated rate of principal payments on the Mortgage
Loans could result in an actual yield to such investor that is lower than the
anticipated yield.
The rate of principal payments (including prepayments, repurchases,
defaults, and liquidations) on pools of mortgage loans may vary significantly
over time and may be influenced by a variety of economic, geographic, and other
factors, including changes in Mortgagors' housing needs, job transfers,
unemployment, Mortgagors' net equity in the Mortgaged Properties, and servicing
decisions. In general, if prevailing interest rates were to fall significantly
below the Mortgage Rates on the Mortgage Loans, the Mortgage Loans could be
subject to higher prepayment rates than if prevailing interest rates were to
remain at or above the Mortgage Rates on the Mortgage Loans. Conversely, if
prevailing interest rates were to rise significantly, the rate of prepayments on
the Mortgage Loans would generally be expected to decrease. No assurances can be
given as to the rate of prepayments on the Mortgage Loans in stable or changing
interest rate environments.
As described herein under "Description of the Certificates -- Principal
Distributions," the Senior Accelerated Distribution Percentage of the applicable
Non-PO Percentage of all principal prepayments will be distributed initially to
the Senior Certificates then entitled to receive principal distributions. This
allocation may result in all (or a disproportionate percentage) of such
principal prepayments being distributed to holders of certain Classes of Senior
Certificates and none (or less than their pro rata share) of such principal
prepayments being distributed to holders of the Subordinate Certificates during
the periods of time described in the definition of "Senior Accelerated
Distribution Percentage."
The timing of changes in the rate of prepayments on the Mortgage Loans may
significantly affect an investor's actual yield to maturity, even if the average
rate of principal payments is consistent with an investor's expectation. In
general, the earlier a prepayment of principal on the Mortgage Loans, the
greater the effect on an investor's yield to maturity. The effect on an
investor's yield as a result of principal payments occurring at a rate higher
(or lower) than the rate anticipated by the investor during the period
immediately following the issuance of the Class A-1 Certificates may not be
offset by a subsequent like decrease (or increase) in the rate of principal
payments.
WEIGHTED AVERAGE LIFE OF THE CLASS A-1 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 Class A-1 Certificates
will be influenced by the rate at which principal payments (including scheduled
payments, principal prepayments, liquidations, and payments made pursuant to any
applicable policies of insurance) on the Mortgage Loans are made. Principal
payments on the Mortgage Loans 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 Mortgage Loans).
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The table entitled Percent of Initial Security Principal Balance
Outstanding at the respective percentages of CPR sets forth below indicate the
weighted average life of the Class A-1 Certificates and sets forth the
percentage of the initial principal amount of the Class A-1 Certificates that
would be outstanding after each of the dates shown at the indicated constant
prepayment rates, or CPR. The tables have been prepared on the basis of the
following assumptions regarding the characteristics of the Mortgage Loans: (i)
the Mortgage Pool consists of 20 mortgage loan pools having the characteristics
set forth below; (ii) the Mortgage Loans prepay at the indicated percentage of
CPR; (iii) distributions on the Class A-1 Certificates are received in cash, on
the 25th day of each month, commencing in August, 2000; (iv) no defaults or
delinquencies in, or modifications, waivers or amendments respecting, the
payment by the mortgagors of principal and interest on the Mortgage Loans occur;
(v) the initial Security Principal Balance of the Class A-1 Certificates is
$121,906,000; (vi) prepayments represent payment in full of individual Mortgage
Loans and are received on the respective Due Dates and include 30 days' interest
thereon; (vii) there are no repurchases of Mortgage Loans due to breaches of any
representation and warranty or otherwise; (viii) the Class A-1 Certificates are
purchased on July 27, 2000; (ix) the Servicing Fee Rate is as described above
under the heading "Description of the Certificates -- Interest Distributions"
and the Trustee Fee Rate is 0.012% per annum; and (x) the Master Servicer does
not exercise its right of optional termination described herein.
<TABLE>
<CAPTION>
AMORTIZED
WEIGHTED REMAINING ORIGINAL
AGGREGATE AVERAGE MONTHS TERM TO TERM TO
PRINCIPAL GROSS SINCE MATURITY MATURITY
MORTGAGE LOAN POOL NUMBER BALANCE MORTGAGE RATE ORIGINATION (MONTHS) (MONTHS)
------------------------- -------------- ------------- ----------- --------- --------
<S> <C> <C> <C> <C> <C>
1..................................... $29,892,408.56 8.731% 121 236 357
2..................................... 20,954,243.06 7.695 79 278 357
3..................................... 17,496,740.71 9.498 144 214 358
4..................................... 15,361,358.75 9.996 142 215 357
5..................................... 11,377,202.38 10.499 142 214 356
6..................................... 6,279,934.28 8.648 213 105 318
7..................................... 6,100,492.40 7.476 123 107 230
8..................................... 3,498,358.76 9.489 214 111 325
9..................................... 3,290,927.72 10.988 144 214 358
10.................................... 2,089,141.20 11.500 211 138 349
11.................................... 1,978,513.26 13.518 203 147 350
12.................................... 1,953,159.40 12.000 206 148 354
13.................................... 1,688,594.01 11.476 162 196 358
14.................................... 1,686,033.28 9.995 211 114 325
15.................................... 1,537,305.52 10.500 182 134 316
16.................................... 1,272,588.75 12.500 195 160 355
17.................................... 378,276.26 11.000 174 152 326
18.................................... 319,629.85 8.327 66 293 359
19.................................... 72,325.35 12.359 193 183 376
20.................................... 55,646.83 12.000 177 183 360
</TABLE>
Based on the foregoing assumptions, the following table indicates the
weighted average life of the Class A-1 Certificates and sets forth the
percentages of the initial Security Principal Balance of the Class A-1
Certificates that would be outstanding after the Distribution Date in July of
each of the years indicated, at various percentages of CPR. Neither CPR nor any
other prepayment model or assumption purports to be a historical description of
prepayment experience or a prediction of the anticipated rate of prepayment of
any pool of mortgage loans, including the Mortgage Loans included in the Trust
Fund. Variations in the actual prepayment experience and the balance of the
Mortgage Loans that prepay may increase or decrease the percentage of initial
Security Principal Balance (and weighted average life) shown in the following
tables. Such variations may occur even if the average prepayment experience of
all such Mortgage Loans is the same as any of the specified assumptions.
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<PAGE> 39
PERCENT OF INITIAL SECURITY PRINCIPAL BALANCE OUTSTANDING
AT THE FOLLOWING PERCENTAGES OF CPR
<TABLE>
<CAPTION>
CLASS A-1 CERTIFICATES
AT THE FOLLOWING
PERCENTAGE OF CPR
---------------------------------------------------
DISTRIBUTION DATE 6% 8% 10% 12% 15% 20% 25%
----------------- ---- ---- ---- --- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Initial Percent................................... 100% 100% 100% 100% 100% 100% 100%
July 25, 2001................................... 91 89 87 85 82 77 72
July 25, 2002................................... 83 79 76 72 67 59 52
July 25, 2003................................... 75 70 65 61 55 45 37
July 25, 2004................................... 67 61 56 51 44 34 26
July 25, 2005................................... 60 53 48 42 35 25 18
July 25, 2006................................... 53 46 40 35 28 19 12
July 25, 2007................................... 46 40 34 29 22 14 8
July 25, 2008................................... 40 34 28 23 17 10 6
July 25, 2009................................... 35 28 23 19 13 7 4
July 25, 2010................................... 30 24 19 15 10 5 3
July 25, 2011................................... 26 20 16 12 8 4 2
July 25, 2012................................... 22 17 13 10 6 3 1
July 25, 2013................................... 18 14 10 8 5 2 1
July 25, 2014................................... 15 11 8 6 3 1 1
July 25, 2015................................... 12 8 6 4 2 1 0
July 25, 2016................................... 9 6 4 3 2 1 0
July 25, 2017................................... 6 4 3 2 1 0 0
July 25, 2018................................... 3 2 1 1 1 0 0
July 25, 2019................................... 2 1 1 1 0 0 0
July 25, 2020................................... 1 1 0 0 0 0 0
July 25, 2021................................... 1 1 0 0 0 0 0
July 25, 2022................................... 0 0 0 0 0 0 0
July 25, 2023................................... 0 0 0 0 0 0 0
Weighted average life (years)(+).................. 7.47 6.63 5.91 5.30 4.55 3.61 2.93
</TABLE>
------------
+ The weighted average life of the Class A-1 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
the Class A-1 Certificates.
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
Bank, National Association, a national banking association. Neither Union
Planters Bank, National Association nor the Depositor, nor any affiliate of the
foregoing, has guaranteed or is otherwise obligated with respect to the
Certificates. 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 July 1, 2000 (the "Pooling and Servicing
Agreement"), by and among the Depositor, the Master Servicer, the Trustee and
the Contract of Insurance Holder, which incorporates by reference the
Depositor's Standard Terms to Pooling and Servicing Agreement (May 1998
Edition).
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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
any 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 Mortgage Loans, without recourse, to the Trustee for the benefit of
the Certificateholders. Pursuant to the terms of the Pooling and Servicing
Agreement, the Contract of Insurance Holder will be reflected as the FHA
mortgagee of record with respect to all FHA Loans solely for FHA regulatory
purposes. 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) 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; (v) a certificate evidencing the
FHA Insurance Policy or VA Guaranty, as applicable; 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 not
require the Depositor to cause the assignments of 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 unless the
long-term unsecured debt rating of the Asset Seller declines below the level
indicated in the Pooling and Servicing Agreement.
CERTIFICATE ACCOUNT
The Master Servicer is required to deposit on a daily basis all amounts
received with respect to the Mortgage Loans, net of its servicing compensation,
into a separate account (the "Certificate Account") maintained with Trustee.
