<PAGE> 1
Filed Pursuant to Rule 424(b)(5).
Registration No. 333-47311.
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED JUNE 5, 1998)
$422,092,000 (APPROXIMATE)
AMERICAN RESIDENTIAL EAGLE CERTIFICATE TRUST 1998-1
CERTIFICATE ISSUER
MORTGAGE-BACKED CALLABLE CERTIFICATES, SERIES 1998-1
---------------------------
[Logo] AMERICAN RESIDENTIAL EAGLE, INC. [LOGO]
DEPOSITOR
---------------------------
AMERICAN RESIDENTIAL EAGLE BOND TRUST 1998-1
BOND ISSUER
---------------------------
NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION
MASTER SERVICER
---------------------------
The Mortgage-Backed Callable Certificates, Series 1998-1 (the
"Certificates") will represent the entire beneficial ownership interest in
American Residential Eagle Certificate Trust 1998-1 (the "Trust" or the
"Certificate Issuer") to be created pursuant to a Trust Agreement, dated as of
June 1, 1998 (the "Trust Agreement"), between American Residential Eagle, Inc.
(the "Depositor") and First Union National Bank, as trustee (the "Certificate
Trustee"). The assets of the Trust (the "Trust Fund Assets") will consist
primarily of a single Collateralized Callable Mortgage Bond (the "Underlying
Bond") issued by American Residential Eagle Bond Trust 1998-1 (the "Bond
Issuer"). The Underlying Bond is secured by a pool (the "Mortgage Pool") of
conventional, adjustable rate mortgage loans (the "Mortgage Loans") secured by
first liens on one- to four-family residential properties. The Mortgage Loans
will be acquired by the Bond Issuer from the Depositor. Only the Classes of
Certificates identified in the table below (the "Offered Certificates") are
offered hereby.
On the 25th day of each month or, if such 25th day is not a Business Day (as
defined herein), on the first Business Day thereafter (each, a "Distribution
Date"), commencing on June 25, 1998, from and to the extent of funds available
therefor in the Distribution Account referred to herein, a distribution will be
made on the Offered Certificates in the amounts and in the priorities set forth
herein. As more fully described herein, interest on the Offered Certificates
will be calculated on the basis of the Certificate Principal Amounts thereof and
the applicable Certificate Interest Rate.
PROSPECTIVE INVESTORS IN THE OFFERED CERTIFICATES SHOULD REVIEW THE
INFORMATION SET FORTH UNDER "RISK FACTORS" ON PAGE S-16 OF THIS PROSPECTUS
SUPPLEMENT AND IN THE PROSPECTUS ON PAGE 18. THESE RISKS INCLUDE:
<TABLE>
<S> <C>
- - - YIELD, PREPAYMENT AND MATURITY RISKS - LIMITED LIQUIDITY
- - - EFFECT OF MORTGAGE RATES - ADEQUACY OF CREDIT ENHANCEMENT
- - - LIMITED RECOURSE - UNDERWRITING STANDARDS AND POTENTIAL DELINQUENCIES
- - - MORTGAGE LOAN CONCENTRATION
</TABLE>
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
Class Certificate Certificate
Class Principal Amount(1) Interest Rate CUSIP Number
----- ------------------- ------------- ------------
<S> <C> <C> <C>
A-1 ...................................................... $143,970,000 (2) 02926PAA9
A-2 ...................................................... 232,093,000 (3) 02926PAB7
M-1....................................................... 46,029,000 (4) 02926PAC5
</TABLE>
- - ---------------
(1) Approximate, as described herein.
(2) Interest will accrue on the Class A-1 Certificates with respect to each
Distribution Date at a per annum rate equal to the least of (i) LIBOR (as
defined herein) plus 0.09% (the "Class A-1 Spread"), (ii) 9.50% and (iii)
the Bond Interest Rate (as defined herein). On each Distribution Date after
which the Bond Principal Balance (as defined herein) is less than 35% of the
initial Bond Principal Balance thereof, the Certificate Interest Rate
applicable to the Class A-1 Certificates will be increased as described
herein. The initial Certificate Interest Rate of the Class A-1 Certificates
will be 5.75% per annum.
(3) Interest will accrue on the Class A-2 Certificates with respect to each
Distribution Date at a per annum rate equal to the least of (i) LIBOR plus
0.21% (the "Class A-2 Spread"), (ii) 9.50% and (iii) the Bond Interest Rate.
On each Distribution Date after which the Bond Principal Balance is less
than 35% of the initial Bond Principal Balance thereof, the Certificate
Interest Rate applicable to the Class A-2 Certificates will be increased as
described herein. The initial Certificate Interest Rate of the Class A-2
Certificates will be 5.87% per annum.
(4) Interest will accrue on the Class M-1 Certificates with respect to each
Distribution Date at a per annum rate equal to the least of (i) LIBOR plus
0.50% (the "Class M-1 Spread"), (ii) 9.50% and (iii) the Net Funds Cap (as
defined herein). On each Distribution Date after which the Bond Principal
Balance is less than 35% of the initial Bond Principal Balance thereof, the
Certificate Interest Rate applicable to the Class M-1 Certificates will be
increased as described herein. The initial Certificate Interest Rate of the
Class M-1 Certificates will be 6.16% per annum.
---------------------------
The Offered Certificates will be purchased by Lehman Brothers Inc. (the
"Underwriter") from the Depositor and will be offered by the Underwriter from
time to time in negotiated transactions or otherwise at varying prices to be
determined at the time of sale. Proceeds to the Depositor from the sale of the
Offered Certificates will be approximately 100% of the aggregate initial
Certificate Principal Amount thereof, before deducting expenses payable by the
Depositor.
The Offered Certificates are offered by the Underwriter, subject to prior
sale, withdrawal, cancellation, modification of the offer without notice, to
delivery to and acceptance by the Underwriter and certain further conditions. It
is expected that delivery of the Offered Certificates will be made in book-entry
form only through the Same-Day Funds Settlement System of The Depository Trust
Company, Cedel Bank, societe anonyme and the Euroclear System on or about June
17, 1998.
---------------------------
LEHMAN BROTHERS
June 15, 1998
<PAGE> 2
Each of the Mortgage Loans was purchased by the Depositor from American
Residential Investment Trust, Inc. ("AmREIT") which in turn acquired the
Mortgage Loans directly from the originator or in the secondary mortgage market.
The Bond Issuer will pledge the Mortgage Loans to the Bond Trustee pursuant to
the Indenture to secure the Underlying Bond and will assign the Underlying Bond
to the Depositor for deposit to the Trust Fund prior to the date of initial
issuance of the Certificates.
The Certificates will consist of the Class A-1 and Class A-2 Certificates
(the "Senior Certificates"), the Class M-1 and Class M-2 Certificates (the
"Mezzanine Certificates"), the Class B Certificates, the Class X Certificate and
the Class O Certificate (the "Ownership Certificate"). The Mezzanine
Certificates, the Class B Certificates and the Class X Certificate sometimes are
referred to together herein as the "Subordinate Certificates;" and the Class M-1
Certificates are referred to sometimes herein as the "Offered Subordinate
Certificates." Only the Class A-1, Class A-2 and Class M-1 Certificates are
offered hereby.
An election will be made to treat the Trust Fund Assets as a financial
asset securitization investment trust ("FASIT") for federal income tax purposes.
As described more fully herein and in the Prospectus, the Senior Certificates
and the Subordinate Certificates will constitute "regular interests" in the
FASIT. See "FEDERAL INCOME TAX CONSEQUENCES" herein and in the Prospectus.
THE CERTIFICATES DO NOT REPRESENT AN INTEREST IN OR OBLIGATION OF THE
DEPOSITOR, THE CERTIFICATE ISSUER, THE BOND ISSUER, THE CERTIFICATE TRUSTEE, THE
BOND TRUSTEE, THE SERVICER, THE MASTER SERVICER, THE SPECIAL SERVICER OR ANY OF
THEIR RESPECTIVE AFFILIATES, EXCEPT AS SET FORTH HEREIN. NEITHER THE
CERTIFICATES NOR THE UNDERLYING MORTGAGE LOANS ARE INSURED OR GUARANTEED BY THE
UNITED STATES GOVERNMENT, THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER
GOVERNMENTAL AGENCY OR INSTRUMENTALITY.
------------------------
THE YIELD TO INVESTORS ON EACH CLASS OF OFFERED CERTIFICATES WILL BE
SENSITIVE IN VARYING DEGREES TO, AMONG OTHER THINGS, THE RATE AND TIMING OF
PRINCIPAL PAYMENTS (INCLUDING PREPAYMENTS) OF THE MORTGAGE LOANS AND WHETHER AN
OPTIONAL REDEMPTION OF THE UNDERLYING BOND OR AN OPTIONAL OR SPECIAL TERMINATION
OF THE TRUST IS EFFECTED AS HEREIN DESCRIBED. THE YIELD OF A CLASS OF OFFERED
CERTIFICATES PURCHASED AT A DISCOUNT OR PREMIUM WILL BE MORE SENSITIVE TO THE
RATE AND TIMING OF PAYMENTS THEREON THAN A CLASS PURCHASED AT PAR. PROSPECTIVE
PURCHASERS OF CERTIFICATES SHOULD CONSIDER, IN THE CASE OF ANY SUCH CERTIFICATES
PURCHASED AT A DISCOUNT, THE RISK THAT A SLOWER THAN ANTICIPATED RATE OF
PRINCIPAL PAYMENTS COULD RESULT IN AN ACTUAL YIELD THAT IS LOWER THAN THE
ANTICIPATED YIELD AND, IN THE CASE OF ANY OFFERED CERTIFICATES PURCHASED AT A
PREMIUM, THE RISK THAT A FASTER THAN ANTICIPATED RATE OF PRINCIPAL PAYMENTS
COULD RESULT IN AN ACTUAL YIELD THAT IS LOWER THAN THE ANTICIPATED YIELD. THE
YIELD TO INVESTORS IN THE OFFERED CERTIFICATES ALSO WILL BE ADVERSELY AFFECTED
BY NET PREPAYMENT INTEREST SHORTFALLS AND BY REALIZED LOSSES (EACH AS DEFINED
HEREIN). SEE "PREPAYMENT AND YIELD CONSIDERATIONS."
The Class M-1 Certificates are subordinate to the Senior Certificates to
the extent described herein. As a result of such subordination, the yield on the
Class M-1 Certificates will be more sensitive than the yields on the Senior
Certificates, to delinquencies and losses on the Mortgage Loans.
THE SENIOR CERTIFICATES MAY BE TRANSFERRED TO PLANS (AS DEFINED HEREIN)
PROVIDED THAT THE REQUIREMENTS OF A PROHIBITED TRANSACTION EXEMPTION GRANTED TO
THE UNDERWRITER ARE SATISFIED, AS SET FORTH UNDER "ERISA MATTERS" HEREIN. THE
OFFERED SUBORDINATE CERTIFICATES MAY NOT BE TRANSFERRED TO PLANS, EXCEPT AS
DESCRIBED UNDER "ERISA MATTERS" HEREIN.
S-2
<PAGE> 3
There is currently no secondary market for the Offered Certificates. The
Underwriter intends to make a secondary market in the Offered Certificates, but
has no obligation to do so. There can be no assurance that such a market will
develop or, if it does develop, that it will continue. See "RISK
FACTORS -- Limited Liquidity" herein and in the Prospectus.
This Prospectus Supplement relates to the Underlying Bond as well as the
Offered Certificates. Additional information regarding the Certificates and the
Underlying Bond is contained in the Prospectus dated June 5, 1998 (the
"Prospectus") and purchasers are urged to read both this Prospectus Supplement
and the Prospectus in full. Sales of the Offered Certificates may not be
consummated unless the purchaser has received both this Prospectus Supplement
and the Prospectus.
Until ninety days after the date of this Prospectus Supplement, all dealers
effecting transactions in the Offered Certificates, whether or not participating
in this distribution, may be required to deliver a Prospectus Supplement and the
Prospectus. This is in addition to the obligation of dealers to deliver a
Prospectus Supplement and the Prospectus when acting as underwriters and with
respect to their unsold allotments or subscriptions.
The information set forth herein under "SERVICING OF THE MORTGAGE
LOANS -- The Master Servicer" has been provided by Norwest Bank Minnesota,
National Association ("Norwest" or the "Master Servicer"); the information set
forth herein under "SERVICING OF THE MORTGAGE LOANS -- The Servicer" has been
provided by Aurora Loan Services Inc., ("Aurora"); and the information set forth
herein under "SERVICING OF THE MORTGAGE LOANS -- The Special Servicer" has been
provided by Ocwen Federal Bank FSB ("Ocwen" or the "Special Servicer"). No
representation is made by the Depositor, the Certificate Issuer, the Certificate
Trustee, the Bond Issuer, the Bond Trustee, the Underwriter or any of their
respective affiliates as to the accuracy or completeness of the information
provided by the Master Servicer, the Servicer or the Special Servicer.
After the initial distribution of the Offered Certificates by the
Underwriter, the Prospectus and Prospectus Supplement may be used by the
Underwriter in connection with market making transactions in the Offered
Certificates. The Underwriter may act as principal or agent in such
transactions. Such transactions will be at prices related to prevailing market
prices at the time of sale.
---------------------------------------
No person is authorized in connection with this offering to give any
information or to make any representation about the Certificate Issuer, the Bond
Issuer, the Depositor, the Master Servicer, the Servicer, the Special Servicer,
the Certificate Trustee, the Bond Trustee, the Underlying Bond, the Offered
Certificates or any other matter referred to herein, other than those contained
in this Prospectus Supplement or the Prospectus. If any other information or
representation is given or made, such information or representation may not be
relied upon as having been authorized by any of above persons. This Prospectus
Supplement and the Prospectus do not constitute an offer to sell or a
solicitation of an offer to buy securities in any jurisdiction or to any person
to whom it is unlawful to make such offer in such jurisdiction. Neither the
delivery of this Prospectus Supplement or the Prospectus nor any sale hereunder
or thereunder shall, under any circumstances, create any implication that the
information contained herein or therein is correct as of any time subsequent to
their respective dates.
S-3
<PAGE> 4
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SUMMARY OF TERMS..................... S-5
RISK FACTORS......................... S-16
Underwriting Standards and
Potential Delinquencies......... S-16
Effect of Mortgage Rates on the
Bond Interest Rate and
Certificate Interest Rates...... S-16
Yield, Prepayment and Maturity
Risks........................... S-16
Adequacy of Credit Enhancement;
Risks of Holding Subordinated
Certificates.................... S-17
Limited Source of
Payments -- Limited Recourse to
Depositor and No Resource to
Master Servicer, Special
Servicer or Trustees............ S-18
Limited Liquidity.................. S-18
Lack of Primary Mortgage
Insurance....................... S-18
Geographic Concentration of the
Mortgage Loans.................. S-19
Failure to Qualify as a FASIT...... S-19
Consequences of Owning Book-Entry
Certificates.................... S-19
USE OF PROCEEDS...................... S-20
TRUST FUND ASSETS.................... S-20
General............................ S-20
The Mortgage Pool.................. S-20
The Index.......................... S-31
Assignment of the Mortgage Loans... S-31
Underwriting Guidelines............ S-32
DESCRIPTION OF THE CERTIFICATES...... S-35
General............................ S-35
Book-Entry Registration............ S-37
Payments on Mortgage Loans;
Accounts........................ S-40
Distributions of Interest.......... S-40
Determination of LIBOR............. S-43
Distributions of Principal......... S-44
Credit Enhancement................. S-48
Termination; Optional Termination;
Bond Redemption................. S-50
Special Termination of the Trust... S-50
The Certificate Trustee; Bond
Trustee......................... S-51
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
DESCRIPTION OF THE UNDERLYING BOND... S-51
General............................ S-51
Bond Distributions................. S-51
Bond Interest...................... S-52
LIBOR Rate Determination........... S-52
Bond Principal..................... S-52
Bond Redemption.................... S-53
PREPAYMENT AND YIELD
CONSIDERATIONS..................... S-53
General............................ S-53
Overcollateralization.............. S-54
Subordination of the Subordinate
Certificates.................... S-54
Weighted Average Life.............. S-55
SERVICING OF THE MORTGAGE LOANS...... S-59
The Master Servicer................ S-59
The Servicer....................... S-59
The Special Servicer............... S-60
Servicing Responsibilities......... S-62
Special Servicing of Delinquent
Mortgage Loans.................. S-62
Servicing Compensation and Payment
of Expenses..................... S-62
Prepayment Interest Shortfalls..... S-63
Advances........................... S-63
Collection of Taxes, Assessments
and Similar Items............... S-63
Insurance Coverage................. S-64
Evidence as to Compliance.......... S-64
Certain Rights Related to
Foreclosure and the Special
Servicer........................ S-64
FEDERAL INCOME TAX CONSEQUENCES...... S-64
ERISA MATTERS........................ S-65
UNDERWRITING......................... S-66
LEGAL MATTERS........................ S-67
RATINGS.............................. S-67
INDEX TO DEFINED TERMS............... S-68
</TABLE>
S-4
<PAGE> 5
SUMMARY OF TERMS
This Summary of Terms is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus Supplement and in
the accompanying Prospectus. Certain capitalized terms used in this Summary of
Terms are defined elsewhere in this Prospectus Supplement or in the Prospectus.
Wherever reference is made herein to a percentage of some or all of the Mortgage
Loans, such percentage is determined (unless otherwise specified) on the basis
of the aggregate Scheduled Principal Balance of such Mortgage Loans as of the
Cut-off Date.
Offered Certificates....... Mortgage-Backed Callable Certificates, Series
1998-1, in the Classes indicated on the cover page
hereof. The Offered Certificates will be issued
pursuant to a Trust Agreement, to be dated as of
June 1, 1998, between the Depositor and the
Certificate Trustee ( the "Trust Agreement"). See
"DESCRIPTION OF THE CERTIFICATES" herein.
Depositor.................. American Residential Eagle, Inc., a Delaware
corporation (the "Depositor" or the "Company"). The
Company is a wholly-owned subsidiary of AmREIT.
Bond Issuer................ American Residential Eagle Bond Trust 1998-1, a
Delaware statutory business trust (the "Bond
Issuer") created pursuant to a Deposit Trust
Agreement (the "Deposit Trust Agreement") between
the Depositor and Wilmington Trust Company, a
Delaware banking corporation, as owner trustee.
Certificate Issuer......... American Residential Eagle Certificate Trust
1998-1, the trust formed by the Depositor pursuant
to the Trust Agreement for the purpose of creating
and issuing the Certificates (the "Certificate
Issuer").
Owner Trustee.............. Wilmington Trust Company, a Delaware banking
corporation, not in its individual capacity but
solely in its capacity as owner trustee under the
Deposit Trust Agreement (the "Owner Trustee").
Bond Trustee............... First Union National Bank ("First Union"), a
national banking association with its main office
in Charlotte, North Carolina, in its capacity as
trustee under the Indenture (the "Bond Trustee").
Certificate Trustee........ First Union, in its capacity as trustee under the
Trust Agreement (the "Certificate Trustee"). See
"DESCRIPTION OF THE CERTIFICATES -- The Certificate
Trustee".
Cut-off Date............... May 1, 1998.
Closing Date............... On or about June 17, 1998 (the "Closing Date").
Distribution Date.......... The 25th day of each month, or, if such day is not
a Business Day, the next succeeding Business Day,
commencing in June 1998.
Record Date................ The "Record Date" for each Distribution Date will
be the close of business on the Business Day
immediately preceding such Distribution Date.
Trust Fund Assets.......... The Trust Fund Assets will consist primarily of the
Underlying Bond. The Underlying Bond is secured by
the Mortgage Pool and represents the right to
receive payments received on the Mortgage Pool as
described herein.
Underlying Bond............ The Underlying Bond will be issued by the Bond
Issuer pursuant to an Indenture, dated as of June
1, 1998 (the "Indenture"), between the Bond Issuer
and the Bond Trustee. Payments of principal and
interest
S-5
<PAGE> 6
due on the Underlying Bond each month will be the
sole source of distributions on the Certificates.
The Underlying Bond is payable solely from amounts
received in respect of the Mortgage Loans included
in the Mortgage Pool. As more fully described
herein, the Underlying Bond will have the benefit
of credit enhancement in the form of
overcollateralization. The Underlying Bond is
expected to be issued in an initial principal
amount of approximately $456,822,000 and will be
secured by the Mortgage Loans in the Mortgage Pool.
Mortgage Pool.............. The Mortgage Pool will consist of approximately
3,704 conventional, adjustable rate, fully
amortizing Mortgage Loans, secured by first liens
on one- to four-family residential real property
(each, a "Mortgaged Property") with original terms
to maturity from the first due date of the
scheduled monthly payment (a "Scheduled Payment")
of not more than 30 years, having an aggregate
Schedule Principal Balance (as defined herein) as
of the Cut-off Date of approximately $463,075,880.
All of the Mortgage Loans will have been deposited
with the Bond Issuer by the Depositor which, in
turn, will have acquired the Mortgage Loans from
AmREIT pursuant to a Mortgage Loan Purchase
Agreement, dated as of June 1, 1998 (the "Mortgage
Loan Purchase Agreement"), between the Depositor
and AmREIT. All of the Mortgage Loans were acquired
by AmREIT from various originators in the ordinary
course of its business and substantially in
accordance with the underwriting criteria specified
herein.
All of the Mortgage Loans provide for a semi-annual
adjustment of the applicable interest rate borne
thereby (the "Mortgage Rate"), based on the
six-month London interbank offered rates
("Six-Month LIBOR") for United States dollar
deposits and for corresponding adjustments to the
monthly payment amount due thereon, in each case as
specified in the related Mortgage Note and subject
to the limitations described under "THE TRUST FUND
ASSETS -- The Mortgage Pool" herein, except that
with respect to approximately 75.50% of the
Mortgage Loans (the "Delayed Adjustment Mortgage
Loans"), the first Mortgage Rate adjustment for
such Mortgage Loan will occur after the second
anniversary date of origination of such Mortgage
Loan.
Approximately 71.39% of the Mortgage Loans provide
for payment by the mortgagor of a prepayment
premium in connection with certain full or partial
prepayments of principal. Generally, each such
Mortgage Loan provides for payment of a prepayment
premium in connection with certain partial
prepayments and prepayments in full made within the
period of time specified in the related Mortgage
Note, ranging from six months to approximately five
years from the date of origination of such Mortgage
Loan, as described herein. The amount of the
applicable prepayment premium, to the extent
permitted under applicable state law, is as
provided in the related Mortgage Note; generally,
such amount is equal to six months' interest on any
amounts prepaid in excess of 20% of the original
principal balance of the related Mortgage Loan
during any 12-month period.
Distributions of Interest
and Principal.............. Interest accrued during the applicable Accrual
Period on each Class of Offered Certificates at the
applicable per annum rate (each, a "Certificate
Interest Rate") described on the cover page hereof
(but subject to
S-6
<PAGE> 7
any increase as described below under "DESCRIPTION
OF THE CERTIFICATES -- Distributions of Interest")
will be distributable on each Distribution Date, to
the extent of the Interest Distribution Amount (as
defined herein) for such date. With respect to each
Distribution Date, the "Accrual Period" applicable
to each Class of Offered Certificates will be the
period beginning on the immediately preceding
Distribution Date (or on the Closing Date, in the
case of the first Accrual Period) and ending on the
day immediately preceding the related Distribution
Date. See "DESCRIPTION OF THE
CERTIFICATES -- Distributions of Interest" herein.
The approximate initial Class Certificate Principal
Amount of each Class of Offered Certificates is set
forth on the cover page hereof.
On each Distribution Date, an amount equal to the
Principal Distribution Amount (as defined herein)
for such Distribution Date will be applied, as more
fully described herein, to make distributions of
principal on the Offered Certificates. See
"DESCRIPTION OF THE CERTIFICATES -- Distributions
of Principal" herein.
Final Scheduled
Distribution Date.......... The final scheduled Distribution Date of the Class
A-1 Certificates is September 25, 2019, which was
determined by adding twelve months to the final
Distribution Date for the Class A-1 Certificates as
determined under the Modeling Assumptions and
assuming that the underlying Mortgage Loans prepay
at 0% CPR. Scheduled distributions on the
Underlying Bond, assuming no defaults or losses on
the Mortgage Loans that are not covered by the
limited credit support described herein, will be
sufficient to make timely distributions of interest
and reduce the Certificate Principal Amounts of the
Class A-2, Class M-1, Class M-2 and Class B
Certificates to zero not later than May 25, 2028
(such date being the scheduled maturity date of the
Underlying Bond). The actual final Distribution
Date for the Offered Certificates may be earlier or
later, and could be substantially earlier, than the
final scheduled Distribution Date. See "DESCRIPTION
OF THE CERTIFICATES -- Final Scheduled Distribution
Date" and "PREPAYMENT AND YIELD CONSIDERATIONS".
Bond Redemption;
Optional Termination
and Special
Termination.............. At its option, the Bond Issuer may redeem the
Underlying Bond at par (plus accrued interest) as
herein described on any Distribution Date after
which the Bond Principal Balance is less than 35%
of the initial Bond Principal Balance. Any such
optional redemption will result in the early
retirement of the Certificates. On any Distribution
Date after which the Bond Principal Balance is less
than 35% of the initial Bond Principal Balance
thereof, the Bond Interest Rate will increase for
the remaining term as described in the Summary at
"DESCRIPTION OF THE UNDERLYING BOND -- Bond
Distributions of Interest".
On any Distribution Date on which the Pool
Principal Balance is equal to 10% or less of the
initial Pool Principal Balance, the Servicer will
have the option to direct the Master Servicer to
solicit not less than three bids for the Mortgage
Loans and to sell the Mortgage Loans at the highest
bid (provided such bid is not less than the then
aggregate outstanding
S-7
<PAGE> 8
principal balance of the Mortgage Loans plus
accrued interest thereon to the sale date). Any
such auction purchase will be subject to the right
of first refusal of the Depositor to purchase the
Mortgage Loans at the same bid price. Any such
auction purchase will result in the early
retirement of the Certificates. See "DESCRIPTION OF
THE CERTIFICATES -- Termination; Optional
Termination" herein.
On any Distribution Date for which the aggregate
Certificate Principal Amount of the Certificates is
less than 35% of their initial aggregate
Certificate Principal Amount, the holder of the
Class O Certificate, so long as it holds such
Certificate, will have the option to purchase all,
but not less than all, of the Certificates (other
than the Class X Certificate) remaining outstanding
on such Distribution Date for a purchase price
equal to the outstanding Certificate Principal
Amount of each such Certificate plus interest
accrued thereon (but unpaid) at the applicable
Certificate Interest Rate. See "DESCRIPTION OF THE
CERTIFICATES -- Special Termination of the Trust"
herein. See "PREPAYMENT AND YIELD CONSIDERATIONS"
herein.
Credit Enhancement......... Credit enhancement for the Offered Certificates
consists of the subordination of the Subordinate
Certificates, the priority of application of
Applied Loss Amounts and overcollateralization, in
each case as described herein.
Overcollateralization. The Certificates will
indirectly have the benefit of
"overcollateralization" represented by the excess
of (i) the aggregate Scheduled Principal Balance of
the Mortgage Loans in the Mortgage Pool pledged to
the Bond Trustee to secure payment of the
Underlying Bond, over (ii) the Bond Principal
Balance (the "Bond Overcollateralization Amount").
The Bond Overcollateralization Amount will
initially be an amount specified by the Rating
Agency, expected to be approximately $6,253,880. To
the extent of funds available therefore, the Excess
Mortgage Amount (as defined herein) will be applied
as described herein, having the effect of
maintaining overcollateralization at the Targeted
Overcollateralization Amount (as defined herein).
In addition, to the extent that a Bond
Overcollateralization Deficiency exists after
taking into account distributions on the Underlying
Bond required for such Distribution Date, amounts
otherwise distributable to the Class X Certificates
will be deposited into the Reserve Fund until the
amount on deposit therein equals the Required
Reserve Fund Amount. The "Required Reserve Fund
Amount" will be an amount, as of any Distribution
Date, equal to the amount by which the Targeted
Overcollateralization Amount exceeds the Bond
Overcollateralization Amount (after giving effect
to the distributions to be made on such
Distribution Date) (a "Bond Overcollateralization
Deficiency"). See "DESCRIPTION OF THE
CERTIFICATES -- Credit Enhancement --
Overcollateralization" herein.
Subordination of Subordinate Certificates. The
rights of holders of the Subordinate Certificates
to receive distributions will be subordinated, to
the extent described herein, to such rights of each
Class of Offered Certificates having a higher
priority of distribution. The initial aggregate
Certificate Principal Amount of the Subordinated
Certificates will equal approximately 17.68% of the
initial aggregate Certificate Principal Amount of
all the Certificates. The initial Certificate
Principal Amount
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of the Class M-2 and Class B Certificates (which
are not offered hereby) will equal approximately
7.60% of the initial aggregate Certificate
Principal Amount of all the Certificates. The
initial Certificate Principal Amount of the Class B
Certificates (which are not offered hereby) will
equal 3.80% of the initial Certificate Principal
Amount of all the Certificates. The Class X
Certificate is an interest-only certificate and
will have a notional principal balance equal at all
times to the principal balance of the Underlying
Bond. Distributions to the Class X Certificate will
be fully subordinated to payments of principal and
interest on the Senior Certificates, the Class M-1,
Class M-2 and the Class B Certificates. See
"DESCRIPTION OF THE CERTIFICATES -- Credit
Enhancement -- Subordination" herein.
Realized Losses; Application of Applied Loss
Amounts. Realized Losses (as defined herein) on the
Mortgage Loans will reduce amounts distributable in
respect of the Underlying Bond and, to the extent
that the Bond Overcollateralization Amount (as
defined herein) has been reduced to zero, in
respect of the Offered Certificates. In addition,
Applied Loss Amounts will be allocated in reduction
of the Certificate Principal Amounts, in reverse
order of priority of distribution, to the extent
described under "DESCRIPTION OF THE CERTIFICATES --
Credit Enhancement -- Realized Losses" herein.
Denominations.............. The Offered Certificates (collectively, the
"Book-Entry Certificates") will be issued,
maintained and transferred on the book-entry
records of The Depository Trust Company ("DTC") and
its Participants in minimum denominations of
$100,000 and integral multiples of $1 in excess
thereof.
Book-Entry Certificates.... Each Class of Book-Entry Certificates will be
represented by one or more Certificates registered
in the name of Cede & Co., as nominee of DTC.
Persons acquiring beneficial ownership interests in
Book-Entry Certificates ("Beneficial Owners") will
hold their Certificate interests through DTC, in
the United States, or Cedel Bank, societe anonyme
("Cedel") or the Euroclear System ("Euroclear"), in
Europe. Transfers within DTC, Cedel or Euroclear,
as the case may be, will be made in accordance with
the usual rules and operating procedures of the
relevant system. Cross-market transfers between
persons holding directly or indirectly through DTC
and counterparts holding directly or indirectly
through Cedel or Euroclear will be effected in DTC
through Citibank, N.A. ("Citibank") or The Chase
Manhattan Bank ("Chase"), the depositaries of Cedel
and Euroclear, respectively, and each participating
member of DTC.
No Beneficial Owner will be entitled to receive a
Certificate of such Class in certificated form,
except under the limited circumstances described
herein. For each Book-Entry Certificate, DTC will
effect payments to and transfers of the Book-Entry
Certificates among the respective Beneficial Owners
by means of its electronic recordkeeping services,
acting through organizations that participate in
DTC. This arrangement may result in certain delays
in receipt of distributions by Beneficial Owners
and may restrict a Beneficial Owner's ability to
pledge the Book-Entry Certificates beneficially
owned by it. All references in this Prospectus
Supplement to the Book-Entry Certificates reflect
the rights of Beneficial Owners only as such rights
may be exercised through
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DTC and its participating organizations so long as
such Certificates are held by DTC.
See "DESCRIPTION OF THE CERTIFICATES -- Book-Entry
Registration" in the Prospectus and "ANNEX I"
hereto.
Prepayment
Considerations............. The rate of principal payments on the Offered
Certificates will depend on, among other things,
the rate and timing of principal payments
(including prepayments, repurchases, defaults and
liquidations) on the Mortgage Loans. As is the case
with mortgage-backed securities generally, the
Offered Certificates are subject to substantial
inherent cash flow uncertainties because the
Mortgage Loans may be prepaid at any time. However,
the majority of the Mortgage Loans are subject to
prepayment premiums to the extent described herein.
Generally, when prevailing interest rates increase,
prepayment rates on mortgage loans tend to decrease
in subsequent periods, resulting in a reduced rate
of return of principal to investors at a time when
reinvestment at such higher prevailing rates would
be desirable. Conversely, when prevailing interest
rates decline, prepayment rates on mortgage loans
tend to increase in subsequent periods, resulting
in an accelerated rate of return of principal to
investors at a time when reinvestment at comparable
yields may not be possible. See "PREPAYMENT AND
YIELD CONSIDERATIONS" herein.
Approximately 71.39% of the Mortgage Loans are
subject to prepayment premiums during intervals
ranging from six months to approximately five years
following origination, as described under "TRUST
FUND ASSETS -- The Mortgage Pool" herein. Such
prepayment premiums may have the effect of reducing
the amount or the likelihood of prepayment of such
Mortgage Loans during such intervals.
Yield Considerations....... The yields on the Offered Certificates will depend
on, among other things, the rate and timing of
principal payments (including prepayments,
purchases, defaults and liquidations) on the
Mortgage Loans and the allocation thereof to reduce
the Certificate Principal Amounts of such
Certificates. The yields on the Offered
Certificates will also depend on other factors,
such as the applicable Certificate Interest Rate
and the purchase price for such Certificates. The
yields on the Offered Certificates may be adversely
affected by Net Prepayment Interest Shortfalls (as
defined herein) and Realized Losses (as defined
herein) on the Mortgage Loans.
In general, in the case of any Offered Certificates
purchased at a premium, if principal payments on
the related Mortgage Loans occur at a rate faster
than anticipated at the time of purchase, the
investor's actual yield to maturity may be lower
than that originally anticipated. Conversely, in
the case of any Offered Certificates purchased at a
discount, if principal payments on the related
Mortgage Loans occur at a rate slower than that
assumed at the time of purchase, the investor's
actual yield to maturity may be lower than that
originally anticipated.
The yields of the Offered Certificates will be
affected by the application of the Excess Mortgage
Amount to maintain the Bond Overcollateralization
Amount.
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<PAGE> 11
The yields of the Offered Certificates will also be
affected by the optional redemption of the
Underlying Bond by the Bond Issuer (which will
cause an early retirement of the Certificates), the
exercise by the holder of the Class O Certificate
of its right to purchase the outstanding
Certificates (other than the Class X Certificate),
or the sale at auction of the Mortgage Loans under
the circumstances described at "DESCRIPTION OF THE
CERTIFICATES -- Termination; Optional Termination"
and "-- Special Termination of the Trust."
The Certificate Interest Rates applicable to the
Offered Certificates will be affected by the level
of LIBOR from time to time, and by the Mortgage
Rates of the Mortgage Loans from time to time as
described under "RISK FACTORS -- Effect of Mortgage
Rates on the Bond Interest Rate and the Certificate
Interest Rates."
Description of the
Underlying Bond............ A. Bond Distribution Date. The 25th day of each
month or, if such day is not a business day, the
first business day thereafter, commencing in June
1998 (each a "Bond Distribution Date"). Payments on
each Bond Distribution Date will be made to the
Certificate Trustee as the holder of the Underlying
Bond for distribution to Certificateholders on the
related Distribution Date.
B. Bond Distributions of Interest. On each Bond
Distribution Date, the holder of the Underlying
Bond will be entitled to receive interest in the
amount of the "Interest Distribution Amount" for
such Bond Distribution Date equal to interest
accrued on the then outstanding Bond Principal
Balance for such Bond immediately prior to such
Bond Distribution Date at the related Bond Interest
Rate, together with other amounts in respect of
interest as described at "DESCRIPTION OF THE
UNDERLYING BOND -- Bond Interest". The interest
rate for the Underlying Bond (the "Bond Interest
Rate") on each Bond Distribution Date after the
first Bond Distribution Date and up to and
including any Bond Distribution Date on which the
Bond Principal Balance is greater than or equal to
35% of the initial Bond Principal Balance will be
equal to the least of (i) a per annum floating rate
equal to LIBOR, for the related Accrual Period,
plus 0.48%, (the "Bond Margin"), (ii) 9.50% per
annum and (iii) the Net Funds Cap. As to any Bond
Distribution Date, the "Net Funds Cap" will equal
the weighted average (by Scheduled Principal
Balance) of the Net Mortgage Rates (as defined
herein) of the Mortgage Loans. On each Bond
Distribution Date after which the Bond Principal
Balance is less than 35% of the initial Bond
Principal Balance, the Bond Interest Rate for the
remaining term of the Underlying Bond will be equal
to the least of (i) a per annum floating rate equal
to LIBOR for the related Accrual Period plus 1.90%,
(ii) 10.00% per annum and (iii) the Net Funds Cap.
The Bond Interest Rate for the first Bond
Distribution Date will equal 6.14% per annum. See
"DESCRIPTION OF THE UNDERLYING BOND -- Bond
Interest" herein and "DESCRIPTION OF THE
SECURITIES -- Payments of Interest" in the
Prospectus.
C. Bond Distributions of Principal. On each Bond
Distribution Date, to the extent funds are
available therefor, principal payments in reduction
of the then outstanding Bond Principal Balance on
the Underlying
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<PAGE> 12
Bond will be made in an amount equal to the
Principal Distribution Amount for such Bond
Distribution Date. The Principal Distribution
Amount is described under "DESCRIPTION OF THE
UNDERLYING BOND -- Bond Distributions" herein. The
"Bond Principal Balance" of the Underlying Bond on
any date of determination is the initial principal
balance thereof as of the Closing Date reduced by
all payments of principal thereon prior to such
date of determination, and any amounts representing
Applied Loss Amounts.
D. Stated Maturity of the Underlying Bond. May 25,
2028.
E. Optional Redemption of Underlying Bond;
Termination. The Underlying Bond may be redeemed in
whole, but not in part, at the Bond Issuer's
option, on the Bond Distribution Date after which
the Bond Principal Balance with respect to such
Bond Distribution Date is 35% or less of the
initial Bond Principal Balance, at a redemption
price generally equal to 100% of the unpaid Bond
Principal Balance, plus accrued and unpaid interest
thereon at the Bond Interest Rate for the
Underlying Bond (the "Redemption Price"). Upon
redemption and retirement of the Underlying Bond,
the collateral securing the Underlying Bond will be
released from the lien of the Indenture.
F. Bond Credit Enhancement. The credit enhancement
provided for the benefit of the holder of the
Underlying Bond consists solely of
overcollateralization i.e., the pledge to the Bond
Trustee on the Closing Date of Mortgage Loans
having an aggregate Scheduled Principal Balance as
of the Cut-off Date in excess of the Bond Principal
Balance on the Closing Date. Such excess is the
"Bond Overcollateralization Amount" as of the
Closing Date. Thereafter, with respect to any Bond
Distribution Date, the "Bond Overcollateralization
Amount" will equal the excess, if any, of (x) the
Pool Principal Balance as of such Bond Distribution
Date, over (y) the Bond Principal Balance as of
such Bond Distribution Date (after giving effect to
all principal payments made on the Underlying Bond
on such Bond Distribution Date). After the Closing
Date, principal distributions on the Underlying
Bond will be made on each Bond Distribution Date,
to the extent of any Excess Mortgage Amount (as
defined herein), in amounts up to the amount
necessary to maintain the Bond
Overcollateralization Amount at a level equal to
the Targeted Overcollateralization Amount. See
"DESCRIPTION OF THE CERTIFICATES -- Distributions
of Interest." The Targeted Overcollateralization
Amount may adjust after the Closing Date, as
described herein.
The "Pool Principal Balance" with respect to any
Bond Distribution Date equals the Aggregate Loan
Balances (as defined herein) of the Mortgage Loans
outstanding on the last day of the Collection
Period preceding the month of such Bond
Distribution Date. The "Initial Pool Principal
Balance" means the Pool Principal Balance as of the
Cut-off Date. See "DESCRIPTION OF THE UNDERLYING
BOND -- Bond Principal" and "-- Bond Redemption"
herein.
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Master Servicer and
Servicers.................. The Mortgage Loans will be serviced pursuant to a
master servicing agreement to be dated as of June
1, 1998 (the "Master Servicing Agreement") among
the Bond Issuer, the Bond Trustee and Norwest Bank
Minnesota, National Association, as Master Servicer
(the "Master Servicer"). The Master Servicer will
not be ultimately responsible for the performance
of the servicing activities by the Servicer or the
Special Servicer except as described under
"SERVICING OF THE MORTGAGE LOANS" -- Prepayment
Interest Shortfalls" and "-- Advances" herein. In
the event of a termination of the Master Servicer
due to a "Master Servicing Default" under the
Master Servicing Agreement, the duties of the
Master Servicer will be assumed by the Bond
Trustee, unless an alternative successor Master
Servicer is appointed by the Bond Issuer. The
Mortgage Loans will initially be serviced by Aurora
Loan Services Inc. (the "Servicer") as described
herein. In addition, special servicing of certain
delinquent Mortgage Loans, and ongoing servicing of
such loans to the extent not liquidated, will
initially be performed by Ocwen Federal Bank FSB
(the "Special Servicer"). The Servicer and the
Special Servicer are referred to together herein,
unless the context requires otherwise, as the
"Servicers."
The Master Servicer and the Servicers will each
receive a monthly fee, in addition to other
compensation as described herein. The Special
Servicer will also receive certain additional
compensation.
In addition to the fees or other compensation paid
to the Master Servicer and Servicers, there will be
deducted from amounts received in respect of the
Mortgage Loans which are allocable to interest an
amount sufficient to provide for the payment of the
Owner Trustee's fee, the Bond Trustee's fee, the
Certificate Trustee's fee and a management fee paid
to AmREIT for management services provided to the
Bond Issuer (the "AmREIT Management Fee"). As to
each Mortgage Loan, the sum of the Master Servicing
Fee Rate, the Servicing Fee Rate, the Basic Fee
Rate (paid to the Special Servicer) and the rate at
which the Bond Trustee's fee, the Owner Trustee's
Fees and the AmREIT Management Fee are determined
is referred to as the "Bond Expense Rate." The Bond
Expense Rate together with the Certificate
Trustee's Fee Rate is referred to as the "Expense
Fee Rate." The "Net Mortgage Rate" of a Mortgage
Loan is the Mortgage Rate thereof minus the related
Expense Fee Rate. See "SERVICING OF THE MORTGAGE
LOANS -- The Master Servicer," "-- The Servicer"
and "-- The Special Servicer."
Advances................... The Master Servicer is required to make advances
("Advances") in respect of Scheduled Payments on
the Mortgage Loans, net of the Master Servicing Fee
and the applicable Servicing Fee (or Basic Fee), if
the related Servicer does not do so, subject to the
limitations described herein. The Bond Trustee will
be obligated to make any such Advance if the Master
Servicer fails in its obligation to do so, to the
extent provided in the Indenture. See "SERVICING OF
THE MORTGAGE LOANS -- Advances" herein.
Federal Income Tax
Consequences............. For federal income tax purposes, the Trust Fund
will be treated as a "financial asset
securitization investment trust" ("FASIT"). The
Senior Certificates and the Subordinate
Certificates will constitute "regular interests" in
the FASIT and will be treated as debt instruments
of the
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<PAGE> 14
Trust Fund for federal income tax purposes with
payment terms equivalent to the terms of such
Certificates. The Class O Certificate will
constitute the sole class of "ownership interest"
in the FASIT and will be the Class of FASIT
Ownership Securities, as described herein under
"FEDERAL INCOME TAX CONSEQUENCES."
Holders of the Offered Certificates will be
required to include in income interest on such
Certificates in accordance with the accrual method
of accounting. Certain Classes of Offered
Certificates may, depending on their respective
issue prices, be treated as having been issued with
"original issue discount" for federal income tax
purposes. For further information regarding the
federal income tax consequences of investing in the
Certificates, see "FEDERAL INCOME TAX CONSEQUENCES"
herein and in the Prospectus.
Legal Investment........... The Senior Certificates and the Class M-1
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 at least one nationally
recognized statistical rating agency and, as such,
are legal investments for certain entities to the
extent provided in SMMEA. SMMEA, however, provides
for State limitations on the authority of such
entities to invest in "Mortgage Related Securities"
to the extent described herein and in the
Prospectus.
Certain Classes of Certificates may be deemed
"high-risk mortgage securities" as defined in the
supervisory policy statement on securities
activities approved by the Federal Financial
Institutions Examination Council on December 3,
1991 and adopted by the Controller of the Currency,
the Federal Deposit Insurance Corporation, the
Federal Reserve Board and the Office of Thrift
Supervision.
The Depositor makes no representations as to the
proper characterization of the Offered Certificates
for legal investment or other purposes, or as to
the ability of particular investors to purchase the
Offered Certificates under applicable legal
investment restrictions. These 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 a legal investment or are
subject to investment, capital or other
restrictions. Institutions whose investment
activities are subject to review by federal or
state regulatory authorities should consult with
their counsel or the applicable authorities in
order to determine whether an investment in the
Offered Certificates complies with applicable
guidelines, policy statements or restrictions. See
"LEGAL INVESTMENT CONSIDERATIONS" in the
Prospectus.
ERISA Matters.............. The Employee Retirement Income Security Act of
1974, as amended ("ERISA"), and Section 4975 of the
Code impose certain restrictions on employee
benefit plans subject to ERISA or plans or
arrangements subject to Section 4975 of the Code
("Plans") and on persons who are parties in
interest or disqualified persons ("parties in
interest") with respect to such Plans. The Senior
Certificates may be purchased or
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<PAGE> 15
transferred to Plans provided that the conditions
of Prohibited Transaction Exemption ("PTE") 91-14
(as amended by PTE 97-34) granted to the
Underwriter are satisfied as described herein.
However, if the conditions of such exemption are
not met, an investment in the Certificates is
likely to be treated as equity interests in the
Certificate Issuer; accordingly, a fiduciary of a
Plan should carefully review with its legal
advisors whether the purchase or holding of the
Offered Certificates could give rise to a
transaction prohibited or not permissible under
ERISA or the Code. THE OFFERED SUBORDINATE
CERTIFICATES MAY NOT BE PURCHASED BY PLANS (AS
DEFINED HEREIN), EXCEPT AS DESCRIBED HEREIN AND IN
TRUST AGREEMENT. See "ERISA MATTERS" herein and in
the Prospectus.
Certificate Rating......... It is a condition to the issuance of the Senior
Certificates that they be rated "AAA" by Standard &
Poor's Rating Services, a division of The
McGraw-Hill Companies, Inc. ("S&P") and "AAA" by
Duff & Phelps Credit Rating Co. ("Duff & Phelps"
and together with S&P, the "Rating Agencies"). It
is a condition to the issuance of the Class M-1
Certificates that they be rated "AA" by Duff &
Phelps. See "RATINGS" herein.
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<PAGE> 16
RISK FACTORS
In addition to the matters described elsewhere in this Prospectus
Supplement and the accompanying Prospectus, prospective investors should
carefully consider the following factors before deciding to invest in the
Offered Certificates.
UNDERWRITING STANDARDS AND POTENTIAL DELINQUENCIES
The Mortgage Loans in the Mortgage Pool were originated by various banks,
savings and loans associations and other mortgage loan originators (the
"Originators"). The Originators' underwriting standards are primarily intended
to assess the value of a mortgaged property and to evaluate the adequacy of such
property as collateral for a mortgage loan. The originators provide loans
primarily to borrowers who do not qualify for loans conforming to the Federal
National Mortgage Association ("FNMA") and Federal Home Loan Mortgage
Corporation ("FHLMC") guidelines but who have equity in their property. Although
the Originators' primary consideration in underwriting a mortgage loan is the
value of the related mortgaged property, the Originators also consider, among
other things, a mortgagor's credit history, repayment ability and debt
service-to-income ratio, as well as the type and use of the mortgaged property.
As a result of application of the Originators' underwriting standards, the
Mortgage Loans are likely to experience rates of delinquency, foreclosure and
bankruptcy that are higher, and that may be substantially higher, than those
experienced by mortgage loans underwritten in accordance with higher standards.
Furthermore, changes in the values of mortgaged properties may have a
greater effect on the delinquency, foreclosure, bankruptcy and loss experience
of the Mortgage Loans than on mortgage loans originated under stricter
guidelines. No assurance can be given that the values of the mortgaged
properties have remained or will remain at the levels in effect on the dates of
origination of the related Mortgage Loans.
EFFECT OF MORTGAGE RATES ON THE BOND INTEREST RATE AND THE CERTIFICATE INTEREST
RATES
The calculation of the Bond Interest Rate is based in substantial part upon
the value of LIBOR and the weighted average of the Mortgage Rates (net of
certain amounts described herein) of the Mortgage Loans, which are subject to
periodic adjustment caps, maximum rates and minimum rates. In general, the
Mortgage Rates are adjusted at six-month intervals based upon Six-Month LIBOR
whereas the Bond Interest Rate is adjusted monthly based upon one-month LIBOR,
as described under "DESCRIPTION OF THE UNDERLYING BOND" herein. Consequently,
interest paid on the Underlying Bond during any Collection Period may not equal
the amount of interest that would accrue on the Underlying Bond at the
applicable Bond Interest Rate (without giving effect to the limitation thereof
by the Mortgage Rates) during the related Accrual Period. In particular, the
Bond Interest Rate adjusts monthly, while the Mortgage Rates of the Mortgage
Loans adjust semi-annually with the result that the Net Funds Cap may limit
increases in the Bond Interest Rate. The Certificate Interest Rate for each
Class of Offered Certificates is subject to the Bond Interest Rate (which, in
turn, is subject to the Net Funds Cap). Consequently, the Bond Interest Rate may
limit the Certificate Interest Rate for extended periods in a rising interest
rate environment. The Mortgage Rates on approximately 75.50% of the Mortgage
Loans will not adjust until the second anniversary of their origination.
YIELD, PREPAYMENT AND MATURITY RISKS
The rate of principal payments on the Certificates, the amount of principal
and interest payments on the Certificates and the yields to maturity of the
Certificates will be directly related to the amount of principal and interest
payments on the Underlying Bond (which will, in turn, be directly related to the
rate of principal and interest payments on the Mortgage Loans). The rate of
principal payments on the Mortgage Loans will in turn be affected by the
amortization schedules of the Mortgage Loans, the rate of principal prepayments
(including partial prepayments and those resulting from refinancing) thereon by
mortgagors, liquidations of defaulted Mortgage Loans, repurchases by AmREIT or
other persons of Deleted Mortgage Loans as a result of defective documentation
or breaches of representations or warranties, purchases of defaulted or
delinquent
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<PAGE> 17
Mortgage Loans by the Special Servicer (or the holder of the investor
certificate (as defined herein) under the Deposit Trust Agreement).
The rate of payments (including prepayments) on mortgage loans is
influenced by a variety of economic, geographic, social and other factors. If
prevailing rates for similar mortgage loans fall below the Mortgage Rates on the
Mortgage Loans, the rate of prepayment would generally be expected to increase.
Conversely, if prevailing rates for similar mortgage loans rise above the
Mortgage Rates on the Mortgage Loans, the rate of prepayment would generally be
expected to decrease. An investor that purchases an Offered Certificate at a
discount should consider the risk that a slower than anticipated rate of
principal payments on the Mortgage Loans will result in an actual yield that is
lower than such investor's expected yield. An investor that purchases an Offered
Certificate at a premium should consider the risk that a faster than anticipated
rate of principal payments on the Mortgage Loans will result in an actual yield
that is lower than such investor's expected yield.
The yields on the Offered Certificates may be affected by the adjustment of
the Mortgage Rates of the Mortgage Loans on the related Adjustment Dates (as
defined herein). In addition, because the Mortgage Rate for each Mortgage Loan
is based on Six-Month LIBOR plus the related Gross Margin, such rate could be
higher than prevailing market interest rates, which may cause the related
borrower to prepay such Mortgage Loan. Finally, because the Mortgage Rates on
the Mortgage Loans are based on Six-month LIBOR while the Certificate Interest
Rates are based in part on one-month LIBOR and a substantial number of the
Mortgage Loans are Delayed Adjustment Mortgage Loans, any resulting Basis Risk
Shortfalls, to the extent not covered by amounts otherwise distributable on the
Offered Certificates as described herein, will adversely affect the yields on
the Offered Certificates. See "Prepayment and Yield Considerations."
NO REPRESENTATION IS MADE AS TO THE RATE OF PRINCIPAL PAYMENTS ON THE
MORTGAGE LOANS OR AS TO THE YIELD TO MATURITY OF ANY CLASS OF OFFERED
CERTIFICATES. INVESTORS ARE URGED TO MAKE AN INVESTMENT DECISION WITH RESPECT TO
THE OFFERED CERTIFICATES BASED ON THE ANTICIPATED YIELD TO MATURITY OF SUCH
CERTIFICATES RESULTING FROM THEIR RESPECTIVE PRICES AND EACH INVESTOR'S OWN
DETERMINATION AS TO ANTICIPATED MORTGAGE LOAN PREPAYMENT RATES.
FURTHER, INVESTORS SHOULD TAKE INTO ACCOUNT THE BOND ISSUER'S OPTION TO
REDEEM THE UNDERLYING BOND, THE CLASS O CERTIFICATEHOLDER'S RIGHT TO PURCHASE
THE CERTIFICATES (OTHER THAN THE CLASS X CERTIFICATE) AND THE SALE OF THE
MORTGAGE LOANS AT AUCTION AS DESCRIBED HEREIN UNDER "DESCRIPTION OF THE
CERTIFICATES -- TERMINATION; OPTIONAL TERMINATION; BOND REDEMPTION" AND
"-- SPECIAL TERMINATION OF THE TRUST" WOULD HAVE ON THE ANTICIPATED YIELD TO
MATURITY OF THE CERTIFICATES. BECAUSE THE BOND ISSUER'S OPTION TO REDEEM THE
UNDERLYING BOND (WHICH REDEMPTION WILL RESULT IN THE TERMINATION OF THE
CERTIFICATES) AND THE CLASS O CERTIFICATEHOLDER'S RIGHT TO PURCHASE THE
CERTIFICATES (OTHER THAN THE CLASS X CERTIFICATE) WILL BECOME EXERCISABLE WHEN A
SUBSTANTIAL PORTION OF THE PRINCIPAL AMOUNT OF THE BOND OR THE CERTIFICATES, AS
THE CASE MAY BE, WILL BE OUTSTANDING, THE BOND ISSUER'S DECISION WHETHER OR NOT
TO REDEEM THE UNDERLYING BOND AND THE CLASS O CERTIFICATEHOLDER'S DECISION
WHETHER OR NOT TO EXERCISE ITS PURCHASE OPTION TO PURCHASE THE CERTIFICATES MAY
HAVE A SIGNIFICANT IMPACT ON AN INVESTOR'S YIELD. THE BOND ISSUER'S DECISION
WHETHER OR NOT TO REDEEM THE UNDERLYING BOND WILL DEPEND UPON A NUMBER OF
FACTORS AT THE TIME THE UNDERLYING BOND FIRST BECOMES REDEEMABLE AND THEREAFTER,
WHICH FACTORS ARE NOT POSSIBLE TO PREDICT AT THE TIME OF ISSUANCE OF THE
CERTIFICATES. SIMILARLY, THE CLASS O CERTIFICATEHOLDER'S DECISION TO PURCHASE
THE CERTIFICATES (OTHER THAN THE CLASS X CERTIFICATE) WILL DEPEND ON A NUMBER OF
FACTORS AT THE TIME ITS PURCHASE OPTION FIRST BECOMES EXERCISABLE AND
THEREAFTER, INCLUDING BUT NOT LIMITED TO WHETHER THE VALUE OF THE CERTIFICATES
AT THE TIME THE OPTION MAY BE EXERCISED IS GREATER THAN THEIR PAR VALUE. NO
REPRESENTATION IS MADE AS TO WHEN OR IF THE BOND ISSUER OR THE CLASS O
CERTIFICATEHOLDER WILL ELECT TO EXERCISE THEIR RESPECTIVE OPTIONS.
ADEQUACY OF CREDIT ENHANCEMENT; RISKS OF HOLDING SUBORDINATED CERTIFICATES
The primary sources of credit enhancement for the Offered Certificates are
overcollateralization, to the extent created and maintained as described herein,
and the subordination of Certificates having a lower priority of distribution.
There can be no assurance as to whether such overcollateralization will be
maintained at the levels described herein.
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The rights of the holders of the Class M-1 Certificates to receive
distributions with respect to the Underlying Bond will be subordinated to such
rights of the Senior Certificates; the rights of the holders of the Class M-2
Certificates to receive distributions with respect to the Underlying Bond will
be subordinated to such rights of the Senior Certificates and the Class M-1
Certificates; the rights of the holder of the Class B Certificates to receive
distributions with respect to the Underlying Bond will be subordinated to such
rights of the Senior Certificates and the Mezzanine Certificates and the rights
of the holder of the Class X Certificate to receive distributions with respect
to the Underlying Bond will be subordinated to all other Classes of
Certificates. Delinquencies that are not advanced by or on behalf of the
Servicer or the Master Servicer (because the amounts, if advanced, would be
nonrecoverable), will adversely affect the yields on the Offered Certificates.
Because of the priority of distributions, shortfalls resulting from
delinquencies not so advanced will be borne first by the Class X Certificates,
second by the Class B Certificates, third by the Class M-2 Certificates, fourth
by the Class M-1 Certificates and finally, pro rata, by the Senior Certificates.
The weighted average life of, and the yield to maturity on, the Subordinate
Certificates, in decreasing order of their priority of distributions, will be
progressively more sensitive to the rate and timing of Mortgagor defaults and
the severity of ensuing losses on the Mortgage Loans. If the actual rate and
severity of unreimbursed losses on the Mortgage Loans is higher than those
assumed by a holder of a Subordinate Certificate, the actual yield to maturity
of such Certificate may be lower than the yield expected by such holder based on
such assumptions. The timing of unreimbursed losses on the Mortgage Loans will
also affect an investor's actual yield to maturity, even if the rate of defaults
and severity of losses over the life of the Mortgage Loans are consistent with
such investor's expectations. In general, the earlier a loss occurs the greater
the effect on an investor's yield to maturity. Realized Losses on the Mortgage
Loans will reduce the Class Certificate Balance of the Subordinate Certificates
to the extent of any losses allocated thereto without the receipt of cash
attributable to such reduction. See "DESCRIPTION OF THE CERTIFICATES --
Allocation of Losses" herein.
LIMITED SOURCE OF PAYMENTS -- LIMITED RECOURSE TO DEPOSITOR AND NO RECOURSE TO
SERVICER, MASTER SERVICER, SPECIAL SERVICER OR TRUSTEES
The Underlying Bond will be the sole source of payments on the
Certificates. The Certificates do not represent an interest in or obligation of
the Depositor, AmREIT, the Owner Trustee, the Bond Trustee, the Certificate
Trustee, the Servicer, the Master Servicer, the Special Servicer or any of their
affiliates, except for limited obligations of the Depositor with respect to
certain breaches of its representations and warranties. Neither the
Certificates, the Underlying Bond nor the Mortgage Loans will be guaranteed by
or insured by any governmental agency or instrumentality, the Depositor, AmREIT,
the Owner Trustee, the Bond Trustee, the Certificate Trustee, the Servicer, the
Special Servicer, the Master Servicer or any of their affiliates. Consequently,
in the event that payments on the Underlying Bond are insufficient or otherwise
unavailable to make all payments required on the Certificates, there will be no
recourse to the Depositor, AmREIT, the Owner Trustee, the Bond Trustee, the
Certificate Trustee, the Servicer, the Special Servicer, the Master Servicer or
any of their affiliates, except as herein described.
LIMITED LIQUIDITY
The Underwriter intends to make a secondary market in the Offered
Certificates, but has no obligation to do so. There is currently no secondary
market in the Offered Certificates and there can be no assurance that such a
market will develop or, if it does develop, that it will provide
Certificateholders with liquidity of investment or that it will continue for the
life of the Certificates.
LACK OF PRIMARY MORTGAGE INSURANCE
Approximately 36.68% of the Mortgage Loans have current Loan-to-Value
Ratios (as defined herein) in excess of 80%. None of such Mortgage Loans are
covered by primary mortgage insurance policies. In the event of default by the
related borrowers, liquidation of the related Mortgaged Properties is more
likely to result in a Realized Loss than if such insurance coverage had been
provided.
S-18
<PAGE> 19
GEOGRAPHIC CONCENTRATION OF THE MORTGAGE LOANS
Approximately 36.11% of the Mortgage Loans are secured by Mortgaged
Properties located in the state of California. The economy of California may be
adversely affected to a greater degree than the economies of other areas of the
country by certain developments affecting industries concentrated in such state.
In recent periods, certain regions of the United States have experienced
significant downturns in the market value of real estate. In addition, Mortgaged
Properties located in California may be more susceptible to certain types of
hazards, such as wildfires and mudslides, and certain types of special hazards
not covered by insurance, such as earthquakes, than properties located in other
parts of the country.
Federal emergency aid has been made available to property owners in several
areas of California, Florida, Georgia and other states as a result of recent
flooding, severe storms, and, in California, landslides. It is not known whether
additional areas may be affected by such conditions. Neither the Depositor nor
the Servicer has inspected the Mortgaged Properties in the affected areas, and
there can be no assurance that material damage to any Mortgaged Property in such
affected areas has not occurred. Under the Mortgage Loan Purchase Agreement (see
"TRUST FUND ASSETS" herein), AmREIT will, among other things, represent and
warrant to the Depositor that each Mortgaged Property is free of material damage
and in good repair as of the date of issuance of the Certificates. In the event
of an uncured breach of such representation and warranty that materially and
adversely affects the interest of Certificateholders, AmREIT will be required to
repurchase the affected Mortgage Loan or substitute another mortgage loan
therefor. If any damage caused by the flooding, ice storms or landslides occurs
after the Closing Date, then AmREIT will have no such obligation. In addition,
the standard hazard policies covering the Mortgage Properties generally do not
cover damage caused by flooding and landslides, and flood or landslide insurance
may not have been obtained with respect to such Mortgaged Properties. To the
extent that any insurance proceeds received with respect to any damaged
Mortgaged Properties are not applied to the restoration thereof, such proceeds
will be used to prepay the Mortgage Loans in whole or in part. Any repurchases
or prepayments of the Mortgage Loans may reduce the weighted average lives of
the Certificates offered hereby and will reduce the yields on any Certificates
purchased at a premium.
FAILURE TO QUALIFY AS A FASIT
Although Jeffers, Wilson, Shaff & Falk LLP, special tax counsel to the
Depositor, have rendered an opinion concluding that the Trust Fund will qualify
as a FASIT for federal income tax purposes, no regulations or other
administrative guidance yet exists interpreting the FASIT provisions of the
Code. Regulations could be issued in the future and those regulations could have
retroactive effect. Accordingly, there cannot be absolute certainty as to the
classification of the Trust Fund as a FASIT. If such regulations were
promulgated and if the Trust Fund failed to qualify as a FASIT under those
regulations, it might be classified as a taxable mortgage pool that would be
taxed as a corporation. Any entity level tax incurred would reduce cash
available for distribution to holders of Certificates.
CONSEQUENCES OF OWNING BOOK-ENTRY CERTIFICATES
Since transactions in Book-Entry Certificates such as the Offered
Certificates generally can be effected only through DTC, Participants and
Indirect Participants, the ability of a Beneficial Owner to pledge Book-Entry
Certificates to persons or entities that do not participate in the DTC system,
or to otherwise act with respect to such Book-Entry Certificates, may be limited
due to the lack of a physical certificate for such Book-Entry Certificates. In
addition, under a book-entry format, Beneficial Owners may experience delays in
their receipt of payments, since distributions will be made by the Certificate
Trustee, or a paying agent on behalf of the Certificate Trustee, to Cede & Co.,
as nominee for DTC. Also, issuance of Book-Entry Certificates in book-entry form
may reduce the liquidity thereof in any secondary trading market that may
develop therefor because investors may be unwilling to purchase securities for
which they cannot obtain delivery of physical certificates. See "DESCRIPTION OF
THE CERTIFICATES -- BOOK-ENTRY CERTIFICATES" herein.
S-19
<PAGE> 20
USE OF PROCEEDS
The Depositor will apply the net proceeds of the sale of the Offered
Certificates against the purchase price of the Underlying Bond.
TRUST FUND ASSETS
GENERAL
The Trust Fund Assets will consist primarily of the Underlying Bond. The
Underlying Bond will be secured by a pool (the "Mortgage Pool") of adjustable
rate, fully amortizing, conventional mortgage loans secured by first liens on
one- to four-family residential properties (each, a "Mortgaged Property") with
original terms to maturity from the first due date of the scheduled monthly
payment (a "Scheduled Payment") of not more than 30 years. None of the Mortgage
Loans will be guaranteed by any governmental agency. All of the Mortgage Loans
will have been deposited with the Bond Issuer by the Depositor which, in turn,
will have acquired them from AmREIT pursuant to the Mortgage Loan Purchase
Agreement between the Depositor and AmREIT. All of the Mortgage Loans will have
been acquired by AmREIT in the ordinary course of its business and substantially
in accordance with the underwriting criteria specified herein. This two-stage
process in which the Underlying Bond is first issued and then deposited into the
Trust Fund permits the Depositor to obtain the benefits of additional
flexibility in structuring the payment terms of the Certificates, as authorized
for FASITs, while at the same time being able to retain the Mortgage Loans as
consolidated assets of the Bond Issuer for accounting purposes.
THE MORTGAGE POOL
Under the Mortgage Loan Purchase Agreement, AmREIT will make certain
representations, warranties and covenants to the Depositor relating to, among
other things, the due execution and enforceability of the Mortgage Loan Purchase
Agreement and certain characteristics of the Mortgage Loans and, subject to the
limitations described below under "-- ASSIGNMENT OF THE MORTGAGE LOANS," will be
obligated to purchase or substitute a similar mortgage loan for any Mortgage
Loan as to which there exists deficient documentation or an uncured material
breach of any such representation, warranty or covenant. See "MORTGAGE LOAN
PROGRAM -- Representations by Sellers; Repurchases" in the Prospectus. The
Depositor will in turn assign all of its rights under the Mortgage Loan Purchase
Agreement to the Bond Issuer. Under the Indenture, the Bond Issuer will pledge
all its right, title and interest in and to such representations, warranties and
covenants (including AmREIT's repurchase or substitution obligation) to the Bond
Trustee for the benefit of the Bondholders. The Bond Issuer will make no
representations or warranties with respect to the Mortgage Loans and will have
no obligation to repurchase or substitute Mortgage Loans with deficient
documentation or which are otherwise defective. The obligations of AmREIT with
respect to the Bonds are limited to AmREIT's obligation to purchase or
substitute Mortgage Loans with deficient documentation or which are otherwise
defective as a result of a material breach of a representation or warranty under
the Mortgage Loan Purchase Agreement.
Certain information with respect to the Mortgage Pool is set forth below.
Prior to the Closing Date, Mortgage Loans may be removed from the collateral and
other Mortgage Loans may be substituted therefor. The Depositor believes that
the information set forth herein with respect to the Mortgage Loans as presently
constituted is representative of the characteristics of the Mortgage Loans as
they will be constituted at the Closing Date, although certain characteristics
of the Mortgage Loans in the Mortgage Loan Pool may vary. The final Mortgage
Pool will be filed as an exhibit to the final form of the Agreements filed on
Form 8-K following the Closing Date. Unless otherwise indicated, information
presented below expressed as a percentage (other than rates of interest) are
approximate percentages based on the Scheduled Principal Balances of the
Mortgage Loans as of the Cut-off Date. Wherever reference is made herein to a
percentage of some or all of the Mortgage Loans, such percentage is determined
(unless otherwise specified) on the basis of the aggregate Scheduled Principal
Balance of such Mortgage Loans as of the Cut-off Date.
S-20
<PAGE> 21
The Mortgage Pool will consist of approximately 3,704 conventional,
adjustable rate, fully-amortizing Mortgage Loans, having an aggregate Scheduled
Principal Balance as of the Cut-off Date (without giving effect to Scheduled
Payments due on such date) of approximately $463,075,880 (the "Cut-off Date
Balance"). The Mortgage Loans were originated or acquired by the Originators
described herein generally in accordance with the Underwriting Guidelines
described herein. Because such Underwriting Guidelines do not conform to FNMA or
FHLMC guidelines, the Mortgage Loans are likely to experience higher rates of
delinquency, foreclosure and bankruptcy than if they had been underwritten to a
higher standard. Interest on the majority of the Mortgage Loans accrues on the
basis of a 360-day year consisting of twelve 30-day months.
Each Mortgage Loan provides for semi-annual adjustment of the applicable
Mortgage Rate, as specified in the related Mortgage Note, based on the Six-Month
LIBOR Index (the "Index," as defined under "-- The Index" below) and for
corresponding adjustments to the monthly payment amount due thereon, in each
case as specified in the related Mortgage Note and subject to the limitations
described herein, except that with respect to approximately 75.50% of such
Mortgage Loans (the "Delayed Adjustment Mortgage Loans"), the first Mortgage
Rate adjustment for such Mortgage Loan will occur after an initial period of two
years following origination as described herein.
All of the Mortgage Loans are secured by first mortgages or deeds of trust
or other similar security instruments creating first liens on one- to
four-family residential properties consisting of one- to four-family dwelling
units, individual condominium units, manufactured housing or individual units in
planned unit developments.
Pursuant to its terms, each Mortgage Loan, other than a loan secured by a
condominium unit, is required to be covered by a standard hazard insurance
policy in an amount equal to the lower of the unpaid principal amount thereof or
the replacement value of the improvements on the Mortgaged Property. Generally,
a condominium association is responsible for maintaining hazard insurance
covering the entire building.
Approximately 36.68% of the Mortgage Loans have current Loan-to-Value
Ratios in excess of 80%. None of such Mortgage Loans are covered by primary
mortgage insurance policies. The "Loan-to-Value Ratio" of a Mortgage Loan at any
time is the principal balance of such Mortgage Loan at the date of determination
divided by the appraised value of the Mortgaged Property.
As of the Cut-off Date, approximately 2.98% of the Mortgage Loans were one
Scheduled Payment delinquent, approximately 1.11% of the Mortgage Loans were two
Scheduled Payments delinquent and approximately 0.75% were three Scheduled
Payments or more delinquent.
Approximately 71.39% of the Mortgage Loans provide for payment by the
mortgagor of a prepayment premium in connection with certain full or partial
prepayments of principal. Generally, each such Mortgage Loan provides for
payment of a prepayment premium in connection with certain partial prepayments
and prepayments in full made within the period of time specified in the related
Mortgage Note, ranging from one to approximately five years from the date of
origination of such Mortgage Loan, as described herein. The amount of the
applicable prepayment premium, to the extent permitted under applicable state
law, is as provided in the related Mortgage Note; generally, such amount is
equal to six months' interest on any amounts prepaid in excess of 20% of the
then original principal balance of the related Mortgage Loan during any 12-
month period.
Each Mortgage Loan provides for semi-annual adjustment of the related
Mortgage Rate, as specified in the related Mortgage Note, and for corresponding
adjustments to the monthly payment amount due thereon, in each case on each
adjustment date applicable thereto (each such date, an "Adjustment Date");
provided that the first such adjustment for the Delayed Adjustment Mortgage
Loans will occur after an initial period of two years following origination. On
each Adjustment Date for each Mortgage Loan, the Mortgage Rate thereon will be
adjusted to equal the sum, rounded generally to the nearest multiple of 0.125%,
of the applicable Index (as described below) and a fixed percentage amount (the
"Gross Margin"), provided that in the substantial majority of cases the Mortgage
Rate on each such Mortgage Loan generally will not increase or decrease by more
than a fixed percentage specified in the related Mortgage Note (the "Periodic
Cap") on any related Adjustment Date, except in the case of the first such
adjustment with respect to a Delayed Adjustment
S-21
<PAGE> 22
Mortgage Loan, and will not exceed a specified maximum Mortgage Rate over the
life of such Mortgage Loan (the "Maximum Rate") or be less than a specified
minimum Mortgage Rate over the life of such Mortgage Loan (the "Minimum Rate").
The Mortgage Rate on the Mortgage Loans generally will not increase or decrease
on the first Adjustment Rate by more than a fixed percentage specified in the
related Mortgage Note (the "Initial Cap"); the weighted average of the Initial
Caps is approximately 1.48% per annum. Effective with the first monthly payment
due on each Mortgage Loan after each related Adjustment Date, the monthly
payment amount will be adjusted to an amount that will amortize fully the
outstanding principal balance of the related Mortgage Loan over its remaining
term, and pay interest at the Mortgage Rate as so adjusted. Due to the
application of the Initial Caps, Periodic Caps and Maximum Rates, the Mortgage
Rate on each such Mortgage Loan, as adjusted on any related Adjustment Date, may
be less than the sum of the Index and the related Gross Margin, rounded as
described herein. See "-- The Index" herein. The Mortgage Loans generally do not
permit the related mortgagor to convert the adjustable Mortgage Rate thereon to
a fixed Mortgage Rate.
The Mortgage Loans are expected to have the following approximate aggregate
characteristics as of the Cut-off Date.
<TABLE>
<S> <C>
Number of Mortgage Loans.................................... 3,704
Aggregate Loan Balance...................................... $463,075,879.91
Mortgage Rates:
Weighted Average....................................... 9.61%
Range.................................................. 6.49% to 13.90%
Weighted Average Remaining Term to Maturity (in months)..... 354
</TABLE>
The Scheduled Principal Balances of the Mortgage Loans range from
approximately $10,726 to $767,558. The Mortgage Loans had an average Scheduled
Principal Balance of approximately $125,020.
The weighted average Loan-to-Value Ratio at origination of the Mortgage
Loans is approximately 77.94%, and no Mortgage Loan has a Loan-to-Value Ratio at
origination exceeding 100.00%.
No more than approximately 0.37% of the Mortgage Loans are secured by
Mortgaged Properties located in any one zip code area.
S-22
<PAGE> 23
The following tables set forth as of the Cut-off Date the number, aggregate
Scheduled Principal Balance and percentage of the Mortgage Loans having the
stated characteristics shown in the tables in each range. (The sum of the
amounts of the aggregate Scheduled Principal Balances and the percentages in the
following tables may not equal the totals due to rounding.)
ORIGINAL LOAN-TO-VALUE RATIOS
<TABLE>
<CAPTION>
PERCENTAGE OF
AGGREGATE MORTGAGE LOANS
NUMBER OF SCHEDULED BY AGGREGATE
MORTGAGE PRINCIPAL SCHEDULED
RANGE OF ORIGINAL LOAN-TO-VALUE RATIOS(%) LOANS BALANCE PRINCIPAL BALANCE
----------------------------------------- --------- --------------- -----------------
<S> <C> <C> <C>
10.001 to 20.000................................ 5 $ 221,612.01 0.05%
20.001 to 30.000................................ 18 731,555.21 0.16
30.001 to 40.000................................ 32 1,957,965.35 0.42
40.001 to 50.000................................ 77 6,417,835.92 1.39
50.001 to 60.000................................ 185 15,031,296.90 3.25
60.001 to 70.000................................ 572 63,592,365.61 13.73
70.001 to 80.000................................ 1,611 205,255,122.38 44.32
80.001 to 90.000................................ 1,161 163,588,584.23 35.33
90.001 to 100.000................................ 43 6,279,542.30 1.36
----- --------------- ------
Total....................................... 3,704 $463,075,879.91 100.00%
===== =============== ======
</TABLE>
The weighted average original Loan-to-Value Ratio of the Mortgage Loans is
expected to be approximately 77.94%.
ORIGINAL TERMS TO MATURITY
<TABLE>
<CAPTION>
PERCENTAGE OF
AGGREGATE MORTGAGE LOANS
NUMBER OF SCHEDULED BY AGGREGATE
MORTGAGE PRINCIPAL SCHEDULED
RANGE OF MATURITIES (MONTHS) LOANS BALANCE PRINCIPAL BALANCE
---------------------------- --------- --------------- -----------------
<S> <C> <C> <C>
120.............................................. 1 $ 10,725.66 0.00%
180.............................................. 17 885,984.51 0.19
240.............................................. 2 106,692.18 0.02
334.............................................. 1 126,111.45 0.03
360.............................................. 3,683 461,946,366.11 99.76
----- --------------- ------
Total....................................... 3,704 $463,075,879.91 100.00%
===== =============== ======
</TABLE>
The weighted average original term to maturity is approximately 360 months.
S-23
<PAGE> 24
CUT-OFF DATE SCHEDULED PRINCIPAL BALANCES
<TABLE>
<CAPTION>
PERCENTAGE OF
AGGREGATE MORTGAGE LOANS
NUMBER OF SCHEDULED BY AGGREGATE
MORTGAGE PRINCIPAL SCHEDULED
RANGE OF SCHEDULED PRINCIPAL BALANCES($) LOANS BALANCE PRINCIPAL BALANCE
---------------------------------------- --------- --------------- -----------------
<S> <C> <C> <C>
1 to 50,000.............................. 490 $ 18,080,028.24 3.90%
50,001 to 100,000............................... 1,370 104,038,023.50 22.47
100,001 to 150,000............................... 873 107,062,102.27 23.12
150,001 to 200,000............................... 455 79,078,487.60 17.08
200,001 to 250,000............................... 221 48,910,568.24 10.56
250,001 to 300,000............................... 110 30,282,477.24 6.54
300,001 to 350,000............................... 64 20,750,106.65 4.48
350,001 to 400,000............................... 39 14,703,872.79 3.18
400,001 to 450,000............................... 35 14,725,824.36 3.18
450,001 to 500,000............................... 21 10,147,758.86 2.19
500,001 to 550,000............................... 7 3,718,489.85 0.80
550,001 to 600,000............................... 14 8,108,114.27 1.75
600,001 to 650,000............................... 1 643,983.48 0.14
650,001 to 700,000............................... 2 1,340,651.69 0.29
700,001 to 750,000............................... 1 717,832.60 0.16
750,001 to 800,000............................... 1 767,558.27 0.17
----- --------------- ------
Total....................................... 3,704 $463,075,879.91 100.00%
===== =============== ======
</TABLE>
The average Cut-off Date Scheduled Principal Balance is approximately
$125,020.
CURRENT MORTGAGE RATES
<TABLE>
<CAPTION>
PERCENTAGE OF
AGGREGATE MORTGAGE LOANS
NUMBER OF SCHEDULED BY AGGREGATE
MORTGAGE PRINCIPAL SCHEDULED
RANGE OF CURRENT MORTGAGE RATES(%) LOANS BALANCE PRINCIPAL BALANCE
---------------------------------- --------- --------------- -----------------
<S> <C> <C> <C>
6.001 to 6.500................................. 3 $ 267,090.20 0.06%
6.501 to 7.000................................. 17 2,313,551.61 0.50
7.001 to 7.500................................. 42 7,227,387.88 1.56
7.501 to 8.000................................. 122 20,265,832.80 4.38
8.001 to 8.500................................. 290 45,099,172.10 9.74
8.501 to 9.000................................. 548 84,116,455.04 18.16
9.001 to 9.500................................. 586 82,102,786.70 17.73
9.501 to 10.000................................. 794 94,754,061.22 20.46
10.001 to 10.500................................. 469 52,543,042.43 11.35
10.501 to 11.000................................. 390 39,963,186.72 8.63
11.001 to 11.500................................. 182 15,604,159.76 3.37
11.501 to 12.000................................. 123 9,136,392.45 1.97
12.001 to 12.500................................. 65 5,247,955.28 1.13
12.501 to 13.000................................. 40 2,337,418.65 0.50
13.001 to 13.500................................. 22 1,538,431.26 0.33
13.501 to 14.000................................. 11 558,955.81 0.12
----- --------------- ------
Total....................................... 3,704 $463,075,879.91 100.00%
===== =============== ======
</TABLE>
The weighted average Mortgage Rate is approximately 9.61% per annum.
S-24
<PAGE> 25
GEOGRAPHIC DISTRIBUTION
<TABLE>
<CAPTION>
PERCENTAGE OF
AGGREGATE MORTGAGE LOANS
NUMBER OF SCHEDULED BY AGGREGATE
MORTGAGE PRINCIPAL SCHEDULED
STATE LOANS BALANCE PRINCIPAL BALANCE
----- --------- --------------- -----------------
<S> <C> <C> <C>
California....................................... 950 $167,237,503.88 36.11%
Colorado......................................... 292 36,317,948.23 7.84
Oregon........................................... 228 27,789,600.99 6.00
Michigan......................................... 271 26,547,913.93 5.73
Utah............................................. 167 20,281,667.21 4.38
Texas............................................ 221 19,532,641.85 4.22
Florida.......................................... 210 18,732,772.08 4.05
Illinois......................................... 113 14,054,281.97 3.03
Washington....................................... 118 13,881,427.11 3.00
Minnesota........................................ 122 13,290,255.75 2.87
New York......................................... 93 11,852,232.74 2.56
Nevada........................................... 67 8,826,327.28 1.91
Georgia.......................................... 59 7,734,264.33 1.67
Arizona.......................................... 52 6,792,299.11 1.47
Ohio............................................. 75 6,026,460.75 1.30
Hawaii........................................... 37 5,756,733.48 1.24
Idaho............................................ 67 5,216,092.72 1.13
Maryland......................................... 33 5,148,658.53 1.11
Massachusetts.................................... 42 4,972,059.79 1.07
New Jersey....................................... 27 3,883,975.41 0.84
Pennsylvania..................................... 43 3,627,811.67 0.78
New Mexico....................................... 36 3,594,846.78 0.78
Tennessee........................................ 29 3,297,613.30 0.71
Missouri......................................... 33 3,151,228.55 0.68
Oklahoma......................................... 39 2,499,730.70 0.54
Iowa............................................. 33 2,485,948.31 0.54
North Carolina................................... 22 2,294,187.16 0.50
Louisiana........................................ 29 2,269,809.42 0.49
Montana.......................................... 25 2,218,216.31 0.48
South Carolina................................... 29 2,094,230.99 0.45
Wisconsin........................................ 16 1,463,323.13 0.32
Indiana.......................................... 25 1,380,725.00 0.30
Nebraska......................................... 13 1,263,866.76 0.27
Kansas........................................... 14 1,253,553.29 0.27
Connecticut...................................... 6 963,017.49 0.21
Alabama.......................................... 12 898,109.16 0.19
Kentucky......................................... 11 871,800.71 0.19
Wyoming.......................................... 11 787,810.34 0.17
Maine............................................ 11 705,250.62 0.15
Rhode Island..................................... 6 614,495.14 0.13
District of Columbia............................. 5 512,986.84 0.11
Arkansas......................................... 6 334,802.25 0.07
Mississippi...................................... 3 245,117.10 0.05
New Hampshire.................................... 1 216,380.05 0.05
Virginia......................................... 1 81,122.60 0.02
North Dakota..................................... 1 74,779.10 0.02
----- --------------- ------
Total....................................... 3,704 $463,075,879.91 100.00%
===== =============== ======
</TABLE>
S-25
<PAGE> 26
LOAN PURPOSE
<TABLE>
<CAPTION>
PERCENTAGE OF
AGGREGATE MORTGAGE LOANS
NUMBER OF SCHEDULED BY AGGREGATE
MORTGAGE PRINCIPAL SCHEDULED
LOAN PURPOSE LOANS BALANCE PRINCIPAL BALANCE
------------ --------- --------------- -----------------
<S> <C> <C> <C>
Purchase......................................... 1,591 $198,671,708.61 42.90%
Cash Out Refinance............................... 1,295 154,003,729.52 33.26
Rate/Term Refinance.............................. 818 110,400,441.78 23.84
----- --------------- ------
Total....................................... 3,704 $463,075,879.91 100.00%
===== =============== ======
</TABLE>
OCCUPANCY STATUS(1)
<TABLE>
<CAPTION>
PERCENTAGE OF
AGGREGATE MORTGAGE LOANS
NUMBER OF SCHEDULED BY AGGREGATE
MORTGAGE PRINCIPAL SCHEDULED
OCCUPANCY STATUS LOANS BALANCE PRINCIPAL BALANCE
---------------- --------- --------------- -----------------
<S> <C> <C> <C>
Primary Home..................................... 3,384 $434,819,550.48 93.90%
Investment....................................... 264 22,347,445.30 4.83
Second Home...................................... 56 5,908,884.13 1.28
----- --------------- ------
Total....................................... 3,704 $463,075,879.91 100.00%
===== =============== ======
</TABLE>
- - ---------------
(1) Based upon representations of the related Mortgagors at the time of
origination.