Interest or other income earned on funds in the Certificate Account will be paid
to the Master Servicer as additional servicing compensation, and certain
interest or other income earned on funds in the Distribution Account (which is
an account held by the Trustee for the benefit of the Certificateholders, as
defined in the Pooling and Servicing Agreement) will be paid to the Trustee as
additional Trustee 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
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 Mortgage Loan, 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 Mortgage Loan is computed. The
Servicing Fee Rate equals (a) 1.00% per annum with respect to each Mortgage Loan
with a Mortgage Rate greater than 8.625% per annum, (b) 0.75% per annum with
respect to each Mortgage Loan with a Mortgage Rate less than or equal to 8.625%
per annum, but greater than 8.000% per annum, and (c) 0.50% per annum with
respect to each Mortgage Loan with a Mortgage Rate less than or equal to 8.000%
per annum.
.
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<PAGE> 41
As additional servicing compensation, the Master Servicer is entitled to
retain all prepayment penalties and late payment charges, to the extent
collected from mortgagors, together with certain interest or other income earned
on funds held in the Certificate Account. The Servicing Standard requires the
Master Servicer to, among other things, diligently service and administer the
Mortgage Loans 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 Trustee shall furnish to each
Certificateholder, to the Depositor, to the Master Servicer and to the Rating
Agency a statement setting forth certain information with respect to the
Mortgage Loans and the Certificates required pursuant to the Pooling and
Servicing Agreement. In addition, within a reasonable period of time after each
calendar year, the Trustee 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.
VOTING RIGHTS
At all times during the term of the Pooling and Servicing Agreement, 99% of
the Voting Rights shall be allocated among the Class A-1, Class PO and Class B
Certificateholders in proportion to the respective Security Principal Balances
of their Certificates. Voting Rights allocated to the Class A-1, Class PO and
Class B Certificateholders will be allocated among such Certificateholders in
proportion to the Percentage Interests evidenced by their respective
Certificates. The Class X-1 and Class R Certificateholders are each entitled to
one-half of 1% of the Voting Rights.
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 Mortgage Loan 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 Mortgage Loans 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 Mortgage Loans 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 Mortgage Loans 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. In no event shall
the termination price be less than an amount equal to (i) the then outstanding
Security Principal Balance of all then outstanding Classes of Certificates, plus
accrued and unpaid interest thereon, reduced by (ii) any losses or shortfalls
otherwise allocable to any such Class of Certificates on the date of
termination. The payment of any termination price shall be made in the same
order of priority set forth under "Description of the Certificates" above. Such
purchase will effect early retirement of the then outstanding Certificates, but
the right of the Master Servicer to effect such termination is subject to the
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<PAGE> 42
requirement that the aggregate Principal Balance of the Mortgage Loans then in
the Trust Fund is less than 5% of the aggregate Principal Balance of the
Mortgage Loans as of the Cut-off Date.
THE TRUSTEE
The Bank of New York, a New York banking corporation is the Trustee under
the Pooling and Servicing Agreement. The mailing address of the Trustee is 101
Barclay Street, New York, New York 10286, Attention: Mortgage-Backed Securities.
The principal compensation to be paid to the Trustee in respect of its
trustee activities will be the Trustee Fee. The Trustee Fee will be payable
monthly only from amounts received in respect of interest on each Mortgage Loan,
will accrue at the Trustee 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 Mortgage Loan is computed. The Trustee Fee Rate with
respect to each Mortgage Loan equals 0.012% per annum. The Trustee will also be
entitled to certain investment earnings on funds on deposit in the Distribution
Account (as specified in the Pooling and Servicing Agreement).
THE CONTRACT OF INSURANCE HOLDER; CLAIMS ADMINISTRATOR
Union Planters Bank, National Association, a national banking association,
is the Contract of Insurance Holder under the Pooling and Servicing Agreement.
The mailing address of the Contract of Insurance Holder is 7130 Goodlett Farms
Parkway, Cordova, Tennessee 38018, Attention: UPMFC Trust 2000-1. Pursuant to
the terms of the Pooling and Servicing Agreement, the Contract of Insurance
Holder will be reflected as the mortgagee with respect to the FHA Loans solely
for FHA regulatory purposes and shall at all times maintain its status as a HUD
approved mortgagee and shall take or refrain from taking such actions as
directed by the Claims Administrator as necessary or appropriate to maintain FHA
Insurance Policies for the FHA Loans, for the benefit of the Certificateholders.
Union Planters Bank, National Association, will also serve as claims
administrator (in such capacity, the "Claims Administrator") with respect to the
FHA Loans. The Claims Administrator shall perform on behalf of the Contract of
Insurance Holder the duties associated with the submission of FHA claims in
connection with the FHA Insurance Policies, except to the extent that certain
documents must be signed by the Contract of Insurance Holder (in which case the
Contract of Insurance Holder may appoint an attorney-in-fact to sign on its
behalf) and shall not, in its capacity as Claims Administrator or as Master
Servicer, take any action or omit to take any action that would cause the
Contract of Insurance Holder to violate the Pooling and Servicing Agreement or
otherwise fail to maintain valid FHA Insurance Policies or cause any denial by
FHA of an insurance claim with respect to any FHA Loan.
FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The Pooling and Servicing Agreement provides that the assets of the Trust
Fund will be treated as a real estate mortgage investment conduit, or REMIC, for
federal income tax purposes. The Class A-1 Certificates, the Class PO
Certificates, the Subordinate Certificates and the Class X-1 Certificates will
represent regular interests in the REMIC. The Class R Certificate will represent
the residual interest in the REMIC.
Hunton & Williams ("Tax Counsel") is of the opinion that, assuming
compliance with the Pooling and Servicing Agreement, for federal income tax
purposes, the assets of the Trust Fund will qualify as a REMIC within the
meaning of Section 860D of the Internal Revenue Code of 1986, as amended (the
"Code").
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<PAGE> 43
TAXATION OF REGULAR INTERESTS
A holder of the Offered Certificates will be treated for federal income tax
purposes as owning a regular interest in a REMIC. A REMIC regular interest
generally is treated for federal income tax purposes as an ordinary debt
instrument. See "Federal Income Tax Consequences -- REMIC Securities" in the
Prospectus.
The Offered Certificates will be treated as assets described in Section
7701(a)(19)(C) of the Code and "real estate assets" under Section 856(c)(4)(A)
of the Code, generally in the same proportion that the assets in the Trust Fund
would be so treated. In addition, interest on the Offered Certificates will be
treated as "interest on obligations secured by mortgages on real property" under
Section 856(c)(3)(B) of the Code, generally to the extent that the Offered
Certificates are treated as "real estate assets" under Section 856(c)(4)(A) of
the Code. See "Federal Income Tax Consequences -- REMIC Securities" in the
Prospectus.
It is not anticipated that the Trust Fund will engage in any transactions
that would subject it to the prohibited transactions tax as defined in Section
860F(a)(2) of the Code, the contributions tax as defined in Section 860G(d) of
the Code or the tax on net income from foreclosure property as defined in
Section 860G(c) of the Code. However, in the event that any such tax is imposed
on the Trust Fund, such tax will be borne (i) by the Trustee, if the Trustee has
breached its obligations with respect to REMIC compliance under the Agreement,
(ii) the Master Servicer, if the Master Servicer has breached its obligations
with respect to REMIC compliance under the Agreement, and (iii) otherwise by the
Trust Fund, with a resulting reduction in amounts otherwise distributable to
Holders of the Offered Certificates. See "Federal Income Tax Consequences" in
the Prospectus.
The responsibility for filing annual federal information returns and other
reports will be borne by the Trustee. See Federal Income Tax
Consequences -- Reporting and Tax Administration" in the Prospectus.
For further information regarding the federal income tax consequences of
investing in the Offered Certificates, see "Federal Income Tax
Consequences -- REMIC Securities" in the Prospectus.
USE OF PROCEEDS
Substantially all of the net proceeds to be received from the sale of the
Certificates will be used to purchase the Mortgage Loans and to pay other
expenses connected with pooling the Mortgage Loans and issuing the Certificates.
UNDERWRITING
The Depositor has entered into an underwriting agreement dated July 19,
2000 (the "Underwriting Agreement") with Morgan Stanley & Co. Incorporated (the
"Underwriter"), to which the Asset Seller is also a party. 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.
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 and the Asset Seller have agreed to indemnify the Underwriter
against certain civil liabilities, including liabilities under the Securities
Act of 1933, as amended, to the extent and under the circumstances set forth in
the Underwriting Agreement.
The Underwriter intends to make a secondary market in the Offered
Certificates, but has no obligation to do so. Currently, no secondary market for
the Offered Certificates exists. We cannot assure, nor can you assume, that such
a market will develop, or, if one does develop, that it will continue to operate
in the future or provide you with a sufficient level of liquidity for your
investment.
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<PAGE> 44
The Depositor estimates that its aggregate expenses in connection with the
issuance and offering of the Offered Certificates, excluding underwriting
discounts and commissions, will be approximately $500,000.
LEGAL MATTERS
Certain legal matters will be passed upon for the Depositor by Hunton &
Williams, Richmond, Virginia, and New York, New York, and for the Underwriter by
Brown & Wood LLP, New York, New York. The material federal income tax
consequences of the Offered Certificates have been passed upon for the Depositor
by Hunton & Williams.
RATINGS
It is a condition to their issuance that the Offered Certificates be rated
"Aaa" by Moody's Investors Service, Inc. ("Moody's") and "AAA" by Fitch, Inc.
("Fitch", and together with Moody's, the "Rating Agencies").
The ratings on mortgage-backed pass-through certificates address the
likelihood of the receipt by certificateholders of all distributions on the
underlying assets to which they are entitled. Ratings 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 Mortgage Loans or in the event that the
Trust Fund 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 only Fitch and Moody's 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.