PROPERTY TYPE
<TABLE>
<CAPTION>
PERCENT OF
AGGREGATE MORTGAGE LOANS
NUMBER OF SCHEDULED BY AGGREGATE
MORTGAGE PRINCIPAL SCHEDULED
PROPERTY TYPE LOANS BALANCE PRINCIPAL BALANCE
------------- --------- --------------- -----------------
<S> <C> <C> <C>
Single Family.................................... 3,058 $380,941,727.86 82.26%
Planned Unit Development......................... 269 42,974,205.83 9.28
Condominium...................................... 227 23,410,647.65 5.06
Two- to Four-Family.............................. 96 11,083,265.74 2.39
Manufactured Housing............................. 53 4,628,576.49 1.00
Town House....................................... 1 37,456.34 0.01
----- --------------- ------
Total....................................... 3,704 $463,075,879.91 100.00%
===== =============== ======
</TABLE>
S-26
<PAGE> 27
MAXIMUM MORTGAGE RATES
<TABLE>
<CAPTION>
PERCENT OF
AGGREGATE MORTGAGE LOANS
NUMBER OF SCHEDULED BY AGGREGATE
MORTGAGE PRINCIPAL SCHEDULED
RANGE OF MAXIMUM RATES(%) LOANS BALANCE PRINCIPAL BALANCE
------------------------- --------- --------------- -----------------
<S> <C> <C> <C>
10.501 to 11.000................................. 1 $ 126,679.29 0.03%
11.501 to 12.000................................. 1 94,759.00 0.02
12.001 to 12.500................................. 3 267,090.20 0.06
12.501 to 13.000................................. 18 2,807,138.16 0.61
13.001 to 13.500................................. 47 8,554,799.64 1.85
13.501 to 14.000................................. 130 21,434,671.93 4.63
14.001 to 14.500................................. 276 42,555,079.37 9.19
14.501 to 15.000................................. 522 79,352,240.29 17.14
15.001 to 15.500................................. 568 79,117,907.52 17.09
15.501 to 16.000................................. 789 95,794,717.41 20.69
16.001 to 16.500................................. 453 48,421,759.50 10.46
16.501 to 17.000................................. 402 45,418,241.29 9.81
17.001 to 17.500................................. 208 17,830,239.09 3.85
17.501 to 18.000................................. 135 10,407,618.13 2.25
18.001 to 18.500................................. 69 5,769,167.89 1.25
18.501 to 19.000................................. 45 2,817,541.54 0.61
19.001 to 19.500................................. 22 1,592,993.41 0.34
19.501 to 20.000................................. 11 478,367.34 0.10
20.001 to 20.500................................. 4 234,868.91 0.05
----- --------------- ------
Total....................................... 3,704 $463,075,879.91 100.00%
===== =============== ======
</TABLE>
The weighted average Maximum Rate of the Mortgage Loans is approximately
15.64% per annum.
REMAINING TERMS TO MATURITY
<TABLE>
<CAPTION>
PERCENT OF
AGGREGATE MORTGAGE LOANS
NUMBER OF SCHEDULED BY AGGREGATE
MORTGAGE PRINCIPAL SCHEDULED
RANGE OF MATURITY (MONTHS) LOANS BALANCE PRINCIPAL BALANCE
-------------------------- --------- --------------- -----------------
<S> <C> <C> <C>
61 to 120....................................... 1 $ 10,725.66 0.00%
121 to 180....................................... 17 885,984.51 0.19
181 to 240....................................... 2 106,692.18 0.02
301 to 360....................................... 3,684 462,072,477.56 99.78
----- --------------- ------
Total....................................... 3,704 $463,075,879.91 100.00%
===== =============== ======
</TABLE>
The weighted average remaining term to maturity of the Mortgage Loans is
approximately 354 months.
S-27
<PAGE> 28
MINIMUM MORTGAGE RATES
<TABLE>
<CAPTION>
PERCENT OF
AGGREGATE MORTGAGE LOANS
NUMBER OF SCHEDULED BY AGGREGATE
MORTGAGE PRINCIPAL SCHEDULED
RANGE OF MINIMUM RATES(%) LOANS BALANCE PRINCIPAL BALANCE
------------------------- --------- --------------- -----------------
<S> <C> <C> <C>
5.001 to 5.500................................. 4 $ 591,085.67 0.13%
5.501 to 6.000................................. 4 1,142,795.88 0.25
6.001 to 6.500................................. 21 1,834,353.28 0.40
6.501 to 7.000................................. 32 5,671,254.24 1.22
7.001 to 7.500................................. 55 9,625,730.49 2.08
7.501 to 8.000................................. 135 22,100,084.87 4.77
8.001 to 8.500................................. 308 46,450,359.99 10.03
8.501 to 9.000................................. 570 86,908,174.53 18.77
9.001 to 9.500................................. 598 82,666,282.10 17.85
9.501 to 10.000................................. 776 91,564,088.44 19.77
10.001 to 10.500................................. 436 48,027,932.45 10.37
10.501 to 11.000................................. 363 36,789,511.93 7.94
11.001 to 11.500................................. 163 13,241,785.80 2.86
11.501 to 12.000................................. 114 8,186,986.43 1.77
12.001 to 12.500................................. 59 4,846,029.03 1.05
12.501 to 13.000................................. 36 2,021,254.68 0.44
13.001 to 13.500................................. 19 849,214.29 0.18
13.501 to 14.000................................. 11 558,955.81 0.12
----- --------------- ------
Total....................................... 3,704 $463,075,879.91 100.00%
===== =============== ======
</TABLE>
The weighted average Minimum Rate of the Mortgage Loans is approximately
9.49% per annum.
S-28
<PAGE> 29
GROSS MARGINS OF THE MORTGAGE LOANS
<TABLE>
<CAPTION>
PERCENT OF
AGGREGATE MORTGAGE LOANS
NUMBER OF SCHEDULED BY AGGREGATE
MORTGAGE PRINCIPAL SCHEDULED
RANGE OF GROSS MARGINS(%) LOANS BALANCE PRINCIPAL BALANCE
------------------------- --------- --------------- -----------------
<S> <C> <C> <C>
0.001 to 0.250................................... 1 $ 97,505.21 0.02%
3.251 to 3.500................................... 1 199,365.73 0.04
3.751 to 4.000................................... 8 1,742,549.61 0.38
4.001 to 4.250................................... 1 63,413.60 0.01
4.251 to 4.500................................... 4 385,015.33 0.08
4.501 to 4.750................................... 5 480,268.76 0.10
4.751 to 5.000................................... 32 3,786,653.21 0.82
5.001 to 5.250................................... 77 10,356,416.86 2.24
5.251 to 5.500................................... 166 21,160,782.78 4.57
5.501 to 5.750................................... 99 12,569,220.79 2.71
5.751 to 6.000................................... 439 55,038,480.81 11.89
6.001 to 6.250................................... 272 37,026,648.00 8.00
6.251 to 6.500................................... 750 85,039,055.06 18.36
6.501 to 6.750................................... 238 27,447,535.27 5.93
6.751 to 7.000................................... 1,210 156,666,297.83 33.83
7.001 to 7.250................................... 256 35,060,898.01 7.57
7.251 to 7.500................................... 61 6,729,990.32 1.45
7.501 to 7.750................................... 29 3,793,884.96 0.82
7.751 to 8.000................................... 34 3,562,999.67 0.77
8.001 to 8.250................................... 13 1,078,887.12 0.23
8.251 to 8.500................................... 5 683,729.12 0.15
8.501 to 8.750................................... 2 53,679.85 0.01
9.501 to 9.750................................... 1 52,602.01 0.01
----- --------------- ------
Total....................................... 3,704 $463,075,879.91 100.00%
===== =============== ======
</TABLE>
The weighted average Gross Margin of the Mortgage Loans is approximately
6.57% per annum.
S-29
<PAGE> 30
NEXT ADJUSTMENT DATE OF THE MORTGAGE LOANS
<TABLE>
<CAPTION>
PERCENT OF
AGGREGATE MORTGAGE LOANS
NUMBER OF SCHEDULED BY AGGREGATE
MORTGAGE PRINCIPAL SCHEDULED
NEXT ADJUSTMENT DATE LOANS BALANCE PRINCIPAL BALANCE
-------------------- --------- --------------- -----------------
<S> <C> <C> <C>
May 1998......................................... 1 $ 273,777.44 0.06%
June 1998........................................ 238 31,374,515.13 6.78
July 1998........................................ 204 26,357,019.20 5.69
August 1998...................................... 12 1,118,859.72 0.24
September 1998................................... 27 3,816,647.40 0.82
October 1998..................................... 98 12,393,030.36 2.68
November 1998.................................... 295 38,177,592.64 8.24
December 1998.................................... 1 104,557.26 0.02
January 1999..................................... 1 70,979.02 0.02
February 1999.................................... 1 109,279.01 0.02
March 1999....................................... 5 376,783.46 0.08
May 1999......................................... 1 208,496.68 0.05
June 1999........................................ 7 410,622.62 0.09
July 1999........................................ 65 7,274,668.80 1.57
August 1999...................................... 67 7,491,958.71 1.62
September 1999................................... 109 12,960,308.31 2.80
October 1999..................................... 285 38,711,951.61 8.36
November 1999.................................... 888 111,612,884.24 24.10
December 1999.................................... 739 90,237,645.18 19.49
January 2000..................................... 659 79,440,444.39 17.15
February 2000.................................... 1 553,858.73 0.12
----- --------------- ------
Total....................................... 3,704 $463,075,879.91 100.00%
===== =============== ======
</TABLE>
INITIAL FIXED TERM/SUBSEQUENT ADJUSTABLE RATE TERM OF THE MORTGAGE LOANS
<TABLE>
<CAPTION>
PERCENT OF
AGGREGATE MORTGAGE LOANS
NUMBER OF SCHEDULED BY AGGREGATE
INITIAL FIXED TERM/SUBSEQUENT MORTGAGE PRINCIPAL SCHEDULED
ADJUSTABLE RATE TERM LOANS BALANCE PRINCIPAL BALANCE
----------------------------- --------- --------------- -----------------
<S> <C> <C> <C>
No Delayed Adjustment............................ 874 $113,475,397.38 24.50%
Two Years/Twenty-Eight Years..................... 2,830 349,600,482.53 75.50
----- --------------- ------
Total....................................... 3,704 $463,075,879.91 100.00%
===== =============== ======
</TABLE>
PERIODIC CAPS OF THE MORTGAGE LOANS
<TABLE>
<CAPTION>
PERCENT OF
AGGREGATE MORTGAGE LOANS
NUMBER OF SCHEDULED BY AGGREGATE
MORTGAGE PRINCIPAL SCHEDULED
PERIODIC CAP(%) LOANS BALANCE PRINCIPAL BALANCE
--------------- --------- --------------- -----------------
<S> <C> <C> <C>
1.000............................................ 3,572 $441,209,070.68 95.28%
1.500............................................ 132 21,866,809.23 4.72
----- --------------- ------
Total....................................... 3,704 $463,075,879.91 100.00%
===== =============== ======
</TABLE>
S-30
<PAGE> 31
INITIAL CAPS OF THE MORTGAGE LOANS
<TABLE>
<CAPTION>
PERCENT OF
AGGREGATE MORTGAGE LOANS
NUMBER OF SCHEDULED BY AGGREGATE
MORTGAGE PRINCIPAL SCHEDULED
INITIAL CAP(%) LOANS BALANCE PRINCIPAL BALANCE
-------------- --------- --------------- -----------------
<S> <C> <C> <C>
1.000............................................ 2,857 $348,051,860.61 75.16%
1.500............................................ 42 5,938,375.81 1.28
2.000............................................ 7 474,968.30 0.10
3.000............................................ 797 108,475,681.55 23.43
6.000............................................ 1 134,993.64 0.03
----- --------------- ------
Total....................................... 3,704 $463,075,879.91 100.00%
===== =============== ======
</TABLE>
THE INDEX
The Six-Month LIBOR Index. The Index applicable to the determination of the
Mortgage Rates for Mortgage Loans will be the average of the interbank offered
rates for six-month United States dollar deposits in the London market,
calculated as provided in the related Mortgage note and as most recently
available either (i) as of the first business day of a specified period of time
prior to such Adjustment Date, (ii) as of the business day of the month
preceding the month of such Adjustment Date or (iii) the last business day of
the second month preceding the month of such Adjustment Date occurs, as
specified in the related Mortgage Note.
ASSIGNMENT OF THE MORTGAGE LOANS
Pursuant to the Indenture, the Bond Issuer on the Closing Date will pledge,
transfer, assign, set over and otherwise convey without recourse to the Bond
Trustee in trust for the benefit of the Underlying Bondholder all right, title
and interest of the Bond Issuer in and to each Mortgage Loan and all right,
title and interest in and to all other assets included in the Collateral,
including all principal and interest received on or with respect to the Mortgage
Loans, exclusive of principal and interest due on or prior to the Cut-off Date.
In connection with such transfer and assignment, the Bond Issuer will
deliver or cause to be delivered to the Bond Trustee, or a custodian for the
Bond Trustee, among other things, the original promissory note (the "Mortgage
Note") (and any modification or amendment thereto) endorsed in blank without
recourse, the original instrument creating a first lien on the related Mortgaged
Property (the "Mortgage") with evidence of recording indicated thereon, an
assignment in recordable form of the Mortgage, the title policy with respect to
the related Mortgaged Property and, if applicable, all recorded intervening
assignments of the Mortgage and any riders or modifications to such Mortgage
Note and Mortgage (except for any such document not returned from the public
recording office, which will be delivered to the Bond Trustee as soon as the
same is available to the Bond Issuer) (collectively, the "Mortgage File").
Assignments of the Mortgage Loans to the Bond Trustee (or its nominee) will be
recorded in the appropriate public office for real property records, except in
states where, in the opinion of counsel, such recording is not required to
protect the Bond Trustee's interest in the Mortgage Loans against the claim of
any subsequent transferee or any successor to or creditor of the Bond Issuer.
The Custodians for the Bond Trustee will review each Mortgage File on or
prior to the Closing Date (or promptly after such Custodians' receipt of any
document permitted to be delivered after the Closing Date) and if any document
in a Mortgage File is found to be missing or defective in a material respect and
the Bond Issuer does not cure such defect within 90 days of notice thereof from
the Bond Trustee (or within such longer period not to exceed 180 days after the
Closing Date as provided in the Mortgage Loan Purchase Agreement in the case of
missing documents not returned from the public recording office), AmREIT will be
obligated to purchase the related Mortgage Loan. Rather than purchase the
Mortgage Loan as provided above, AmREIT may remove such Mortgage Loan (a
"Deleted Mortgage Loan") from the Collateral and substitute in its place another
mortgage loan (a "Replacement Mortgage Loan"). Any Replacement Mortgage Loan
generally will, on the date of substitution, among other characteristics set
forth in the Mortgage Loan Purchase
S-31
<PAGE> 32
Agreement, (i) have a principal balance, after deduction of all Scheduled
Payments due in the month of substitution, not in excess of, and not more than
5% less than, the Scheduled Principal Balance of the Deleted Mortgage Loan (the
amount of any shortfall to be deposited in the Bond Account by AmREIT and held
for distribution to the Bondholders on the related Distribution Date (a
"Substitution Adjustment Amount")), (ii) have a Mortgage Rate not lower than,
and not more than 1% per annum higher than, that of the Deleted Mortgage Loan,
(iii) have a Loan-to-Value Ratio not higher than that of the Deleted Mortgage
Loan, (iv) have a remaining term to maturity not greater than (and not more than
less than) that of the Deleted Mortgage Loan, and (v) comply with all of the
representations and warranties set forth in the Mortgage Loan Purchase Agreement
as of the date of substitution. This cure, purchase or substitution obligation
constitutes the sole remedy available to Certificateholders or the Bond Trustee
for omission of, or a material defect in, a Mortgage Loan document.
UNDERWRITING GUIDELINES
All of the Mortgage Loans have been purchased by AmREIT in the ordinary
course of business directly from the Originators or in the secondary mortgage
market. AmREIT approves individual institutions as eligible Originators after an
evaluation of certain criteria, including the Originator's mortgage origination
and servicing experience and financial stability. Each Originator and/or the
entity from which AmREIT purchased the Mortgage Loans has represented and
warranted that all Mortgage Loans originated and/or sold by it will have been
underwritten in accordance with standards consistent with those utilized by
mortgage lenders generally during the period of origination and have been
originated by entities that satisfy the criteria for originators of loans that
are eligible for inclusion in "mortgage-related securities."
The following is a general summary of the Underwriting Guidelines believed
by the Depositor to be generally applied, with some variation, by each
Originator. It does not purport to be a complete description of the underwriting
standards of any of the Originators.
The Underwriting Guidelines are primarily intended to evaluate the value
and adequacy of the mortgaged property as collateral; such guidelines are also
intended, to a lesser extent, to consider the mortgagor's credit standing and
repayment ability. On a case-by-case basis, the Originators may determine that,
based upon compensating factors, a prospective mortgagor not strictly qualifying
under the applicable underwriting guidelines warrants an underwriting exception.
Compensating factors may include, but are not limited to, low loan-to-value
ratio, low debt-to-income ratio, good credit history, stable employment,
financial reserves, and time in residence at the applicant's current address. A
significant number of the Mortgage Loans may represent such underwriting
exceptions.
Under the Underwriting Guidelines, the Originators review and verify the
loan applicant's sources of income (except under the stated income programs),
calculate the amount of income from all such sources indicated on the loan
application, review the credit history of the applicant and calculate the
debt-to-income ratio to determine the applicant's ability to repay the loan, and
review the mortgaged property for compliance with the Underwriting Guidelines.
The Underwriting Guidelines are applied in accordance with a procedure that
generally requires (i) an appraisal of the mortgaged property that conforms to
FNMA and FHLMC standards and (ii) a review of such appraisal, which review may
be conducted by the Originator's staff appraiser or representative and,
depending upon the original principal balance and loan-to-value ratio of the
mortgaged property, may include a review of the original appraisal or a drive-by
review appraisal of the mortgaged property. The Underwriting Guidelines
generally permit single-family loans with loan-to-value ratios at origination of
up to 90% (or, with respect to certain Mortgage Loans, up to 95%) for the
highest credit grading category (80% under the stated income programs),
depending on the creditworthiness of the mortgagor and, in some cases, the type
and use of the property and the debt-to-income ratio. Under the Underwriting
Guidelines, the maximum combined loan-to-value ratio for purchase money mortgage
loans may differ from those applicable to refinancings.
The Mortgage Loans were originated on the basis of loan application
packages submitted through mortgage brokerage companies or at the related
Originator's retail branches or were purchased from originators approved by the
Originators. Loan application packages submitted through mortgage brokerage
S-32
<PAGE> 33
companies, containing in each case relevant credit, property and underwriting
information on the loan request, are compiled by the applicable mortgage
brokerage company and submitted to the Originator for approval and funding. The
mortgage brokerage companies receive all or a portion of the loan origination
fee charged to the mortgagor at the time the loan is made.
Each prospective borrower completes an application that includes
information with respect to the applicant's liabilities, income (except with
respect to certain "No Documentation" mortgage loans described below) and
employment history, as well as certain other personal information. Each
Originator requires a credit report on each applicant from a credit reporting
company. The report typically contains information relating to such matters as
credit history with local and national merchants and lenders, installment debt
payments and any record of defaults, bankruptcy, repossession, suits or
judgments.
Mortgaged properties that are to secure mortgage loans are generally
appraised by qualified independent appraisers. Each appraisal includes a market
data analysis based on recent sales of comparable homes in the area and, where
deemed appropriate, replacement cost analysis based on the current cost of
constructing a similar home. Except with respect to purchase money mortgage
loans, independent appraisals are generally reviewed by the related Originators
before the loan is funded, and a drive-by review or appraisal is generally
performed in connection with loan amounts over a certain predetermined dollar
amount established for each state. With respect to purchase money mortgage
loans, an independent appraisal may or may not be reviewed by the Originator.
The Underwriting Guidelines are less stringent than the standards generally
acceptable to FNMA and FHLMC. Mortgagors who qualify under the Underwriting
Guidelines generally have payment histories and debt ratios that would not
satisfy FNMA and FHLMC underwriting guidelines and may have a record of major
derogatory credit items such as outstanding judgments or prior bankruptcies. The
Underwriting Guidelines establish the maximum permitted loan-to-value ratio for
each loan type based upon these and other risk factors. Because such
Underwriting Guidelines do not conform to FNMA or FHLMC guidelines, the Mortgage
Loans are likely to experience higher rates of delinquency, foreclosure and
bankruptcy than if they had been underwritten to a higher standard. See "RISK
FACTORS -- Underwriting Standards and Potential Delinquencies" herein.
In general, a substantial majority of the Mortgage Loans were originated
consistent with and generally conform to "Full Documentation," "Limited
Documentation," or "Stated Income Documentation" residential loan programs.
Under each of such programs, the related Originator generally reviews the
applicant's source of income, calculates the amount of income from sources
indicated on the loan application or similar documentation, reviews the credit
history of the applicant, calculates the debt service-to-income ratio to
determine the applicant's ability to repay the loan, and reviews the type and
use of the property being financed. The Underwriting Guidelines require that
mortgage loans be underwritten according to a standardized procedure that
complies with applicable federal and state laws and regulations and requires the
Originator's underwriters to be satisfied that the value of the property being
financed, as indicated by an appraisal and a review of the appraisal, supports
the outstanding loan balance. The Underwriting Guidelines permit one- to
four-family loans to have loan-to-value ratios at origination of generally up to
90% (or, in certain cases, 95%), depending on, among other things, the loan
documentation program, the purpose of the mortgage loan, the mortgagor's credit
history, and repayment ability, as well as the type and use of the property.
With respect to mortgage loans secured by mortgaged properties acquired by a
mortgagor under a "lease option purchase," the loan-to-value ratio of the
related mortgage loan is generally based on the appraised value at the time of
origination of such mortgage loan.
Certain of the Mortgage Loans were originated under "No Documentation"
programs, pursuant to which no information was obtained regarding the borrowers'
income or employment and there was no verification of the borrowers' assets.
Under the Full Documentation programs, applicants generally are required to
submit two written forms of verification of stable income for 24 months (or, if
certain loan-to-value ratio guidelines are met, for 12 months). Under the
Limited Documentation programs, generally one such form of verification is
required for six or 12 months, depending upon the practices of the applicable
Originator. Under the Stated Income
S-33
<PAGE> 34
Documentation programs, generally an applicant may be qualified based upon
monthly income as stated on the mortgage loan application if the applicant meets
certain criteria. All the foregoing programs typically require that with respect
to each applicant, there be a telephone verification of the applicant's
employment. Verification of the source of funds (if any) required to be
deposited by the applicant into escrow in the case of a purchase money loan is
generally required under the Full Documentation program guidelines, except, with
respect to certain Originators, in the case of mortgage loans with loan-to-value
ratios below a specified level. Generally, no such verification is required
under the other programs.
Under the Underwriting Guidelines, various risk categories are used to
grade the likelihood that the mortgagor will satisfy the repayment conditions of
the mortgage loan. These categories establish the maximum permitted
loan-to-value ratio and loan amount, given the occupancy status of the mortgage
property and the mortgagor's credit history and debt ratio. In general, higher
credit risk mortgage loans are graded in categories that permit higher debt
ratios and more (or more recent) major derogatory credit items such as
outstanding judgments or prior bankruptcies; however, the Underwriting
Guidelines establish lower maximum loan-to-value ratios and maximum loan amounts
for loans graded in such categories.
A substantial portion of the Mortgage Loans were classified by the related
Originators in relatively low -- that is, relatively higher risk -- credit
categories. The incidence of delinquency, default and bankruptcy with respect to
such Mortgage Loans is expected to be greater than if such Mortgage Loans had
been classified in relatively higher categories.
S-34
<PAGE> 35
Substantially all of the Mortgage Loans are residential Mortgage Loans made
to borrowers with credit ratings below the conforming Mortgage Loan underwriting
guidelines ("Sub-prime Mortgage Loans"). The following matrix generally
describes the underwriting criteria employed by AmREIT in evaluating the credit
quality of Sub-prime Mortgage Loans. Such underwriting criteria may differ from
the criteria employed by the Originators of the Mortgage Loans.
CREDIT GRADE TABLE
<TABLE>
<CAPTION>
MAXIMUM
LOAN-TO-VALUE* RATIOS
MAXIMUM MORTGAGE ------------------------------- MAXIMUM
CREDIT DELINQUENCIES PROPERTY OWNER NON-OWNER DEBT-TO-INCOME
LEVEL DURING LAST YEAR CONSUMER CREDIT TYPE OCCUPIED OCCUPIED RATIOS
- - ------ ---------------- --------------- -------- -------- --------- -----------------
<C> <S> <C> <C> <C> <C> <C>
A Up to one 30-day Generally excellent credit for the SFR/PUD 85-90% 75-80% 45%
last two years, with only minor
derogatory accounts permitted. No Condo's/ 75-80% 70-75%
bankruptcy, discharge, or notice of 2-4
default filings during preceding units
three years.
A- Up to two 30-day Generally good credit for the last SFR/PUD 85-90% 75-80% 45%
two years, with minor derogatory
accounts permitted. Overall credit Condo's/ 75-80% 70-75%
paid as agreed. No bankruptcy, 2-4
discharge, or notice of default units
filings during preceding two years.
B Up to four Satisfactory credit with recurring SFR/PUD 80-85% 70-75% 50%
30-day 30-day accounts & minor 60-day
accounts. Isolated judgements and Condo's/ 70-75% 65-70%
charge-offs permitted on a 2-4
case-by-case basis. No bankruptcy, units
discharge, or notice of default
filings during preceding two years.
B- One-60-day Satisfactory credit with recurring SFR/PUD 80-85% 70-76% 50%
30-day accounts & minor 60-day
accounts. Isolated judgements and Condo's/ 70-75% 65-70%
charge-offs permitted on a 2-4
case-by-case basis. No bankruptcy, units
discharge, or notice of default
filings during preceding two years.
C Up to One-90-day Generally poor credit, as the SFR/PUD 70-75% 65-70% 55%
applicant may have experienced
significant credit problems in the Condo's/ 65-70% 60-65%
past, including judgements, charge- 2-4
offs and collection accounts. On a units
case-by-case basis, a notice of
default/ foreclosure filing may have
occurred in the last twelve months
with a good explanation. Not
currently in bankruptcy, but may have
recently occurred with proof of
dismissal/ discharge.
C-/D Up to One 120- High-risk credit, as the applicant SFR/PUD 70-75% 65-70% 60%
day may be currently experiencing
significant credit problems, Condo's/ 65-70% 60-65%
including being subject to notice of 2-4
default/ foreclosure filings or units
currently in bankruptcy.
</TABLE>
- - ---------------
* The maximum Loan-To-Value ("LTV") set forth in the Table is for borrowers
providing Full Documentation. The LTV is reduced 5% for Limited Documentation
and 10% for Stated Income Documentation applications, if applicable.
DESCRIPTION OF THE CERTIFICATES
GENERAL
The Certificates will be issued pursuant to a Trust Agreement, dated as of
June 1, 1998 (the "Trust Agreement"), between the Depositor and the Certificate
Trustee. The form of Trust Agreement has been filed as an exhibit to the
Registration Statement of which the Prospectus Supplement and the Prospectus is
a part. The following is a summary of the material terms of the Offered
Certificates. Reference is made to the Prospectus for important additional
information regarding the terms and conditions of the Trust Agreement and the
Certificates. When particular provisions or terms used in the Trust Agreement
are referred to, the actual provisions (including definitions of terms) are
incorporated by reference.
S-35
<PAGE> 36
The Mortgage-Backed Callable Certificates, Series 1998-1 (the
"Certificates") will consist of the Class A-1 Certificates and the Class A-2
Certificates (the "Class A-1 Certificates" and the "Class A-2 Certificates,"
respectively, and collectively, the "Senior Certificates"), the Class M-1
Certificates and the Class M-2 Certificates (collectively, the "Mezzanine
Certificates"), the Class B Certificates, the Class X Certificate and the Class
O Certificate (the "Ownership Certificate"). The Mezzanine Certificates, the
Class B Certificates and the Class X Certificate are collectively referred to
sometimes herein as the "Subordinate Certificates" and the Class M-1
Certificates are referred to herein as the "Offered Subordinate Certificates."
Only the Senior Certificates and the Class M-1 Certificates (the "Offered
Certificates") are offered hereby.
Each Class of Offered Certificates will have the respective approximate
initial aggregate Certificate Principal Amount (a "Class Certificate Principal
Amount") set forth or described on the cover page hereof. The Class X
Certificate (which does not have a stated Class Certificate Principal Amount)
will be entitled to certain amounts released from the Reserve Fund in excess of
the Required Reserve Fund Amount (as more fully described herein). The Ownership
Certificate will not have a Class Certificate Principal Amount and will not bear
interest. The aggregate Certificate Principal Amount of the Certificates, and
the initial Class Certificate Principal Amount of each Class of Offered
Certificates, may be increased or decreased by up to five percent to the extent
that the Cut-off Date Balance of the Mortgage Loans is increased or decreased as
described under "Trust Fund Assets -- The Mortgage Pool."
The Senior Certificates in the aggregate will evidence an initial
beneficial ownership interest of approximately 82.32% in the initial Bond
Principal Balance; the Mezzanine Certificates in the aggregate will evidence
approximately 13.88% of the undivided interest in the initial Bond Principal
Balance; and the Class B Certificates evidence in the aggregate the remaining
3.80% undivided interest in the initial Bond Principal Balance.
Distributions on the Offered Certificates will be made on each Distribution
Date, commencing in June 1998, to Certificateholders of record on the applicable
Record Date. The "Record Date" for each Distribution Date will be the close of
business on the Business Day immediately preceding such Distribution Date. A
"Business Day" is generally any day other than a Saturday or Sunday or a day on
which banks in New York, North Carolina, Minnesota or Maryland (or, as to each
Servicer, such other states as are specified in the related Servicing Agreement)
are closed.
Distributions on the Offered Certificates will be made to each registered
holder entitled thereto, either (i) by check mailed to the address of such
Certificateholder as it appears on the books of the Certificate Trustee, or (ii)
at the request, submitted to the Certificate Trustee in writing at least five
Business Days prior to the related Record Date, of any holder of an Offered
Certificate having an initial Certificate Principal Amount of not less than
$2,500,000, by wire transfer (at the expense of such holder) in immediately
available funds; provided, that the final distribution in respect of any Offered
Certificate will be made only upon presentation and surrender of such
Certificate at the Corporate Trust Office of the Trustee. See "-- The Trustee"
herein.
The Offered Certificates (the "Book-Entry Certificates") will be issued,
maintained and transferred on the book-entry records of The Depository Trust
Company ("DTC") and its Participants (as defined herein). The Book-Entry
Certificates will be issued in minimum denominations of $100,000 and integral
multiples of $1 in excess thereof.
Each Class of Book-Entry Certificates will be represented by one or more
certificates registered in the name of the nominee of DTC. The Depositor has
been informed by DTC that DTC's nominee will be Cede & Co. No person acquiring
an interest in a Book-Entry Certificate (each, a "Beneficial Owner") will be
entitled to receive a certificate representing such person's interest (a
"Definitive Certificate"), except as set forth below under "-- Book-Entry
Registration -- Definitive Certificates." Unless and until Definitive
Certificates are issued for the Book-Entry Certificates under the limited
circumstances described herein, all references to actions by Certificateholders
with respect to the Book-Entry Certificates shall refer to actions taken by DTC
upon instructions from its Participants, and all references herein to
distributions, notices, reports and statements to Certificateholders with
respect to the Book-Entry Certificates shall refer to
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distributions, notices, reports and statements to DTC or Cede & Co., as the
registered holder of the Book-Entry Certificates, for distribution to Beneficial
Owners by DTC in accordance with DTC procedures.
BOOK-ENTRY REGISTRATION
General. Beneficial Owners will hold their Certificates through DTC in the
United States, or Cedel or Euroclear (in Europe) if they are participants of
such systems, or indirectly through organizations which are participants in such
systems. Each Class of Book-Entry Certificates will be issued in one or more
certificates that equal the initial Class Certificate Principal Amount of the
related Class of Offered Certificates and will initially be registered in the
name of Cede & Co., the nominee of DTC. Cedel and Euroclear will hold omnibus
positions on behalf of their participants through customers' securities accounts
in Cedel's and Euroclear's names on the books of their respective depositaries
which in turn will hold such positions in customers' securities accounts in the
depositaries names on the books of DTC. Citibank will act as depositary for
Cedel and Chase will act as depositary for Euroclear (in such capacities,
individually the "Relevant Depositary" and collectively, the "European
Depositaries"). Beneficial Owners will not be entitled to receive a physical
certificate representing such Certificate (a "Definitive Certificate"). Unless
and until Definitive Certificates are issued, it is anticipated that the only
"Certificateholder" of the Offered Certificates will be Cede & Co., as nominee
of DTC. Beneficial Owners will not be Certificateholders as that term is used in
the Agreement. Beneficial Owners are only permitted to exercise their rights
indirectly through Participants and DTC.
The beneficial owner's ownership of a Book-Entry Certificate will be
recorded on the records of the brokerage firm, bank, thrift institution or other
financial intermediary (each, a "Financial Intermediary") that maintains the
beneficial owner's account for such purpose. In turn, the Financial
Intermediary's ownership of such Book-Entry Certificate will be recorded on the
records of DTC (or of a participating firm (a "Participant") that acts as agent
for the Financial Intermediary, whose interest will in turn be recorded on the
records of DTC, if the beneficial owner's Financial Intermediary is not a DTC
participant and on the records of Cedel or Euroclear, as appropriate).
Beneficial Owners will receive all distributions of principal of, and
interest on, the Offered Certificates from the Certificate Trustee through DTC
and DTC participants. While the Offered Certificates are outstanding (except
under the circumstances described below), under the rules, regulations and
procedures creating and affecting DTC and its operations (the "Rules"), DTC is
required to make book-entry transfers among Participants on whose behalf it acts
with respect to the Offered Certificates and is required to receive and transmit
distributions of principal of, and interest on, the Offered Certificates.
Participants and indirect participants with whom Beneficial Owners have accounts
with respect to Offered Certificates are similarly required to make book-entry
transfers and receive and transmit such distributions on behalf of their
respective Beneficial Owners. Accordingly, although Beneficial Owners will not
possess certificates, the Rules provide a mechanism by which Beneficial Owners
will receive distributions and will be able to transfer their interest.
Beneficial Owners will not receive or be entitled to receive certificates
representing their respective interests in the Offered Certificates, except
under the limited circumstances described below. Unless and until Definitive
Certificates are issued, Beneficial Owners who are not Participants may transfer
ownership of Offered Certificates only through Participants and indirect
participants by instructing such Participants and indirect participants to
transfer Offered Certificates, by book-entry transfer, through DTC for the
account of the purchasers of such Offered Certificates, which account is
maintained with their respective Participants. Under the Rules and in accordance
with DTC's normal procedures, transfer of ownership of Book-Entry Certificates
will be executed through DTC and the accounts of the respective Participants at
DTC will be debited and credited. Similarly, the Participants and indirect
participants will make debits or credits, as the case may be, on their records
on behalf of the selling and purchasing Beneficial Owners.
Because of time zone differences, credits of securities received in Cedel
or Euroclear as a result of a transaction with a Participant will be made during
subsequent securities settlement processing and dated the business day following
the DTC settlement date. Such credits or any transactions in such securities
settled during such processing will be reported to the relevant Euroclear or
Cedel Participants on such business day.
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Cash received in Cedel or Euroclear as a result of sales of securities by or
through a Cedel Participant (as defined below) or Euroclear Participant (as
defined below) to a DTC Participant will be received with value on the DTC
settlement date but will be available in the relevant Cedel or Euroclear cash
account only as of the business day following settlement in DTC. For information
with respect to tax documentation procedures relating to the Certificates, see
"FEDERAL INCOME TAX CONSEQUENCES -- Treatment of Foreign Investors" and "GLOBAL
CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES -- Certain U.S. Federal
Income Tax Documentation Requirements" in Annex I hereto.
Transfers between Participants will occur in accordance with DTC rules.
Transfers between Cedel Participants and Euroclear Participants will occur in
accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through Cedel
Participants or Euroclear Participants, on the other, will be effected in DTC in
accordance with the DTC rules on behalf of the relevant European international
clearing system by the Relevant Depositary; however, such cross market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in such system in accordance
with its rules and procedures and within its established deadlines (European
time). The relevant European international clearing system will, if the
transaction meets its settlement requirements, deliver instructions to the
Relevant Depositary to take action to effect final settlement on its behalf by
delivering or receiving securities in DTC, and making or receiving payment in
accordance with normal procedures for same day funds settlement applicable to
DTC. Cedel Participants and Euroclear Participants may not deliver instructions
directly to the European Depositaries.
DTC, which is a New York-chartered limited purpose trust company, performs
services for its participants, some of which (and/or their representatives) own
DTC. In accordance with its normal procedures, DTC is expected to record the
positions held by each DTC participant in the Book-Entry Certificates, whether
held for its own account or as a nominee for another person. In general,
beneficial ownership of Book-Entry Certificates will be subject to the rules,
regulations and procedures governing DTC and DTC participants as in effect from
time to time.
Cedel is incorporated under the laws of Luxembourg as a professional
depository. Cedel holds securities for its participating organizations ("Cedel
Participants") and facilitates the clearance and settlement of securities
transactions between Cedel Participants through electronic book-entry changes in
accounts of Cedel Participants, thereby eliminating the need for physical
movement of certificates. Transactions may be settled in Cedel in any of 28
currencies, including United States dollars. Cedel provides to its Cedel
Participants, among other things, services for safekeeping, administration,
clearance and settlement of internationally-traded securities and securities
lending and borrowing. Cedel interfaces with domestic markets in several
countries. As a professional depository, Cedel is subject to regulation by the
Luxembourg Monetary Institute. Cedel participants are recognized financial
institutions around the world, including underwriters, securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations. Indirect access to Cedel is also available to others, such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a Cedel Participant, either directly or indirectly.
Euroclear was created in 1968 to hold securities for its participants
("Euroclear Participants") and to clear and settle transactions between
Euroclear Participants through simultaneous electronic book-entry delivery
against payment, thereby eliminating the need for physical movement of
certificates and any risk from lack of simultaneous transfers of securities and
cash. Transactions may be settled in any of 32 currencies, including United
States dollars. Euroclear includes various other services, including securities
lending and borrowing, and interfaces with domestic markets in several countries
generally similar to the arrangements for cross-market transfers with DTC
described above. Euroclear is operated by the Brussels, Belgium office of Morgan
Guaranty Trust Company of New York (the "Euroclear Operator"), under contract
with Euroclear Clearance Systems S.C., a Belgian cooperative corporation (the
"Cooperative"). All operations are conducted by the Euroclear Operator, and all
Euroclear securities clearance accounts and Euroclear cash accounts are accounts
with the Euroclear Operator, not the Cooperative. The Cooperative establishes
policy for Euroclear
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on behalf of Euroclear Participants. Euroclear Participants include banks
(including central banks), securities brokers and dealers and other professional
financial intermediaries. Indirect access to Euroclear is also available to
other firms that clear through or maintain a custodial relationship with a
Euroclear Participant, either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it is
regulated and examined by the Board of Governors of the Federal Reserve System
and the New York State Banking Department, as well as the Belgian Banking
Commission.
Securities clearance accounts and cash accounts with the Euroclear Operator
are governed by the Terms and Conditions Governing Use of Euroclear and the
related Operating Procedures of the Euroclear System and applicable Belgian law
(collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within Euroclear, withdrawals of securities and
cash from Euroclear, and receipts of payments with respect to securities in
Euroclear. All securities in Euroclear are held on a fungible basis without
attribution of specific certificates to specific securities clearance accounts.
The Euroclear Operator acts under the Terms and Conditions only on behalf of
Euroclear Participants, and has no record of or relationship with persons
holding through Euroclear Participants.
Distributions on the Book-Entry Certificates will be made on each
Distribution Date by the Certificate Trustee to DTC. DTC will be responsible for
crediting the amount of such payments to the accounts of the applicable DTC
participants in accordance with DTC's normal procedures. Each DTC participant
will be responsible for disbursing such payment to the beneficial owners of the
Book-Entry Certificates that it represents and to each Financial Intermediary
for which it acts as agent. Each such Financial Intermediary will be responsible
for disbursing funds to the beneficial owners of the Book-Entry Certificates
that it represents.
Under a book-entry format, beneficial owners of the Book-Entry Certificates
may experience some delay in their receipt of payments, since such payments will
be forwarded by the Certificate Trustee to Cede. Distributions with respect to
Certificates held through Cedel or Euroclear will be credited to the cash
accounts of Cedel Participants or Euroclear Participants in accordance with the
relevant system's rules and procedures, to the extent received by the Relevant
Depositary. Such distributions will be subject to tax reporting in accordance
with relevant United States tax laws and regulations. See "FEDERAL INCOME TAX
CONSEQUENCES -- Treatment of Foreign Investors" herein. Because DTC can only act
on behalf of Financial Intermediaries, the ability of a beneficial owner to
pledge Book-Entry Certificates to persons or entities that do not participate in
the Depository system, or otherwise take actions in respect of such Book-Entry
Certificates, may be limited due to the lack of physical certificates for such
Book-Entry Certificates. In addition, issuance of the Book-Entry Certificates in
book-entry form may reduce the liquidity of such Certificates in the secondary
market since certain potential investors may be unwilling to purchase
Certificates for which they cannot obtain physical certificates.
Monthly and annual reports to the Certificate Trust will be provided to
Cede & Co., as nominee of DTC, and may be made available by Cede & Co. to
beneficial owners upon request, in accordance with the rules, regulations and
procedures creating and affecting the Depository, and to the Financial
Intermediaries to whose DTC accounts the Book-Entry Certificates of such
beneficial owners are credited.
DTC has advised the Certificate Trustee that, unless and until Definitive
Certificates are issued, DTC will take any action permitted to be taken by the
holders of the Book-Entry Certificates under the Trust Agreement only at the
direction of one or more Financial Intermediaries to whose DTC accounts the
Book-Entry Certificates are credited, to the extent that such actions are taken
on behalf of Financial Intermediaries whose holdings include such Book-Entry
Certificates. Cedel or the Euroclear Operator, as the case may be, will take any
other action permitted to be taken by a Certificateholder under the Trust
Agreement on behalf of a Cedel Participant or Euroclear Participant only in
accordance with its relevant rules and procedures and subject to the ability of
the Relevant Depositary to effect such actions on its behalf through DTC. DTC
may take actions, at the direction of the related Participants, with respect to
some Book-Entry Certificates which conflict with actions taken with respect to
other Offered Certificates.
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Although DTC, Cedel and Euroclear have agreed to the foregoing procedures
in order to facilitate transfers of Book-Entry Certificates among participants
of DTC, Cedel and Euroclear, they are under no obligation to perform or continue
to perform such procedures and such procedures may be discontinued at any time.
Neither the Depositor, AmREIT, the Master Servicer or the Certificate
Trustee will have any responsibility for any aspect of the records relating to
or payments made on account of beneficial ownership interests of the Book-Entry
Certificates held by Cede & Co., as nominee for DTC, or for maintaining,
supervising or reviewing any records relating to such beneficial ownership
interests.
Definitive Certificates. Definitive Certificates will be issued to
Beneficial Owners or their nominees, respectively, rather than to DTC or its
nominee, only if the (a) DTC or the Depositor advises the Certificate Trustee in
writing that the DTC is no longer willing, qualified or able to discharge
properly its responsibilities as nominee and depository with respect to the
Book-Entry Certificates and the Depositor or the Certificate Trustee is unable
to locate a qualified successor; (b) the Depositor, at its sole option, elects
to terminate a book-entry system through the DTC; or (c) after the occurrence of
a Certificate Event of Default, beneficial owners having Percentage Interests
aggregating not less than 51% of all Percentage Interests evidenced by each
Class of the Book-Entry Certificates advise the Certificate Trustee and DTC
through Financial Intermediaries in writing that continuation of a book-entry
system through DTC (or a successor thereto) is no longer in the best interests
of beneficial owners. Upon the occurrence of any such event, the Certificate
Trustee is required to direct DTC to notify Participants who have ownership of
Book-Entry Certificates as indicated on the records of DTC of the availability
of Definitive Certificates for their Book-Entry Certificates. Upon surrender by
DTC of the Definitive Certificates representing the Book-Entry Certificates and
upon receipt of instructions from DTC for re-registration, the Certificate
Trustee will re-issue the Book-Entry Certificates as Definitive Certificates in
the respective principal amounts owned by individual Beneficial Owners, and
thereafter the Certificate Trustee will recognize the holders of such Definitive
Certificates as Certificateholders under the Trust Agreement.
PAYMENTS ON MORTGAGE LOANS; ACCOUNTS
On or prior to the Closing Date, the Master Servicer will establish an
account (the "Bond Account") with the Bond Trustee, which shall be maintained
(as a separate trust account) by the Master Servicer in trust for the benefit of
the Trust as holder of the Underlying Bond. Funds credited to the Bond Account
may be invested for the benefit and at the risk of the Master Servicer in
Eligible Investments, as defined in the Master Servicing Agreement, that are
scheduled to mature on or prior to the Business Day preceding the next
Distribution Date. On each Distribution Date, the Master Servicer shall withdraw
from the Bond Account the Interest Remittance Amount and the Principal
Remittance Amount and shall deposit such amounts in an account established and
maintained with the Certificate Trustee on behalf of Certificateholders (the
"Distribution Account").
DISTRIBUTIONS OF INTEREST
The amount of interest distributable on each Distribution Date in respect
of each Class of Certificates will equal the sum of Current Interest, any
applicable Basis Risk Shortfall or Unpaid Basis Risk Shortfall and any
Carryforward Interest (each as defined herein) for such date, to the extent of
the Interest Distribution Amount on such Distribution Date. Interest will accrue
on the Offered Certificates on the basis of a 360-day year and the actual number
of days elapsed in each Accrual Period.
The "Certificate Interest Rate" for each Class of Offered Certificates will
be the applicable per annum rate described on the cover page hereof (and the
Certificate Interest Rates of the Class M-2 Certificates and the Class B
Certificates will be the same formulation as the Certificate Interest Rate for
the Class M-1 Certificates except that the applicable spread over LIBOR for the
Class M-2 Certificates will be 0.70% (the "Class M-2 Spread") and the applicable
spread over LIBOR for the Class B Certificates will be 1.40% (the "Class B
Spread"); provided, that on any Distribution Date after which the Bond Principal
Balance is less than 35% at the initial Bond Principal Balance, then with
respect to each succeeding Distribution Date the
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Class A-1 Spread will be increased to 0.18%, the Class A-2 Spread will be
increased to 0.42%, the Class M-1 Spread will be increased to 1.00%, the Class
M-2 Spread will be increased to 1.20% and the Class B Spread will be increased
to 1.90%. Each of the Class A-1 Spread, the Class A-2 Spread, the Class M-1
Spread, the Class M-2 Spread and the Class B Spread is referred to herein as the
"Spread" applicable to such Class. The "Net Mortgage Rate" for any Mortgage Loan
at any time equals the Mortgage Rate thereof minus the Expense Fee Rate as
described in the Summary under "Master Servicer and Servicers". The "Certificate
Principal Amount" of any Offered Certificate will equal such Certificate
Principal Amount as of the Closing Date as reduced by all amounts previously
distributed on such Certificate in respect of principal and any Applied Loss
Amount previously allocated thereto.
The Class X Certificate is an interest-only certificate and will have a
notional principal balance equal at all times to the principal balance of the
Underlying Bond. Distributions to the Class X Certificate will be fully
subordinate to payments of principal and interest on the Senior and other
Subordinate Certificates. For each Accrual Period, interest will accrue on the
Class X Certificate notional principal balance at a rate (the "Class X
Certificate Rate") equal to the excess, if any, of (i) the Bond Interest Rate
over (ii) a rate generally equal to LIBOR plus a spread that equals the weighted
average (based upon the outstanding principal balance of such Class) of the
Class A-1 Spread, the Class A-2 Spread, the Class M-1 Spread, the Class M-2
Spread, and the Class B Spread (as those terms are defined herein).
With respect to any Distribution Date and each Class of Certificates, to
the extent that (a) the amount that would be payable if clause (i) or (ii) of
the definition of Certificate Interest Rate on the cover page hereof applicable
to any Class of Offered Certificates is used to calculate interest exceeds (b)
the amount that would be payable if the Bond Interest Rate applies (such excess,
a "Basis Risk Shortfall"), the holders of Certificates of such Class will be
entitled to the amount of such Basis Risk Shortfall or Unpaid Basis Risk
Shortfall with interest thereon at the applicable Certificate Interest Rate from
available funds on subsequent Distribution Dates. The "Unpaid Basis Risk
Shortfall" for any Class of Offered Certificates on any Distribution Date will
equal the aggregate of all Basis Risk Shortfalls for such Class for all previous
Distribution Dates, together with interest thereon at the applicable Certificate
Interest Rate, less all payments made to the holders of such Class of
Certificates in respect of such Basis Risk Shortfalls on or prior to such
Distribution Date. Similarly, with respect to any Bond Distribution Date, to the
extent that (a) the amount that would be payable if clause (i) or (ii) of the
definition of Bond Interest Rate is used to calculate interest on the Underlying
Bond exceeds (b) the amount that would be payable if the Net Funds Cap applies
(such excess, a "Bond Basis Risk Shortfall"), the holder of the Underlying Bond
will be entitled to the amount of such Bond Basis Risk Shortfall or Bond Unpaid
Basis Risk Shortfall with interest thereon at the Bond Interest Rate from
available funds on subsequent Bond Distribution Dates. The "Bond Unpaid Basis
Risk Shortfall" on any Bond Distribution Date will equal the aggregate of all
Bond Basis Risk Shortfalls for all previous Distribution Dates, together with
interest thereon at the Bond Interest Rate, less all payments made to the holder
of the Underlying Bond in respect of Bond Basis Risk Shortfalls on or prior to
such Bond Distribution Date.
"Current Interest" with respect to each Class of Offered Certificates will
equal, with respect to any Distribution Date, the aggregate amount of interest
accrued at the applicable Certificate Interest Rate during the related Accrual
Period on the Class Certificate Principal Amount of such Class (or notional
balance in the case of the Class X Certificate). "Carryforward Interest" with
respect to each Class of Offered Certificates will equal, with respect to any
Distribution Date, the sum of (i) the amount, if any, by which (x) the sum of
(A) Current Interest for such Class for the immediately preceding Distribution
Date and (B) any unpaid Carryforward Interest from previous Distribution Dates
exceeds (y) the amount distributed in respect of interest on such Class on such
immediately preceding Distribution Date, and (ii) interest on such amount for
the related Accrual Period at the applicable Certificate Interest Rate.
The "Interest Distribution Amount" with respect to any Distribution Date
will be equal the amount of interest received for such Distribution Date from
the Underlying Bond, which will be equal to one month's interest (calculated on
the basis of the actual number of days elapsed and a year of 360 days) on the
outstanding Bond Principal Balance at the then applicable Bond Interest Rate
plus other amounts received with respect to interest as described at
"DESCRIPTION OF THE UNDERLYING BOND -- Bond
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<PAGE> 42
Interest". Such amount will be payable from amounts allocable to interest on the
Mortgage Loans (the "Interest Remittance Amount") equal to (i) all interest
collected (other than Payaheads) or advanced in respect of Scheduled Payments on
the Mortgage Loans, including any prepayment premiums or penalties, during the
related Collection Period (less (x) expenses calculated at the Expense Fee Rate
and (y) unreimbursed Advances and other amounts due to the Master Servicer, the
Servicers or the Bond Trustee, to the extent allocable to interest), (ii) all
Compensating Interest (as defined herein) paid by the Master Servicer or any
Servicer with respect to the related Prepayment Period, (iii) the portion of any
Substitution Amount (as defined herein) paid during the related Prepayment
Period (as defined herein) allocable to interest, and (iv) all Net Liquidation
Proceeds and any other recoveries collected during the related Prepayment
Period, to the extent allocable to interest, as reduced in each case by
unreimbursed Advances and other amounts due to the Master Servicer, the
Servicers or the Bond Trustee, to the extent allocable to interest.
A "Payahead" is generally any Scheduled Payment intended by the related
borrower to be applied in a Collection Period subsequent to the Collection
Period in which such payment was received.
The "Substitution Amount" will be generally equal to the amount, if any, by
which the Scheduled Principal Balance of a Mortgage Loan required to be removed
from the Mortgage Pool due to a breach of representation or warranty or
defective documentation exceeds the principal balance of the related substitute
Mortgage Loan, plus unpaid interest accrued thereon at the applicable Remittance
Rate through the end of the Collection Period during which such substitution
occurs. The "Remittance Rate" for any Mortgage Loan at any time equals the
Mortgage Rate thereof minus the Master Servicing Fee Rate and the Servicing Fee
Rate (or Basic Fee Rate, as applicable).
On each Distribution Date, the Interest Distribution Amount for such date
will be distributed in the following order of priority:
(i) pro rata, to the Class A-1 and Class A-2 Certificates, Current
Interest for each such Class and such Distribution Date and any
Carryforward Interest for each such Class and such Distribution Date;
(ii) to the Class M-1 Certificates, Current Interest for such Class
and such Distribution Date;
(iii) to the Class M-2 Certificates, Current Interest for such Class
and such Distribution Date;
(iv) to the Class B Certificates, Current Interest for such Class and
such Distribution Date;
(v) pro rata, to the Class A-1 and Class A-2 Certificates, any Basis
Risk Shortfall and Unpaid Basis Risk Shortfall for each such Class and such
Distribution Date;
(vi) to the Class M-1 Certificates, any Basis Risk Shortfall and
Unpaid Basis Risk Shortfall for such Class and such Distribution Date;
(vii) to the Class M-2 Certificates, any Basis Risk Shortfall and
Unpaid Basis Risk Shortfall for such Class and such Distribution Date;
(viii) to the Class B Certificates, any Basis Risk Shortfall and
Unpaid Basis Risk Shortfall for such Class and such Distribution Date;
(ix) to the Class M-1 Certificates, any Carryforward Interest for
such Class and such Distribution Date;
(x) to the Class M-2 Certificates, any Carryforward Interest for
such Class and such Distribution Date;
(xi) to the Class B Certificates, any Carryforward Interest for such
Class and such Distribution Date; and
(xii) to the Class X Certificate, Current Interest for such Class and
such Distribution Date.
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As to any Distribution Date, to the extent a Bond Overcollaterization
Deficiency exists after distributions on the Underlying Bond required for such
Distribution Date, amounts otherwise distributable to the holder of the Class X
Certificate will be deposited in the Reserve Fund (as defined herein) until the
amount in the Reserve Fund equals the Required Reserve Fund Amount (as defined
herein).
When a principal prepayment in full is made on a Mortgage Loan, the
borrower is charged interest only to the date of such prepayment, instead of for
a full month, with a resulting reduction in interest payable for the month
during which the prepayment is made. Prepayments in part may be applied,
depending upon the practices of the applicable Servicer, as of the date of
receipt or as of the first day of the related Prepayment Period. Full or partial
prepayments (or proceeds of other liquidations) received in any calendar month
will be distributed to Offered Certificateholders on the Distribution Date
following the applicable Prepayment Period. To the extent that, as a result of a
full or partial prepayment, a mortgagor is not required to pay a full month's
interest on the amount prepaid, a shortfall in the amount available to make
distributions of interest on the related Certificates could result. The
difference between one month's interest at the Mortgage Rate, as reduced by the
Servicing Fee Rate (or Basic Fee Rate) and the Master Servicing Fee Rate, on a
Mortgage Loan as to which a voluntary prepayment has been made and the amount of
interest actually received in connection with such prepayment is a "Prepayment
Interest Shortfall." With respect to prepayments in full, but not in part, the
applicable Servicer is generally obligated to fund any resulting Prepayment
Interest Shortfalls (such payment obligation being limited to the applicable
Servicer's Servicing Fee or Basic Fee, as applicable). The Master Servicer is
obligated to reduce its Aggregate Master Servicing Compensation (as defined
herein) for the related Distribution Date to the extent necessary to fund any
Prepayment Interest Shortfalls required to be paid and not paid by the
applicable Servicer. See "SERVICING OF THE MORTGAGE LOANS -- Prepayment Interest
Shortfalls" herein. Any such payment by a Servicer or the Master Servicer is
referred to herein as "Compensating Interest." Any Prepayment Interest
Shortfalls not funded by the Servicers or the Master Servicer or from excess
interest to the extent provided in the Trust Agreement ("Net Prepayment Interest
Shortfalls") will (i) in the case of the Underlying Bond, be allocated in
reduction of the Interest Distribution Amount and (ii) in the case of each Class
of Certificates, be allocated pro rata, in reduction thereof.
DETERMINATION OF LIBOR
LIBOR will be determined by the Master Servicer in accordance with the
following provisions:
On the second London Banking Day (as defined below) immediately preceding
the first day of each Accrual Period (each, a "LIBOR Determination Date"),
(except with respect to the first Accrual Period) the Certificate Trustee will
determine the arithmetic mean of the LIBOR quotations for one-month Eurodollar
deposits ("LIBOR") for the succeeding Accrual Period on the basis of the offered
LIBOR quotations provided to the Certificate Trustee as of 11:00 a.m. (London
time) on such LIBOR Determination Date. As used herein with respect to a LIBOR
Determination Date, "London Banking Day" means any day on which commercial banks
and foreign exchange markets settle payments in London and New York City;
"Reference Banks" means four leading banks engaged in transactions in Eurodollar
deposits in the international Eurocurrency market (i) with an established place
of business in London, (ii) whose quotations appear on the Bloomberg Screen
LIUS01M Index Page on the LIBOR Determination Date in question and (iii) which
have been designated as such by the Certificate Trustee and are able and willing
to provide such quotations to the Certificate Trustee on each LIBOR
Determination Date; and "Bloomberg Screen LIUS01M Index Page" means the display
designated as page "LIUS01M" on the Bloomberg Financial Markets Commodities News
(or such other pages as may replace such page on that service for the purpose of
displaying LIBOR quotations of major banks). If any Reference Bank is removed
from the Bloomberg Screen LIUS01M Index Page or in any other way fails to meet
the qualifications of a Reference Bank, the Certificate Trustee may, in its sole
discretion, designate an alternative Reference Bank.
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On each LIBOR Determination Date, LIBOR for the next succeeding Accrual
Period will be established by the Master Servicer as follows:
(i) If on any LIBOR Determination Date two or more of the Reference
Banks provide offered LIBOR quotations on the Bloomberg Screen LIUS01M
Index Page, LIBOR for the next applicable Accrual Period will be the
arithmetic mean of such offered quotations (rounding such arithmetic mean
if necessary to the nearest five decimal places).
(ii) If on any LIBOR Determination Date only one or none of the
Reference Banks provides such offered quotations, LIBOR for the next
applicable Accrual Period will be the higher of (x) LIBOR as determined on
the previous LIBOR Determination Date and (y) the Reserve Interest Rate.
The "Reserve Interest Rate" will be the rate per annum that the Certificate
Trustee determines to be either (A) the arithmetic mean (rounding such
arithmetic mean if necessary to the nearest five decimal places) of the
one-month Eurodollar lending rate that New York City banks selected by the
Certificate Trustee are quoting, on the relevant LIBOR Determination Date,
to the principal London offices of at least two leading banks in the London
interbank market or (B) in the event that the Certificate Trustee can
determine no such arithmetic mean, the lowest one-month Eurodollar lending
rate that the New York City banks selected by the Certificate Trustee are
quoting on such LIBOR Determination Date to leading European banks.
(iii) If on any LIBOR Determination Date the Certificate Trustee is
required but is unable to determine the Reserve Interest Rate in the manner
provided in paragraph (ii) above, LIBOR for the next applicable Accrual
Period will be LIBOR as determined on the previous LIBOR Determination
Date.
Notwithstanding the foregoing, LIBOR for the next succeeding Accrual Period
shall not be based on LIBOR for the previous Accrual Period for two consecutive
LIBOR Determination Dates. If, under the priorities described above, LIBOR for
the next succeeding Accrual Period would be based on LIBOR for the previous
LIBOR Determination Date for the second consecutive LIBOR Determination Date,
the Certificate Trustee shall select an alternative index (over which the
Certificate Trustee has no control) used for determining Eurodollar lending
rates that is calculated and published (or otherwise made available) by an
independent third party.
The establishment of LIBOR by the Master Servicer and the Master Servicer's
subsequent calculation of the rate of interest applicable to the applicable
Classes of Offered Certificates for the relevant Accrual Period, in the absence
of manifest error, will be final and binding.
DISTRIBUTIONS OF PRINCIPAL
Distributions of principal on the Offered Certificates will be made on each
Distribution Date in an aggregate amount equal to the Principal Distribution
Amount for such Distribution Date.
The "Principal Distribution Amount" for any Distribution Date will be equal
to all amounts distributable as principal on the Underlying Bond which generally
will be equal to the sum of (i) the excess, if any, of the Principal Remittance
Amount for such date over, with respect to each Distribution Date, the Bond
Overcollateralization Excess Amount, if any, for such date and (ii) the Extra
Principal Distribution Amount, if any, for such date. The "Principal Remittance
Amount" for any Distribution Date will equal the sum of (i) all principal
collected (other than Payaheads) or advanced in respect of Scheduled Payments on
the Mortgage Loans during the related Collection Period (less unreimbursed
Advances and other amounts due to the Master Servicer, the Servicers or the
Owner Trustee, the Certificate Trustee or Bond Trustee, to the extent allocable
to principal), (ii) the outstanding principal balance of each Mortgage Loan that
was repurchased from the Bond Issuer during the related Prepayment Period, (iii)
the portion of any Substitution Amount paid during the related Prepayment Period
allocable to principal, and (iv) all Net Liquidation Proceeds and any other
recoveries collected during the related Prepayment Period, to the extent
allocable to principal, as reduced in each case by unreimbursed Advances and
other amounts due to the Master Servicer, the Servicers or the Owner Trustee,
the Certificate Trustee or Bond Trustee, to the extent allocable to principal.
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The "Collection Period" with respect to any Distribution Date is the
one-month period beginning on the second day of the calendar month immediately
preceding the month in which such Distribution Date occurs and ending on the
first day of the month in which such Distribution Date occurs.
The "Due Period" is the period beginning on the second day of the preceding
calendar month and ending on the due date in the current calendar month.
The "Prepayment Period" with respect to each Distribution Date is the
one-month period beginning on the Cut-off Date, in the case of the first
Distribution Date, and on the second day of the calendar month immediately
preceding the month in which the related Distribution Date occurs, in the case
of each subsequent Distribution Date, and ending on the first day of the month
in which such Distribution Date occurs.
The Principal Distribution Amount will be distributed on each Distribution
Date as follows:
On each Distribution Date (a) prior to the Stepdown Date or (b) with
respect to which a Trigger Event has occurred, the Principal Distribution
Amount for such date will be distributed in the following order of
priority:
(i) to the Class A-1 Certificates, until the Class Certificate
Principal Amount of such Class has been reduced to zero;
(ii) to the Class A-2 Certificates, until the Class Certificate
Principal Amount of such Class has been reduced to zero;
(iii) to the Class M-1 Certificates, until the Class Certificate
Principal Amount of such Class has been reduced to zero;
(iv) to the Class M-2 Certificates, until the Class Certificate
Principal Amount of such Class has been reduced to zero; and
(v) to the Class B Certificates, until the Class Certificate
Principal Amount of such Class has been reduced to zero.
On each Distribution Date (a) on or after the Stepdown Date and (b)
with respect to which a Trigger Event has not occurred, the Principal
Distribution Amount for such date will be distributed in the following
order of priority:
(i) to the Class A-1 and Class A-2 Certificates, an amount equal to
the lesser of (x) the Principal Distribution Amount for such
Distribution Date and (y) the Senior Principal Distribution Amount for
such date, in the following order of priority:
first, to the Class A-1 Certificates, until the Class
Certificate Principal Amount of such Class has been reduced to zero,
and
second, to the Class A-2 Certificates, until the Class
Certificate Principal Amount of such Class has been reduced to zero;
(ii) to the Class M-1 Certificates, an amount equal to the lesser
of (x) the excess of (1) the Principal Distribution Amount for such
Distribution Date over (2) the amount distributed to the Class A-1 and
Class A-2 Certificates on such date pursuant to clause (i) above and (y)
the Class M-1 Principal Distribution Amount for such date, until the
Class Certificate Principal Amount of such Class has been reduced to
zero;
(iii) to the Class M-2 Certificates, an amount equal to the lesser
of (x) the excess of (1) the Principal Distribution Amount for such
Distribution Date over (2) the amount distributed to the Class A-1,
Class A-2 and Class M-1 Certificates on such date pursuant to clauses
(i) and (ii) above and (y) the Class M-2 Principal Distribution Amount
for such date, until the Class Certificate Principal Amount of such
Class has been reduced to zero; and
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(iv) to the Class B Certificates, an amount equal to the lesser of
(x) the excess of (1) the Principal Distribution Amount for such
Distribution Date over (2) the amount distributed to the Class A-1,
Class A-2, Class M-1 and Class M-2 Certificates on such date pursuant to
clauses (i), (ii) and (iii) above and (y) the Class B Principal
Distribution Amount for such date, until the Class Certificate Principal
Amount of such Class has been reduced to zero.
Notwithstanding the foregoing, on any Distribution Date on which the Class
Certificate Principal Amount of each Class of Certificates having a higher
priority of distribution has been reduced to zero, any remaining Principal
Distribution Amount will be distributed to the remaining Classes of Offered
Certificates, in the order of priority set forth above, until the Class
Certificate Principal Amount of each such Class has been reduced to zero.
A "Trigger Event" has occurred with respect to any Distribution Date if the
Rolling Three Month Delinquency Rate as of the last day of the immediately
preceding Collection Period equals or exceeds 50% of the Senior Enhancement
Percentage for such Distribution Date.
The "Rolling Three Month Delinquency Rate" with respect to any Distribution
Date will be the fraction, expressed as a percentage, equal to the average of
the Pool Delinquency Rates for each of the three (or one and two, in the case of
the first and second Distribution Dates) immediately preceding Collection
Periods. The "Pool Delinquency Rate" for any Collection Period will be the
fraction, expressed as a percentage, the numerator of which is the aggregate
outstanding principal balance of all Mortgage Loans 60 or more days delinquent
(including all foreclosures and REO Properties) as of the close of business on
the last day of such Collection Period, and the denominator of which is the
Aggregate Loan Balance as of the close of business on the last day of such
Collection Period.
The "Stepdown Date" is generally the later to occur of (x) the Distribution
Date in June 2001 and (y) the first Distribution Date on which the Senior
Enhancement Percentage is greater than or equal to 37.58%.
The "Senior Principal Distribution Amount" for any Distribution Date will
be equal to (a) prior to the Stepdown Date or if a Trigger Event has occurred
with respect to such Distribution Date, 100% of the Principal Distribution
Amount and (b) on or after the Stepdown Date and as long as a Trigger Event has
not occurred with respect to such Distribution Date, the amount, if any, by
which (x) the aggregate Certificate Principal Amount of the Senior Certificates
immediately prior to such Distribution Date exceeds (y) the lesser of (A) the
product of (i) 62.42% and (ii) the Bond Principal Balance after all
distributions in reduction thereof have been made on such Distribution Date plus
the Bond Overcollateralization Amount as of such Distribution Date (such sum,
the "Stepped-up Bond Balance") and (B) the amount, if any, by which (i) the
Stepped-up Bond Balance exceeds (ii) $2,315,379.
The "Class M-1 Principal Distribution Amount" for any Distribution Date
will be equal, on or after the Stepdown Date and as long as a Trigger Event has
not occurred with respect to such Distribution Date, to the amount, if any, by
which (x) the sum of (i) the Class Certificate Principal Amounts of the Class
A-1 and Class A-2 Certificates after giving effect to distributions on such
Distribution Date and (ii) the Class Certificate Principal Amount of the Class
M-1 Certificates immediately prior to such Distribution Date exceeds (y) the
lesser of (A) the product of (i) 82.30% and (ii) the Stepped-up Bond Balance and
(B) the amount, if any, by which (i) the Stepped-up Bond Balance exceeds (ii)
$2,315,379.
The "Class M-2 Principal Distribution Amount" for any Distribution Date
will be equal, on or after the Stepdown Date and as long as a Trigger Event has
not occurred with respect to such Distribution Date, to the amount, if any, by
which (x) the sum of (i) the Class Certificate Principal Amounts of the Class
A-1, Class A-2 and Class M-1 Certificates after giving effect to distributions
on such Distribution Date and (ii) the Class Certificate Principal Amount of the
Class M-2 Certificates immediately prior to such Distribution Date exceeds (y)
the lesser of (A) the product of (i) 89.80% and (ii) the Stepped-up Bond Balance
and (B) the amount, if any, by which (i) the Stepped-up Bond Balance exceeds
(ii) $2,315,379.
The "Class B Principal Distribution Amount" for any Distribution Date will
be equal, on or after the Stepdown Date and as long as a Trigger Event has not
occurred with respect to such Distribution Date, to the
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amount, if any, by which (x) the sum of (i) the Class Certificate Principal
Amounts of the Class A-1, Class A-2, Class M-1 and Class M-2 Certificates after
giving effect to distributions on such Distribution Date and (ii) the Class
Certificate Principal Amount of the Class B Certificates immediately prior to
such Distribution Date exceeds (y) the lesser of (A) the product of (i) 97.30%
and (ii) the Stepped-up Bond Balance and (B) the amount, if any, by which (i)
the Stepped-up Bond Balance exceeds (ii) $2,315,379.
The "Senior Enhancement Percentage" with respect to any Distribution Date
will be the fraction, expressed as a percentage, the numerator of which is the
sum of the aggregate Certificate Principal Amount of the Subordinate
Certificates and the Bond Overcollateralization Amount, in each case after
giving effect to distributions on such Distribution Date, and the denominator of
which is the Stepped-up Bond Balance as of the last day of the related
Collection Period.
The "Extra Principal Distribution Amount" with respect to any Bond
Distribution Date will be equal to the lesser of (i) the Excess Mortgage Amount
for such Distribution Date as reduced by amounts in respect thereof applied on
such date to distributions of interest on the Underlying Bond and Bond Deferred
Amounts as described under "DESCRIPTION OF THE UNDERLYING BOND -- Bond
Distributions" and (ii) the Bond Overcollateralization Deficiency for such date.
The "Bond Overcollateralization Amount" with respect to any Distribution
Date will be equal to the amount, if any, by which (x) the Aggregate Loan
Balance as of the last day of the related Collection Period exceeds (y) the Bond
Principal Balance after giving effect to distributions on such Distribution
Date. On the Closing Date the Overcollateralization Amount will be an amount
specified by the Rating Agencies, expected to be approximately $6,253,880.
The "Bond Overcollateralization Deficiency" with respect to any
Distribution Date will be equal to the amount, if any, by which (x) the Targeted
Overcollateralization Amount for such Distribution Date exceeds (y) the Bond
Overcollateralization Amount for such Distribution Date .
The "Certificate Deferred Amount," with respect to each Distribution Date
and for each Class of Certificates, will be equal to the amount by which the
aggregate of Applied Loss Amounts previously applied in reduction of the Class
Certificate Principal Amount thereof exceeds the aggregate of amounts previously
distributed in reimbursement thereof.
The "Bond Deferred Amount," for each Distribution Date, will be equal to
the amount by which the aggregate of Applied Loss Amounts previously allocated
to the Bond Principal Balance exceeds the aggregate of amounts previously
distributed in respect thereof.
The "Bond Overcollateralization Excess Amount" for each Distribution Date
will be equal to the excess of (i) the Bond Overcollateralization Amount for
such date, over (ii) the Targeted Overcollateralization Amount for such date.
The "Targeted Overcollateralization Amount" with respect to any
Distribution Date will be equal to (x) prior to the Stepdown Date, the product
of 1.35% and the Cut-off Date Balance (as defined herein) and (y) on and after
the Stepdown Date, the greater of (i) the product of 2.70% and the Aggregate
Loan Balance as of the last day of the related Collection Period and (ii)
$2,315,379.
The "Scheduled Principal Balance" of any Mortgage Loan as of any date of
determination will be generally equal to its outstanding principal balance as of
the Cut-off Date, after giving effect to Scheduled Payments due on or before
such date, whether or not received, reduced by (i) the principal portion of all
Scheduled Payments due on or before the due date in the Prepayment Period
immediately preceding such date of determination, whether or not received, and
(ii) all amounts allocable to unscheduled principal payments received on or
before the last day of the Collection Period immediately preceding such date of
determination. The "Aggregate Loan Balance" as of any date of determination will
be equal to the aggregate of the Scheduled Principal Balances of the Mortgage
Loans as of such date.
"Net Liquidation Proceeds" means all amounts, net of unreimbursed expenses
incurred in connection with liquidation or foreclosure and unreimbursed
Advances, if any, received and retained in connection with the liquidation of
defaulted Mortgage Loans, by foreclosure or otherwise, together with any net
proceeds
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received on a monthly basis with respect to any properties acquired on behalf of
the Certificateholders by foreclosure or deed in lieu of foreclosure.
CREDIT ENHANCEMENT
Credit enhancement for the Offered Certificates consists of (i) the
subordination of the Subordinate Certificates, (ii) the priority of application
of Realized Losses and (iii) overcollateralization, in each case as described
herein.
Subordination. The rights of holders of the Subordinate Certificates to
receive distributions with respect to the Underlying Bond will be subordinated,
to the extent described herein, to such rights of holders of each Class of
Offered Certificates having a higher priority of distribution, as described
under "DESCRIPTION OF THE CERTIFICATES -- Distributions of Interest" and
"-- Distributions of Principal." This subordination is intended to enhance the
likelihood of regular receipt by holders of Offered Certificates having a higher
priority of distribution of the full amount of interest and principal
distributable thereon, and to afford such Certificateholders limited protection
against Realized Losses incurred with respect to the Mortgage Loans and applied
as a Bond Deferred Amount.
The limited protection afforded to holders of Class A-1, Class A-2, Class
M-1, Class M-2 and Class B Certificates by means of the subordination of
Subordinate Certificates having a lower priority of distribution will be
accomplished by the preferential right of holders of Offered Certificates to
receive, prior to any distribution in respect of interest or principal,
respectively, being made on any Distribution Date in respect of Certificates
having a lower priority of distribution, the amounts of interest due them and
principal available for distribution, respectively, on such Distribution Date,
and, if necessary, by the right of such Certificateholders to receive future
distributions of amounts that would otherwise be distributable to holders of
lower ranking Certificates.
Realized Losses; Application of Applied Loss Amounts. If a Mortgage Loan
becomes a Liquidated Mortgage Loan during any Collection Period, the related Net
Liquidation Proceeds, to the extent allocable to principal, may be less than the
outstanding principal balance of such Mortgage Loan. The amount of such
insufficiency is a "Realized Loss." To the extent that the Mortgage Pool
experiences Realized Losses, such Realized Losses will reduce the aggregate of
amounts distributable on the Underlying Bond (and, in turn, on the Certificates)
and will reduce the aggregate Scheduled Principal Balance of the Mortgage Loans,
and thus may reduce the Bond Overcollateralization Amount. A "Liquidated
Mortgage Loan" is, in general, a defaulted Mortgage Loan as to which the
Servicer has determined that all amounts that it expects to recover in respect
of such Mortgage Loan have been recovered (exclusive of any possibility of a
deficiency judgment).
If on any Distribution Date after giving effect to all Realized Losses
incurred during the related Collection Period and distributions of principal on
such Distribution Date, the aggregate Bond Principal Balance exceeds the
Stepped-up Bond Balance as of the end of such Collection Period (such excess, an
"Applied Loss Amount"), the amount of such Applied Loss Amount will be allocated
to (but will not reduce) the Bond Principal Balance. Correspondingly, any such
Applied Loss Amount allocated to the Underlying Bond will be allocated in
reduction of the Class Certificate Principal Amounts of the Subordinate
Certificates in reverse order of priority of distribution. As a result, Applied
Loss Amounts will be allocated in reduction of the Class Certificate Principal
Amount of first, the Class B Certificates, until the Class Certificate Principal
Amount thereof has been reduced to zero; second, the Class M-2 Certificates,
until the Class Certificate Principal Amount thereof has been reduced to zero;
third, the Class M-1 Certificates, until the Class Certificate Principal Amount
thereof has been reduced to zero; and fourth, pro rata, to the Senior
Certificates.
To the extent Applied Loss Amounts have been allocated to the Underlying
Bond on previous Distribution Dates, the Underlying Bond will be entitled to
distributions of Bond Deferred Amounts to the extent the Excess Mortgage Amount
is available therefor as described under "DESCRIPTION OF THE UNDERLYING
BOND -- Bond Distributions" herein. Any Bond Deferred Amounts received in
respect of the Underlying Bond will be distributed to the Certificates in
respect of any Applied Loss Amounts previously allocated thereto, in the order
of priority of such Classes of Certificates. Any distributions of such amounts
will
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not reduce the Certificate Principal Amount of such Classes (or the Bond
Principal Balance of the Underlying Bond).
Overcollateralization. As of the Closing Date the Bond
Overcollateralization Amount is expected to be approximately $6,253,880. To the
extent described herein, the Excess Mortgage Amount (principally, the excess of
interest generated on the Mortgage Loans over amounts required to pay interest
on the Underlying Bond) will be applied as an additional payment of principal on
the Underlying Bond on any Bond Distribution Date to maintain the Bond
Overcollateralization Amount at the Targeted Overcollateralization Amount (i.e.,
the level of overcollateralization required by the Rating Agencies). The level
of Excess Mortgage Amounts from time to time will be principally influenced by
(i) the extent to which the weighted average Net Mortgage Rate exceeds the Bond
Interest Rate, and (ii) the Bond Overcollateralization Amount (i.e., the extent
that interest on the Mortgage Loans accrues on an aggregate Scheduled Principal
Balance in excess of the Bond Principal Balance). ANY EXCESS MORTGAGE AMOUNTS
NOT REQUIRED TO BE APPLIED IN PAYMENT OF THE UNDERLYING BOND AS DESCRIBED HEREIN
WILL BE RELEASED FROM THE LIEN OF THE INDENTURE AND WILL BE DISTRIBUTED TO THE
DEPOSITOR OR ITS DESIGNEE. SUCH RELEASED AMOUNTS WILL, THEREFORE, NOT BE
AVAILABLE FOR DISTRIBUTIONS ON THE CERTIFICATES.
Reserve Fund. To the extent a Bond Overcollateralization Deficiency exists
on any Distribution Date (after giving effect to all payments on the Underlying
Bond), amounts otherwise distributable to the holder of the Class X Certificate
(along with any Excess Deferred Amount Deposit) will be deposited in the Reserve
Fund until the amount on deposit therein equals the Required Reserve Fund Amount
for such date. The Reserve Fund will be held by the Certificate Trustee as an
asset of the Trust Fund. The Reserve Fund will not, however, be an asset of the
FASIT established under the Trust Agreement but will instead be owned solely by
the Holder of the Class X Certificate for Federal income tax purposes. As of any
Distribution Date, the "Excess Deferred Amount Deposit" is generally the excess
of (i) distributions in respect of the Bond Deferred Amount for such date over
(ii) distributions in respect of Certificate Deferred Amounts for such date.
On each Distribution Date, amounts on deposit in the Reserve Fund in excess
of the Required Reserve Fund Amount will be released to the holder of the Class
X Certificate. The "Required Reserve Fund Amount" on any Distribution Date will
be equal to the amount, if any, by which the Targeted Overcollateralization
Amount exceeds the Bond Overcollateralization Amount (after giving effect to any
payments to be made on such Distribution Date). Amounts on deposit in the
Reserve Fund will be invested by the Trustee in accordance with the Trust
Agreement.
On each Distribution Date, amounts on deposit in the Reserve Fund will be
applied, to the extent that any amount set forth below remains unpaid after
distributions on such Distribution Date of the Interest Distribution Amount and
Principal Distribution Amount, in the following order of priority:
(i) pro rata, to the Class A-1 and Class A-2 Certificates, any Current
Interest for each such Class and such Distribution Date and any
Carryforward Interest for each such Class and such Distribution Date;
(ii) to the Class M-1 Certificates, Current Interest for such Class
and such Distribution Date;
(iii) to the Class M-2 Certificates, Current Interest for such Class
and such Distribution Date;
(iv) to the Class B Certificates, Current Interest for such Class and
such Distribution Date;
(v) pro rata, to the Class A-1 and Class A-2 Certificates, any Basis
Risk Shortfall and Unpaid Basis Risk Shortfall for each such Class and such
Distribution Date;
(vi) to the Class M-1 Certificates, any Basis Risk Shortfall and
Unpaid Basis Risk Shortfall for such Class and such Distribution Date;
(vii) to the Class M-2 Certificates, any Basis Risk Shortfall and
Unpaid Basis Risk Shortfall for such Class and such Distribution Date;
(viii) to the Class B Certificates, any Basis Risk Shortfall and
Unpaid Basis Risk Shortfall for such Class and such Distribution Date;
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(ix) to the Class M-1 Certificates, any Carryforward Interest for such
Class and such Distribution Date;
(x) to the Class M-1 Certificates, any Certificate Deferred Amounts
previously allocated to such Class;
(xi) to the Class M-2 Certificates, any Carryforward Interest for such
Class and such Distribution Date;
(xii) to the Class M-2 Certificates, any Certificate Deferred Amounts
previously allocated to such Class;
(xiii) to the Class B Certificates, any Carryforward Interest for such
Class and such Distribution Date;
(xiv) to the Class B Certificates, any Certificate Deferred Amounts
previously allocated to such Class; and
(xv) to the Class X Certificates, any remaining amount in excess of
the Required Reserve Fund Amount for such date.
TERMINATION; OPTIONAL TERMINATION; BOND REDEMPTION
The Bond Issuer has the option to redeem the Underlying Bond at par on any
Bond Distribution Date on which the then outstanding Bond Principal Balance is
less than 35% of the initial Bond Principal Balance. If the Bond Issuer elects
to redeem the Underlying Bond it shall, no later than 30 days prior to the
Distribution Date selected for such redemption, deliver notice of such election
to the Bond Trustee together with the redemption price therefor to be deposited
in the Distribution Account. An optional redemption of the Underlying Bond will
result in a corresponding mandatory redemption of the Certificates.
On any Distribution Date on which the Pool Principal Balance is equal to
10% or less of the initial Pool Principal Balance, the Servicer (subject to the
terms of the Master Servicing Agreement) will have the option to direct the
Master Servicer to solicit not less than three bids for the Mortgage Loans and
to sell the Mortgage Loans for a price equal to the highest bid received
(provided that such bid price is at least equal to the then aggregate
outstanding principal balance of the Mortgage Loans (plus accrued interest
thereon to the date of sale)) (the "Minimum Purchase Price"). Any such purchase
will be subject to the right of first refusal of the Depositor to purchase the
Mortgage Loans at such bid price. Any such auction purchase will result in an
early retirement of the Certificates. If the purchase price would be less than
the Minimum Purchase Price, the Servicer may direct the Master Servicer to
continue to solicit bids as described above (at intervals specified in the
Master Servicing Agreement) until a bid at least equal to the Minimum Purchase
Price is received.
Distributions in respect of any such optional termination will be paid to
Certificateholders in order of their priority of distribution as described under
"-- Distributions of Principal."
In no event will the Trust created by the Trust Agreement continue beyond
the later of (a) the repurchase described above, (b) the expiration of 21 years
from the death of the survivor of the person named in the Trust Agreement and
(c) May 25, 2028. The termination of the Trust will be effected in a manner
consistent with applicable federal income tax regulations and the status of the
Trust Fund Assets as a FASIT.
SPECIAL TERMINATION OF THE TRUST
On any Distribution Date on which the aggregate Certificate Principal
Amount of the Certificates is less than 35% of their initial aggregate
Certificate Principal Amount, the holder of the Class O Certificate, so long as
it holds such Certificate, will have the option to purchase all, but not less
than all, of the Certificates (other than the Class X Certificate) remaining
outstanding on such Distribution Date for a price equal to the aggregate
outstanding Certificate Principal Amount of each such Certificate plus accrued
but unpaid interest thereon. A number of factors would influence the Class O
Certificateholder to elect to exercise its purchase
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option, including whether the value of the Certificates at the time such option
could be exercised exceeds the aggregate par value of such Certificates.