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
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<PAGE> 45
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 Underwriter at the time of the printing of the Prospectus,
however, 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 90-24; Exemption Application No.
D-8019, 55 Fed. Reg. 20548 (1990))(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 Mortgage Loans.
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 or Moody's;
(4) the trustee of the related trust must not be an affiliate of any
other member of the Restricted Group (as defined below); and
(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; 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 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 Underwriter, the Depositor and the Master Servicer of the
Mortgage Loans 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 or
Fitch
S-43
<PAGE> 46
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
Mortgage Loans 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 relief from certain self-dealing/conflict of interest prohibited
transactions that may arise if a Plan fiduciary causes a Plan to acquire
Certificates in a Trust containing obligations on which the fiduciary (or its
affiliate) is an obligor 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 Offered
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 96-23, regarding investment decisions by in-house asset
managers, (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 84-14, regarding investment decisions made by a qualified
professional asset manager, or (e) PTCE 83-1, regarding acquisitions by Plans of
interests in mortgage pools. Before purchasing Offered 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 Offered 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 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.
LEGAL INVESTMENT
The Offered 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
Offered 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.
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
S-44
<PAGE> 47
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
the Offered Certificates for legal investment or other purposes, or as to the
legality of investment by particular investors in the Offered Certificates under
applicable legal investment restrictions. The uncertainties may adversely affect
the liquidity of the 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-45
<PAGE> 48
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 pass-through certificates,
mortgage-backed securities evidencing interests in or secured by one- to
four-family first lien residential mortgage loans ("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"). The Trust Fund for any Series of Securities may include FHA Loans and
VA Loans (as defined herein) that are past due as of the related Cut-off Date.
The Mortgage Loans included in the Trust Fund for any Series may be underwritten
in accordance with underwriting standards for "non-conforming credits," which
include mortgagors whose creditworthiness and repayment ability do not satisfy
Fannie Mae or Freddie Mac underwriting guidelines. Mortgage Loans originated in
accordance with underwriting standards for non-conforming credits are also
referred to as "sub-prime" loans. Consequently, such Mortgage Loans may
experience rates of delinquency and foreclosure that are higher, and may be
substantially higher, than mortgage loans originated in accordance with Fannie
Mae or Freddie Mac underwriting guidelines. As a result, losses on such Mortgage
Loans may be higher than losses on mortgage loans originated in accordance with
such guidelines, and certain Securities collateralized by such Mortgage Loans
may experience an increased risk of loss or delay in payment. See "Risk
Factors -- Underwriting standards for certain Mortgage Loans may be less
stringent and increase the potential for delinquencies" herein. 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,
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."
(Continued on next page)
------------------------
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, THE MATERIAL RISKS SET FORTH UNDER THE CAPTION "RISK FACTORS" COMMENCING
ON PAGE 9 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.
July 19, 2000
<PAGE> 49
(Continued from previous page)
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") for federal income tax purposes. See also "Federal
Income Tax Consequences" herein.
ii
<PAGE> 50
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 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
iii
<PAGE> 51
Offered Securities, pursuant to the applicable 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
The following documents filed or caused to be filed by the Depositor with
the Commission pursuant to the Exchange Act are hereby incorporated in this
Prospectus be reference: (i) the Depositor's Registration Statement on Form 10;
and (ii) all other documents filed or caused to be filed by the Depositor with
the Commission pursuant to Section 12 of the Exchange Act.
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.
iv
<PAGE> 52
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUPPLEMENT................. iii
AVAILABLE INFORMATION................. iii
INCORPORATION OF CERTAIN INFORMATION
BY REFERENCE........................ iv
SUMMARY OF PROSPECTUS................. 1
RISK FACTORS.......................... 9
DESCRIPTION OF THE TRUST FUNDS........ 16
Assets.............................. 16
Mortgage Loans...................... 16
MBS................................. 21
Agency Securities................... 22
Accounts............................ 28
Credit Support...................... 28
Liquidity Facilities................ 28
Cash Flow Agreements................ 28
Pre-Funding......................... 29
YIELD CONSIDERATIONS.................. 29
General............................. 29
Pass-Through Rate and Interest
Rate............................. 30
Timing of Payment of Interest....... 30
Payments of Principal;
Prepayments...................... 30
Prepayments -- Maturity and Weighted
Average Life..................... 31
Other Factors Affecting Weighted
Average Life..................... 32
THE DEPOSITOR......................... 34
DESCRIPTION OF THE OFFERED
SECURITIES.......................... 34
General............................. 34
Distributions....................... 35
Available Distribution Amount....... 35
Distributions of Interest........... 36
Distributions of Principal.......... 37
Components.......................... 37
Allocation of Losses and
Shortfalls....................... 37
Advances in Respect of
Delinquencies.................... 37
Reports to Securityholders.......... 38
Termination......................... 40
Book-Entry Registration............. 41
DESCRIPTION OF THE AGREEMENTS......... 42
Assignment of Assets; Repurchases... 43
Representations and Warranties;
Repurchases...................... 44
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Security Account and Other
Collection Accounts.............. 45
Collection and Other Servicing
Procedures....................... 48
Sub-Servicers....................... 50
Realization Upon Defaulted Mortgage
Loans............................ 51
Fidelity Bonds and Errors and
Omissions Insurance.............. 52
Due-on-Sale Provisions.............. 53
Retained Interest; Servicing
Compensation and Payment of
Expenses......................... 53
Evidence As To Compliance........... 53
Certain Matters Regarding A Master
Servicer and The Depositor....... 54
Special Servicers................... 55
Events of Default Under Pooling and
Servicing Agreements............. 55
Certificateholder Rights Upon Event
of Default....................... 55
Amendment........................... 56
The Trustee......................... 56
Duties of the Trustee............... 57
Certain Matters Regarding the
Trustee.......................... 57
Resignation and Removal of the
Trustee.......................... 57
Certain Terms of the Indenture...... 58
General............................. 58
Modification of Indenture........... 58
Events of Default................... 59
Authentication and Delivery of
Bonds............................ 60
List of Bondholders................. 60
Annual Compliance Statement......... 60
Reports to Bondholders.............. 61
Trustee's Annual Report............. 61
Trustee............................. 61
Satisfaction and Discharge of the
Indenture........................ 61
DESCRIPTION OF CREDIT SUPPORT......... 62
General............................. 62
Maintenance of Credit Support....... 62
Reduction or Substitution of Credit
Support.......................... 63
Subordinate Securities.............. 63
Cross-Support Provisions............ 63
Insurance or Guarantees with Respect
to the Assets.................... 63
Letter of Credit.................... 63
Insurance Policies and Surety
Bonds............................ 64
Special Hazard Insurance Policies... 64
</TABLE>
v
<PAGE> 53
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Mortgagor Bankruptcy Bond........... 64
Reserve Funds....................... 64
Overcollateralization............... 65
Credit Support with Respect To
MBS.............................. 65
INSURANCE POLICIES ON THE MORTGAGE
LOANS............................... 65
Primary Mortgage Guaranty Insurance
Policies......................... 65
Hazard Insurance Policies........... 66
FHA Mortgage Insurance.............. 67
VA Mortgage Guaranty................ 68
CERTAIN LEGAL ASPECTS OF MORTGAGE
LOANS............................... 69
General............................. 69
Types of Mortgage Instruments....... 69
Interest in Real Property........... 69
Foreclosure......................... 70
Anti-Deficiency Legislation and
Other Limitations on Lenders..... 73
Environmental Legislation........... 74
Due-on-Sale Clauses................. 75
Prepayment Charges.................. 75
Subordinate Financing............... 75
Applicability of Usury Laws......... 76
Alternative Mortgage Instruments.... 76
Soldiers' and Sailors' Civil Relief
Act of 1940...................... 77
Forfeitures in Drug and RICO
Proceedings...................... 77
Other Legal Considerations.......... 77
USE OF PROCEEDS....................... 78
FEDERAL INCOME TAX CONSEQUENCES....... 78
General............................. 78
REMIC Securities.................... 79
Tax Treatment of Residual
Securities....................... 91
Taxation of Residual
Securityholders.................. 91
Limitations on Offset or Exemption
of REMIC Income.................. 93
Non-Recognition of Certain Transfers
for Federal Income Tax
Purposes......................... 93
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Ownership of Residual Interests by
Disqualified Organizations....... 94
Special Considerations for Certain
Types of Investors............... 95
Disposition of Residual
Securities....................... 97
Liquidation of the REMIC............ 98
Treatment by the REMIC of Original
Issue Discount, Market Discount,
and Amortizable Premium.......... 98
REMIC-Level Taxes................... 99
REMIC Qualification................. 100
Asset Composition................... 100
Investors' Interests................ 100
Consequences of Disqualification.... 101
Taxable Mortgage Pools.............. 102
Taxation of Certain Foreign Holders
of REMIC Securities.............. 102
Reporting and Tax Administration.... 103
Non-REMIC Certificates.............. 104
Treatment of the Non-REMIC
Certificates for Federal Income
Tax Purposes..................... 105
Non-REMIC Collateralized Mortgage
Bonds............................ 110
Partnership Trust Funds............. 111
Taxation of Partnership
Bondholders...................... 112
Taxation of Owners of Partnership
Certificates..................... 112
STATE TAX CONSIDERATIONS.............. 117
ERISA CONSIDERATIONS.................. 117
LEGAL INVESTMENT...................... 119
PLAN OF DISTRIBUTION.................. 120
LEGAL MATTERS......................... 120
EXPERTS............................... 120
FINANCIAL INFORMATION................. 120
RATINGS............................... 121
GLOSSARY.............................. 122
</TABLE>
vi
<PAGE> 54
SUMMARY OF PROSPECTUS
The following summary of material 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.
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").