THE CERTIFICATE TRUSTEE; BOND TRUSTEE
First Union National Bank will be the Certificate Trustee under the Trust
Agreement and the Bond Trustee under the Indenture. The Certificate Trustee will
be paid a monthly fee (the "Trustee Fee") calculated as a fixed percentage equal
to 0.0010% per annum (the "Trustee Fee Rate") on the Aggregate Loan Balance, and
will also be entitled to retain, as additional compensation, any interest or
other income earned on funds on deposit in the Certificate Account pending
distribution to Certificateholders. The Bond Trustee will be paid a fee (the
"Bond Trustee Fee") calculated as a fixed percentage equal to 0.00075% per annum
(the "Bond Trustee Fee Rate") on the Aggregate Loan Balance. The Certificate
Trustee will be entitled to reimbursement for certain expenses prior to
distribution of any amounts to Certificateholders. The Certificate Trustee's and
the Bond Trustee's "Corporate Trust Office" for purposes of presentment and
surrender of the Offered Certificates for the final distribution thereon and for
all other purposes is located at 230 South Tryon Street NC1179, Charlotte, North
Carolina 28288, Attention: Structured Finance, or such address as First Union
may designate from time to time by notice to the Certificateholders, the
Depositor, the Master Servicer, the Servicer and the Special Servicer.
DESCRIPTION OF THE UNDERLYING BOND
GENERAL
The Underlying Bond will be issued by the Bond Issuer pursuant to an
Indenture dated as of June 1, 1998 between the Bond Issuer and First Union
National Bank as Bond Trustee. The payments of principal and interest on the
Underlying Bond will be the primary source for distributions on the
Certificates. The Underlying Bond is payable solely from the limited assets of
the Bond Issuer.
BOND DISTRIBUTIONS
Distributions on the Underlying Bond will be made by the Bond Trustee on
the 25th day of each month, or if such day is not a business day, on the first
business day thereafter, commencing on June 25, 1998 (each a "Bond Distribution
Date").
Distributions on each Bond Distribution Date will be made by wire transfer
in immediately available funds to the Distribution Account; provided, however,
that the final payment in retirement of the Underlying Bond will be made only
upon presentment and surrender of such Underlying Bond at the Corporate Trust
Office of the Bond Trustee.
"Available Funds" for each Bond Distribution Date will generally be equal
to the sum of the Interest Remittance Amount and the Principal Remittance
Amount.
On each Bond Distribution Date all amounts collected on the Mortgage Loans
in respect of interest will be distributed by the Bond Trustee at the direction
of the Master Servicer in the following order of priority, to the payment of the
following amounts for such Bond Distribution Date: first, the fee payable to the
Bond Trustee under the Indenture, AmREIT under the Management Agreement, the
Owner Trustee under the Deposit Trust Agreement and the Certificate Trustee
under the Trust Agreement, second, to pay certain costs and expenses incurred by
the Master Servicer and Bond Trustee in administration of the Mortgage Pool and
the Bond Trust (but not to exceed up to $150,000 per annum (the "Capped
Amount")) and third, the Interest Payment Amount and any Basis Risk Interest.
Any remaining amount (the "Excess Mortgage Interest") will be distributed as
described below.
On each Bond Distribution Date, all amounts collected on the Mortgage Loans
in respect of principal will be distributed by the Bond Trustee at the direction
of the Master Servicer to repay the Bond Principal Amount in an amount equal to
the lesser of (i) the sum of such principal collections and (ii) the amount
S-51
<PAGE> 52
necessary to cause the Bond Overcollateralization Amount to equal the Targeted
Overcollateralization Amount. Any remaining amount (the "Excess Mortgage
Principal") will be distributed as described below.
On each Bond Distribution Date, following distribution of the amounts
described above, any Excess Mortgage Interest and Excess Mortgage Principal
(together, the "Excess Mortgage Amount") will be distributed by the Bond Trustee
in the following order of priority, to the payment of the following amounts for
such Bond Distribution Date to the extent that any such amount remains unpaid:
first, the Interest Payment Amounts and any Basis Risk Shortfalls and any Unpaid
Basis Risk Shortfalls for such Bond Distribution Date, second, any Bond Deferred
Amounts for such Bond Distribution Date, third, any amount necessary to cause
the Bond Overcollateralization Amount to equal the Targeted
Overcollateralization Amount on such Bond Distribution Date, fourth,
compensation payable to the Special Servicer on such Bond Distribution Date any
costs and expenses of the Master Servicer or the Bond Trustee related to
administration of the Mortgage Loans or the Bond Trust in excess of the Capped
Amount and fifth, any remaining amount to the holder of the Investor Certificate
under the Deposit Trust Agreement.
BOND INTEREST
The Bond Interest Rate on the Underlying Bond for each Bond Distribution
Date is described herein under "SUMMARY OF TERMS -- BOND INTEREST RATE."
On each Bond Distribution Date, the Underlying Bond will be entitled to
receive an amount allocable to interest (the "Interest Payment Amount") equal to
the sum of (i) interest at the Bond Interest Rate for the related Accrual Period
for the Underlying Bond on the then outstanding Principal Balance for such Bond
immediately prior to such Bond Distribution Date, and (ii) the sum of the
amounts, if any, by which the amount described in clause (i) above on each prior
Bond Distribution Date exceeded the amount actually distributed as interest on
the Underlying Bond on such prior Bond Distribution Date and not subsequently
distributed, together with, to the extent permitted by applicable law, interest
on the amount described in clause (ii) at the related Bond Interest Rate. In
addition, the Underlying Bond will be entitled to any Bond Basis Risk Shortfalls
and any Bond Unpaid Basis Risk Shortfalls (such amounts, together with the
Interest Payment Amount, are referred to herein as the "Interest Distribution
Amount"). With respect to each Bond Distribution Date, the "Accrual Period" will
be the period commencing on the immediately preceding Bond Distribution Date
(or, in the case of the first Accrual Period, commencing on the Closing Date)
and ending on the date immediately preceding such Bond Distribution Date.
Accrued interest to be paid on any Bond Distribution Date will be
calculated on the basis of the then outstanding Principal Balance for the
Underlying Bond immediately prior to such Bond Distribution Date. Interest will
be calculated and payable on the basis of a 360-day year and the actual number
of days elapsed.
LIBOR RATE DETERMINATION
On the second business day prior to the commencement of each Interest
Accrual Period after the initial Interest Accrual Period for the Underlying Bond
(each a "LIBOR Rate Determination Date"), the Master Servicer will determine the
arithmetic mean of LIBOR quotations for one-month Eurodollar deposits ("LIBOR")
in the same manner applicable to determining LIBOR on the Certificates as
described at "DESCRIPTION OF THE CERTIFICATES -- Determination of LIBOR".
BOND PRINCIPAL
On each Bond Distribution Date, the Principal Remittance Amount will (along
with the Excess Mortgage Amount) be distributable on the Underlying Bond until
the Targeted Overcollateralization Amount has been achieved. The Principal
Remittance Amount will generally include all principal collected or advanced in
respect of Scheduled Payments of the Mortgage Loans during the related
Collection Period and certain unscheduled payments thereon including: principal
prepayments of Mortgage Loans, certain repurchases of Mortgage Loans and the
principal portion of any liquidation proceeds, insurance proceeds and other
recoveries on the Mortgage Loans.
S-52
<PAGE> 53
BOND REDEMPTION
The Underlying Bond may be redeemed in whole, but not in part, at the Bond
Issuer's option, on any Bond Distribution Date on or after the Bond Distribution
Date after which the Bond Principal Balance with respect to such Bond
Distribution Date is 35% or less of the initial Bond Principal Balance, at a
redemption price equal to 100% of the unpaid Bond Principal Balance, plus
accrued and unpaid interest thereon at the Bond Interest Rate (the "Redemption
Price"). In addition, the Redemption Price would include any accrued but unpaid
interest. On any Bond Distribution Date after which the Bond Principal Balance
is less than 35% of the initial Bond Principal Balance, the Bond Interest Rate
will be increased for the remainder of the life of the Underlying Bond to the
least of (i) a per annum floating rate equal to LIBOR for the related Interest
Accrual Period plus 1.90%, (ii) 10.00% per annum and (iii) the Net Funds Cap.
PREPAYMENT AND YIELD CONSIDERATIONS
GENERAL
Because principal payments on the Mortgage Loans will be distributed to
Certificateholders, the rate of principal payments on the Offered Certificates,
the aggregate amount of each interest payment on the interest bearing Offered
Certificates and the yield to maturity of Offered Certificates purchased at a
price other than par are directly related to the rate of payments of principal
on the Mortgage Loans. The principal payments on the Mortgage Loans may be in
the form of scheduled principal payments or principal prepayments (for this
purpose, the term "principal prepayment" includes prepayments and any other
recovery of principal in advance of its scheduled Due Date, including
liquidations due to default, casualty, condemnation and the like). Any such
prepayments will result in distributions to holders of the Offered Certificates
of amounts which would otherwise be distributed over the remaining term of the
Mortgage Loans. The yield to maturity on the Offered Certificates will also be
affected to the extent Mortgage Loans bearing higher Mortgage Rates prepay at a
more rapid rate than Mortgage Loans with lower Mortgage Rates, the amount and
timing of mortgagor delinquencies and defaults resulting in Realized Losses, the
application of Excess Mortgage Interest, the purchase price for the Certificates
and other factors.
The rate at which mortgage loans in general prepay may be influenced by a
number of factors, including general economic conditions, mortgage market
interest rates, availability of mortgage funds and homeowner mobility. In
general, if prevailing interest rates fall significantly below the interest
rates on the Mortgage Loans, the Mortgage Loans are likely to prepay at higher
rates than if prevailing rates remain at or above the interest rates on the
Mortgage Loans. Conversely, if interest rates rise above the interest rates on
the Mortgage Loans, the rate of prepayment would be expected to decrease. Other
factors affecting prepayment of the Mortgage Loans include such factors as
changes in the borrowers' housing needs, job transfers, unemployment,
mortgagers' net equity in the mortgaged properties, changes in the value of the
mortgaged properties, mortgage market interest rates and servicing decisions.
The Mortgage Loans generally have due-on-sale clauses.
Approximately 71.39% of the Mortgage Loans are subject to prepayment
premiums during intervals ranging from six months to approximately five years
following origination, as described under "THE MORTGAGE POOL" herein. Such
prepayment premiums may have the effect of reducing the amount or the likelihood
of prepayment of such Mortgage Loans during such intervals.
The rate of principal payments on the Mortgage Loans will be affected by
the amortization schedules of the Mortgage Loans, the rate and timing of
prepayments thereon by the mortgagors, liquidations of defaulted Mortgage Loans,
repurchases of Mortgage Loans due to certain breaches of representations and
warranties or defective documentation and purchases of defaulted Mortgage Loans
by the Special Servicer as described under "SERVICING OF THE MORTGAGE
LOANS -- Certain Rights Related to Foreclosure and the Special Servicer" herein.
The timing of changes in the rate of prepayments, liquidations and purchases of
the related Mortgage Loans may, and the timing of Realized Losses will,
significantly affect the yield to an investor, even if the average rate of
principal payments experienced over time is consistent with an investor's
expectation. Because the rate and timing of principal payments on the Mortgage
Loans will depend on future events and on a variety of factors, no assurance can
be given as to such rate or the timing of principal payments
S-53
<PAGE> 54
on the Offered Certificates. In general, the earlier a prepayment of principal
of the related Mortgage Loans, the greater the effect on an 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 the
period immediately following the issuance of the Certificates may not be offset
by a subsequent like decrease (or increase) in the rate of principal payments.
Prepayments, liquidations and purchases of the Mortgage Loans will result
in distributions to holders of the related Certificates of principal amounts
that would otherwise be distributed over the remaining terms of such Mortgage
Loans. The rate of defaults on the Mortgage Loans will also affect the rate and
timing of principal payments on the Mortgage Loans. In general, defaults on
mortgage loans are expected to occur with greater frequency in their early
years.
The yields on the Offered Certificates may be adversely affected by Net
Prepayment Interest Shortfalls on the Mortgage Loans.
The Bond Issuer has the option to redeem the Underlying Bond and the
Servicer has the option to cause the auction of the Mortgage Loans under the
circumstances described at "DESCRIPTION OF THE CERTIFICATES -- Termination;
Optional Termination; Optional Redemption". The Class O Holder has the option to
purchase the Offered Certificates under the circumstances described at
"DESCRIPTION OF THE CERTIFICATES -- Special Termination of the Trust." In
addition, AmREIT may be required to repurchase Mortgage Loans because of
defective documentation or material breaches in its representations and
warranties with respect to such Mortgage Loans. Any such repurchases or sales of
the Mortgage Loans will shorten the weighted average lives of the Classes of
Offered Certificates.
If the purchaser of a Certificate offered at a discount from its initial
principal amount calculates its anticipated yield to maturity based on an
assumed rate of payment of principal that is faster than that actually
experienced on the related Mortgage Loans, the actual yield to maturity may be
lower than that so calculated. Conversely, if the purchaser of a Certificate
offered at a premium calculates its anticipated yield to maturity based on an
assumed rate of payment of principal that is slower than that actually
experienced on the related Mortgage Loans, the actual yield to maturity may be
lower than that so calculated.
The Certificate Interest Rates applicable to the Offered Certificates will
be affected by the level of LIBOR from time to time, and by the Mortgage Rates
of the Mortgage Loans from time to time as described under "RISK
FACTORS -- Effect of Mortgage Rates on the Bond Interest Rate and the
Certificate Interest Rates."
OVERCOLLATERALIZATION
The yields of the Offered Certificates will also be affected by the
application of the Excess Mortgage Amount to pay principal on the Underlying
Bond in order to maintain overcollateralization at the Targeted
Overcollateralization Amount. No assurance can be given as to the rate at which
overcollateralization will be created, or whether such overcollateralization
will be maintained at the levels described herein.
SUBORDINATION OF THE SUBORDINATE CERTIFICATES
As described herein, holders of Certificates having a relatively higher
priority of distribution will have a preferential right to receive amounts in
respect of interest to the extent of the Interest Remittance Amount and amounts
in respect of principal to the extent of the Principal Distribution Amount. In
addition, Applied Loss Amounts will be allocated in reduction of the Bond
Principal Balance which, in turn will be allocated in reduction of the
Certificate Principal Amounts of the Class B, Class M-2, Class M-1 Certificates
and the Senior Certificates in reverse order of priority of distribution. As a
result, the yields to maturity of the Class M-1 Certificates will be more
sensitive to delinquencies and losses on the Mortgage Loans than the yields of
the Senior Certificates.
S-54
<PAGE> 55
WEIGHTED AVERAGE LIFE
Weighted average life refers to the average amount of time that will elapse
from the date of issuance of a security to the date of distribution to the
investor of each dollar distributed in net reduction of principal of such
security (assuming no losses). The weighted average lives of the Offered
Certificates will be influenced by, among other things, the rate at which
principal of the related Mortgage Loans is paid, which may be in the form of
scheduled amortization, prepayments or liquidations.
Prepayments on mortgage loans are commonly measured relative to a constant
prepayment standard or model. The model used in this Prospectus Supplement for
the Mortgage Loans ("CPR") represents an assumed constant rate of prepayment
each month relative to the then outstanding principal balance of a pool of
mortgage loans for the life of such mortgage loans. CPR does not purport to be
either a historical description of the prepayment experience of any pool of
mortgage loans or a prediction of the anticipated rate of prepayment of any
mortgage loans, including the Mortgage Loans to be included in the Trust Fund.
The table on page S-58 was prepared based on the following assumptions
(collectively, the "Modeling Assumptions"): (i) the initial Class Certificate
Principal Amounts and the Certificate Interest Rates are as set forth or
described on the cover of this Prospectus Supplement; (ii) each Scheduled
Payment of principal and interest is timely received on the first day of each
month commencing in June 1998; (iii) principal prepayments are received in full
on the first day of each month commencing in June 1998 and there are no Net
Prepayment Interest Shortfalls; (iv) there are no defaults or delinquencies on
the Mortgage Loans; (v) all Mortgage Loans amortize on the basis of a monthly,
level payment schedule; (vi) Distribution Dates occur on the 25th day of each
month, commencing June 25, 1998; (vii) there are no purchases or substitutions
of the Mortgage Loans; (viii) the Mortgage Rate of each Adjustable Rate Mortgage
Loan is adjusted on the next applicable Adjustment Date to equal the value of
the applicable Index set forth below plus the related Gross Margin, subject to
any applicable Initial Cap, Periodic Cap, Minimum Rate and Maximum Rate; (ix)
the value of one-month LIBOR is 5.66%; (x) the value of the Six-Month LIBOR
Index is 5.75%; (xi) there is no optional termination of the Trust Fund; (xii)
there is no special termination of the Trust Fund, except in the case of the
weighted average life with special termination; (xiii) the Certificates are
issued on June 17, 1998; (xiv) no prepayment penalties have been collected on
the Mortgage Loans; and (xvi) the Mortgage Pool consists of the following
Mortgage Loans having the following characteristics:
S-55
<PAGE> 56
ASSUMED ADJUSTABLE RATE MORTGAGE LOAN CHARACTERISTICS
<TABLE>
<CAPTION>
REMAINING
CURRENT NEXT TERM TO
PRINCIPAL MORTGAGE ADJUSTMENT GROSS INITIAL PERIODIC MATURITY
BALANCE ($) RATE (%) DATE MARGIN (%) CAP (%) CAP (%) (MONTHS)
--------------------- -------- ---------- ---------- ------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
55,767,813.81 10.056 12/1/99 6.578 1.000 1.000 354
208,496.68 8.770 5/1/99 6.250 1.500 1.500 348
189,193.74 10.187 9/1/99 6.692 2.000 1.000 352
12,008,934.31 9.963 10/1/99 6.529 3.000 1.014 351
61,878,453.30 9.192 9/1/98 6.547 1.000 1.000 354
2,408,521.96 10.096 9/1/98 6.001 1.500 1.500 352
43,046.37 10.340 10/1/98 6.500 3.000 1.000 353
30,769,064.68 9.561 11/1/99 6.627 1.000 1.000 354
17,505,459.96 9.181 12/1/99 6.343 3.000 1.212 355
134,993.64 10.750 1/1/00 7.000 6.000 1.000 356
18,999,233.60 8.666 8/1/98 6.657 1.000 1.000 353
1,700,429.33 9.967 9/1/98 5.964 1.500 1.500 353
111,646,490.07 9.526 12/1/99 6.687 1.000 1.000 355
50,518,456.34 9.612 11/1/99 6.505 3.000 1.064 353
5,735,383.85 8.981 9/1/98 6.495 1.000 1.000 355
510,235.82 9.945 10/1/98 5.833 1.500 1.500 353
43,371.00 9.600 11/1/98 6.720 3.000 1.000 354
29,926,512.24 10.171 12/1/99 6.570 1.000 1.000 355
142,531.38 10.525 9/1/99 7.143 2.000 1.000 352
24,217,503.54 9.893 10/1/99 6.370 3.000 1.022 351
13,210,492.16 9.708 8/1/98 6.822 1.000 1.000 355
298,826.86 9.968 8/1/98 5.811 1.500 1.500 351
143,243.18 10.802 8/1/98 5.095 2.000 1.000 349
104,141.02 9.625 9/1/99 6.750 3.000 1.000 352
179,572.31 9.740 6/1/98 7.750 1.000 1.000 355
46,032.27 11.027 10/1/99 8.027 3.000 1.000 353
12,426,122.11 10.206 12/1/99 6.499 1.000 1.000 354
3,988,736.74 9.394 11/1/99 6.354 3.000 1.076 354
7,512,722.48 9.667 8/1/98 6.600 1.000 1.000 353
811,865.16 9.960 8/1/98 5.643 1.500 1.500 351
</TABLE>
S-56
<PAGE> 57
The actual characteristics and performance of the Mortgage Loans will
differ from the assumptions used in constructing the tables set forth below,
which are hypothetical in nature and are provided only to give a general sense
of how the principal cash flows might behave under varying prepayment scenarios.
For example, it is not expected that the Mortgage Loans will prepay at a
constant rate until maturity, that all of the Mortgage Loans will prepay at the
same rate or that there will be no defaults or delinquencies on the Mortgage
Loans. Moreover, the diverse remaining terms to maturity of the Mortgage Loans
could produce slower or faster principal distributions than indicated in the
tables at the various percentages of CPR specified, even if the weighted average
remaining term to maturity of the Mortgage Loans is as assumed. Any difference
between such assumptions and the actual characteristics and performance of the
Mortgage Loans, or actual prepayment or loss experience, will cause the
percentages of initial Class Certificate Principal Amounts outstanding over time
and the weighted average lives of the Offered Certificates to differ (which
difference could be material) from the corresponding information in the tables
for each indicated percentage of CPR.
Subject to the foregoing discussion and assumptions, the following tables
indicate the weighted average lives of the Offered Certificates with and without
special termination of the Trust Fund as described under "DESCRIPTION OF THE
CERTIFICATES -- Special Termination of the Trust" herein and set forth the
percentages of the initial Class Certificate Principal Amounts of the Offered
Certificates that would be outstanding after each of the Distribution Dates
shown at various percentages of CPR.
The weighted average life of an Offered Certificate is determined by (i)
multiplying the net reduction, if any, of the applicable Class Certificate
Principal Amount by the number of years from the date of issuance of the Offered
Certificate to the related Distribution Date, (ii) adding the results and (iii)
dividing the sum by the aggregate of the net reductions of Class Certificate
Principal Amount described in (i) above.
S-57
<PAGE> 58
PERCENTAGE OF INITIAL CLASS CERTIFICATE PRINCIPAL AMOUNT OF THE
OFFERED CERTIFICATES OUTSTANDING AT THE FOLLOWING PERCENTAGES OF CPR
<TABLE>
<CAPTION>
CLASS A-1 CERTIFICATES CLASS A-2 CERTIFICATES
--------------------------------------- ---------------------------------------
DISTRIBUTION DATE 0% 9% 15% 21% 27% 35% 0% 9% 15% 21% 27% 35%
- - ----------------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial
Percentage...... 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
May 1999.......... 98 69 50 31 12 0 100 100 100 100 100 91
May 2000.......... 96 42 8 0 0 0 100 100 100 86 68 46
May 2001.......... 95 17 0 0 0 0 100 100 83 59 39 16
May 2002.......... 93 0 0 0 0 0 100 96 64 47 35 16
May 2003.......... 91 0 0 0 0 0 100 84 54 37 25 14
May 2004.......... 89 0 0 0 0 0 100 72 45 29 18 9
May 2005.......... 87 0 0 0 0 0 100 62 38 23 13 6
May 2006.......... 84 0 0 0 0 0 100 56 32 18 10 4
May 2007.......... 81 0 0 0 0 0 100 50 27 14 7 2
May 2008.......... 77 0 0 0 0 0 100 45 23 11 5 1
May 2009.......... 73 0 0 0 0 0 100 40 19 9 4 1
May 2010.......... 69 0 0 0 0 0 100 36 16 7 3 *
May 2011.......... 64 0 0 0 0 0 100 32 13 5 2 0
May 2012.......... 58 0 0 0 0 0 100 29 11 4 1 0
May 2013.......... 52 0 0 0 0 0 100 26 9 3 1 0
May 2014.......... 45 0 0 0 0 0 100 23 8 2 * 0
May 2015.......... 36 0 0 0 0 0 100 20 6 2 0 0
May 2016.......... 27 0 0 0 0 0 100 18 5 1 0 0
May 2017.......... 17 0 0 0 0 0 100 15 4 1 0 0
May 2018.......... 5 0 0 0 0 0 100 13 3 * 0 0
May 2019.......... 0 0 0 0 0 0 95 11 3 0 0 0
May 2020.......... 0 0 0 0 0 0 85 10 2 0 0 0
May 2021.......... 0 0 0 0 0 0 75 8 2 0 0 0
May 2022.......... 0 0 0 0 0 0 63 6 1 0 0 0
May 2023.......... 0 0 0 0 0 0 54 5 * 0 0 0
May 2024.......... 0 0 0 0 0 0 44 4 * 0 0 0
May 2025.......... 0 0 0 0 0 0 34 3 0 0 0 0
May 2026.......... 0 0 0 0 0 0 21 1 0 0 0 0
May 2027.......... 0 0 0 0 0 0 8 0 0 0 0 0
May 2028.......... 0 0 0 0 0 0 0 0 0 0 0 0
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
WEIGHTED AVERAGE
LIFE IN YEARS:
(a) Without
Special
Termination..... 13.8 1.7 1.0 0.7 0.5 0.4 25.3 11.1 7.2 5.1 3.8 2.6
==== ==== ==== ==== ==== ==== ==== ==== ==== ==== ==== ====
(b) With Special
Termination..... 13.8 1.7 1.0 0.7 0.5 0.4 24.5 8.0 4.8 3.4 2.5 1.8
==== ==== ==== ==== ==== ==== ==== ==== ==== ==== ==== ====
<CAPTION>
CLASS M-1 CERTIFICATES
---------------------------------------
DISTRIBUTION DATE 0% 9% 15% 21% 27% 35%
- - ----------------- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Initial
Percentage...... 100% 100% 100% 100% 100% 100%
May 1999.......... 100 100 100 100 100 100
May 2000.......... 100 100 100 100 100 100
May 2001.......... 100 100 100 100 100 100
May 2002.......... 100 100 100 76 56 62
May 2003.......... 100 100 86 60 40 23
May 2004.......... 100 100 73 47 29 15
May 2005.......... 100 99 61 37 21 9
May 2006.......... 100 89 52 29 15 6
May 2007.......... 100 80 44 23 11 2
May 2008.......... 100 72 37 18 8 0
May 2009.......... 100 65 31 14 6 0
May 2010.......... 100 58 26 11 3 0
May 2011.......... 100 52 21 8 1 0
May 2012.......... 100 46 18 6 0 0
May 2013.......... 100 41 15 4 0 0
May 2014.......... 100 37 12 2 0 0
May 2015.......... 100 32 10 * 0 0
May 2016.......... 100 28 8 0 0 0
May 2017.......... 100 25 7 0 0 0
May 2018.......... 100 21 5 0 0 0
May 2019.......... 100 18 3 0 0 0
May 2020.......... 100 15 1 0 0 0
May 2021.......... 100 13 * 0 0 0
May 2022.......... 100 10 0 0 0 0
May 2023.......... 87 8 0 0 0 0
May 2024.......... 71 6 0 0 0 0
May 2025.......... 54 3 0 0 0 0
May 2026.......... 34 0 0 0 0 0
May 2027.......... 12 0 0 0 0 0
May 2028.......... 0 0 0 0 0 0
---- ---- ---- ---- ---- ----
WEIGHTED AVERAGE
LIFE IN YEARS:
(a) Without
Special
Termination..... 27.0 14.7 9.6 6.8 5.4 4.7
==== ==== ==== ==== ==== ====
(b) With Special
Termination..... 25.8 9.7 5.9 4.1 3.3 2.4
==== ==== ==== ==== ==== ====
</TABLE>
- - ---------------
* Indicates a value between 0.0% and 0.5%.
S-58
<PAGE> 59
SERVICING OF THE MORTGAGE LOANS
THE MASTER SERVICER
The information set forth in this section has been provided by Norwest Bank
Minnesota, National Association ("Norwest" or the "Master Servicer"), and
neither the Depositor nor the Underwriter makes any representations or
warranties as to the accuracy or completeness of such information.
Norwest is a national banking association, with executive offices located
at Sixth Street and Marquette Avenue, Minneapolis, Minnesota 55479 and its
master servicing offices located at 11000 Broken Land Parkway, Columbia,
Maryland 21044.
The Servicers, including the Special Servicer, will directly service the
Mortgage Loans under the supervision of the Master Servicer. The Master Servicer
will not be ultimately responsible for the servicing of the Mortgage Loans
except to the extent described under "SERVICING OF THE MORTGAGE LOANS" herein.
The Master Servicer is engaged in the business of master servicing single
family residential mortgage loans secured by properties located in all 50 states
and the District of Columbia. As of December 31, 1997, the Master Servicer
master serviced more than 250,000 mortgage loans with an aggregate outstanding
principal balance of approximately $30 billion.
THE SERVICER
The information set forth in this section has been provided by the
Servicer, and neither the Depositor nor the Underwriter makes any
representations or warranties as to the accuracy or completeness of such
information.
The Mortgage Loans will initially be serviced by Aurora. Aurora, an
affiliate of Lehman Brothers Holdings Inc., began operation as a servicer of
residential mortgage loans in August 1997 following the acquisition of
substantially all of the assets and a majority of the management and employees
of Harbourton Financial Services L.P. ("Harbourton"). Prior to such acquisition,
Harbourton liquidated a substantial portion of its servicing portfolio,
generally retaining loans with higher rates of delinquency.
Aurora's executive offices are located at 2530 South Parker Road, Suite
601, Aurora, Colorado 80014 and its centralized real estate loan servicing
facility is located at 601 Fifth Avenue, Scottsbluff, Nebraska 69361. Aurora has
been approved to service mortgage loans for GNMA, FNMA, and FHLMC.
As of March 31, 1998, Aurora's total loan servicing and subservicing
portfolio included loans with an aggregate outstanding principal balance of
approximately $4.30 billion, of which the substantial majority are subserviced
for Lehman Brothers Holdings Inc. The following table sets forth certain
information regarding the delinquency and foreclosure experience of Aurora and
Harbourton with respect to conventional mortgage loans. The indicated periods of
delinquency are based on the number of days past due on a contractual basis.
S-59
<PAGE> 60
DELINQUENCIES AND FORECLOSURES
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------------------------------- MARCH 31,
1994 1995 1996 1997(3) 1998(3)
-------- -------- -------- ------- ---------
<S> <C> <C> <C> <C> <C>
Total mortgage loans....................... $1,061 $1,625 $1,765 $1,203 $1,195
Percentage of mortgage loans delinquent by
period of delinquency(1)(2)
30 to 59 days............................ 1.93% 2.26% 1.92% 3.21% 3.04%
60 to 89 days............................ 0.40 0.46 0.45 0.73 0.66
90 days or more.......................... 0.35 0.24 0.25 0.28 0.24
-------- -------- -------- ---- ----
Total percentage of mortgage loans
delinquent(1)(2)......................... 2.68% 2.96% 2.62% 4.22% 3.94%
In foreclosure (excluding
bankruptcies)......................... 0.50 0.99 1.16 1.99 1.93
In bankruptcy............................ 0.57 0.36 0.47 0.78 0.87
-------- -------- -------- ---- ----
Total(2)................................... 3.75% 4.31% 4.25% 6.99% 6.74%
======== ======== ======== ==== ====
</TABLE>
- - ---------------
(1) Delinquency information is for conventional loans only, excluding
bankruptcies.
(2) Percentages are based on the number of mortgage loans.
(3) Excludes information related to the servicing of certain sub-prime loans
acquired in 1997 and 1998.
The above delinquency and foreclosure data represent the recent experience
of Aurora. The loans in Aurora's servicing portfolio may differ significantly
from the Mortgage Loans. The actual loss and delinquency experience on the
Mortgage Loans will depend, among other things, on the value of the Mortgaged
Properties securing such Mortgage Loans and the ability of mortgagors to make
required payments. There can be no assurance, and no representation is made,
that the delinquency experience with respect to the Mortgage Loans will be
similar to that reflected in the tables above, nor is any representation made as
to the rate at which losses may be experienced on liquidation of defaulted
Mortgage Loans.
The likelihood that mortgagors will become delinquent in the payment of
their mortgage loans and the rate of any subsequent foreclosures may be affected
by a number of factors related to borrowers' personal circumstances, including,
for example, unemployment or change in employment (or in the case of self-
employed mortgagors or mortgagors relying on commission income, fluctuations in
income), marital separation and a mortgagor's equity in the related mortgaged
property. In addition, delinquency and foreclosure experience may be sensitive
to adverse economic conditions, either nationally or regionally, may exhibit
seasonal variations and may be influenced by the level of interest rates and
servicing decisions on the applicable mortgage loans. Regional economic
conditions (including declining real estate values) may particularly affect
delinquency and foreclosure experience on mortgage loans to the extent that
mortgaged properties are concentrated in certain geographic areas.
THE SPECIAL SERVICER
The information set forth in this section has been provided by the Special
Servicer, and neither the Depositor nor the Underwriter makes any
representations or warranties as to the accuracy or completeness of such
information.
Ocwen Federal Bank FSB ("Ocwen" or the "Special Servicer"), a federally
chartered savings bank with its home office in Fort Lee, New Jersey and its
servicing operations and corporate offices in West Palm Beach, Florida. Ocwen is
a wholly-owned subsidiary of Ocwen Financial Corporation, a public financial
services holding company. At March 31, 1998, Ocwen had approximately $2.488
billion in assets, approximately $2.234 billion in liabilities and approximately
$254 million in equity. At March 31, 1998, Ocwen's tangible and leverage capital
ratio was approximately 10.24% and its risk-based capital ratio was
approximately 12.82%. For the three months ended March 31, 1998, Ocwen's income
from continuing operations was approximately $19 million.
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<PAGE> 61
The primary business of the Special Servicer has been the resolution of
nonperforming single-family, multifamily and commercial mortgage loan portfolios
acquired from the Resolution Trust Corporation, from private investors, and most
recently, from the United States Department of Housing and Urban Development
("HUD") through HUD's auction of defaulted FHA Loans.
The following tables set forth, for the non-conforming credit mortgage loan
("BCD Mortgage Loan") servicing portfolio serviced by the Special Servicer,
certain information relating to the delinquency, foreclosure, REO and loss
experience with respect to such mortgage loans (including loans in foreclosure
included in the Special Servicer's servicing portfolio (which portfolio does not
include mortgage loans that are subserviced by others)) at the end of the
indicated periods. 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 it is one month past due on a contractual
basis. The information contained in the monthly remittance reports that will be
sent to investors will be compiled, to the extent relating to Mortgage Loans
serviced by the Special Servicer, using the same methodology as that used to
compile the information contained in the table below.
DELINQUENCIES AND FORECLOSURES
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
AS OF AS OF
DECEMBER 31, 1996 DECEMBER 31, 1997
---------------------------------------- ------------------------------------------
PERCENT PERCENT
BY PERCENT BY BY PERCENT BY
BY NO. DOLLAR BY NO. DOLLAR BY NO. DOLLAR BY NO. DOLLAR
OF LOANS AMOUNT OF LOANS AMOUNT OF LOANS AMOUNT OF LOANS AMOUNT
-------- ------ -------- ------- -------- ------ -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total Portfolio...... 2,834 $305,085 100.00% 100.00% 21,827 $2,318,261 100.00% 100.00%
Period of
Delinquency:
30-59 Days......... 107 10,554 3.78% 3.46% 437 41,429 2.00% 1.79%
60-89 Days......... 38 4,321 1.34% 1.42% 171 17,803 0.73% 0.77%
90 Days or more.... 138 17,969 4.87% 5.89% 302 36,878 1.38% 1.59%
Total Delinquent
Loans.............. 283 32,844 9.99% 10.77% 910 96,110 4.17% 4.15%
Loans in
Foreclosure(1)..... 136 17,805 4.80% 5.84% 281 34,663 1.29% 1.50%
<CAPTION>
AS OF
MARCH 31, 1998
------------------------------------------
PERCENT
BY PERCENT BY
BY NO. DOLLAR BY NO. DOLLAR
OF LOANS AMOUNT OF LOANS AMOUNT
-------- ------ -------- -------
<S> <C> <C> <C> <C>
Total Portfolio...... 34,425 $3,494,243 100.00% 100.00%
Period of
Delinquency:
30-59 Days......... 527 49,571 1.53% 1.42%
60-89 Days......... 416 40,327 1.21% 1.15%
90 Days or more.... 643 65,543 1.87% 1.88%
Total Delinquent
Loans.............. 1,586 155,441 4.61% 4.45%
Loans in
Foreclosure(1)..... 498 58,884 1.45% 1.63%
</TABLE>
- - ---------------
(1) Loans in foreclosure are also included under the heading "Total Delinquent
Loans."
REAL ESTATE OWNED
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
AS OF AS OF AS OF
DECEMBER 31, 1996 DECEMBER 31, 1997 MARCH 31, 1998
----------------- ------------------- -------------------
BY NO. BY BY NO. BY BY NO. BY
OF DOLLAR OF DOLLAR OF DOLLAR
LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Total Portfolio.......................... 2,834 $305,085 21,827 $2,318,261 34,425 $3,494,243
Foreclosed Loans(1)...................... 34 3,329 66 7,387 92 11,185
Foreclosure Ratio(2)..................... 1.20% 1.09% 0.30% 0.32% 0.27% 0.32%
</TABLE>
- - ---------------
(1) For the purposes of these tables, "Foreclosed Loans" means the principal
balance of mortgage loans secured by mortgaged properties the title to which
has been acquired by the Special Servicer.
(2) The "Foreclosure Ratio" is equal to the aggregate principal balance or
number of Foreclosed Loans divided by the aggregate principal balance, or
number, as applicable, of mortgage loans in the total Portfolio at the end
of the indicated period.
S-61
<PAGE> 62
LOAN GAIN/(LOSS) EXPERIENCE
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
AS OF AS OF AS OF
DECEMBER 31, 1996 DECEMBER 31, 1997 MARCH 31, 1998
----------------- ------------------ --------------
<S> <C> <C> <C>
Total Portfolio(1).................................. $305,085 $2,318,261 $3,494,243
Net Gains/(Losses)(2)............................... 24 (1,209) (387)
Net Gains/(Losses) as a Percentage of Total
Portfolio......................................... 0.01% (0.05)% (0.01)%
</TABLE>
- - ---------------
(1) "Total Portfolio" on the date stated above is the principal balance of the
mortgage loans outstanding on the last day of the period.
(2) "Net Gains/(Losses)" are actual gains or losses incurred on liquidated
properties and shortfall payoffs for each respective period. Gains or losses
on liquidated properties are calculated as net sales proceeds less book
value (exclusive of loan purchase premium or discount). Shortfall payoffs
are calculated as the difference between principal payoff amount and unpaid
principal at the time of payoff.
The above delinquency, foreclosure, real estate owned and loss statistics
represent the recent experience of Ocwen. The loans in Ocwen's servicing
portfolio may differ significantly from the Mortgage Loans. The actual loss and
delinquency experience on the Mortgage Loans will depend, among other things, on
the value of the Mortgaged Properties securing such Mortgage Loans and the
ability of mortgagors to make required payments. There can be no assurance, and
no representation is made, that the delinquency experience with respect to the
Mortgage Loans will be similar to that reflected in the tables above, nor is any
representation made as to the rate at which losses may be experienced on
liquidation of defaulted Mortgage Loans.
SERVICING RESPONSIBILITIES
The Mortgage Loans will be serviced by the Servicer and, to the extent
applicable as described below, the Special Servicer, under the supervision of
the Master Servicer in accordance with the provisions of the servicing agreement
or, if applicable, the Special Servicing Agreement (each, a "Servicing
Agreement"). The Servicer and the Special Servicer are referred to together
herein, unless the context requires otherwise, as the "Servicers."
Notwithstanding anything to the contrary in the Prospectus, the Master
Servicer will not be ultimately responsible for the performance of the servicing
activities by the Servicers, except as described under "-- Prepayment Interest
Shortfalls" and "-- Advances" below. If a Servicer fails to fulfill its
obligations under the applicable Servicing Agreement resulting in a material
breach, the Master Servicer will terminate such Servicer and appoint a successor
servicer as provided in the Trust Agreement.
SPECIAL SERVICING OF DELINQUENT MORTGAGE LOANS
If a Mortgage Loan becomes more than 60 days delinquent, the responsibility
for servicing such Mortgage Loan (a "Transferred Mortgage Loan") will be
transferred to the Special Servicer. The Special Servicer will be required under
the Special Servicing Agreement to diligently attempt to collect all amounts due
under each Transferred Mortgage Loan. The Special Servicer will be authorized
under such agreement to foreclose on any Transferred Mortgage Loan or to pursue
such alternatives to foreclosure as modification of the terms of such loan,
negotiation of a repayment plan and forbearance of foreclosure, or acceptance of
a discounted payoff. If the borrower resumes payment on a Transferred Mortgage
Loan, such loan will continue to be serviced by the Special Servicer pursuant to
the provisions of the Special Servicing Agreement.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
The Master Servicer will be paid a monthly fee (the "Master Servicing Fee")
with respect to each Mortgage Loan equal to 0.0075% per annum (the "Master
Servicing Fee Rate") on the outstanding principal balance of each Mortgage Loan.
The Servicer will be paid a monthly fee (a "Servicing Fee") with respect to each
Mortgage Loan serviced by it calculated as 0.50% per annum (the "Servicing Fee
Rate") on the outstanding principal balance of each such Mortgage Loan.
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<PAGE> 63
The Servicer will also be entitled to receive, to the extent provided in
the applicable Servicing Agreement, additional compensation, in the form of any
interest or other income earned on funds it has deposited in a custodial account
pending remittance to the Master Servicer, as well as certain customary fees and
charges paid by borrowers. The Master Servicer will be entitled to receive, as
additional compensation, any interest or other income earned on funds in the
Bond Account prior to deposit into the Certificate Account. The aggregate of the
Master Servicing Fees and such additional compensation is referred to herein as
the Master Servicer's "Aggregate Master Servicing Compensation."
The Special Servicer will be paid a monthly fee (the "Basic Fee") with
respect to each Transferred Mortgage Loan calculated as 0.50% per annum (the
"Basic Fee Rate") on the outstanding principal balance of each such Mortgage
Loan. The Special Servicer will also be entitled to additional compensation.
The aggregate compensation of the Master Servicer, the Servicing Fee of the
Servicer, and the Basic Fee of the Special Servicer are subject to reduction as
described below under "-- Prepayment Interest Shortfalls." The Master Servicer
and the Servicer (including the Special Servicer) will be entitled to
reimbursement for certain expenses prior to distribution of any amounts to
Certificateholders.
PREPAYMENT INTEREST SHORTFALLS
When a borrower prepays a Mortgage Loan in full or in part between
Scheduled Payment dates, the borrower pays interest on the amount prepaid only
from the last Scheduled Payment date to the date of prepayment (or to the first
day of the applicable month, in the case of certain prepayments in part), with a
resulting reduction in interest payable for the month during which the
prepayment is made. Any Prepayment Interest Shortfall resulting from a
prepayment in full, but not in part, is generally required to be paid by the
Servicer, but only to the extent that the aggregate of Prepayment Interest
Shortfalls in such month does not exceed the Servicing Fee or, in the case of
the Special Servicer, the Basic Fee, on the Mortgage Loans serviced by it for
the applicable Distribution Date.