Risk Factors............... An investment in the Securities involves various
risks, and prospective investors should consider
carefully the matters discussed under "Risk
Factors" herein and in the related Prospectus
Supplement prior to making an investment in the
Securities
Depositor.................. Union Planters Mortgage Finance Corp., a Delaware
corporation, and limited-purpose wholly-owned
financing subsidiary of Union Planters Bank,
National Association. See "The Depositor."
Master Servicer............ Union Planters Bank, National Association, (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 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
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(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 may include (i)
Mortgage Loans that, as of any date of
determination have more than three but less than
twelve scheduled payments of principal and interest
past due under the terms of the related Mortgage
Note (each, a "Sub-Performing Mortgage Loan"), and
(ii) 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"). Up to 20% of the
Assets with respect to any Series of Securities may
consist of Sub-Performing Mortgage Loans.
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
mortgage pass-through certificates or other
mortgage-backed securities evidencing interests in
or secured by Mortgage Loans that (a) have been
previously offered and distributed to the public
pursuant to an effective registration statement; or
(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 (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 Fannie Mae Certificates,
Freddie Mac 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
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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,
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."
(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
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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.
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 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
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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
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 by
the Depositor or any of its affiliates, by any
governmental agency or instrumentality or by any
other person. 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 certain Stripped Interest Securities and
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 is then entitled to receive in
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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 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
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Fund or specified portions thereof as one or more
REMICs under the provisions of the Code. The
Prospectus Supplement for each Series of Securities
will specify whether such an election will be made.
The opinion of Hunton & Williams, counsel to the
Depositor, regarding the federal income tax
treatment of each Class of Securities is contained
herein. See "Federal Income Tax
Consequences -- General", herein.
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.
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 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.
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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, which represent the
principal factors that make an offering of Securities speculative or one of high
risk.
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
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proceeds are insufficient or otherwise unavailable to make all payments provided
for under the Offered Securities.
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.
THE BANKRUPTCY OR INSOLVENCY OF THE DEPOSITOR MAY INCREASE RISKS OF LOSS OR
DELAYED PAYMENT TO BONDHOLDERS
The bankruptcy or insolvency of the Depositor could adversely affect
payments on the Bonds. For this reason, the Depositor was formed as a
limited-purpose financing subsidiary of Union Planters Bank, National
Association. See "The Depositor." Notwithstanding its limited purpose, in the
event of a bankruptcy or insolvency of the Depositor, the automatic stay imposed
by Title 11 of the United States Code (the "Bankruptcy Code") could prevent
enforcement of the obligations of the Depositor, including its obligations under
the Bonds and an Indenture, or actions against any of the Depositor's property,
including the related Trust Assets, prior to modification of the stay. In
addition, the trustee in bankruptcy for the Depositor or the Depositor itself as
debtor-in-possession may be able to accelerate payment of the Bonds and
liquidate the Trust Assets. In the event the principal of the bonds is declared
due and payable, the Bondholders would lose the right to future payments of
interest and might suffer reinvestment loss in a lower interest rate environment
and (i) in the case of Bonds purchased at a premium from their parity price, may
fail to recover fully their initial investments, and (ii) in the case of Bonds
purchased at a discount from their parity price, may be entitled, under
applicable provisions of the Bankruptcy Code, to receive no more than an amount
equal to the unpaid principal amount thereof less unamortized original issue
discount ("Accreted Value"). There is no assurance as to how such Accreted Value
would be determined if such event occurred.
THE INSOLVENCY, RECEIVERSHIP OR CONSERVATORSHIP OF UNION PLANTERS BANK, NATIONAL
ASSOCIATION MAY INCREASE RISKS OF LOSS OR DELAYED PAYMENT TO BONDHOLDERS
The Depositor believes that each transfer of Assets from Union Planters
Bank, National Association to the Depositor will constitute an absolute and
unconditional sale. However, in the event of a Federal Deposit Insurance
Corporation ("FDIC") receivership or conservatorship of Union Planters Bank,
N.A., the FDIC could attempt to recharacterize the sale of the Assets as a
borrowing secured by a pledge of the Assets. Such an attempt, even if
unsuccessful, could result in delays in distributions on the Bonds. If such an
attempt were successful, the FDIC could elect to accelerate payment of the Bonds
and liquidate the Assets, with the holders of the Bonds entitled to no more than
the then outstanding principal amount of such Bonds together with interest at
the applicable Interest Rate to the date of payment. There is no assurance that
the proceeds of any such sale would be sufficient to pay such amounts. In the
event the principal of the Bonds is declared due and payable, the Bondholders of
the Bonds would lose the right to future payments of interest and might suffer
reinvestment loss in a lower interest rate environment and (i) in the case of
Bonds purchased at a premium from their parity price, may fail to recover fully
their initial investments, and (ii) in the case of Bonds purchased at a discount
from their parity price, may be entitled to receive no more than an amount equal
to the Accreted value. There is no assurance as to how such Accreted Value would
be determined if such event occurred.
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SUB-PERFORMING MORTGAGE LOANS, 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
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.
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.
UNDERWRITING STANDARDS FOR SUB-PRIME MORTGAGE LOANS MAY BE LESS STRINGENT AND
INCREASE THE POTENTIAL FOR DELINQUENCIES
Certain Mortgage Loans may be originated under underwriting standards less
stringent than the underwriting guidelines of Fannie Mae or Freddie Mac
(sub-prime Mortgage Loans). Such sub-prime Mortgage Loans generally will bear
higher rates of interest than Mortgage Loans that are originated in accordance
with Fannie Mae and Freddie Mac underwriting guidelines. Such "non-conforming"
Mortgage Loans generally will be underwritten in accordance with the
underwriting standards described under "Description of the Trust
Funds -- Mortgage Loans -- Non-conforming Credits," which are intended to
provide for the origination of single-family mortgage loans for non-conforming
credits. A mortgage loan made to a "non-conforming credit" means a mortgage loan
that is ineligible for purchase by Fannie Mae or Freddie Mac due to borrower
credit characteristics that do not meet Fannie Mae or Freddie Mac underwriting
guidelines, including a loan made to a borrower whose creditworthiness and
repayment ability do not satisfy such Fannie Mae or Freddie Mac underwriting
guidelines or a borrower who may have a record of major derogatory credit items,
such as default on a prior mortgage loan, credit write-offs, outstanding
judgments and prior bankruptcies. Accordingly, such Mortgage Loans are likely to
experience rates of delinquency and foreclosure that are higher, and may be
substantially higher, than Mortgage Loans originated in accordance with Fannie
Mae or Freddie Mac underwriting guidelines. As a result, losses on such
non-conforming (or sub-prime) Mortgage Loans are likely to be higher than losses
on Mortgage Loans originated in accordance with such guidelines.
The primary considerations in underwriting a Mortgage Loan, other than the
creditworthiness of the Mortgagor, are the value of the Mortgaged Property and
the adequacy of such property as collateral in relation to the amount of the
Mortgage Loan. Because delinquencies and foreclosures are likely to be more
frequent
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for sub-prime Mortgage Loans originated under underwriting standards for
non-conforming credits than for Mortgage Loans originated in accordance with
Fannie Mae or Freddie Mac underwriting guidelines, changes in the values of the
related Mortgaged Property may have a greater effect on the loss experience of
the sub-prime Mortgage Loans than on Mortgage Loans originated in accordance
with Fannie Mae or Freddie Mac underwriting guidelines. No assurance can be
given that the values of Mortgaged Property have remained or will remain at the
levels in effect on the dates of origination of the related Mortgage Loans. If
the values of the Mortgaged Properties decline after the dates of origination of
the Mortgage Loans, the rate and severity of losses on the Mortgage Loans may
increase, and such increase may be substantial.
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."
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."
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
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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 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.
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.
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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 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.
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.
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 the distribution of interest
may not be made until the Distribution Date in the month following the month of
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
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indebtedness would be inequitable or unjust or the circumstances would render
the acceleration unconscionable.
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.
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.
CREDIT RATINGS PROVIDED BY RATING AGENCIES ARE SUBJECT TO DOWNGRADE
The credit ratings provided by the Rating Agencies to each Class of
Securities offered hereunder are subject to downgrade or withdrawal at any time.
The downgrade or withdrawal of any credit rating would likely decrease the
market value and liquidity of the affected Class of Securities. In addition, the
credit ratings assigned to Classes of Securities that are subordinated to other
Classes of Securities are more likely to change than credit ratings assigned to
more senior Classes. See "Description of Credit Support" and "Ratings."
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DESCRIPTION OF THE TRUST FUNDS
ASSETS
Permissible categories of assets of each Trust Fund include (i) one- to
four-family first lien residential mortgage loans (the "Mortgage Loans"), (ii)
pass-through certificates or other mortgage-backed securities evidencing
interests in or secured by one or more Mortgage Loans that (a) have been
previously offered and distributed to the public pursuant to an effective
registration statement; or (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 ("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.
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
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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 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
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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 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.
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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.
Non-conforming Credits (Sub-Prime Mortgage Loans)
If specified in the Prospectus Supplement, the underwriting guidelines used
to originate certain sub-prime Mortgage Loans may be less stringent than those
of Fannie Mae or Freddie Mac, primarily in that they generally permit the
Mortgagor to have a higher debt-to-income ratio and a larger number of
derogatory credit items than do the underwriting guidelines of Fannie Mae or
Freddie Mac.
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 may contain (i)
Mortgage Loans that, as of any date of determination, have more than three but
less than twelve scheduled payments of principal and interest past due under the
terms of the related Mortgage Note (each, a "Sub-Performing Mortgage Loan"), and
(ii) 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 Prospectus Supplement for any Series of Securities will include tabular
disclosure regarding the number of Assets, the percentage by number, the
Aggregate Principal Balance as of the Cut-off Date, and the percent by Aggregate
Principal Balance as of the Cut-off Date for the Sub-Performing Mortgage Loans
and Reinstated Mortgage Loans, if any, included in the related Trust Fund. In
addition, the disclosure concerning the Master Servicer will include related
tabular delinquency and foreclosure experience.
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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 servicer or through VA's supplemental servicing of the loan, VA
determines, through an economic analysis, whether VA will (a) authorize the
servicer 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 (or to a servicer on its behalf)
in the event of default by the borrower. Upon default, the servicer, depending
upon the circumstances, may (a) acquire (through foreclosure or deed in lieu of
foreclosure) and convey title to FHA, (b) work with the borrower to sell the
property before the foreclosure sale or (c) in rare circumstances, assign the
mortgage to FHA. The servicer 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 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.
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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 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
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(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 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
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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 Fannie Mae 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 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
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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
Freddie Mac is a corporate instrumentality of the United States created
pursuant to Title III of the Emergency Home Finance Act of 1970, as amended (the
"Freddie Mac Act"). The common stock of Freddie Mac is owned by the Federal Home
Loan Banks and its preferred stock is owned by stockholders of the Federal Home
Loan Banks. Freddie Mac was established primarily for the purpose of increasing
the availability of mortgage credit for the financing of urgently needed
housing. It seeks to provide an enhanced degree of liquidity for residential
mortgage investments primarily by assisting in the development of secondary
markets for conventional mortgages. The principal activity of Freddie Mac
currently consists of the purchase of first lien conventional 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 Freddie Mac Certificates. Freddie Mac 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.
Freddie Mac Certificates
Each Freddie Mac Certificate represents an undivided interest in a pool of
mortgage loans that may consist of first lien conventional loans, FHA Loans or
VA Loans. Freddie Mac Certificates are sold under the terms of a Mortgage
Participation Certificate Agreement. A Freddie Mac Certificate may be issued
under either Freddie Mac's Cash Program or Guarantor Program.
Mortgage loans underlying the Freddie Mac 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
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applicable standards set forth in the Freddie Mac Act. Such mortgage loans will
be secured by loans on properties that would qualify as Mortgaged Properties. A
Freddie Mac Certificate group may include whole loans, participation interests
in whole loans and undivided interests in whole loans and/or participations
comprising another Freddie Mac Certificate group. Under the Guarantor Program,
any such Freddie Mac Certificate Group may include only whole loans or
participation interests in whole loans.
Freddie Mac guarantees to such registered holder of a Freddie Mac
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 Freddie Mac Certificate group represented by
such Freddie Mac Certificate, whether or not received. Freddie Mac also
guarantees to each registered holder of a Freddie Mac 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 Freddie Mac's Gold PC Program, Freddie Mac 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, Freddie Mac
indemnifies holders of Freddie Mac Certificates against any diminution in
principal by reason of charges for property repairs, maintenance and
foreclosure. Freddie Mac 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 Freddie
Mac Certificates, including the timing of demand for acceleration, Freddie Mac
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 Freddie Mac to determine that a mortgage loan
should be accelerated varies with the particular circumstances of each
mortgagor, and Freddie Mac has not adopted standards which require that the
demand be made within any specified period.
Freddie Mac Certificates are not guaranteed by the United States or by any
Federal Home Loan Bank and do not constitute debts or obligations of the United
States or any Federal Home Loan Bank. The obligations of Freddie Mac under its
guaranty are obligations solely of Freddie Mac and are not backed by, or
entitled to, the full faith and credit of the United States. If Freddie Mac were
unable to satisfy such obligations, distributions to holders of Freddie Mac
Certificates would consist solely of payments and other recoveries on the
underlying mortgage loans and, accordingly, monthly distributions to holders of
Freddie Mac Certificates would be affected by delinquent payments and defaults
on such mortgage loans.
Registered holders of Freddie Mac Certificates are entitled to receive
their monthly pro rata share of all principal payments on the underlying
mortgage loans received by Freddie Mac, including any scheduled principal
payments, full and partial prepayments of principal and principal received by
Freddie Mac by virtue of condemnation, insurance, liquidation or foreclosure,
and repurchases of the mortgage loans by Freddie Mac or the seller thereof.
Freddie Mac is required to remit each registered Freddie Mac certificateholder's
pro rata share of principal payments on the underlying mortgage loans, interest
at the Freddie Mac pass-through rate and any other sums such as prepayment fees,
within 60 days of the date on which such payments are deemed to have been
received by Freddie Mac.
Under Freddie Mac's Cash Program, there is no limitation on the amount by
which interest rates on the mortgage loans underlying a Freddie Mac Certificate
may exceed the pass-through rate on the Freddie Mac Certificate. Under such
program, Freddie Mac 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 Freddie Mac. 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 Freddie Mac Certificate group under the Cash Program
will vary
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since mortgage loans and participations are purchased and assigned to a Freddie
Mac Certificate group based upon their yield to Freddie Mac rather than on the
interest rate on the underlying mortgage loans. Under Freddie Mac's Guarantor
Program, the pass-through rate on a Freddie Mac Certificate is established based
upon the lowest interest rate on the underlying mortgage loans, minus a minimum
servicing fee and the amount of Freddie Mac's management and guaranty income as
agreed upon between the seller and Freddie Mac.
Freddie Mac Certificates duly presented for registration of ownership on or
before the last Business Day of a month are registered effective as of the first
day of the month. The first remittance to a registered holder of a Freddie Mac
Certificate will be distributed so as to be received normally by the 15th day of
the second month following the month in which the purchaser became a registered
holder of such Freddie Mac Certificate. Thereafter, such remittance will be
distributed monthly to the registered holder so as to be received normally by
the 15th day of each month. The Federal Reserve Bank of New York maintains book-
entry accounts with respect to Freddie Mac Certificates sold by Freddie Mac on
or after January 2, 1985, and makes payments of principal and interest each
month to the registered holders thereof in accordance with such holders'
instructions.
The Freddie Mac 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 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
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(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 Freddie Mac, Fannie Mae or GNMA Certificates. The
yield on and value of stripped Agency Securities are extremely sensitive to the
timing and amount of principal prepayments on the underlying securities. The
underlying securities will be held under a trust agreement by Freddie Mac,
Fannie Mae or GNMA, each as trustee, or by another trustee named in the related
Prospectus Supplement. Freddie Mac, 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.
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 Freddie Mac. 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.
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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, 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 addition, the related Prospectus Supplement will provide certain
information with respect to the obligor under any such Cash Flow Agreement.
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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.
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."
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ANY REDEMPTION OR TERMINATION OF THE SECURITIES WILL HAVE AN ADVERSE AFFECT
ON THE YIELD TO MATURITY OF ANY SECURITIES PURCHASED AT A PREMIUM, BECAUSE SUCH
REDEMPTION OR TERMINATION WILL HAVE THE SAME EFFECT AS A PREPAYMENT IN FULL OF
THE ASSETS.
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 f 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
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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.
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
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interest on the principal balance thereof, and because such excess will be
applied 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 Bank, National Association 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
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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.
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;
(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
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(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
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increase in the 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
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Proceeds but also from collections on Assets otherwise distributable to other
Subordinate Securities. See "Description of Credit Support."
Advances are intended to maintain 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;
(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;
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(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;
(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;
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(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%. The maximum
amount of Assets or Securities that may be outstanding at the time of an
optional redemption shall be 25%, with respect to any Series of Bonds, or 10%,
with respect to any Series of Certificates. 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
maximum amount of Assets or Securities that may be outstanding at the time of an
optional termination shall be 25%, with respect to any Series of Bonds, or 10%,
with respect to any Series of Certificates. The termination price for 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
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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; provided, however, that in no event shall the termination price
be less than the then outstanding Security Principal Balance of all then
outstanding Classes of Securities, plus accrued and unpaid interest thereon, and
less any losses or shortfalls otherwise allocable to any such Class of
Securities on the Payment Date or Distribution Date of such termination. 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.
Following the transfer of Assets and REO Properties by the Trust Fund, the
Securityholders shall have no continuing liabilities with respect thereto,
either direct or indirect.
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.
ANY REDEMPTION OR TERMINATION OF THE SECURITIES WILL HAVE AN ADVERSE AFFECT
ON THE YIELD TO MATURITY OF ANY SECURITIES PURCHASED AT A PREMIUM, BECAUSE SUCH
REDEMPTION OR TERMINATION WILL HAVE THE SAME EFFECT AS A PREPAYMENT IN FULL OF
THE ASSETS.
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
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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 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
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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 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
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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 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. 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
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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 no 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.
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 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
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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 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 and
REO 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";
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(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;
(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, make withdrawals
from the Security Account for each Trust Fund for any of the following purposes,
as applicable:
(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";
(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;
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(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, 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, 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
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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
Fannie Mae or Freddie Mac 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 Fannie Mae or Freddie Mac 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 status of the related REMIC 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 will not be given until a default has continued for 90
days. If the Mortgaged Property is in jeopardy, however, the notice will 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.
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.
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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 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 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
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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 offer 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 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 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, unless (i) the
Internal Revenue Service grants an extension of time to sell such property or
(ii) the Trustee receives an opinion of
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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, 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
of the Code (if a REMIC 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."
FIDELITY BONDS AND ERRORS AND OMISSIONS INSURANCE
Each Servicing Agreement and Pooling and Servicing 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 may 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.
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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.
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
the Uniform Single Attestation Program for Mortgage Bankers, 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, 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
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(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 Servicing Agreement and Pooling and Servicing 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, or for errors in judgment 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 may rely in
good faith on any document of any kind prima facia properly executed and
submitted by any person respecting any matters arising under such 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.