Any Prepayment Interest Shortfalls required to be funded but not funded by
the Servicer is required to be paid by the Master Servicer, to the extent that
such amount does not exceed the Aggregate Master Servicing Compensation for the
applicable Distribution Date, through a reduction in the amount of such
compensation.
ADVANCES
The Servicers will generally be obligated to make Advances with respect to
delinquent payments of principal of and interest on the Mortgage Loans, adjusted
to the related Mortgage Rate less the Servicing Fee Rate (or Basic Fee Rate), to
the extent that such Advances, in its judgment, are reasonably recoverable from
future payments and collections, insurance payments or proceeds of liquidation
of a Mortgage Loan. The Master Servicer will be obligated to make any such
Advances if the applicable Servicer fails to do so, and the Bond Trustee will be
obligated to make any required Advance if the Master Servicer fails in its
obligation to do so, to the extent provided in the Indenture. The Master
Servicer, the Servicer or the Certificate Trustee, as applicable, will be
entitled to recover any Advances made by it with respect to a Mortgage Loan out
of late payments thereon or out of related liquidation proceeds and insurance
proceeds or, if such amounts are insufficient, from collections on other
Mortgage Loans. Such reimbursements may result in Realized Losses.
The purpose of making such Advances is to maintain a regular cash flow to
the Certificateholders, rather than to guarantee or insure against losses. No
party will be required to make any Advances with respect to reductions in the
amount of the monthly payments on Mortgage Loans due to reductions made by a
bankruptcy court in the amount of a Scheduled Payment owed by a mortgagor or a
reduction of the applicable Mortgage Rate by application of the Soldiers' and
Sailors' Relief Act of 1940, as amended.
COLLECTION OF TAXES, ASSESSMENTS AND SIMILAR ITEMS
The Servicer will, to the extent required by the related loan documents,
maintain escrow accounts for the collection of hazard insurance premiums and
real estate taxes with respect to the Mortgage Loans, and will make advances
with respect to delinquencies in required escrow payments by the related
mortgagors.
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<PAGE> 64
INSURANCE COVERAGE
The Master Servicer and the Servicer are required to obtain and thereafter
maintain in effect a bond, corporate guaranty or similar form of insurance
coverage (which may provide blanket coverage), or any combination thereof,
insuring against loss occasioned by the errors and omissions of their respective
officers and employees.
EVIDENCE AS TO COMPLIANCE
The Master Servicing Agreement will provide that each year during which the
Master Servicer directly services any of the Mortgage Loans a firm of
independent accountants will furnish a statement to the Certificate Trustee to
the effect that such firm has examined certain documents and records relating to
the servicing of mortgage loans similar to the Mortgage Loans by the Master
Servicer and that, on the basis of such examination, such firm is of the opinion
that the master servicing has been conducted in accordance with the terms of the
Master Servicing Agreement, except for (i) such exceptions as the firm believes
to be immaterial and (ii) such other exceptions set forth in such statement.
CERTAIN RIGHTS RELATED TO FORECLOSURE AND THE SPECIAL SERVICER
Certain rights in connection with foreclosure of defaulted Mortgage Loans
will be granted to the initial holder of the investor certificate under the
Deposit Trust Agreement (the "Investor Certificateholder"). Such rights will
include the right to recommend foreclosure or alternatives to foreclosure, and,
if such recommendation is not accepted by the Special Servicer, to purchase such
Mortgage Loan from the Trust Fund. The Special Servicer also shall have certain
rights to purchase defaulted Mortgage Loans from the Trust Fund if the Investor
Certificateholder declines to purchase such Mortgage Loans. Any such purchase
may affect the yields to maturity of the Offered Certificates. The Investor
Certificateholder will also have the right to terminate the rights and
obligations of the Special Servicer under the conditions specified in the
Special Servicing Agreement. The rights of the Investor Certificateholder
described above may not be transferred.
FEDERAL INCOME TAX CONSEQUENCES
Jeffers, Wilson, Shaff & Falk, LLP, has advised the Company and the
Depositor that in its opinion (a) based on the Indenture and other relevant
documents, the Underlying Bond will be treated as debt for federal income tax
purposes and not as an ownership interest in the Mortgage Pool, the Bond Issuer
or a separate association taxable as a corporation and (b) based on the Trust
Agreement and other relevant documents, the Trust Fund Assets will qualify as a
FASIT within the meaning of Section 860L(a) of the Code.
The Offered Certificates will be regular interests in the FASIT and
generally will be treated as debt instruments issued by the FASIT for federal
income tax purposes. Income on the Offered Certificates must be reported under
an accrual method of accounting. See "FEDERAL INCOME TAX CONSEQUENCES" in the
Prospectus for a discussion of the material federal income tax consequences of
the purchase, ownership and disposition of FASIT regular interests.
The Offered Certificates may, depending on their respective issue prices,
be treated for federal income tax purposes as having been issued with an amount
of original issue discount equal to the difference between its principal balance
and its issue price. See "FEDERAL INCOME TAX CONSEQUENCES" in the Prospectus.
For purposes of determining the amount and the rate of accrual of original issue
discount and market discount, the Depositor intends to assume that there will be
prepayments on the Mortgage Loans at a rate equal to 21% CPR.
Notwithstanding the use of the above prepayment assumption in pricing of
the Offered Certificates, no representation is made that the Mortgage Loans will
actually prepay at the assumed rate or at any other rate. The amount of original
issue discount and certain other information with respect to each Offered
Certificate will be set forth on the face of such Certificate as required by
applicable regulations and as described in the Prospectus. See "PREPAYMENT AND
YIELD CONSIDERATIONS -- WEIGHTED AVERAGE
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<PAGE> 65
LIFE OF THE OFFERED CERTIFICATES" herein and "FEDERAL INCOME TAX CONSEQUENCES"
in the Prospectus.
The Offered Certificates will be treated as regular interests in a FASIT
under section 860L of the Code. Accordingly, the Offered Certificates (i) will
be treated as assets described in section 7701(a)(19)(C)(xi) (but not as assets
described in section 7701(a)(19)(C)(v) of the Code, and (ii) under most
circumstances, will not be "real estate assets" within the meaning of section
856(c)(5) of the Code. See "FEDERAL INCOME TAX CONSEQUENCES" in the Prospectus.
Holders of high yield regular FASIT interests are required to apply the
accrual method of accounting for income from the FASIT interest and may not
offset such income by the holder's net operating loss carryover. High yield
FASIT regular interests are subject to certain transfer restrictions. None of
the Offered Certificates will be high yield regular FASIT interests as that term
is defined in the Code.
DUE TO THE COMPLEXITY OF THE FEDERAL INCOME TAX RULES APPLICABLE TO OFFERED
CERTIFICATES 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 OFFERED CERTIFICATES.
ERISA MATTERS
A fiduciary of a pension, profit-sharing, stock bonus plan or individual
retirement account, including a plan for self employed individuals and their
employees or any other employee benefit plan subject to the prohibited
transaction provisions of the Code or the fiduciary responsibility provisions of
the Employee Retirement Income Security Act of 1974 ("ERISA") (collectively, a
"Plan"), should consider (i) whether the ownership of Certificates is in
accordance with the documents and instruments governing the Plan, (ii) whether
the ownership of the Certificates is inconsistent with the fiduciary's
responsibilities and satisfies the requirements of Part 4 of Subtitle A of Title
I of ERISA (if applicable) and, in particular, the diversification, prudence and
liquidity requirements of Section 404 of ERISA, (iii) the prohibitions under
ERISA on improper delegation of control over, or responsibility for "plan
assets" and ERISA's imposition of co-fiduciary liability on a fiduciary who
participates in, or permits (by action or inaction) the occurrence of, or fails
to remedy a known breach of duty by another fiduciary with respect to plan
assets, and (iv) the need to value the assets of the Plan annually.
The U.S. Department of Labor granted to Lehman Brothers Inc. ("Lehman
Brothers") Prohibited Transaction Exemption 91-14 as amended by Prohibited
Transaction Exemption 97-34 (the "Exemption") which exempts from the application
of the prohibited transaction rules transactions relating to (1) the
acquisition, sale and holding by Plans of certain certificates representing an
undivided interest in certain asset-backed pass-through trusts, with respect to
which Lehman Brothers or any of its affiliates is the sole underwriter or the
manager or co-manager of the underwriting syndicate; and (2) the servicing,
operation and management of such asset-backed pass-through trusts, provided that
the general conditions and certain other conditions set forth in the Exemption
are satisfied. The Exemption will apply to the acquisition, holding and resale
of Senior Certificates by a Plan provided that certain conditions (certain of
which are described below) are met.
Among the conditions which must be satisfied for the Exemption to apply are
the following:
(1) The acquisition of Senior Certificates by a Plan is on terms
(including the price for such Certificates) that are at least as favorable
to the investing Plan as they would be in an arm's-length transaction with
an unrelated party;
(2) The rights and interests evidenced by the Senior Certificates
acquired by the Plan are not subordinated to the rights and interests
evidenced by other certificates of the Trust;
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<PAGE> 66
(3) The Senior 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 Standard & Poor's, Moody's, Duff & Phelps or
Fitch Investors Service;
(4) The sum of all payments made to and retained by the Underwriter in
connection with the distribution of the Senior Certificates represents not
more than reasonable compensation for underwriting such Certificates; the
sum of all payments made to and retained by the Bond Issuer pursuant to the
sale of the Underlying Bond to the Trust represents not more than the fair
market value of such Underlying Bond; the sum of all payments made to and
retained by the Servicers represents not more than reasonable compensation
for each such Servicer's services under the agreement with such Servicer
and reimbursement of such Servicer's reasonable expenses in connection
therewith;
(5) The Trustee is not an affiliate of the Underwriter, any sponsor,
any Servicer, any certificate insurer, any borrower whose obligations under
the Underlying Bond constitute more than 5% of the aggregate unamortized
principal balance of the assets in the Trust, or any of their respective
affiliates (the "Restricted Group"); and
(6) The Plan investing in the Senior 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.
The Underwriter believes that the Exemption will apply to the acquisition
and holding of Senior Certificates by Plans and that all conditions of the
Exemption other than those within the control of the investors will be met.
EMPLOYEE BENEFIT PLANS ("PLANS") THAT ARE SUBJECT TO ERISA, AND ANY PERSON
UTILIZING THE ASSETS OF SUCH A PLAN, MAY NOT PURCHASE THE OFFERED SUBORDINATE
CERTIFICATES, except that any insurance company may purchase such Certificates
with assets of its general account if the exemptive relief granted by the
Department of Labor for transactions involving insurance company general
accounts in Prohibited Transactions Exemption 95-60, 60 Fed. Reg. 35925 (June
12, 1995) is available with respect to such investment. The Trust Agreement will
include certain restrictions on the transfer of the Offered Subordinate
Certificates.
Holders of the Senior Certificates may obtain the name of the registered
holder of the Class O Certificate by contacting the Certificate Trustee at its
corporate office.
UNDERWRITING
Subject to the terms and conditions set forth in the underwriting agreement
and in a terms agreement (collectively, the "Underwriting Agreement") between
the Depositor and Lehman Brothers Inc., (the "Underwriter"), the Depositor has
agreed to sell to the Underwriter, and the Underwriter has agreed to purchase
from the Depositor, the Offered Certificates.
The distribution of the Offered Certificates by the Underwriter will be
effected in each case from time to time in one or more negotiated transactions,
or otherwise, at varying prices to be determined, in each case, at the time of
sale. The Underwriter may effect such transactions by selling the Certificates
to or through dealers, and such dealers may receive from the Underwriter, for
whom they act as agent, compensation in the form of underwriting discounts,
concessions or commissions. The Underwriter and any dealers that participate
with the Underwriting discounts, concessions or commissions. The Underwriter and
any dealers that participate with the Underwriter in the distribution of the
Certificates may be deemed to be an underwriter, and any discounts, commissions
or concessions received by them, and any profit on the resale of the
Certificates purchased by them, may be deemed to be underwriting discounts and
commissions under the Securities Act of 1933, as amended (the "Act"). The
Underwriting Agreement provides that the Depositor will indemnify the
Underwriter, or make contributions to the Underwriter with respect to, certain
civil liabilities, including liabilities under the Act.
The Underwriter is an affiliate of Aurora.
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<PAGE> 67
After the initial distribution of the Offered Certificates by the
Underwriter, the Prospectus and Prospectus Supplement may be used by the
Underwriter in connection with market making transactions in the Offered
Certificates. The Underwriter may act as principal or agent in such
transactions. Such transactions will be at prices related to revailing market
prices at the time of sale.
LEGAL MATTERS
The validity of the Certificates and the Underlying Bond will be passed
upon for the Depositor by Tobin & Tobin, a professional corporation, San
Francisco, California. Certain federal income tax consequences with respect to
the Certificates and the Underlying Bond will be passed upon for the Depositor
by Jeffers, Wilson, Shaff & Falk, LLP, Irvine, California. Brown & Wood LLP,
Washington, D.C., will act as counsel for the Underwriter.
RATINGS
It is a condition to the issuance of the Senior Certificates that they be
rated "AAA" by S&P and "AAA" by Duff & Phelps. It is a condition to the issuance
of the Class M-1 Certificates that they be rated "AA" by Duff & Phelps. The
rating of "AAA" is the highest ratings that S&P and Duff & Phelps assign to
securities. A securities rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating organization.
A securities rating addresses the likelihood of the receipt by Offered
Certificateholders of distributions in the amount of scheduled payments on the
Mortgage Loans. Neither the rating of S&P nor Duff & Phelps addresses the effect
of Basis Risk Shortfalls. See "DESCRIPTION OF THE CERTIFICATES -- Distribution
of Interest". The rating takes into consideration the characteristics of the
Mortgage Loans and the structural, legal and tax aspects associated with the
Offered Certificates. The ratings on the Offered Certificates do not represent
any assessment of the likelihood or rate of principal prepayments. The ratings
do not address the possibility that Offered Certificateholders might suffer a
lower than anticipated yield due to prepayments.
The security ratings assigned to the Offered Certificates should be
evaluated independently from similar ratings on other types of securities. A
security rating is not a recommendation to buy, sell or hold securities and may
be subject to revision or withdrawal at any time by the Rating Agencies.
The Depositor has not requested a rating of the Offered Certificates by any
rating agency other than the Rating Agencies; there can be no assurance,
however, as to whether any other rating agency will rate the Offered
Certificates or, if it does, what rating would be assigned by such other rating
agency. The rating assigned by such other rating agency to the Offered
Certificates could be lower than the respective ratings assigned by the Rating
Agencies.
S-67
<PAGE> 68
INDEX TO DEFINED TERMS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
accredited investor......................................... S-66
Accrual Period.............................................. S-7
Act......................................................... S-66
Adjustment Date............................................. S-21
Advances.................................................... S-13
Aggregate Loan Balance...................................... S-47
Aggregate Master Servicing Compensation..................... S-63
AmREIT...................................................... S-2
AmREIT Management Fee....................................... S-13
Applied Loss Amount......................................... S-48
Aurora...................................................... S-3
Available Funds............................................. S-51
Basic Fee................................................... S-63
Basic Fee Rate.............................................. S-63
Basis Risk Shortfall........................................ S-41
BCD Mortgage Loan........................................... S-61
Beneficial Owner............................................ S-36
Beneficial Owners........................................... S-9
Bloomberg Screen LIUS01M Index Page......................... S-43
Bond Account................................................ S-40
Bond Basis Risk Shortfall................................... S-41
Bond Deferred Amount........................................ S-47
Bond Distribution Date...................................... S-11
Bond Expense Rate........................................... S-13
Bond Interest Rate.......................................... S-11
Bond Issuer................................................. Cover
Bond Margin................................................. S-11
Bond Overcollateralization Amount........................... S-8
Bond Overcollateralization Deficiency....................... S-8
Bond Overcollateralization Excess Amount.................... S-47
Bond Principal Balance...................................... S-12
Bond Trustee................................................ S-5
Bond Trustee Fee............................................ S-51
Bond Trustee Fee Rate....................................... S-51
Bond Unpaid Basis Risk Shortfall............................ S-41
Book-Entry Certificates..................................... S-9
Business Day................................................ S-36
Capped Amount............................................... S-51
Carryforward Interest....................................... S-41
Cede & Co................................................... S-9
Cedel....................................................... S-9
Cedel Participants.......................................... S-38
Certificate Deferred Amount................................. S-47
Certificate Interest Rate................................... S-6
Certificate Issuer.......................................... Cover
Certificate Principal Amount................................ S-41
Certificate Trustee......................................... Cover
Certificateholder........................................... S-37
Certificates................................................ Cover
Chase....................................................... S-9
</TABLE>
S-68
<PAGE> 69
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Citibank.................................................... S-9
Class A-1 Certificates...................................... S-36
Class A-2 Certificates...................................... S-36
Class A-1 Spread............................................ Cover
Class A-2 Spread............................................ Cover
Class B Principal Distribution Amount....................... S-46
Class B Spread.............................................. S-40
Class Certificate Principal Amount.......................... S-36
Class M-1 Principal Distribution Amount..................... S-46
Class M-1 Spread............................................ Cover
Class M-2 Principal Distribution Amount..................... S-46
Class M-2 Spread............................................ S-40
Class X Certificate Rate.................................... S-41
Closing Date................................................ S-5
Code........................................................ S-64
Collection Period........................................... S-45
Company..................................................... S-5
Compensating Interest....................................... S-43
Cooperative................................................. S-38
Corporate Trust Office...................................... S-51
CPR......................................................... S-55
Current Interest............................................ S-41
Cut-off Date................................................ S-5
Cut-off Date Balance........................................ S-21
Definitive Certificate...................................... S-36
Delayed Adjustment Mortgage Loans........................... S-6
Deleted Mortgage Loan....................................... S-31
Deposit Trust Agreement..................................... S-5
Depositor................................................... Cover
Distribution Account........................................ S-40
Distribution Date........................................... Cover
DTC......................................................... S-9
Due Period.................................................. S-45
Duff & Phelps............................................... S-15
ERISA....................................................... S-14
Euroclear................................................... S-9
Euroclear Operator.......................................... S-38
Euroclear Participants...................................... S-38
European Depositaries....................................... S-37
Excess Mortgage Amount...................................... S-52
Excess Mortgage Interest.................................... S-51
Excess Mortgage Principal................................... S-52
Exemption................................................... S-65
Expense Fee Rate............................................ S-13
Extra Principal Distribution Amount......................... S-47
FASIT....................................................... S-2
FHA......................................................... Prospectus
FHLMC....................................................... S-16
Final Scheduled Distribution Date........................... S-7
Financial Intermediary...................................... S-37
First Union................................................. S-5
FNMA........................................................ S-16
</TABLE>
S-69
<PAGE> 70
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Full Documentation.......................................... S-33
Global Securities........................................... I-1
GNMA........................................................ Prospectus
Gross Margin................................................ S-21
Harbourton.................................................. S-59
high-risk mortgage securities............................... S-14
HUD......................................................... S-61
Indenture................................................... S-5
Index....................................................... S-21
Initial Cap................................................. S-22
Initial Pool Principal Balance.............................. S-12
Interest Distribution Amount................................ S-11
Interest Payment Amount..................................... S-52
Interest Remittance Amount.................................. S-42
Investor Certificateholder.................................. S-64
Lehman Brothers............................................. Cover
LIBOR....................................................... S-43
LIBOR Determination Date.................................... S-43
LIBOR Rate Determination Date............................... S-52
Limited Documentation....................................... S-33
Liquidated Mortgage Loan.................................... S-48
Loan-to-Value Ratio......................................... S-21
London Banking Day.......................................... S-43
Master Servicer............................................. S-3
Master Servicing Agreement.................................. S-13
Master Servicing Default.................................... S-13
Master Servicing Fee........................................ S-62
Master Servicing Fee Rate................................... S-62
Maximum Rate................................................ S-22
Mezzanine Certificates...................................... S-2
Minimum Purchase Price...................................... S-50
Minimum Rate................................................ S-22
Modeling Assumptions........................................ S-55
Mortgage.................................................... S-31
Mortgage File............................................... S-31
Mortgage Loan Purchase Agreement............................ S-6
Mortgage Loans.............................................. Cover
Mortgage Note............................................... S-31
Mortgage Pool............................................... Cover
Mortgage Rate............................................... S-6
Mortgaged Property.......................................... S-6
Mortgaged Related Securities................................ S-14
Net Funds Cap............................................... S-11
Net Liquidation Proceeds.................................... S-47
Net Mortgage Rate........................................... S-13
Net Prepayment Interest Shortfall........................... S-43
No Documentation............................................ S-33
Nonresident................................................. Prospectus
Norwest..................................................... S-3
Ocwen....................................................... S-3
Offered Certificates........................................ Cover
Offered Subordinate Certificates............................ S-2
</TABLE>
S-70
<PAGE> 71
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
original issue discount..................................... S-14
Originator.................................................. S-32
Originators................................................. S-16
Overcollateralization....................................... S-8
Owner Trustee............................................... S-5
Ownership Certificates...................................... S-2
Participant................................................. S-37
parties in interest......................................... S-14
Payahead.................................................... S-42
Periodic Cap................................................ S-21
Plan........................................................ S-65
Plans....................................................... S-14
Pool Delinquency Rate....................................... S-46
Pool Principal Balance...................................... S-12
Prepayment Interest Shortfall............................... S-43
Prepayment Period........................................... S-45
Principal Distribution Amount............................... S-44
principal prepayment........................................ S-53
Principal Remittance Amount................................. S-44
Prospectus.................................................. S-3
PTE......................................................... S-15
Rating Agencies............................................. S-15
Realized Loss............................................... S-48
Record Date................................................. S-5
Redemption Price............................................ S-12
Reference Banks............................................. S-43
regular interests........................................... S-13
Relevant Depositary......................................... S-37
Remittance Rate............................................. S-42
Replacement Mortgage Loan................................... S-31
Required Reserve Fund Amount................................ S-8
Reserve Fund................................................ S-49
Reserve Interest Rate....................................... S-44
Restricted Group............................................ S-66
Rolling Three Month Delinquency Rate........................ S-46
Rules....................................................... S-37
S&P......................................................... S-15
Scheduled Payment........................................... S-6
Scheduled Principal Balance................................. S-47
Senior Certificates......................................... S-2
Senior Enhancement Percentage............................... S-47
Senior Principal Distribution Amount........................ S-46
Servicer.................................................... S-13
Servicers................................................... S-13
Servicing Agreement......................................... S-62
Servicing Fee............................................... S-62
Servicing Fee Rate.......................................... S-62
Six-Month LIBOR............................................. S-6
Six-Month LIBOR Index....................................... S-31
SMMEA....................................................... S-14
Special Servicer............................................ S-3
Spread...................................................... S-41
</TABLE>
S-71
<PAGE> 72
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Stated Income Documentation................................. S-33
Stepdown Date............................................... S-46
Stepped-up Bond Balance..................................... S-46
Subordinate Certificates.................................... S-2
Sub-prime Mortgage Loans.................................... S-35
Substitution Adjustment Amount.............................. S-32
Substitution Amount......................................... S-42
Targeted Overcollateralization Amount....................... S-47
Terms & Conditions.......................................... S-39
Transferred Mortgage Loan................................... S-62
Trigger Event............................................... S-46
Trust....................................................... Cover
Trust Agreement............................................. Cover
Trust Fund Assets........................................... Cover
Trustee Fee................................................. S-51
Trustee Fee Rate............................................ S-51
Underlying Bond............................................. Cover
Underwriter................................................. Cover
Underwriting Agreement...................................... S-66
Underwriting Guidelines..................................... S-32
Unpaid Basis Risk Shortfall................................. S-41
U.S. Person................................................. I-4
</TABLE>
S-72
<PAGE> 73
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered American
Residential Eagle Certificate Trust 1998-1 Mortgage-Backed Callable
Certificates, Series 1998-1 (the "Global Securities") will be available only in
book-entry form. Investors in the Global Securities may hold such Global
Securities through any of DTC, Cedel or Euroclear. The Global Securities will be
tradeable as home market instruments in both the European and U.S. domestic
markets. Initial settlement and all secondary trades will settle in same-day
funds.
Secondary market trading between investors holding Global Securities
through Cedel and Euroclear will be conducted in the ordinary way in accordance
with their normal rules and operating procedures and in accordance with
conventional eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors holding Global Securities
through DTC will be conducted according to the rules and procedures applicable
to U.S. corporate debt obligations and prior mortgage loan asset backed
certificates issues.
Secondary cross-market trading between Cedel or Euroclear and DTC
Participants holding Certificates will be effected on a delivery-against-payment
basis through the respective Depositaries of Cedel and Euroclear (in such
capacity) and as DTC Participants.
Non-U.S. holders (as described below) of Global Securities will be subject
to U.S. withholding taxes unless such holders meet certain requirements and
deliver appropriate U.S. tax documents to the securities clearing organizations
or their participants.
INITIAL SETTLEMENT
All Global Securities will be held in book-entry form by DTC in the name of
Cede & Co. as nominee of DTC. Investors' interests in the Global Securities will
be represented through financial institutions acting on their behalf as direct
and indirect Participants in DTC. As a result, Cedel and Euroclear will hold
positions on behalf of their participants through their respective Depositaries,
which in turn will hold such positions in accounts as DTC Participants.
Investors electing to hold their Global Securities through DTC will follow
the settlement practices applicable to prior mortgage loan asset backed
certificates issues. Investor securities custody accounts will be credited with
their holdings against payment in same-day funds on the settlement date.
Investors electing to hold their Global Securities through Cedel or
Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary global security
and no "lock-up" or restricted period. Global Securities will be credited to the
securities custody accounts on the settlement date against payment in same-day
funds.
SECONDARY MARKET TRADING
Since the purchaser determines the place of delivery, it is important to
establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
Trading between DTC Participants. Secondary market trading between DTC
Participants will be settled using the procedures applicable to prior mortgage
loan asset backed certificates issues in same-day funds.
Trading between Cedel and/or Euroclear Participants. Secondary market
trading between Cedel Participants or Euroclear Participants will be settled
using the procedures applicable to conventional eurobonds in same-day funds.
Trading between DTC seller and Cedel or Euroclear purchaser. When Global
Securities are to be transferred from the account of a DTC Participant to the
account of a Cedel Participant or a Euroclear
I-1
<PAGE> 74
Participant, the purchaser will send instructions to Cedel or Euroclear through
a Cedel Participant or Euroclear Participant at least one business day prior to
settlement. Cedel or Euroclear will instruct the respective Depositary, as the
case may be, to receive the Global Securities against payment. Payment will
include interest accrued on the Global Securities from and including the last
coupon payment date to and excluding the settlement date, on the basis of either
the actual number of days in such accrual period and a year assumed to consist
of 360 days or a 360-day year of twelve 30-day months as applicable to the
related class of Global Securities. For transactions settling on the 31st of the
month, payment will include interest accrued to and excluding the first day of
the following month. Payment will then be made by the respective Depositary of
the DTC Participant's account against delivery of the Global Securities. After
settlement has been completed, the Global Securities will be credited to the
respective clearing system and by the clearing system, in accordance with its
usual procedures, to the Cedel Participant's or Euroclear Participant's account.
The securities credit will appear the next day (European time) and the cash debt
will be back-valued to, and the interest on the Global Securities will accrue
from, the value date (which would be the preceding day when settlement occurred
in New York). If settlement is not completed on the intended value date (i.e.,
the trade fails), the Cedel or Euroclear cash debt will be valued instead as of
the actual settlement date.
Cedel Participants and Euroclear Participants will need to make available
to the respective clearing systems the funds necessary to process same-day funds
settlement. The most direct means of doing so is to preposition funds for
settlement, either from cash on hand or existing lines of credit, as they would
for any settlement occurring within Cedel or Euroclear. Under this approach,
they may take on credit exposure to Cedel or Euroclear until the Global
Securities are credited to their accounts one day later.
As an alternative, if Cedel or Euroclear has extended a line of credit to
them, Cedel Participants or Euroclear Participants can elect not to preposition
funds and allow that credit line to be drawn upon the finance settlement. Under
this procedure, Cedel Participants or Euroclear Participants purchasing Global
Securities would incur overdraft charges for one day, assuming they cleared the
overdraft when the Global Securities were credited to their accounts. However,
interest on the Global Securities would accrue from the value date. Therefore,
in many cases the investment income on the Global Securities earned during that
one-day period may substantially reduce or offset the amount of such overdraft
charges, although this result will depend on each Cedel Participant's or
Euroclear Participant's particular cost of funds.
Since the settlement is taking place during New York business hours, DTC
Participants can employ their usual procedures for sending Global Securities to
the respective European Depositary for the benefit of Cedel Participants or
Euroclear Participants. The sale proceeds will be available to the DTC seller on
the settlement date. Thus, to the DTC Participants a cross-market transaction
will settle no differently than a trade between two DTC Participants.
Trading between Cedel or Euroclear Seller and DTC Purchaser. Due to time
zone differences in their favor, Cedel Participants and Euroclear Participants
may employ their customary procedures for transactions in which Global
Securities are to be transferred by the respective clearing system, through the
respective Depositary, to a DTC Participant. The seller will send instructions
to Cedel or Euroclear through a Cedel Participant or Euroclear Participant at
least one business day prior to settlement. In these cases Cedel or Euroclear
will instruct the respective Depositary, as appropriate, to deliver the Global
Securities to the DTC Participant's account against payment. Payment will
include interest accrued on the Global Securities from and including the last
coupon payment to and excluding the settlement date on the basis of either the
actual number of days in such accrual period and a year assumed to consist of
360 days or a 360-day year of twelve 30-day months as applicable to the related
class of Global Securities. For transactions settling on the 31st of the month,
payment will include interest accrued to and excluding the first day of the
following month. The payment will then be reflected in the account of the Cedel
Participant or Euroclear Participant the following day, and receipt of the cash
proceeds in the Cedel Participant's or Euroclear Participant's account would be
back-valued to the value date (which would be the preceding day, when settlement
occurred in New York). Should the Cedel Participant or Euroclear Participant
have a line of credit with its respective clearing system and elect to be in
debt in anticipation of receipt of the sale proceeds in its account, the
back-valuation will extinguish any overdraft incurred over that one day period.
If settlement is not completed on the intended
I-2
<PAGE> 75
value date (i.e., the trade fails), receipt of the cash proceeds in the Cedel
Participant's or Euroclear Participant's account would instead be valued as of
the actual settlement date.
Finally, day traders that use Cedel or Euroclear and that purchase Global
Securities from DTC Participants for delivery to Cedel Participants or Euroclear
Participants should note that these trades would automatically fail on the sale
side unless affirmative action were taken. At least three techniques should be
readily available to eliminate this potential problem:
(a) borrowing through Cedel or Euroclear for one day (until the
purchase side of the day trade is reflected in their Cedel or Euroclear
accounts) in accordance with the clearing system's customary procedures;
(b) borrowing the Global Securities in the U.S. from a DTC Participant
no later than one day prior to the settlement, which would give the Global
Securities sufficient time to be reflected in their Cedel or Euroclear
account in order to settle the sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of the trade
so that the value date for the purchase from the DTC Participant is at
least one day prior to the value date for the sale to the Cedel or
Euroclear Participant.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of Global Securities holding securities through Cedel or
Euroclear (or through DTC if the holder has an address outside the U.S.) will be
subject to the 30% U.S. withholding tax that generally applies to payments of
interest (including original issue discount) on registered debt issued by U.S.
Persons, unless (i) each clearing system, bank or other financial institution
that holds customers' securities in the ordinary course of its trade or business
in the chain of intermediaries between such beneficial owner and the U.S. entity
required to withhold tax complies with applicable certification requirements and
(ii) such beneficial owner takes one of the following steps to obtain an
exemption or reduced tax rate:
Exemption for non-U.S. Persons (Form W-8). Beneficial owners of Global
Securities that are non-U.S. Persons can obtain a complete exemption from the
withholding tax by filing a signed Form W-8 (Certificate of Foreign Status). If
the information shown on Form W-8 changes, a new Form W-8 must be filed within
30 days of such change.
Exemption for non-U.S. Persons with effectively connected income (Form
4224). A non-U.S. Person, including a non-U.S. corporation or bank with a U.S.
branch, for which the interest income is effectively connected with its conduct
of a trade or business in the United States, can obtain an exemption from the
withholding tax by filing Form 4224 (Exemption from Withholding of Tax on Income
Effectively Connected with the Conduct of a Trade or Business in the United
States).
Exemption or reduced rate for non-U.S. Persons resident in treaty countries
(Form 1001). Non-U.S. Persons that are Certificate Owners residing in a country
that has a tax treaty with the United States can obtain an exemption or reduced
tax rate (depending on the treaty terms) by filing Form 1001 (Ownership,
Exemption or Reduced Rate Certificate). If the treaty provides only for a
reduced rate, withholding tax will be imposed at that rate unless the filer
alternatively files Form W-8. Form 1001 may be filed by the Certificate Owners
or his agent.
Exemption for U.S. Persons (Form W-9). U.S. Persons can obtain a complete
exemption from the withholding tax by filing Form W-9 (Payer's Request for
Taxpayer Identification Number and Certification).
U.S. Federal Income Tax Reporting Procedure. The Certificate Owner of a
Global Security or, in the case of a Form 1001 or a Form 4224 filer, his agent,
files by submitting the appropriate form to the person through whom it holds
(the clearing agency, in the case of persons holding directly on the books of
the clearing agency). Form W-8 and Form 1001 are effective for three calendar
years and Form 4224 is effective for one calendar year.
I-3
<PAGE> 76
The term "U.S. Person" means (i) a citizen or resident of the United
States, (ii) a corporation or partnership organized in or under the laws of the
United States or any state or the District of Columbia (other than a partnership
that is not treated as a United States person under any applicable Treasury
regulations), (iii) an estate the income of which is includible in gross income
for United States tax purposes, regardless of its source, or (iv) a trust if a
court within the United States is able to exercise primary supervision over the
administration of the trust and one or more United States persons have authority
to control all substantial decisions of the trust. Notwithstanding the preceding
sentence, to the extent provided in regulations, certain trusts in existence on
August 20, 1996 and treated as United States persons prior to such date that
elect to continue to be so treated also shall be considered U.S. Persons. This
summary does not deal with all aspects of U.S. Federal income tax withholding
that may be relevant to foreign holders of the Global Securities. Investors are
advised to consult their own tax advisors for specific tax advice concerning
their holding and disposing of the Global Securities.
I-4
<PAGE> 77
PROSPECTUS
AMERICAN RESIDENTIAL EAGLE, INC.
DEPOSITOR
$1,000,000,000
(AGGREGATE AMOUNT)
MORTGAGE-BACKED SECURITIES
(ISSUABLE IN SERIES)
------------------------
American Residential Eagle, Inc., a Delaware corporation (the "Company" or
the "Depositor"), proposes to establish one or more trusts to issue and sell
from time to time one or more Series of Collateralized Mortgage Bonds (the
"Bonds") and/or Mortgage-Backed Certificates (the "Certificates" and, together
with the Bonds, the "Securities"). This Prospectus covers up to $500,000,000 in
aggregate offering price of Bonds and $500,000,000 in aggregate offering price
of Certificates. Each Series of Bonds will be secured by the assets of a trust
("Trust Fund Assets") and each Series of Certificates will evidence beneficial
ownership of the Trust Fund Assets in the related trust. The Trust Fund Assets
for each Series of Bonds will consist primarily of mortgage collateral (the
"Mortgage Collateral") comprised of one or more of the following types: (i)
fixed-rate or floating-rate, first or junior lien mortgage loans secured by one-
to four-family residential properties or other types of residential or mixed use
properties described herein under "TRUST FUND ASSETS -- THE MORTGAGE
LOANS -- FREEDOM PROGRAM" (the "Mortgage Loans"), (ii) mortgage pass-through
securities (the "Agency Securities") issued or guaranteed by the Government
National Mortgage Association ("GNMA"), the Federal National Mortgage
Association ("FNMA") or the Federal Home Loan Mortgage Corporation ("FHLMC") or
(iii) a combination of Agency Securities and Mortgage Loans. The Trust Fund
Assets for each Series of Certificates will consist primarily of one or more
Bonds representing the right to receive all or substantially all of the payments
on the Mortgage Collateral and other items securing such Bonds. Each Series of
Certificates will accordingly be supported by the Mortgage Collateral and other
items included in the Trust Fund Assets for the related Series of Bonds. The
Trust Fund Assets for a Series of Securities may also include certain cash
accounts, insurance policies, surety bonds, guaranteed investment contracts,
cross-collateralization rights, reinvestment income, guaranties, letters of
credit or derivative arrangements to the extent described herein and in the
related Prospectus Supplement. Certain capitalized terms used and not otherwise
defined herein shall have the meanings ascribed thereto elsewhere in this
Prospectus. See "INDEX OF CERTAIN DEFINITIONS" on page 96 of this Prospectus for
the location of the definitions of certain capitalized terms.
Each Series of Securities will consist of one or more Classes. Interest on
the Securities will accrue at a fixed rate, a variable rate or a combination
thereof, as determined in the manner specified in the related Prospectus
Supplement. Principal payments on each Class of Bonds of a Series will be made
in the manner specified in the related Prospectus Supplement. If so specified in
the related Prospectus Supplement, one or more Classes of a Series may be
entitled to receive payments of principal, interest or any combination thereof
prior to one or more other Classes of such Series either for the life of such
Securities or during certain periods. A Series of Securities may include one or
more Classes entitled to (i) principal distributions, with disproportionate,
nominal or no interest distributions or (ii) interest distributions, with
disproportionate, nominal or no principal distributions. In addition, a Series
of Securities may include one or more Classes of Securities that are senior in
right of payment to one or more other Classes of such Series. Credit enhancement
for the Securities of a Series will be as specified in the related Prospectus
Supplement.
The rate of payment of the principal of each Class of Securities will
generally depend, among other things, on the rate of payment (including
prepayments) of the Mortgage Collateral underlying such Class of Securities.
Consequently, the actual maturity of any Class of Securities could occur
substantially sooner than its Stated Maturity. Each Series of Securities may be
subject to redemption or early termination under the circumstances described
herein and in the related Prospectus Supplement. In certain cases, a Series of
Securities may be titled "Mortgaged-Backed Callable Securities" depending upon
the terms of the redemption or early termination provisions thereof.
FOR A DISCUSSION OF ALL MATERIAL RISK FACTORS RELATING TO INVESTMENTS IN
THE SECURITIES, SEE "RISK FACTORS" COMMENCING ON PAGE 18 OF THIS PROSPECTUS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Each Series of Securities will be issued by a separate trust (each, an
"Issuer") established by the Company, will represent obligations of or interests
in such Issuer and will not be insured or guaranteed by GNMA, FNMA or FHLMC or
any other governmental agency or instrumentality or by the Company, any
affiliate of the Company, or, unless otherwise specified in the related
Prospectus Supplement, any other person or entity. No Issuer of any Series of
Securities is expected to have significant assets other than those comprising
the Trust Fund Assets for such Series of Securities. Prior to issuance, there
will have been no market for the Securities of any Series, and there can be no
assurance that a secondary market for any Securities will develop or, if it does
develop that it will continue or provide Securityholders with a sufficient level
of liquidity of investment. This Prospectus may not be used to consummate sales
of a Series of Securities unless accompanied by a Prospectus Supplement.
Bonds of each Series will be characterized for federal income tax purposes
as debt instruments. If specified in the related Prospectus Supplement, one or
more elections will be made to treat the Trust Fund Assets (or specified
portions thereof) evidenced by a Series of Certificates as a "financial asset
securitization investment trust ("FASIT"), for federal income tax purposes. See
"FEDERAL INCOME TAX CONSEQUENCES" herein.
Offers of the Securities of any Series 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.
June 5, 1998.
<PAGE> 78
UNTIL 90 DAYS AFTER THE DATE OF EACH PROSPECTUS SUPPLEMENT, ALL DEALERS
EFFECTING TRANSACTIONS IN THE SECURITIES COVERED BY SUCH PROSPECTUS SUPPLEMENT,
WHETHER OR NOT PARTICIPATING IN THE DISTRIBUTION THEREOF, MAY BE REQUIRED TO
DELIVER SUCH PROSPECTUS SUPPLEMENT AND THIS PROSPECTUS. THIS IS IN ADDITION TO
THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS AND PROSPECTUS SUPPLEMENT WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
PROSPECTUS SUPPLEMENT
The Prospectus Supplement relating to a Series of Securities to be offered
hereunder will, among other things, set forth with respect to such Series of
Securities, which Classes of such Series are being offered by the Prospectus
Supplement (the "Offered Securities") and, to the extent applicable: (i)
information concerning the Issuer of such Series of Securities; (ii) the
principal amount and the interest rate, or the method to be used to determine
the interest rate, of each Class of such Series of Securities; (iii) certain
characteristics of the Mortgage Collateral included in the Trust Fund Assets for
such Series of Securities and, if applicable, information as to any insurance
policies, surety bonds, guaranties, derivative arrangements,
cross-collateralization, reinvestment income, guaranteed investment contracts or
letters of credit, and the amount and source of any Reserve Fund or other cash
account for the Securities of such Series; (iv) the circumstances, if any, under
which the Securities of such Series are subject to special redemption or
optional redemption or early termination; (v) the Stated Maturity of each Class
of Securities of such Series; (vi) the method used to calculate the aggregate
amount of principal required to be applied to the Securities of such Series on
each Distribution Date and the priority in which such payments will be applied
among the Classes of Securities of such Series; (vii) the principal amount of
each Class of Securities of such Series that would be outstanding on specified
Distribution Dates if the Mortgage Collateral relating to such Class prepaid at
various assumed rates; (viii) the Distribution Dates for such Series of
Securities; (ix) information as to the nature and extent of subordination with
respect to any Class of Securities of such Series that is subordinate in right
of payment to any other Class; (x) any minimum principal payment requirements
and the terms of any related minimum principal payment agreement with respect to
such Series of Securities; (xi) additional information with respect to the plan
of distribution of the Securities of such Series; and (xii) information as to
the Master Servicer and the Bond Trustee and the Certificate Trustee for such
Series.
AVAILABLE INFORMATION
The Depositor has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement under the Securities Act of 1933, as
amended (the "Securities Act"), with respect to the Securities. This Prospectus,
which forms a part of the Registration Statement, and the Prospectus Supplement
relating to each Series of 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, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661; and Northeast Regional Office, Seven World
Trade Center, New York, New York 10048. The Commission also maintains a Web site
at http://www.sec.gov from which such Registration Statement and exhibits may be
obtained.