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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 UNDER POOLING AND SERVICING AGREEMENTS
Events of Default under any Pooling and Servicing Agreement generally will
include (a) any failure by the Master Servicer to remit funds in the Security
Account or to make certain required advances, and the continuance of such
failure unremedied for a period of five days after the date upon which such
payment or remittance was due; (b) any failure on the part of the Master
Servicer duly to observe or perform in any material respect certain of the
covenants or agreements on the part of the Master Servicer in the Pooling and
Servicing Agreement, which failure continues unremedied for a period of 60 days
after the date on which written notice of such failure, requiring the same to be
remedied, shall have been given to the Master Servicer by the Trustee, or to the
Master Servicer and the Trustee by the Holders of Certificates of a Series
entitled to at least 25% of the related Voting Rights; (c) the issuance of a
decree or order of a court or agency or supervisory authority having
jurisdiction in the premises in an involuntary case under any present or future
federal or state bankruptcy, insolvency or similar law or appointing a
conservator or receiver or liquidator in any insolvency, readjustment of debt,
marshalling of assets and liabilities or similar proceedings, or for the
winding-up or liquidation of its affairs, against the Master Servicer, and the
remaining of such decree or order in force undischarged or unstayed for a period
of 60 consecutive days; (d) the Master Servicer's consent to the appointment of
a conservator or receiver or liquidator in any insolvency, readjustment of debt,
marshalling of assets and liabilities, or similar proceedings of, or relating
to, the Master Servicer or of, or relating to, all or substantially all of the
property of the Master Servicer; or (e) the Master Servicer's (1) admission in
writing of its inability to pay its debts generally as they become due, (2)
filing of a petition to take advantage of, or commence a voluntary case under,
any applicable insolvency or reorganization statute, (3) making of an assignment
for the benefit of its creditors, or (4) voluntarily suspending payment of its
obligations.
The manner of determining the "Voting Rights" of a Security or Class or
Classes of Securities will be specified in the related Prospectus Supplement.
CERTIFICATEHOLDER RIGHTS UPON EVENT OF DEFAULT
So long as an Event of Default under a Pooling and Servicing 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.
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The holders of at least 66 2/3% of the Voting Rights allocated to the
respective Classes of Certificates 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 (a) 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 Pooling and Servicing
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 Pooling and Servicing 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 Trust Agreement, each Pooling and Servicing Agreement and the
Indenture 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
66 2/3% 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 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 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 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
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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.
RESIGNATION AND REMOVAL OF THE TRUSTEE
The Trustee may at any time resign from its obligations and duties under
any Trust Agreement or Pooling and Servicing 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 any Trust Agreement or Pooling and Servicing 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.
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CERTAIN TERMS OF THE INDENTURE
The following summaries describe certain provisions of the Indenture. When
particular provisions or terms used in the Indenture are referred to, the actual
provisions (including definitions of terms) are incorporated by reference as
part of such summaries.
GENERAL
The Indenture does not limit the amount of Bonds that can be issued
thereunder and provides that Bonds of any Series may be issued thereunder up to
the aggregate principal amount that may be authorized from time to time by the
Depositor.
MODIFICATION OF INDENTURE
With the consent of the Holders of not less than a majority in principal
balance of the outstanding Bonds of each Series to be affected or, if fewer than
all Classes of a Series would be affected, of each Class to be affected, the
Trustee and the Depositor may execute a supplemental indenture to add provisions
to, or change in any manner or eliminate provisions of, the Indenture relating
to such Series, or to such Class or Classes, or modify in any manner the rights
of the Holders of the Bonds of such Series, or of such Class or Classes. If any
such supplemental indenture would adversely affect the Holders of any Senior
Bonds or of any subordinated Bonds, then approval of Holders of a majority in
principal balance of such outstanding Senior Bonds or of such outstanding
subordinated Bonds, as the case may be, would also be required.
Without the consent of the Bondholders of each outstanding Bond affected,
however, no supplemental indenture may (i) change the Stated Maturity Date of
the principal of, or timing of any installment of principal or interest on, any
Bond, reduce the principal amount thereof or the interest thereon or the
redemption price thereof or the time for redemption with respect thereto, change
the provisions relating to the application of proceeds of the Trust Estate to
the payment of principal on the Bonds, change any place where, or the currency
in which, any Bond or interest thereon is payable, or impair the right to
institute suit for payment on or after the maturity thereof or, in the case of
redemption, on or after the redemption date, (ii) reduce the percentage in
principal amount of Bonds of the affected Series whose Holders must consent to
any supplemental indenture or to any waiver of compliance with certain
provisions of the Indenture or certain defaults thereunder or their
consequences, (iii) impair or adversely affect the collateral securing a Series,
(iv) permit the creation of any lien ranking prior to or on a par with the lien
of the Indenture with respect to any part of the Trust Estate or terminate the
lien of the Indenture on any part of the Trust Estate or on any property at any
time subject to the Indenture or deprive the Holder of the security afforded by
the lien of the Indenture, (v) change the definition of default under the
Indenture, or reduce the percentage of Bondholders of Bonds of any Series whose
consent is required to direct the Trustee to liquidate the collateral for such
Series, (vi) change any condition precedent for the redemption of any Series of
Bonds or (vii) modify any of the provisions of the Indenture with respect to
supplemental indentures except to increase the percentage of outstanding Bonds
whose consent is required for any such action or to provide that certain other
provisions of the Indenture cannot be modified or waived without the consent of
the Bondholders of each outstanding Bond of a Class affected thereby. The
issuance of additional Bonds in accordance with the provisions and limitations
contained in a Series Supplement relating to outstanding Bonds will be deemed
not to have changed the timing of any installment of principal of or interest on
any outstanding Class of Bonds issued under such Series Supplement for purposes
of requiring Bondholder consent pursuant to clause (i) above.
The Depositor and the Trustee, upon advice of counsel, also may enter into
supplemental indentures, without obtaining the consent of Bondholders, for the
purpose of, among other things, (i) setting forth the terms of and security for
any previously unissued Series, (ii) adding to the covenants of the Depositor or
the Trustee for the benefit of the Bondholders, and (iii) curing ambiguities, or
correcting or supplementing any defective, ineffective or inconsistent provision
or amending any other provision with respect to matters or questions relating to
the Indenture, provided the interests of the Bondholders would not be materially
adversely affected. For purposes of clause (iii) above, among other things, a
supplemental indenture will be conclusively deemed not to adversely affect a
particular Series if (i) the Trustee receives a letter or other
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writing from each Rating Agency rating the Class or Series to the effect that
execution of the supplemental indenture will not result in any change in the
current rating assigned by that Rating Agency to the Class or Series and (ii)
the supplemental indenture effects no change in principal priority schedules,
interest rates, redemption prices, substitution of collateral, Payment Dates,
record dates, Accounting Dates, terms of optional or mandatory redemption,
application of Surplus to the payment of a Series or other payment terms
established by the Series Supplement for the Series.
EVENTS OF DEFAULT
An event of default ("Event of Default") with respect to a Series or Class
of Bonds will be described in the related Prospectus Supplement. Generally, an
Event of Default with respect to the Senior Bonds of a Series (and, so long as
91 days have passed during which no Senior Bond has been outstanding, a Class of
the subordinated Bonds of a Series) is (i) failure to pay required interest and
principal when any related available credit enhancement amount has been reduced
to zero, (ii) failure to pay principal in full prior to the Stated Maturity Date
for such Bonds and (iii) default in the performance of certain covenants in the
Indenture and the continuation of such default for 60 days after notice to the
Depositor by the Trustee or to the Trustee and the Depositor by the Bondholders
of at least 25% in principal amount of such Bonds. Certain events of bankruptcy,
insolvency, reorganization or receivership of the Depositor constitute an Event
of Default for all Bonds of a Series.
Generally, (i) a breach of a representation, warranty or covenant in the
Servicing Agreement will not constitute an Event of Default under the Indenture
and (ii) an Event of Default with respect to one Series will not constitute an
Event of Default with respect to any other Series.
Within 90 days after the occurrence of any default that is, or with notice
or the lapse of time or both would become, an Event of Default with respect to
the Bonds, the Trustee is required under the Indenture to transmit notice of
such default, if known to the Trustee, to all Bondholders, unless such default
shall have been cured or waived, or the Trustee determines in good faith that
the withholding of such notice is in the interest of the Bondholders.
If an Event of Default with respect to the Senior Bonds of a Series occurs
and is continuing, the Bondholders of not less than 25% in principal balance of
the outstanding Senior Bonds of such Series may declare the principal of all of
the Bonds of such Series to be immediately due and payable, by a notice in
writing to the Depositor and to the Trustee. If an Event of Default with respect
to the subordinated Bonds of a Series occurs and is continuing, the Bondholders
of not less than 25% in principal balance of the outstanding subordinated Bonds
(and of the outstanding Senior Bonds, if any) of such Series may declare the
principal of all of the Bonds of such Series to be immediately due and payable,
by a notice in writing to the Depositor and to the Trustee. Any such declaration
may be rescinded by the Bondholders of not less than a majority in principal
balance of the outstanding Bonds that were entitled to vote on the declaration.
Following any such declaration that is not rescinded, the Trustee shall sell the
collateral as described in the Indenture. If an Event of Default has occurred
and is continuing and no Bonds of the Series have been declared due and payable,
or any such declaration and its consequences has been rescinded, the Trustee
may, and on the direction of a majority in principal balance of the outstanding
Senior Bonds (or, if no Senior Bonds are outstanding, subordinated Bonds) shall
give notice to the Depositor of its election to preserve the Trust Estate,
collect the proceeds thereof and make and apply all payments in respect of the
Bonds in accordance with the Indenture.
Proceeds from the liquidation of the collateral for a Series of Bonds will
be applied, after all required payments and reimbursements to the Trustee,
Servicer, and any special Servicer, in the order set forth in the Series
Supplement and related Prospectus Supplement for such Series of Bonds.
Declaration of acceleration and liquidation of the collateral pursuant to the
foregoing procedures shall be the sole remedy for the Bondholders upon an Event
of Default. In the event that a Series of Bonds is declared due and payable, as
described above, and the collateral securing the Bonds is sold, the net proceeds
from such sale may, in limited circumstances, be insufficient to pay the full
unpaid amount of principal of and interest due on each outstanding Class of
Bonds of such Series. Furthermore, in the event that the principal of the Bonds
of a Series is declared due and payable, as described above, and the collateral
securing such Series is sold, the
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Bondholders of any discount Bonds may be entitled to receive no more than an
amount equal to the unpaid principal amount thereof less the unamortized
original issue discount. No assurance can be given about how the amount of the
original issue discount that has not been amortized will be determined.
Subject to the provisions of the Indenture relating to the duties of the
Trustee in case an Event of Default will occur and be continuing, 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 Bondholders of the Bonds of a
Series, unless such Bondholders will have offered to the Trustee reasonable
security or indemnity. Subject to such provisions for indemnification and
certain limitations contained in the Indenture, Holders of a majority in
principal amount of the outstanding Senior Bonds (or the most senior of any
subordinated Bonds if no Senior Bonds are outstanding) of a Series will 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 Bondholders of the
majority in principal amount of the outstanding Senior Bonds (or the
subordinated Bonds if no Senior Bonds are outstanding) of a Series may, in
certain cases, waive any default with respect to such Series.
No Bondholder of any of the Bonds of a Series will have the right to
institute any proceeding with respect to the Indenture, unless (i) such
Bondholder previously has given to the Trustee written notice of an Event of
Default, (ii) the Bondholders of not less than 25% in principal amount of the
outstanding Senior Bonds (or the subordinate Bonds if no Senior Bonds are
outstanding) of the same Series have made written request upon the Trustee to
institute such proceedings in its own name as Trustee and have offered the
Trustee reasonable indemnity, (iii) the Trustee has for 60 days failed to
institute any such proceeding, and (iv) no direction inconsistent with such
written request has been given to the Trustee during such 60-day period by the
Holders of a majority in principal amount of the outstanding Senior Bonds (or
the subordinated Bonds if no Senior Bonds are outstanding) of a Series.
At such time as an Event of Default for a Series is declared and so long as
Senior Bonds of such Series remain outstanding, the Trustee will cease to act on
behalf of the Holders of subordinated Bonds and will thereafter act only on
behalf of the Holders of the Senior Classes of Bonds. The Depositor is required
in such circumstances to appoint a separate trustee for the Holders of the
subordinated Bonds. Such trustee may seek to act in a manner adverse to the
Holders of the Senior Bonds, and such action may result in a delay in
disposition of the Trust Estate or the exercise of other remedies and,
consequently, a delay in payment to the Holders of the Senior Bonds. Should the
Depositor fail to appoint a separate trustee within 60 days after such Event of
Default, the Trustee will petition a court of competent jurisdiction to appoint
a separate trustee.
AUTHENTICATION AND DELIVERY OF BONDS
The Depositor may from time to time deliver Bonds executed by it to the
Trustee and request that the Trustee authenticate such Bonds. Upon the receipt
of such Bonds and such request, and subject to the Depositor's compliance with
certain conditions specified in the Indenture, the Trustee will authenticate and
deliver such Bonds as the Depositor may direct.
LIST OF BONDHOLDERS
Three or more Bondholders of the Bonds of a Series, each of whom has owned
a Bond of such Series for at least six months, may, by written request to the
Trustee, obtain access to the list of all Bondholders of Bonds of the same
Series or of all Bonds, as specified in the request, maintained by the Trustee
for the purpose of communicating with other Bondholders with respect to their
rights under the Indenture. The Trustee may elect not to afford the requesting
Bondholders access to the list of Bondholders if it agrees to mail the desired
communication or proxy, on behalf of the requesting Bondholders, to all such
Bondholders.
ANNUAL COMPLIANCE STATEMENT
The Depositor will be required to file annually with the Trustee a written
statement as to fulfillment of its obligations under the Indenture.
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REPORTS TO BONDHOLDERS
On or before each Payment Date for a Series, the Trustee will transmit by
mail to each Bondholder of such Series a report with respect to the principal
balance of the Bonds of such Series held by such Bondholder as of the
immediately preceding Payment Date and the amount of principal, interest and
premium, if any, paid with respect to the Bonds of such Series held by such
Bondholder since the immediately preceding Payment Date. Such report also will
include information regarding the levels of delinquencies and losses on the
collateral, losses with respect to each related Class of Bonds, and the amount
of servicing and master servicing fees paid with respect to the collateral in
the related collateral pool for the applicable Payment Date.
TRUSTEE'S ANNUAL REPORT
The Trustee under present law is required to mail each year to all
registered Bondholders of Bonds of a Series a brief report with respect to any
of the following events that may have occurred within the previous year (but if
no such event has occurred, no report is required): any change in its
eligibility and qualifications to continue as the Trustee under the Indenture,
any amounts advanced by it under the Indenture, the amount, interest rate and
maturity date of certain indebtedness owing by the Depositor to it in the
Trustee's individual capacity, any change in the property and funds relating to
such Series physically held by the Trustee as such, any additional issue of
Bonds of such Series not previously reported, any change in the release or
release and substitution of any property relating to such Series subject to the
lien of the Indenture, and any action taken by it that materially affects the
Bonds or the Trust Estate for such Series and that has not been previously
reported. In any event, the Trustee will make such information available to all
Bondholders on an annual basis.
TRUSTEE
The Trustee for each Series of Bonds will be specified in the respective
Prospectus Supplement. The commercial bank or trust company serving as Trustee
may have normal banking relationships with the Depositor or any of its
affiliates.
The Trustee may resign at any time, in which event the Depositor will be
obligated to appoint a successor Trustee. The Depositor may remove the Trustee
and appoint a successor Trustee if the Trustee ceases to be eligible to act as
Trustee under the Indenture or if the Trustee becomes insolvent or otherwise
incapable of acting with respect to any Series of Bonds. The Depositor may also
remove the Trustee and appoint a successor Trustee for any Series of Bonds at
any time provided that the Depositor receives confirmation that the appointment
of the successor Trustee will not result in the lowering of the rating of that
Series of Bonds. The Trustee with respect to a Series of Bonds may also be
removed at any time by the holders of a majority in principal amount of the
Bonds of such Series then outstanding.
SATISFACTION AND DISCHARGE OF THE INDENTURE
The Indenture will be discharged as to a Series upon the cancellation of
all of the Bonds of such Series or, with certain limitations, upon deposit with
the Trustee of funds sufficient for the payment or redemption thereof.
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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, 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 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.
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 accordance with the terms
of the related Agreement. 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
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(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
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.
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
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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 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
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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.
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
(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. 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
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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 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.
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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).
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
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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 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.
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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.
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
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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.
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
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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 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 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 created pursuant to the Agreement to fail to
qualify as a REMIC 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
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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. 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 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
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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 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, 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 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 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
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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.
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
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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 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
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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 to the Office of Thrift Supervision, with respect to origination of
alternative mortgage instruments by federal savings and loan
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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 represents the opinion of Hunton & Williams as to the
anticipated material federal income tax consequences of the purchase, ownership,
and disposition of the Securities offered hereunder. The opinion is based upon
laws, regulations, rulings, and decisions now in effect, all of which are
subject to change, and any such change could apply retroactively. Because REMIC
status may be elected with respect to certain Series, this discussion includes a
summary of the federal income tax consequences to holders of REMIC Securities.
The discussion does not purport to deal with the federal income tax consequences
to all categories of investors subject to special rules (such as foreign
investors, certain regulated entities and other investors 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 has 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. 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 opinion is 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 opinion 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. The
Prospectus Supplement for each Series will indicate whether a REMIC election or
elections will be made with respect to the related Trust. For each Series with
respect to which one or more REMIC elections are to be made, Hunton & Williams,
counsel to the Depositor, is of the opinion that, assuming timely filing of a
REMIC 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 (each, a
"Series REMIC"). For each Series of Mortgage Pass-Through Certificates with
respect to which a REMIC election is not to be made, Hunton & Williams is of the
opinion 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, publicly-traded partnership or taxable mortgage pool taxable as a
corporation. In addition, for each Series of Collateralized Mortgage Bonds with
respect to which a REMIC election is not to be made, Hunton & Williams is of the
opinion 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
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.
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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)(4)(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 the extent that its share of allocable investment expenses,
when combined with its other miscellaneous itemized deductions for the taxable
year, fails to exceed
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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 ($128,950, or $64,475
in the case of a separate return by a married individual within the meaning of
Code Section 7703 for taxable year 2000 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), existing final regulations
governing the accrual of original issue discount on debt instruments, 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
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interest that is 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
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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 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
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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 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
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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 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
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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 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
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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 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
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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 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
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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 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
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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
Treasury regulations, amortized premium generally 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.
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. Under the
Contingent Payment Regulations, a secondary market purchaser of a Non-VRDI
Security or an Interest Weighted Security at a premium generally would continue
to accrue interest and determine adjustments on such security based on the
original projected payment schedule devised by the issuer of such security. See
"Federal Income Tax Consequences -- REMIC Securities -- Original Issue
Discount -- Interest Weighted Securities and Non-VRDI Securities" in this
prospectus. The holder of such a security would allocate the difference between
its basis in the security and the adjusted issue price of the security as
negative adjustments to the accruals or projected payments on the security over
the remaining term of the security in a manner that is reasonable -- e.g., based
on a constant yield to maturity.
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.
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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 the applicable
long-term capital gain holding period.
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 39.6%. 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
highest marginal federal tax rate applicable to individuals with respect to net
capital gain on assets held for one year or less generally is 28%. 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%.
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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, 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
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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.
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
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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% 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 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 an applicable Safe Harbor, 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
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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.