No person has been authorized to give any information or to make any
representation 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 Securities offered
hereby and thereby nor an offer of the 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.
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INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents subsequently filed by or on behalf of the Bond Issuer
referred to in the accompanying Prospectus Supplement with the Commission
pursuant to Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), after the date of this Prospectus and
prior to the termination of any offering of the Securities issued by such Bond
Issuer shall be deemed to be incorporated by reference in this Prospectus and to
be a part of this Prospectus from the date of the filing of such documents. Any
statement contained in a document incorporated or deemed to be incorporated by
reference herein shall be deemed to be modified or superseded for all purposes
of this Prospectus to the extent that a statement contained herein (or in the
accompanying Prospectus Supplement) or in any other subsequently filed document
which also is or is deemed to be incorporated by reference modifies or replaces
such statement. Any such statement so modified or superseded shall not be
deemed, except as so modified or superseded, to constitute a part of this
Prospectus. None of the Company, the Master Servicer, the Bond Trustee or the
Certificate Trustee for any Series intends to file with the Commission periodic
reports with respect to the related Issuer following completion of the reporting
period required by Rule 15d-1 or Regulation 15D under the Exchange Act, but the
related Issuer may elect to continue reporting in its sole discretion.
The Bond Trustee or the Certificate Trustee, as the case may be (the
"applicable Trustee"), or such other entity specified in the related Prospectus
Supplement on behalf of any Issuer will provide without charge to each person to
whom this Prospectus is delivered, on the written or oral request of such
person, a copy of any or all of the documents referred to above that have been
or may be incorporated by reference in this Prospectus (not including exhibits
to the information that is incorporated by reference unless such exhibits are
specifically incorporated by reference into the information that this Prospectus
incorporates). Such requests should be directed to the Corporate Trust Office of
the Bond Trustee or the Certificate Trustee or the address of such other entity
specified in the accompanying Prospectus Supplement. Included in the
accompanying Prospectus Supplement is the name, address, telephone number and,
if available, facsimile number of the office or contact person at the Corporate
Trust Office of the Bond Trustee or the Certificate Trustee or such other
entity.
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SUMMARY
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus and in the related
Prospectus Supplement with respect to the Series of Securities offered thereby
and to the related Agreements (as defined herein). Certain capitalized terms
used and not otherwise defined herein shall have the meanings ascribed thereto
elsewhere in this Prospectus. See "INDEX OF CERTAIN DEFINITIONS" on page 97 of
this Prospectus for the location of the definitions of certain capitalized
terms.
Securities Offered......... The Securities offered hereby are Collateralized
Mortgage Bonds (the "Bonds") and Mortgage-Backed
Certificates (the "Certificates"). The Trust Fund
Assets for each Series of Bonds will consist
primarily of mortgage collateral (the "Mortgage
Collateral") comprised of one or more of the
following: (i) fixed-rate, first or junior lien
Mortgage Loans (the "Fixed Rate Mortgage Loans"),
(ii) floating-rate, first or junior lien Mortgage
Loans (the "Floating Rate Mortgage Loans" and,
together with the Fixed Rate Mortgage Loans, the
"Mortgage Loans"), (iii) mortgage pass-through
securities (the "Agency Securities") issued or
guaranteed by the Government National Mortgage
Corporation ("GNMA"), the Federal National Mortgage
Corporation ("FNMA") or the Federal Home Loan
Mortgage Corporation ("FHLMC") or (iv) a
combination of Agency Securities and Mortgage
Loans. The Mortgage Loans will be secured by one-
to four-family residential properties or other
types of residential or mixed use properties as
described under "TRUST FUND ASSETS -- THE MORTGAGE
LOANS -- FREEDOM PROGRAM." The Trust Fund Assets
for each Series of Certificates will consist
primarily of one or more Bonds. The Trust Fund
Assets for a Series of Securities may also include
certain cash accounts, insurance policies, surety
bonds, guaranteed investment contracts,
cross-collateralization rights, reinvestment
income, guaranties or letters of credit to the
extent described herein and in the related
Prospectus Supplement. See "TRUST FUND ASSETS"
herein.
The Bonds will be issued from time to time in one
or more Series pursuant to Indentures (as defined
herein) between each Issuer and a bank or trust
company acting as trustee (the "Bond Trustee") for
the holders of the Bonds of each Series (the
"Bondholders") under the relevant Indenture. The
Certificates may be issued from time to time in one
or more Series pursuant to Trust Agreements (as
defined herein) (Indentures and Trust Agreements
are collectively referred to herein as
"Agreements") between the Depositor and a bank or
trust company acting as trustee (the "Certificate
Trustee") for the holders of the Certificates of
each Series (the "Certificateholders"). Each Series
of Securities will consist of one or more Classes
which may include one or more Classes of Deferred
Interest Securities (as defined herein). A Series
of Securities may include one or more Classes of
Senior Securities (collectively, the "Senior
Securities") and one or more Classes of
Subordinated Securities (collectively, the
"Subordinated Securities"). Unless otherwise
specified in the related Prospectus Supplement, the
Securities represent obligations of or interests in
the Issuer and are not insured or guaranteed by any
other person or entity. See "DESCRIPTION OF THE
SECURITIES" herein. Securities of a Class may
differ from Securities of other Classes of the same
Series in the amounts allocated to and the priority
of principal payments and interest rate and
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<PAGE> 81
in such other manner as specified in the related
Prospectus Supplement. A Series of Securities may
include one or more Classes entitled to (i)
principal distributions, with disproportionate,
nominal or no interest distributions or (ii)
interest distributions, with disproportionate,
nominal or no principal distributions. A Series of
Securities may be insured or guaranteed as to
payment of principal and interest by a third-party
insurer or guarantor, or secured by certain cash
accounts, insurance policies, surety bonds,
guaranteed investment contracts,
cross-collateralization, reinvestment income,
guaranties, letters of credit or derivative
arrangements, in each case to the extent provided
herein and in the related Prospectus Supplement.
Issuer..................... The Issuer with respect to each Series of
Securities will be a trust established by American
Residential Eagle, Inc., a Delaware corporation
(the "Company"), for the sole purpose of issuing
such Series of Securities and engaging in
transactions relating thereto. The Company is a
wholly owned limited purpose finance subsidiary of
American Residential Investment Trust, Inc.
("AmREIT"). AmREIT, a Maryland corporation, has
elected to be taxed as a real estate investment
trust under the Internal Revenue Code of 1986, as
amended (the "Code"). Each trust that is formed to
act as an Issuer will be created pursuant to a
trust agreement between the Company, acting as
depositor (in such capacity, the "Depositor"), and
a bank or trust company acting as trustee. Each
trust will be established by the Company solely for
the purpose of issuing one Series of Securities and
engaging in transactions relating thereto. Neither
AmREIT, the Company nor any of their respective
affiliates will guarantee or otherwise be obligated
to make payments on the Securities. The Securities
will be obligations solely of or represent
interests solely in their respective Issuers. The
assets of each such Issuer, other than those
comprising the Trust Fund Assets for the Securities
it issues, are not expected to be significant. See
"INTRODUCTION -- THE ISSUERS" herein.
Master Servicer............ The entity or entities named as Master Servicer
(each, a "Master Servicer") in the related
Prospectus Supplement will act as master servicer
with respect to all of the Mortgage Loans included
in the Trust Fund Assets for the applicable Series
of Securities pursuant to an agreement (each, a
"Master Servicing Agreement") among the Master
Servicer, the related Issuer and the related Bond
Trustee. The Master Servicer will directly service
the Mortgage Loans or will administer and supervise
the performance of the entities primarily
responsible for servicing the Mortgage Loans (each,
a "Servicer"), who may in turn be administering and
supervising the performance of one or more
subservicers of such Mortgage Loans, and will be
obligated to perform the obligations of a
terminated Servicer or appoint a successor
Servicer. See "SERVICING OF THE MORTGAGE LOANS"
herein.
Special Servicer........... If specified in the related Prospectus Supplement,
the Company may appoint a special servicer (each, a
"Special Servicer") to service, make certain
decisions and take various actions with respect to
delinquent or defaulted Mortgage Loans included in
the Trust Fund Assets for the applicable Series of
Securities. See "SERVICING OF THE MORTGAGE
LOANS -- SPECIAL SERVICING AGREEMENT" herein.
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Description of
Securities................. Each Security will be secured by or represent a
beneficial ownership interest in the Trust Fund
Assets of the related Issuer. The Securities of any
Series may be issued in one or more classes as
specified in the related Prospectus Supplement. A
Series of Securities may include one or more
Classes of senior Securities (collectively, the
"Senior Securities") and one or more Classes of
subordinate Securities (collectively, the
"Subordinated Securities"). Certain Series or
Classes of Securities may be covered by insurance
policies or other forms of credit enhancement, in
each case as described under "Credit Enhancement"
herein and in the related Prospectus Supplement.
One or more Classes of Securities of each Series
(i) may be entitled to receive distributions
allocable only to principal, only to interest or to
any combination thereof; (ii) may be entitled to
receive distributions only of prepayments of
principal throughout the lives of the Securities or
during specified periods; (iii) may be subordinated
in the right to receive distributions of scheduled
payments of principal, prepayments of principal,
interest or any combination thereof to one or more
other Classes of Securities of such Series
throughout the lives of the Securities or during
specified periods; (iv) may be entitled to receive
such distributions only after the occurrence of
events specified in the related Prospectus
Supplement; (v) may be entitled to receive
distributions in accordance with a schedule or
formula or on the basis of collections from
designated portions of the related Trust Fund
Assets; (vi) as to Securities entitled to
distributions allocable to interest, may be
entitled to receive interest at a fixed rate or a
rate that is subject to change from time to time;
and (vii) as to Securities entitled to
distributions allocable to interest, may be
entitled to distributions allocable to interest
only after the occurrence of events specified in
the related Prospectus Supplement and may accrue
interest until such events occur, in each case as
specified in the related Prospectus Supplement. The
timing and amounts of such distributions may vary
among classes or over time, as specified in the
related Prospectus Supplement.
Distributions on the
Securities................. Distributions on the Securities entitled thereto
will be made monthly, quarterly, semi-annually or
at such other intervals and on the dates specified
in the related Prospectus Supplement (each, a
"Distribution Date") out of the payments received
in respect of the related Trust Fund Assets or
other assets pledged for the benefit of the
Securities as described under "Credit Enhancement"
herein to the extent specified in the related
Prospectus Supplement. The amount allocable to
payments of principal and interest on any
Distribution Date will be determined as specified
in the related Prospectus Supplement. The
Prospectus Supplement for a Series of Securities
will describe the method for allocating
distributions among Securities of different classes
as well as the method for allocating distributions
among Securities for any particular Class.
The aggregate original principal balance of the
Securities will not exceed the aggregate
distributions allocable to principal that such
Securities will be entitled to receive. The
Securities will have an aggregate original
principal balance equal to the aggregate unpaid
principal balance of the Trust Fund Assets as of
the related Cut-Off Date and will bear interest in
the aggregate at a rate equal to the interest rate
borne by the underlying Loans (the "Mortgage Rate")
net of the aggregate servicing fees and
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any other amounts specified in the related
Prospectus Supplement or at such other interest
rate as may be specified in such Prospectus
Supplement.
The rate at which interest will be passed through
or paid to holders of each Class of Securities
entitled thereto may be a fixed rate or a rate that
is subject to change from time to time from the
time and for the periods, in each case, as
specified in the related Prospectus Supplement. Any
such rate may be calculated on a loan-by-loan or
weighted average basis or calculated based on a
notional amount, in each case, as described in the
related Prospectus Supplement.
Redemption of Bonds; Early
Termination.............. The Securities of each Series will be redeemable
and subject to early termination under the
circumstances described below. If the Series of
Securities is redeemable or subject to early
termination when the outstanding principal amount
of the Securities is greater than 25% of the
Cut-off Date Principal Balance, such Series will be
titled Mortgage-Backed Callable Securities.
A. Special Redemption.... The Bonds of a Series or a Class may be subject to
special redemption, in whole or in part, as
specified in the related Prospectus Supplement.
Pursuant to a special redemption, the Issuer will
be required to redeem, on the dates specified in
such Prospectus Supplement, at 100% of their unpaid
principal amount, plus accrued interest,
outstanding Bonds of a Series or Class if, as a
result of substantial payments of principal on the
Mortgage Collateral pledged as security for such
Series or Class of Bonds or low reinvestment
yields, or both, the Bond Trustee determines, based
on the assumptions specified in the Indenture, that
in the absence of such special redemption the
amount of cash expected to be on deposit in the
Bond Account on the next Payment Date for such
Series of Bonds would be insufficient to make
required payments on the Bonds of such Series on
such Distribution Date. Any such redemption will
not exceed the principal amount of Bonds that would
otherwise be required to be paid on the next
Distribution Date out of the principal payments and
prepayments so received. See "DESCRIPTION OF THE
SECURITIES -- REDEMPTION OF BONDS -- SPECIAL
REDEMPTION" herein. Principal payments on a special
redemption will be applied to Bonds of a Series in
accordance with the priorities specified in the
related Prospectus Supplement.
B. Optional Redemption... If so provided in the related Prospectus
Supplement, the Bonds of each Series may be subject
to redemption at the option of the Issuer. The
Prospectus Supplement for each Series will specify
the circumstances, if any, under which the Bonds of
such Series may be so redeemed, the manner of
effecting such redemption, the conditions to which
such redemption are subject and the redemption
prices for each Class of Bonds to be redeemed
(which will be no lower than 100% of the principal
amount of outstanding Bonds, plus accured
interest). See "DESCRIPTION OF THE
SECURITIES -- REDEMPTION OF BONDS -- OPTIONAL
REDEMPTION" herein.
The Master Servicer or other party specified in the
related Prospectus Supplement may have the option
to purchase the remaining Trust Fund Assets
supporting a Series of Bonds, subject to the
principal balance of
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<PAGE> 84
such Trust Fund Assets being less than the
percentage specified in the related Prospectus
Supplement of the aggregate principal balance of
the Trust Fund Assets at the Cut-off Date for the
Series. Any such purchase of Trust Fund Assets and
property acquired other person will be at a price
specified in the related Prospectus Supplement
(which will be no lower than 100% of the principal
amount of outstanding Bonds, plus accrued
interest). The exercise of such right may cause the
Issuer to call for redemption of all or a portion
of the related Series of Bonds secured by such
Trust Fund Assets.
C. Early Termination..... If the Series of Bonds included in the Trust Fund
Assets for a Series of Certificates are redeemed in
full pursuant to a special redemption or optional
redemption, the related Series of Certificates will
be retired earlier than would otherwise be the
case. In addition, the Depositor may have the
option to purchase the remaining outstanding
Securities or the Trust Fund Assets supporting a
Series of Certificates, subject to the principal
balance of such Trust Fund Assets being less than
the percentage specified in the related Prospectus
Supplement of the Trust Fund Assets at the Cut-off
Date for the Series. The purchase price for such
remaining outstanding Securities or the Trust Fund
Assets will be at least equal to 100% of the
aggregate principal balance of the outstanding
Certificates, together with accrued interest
thereon. In any such event, the related Issuer of
such Series of Certificates may be terminated and
Certificateholders will receive final distributions
as described in the related Prospectus Supplement.
Trust Fund Assets.......... Each Series of Securities will be separately
supported by one or more of the types of Trust Fund
Assets set forth below. Unless otherwise provided
in the related Prospectus Supplement, the Issuer
may substitute other Mortgage Collateral for the
Mortgage Collateral originally included in the
Trust Fund Assets for the Securities of a Series so
long as the substitute Mortgage Collateral meets
certain criteria. See "TRUST FUND
ASSETS -- SUBSTITUTION OF MORTGAGE COLLATERAL"
herein.
A. Mortgage Loans........ In connection with the issuance of a Series of
Securities supported in whole or in part by
Mortgage Loans, the Issuer will pledge and assign
to the Bond Trustee a pool of conventional (i.e.,
not insured or guaranteed by any governmental
agency) loans secured by first or junior mortgages
or deeds of trust on one- to four-family
residential properties ("Single-Family Mortgage
Loans") or other types of residential or mixed use
loans described under "TRUST FUND ASSETS -- THE
MORTGAGE LOANS -- FREEDOM PROGRAM." Such additional
types of Mortgage Loans include loans secured by
small multifamily residential properties (5 to 20
units) ("Multifamily Mortgage Loans") and small
mixed use residential properties (up to 12 dwelling
units) ("Mixed Use Mortgage Loans"). If so
specified in the related Prospectus Supplement, the
Mortgage Loans may include cooperative apartment
loans ("Cooperative Loans") secured by security
interests in shares issued by private, nonprofit,
cooperative housing corporations ("Cooperatives")
and in the related proprietary leases or occupancy
agreements granting exclusive rights to occupy
specific dwelling units in such Cooperatives'
buildings.
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<PAGE> 85
It is expected that all or a substantial portion of
the Mortgage Loans for each Series of Securities
will have been acquired by the Company from AmREIT
for transfer to the Issuer of such Series and that
such Mortgage Loans will in most cases be
"nonconforming" mortgage loans in that they will
fail to satisfy the criteria to be eligible for
purchase by FNMA or FHLMC for one or more reasons.
AmREIT acquires mortgage loans in the normal course
of its business from entities who have originated
or otherwise acquired such loans. AmREIT works with
such originating entities to develop underwriting
guidelines for loan products that will meet
AmREIT's investment criteria; however, neither
AmREIT nor any of its affiliates originates or
services mortgage loans. None of the Mortgage Loans
will represent obligations of AmREIT.
As described above, a Series of Certificates
supported in whole or in part by Mortgage Loans
will evidence an interest in one or more Bonds
secured by such loans rather than the actual
Mortgage Loans. For a Series of Certificates
supported by Mortgage Loans, following the pledge
and assignment of such loans to the Bond Trustee,
the Bonds secured by the Mortgage Loans will be
deposited into the Issuer of such Series of
Certificates by the Depositor. See "TRUST FUND
ASSETS -- THE MORTGAGE LOANS" herein.
The payment terms of the Mortgage Loans supporting
a Series of Securities, if any, will be described
in the related Prospectus Supplement and may
include any of the following features or
combinations thereof or other features described in
the related Prospectus Supplement:
(a) Interest may be payable at a fixed rate, a rate
adjustable from time to time in relation to an
index (which will be specified in the related
Prospectus Supplement), a rate that is fixed
for a period of time or under certain
circumstances and is followed by an adjustable
rate, a rate that otherwise varies from time to
time, or a rate that is convertible from an
adjustable rate to a fixed rate. Changes to an
adjustable rate may be subject to periodic
limitations, maximum rates, minimum rates or a
combination of such limitations. Accrued
interest may be deferred and added to the
principal of a loan for such periods and under
such circumstances as may be specified in the
related Prospectus Supplement. The loan
agreement or promissory note (the "Mortgage
Note") in respect of a Mortgage Loan may
provide for the payment of interest at a rate
lower than the interest rate (the "Mortgage
Rate") specified in such Mortgage Note for a
period of time or for the life of the loan, and
the amount of any difference may be contributed
from funds supplied by a third party.
(b) Principal may be payable on a level debt
service basis to fully amortize the loan over
its term, may be calculated on the basis of an
assumed amortization schedule that is
significantly longer than the original term to
maturity or on an interest rate that is
different from the interest rate on the
Mortgage Loan or may not be amortized during
all or a portion of the original term. Payment
of all or a substantial portion of the
principal may be due on maturity ("balloon
payments"). Principal may include interest that
has been deferred and added to the principal
balance of the Mortgage Loan.
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<PAGE> 86
(c) Monthly payments of principal and interest may
be fixed for the life of the loan, may increase
over a specified period of time or may change
from period to period. Mortgage Loans may
include limits on periodic increases or
decreases in the amount of monthly payments and
may include maximum or minimum amounts of
monthly payments.
(d) The Mortgage Loans generally may be prepaid at
any time without payment of any prepayment fee,
unless otherwise specified in the related
Prospectus Supplement. If so specified in the
related Prospectus Supplement, prepayments of
principal may be subject to a prepayment fee,
which may be fixed for the life of any such
Mortgage Loan or may decline over time, and may
be prohibited for the life of any such Mortgage
Loan or for certain periods ("lockout
periods"). Certain Mortgage Loans may permit
prepayments after expiration of the applicable
lockout period and may require the payment of a
prepayment fee in connection with any such
subsequent prepayment. All or a portion of any
prepayment fee may be payable as additional
interest on the Securities, if so specified in
the related Prospectus Supplement. Other
Mortgage Loans may permit prepayments without
payment of a fee unless the prepayment occurs
during specified time periods. The Mortgage
Loans may include "due-on-sale" clauses which
permit the mortgagee to demand payment of the
entire Mortgage Loan in connection with the
sale or certain transfers of the related
Mortgaged Property (as defined below). Other
Mortgage Loans may be assumable by persons
meeting then applicable underwriting standards.
See "MORTGAGE LOAN PROGRAM -- UNDERWRITING
STANDARDS" herein.
(e) The real property constituting security for
repayment of a Mortgage Loan (each, a
"Mortgaged Property") may be located in any one
of the fifty states, the District of Columbia,
Guam, Puerto Rico, or any other territory of
the United States as specified in the related
Prospectus Supplement. Unless otherwise
specified in the related Prospectus Supplement,
all of the Mortgage Loans will be covered by
standard hazard insurance policies insuring
against losses due to fire and various other
causes. The Mortgage Loans may be covered by
Primary Mortgage Insurance Policies (as defined
herein) to the extent provided in the related
Prospectus Supplement. See "TRUST FUND
ASSETS -- THE MORTGAGE LOANS" herein.
B. Agency Securities..... The Agency Securities supporting a Series of
Securities will consist of (i) fully modified
pass-through mortgage-backed certificates
guaranteed as to timely payment of principal and
interest by the Government National Mortgage
Association ("GNMA Certificates"), (ii) certi-
ficates ("Guaranteed Mortgage Pass-Through
Certificates") issued and guaranteed as to timely
payment of principal and interest by the Federal
National Mortgage Association ("FNMA
Certificates"), (iii) mortgage participation
certificates issued and guaranteed as to timely
payment of interest and, unless otherwise specified
in the related Prospectus Supplement, ultimate
payment of principal by the Federal Home Loan
Mortgage Corporation ("FHLMC Certificates"), (iv)
stripped mortgage-backed securities representing an
undivided interest in all or a part of
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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 GNMA, FNMA or FHLMC
Certificates and, unless otherwise specified in the
related Prospectus Supplement, guaranteed to the
same extent as the underlying securities, (v)
another type of pass-through certificate issued or
guaranteed by GNMA, FNMA or FHLMC and described in
the related Prospectus Supplement or (vi) a
combination of such Agency Securities. All GNMA
Certificates will be backed by the full faith and
credit of the United States. No FHLMC or FNMA
Certificates will be backed, directly or
indirectly, by the full faith and credit of the
United States. See "TRUST FUND ASSETS -- AGENCY
SECURITIES" herein.
C. Bond and Distribution
Accounts.............. All scheduled monthly principal and interest
payments and all prepayments received with respect
to the Mortgage Collateral for a Series of
Securities, other than amounts not required to be
remitted to the Bond Trustee, such as amounts
retained by the Master Servicer, any Servicer or
any subservicer of Mortgage Loans as servicing
compensation, to pay certain insurance premiums or
to reimburse the Master Servicer or any Servicer
for certain advances it has made, will be remitted
to an account (the "Bond Account") to be
established as an Eligible Account (as defined
herein) on the closing date for the sale of such
Series of Securities (the "Closing Date"). All
principal and interest distributions received from
the Mortgage Collateral and remitted to the Bond
Account, other than amounts, if any, subsequently
withdrawn to reimburse the Master Servicer or any
Servicer for certain non-recoverable advances it
has made, together with (i) the amount of cash, if
any, initially deposited in the Bond Account by the
Issuer, (ii) if applicable, all amounts withdrawn
from any related Reserve Funds, (iii) any Insurance
Proceeds and Liquidation Proceeds (as such terms
are defined herein) and (iv) if so specified in the
related Prospectus Supplement, all reinvestment
income earned thereon, will be available for
transfer to the Distribution Account (as defined
herein) for application to the payment of the
principal of, and interest on, such Series of
Securities as described in the related Prospectus
Supplement.
On or prior to the Closing Date, the Bond Trustee
will establish an account (the "Distribution
Account") which shall be an Eligible Account (as
defined herein) maintained with the Bond Trustee or
the Certificate Trustee, as the case may be, for
the benefit of the Securityholders of the related
Series. On or prior to a date specified in the
related Prospectus Supplement and preceding each
related Distribution Date (each, a "Distribution
Account Deposit Date"), the Master Servicer shall
withdraw from the Bond Account the amount required
to be distributed to Securityholders on such
Distribution Date (the "Security Distribution
Amount"), to the extent of funds available for such
purpose on deposit therein, and will deposit such
amount in the Distribution Account.
Any funds remaining in the Bond Account on a
Distribution Date, other than amounts not
constituting Available Funds, if so specified in
the related Prospectus Supplement, after (i) the
reimbursement of the Master Servicer or any
Servicer for non-recoverable advances made by
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it, (ii) each required payment of interest and
principal to Securityholders of the related Series
has been paid in full, (iii) if applicable, any
Reserve Fund has been funded in the manner
described in the related Prospectus Supplement and
(iv) the payment of certain expenses relating to
such Series of Bonds, will be subject to withdrawal
upon the order of the Issuer. SEE "TRUST FUND
ASSETS -- BOND AND DISTRIBUTION ACCOUNTS" and
"SERVICING OF THE MORTGAGE LOANS" herein.
D. Pre-Funding
Accounts................ If so specified in the related Prospectus
Supplement, the assets of the Issuer will include
the funds on deposit in an account (a "Pre-Funding
Account") which will be used to purchase additional
Mortgage Collateral during a period specified in
such Prospectus Supplement (such period, the
"Funding Period"). See "TRUST FUND ASSETS -- PRE-
FUNDING ACCOUNTS" herein.
Credit Enhancement......... The Mortgage Collateral supporting a Series of
Securities or the Securities of one or more Classes
in the related Series may have the benefit of one
or more types of credit enhancement as described
herein and more fully in the related Prospectus
Supplement. The protection against losses afforded
by any such credit enhancement may be limited. The
type, characteristics and amount of credit
enhancement will be determined based on the
characteristics of the Mortgage Loans underlying or
comprising the Mortgage Collateral and will be
established on the basis of requirements of each
Rating Agency. In addition, one or more Classes of
Securities of a Series may be guaranteed as to
payment of principal and interest by a third party
insurer or guarantor, to the extent provided in the
related Prospectus Supplement. See "CREDIT
ENHANCEMENT" herein.
A. Subordination........... A Series of Securities may consist of one or more
Classes of Senior Securities and one or more
Classes of Subordinated Securities. The rights of
the holders of the Subordinated Securities of a
Series (the "Subordinated Securityholders") to
receive payments of principal and/ or interest (or
any combination thereof) will be subordinated to
such rights of the holders of the Senior Securities
of the same Series (the "Senior Securityholders")
to the extent described in the related Prospectus
Supplement. This subordination is intended to
enhance the likelihood of regular receipt by the
Senior Securityholders of the full amount of their
scheduled payments of principal and/or interest.
The protection afforded to the Senior
Securityholders of a Series by means of the
subordination feature will be accomplished by (i)
the preferential right of such holders to receive,
prior to any payment being made on the related
Subordinated Securities, the amounts of principal
and/or interest due them on each Distribution Date
out of the funds available for payment on such date
in the related Distribution Account and, to the
extent described in the related Prospectus
Supplement, by the right of such holders to receive
future payments that would otherwise have been
payable to the Subordinated Securityholders; or
(ii) as otherwise described in the related
Prospectus Supplement. If so specified in the
related Prospectus Supplement, subordination may
apply only in the event of certain types of losses
not covered by other forms of credit support, such
as hazard losses not covered by standard hazard
insurance policies or losses due to the bankruptcy
or fraud of the borrower. The related Prospectus
Supplement will set forth information concerning,
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among other things, the amount of subordination of
a Class or Classes of Subordinated Securities in a
Series, the circumstances in which such
subordination will be applicable and the manner, if
any, in which the amount of subordination will
decrease over time. See "CREDIT
ENHANCEMENT -- SUBORDINATION" herein.
B. Reserve Funds......... If so specified in the related Prospectus
Supplement, the Issuer will deposit in one or more
Reserve Funds to be established with the Bond
Trustee or the Certificate Trustee, as the case may
be, cash, certificates of deposit, letters of
credit, surety bonds, guaranteed investment
contracts, reinvestment income or any combination
thereof, which may be used by the Bond Trustee or
the Certificate Trustee to make payments on such
Series of Securities to the extent funds are not
otherwise available. The related Prospectus
Supplement will specify the manner of funding the
related Reserve Fund and the conditions under which
the amounts in any such Reserve Fund will be used
to make payments to holders of Securities of a
particular Class or released to the related Issuer.
See "CREDIT ENHANCEMENT -- RESERVE FUNDS" herein.
C. Mortgage Pool
Insurance Policy...... If so specified in the related Prospectus
Supplement, a mortgage pool insurance policy or
policies (the "Mortgage Pool Insurance Policy") may
be obtained and maintained for a Series of
Securities supported by Mortgage Loans, which shall
be limited in scope, covering defaults on such
Mortgage Loans in an initial amount equal to a
specified percentage of the aggregate principal
balance of all Mortgage Loans included in the
related mortgage pool as of the first day of the
month of issuance of the related Series of
Securities or such other date as is specified in
the related Prospectus Supplement (the "Cut-off
Date"). See "CREDIT ENHANCEMENT -- MORTGAGE POOL
INSURANCE POLICIES" herein.
D. Special Hazard
Insurance Policy...... If so specified in the related Prospectus
Supplement, a special hazard insurance policy or
policies (the "Special Hazard Insurance Policy")
may be obtained and maintained for a Series of
Securities supported by Mortgage Loans, covering
certain physical risks that are not otherwise
insured against by standard hazard insurance
policies. Each Special Hazard Insurance Policy will
be limited in scope and will cover losses pursuant
to the provisions of each such Special Hazard
Insurance Policy as described in the related
Prospectus Supplement. See "CREDIT
ENHANCEMENT -- SPECIAL HAZARD INSURANCE POLICIES"
herein.
E. Bankruptcy Bond....... If so specified in the related Prospectus
Supplement, a bankruptcy bond or bonds (the
"Bankruptcy Bond") may be obtained for a Series of
Securities supported by Mortgage Loans to cover
certain losses resulting from action that may be
taken by a bankruptcy court in connection with a
Mortgage Loan. The level of coverage and the
limitations in scope of each Bankruptcy Bond will
be specified in the related Prospectus Supplement.
See "CREDIT ENHANCEMENT -- BANKRUPTCY BONDS"
herein.
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F. Bond Insurance
Policies, Surety Bonds
and Guarantees........ If so specified in the related Prospectus
Supplement, credit enhancement for one or more
Classes of Securities of a Series may be provided
by insurance policies or surety bonds (each, a
"Security Insurance Policy") issued by one or more
insurance companies or sureties. Such guarantee
insurance or surety bond will guarantee timely
payments of interest and/ or full payment of
principal on the basis of a schedule of principal
payments set forth in or determined in the manner
specified in the related Prospectus Supplement. If
specified in the related Prospectus Supplement, one
or more surety bonds, insurance policies or
third-party guarantees may be used to provide
coverage for the risks of default or types of loses
set forth in such Prospectus Supplement. See
"CREDIT ENHANCEMENT -- SECURITY INSURANCE POLICIES,
SURETY BONDS AND GUARANTEES" herein.
G. Letter of Credit...... If so specified in the related Prospectus
Supplement, credit enhancement may be provided for
a Series of Securities supported by Mortgage Loans
by one or more letters of credit. A letter of
credit may provide limited protection against
certain losses in addition to or in lieu of other
credit enhancement, such as losses resulting from
delinquent payments on the Mortgage Loans
supporting the related Series of Securities, losses
from risks not covered by standard hazard insurance
policies, losses due to bankruptcy of a borrower
and application of certain provisions of the
federal Bankruptcy Code, and losses due to denial
of insurance coverage due to misrepresentations
made in connection with the origination or sale of
a Mortgage Loan. The issuer of the letter of credit
(the "L/C Bank") will be obligated to honor demands
with respect to such letter or credit, to the
extent of the amount available thereunder to
provide funds under the circumstances and subject
to such conditions as are specified in the related
Prospectus Supplement. The liability of the L/C
Bank under its letter of credit will be reduced by
the amount of unreimbursed payments thereunder.
H. Over-
Collateralization..... If so specified in the related Prospectus
Supplement, credit enhancement may consist of
over-collateralization whereby the aggregate
principal balance of the related Mortgage
Collateral exceeds the aggregate principal balance
of the Securities of the related Series. Such
over-collateralization may exist on the related
Closing Date or develop thereafter as a result of
the application of a portion of the interest
payment on each Mortgage Loan or Agency Security,
as the case may be, as an additional payment in
respect of principal to reduce the principal
balance of a certain Class or Classes of Securities
of such Series and, thus, accelerate the rate of
payment of principal on such Class or Classes of
Securities. See "CREDIT
ENHANCEMENT -- OVER-COLLATERALIZATION" herein.
I. Cross-
Collateralization..... If so specified in the related Prospectus
Supplement, separate Classes of a Series may be
supported by separate groups of Mortgage
Collateral. In such case, credit support may be
provided by a cross-collateralization feature which
requires that payments be made with respect to
Securities supported by one or more groups of
Mortgage Collateral prior to payments to
Subordinated Securities supported by other groups
of
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Mortgage Collateral within the same Series. See
"CREDIT ENHANCEMENT -- CROSS-COLLATERALIZATION"
herein.
If so specified in the related Prospectus
Supplement, the coverage provided by one or more of
the forms of credit enhancement described in this
Prospectus may apply concurrently to two or more
separate Series of Securities. If applicable, the
related Prospectus Supplement will identify the
Series of Securities to which such credit
enhancement relates and the manner of determining
the amount of coverage provided to such Series of
Securities thereby and of the application of such
coverage to the identified Series of Securities.
See "CREDIT ENHANCEMENT -- CROSS-COLLATERALIZATION"
herein.
J. Minimum Principal
Payment Agreement..... If so specified in the related Prospectus
Supplement, an Issuer may enter into an agreement
with an institution pursuant to which such
institution will provide such funds as may be
necessary to enable such Issuer to make principal
payments on the Securities of the related Series at
a minimum rate set forth in such Prospectus
Supplement. See "CREDIT ENHANCEMENT -- MINIMUM
PRINCIPAL PAYMENT AGREEMENT" herein.
K. Derivative
Arrangements.......... If so specified and to the extent described in the
related Prospectus Supplement, one or more
derivative arrangements may be used to support
payments on the Securities. A derivative
arrangement is a contract or agreement, the price
of which is directly dependent upon (i.e., "derived
from") the value of one or more underlying assets.
Derivatives involve rights or obligations based on
the underlying asset, but do not necessarily result
in a transfer of the underlying asset. Derivative
arrangements include swap agreements, interest rate
swaps, interest rate caps, interest rate floors,
interest rate collars and currency swap agreements.
See "CREDIT ENHANCEMENT -- DERIVATIVE ARRANGEMENTS"
herein.
Advances................... The Master Servicer and each Servicer may be
obligated to advance amounts (each, an "Advance")
corresponding to delinquent interest and/or
principal payments on the Mortgage Loans supporting
a Series of Securities (including, in the case of
Cooperative Loans, unpaid maintenance fees or other
charges under the related proprietary lease) until
the date, as specified in the related Prospectus
Supplement, following the date on which the related
Mortgaged Property is sold at a foreclosure sale or
the related Mortgage Loans are otherwise
liquidated. Any obligation to make Advances may be
subject to limitations as specified in the related
Prospectus Supplement. If so specified in the
related Prospectus Supplement, Advances may be
drawn from a cash account available for such
purpose as described in such Prospectus Supplement.
Advances will be reimbursable to the extent
described under "SERVICING OF THE MORTGAGE
LOANS -- ADVANCES AND OTHER AMOUNTS PAYABLE BY
MASTER SERVICER" herein and "-- ADVANCES" in the
related Prospectus Supplement.
In the event the Master Servicer or Servicer fails
to make a required Advance, the Bond Trustee may be
obligated to advance such amounts otherwise
required to be advanced by the Master Servicer or
Servicer.
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See "SERVICING OF MORTGAGE LOANS -- ADVANCES AND
OTHER AMOUNTS PAYABLE BY MASTER SERVICER" herein.
Tax Status of the
Securities................. The tax counsel to the Company and the Issuer is
Jeffers, Wilson, Shaff & Falk, LLP.
The Bonds, when beneficially owned by someone other
than AmREIT or one of its qualified real estate
investment trust ("REIT") subsidiaries (as defined
in section 856(i) of the Code), will constitute
indebtedness for federal income tax purposes and
not an ownership interest in the Issuer or the
Collateral. See "FEDERAL INCOME TAX CONSEQUENCES"
herein and in the related Prospectus Supplement for
information concerning the material federal tax
consequences of an investment in the Bonds.
If a FASIT election is made, Certificates
representing regular interests in a FASIT will
generally be taxable to holders in the same manner
as evidences of indebtedness issued by the FASIT.
Stated interest on such regular interests will be
taxable as ordinary income and taken into account
using the accrual method of accounting, regardless
of the holder's normal accounting method.
Certain Classes of Securities may be issued with
original issue discount ("OID"). A Securityholder
should be aware that the Code and the Treasury
regulations promulgated thereunder do not
adequately address certain issues relevant to
prepayable securities, such as the Securities.
Securityholders that will be required to report
income with respect to the related Securities under
the accrual method of accounting will do so without
giving effect to delays and reductions in
distributions attributable to a default or
delinquency on the Mortgage Loans, except possibly
to the extent that it can be established that such
amounts are uncollectable. As a result, the amount
of income (including OID) reported by a
Securityholder in any period could significantly
exceed the amount of cash distributed to such
Securityholder in that period.
Use of Proceeds............ The net proceeds to be received from the sale of
the Securities of each Series will be applied by
the Company to the purchase or acquisition of the
related Mortgage Collateral or will be used by the
Company for general corporate purposes. The
Mortgage Collateral included in the Trust Fund
Assets for a Series of Securities will either be
contributed to the Company's capital by AmREIT (or
an affiliate) or acquired by the Company from
AmREIT (or an affiliate) and deposited with the
Issuer of such Series by the Company. See "USE OF
PROCEEDS" herein.
Ratings.................... It is a condition to the issuance of each Series of
Securities that the Securities of such Series to be
offered hereunder be rated in one of the four
highest (two highest if the Securities are
Certificates) rating categories by at least one
nationally recognized statistical rating
organization. A rating is not a recommendation to
purchase, hold or sell Securities inasmuch as such
rating does not comment as to market price or
suitability for a particular investor. Ratings of
Securities will address the likelihood of the
payment of principal and interest thereon pursuant
to their terms. There can be no assurance that a
rating will remain for a given period of time or
that a rating will not be lowered or withdrawn
entirely by a rating agency if in its judgment
circumstances in the future
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<PAGE> 93
so warrant. See "RATINGS" herein. For more detailed
information regarding the ratings assigned to any
Class of a particular Series of Securities, see
"SUMMARY -- RATINGS" and "RATINGS" in the related
Prospectus Supplement.
Legal Investment........... The Prospectus Supplement for each Series of
Securities will specify which, if any, of the
Classes of Securities offered thereby will
constitute "mortgage related securities" for
purposes of the Secondary Mortgage Market
Enhancement Act of 1984 ("SMMEA"). Classes of
Securities that qualify as "mortgage-related
securities" will be legal investments for certain
types of institutional investors to the extent
provided in SMMEA, subject, in any case, to any
other regulations that may govern investments by
such institutional investors. See "LEGAL
INVESTMENT" herein.
ERISA Matters.............. The Employee Retirement Income Security Act of
1974, as amended ("ERISA"), and Section 4975 of the
Code impose certain restrictions on employee
benefit plans subject to ERISA or plans or
arrangements subject to Section 4975 of the Code
("Plans") and on persons who are parties in
interest or disqualified persons ("parties in
interest") with respect to such Plans. The
Prospectus Supplement for each Series of Securities
will discuss the potential applicability of ERISA
and Section 4975 of the Code, the availability of
exemptions therefrom and any limitations on
investment in any Class of such Securities by
Plans. Investments by Plans are also subject to
ERISA's general fiduciary requirements, including
the requirement of investment prudence and
diversification and the requirement that a Plan's
investments be made in accordance with the
documents governing the Plan.
Absence of Active
Public Trading Market.... Unless otherwise specified in the related
Prospectus Supplement, the Securities are not
expected to be listed on an exchange or quoted in
an automated quotation system of a registered
securities association. As a result, it is not
expected that there will be an active public
trading market for the Securities. This may limit
the liquidity of an investment in the Securities
and result in any sale by a Securityholder to be at
a discount from the purchase price.
Risk Factors............... For a discussion of all material risks associated
with an investment in the Securities, see "RISK
FACTORS" commencing on page 18 herein and in the
related Prospectus Supplement.
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RISK FACTORS
Investors should consider, among other things, the following factors in
connection with an investment in the Securities.
RISKS ASSOCIATED WITH SINGLE-FAMILY MORTGAGE LOANS
FACTORS WHICH MAY ADVERSELY AFFECT PROPERTY VALUES. There are several
factors that could adversely affect the value of Mortgaged Properties such that
the outstanding balance of the related Mortgage Loans would equal or exceed the
value of the Mortgaged Properties. Among the factors that could adversely affect
the value of the Mortgaged Properties are an overall decline in the residential
real estate market in the areas in which the Mortgaged Properties are located or
a decline in the general condition of the Mortgaged Properties as a result of
failure of borrowers to maintain adequately the Mortgaged Properties or of
natural disasters that are not necessarily covered by insurance, such as
earthquakes and floods. If such a decline occurs, the actual rates of
delinquencies, foreclosures and losses on the Mortgage Loans could be higher
than those currently experienced in the mortgage lending industry in general.
Losses on such Mortgage Loans that are not otherwise covered by the credit
enhancement described in the applicable Prospectus Supplement will be borne by
the holder of one or more Classes of Securities of the related Series.