Proposed Treasury regulations issued on February 4, 2000 (the "New Proposed
Regulations") would modify that safe harbor. Under the New Proposed Regulations,
a transfer of a noneconomic residual interest would not qualify under the safe
harbor unless in addition to the requirements noted above, the present value of
the anticipated tax liabilities associated with holding the residual interest
does not exceed the sum of the present values of (i) any consideration given to
the transferee to acquire the interest, (ii) the expected future distributions
on the interest, and (iii) any anticipated tax savings associated with holding
the interest as the REMIC generates losses. For purposes of that calculation,
present value generally is calculated using a discount rate equal to the
applicable federal rate. The New Proposed Regulations indicate that the
effective date for the safe harbor modifications could be as early as February
4, 2000. Limitations also exist 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 Freddie Mac, 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 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
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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.
For taxable years beginning on or after January 1, 1998, if an "electing
large partnership" holds a Residual Security, all interests in the electing
large partnership are treated as held by Disqualified Organizations for purposes
of the tax imposed upon a pass-through entity by Section 860E(c) of the Code.
The exception to this tax, otherwise available to a pass-through entity that is
furnished certain affidavits as described above, is not available to an electing
large partnership.
The applicable Trust Agreement will provide that no record or beneficial
ownership interest in a Residual Security may be purchased, transferred or sold,
directly or indirectly, without the express written consent of the Master
Servicer. The Master Servicer will grant such consent to a proposed transfer
only if it receives the following: (i) an affidavit from the proposed transferee
to the effect that it is not a Disqualified Organization and is not acquiring
the Residual Security as a nominee or agent for a Disqualified Organization and
(ii) a covenant by the proposed transferee to the effect that the proposed
transferee agrees to be bound by and to abide by the transfer restrictions
applicable to the Residual Security.
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 the Tax Administrator or 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 Tax Administrator or the affiliate may charge such Residual
Securityholder a reasonable fee for providing the information.
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,
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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 ($128,950, or $64,475 in the
case of a separate return by a married individual within the meaning of Code
Section 7703 for taxable year 2000 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 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
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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.
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
the
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applicable holding period, 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 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
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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 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
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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.
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
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(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 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
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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, a FASIT 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, (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"), (iii) the foreign
person is not a 10% shareholder within the meaning of Section 871(h)(3)(B) of
the Code or a controlled foreign corporation as described under Section
881(c)(3)(C) of the Code, and (iv) the foreign person is not a bank receiving
interest on a loan made in the ordinary course of business. If the
Securityholder fails to meet the conditions listed above, 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 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 REMIC are Mortgage Certificates that are
issued in registered form; (ii) the Mortgage Loans underlying the Mortgage
Certificates were originated after July 18, 1984 and (iii) the securityholder
meets the requirements listed under "Federal Income Tax Consequences -- REMIC
Securities -- Taxation of Certain
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Foreign Holders of REMIC Securities -- REMIC Regular Securities" in this
prospectus. 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
applies, 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 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.
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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.
Net Withholding Regulations
The Treasury Department has issued new regulations which make certain
modifications to the withholding, backup withholding and information reporting
rules described above. The new withholding regulation generally will be
effective for payments made after December 31, 2000, subject to certain
transition rules. Prospective investors are urged to consult their tax advisors
regarding the new withholding regulations.
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
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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.
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)(4)(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 ($128,500, or $64,475 in the case of a separate return by a
married individual within the meaning of Code
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Section 7703 for taxable year 2000 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 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. As in the case of
REMIC Regular Securities, Code Section 1272(a)(6) applies to Non-REMIC
Securities, but no regulations have been issued describing the application of
that Section to such Non-REMIC Securities. Nonetheless, unless and until
administrative guidance to the contrary is released, the Tax Administrator
intends to account for the 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.
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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 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
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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 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
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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.
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.
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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."
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 has advised the Depositor that, based upon the facts as they exist, 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)(4)(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."
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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, (ii) the Trustee (or other person who would otherwise be required to
withhold tax) is provided with Foreign Person Certification, (iii) the foreign
person is not a 10% shareholder within the meaning of Section 871(b)(3)(B) of
the Code or a controlled foreign corporation as described under Section
881(c)(3)(C) of the Code, and (iv) the foreign person is not a bank receiving
interest on a loan made in the ordinary course of business. If the
Securityholder fails to meet the conditions listed above, interest (including
original 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 is of the 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.
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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 is of the 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 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.
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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
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).
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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 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
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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.
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
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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 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
applicable successor forms) 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 may 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 may not be considered "portfolio interest." As a
result, Certificateholders who are Non-U.S. Persons may 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 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.
The Treasury Department has enacted new withholding regulations that
generally will be effective after December 31, 2000. See "Federal Income Tax
Consequences -- Reporting and Tax Administration -- New Withholding Rules"
herein.
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 and certification procedures, unless the holder is an exempt
recipient under applicable provisions of the Code.
Proposed Legislation
The President's recently released budget proposal contains tax legislative
proposals that could affect the tax consequences to you of the purchase,
ownership, and disposition of the certificates. Under one legislative proposal,
a REMIC itself would be secondarily liable for taxes on phantom income and would
be required to
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pay such taxes to the extent that they were not paid by the REMICs residual
holders on the applicable due date. Under current law, only the REMIC residual
holder is liable for the payment of taxes on phantom income. See "Federal Income
Tax Consequences -- Tax Treatment of Residual Securities -- Taxation of Residual
Securityholders" herein. If this legislative proposal were enacted in its
present form, it would be effective for REMICs formed after the date of
enactment. In addition, the President's budget proposes legislation that in its
current form would require holders of debt instruments that use an accrual
method of accounting to include market discount in income on a constant yield
basis as it accrues. Under current law, a holder of a debt instrument with
market discount generally recognizes income attributable to market discount only
as principal is received or when the holder disposes of the debt instrument. See
"Federal Income Tax Consequences -- Tax Treatment of REMIC Regular
Interests-- Market Discount" herein. The proposal would be effective for debt
instruments acquired on or after the date of enactment. It is unknown whether
either of these provisions will be included in any bill introduced into Congress
this year or, if introduced, whether either proposal will be enacted.
Prospective investors in REMIC certificates should consult their tax advisors
regarding the proposed legislation discussed above.
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
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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 transferable 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) Prohibited
Transaction Class Exemption ("PTCE") 96-23, regarding investment decisions made
by in-house asset managers; (b) PTCE 95-60, regarding investments by insurance
company general accounts; (c) PTCE 91-38, regarding investments by bank
collective investment funds; (d) PTCE 90-1, regarding investments by insurance
company pooled separate accounts; (e) PTCE 84-14, regarding investment decisions
made by a qualified professional asset manager; (f) PTCE 83-1, regarding
acquisitions by Plans of interests in mortgage pools; and (g) 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, or result in, 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 APPLICABIL-
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ITY 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 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
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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, underwriting syndicates or designated agents. The
Depositor also may sell the Offered Securities to an affiliate, and such
affiliate may sell the Security, from time to time, either directly or through
one or more Underwriters, underwriting syndicates or through designated agents.
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 any Underwriter(s), the
proceeds to and their intended use by the Depositor, and either the initial
public offering price, the discounts and commissions to any 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.
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.
The Securities issued pursuant to this Registration Statement of which this
Prospectus is a part may be reregistered and distributed when such Securities
are reacquired by the Depositor or an affiliate of the Depositor and deposited
as part of a new Trust Fund.
LEGAL MATTERS
Certain legal matters in connection with the Offered Securities, including
the material federal income tax consequences, will be passed upon for the
Depositor by Hunton & Williams, Richmond, Virginia.
EXPERTS
The balance sheet of Union Planters Mortgage Finance Corp., as of December
31, 1997 incorporated by reference in this Prospectus by reference to Union
Planters Mortgage Finance Corp.'s Registration Statement on Form 10, has been so
incorporated in reliance on the report of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
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.
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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,
Servicing 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 Bank, National Association, a national
banking association, or another party that transfers the Assets of a Series to
the Depositor.
"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
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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.
"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 Bank, National Association, a national banking association.
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"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, (formerly known as FNMA) a federally
chartered and privately owned corporation organized and existing under the
Federal National Mortgage Association Charter Act, as amended, or any successor
thereto.
"Fannie Mae Certificate" means guaranteed mortgage pass-through
certificates representing fractional undivided interests in pools of mortgage
loans formed by Fannie Mae.
"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.
"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.
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"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.
"Freddie Mac" means Freddie Mac (formerly known as the Federal Home Loan
Mortgage Corporation) or any successor thereto.
"Freddie Mac Act" means Title III of the Emergency Home Finance Act of
1970, as amended.
"Freddie Mac Certificate" means a certificate issued by the Freddie Mac
representing an undivided interest in a pool of mortgage loans that may consist
of first lien conventional loans, FHA Loans or VA Loans.
"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.
"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 (including Insurance Proceeds collected in connection with such
liquidation and proceeds of FHA Insurance Policy and VA Guaranty payments
related to any FHA Loan or VA Loan).
"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.
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"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 Union Planters Bank, National Association, a
national banking association and a wholly-owned subsidiary of Union Planters
Corporation, a Tennessee corporation its successors or assigns, or any other
entity identified as the "Master Servicer" in any Prospectus Supplement.
"MBS" means mortgage pass-through certificates or other mortgage-backed
securities evidencing interests in or secured by Mortgage Loans that (a) have
been previously offered and distributed to the public pursuant to an effective
registration statement; or (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.
"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.
"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.
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"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, 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.
"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.
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"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".
"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 Securities, 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.
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"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.
"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(2) 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 Securities, 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. Up to 20% of the Assets with
respect to any Series of Securities may consist of Sub-Performing Mortgage
Loans.
"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.
"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.
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"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.
"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 held subject to the
related Agreement.
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