DELAYS DUE TO LIQUIDATION. Even assuming that the Mortgaged Properties
provide adequate security for the Mortgage Loans, substantial delays could be
encountered in connection with the liquidation of defaulted Mortgage Loans and
corresponding delays in the receipt of related proceeds by Securityholders could
occur. An action to foreclose on a Mortgaged Property securing a Mortgage Loan
is regulated by state statutes and rules and is subject to many of the delays
and expenses of other lawsuits if defenses or counterclaims are interposed,
sometimes requiring several years to complete. Furthermore, in some states an
action to obtain a deficiency judgment is not permitted following a nonjudicial
sale of a Mortgaged Property. In the event of a default by a borrower, these
restrictions, among other things, may impede the ability of the Master Servicer
to foreclose on or sell the Mortgaged Property or to obtain liquidation proceeds
sufficient to repay all amounts due on the related Mortgage Loan. In addition,
the Master Servicer will be entitled to deduct from related liquidation proceeds
all expenses reasonably incurred in attempting to recover amounts due on
defaulted Mortgage Loans and not yet repaid, including legal fees and costs of
legal action, real estate taxes and maintenance and preservation expenses.
DISPROPORTIONATE EFFECT OF LIQUIDATION EXPENSES. Liquidation expenses with
respect to defaulted loans do not vary directly with the outstanding principal
balance of the loan at the time of default. Therefore, assuming that a servicer
took the same steps in realizing upon a defaulted loan having a small remaining
principal balance as it would in the case of a defaulted loan having a large
remaining principal balance, the amount realized after expenses of liquidation
would be smaller as a percentage of the outstanding principal balance of the
small loan than would be the case with the defaulted loan having a large
remaining principal balance.
NATURE OF SECURITY PROVIDED BY JUNIOR LIENS. Certain Mortgage Loans may be
secured by second liens on the related Mortgaged Properties. As to Mortgage
Loans secured by second mortgages, the proceeds from any liquidation, insurance
or condemnation proceedings will be available to satisfy the outstanding balance
of such Mortgage Loans only to the extent that the claims of such senior
mortgages have been satisfied in full, including any related foreclosure costs.
In addition, the holder of a Mortgage Loan secured by a junior mortgage may not
foreclose on the Mortgaged Property unless it forecloses subject to the senior
mortgages, in which case it must either pay the entire amount due on the senior
mortgages to the senior mortgagees at or prior to the foreclosure sale or
undertake the obligation to make payments on the senior mortgages in the event
the mortgagor is in default thereunder. The Issuer will not have any source of
funds to satisfy the senior mortgages or make payments due to the senior
mortgagees, although the Master Servicer or Servicer may, at its option, advance
such amounts to the extent deemed recoverable and prudent. In the event that
such proceeds from a foreclosure or similar sale of the related Mortgaged
Property are insufficient to satisfy all senior liens and the Mortgage Loan in
the aggregate, the Issuer, as the holder of the junior lien, and, accordingly,
Holders of one or more Classes of the Securities, to the extent not covered by
credit
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enhancement, are likely to (i) incur losses in jurisdictions in which a
deficiency judgment against the borrower is not available, and (ii) incur losses
if any deficiency judgment obtained is not realized upon. In addition, the rate
of default of second mortgage loans may be greater than that of mortgage loans
secured by first liens on comparable properties.
RISKS ASSOCIATED WITH MULTIFAMILY AND MIXED USE MORTGAGE LOANS
Investing in Multifamily and Mixed Use Mortgage Loans involves each of the
risks described above for Single-Family Mortgage Loans and certain additional
risks unique to multifamily and commercial lending. Owners of multifamily
residential properties rely on monthly lease payments from tenants to pay for
maintenance and other operating expenses of such properties, to fund capital
improvements and to service any mortgage loan and any other debt that may be
secured by such properties. Various factors, many of which are beyond the
control of the owner or operator of such a property, may affect the economic
viability of that property.
Changes in payment patterns by tenants may result from a variety of social,
legal and economic factors. Economic factors including the rate of inflation,
unemployment levels and relative rates offered for various types of housing may
be reflected in changes in payment patterns including increased risks of
defaults by tenants and higher vacancy rates. Adverse economic conditions,
either local or national, may limit the amount of rent that can be charged and
may result in a reduction in timely lease payments or a reduction in occupancy
levels. Occupancy and rent levels may also be affected by construction of
additional housing units, competition and local politics, including rent
stabilization or rent control laws and policies. In addition, the level of
mortgage interest rates may encourage tenants to purchase singlefamily housing.
The Depositor is unable to determine and has no basis to predict whether, or to
what extent, economic, legal or social factors will affect future rental or
payment patterns.
The location and construction quality of a particular building may affect
the occupancy level as well as the rents that may be charged for individual
units. The characteristics of a neighborhood may change over time or in relation
to new developments. The effects of poor construction quality will increase over
time in the form of increased maintenance and capital improvements. Even good
construction will deteriorate over time if adequate maintenance is not performed
in a timely fashion.
For Mixed Use Mortgage Loans, income from the market value of the portion
of the underlying properties which are retail or office properties would be
adversely affected if space in such properties could not be leased, if tenants
are unable to meet their lease obligations, if a significant tenant were not
able to make its lease payments or were to become a debtor in a bankruptcy case
under the United States Bankruptcy Code and the lease of the related property
was rejected, or if for any other reason rental payments could not be collected.
If tenant sales in the properties that contain retail space were to decline,
percentage rents may decline or tenants may be unable to pay their base rent or
delays in enforcing the lessor's rights could be experienced. Repayment of the
related Mixed Use Mortgage Loans will be affected by the expiration of space
leases and the ability of the respective borrowers to renew their leases or
relet the space on comparable terms. Even if vacated space is successfully
relet, the costs associated with reletting, including tenant improvements and
leasing commissions (to the extent not reserved), could be substantial and could
reduce cash flow from the properties.
The profitable operation of multifamily properties and multi-tenant retail
and office properties is also dependent on the performance and viability of the
property manager of such project. The property manager is responsible for
responding to changes in the local market, planning and implementing the rental
structure, including establishing appropriate rental rates, and advising the
borrower so that maintenance and capital improvements can be carried out in a
timely fashion all of which may impact the borrower's ability to make payments
under the related mortgage loan.
RISKS ASSOCIATED WITH NON-CONFORMING MORTGAGE LOANS
A substantial portion of the Mortgage Loans supporting each Series of
Securities is expected to be comprised of non-conforming Mortgage Loans in that
they will fail to satisfy the criteria to be eligible for
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purchase by FNMA or FHLMC for one or more reasons. Such Mortgage Loans may be
illiquid and present greater credit and other risks than conforming Mortgage
Loans. In addition, to the extent Mortgage Loans are acquired from AmREIT and
have been purchased under AmREIT's Freedom Program, such Mortgage Loans may lack
standardized terms and may be secured by properties which are unique and more
difficult to value than typical residential properties. Such Mortgage Loans may
have been underwritten primarily on the basis of loan-to-value ratios or
favorable credit factors rather than on the borrower's credit standing or income
ratios. Accordingly, the potential loss experience on the non-conforming
Mortgage Loans supporting a Series of Securities may be more difficult to
evaluate compared to the experience for conforming or other more standardized
types of residential and mixed-use properties. Actual losses incurred on such
non-conforming Mortgage Loans may exceed levels of credit enhancement thought to
be sufficient to protect Securityholders from risk of loss.
PREPAYMENT AND YIELD CONSIDERATIONS; REINVESTMENT RISK
The rate of payments of principal, including prepayments (including for
this purpose prepayments resulting from refinancing or liquidations of the
Mortgage Loans or the mortgage loans underlying the Agency Securities, as the
case may be, due to defaults, casualties, condemnations and repurchases by the
Issuer or AmREIT or other Seller or purchases by the Master Servicer or the
Company), on the Mortgage Collateral supporting a Series of Securities will
directly affect the weighted average life of such Series of Securities. The
"weighted average life" of a security refers to the average length of time,
weighted by principal, that will elapse from the date of issuance to the date
each dollar of principal is repaid to the investor. The yields to maturity and
weighted average lives of the Securities will be affected primarily by the
amount and timing of principal payments received on or in respect of the
Mortgage Collateral supporting the related Series of Securities. In addition,
the yields to maturity and weighted average lives of the Securities will be
affected by the extent to which the Issuer thereof elects to exercise any right
to call or redeem such Securities. The "yield to maturity" of a security refers
to the investment rate of return on such security if held to maturity.
The rate of prepayments with respect to conventional mortgage loans has
fluctuated significantly in recent years. The rate of payment of principal,
including prepayments, on the Mortgage Loans or the mortgage loans underlying
the Agency Securities, as the case may be, may be influenced by a variety of
economic, geographic, social, tax, legal and other factors. In general, if
prevailing interest rates fall significantly below the Mortgage Rates borne by
the mortgage loans underlying the Agency Securities or the Mortgage Loans, such
mortgage loans or Mortgage Loans are likely to be subject to higher prepayment
rates than if prevailing interest rates remain at or above such Mortgage Rates.
Conversely, if prevailing interest rates rise appreciably above the Mortgage
Rates borne by the mortgage loans underlying the Agency Securities or the
Mortgage Loans, such mortgage loans or the Mortgage Loans are likely to
experience a lower prepayment rate than if prevailing interest rates remain at
or below such Mortgage Rates. However, there can be no assurance that such will
be the case. In addition, the yields to maturity and weighted average lives of
the Securities of a Series will be affected by the extent to which the Issuer
thereof elects to exercise any option to call or redeem the Securities and by
any distribution of amounts remaining in any Pre-Funding Account following the
end of the related Funding Period. In each case, Securityholders may be unable
to reinvest such payments in securities of comparable quality having interest
rates similar to those borne by such Securities. It is possible that yields on
any such reinvestments will be lower, and may be significantly lower, than the
yields on such Securities.
RISKS ASSOCIATED WITH PAYMENT CHARACTERISTICS OF CLASSES OF SECURITIES
The extent to which the yields to maturity of the various Classes of
Securities of a Series may vary from the anticipated yields will depend upon the
degree to which such Classes are purchased at a discount or premium, the degree
to which the timing of payments thereon is sensitive to the rate of payments of
principal, including prepayments, on the related Mortgage Collateral and the
degree to which the level of payments thereon is sensitive to rapid shifts in
interest rates. The timing of changes in the rate of prepayments on such
Mortgage Collateral 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 addition, the timing of increases and decreases in
interest rates may significantly affect an investor's actual yield to maturity,
even if the average
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level of interest rates over the term of the Security is as expected. Categories
of Classes of Securities that are generally more sensitive to such factors
include the Support Classes, the Inverse Floating Rate Classes, the Interest
Only Classes and the Principal Only Classes. The Prospectus Supplement relating
to a Series of Securities will discuss in greater detail the effect of the rate
and timing of principal payments (including prepayments), delinquencies and
losses and interest rate changes on the yield, weighted average lives and
maturities of such Classes of Securities.
ENVIRONMENTAL RISKS
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 assure the costs of cleanup.
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 ("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, if agents or employees of the
lender have become sufficiently involved in the operations of the borrower,
regardless of whether the environmental damage or threat was caused by a prior
owner. Such costs could result in a loss to the holders of one or more Classes
of a Series of Securities. A lender also risks such liability on foreclosure of
the related property. See "CERTAIN LEGAL ASPECTS OF MORTGAGE
LOANS -- ENVIRONMENTAL RISKS" herein.
LIMITED LIQUIDITY OF INVESTMENT
Prior to issuance, there has been no market for the Securities of any
Series, and there can be no assurance that a secondary market for any Securities
will develop or, if it does develop, that it will provide Securityholders with a
sufficient level of liquidity of investment or will continue while Securities of
such Series remain outstanding. In addition, the market value of Securities of
any Series may fluctuate with changes in prevailing rates of interest and
prepayments, spreads and other factors. Consequently, the sale of Securities by
a Securityholder in any secondary market that may develop may be at a discount
from the purchase price. Issuance of the Securities of a Series in bookentry
form may also reduce the liquidity of such Securities since investors may be
unwilling to purchase Securities for which they cannot obtain physical
certificates. See "-- EFFECTS OF BOOK-ENTRY REGISTRATION" herein. No Issuer is
expected to apply to have the Securities issued by it listed on any exchange or
quoted in an automated quotation system of a registered securities association.
BANKRUPTCY AND INSOLVENCY RISKS
EFFECTS OF BANKRUPTCY OF AMREIT OR THE DEPOSITOR. AmREIT and the Depositor
will treat the transfer of the Trust Fund Assets by AmREIT to the Depositor as a
sale for accounting purposes. The Depositor and each Issuer will treat the
transfer of the Trust Fund Assets from the Depositor to such Issuer as a sale
for accounting purposes. As a sale of the Trust Fund Assets by AmREIT to the
Depositor, the Trust Fund Assets would not be part of AmREIT's bankruptcy estate
and would not be available to AmREIT's creditors. However, in the event of the
insolvency of AmREIT, it is possible that the bankruptcy trustee or a creditor
of AmREIT may attempt to recharacterize the sale of the Trust Fund Assets as a
borrowing by AmREIT, secured by a pledge of the Trust Fund Assets. Similarly, as
a sale of the Trust Fund Assets by the Depositor to an Issuer, the Trust Fund
Assets would not be part of the Depositor's bankruptcy estate and would not be
available to the Depositor's creditors. However, in the event of the insolvency
of the Depositor, it is possible that the bankruptcy trustee or a creditor of
the Depositor may attempt to recharacterize the sale of the Trust Fund Assets as
a borrowing by the Depositor, secured by a pledge of the Trust Fund Assets. In
either case, in the event the transfer is recharacterized as a pledge, the
Depositor or the Issuer, as the case may be, will have a perfected security
interest in the related Trust Fund Assets. Nonetheless, a court could prevent
timely payments of amounts due on the Securities and result in a reduction of
payments due on the Securities.
EFFECTS OF BANKRUPTCY OF THE MASTER SERVICER. In the event of a bankruptcy
or insolvency of the Master Servicer, the bankruptcy trustee or receiver may
have the power to prevent the Bond Trustee or the
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Bondholders from appointing a successor Master Servicer. The time period during
which cash collections may be commingled with the Master Servicer's own funds
prior to each Distribution Date will be specified in the related Prospectus
Supplement. In the event of the insolvency of the Master Servicer and if such
cash collections are commingled with the Master Servicer's own funds for at
least ten days, the Bond Trustee will likely not have a perfected interest in
such collections since such collections would not have been deposited in a
segregated account within ten days after the collection thereof, and the
inclusion thereof in the bankruptcy estate of the Master Servicer may result in
delays in payment and failure to pay amounts due on the Securities of the
related Series.
EFFECTS OF BANKRUPTCY OF OBLIGORS ON THE MORTGAGE COLLATERAL. In addition,
federal and state statutory provisions, including the federal bankruptcy laws
and state laws affording relief to debtors, may interfere with or affect the
ability of the secured mortgage lender to realize upon its security. For
example, in a proceeding under the federal Bankruptcy Code, a lender may not
foreclose on a mortgaged property without the permission of the bankruptcy
court. The rehabilitation plan proposed by the debtor may reduce the secured
indebtedness to the value of the mortgaged property as of the date of the
commencement of the bankruptcy, rendering the lender a general unsecured
creditor for the difference, and also may reduce the monthly payments due under
such mortgage loan, change the rate of interest and alter the mortgage loan
repayment schedule. The effect of any such proceedings under the federal
Bankruptcy Code, including but not limited to any automatic stay, could result
in delays in receiving payments on the Mortgage Collateral supporting a Series
of Securities and possible reductions in the aggregate amount of such payments.
EFFECTS OF BOOK-ENTRY REGISTRATION
LIMITED LIQUIDITY. If the Securities of a Series are issued in bookentry
form, such registration may reduce the liquidity of such Securities in the
secondary trading market since investors may be unwilling to purchase Securities
for which they cannot obtain physical certificates. Since transactions in
book-entry Securities can be effected only through the Depository Trust Company
("DTC") in the United States, CEDEL or Euroclear in Europe, participating
organizations and Financial Intermediaries (as defined herein), the ability of a
Securityholder to pledge a book-entry Security to persons or entities that do
not participate in the DTC, CEDEL or Euroclear systems may be limited due to
lack of a physical certificate representing such Securities. Security Owners
will not be recognized as Securityholders as such term is used in the related
Agreement, and Security Owners will be permitted to exercise the rights of
Securityholders only indirectly through DTC and its Participants.
POTENTIAL DELAYS IN PAYMENTS. In addition, Securityholders may experience
some delay in their receipt of distributions of interest and principal on
book-entry Securities since distributions are required to be forwarded by the
Bond Trustee or the Certificate Trustee to DTC and DTC will then be required to
credit such distributions to the accounts of depository participants which
thereafter will be required to credit them to the account of Securityholders
either directly or indirectly through Financial Intermediaries. See "DESCRIPTION
OF THE SECURITIES -- BOOK-ENTRY SECURITIES" herein.
RATINGS OF THE SECURITIES
RATINGS NOT A RECOMMENDATION. It will be a condition to the issuance of a
Class of Securities offered hereby that they be rated in one of the four highest
rating categories by each Rating Agency identified as rating such Class in the
related Prospectus Supplement. Any such rating would be based on, among other
things, the adequacy of the value of the related Mortgage Collateral and any
credit enhancement with respect to such Class and will represent such Rating
Agency's assessment solely of the likelihood that holders of such Class of
Securities will receive payments to which such Securityholders are entitled
under the applicable Agreement. Such rating will not constitute an assessment of
the likelihood that principal prepayments on mortgages underlying the related
Mortgage Collateral 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 Series of Securities. Such rating shall not be
deemed a recommendation to purchase, hold or sell Securities, inasmuch as it
does not address market price or suitability for a particular investor. Such
rating will not address the possibility that prepayment at higher or lower rates
than anticipated by an investor may cause such
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investor to experience a lower than anticipated yield or that an investor
purchasing a Security at a significant premium might fail to recoup its initial
investment under certain prepayment scenarios.
RATINGS MAY BE LOWERED OR WITHDRAWN. There is also no assurance that any
such rating will remain in effect for any given period of time or may not be
lowered or withdrawn entirely by the applicable Rating Agency in the future if
in its judgment circumstances so warrant. In addition to being lowered or
withdrawn due to any erosion in the adequacy of the value of the assets of the
Issuer or any credit enhancement with respect to a Series of Securities, such
rating might also be lowered or withdrawn because of, among other reasons, an
adverse change in the financial or other condition of a credit enhancement
provider or a change in the rating of such credit enhancement provider's long
term debt.
LIMITATIONS OF ANALYSIS PERFORMED BY RATING AGENCIES. The amount, type and
nature of credit enhancement, if any, established with respect to a Class of
Securities of a Series will be determined on the basis of criteria established
by each Rating Agency. Such criteria are sometimes based upon an actuarial
analysis of the behavior of similar loans in a larger group. Such analysis is
often the basis upon which each Rating Agency determines the amount of credit
enhancement required with respect to each such Class. 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 similar loans accurately predicts the delinquency, foreclosure or loss
experience of any particular pool of mortgages underlying the Mortgage
Collateral. No assurance can be given that the values of any Mortgaged
Properties have remained or will remain at their levels on the respective dates
of origination of the related mortgages. If the residential real estate markets
should experience an overall decline in values such that the outstanding
principal balances of the mortgages underlying the Mortgage Collateral
supporting a particular Series of Securities and any secondary financing on the
related Mortgaged Properties become equal to or greater than the value of the
Mortgaged Properties, the rates of delinquencies, foreclosures and losses could
be higher than those now generally experienced in the mortgage lending industry.
In addition, adverse economic conditions (which may or may not affect real
property values) may affect the timely payment by mortgagors of scheduled
payments of principal and interest on the Mortgage Collateral and, accordingly,
the rates of delinquencies, foreclosures and losses with respect to any Mortgage
Collateral supporting a Series of Securities. To the extent that such losses are
not covered by credit enhancement, such losses will be borne, at least in part
by the holders of one or more Classes of Securities of the related Series.
CREDIT CONSIDERATIONS AND RISKS
LIMITED SOURCE OF PAYMENTS. The Company does not have, nor is it expected
to have, any significant assets. Although the Securities will be obligations of
or interests in their respective Issuers, no Issuer is expected to have
significant assets other than those included in the Trust Fund Assets for the
Series of Securities issued by it. Unless otherwise provided in the related
Prospectus Supplement, the Securities of a Series will be payable solely from
the assets included in the Trust Fund Assets for such Series and will not have
any claim against or security interest in the assets supporting any other
Series. There will be no recourse to the Company or AmREIT, or any other person
for any failure to make payments on the Securities. In addition, at the times
set forth in the related Prospectus Supplement, certain Mortgage Collateral
and/or any balance remaining in the Bond Account for a Series of Securities
immediately after making all payments due on such Securities, after making any
other payments specified in the related Prospectus Supplement, may be promptly
released or remitted to the Company, AmREIT, any credit enhancement provider or
any other person entitled thereto and will no longer be available for making
payments on such Securities. Consequently, investors in the Securities of a
Series must rely solely upon payments of principal and interest on the Mortgage
Collateral and any other assets included in the Trust Fund Assets for such
Series, and the sources of credit enhancement identified in the related
Prospectus Supplement to provide for payments on such Securities.
NO RECOURSE TO COMPANY OR AMREIT. The Securities will not represent an
interest in or obligation of the Company or AmREIT or any affiliate thereof. The
only obligations, if any, of the Company with respect to the Mortgage Collateral
or the Securities of any Series will be pursuant to certain representations and
warranties. The Company does not have, and is not expected in the future to
have, any significant assets with which to meet any obligation to repurchase
Mortgage Collateral with respect to which there has been a breach
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of any representation or warranty. If, for example, the Company were required to
repurchase a Mortgage Loan, its only sources of funds to make such repurchase
would be from funds obtained (i) from the enforcement of a corresponding
obligation, if any, on the part of AmREIT or other Seller, or (ii) to the extent
provided in the related Prospectus Supplement, from a Reserve Fund or similar
credit enhancement established to provide funds for such repurchases.
The only obligations of AmREIT or other Seller with respect to the Mortgage
Collateral or the Securities of any Series will be pursuant to certain
representations and warranties. AmREIT or such other Seller may be required to
repurchase or substitute for any Mortgage Loan with respect to which such
representations and warranties are breached. There is no assurance, however,
that AmREIT or such other Seller will have the financial ability to effect any
such repurchase or substitution.
LIMITATIONS OF DIRECT OR INDIRECT BACKING FOR SECURITIES. Agency
Securities are issued or guaranteed by government-sponsored entities but only
the guarantee by GNMA of GNMA Certificates is entitled to the full faith and
credit of the United States. The guarantees by FNMA and FHLMC of FNMA
Certificates and FHLMC Certificates, respectively, are backed only by the credit
of FNMA, a federally chartered, privately owned corporation or by the credit of
FHLMC, a federally chartered corporation controlled by the Federal Home Loan
Banks. Neither the United States nor any agency thereof will be obligated to
finance the operations of FNMA or FHLMC or to assist either FNMA or FHLMC in any
other way. See "TRUST FUND ASSETS -- AGENCY SECURITIES" herein. Although payment
of principal of, and interest on, any Agency Security securing all or part of a
Series of Securities will be guaranteed by either GNMA, FNMA or FHLMC, such
guarantee will run only to such Agency Security and will not guarantee the
payment of principal or interest on the Securities of such Series.
DEFICIENCY ON SALE OF MORTGAGE COLLATERAL. In the event of an acceleration
of the payment of the Bonds of a Series, upon an Event of Default (as defined
herein) under the Indenture with respect to such Series, there is no assurance
that the proceeds from any sale of the Mortgage Collateral would be sufficient
to pay in full the outstanding principal amount of such Series of Bonds (or
related Series of Certificates) together with interest accrued thereon. The
market value of such Mortgage Collateral generally will fluctuate with changes
in prevailing rates of interest. Consequently, such Mortgage Collateral may be
liquidated at a discount, in which case the proceeds of liquidation might be
less than the aggregate outstanding principal amount and interest payable on the
Securities of such Series. Although the Securities will be obligations of or
represent interests in their respective Issuers, no Issuer is expected to have
significant assets other than those included in the Trust Fund Assets for the
Series of Securities issued by it. It is therefore unlikely that the Issuer will
have sufficient other assets available for payment of any such deficiency. If,
following an Event of Default, a Series of Bonds has been declared to be due and
payable, the Bond Trustee may, in its discretion, but subject to the direction
of the Securityholders, refrain from selling the collateral for such Series of
Bonds and continue to apply amounts received on the collateral to payments due
on the Securities of such Series in accordance with their terms, notwithstanding
the acceleration of the maturity of such Bonds. See "THE AGREEMENTS -- RIGHTS
UPON EVENTS OF DEFAULT" herein.
EFFECT OF SUBORDINATION. If so specified in the related Prospectus
Supplement, the rights of the holders of one or more Classes of Subordinated
Securities will be subordinate to the rights of one or more Classes of Senior
Securities of such Series to payments of principal and/or interest (or any
combination thereof) to the extent specified in the related Prospectus
Supplement. Although subordination is intended to reduce the risk to holders of
Senior Securities of delinquent payments or ultimate losses, the amount of
subordination will be limited. In addition, if principal payments on one or more
Classes of 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
enhancement may be exhausted before the principal of the lower priority Classes
of Securities of such Series has been repaid. As a result, the impact of
significant losses on the Mortgage Collateral may be borne first by any Class of
Subordinated Securities of a Series and thereafter by the Classes of Senior
Securities of such Series, in each case to the extent described in the related
Prospectus Supplement.
LIMITATIONS, REDUCTION AND SUBSTITUTION OF CREDIT ENHANCEMENT. The
Prospectus Supplement for a Series of Securities will describe any credit
enhancement for such Series, which may include cash accounts,
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insurance policies, surety bonds, guaranteed investment contracts,
cross-collateralization, reinvestment income, guarantees, letters of credit or
derivative arrangements to the extent described herein and therein. Although
credit enhancement is intended to reduce the risk of delinquent payments or
losses to holders of Securities entitled to the benefit thereof, the amount of
such credit enhancement will be limited, as set forth in the related Prospectus
Supplement, and may be subject to periodic reduction in accordance with a
schedule or formula or otherwise decline, and could be depleted under certain
circumstances prior to the payment in full of the related Series of Securities,
and as a result Securityholders of the related Series may suffer losses.
Moreover, such credit enhancement may not cover all potential losses or risks.
For example, credit enhancement may or may not cover fraud or negligence by a
loan originator or other parties. In addition, the Bond Trustee or the
Certificate Trustee will generally be permitted to reduce, terminate or
substitute all or a portion of the credit enhancement for any Series of
Securities, provided each applicable Rating Agency indicates that the
then-current rating of the Securities of such Series will not be adversely
affected. See "CREDIT ENHANCEMENT" herein.
The amount of applicable credit enhancement supporting one or more Classes
of Securities of a Series, 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 based on, among other things,
assumptions regarding levels of defaults, delinquencies and losses. There can be
no assurance that the default, delinquency and loss experience on the related
Mortgage Collateral will not exceed such assumed levels. See "-- RATINGS OF THE
SECURITIES" herein.
DELINQUENT LOANS MAY ADVERSELY AFFECT INVESTMENT. Certain of the Mortgage
Loans or mortgage loans underlying the Agency Securities supporting a Series of
Securities may be past due or non-performing as of the related Cut-off Date.
Investors should consider the risk that the inclusion of such loans in the
Mortgage Collateral for a Series of Securities may affect the rate of defaults
and prepayments on such Mortgage Collateral and the yield on the Securities of
such Series.
PRE-FUNDING ACCOUNTS MAY RESULT IN REINVESTMENT RISK
If so specified in the related Prospectus Supplement, on the related
Closing Date the Depositor will deposit cash in an amount (the "Pre-Funded
Amount") specified in such Prospectus Supplement into an account (the
"Pre-Funding Account"). The Pre-Funded Amount will be used to purchase
additional Mortgage Loans and/or Agency Securities ("Subsequent Mortgage
Collateral") during a period from the related Closing Date to a date not more
than one year after such Closing Date (such period, the "Funding Period") from
the Depositor (which, in turn, will acquire such Subsequent Mortgage Collateral
from AmREIT). The Pre-Funding Account will be maintained with the Bond Trustee
for the related Series of Securities and is designed solely to hold funds to be
applied by such Bond Trustee during the Funding Period to pay to the Depositor
the purchase price for Subsequent Mortgage Collateral. Monies on deposit in the
Pre-Funding Account will not be available to cover losses on or in respect of
the related Mortgage Collateral. To the extent that the entire Pre-Funded Amount
has not been applied to the purchase of Subsequent Mortgage Collateral by the
end of the related Funding Period, any amounts remaining in the Pre-Funding
Account will be distributed as a prepayment of principal to Securityholders on
the Distribution Date immediately following the end of the Funding Period in the
amounts and pursuant to the priorities set forth in the related Prospectus
Supplement. Any reinvestment risk resulting from such prepayment will be borne
entirely by the holders of one or more Classes of the related Series of
Securities. See "TRUST FUND ASSETS -- PRE-FUNDING ACCOUNT" herein.
PRE-FUNDING ACCOUNTS MAY ADVERSELY AFFECT INVESTMENT
The ability of the Issuer to acquire Subsequent Mortgage Collateral during
the Funding Period will be dependent upon the ability of the Depositor to
acquire Subsequent Mortgage Collateral that satisfies the requirements described
in the related Prospectus Supplement. Although such Subsequent Mortgage
Collateral must satisfy the characteristics described in the related Prospectus
Supplement, such Subsequent Mortgage Collateral may have certain different
characteristics, including, without limitation, a more recent origination date
than the initial Mortgage Collateral. As a result, the addition of such
Subsequent Mortgage
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Collateral pursuant to the Pre-Funding Account may adversely affect the
performance of the related Securities. See "TRUST FUND ASSETS -- PRE-FUNDING
ACCOUNT" herein.
CONSEQUENCES OF OWNING ORIGINAL ISSUE DISCOUNT SECURITIES
All of the Deferred Interest Securities will be, and certain of the other
Securities may be, issued with original issue discount for federal income tax
purposes. A holder of a Security issued with original issue discount will be
required to include original issue discount in ordinary gross income for federal
income tax purposes as it accrues, in advance of receipt of the cash
attributable to such income. Accrued but unpaid interest on the Deferred
Interest Securities generally will be treated as original issue discount for
this purpose. See "FEDERAL INCOME TAX CONSEQUENCES -- INTEREST AND ORIGINAL
ISSUE DISCOUNT" and "-- MARKET DISCOUNT" herein.
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INTRODUCTION
American Residential Eagle, Inc., a Delaware corporation (the "Company"),
proposes to establish one or more trusts to issue and sell Securities from time
to time under this Prospectus and related Prospectus Supplements. The Company is
a limited purpose finance corporation whose capital stock is wholly owned by
American Residential Investment Trust, Inc. ("AmREIT"). AmREIT, a Maryland
corporation, has elected to be treated as a real estate investment trust under
the Internal Revenue Code of 1986, as amended (the "Code"). The Company was
formed for the sole purpose of acting as the depositor of one or more trusts to
be formed for the purpose of issuing the Securities offered hereby and by the
related Prospectus Supplements. Each trust that is formed to act as an Issuer
will be created pursuant to an agreement between the Company acting as depositor
(in such capacity, the "Depositor"), and a bank or trust company, acting as
trustee. Each trust will be established solely for the purpose of issuing one
Series of Securities and engaging in transactions relating thereto. Each Series
of Securities will be separately supported by the Trust Fund Assets described in
the Prospectus Supplement relating to such Series, which assets will constitute
the only significant assets available to make payments on the Securities of such
Series. Accordingly, the investment characteristics of a Series of Securities
will be determined by the Trust Fund Assets for such Series and will not be
affected by the identity of the obligor with respect to such Series of
Securities. The term "Issuer," as used herein, with respect to a Series of
Securities refers to the trust established by the Company for the sole purpose
of issuing such Series of Securities.
Each Series of Bonds will be issued pursuant to a separate Indenture (the
"Indenture") between the Issuer of such Series and a bank or trust company
acting as trustee for the holders of such Bonds (the "Bond Trustee"). Each
Series of Certificates will be issued pursuant to a separate Trust Agreement
(the "Trust Agreement") between the Depositor and a bank or trust company acting
as trustee (the "Certificate Trustee"). The Indentures and Trust Agreements for
Series of Securities offered hereby are referred to herein collectively as
"Agreements" and individually as an "Agreement." A form of the each Agreement
has been filed as an exhibit to the Registration Statement of which this
Prospectus forms a part. Each final Agreement relating to each Series of
Securities will be filed with the Securities and Exchange Commission as soon as
practicable following the issuance of such Series of Securities.
THE ISSUERS
Any trust established to act as Issuer of a Series of Securities will be
created pursuant to a trust agreement between the Company and a bank or trust
company acting as trustee. Under the terms of each trust agreement creating a
trust relating to a Series of Bonds (a "Bond Issuer"), the Company initially
will retain the entire beneficial interest in the trust created thereunder
unless otherwise specified in the related Prospectus Supplement. The Company may
thereafter sell or assign all or a portion of such beneficial ownership to
another entity or entities unless prohibited from doing so by the related trust
agreement. The beneficial owners of each Bond Issuer will have no liability for
the obligations of the Issuer under the Bonds issued by it and holders of Bonds
of each Series will be deemed to have released the holders of beneficial
interest from any claim, liability or obligation on or with respect to the
Bonds. Each Bond Issuer will be managed by AmREIT. Under the terms of each trust
agreement creating a trust relating to a Series of Certificates (a "Certificate
Issuer"), the Company may retain or sell all or a portion of any Class of such
Series of Certificates.
The Mortgage Collateral for each Series of Securities will have been
deposited with the Issuer of such Series by the Company which, in turn, will
have either (i) received such collateral from AmREIT (or an affiliate) as a
contribution to the Company's capital or (ii) purchased such collateral from
AmREIT (or an affiliate) or another entity or entities (in such capacity, each a
"Seller") as provided in the related Prospectus Supplement. (References herein
to AmREIT in its capacity as Seller shall be deemed to include any affiliate of
AmREIT acting in such capacity.) AmREIT acquires mortgage loans in the normal
course of its business from entities who have originated or otherwise acquired
such loans. AmREIT works with such originating entities to develop underwriting
guidelines for loan products that will meet AmREIT's investment criteria;
however, neither AmREIT nor any of its affiliates originates or services
mortgage loans. None of the Mortgage Loans will represent obligations of AmREIT.
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In connection with the issuance of each Series of Bonds, the related
Mortgage Collateral will be deposited by the Company with the Issuer of such
Series and pledged by such Issuer to the Bond Trustee under the related
Indenture to secure such Series of Bonds. The Indenture with respect to each
Series of Bonds will prohibit the incurrence of further indebtedness by the
Issuer of such Series of Bonds. The Bond Trustee will hold the Mortgage
Collateral for a Series of Bonds as security pledged only for that Series, and
holders of the Bonds of that Series will be entitled to the benefits of such
security pursuant to the terms of the Indenture. In connection with the issuance
of each Series of Certificates, the Company will deposit one or more Series of
Bonds created for such purpose into the Issuer of such Series of Certificates by
assigning the Bonds to the Certificate Trustee under the related Trust Agreement
for such Series of Certificates. The Trust Agreement with respect to such Series
will prohibit the issuance of additional Series of Certificates by that Issuer.
The Certificate Trustee will hold the Bonds so designated as part of the Trust
Fund Assets for such Series of Certificates and the holders of such Series of
Certificates will have beneficial ownership of such Trust Fund Assets pursuant
to the terms of the Trust Agreement.
Each trust agreement will provide that the related trust may not conduct
any activities other than those related to the issuance and sale of the
Securities of the particular Series issued by it and such other limited
activities as may be required in connection with reports and distributions to
holders of beneficial interests in the trust. No trust agreement will be subject
to amendment without the prior written consent of the Bond Trustee or the
Certificate Trustee for the related Series, which consent may not be
unreasonably withheld if such amendment would not adversely affect the interests
of the Securityholders of such Series.
THE COMPANY
The Company was incorporated in the State of Delaware on January 27, 1998
and is a limited purpose finance subsidiary of AmREIT. The Company is a
qualified real estate investment trust subsidiary. AmREIT is a publicly owned
real estate investment trust. The Company's principal executive offices are
located at 445 Marine View Avenue, Suite 100, Del Mar, California 92014. The
Company's telephone number is 619-259-6082.
AmREIT has agreed with the Company that AmREIT will not file or cause to be
filed any voluntary petition in bankruptcy against the Company or any trust
created by it until at least one year after the date on which the related
Securities have been paid in full, if at all.
USE OF PROCEEDS
The net proceeds to be received from the sale of the Securities of each
Series will be applied by the Company to the purchase or acquisition of the
related Trust Fund Assets or the payment of expenses incurred in connection with
the issuance of Securities and otherwise incurred in connection with the conduct
of the Company's operations.
TRUST FUND ASSETS
GENERAL
The Trust Fund Assets securing each Series of Bonds will consist of
collateral (the "Collateral") comprised of (i) the Mortgage Collateral pledged
as security for such Series of Bonds, (ii) funds on deposit in the Bond Account
and the Distribution Account under the Indenture for such Series of Bonds
representing payments and prepayments on Mortgage Collateral, including, to the
extent applicable, all payments which may become due under any applicable
hazard, mortgage guaranty, mortgagor bankruptcy, title insurance and bond
insurance policies (collectively, the "Insurance Proceeds") and the proceeds
(the "Liquidation Proceeds") of foreclosure or settlement of defaulted Mortgage
Loans each as required to be remitted to the Bond Trustee, (iii) cash,
certificates of deposit, letters of credit, surety bonds, reinvestment income,
guaranteed investment contracts or any combination thereof in the aggregate
amount, if any, specified in the related Prospectus Supplement to be deposited
by the Issuer in a related Reserve Fund, (iv) the amount of
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cash, if any, specified in the related Prospectus Supplement, to be initially
deposited by the Issuer in the related Bond Account, (v) certain cash accounts,
insurance policies, surety bonds, reinvestment income, guarantees, letters of
credit, cross-collateralization or derivative arrangements, as specified herein
and in the related Prospectus Supplement, (vi) to the extent applicable, the
reinvestment income on all of the foregoing, (vii) the Issuer's rights under the
Master Servicing Agreement with respect to the Series of Bonds, (viii) the
Issuer's rights under the Mortgage Loan Purchase Agreement with respect to the
Series of Bonds, (ix) amounts (excluding any reinvestment income thereon)
deposited in the related early remittance account, if any, under the Indenture
for such Series of Bonds and (x) the Issuer's rights under certain of the
Mortgage Pool Insurance Policies and/or Bond Insurance Policies obtained for
such Series of Bonds. Scheduled payments on the Mortgage Collateral securing a
Series of Bonds and amounts, if any, initially deposited in the related Bond
Account, together with, to the extent applicable, amounts available to be
withdrawn from any related Reserve Fund, will be sufficient to make timely
payments of interest on the Bonds of such Series and to retire each Class of
Bonds comprising such Series not later than the Stated Maturity of such Class of
Bonds specified in the related Prospectus Supplement.
The Trust Fund Assets for each Series of Certificates will consist
primarily of one or more Bonds representing the right to receive all or
substantially all of the payments on the Collateral securing such Series of
Bonds. Each Series of Certificates will accordingly be supported by the Mortgage
Collateral and other items included in the Trust Fund Assets for the related
Series of Bonds.
Each Prospectus Supplement relating to a Series of Securities will include
information as to (i) the approximate aggregate principal amount of the Mortgage
Collateral supporting such Series and whether the Mortgage Collateral consists
of Mortgage Loans, GNMA Certificates, FNMA Certificates, FHLMC Certificates or
some combination of Mortgage Loans and Agency Securities and (ii) the
approximate weighted average terms to maturity of such Mortgage Collateral.
The Collateral supporting each Series of Securities will serve as Trust
Fund Assets only for that Series of Securities, except to the extent that any
Mortgage Pool Insurance Policies, Special Hazard Insurance Policies, Bankruptcy
Bonds or other form of credit enhancement specified herein may, if specified in
the related Prospectus Supplement, be pledged to support more than one Series of
Securities. See "CREDIT ENHANCEMENT" herein.
The following is a brief description of the Mortgage Collateral expected to
be included in the Trust Fund Assets for a Series of Securities. If specific
information respecting the Mortgage Collateral is not known at the time the
related Series of Securities initially is offered, more general information of
the nature described below will be provided in the related Prospectus
Supplement, and specific information will be set forth in a report on Form 8-K
to be filed with the Securities and Exchange Commission within fifteen days
after the initial issuance of such Securities (the "Detailed Description"). A
schedule of the Mortgage Collateral relating to such Series of Securities will
be attached to the applicable Agreement upon issuance of the Securities.
THE MORTGAGE LOANS
GENERAL. All of the Mortgage Loans will be contributed to the Company's
capital by AmREIT (or an affiliate) or purchased by the Company from AmREIT (or
an affiliate) or another Seller and will be master serviced by the Master
Servicer specified in the related Prospectus Supplement. See "SERVICING OF THE
MORTGAGE LOANS" herein. Mortgage Loans contributed to or acquired by the Company
will have been originated in accordance with the underwriting criteria specified
under "MORTGAGE LOAN PROGRAM -- UNDERWRITING STANDARDS" herein and in the
related Prospectus Supplement. The Mortgage Loans supporting a Series of
Securities will consist solely of conventional loans secured by first or junior
liens on one- to four-family residential properties or other types of
residential or mixed use properties described below under "FREEDOM PROGRAM." All
Mortgage Loans supporting a Series of Certificates will be secured by first
liens on single parcels of real estate. See "CERTAIN LEGAL ASPECTS OF MORTGAGE
LOANS -- GENERAL" herein. The real property constituting security for repayment
of a Mortgage Loan (each, a "Mortgaged Property") may be located in any one of
the fifty states, the District of Columbia, Guam, Puerto Rico, or any other
territory of the United States as specified in the related Prospectus
Supplement.
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Mortgage Loans with certain Loan-to-Value Ratios and/or certain principal
balances may be covered wholly or partially by primary mortgage insurance
policies (each, a "Primary Mortgage Insurance Policy"). The existence, extent
and duration of any such coverage will be described in the applicable Prospectus
Supplement.
Unless otherwise specified in the related Prospectus Supplement, all of the
Mortgage Loans supporting a Series of Securities will have monthly payments due
on the first day of each month. Such monthly installments on each such Mortgage
Loan, net of (i) applicable servicing compensation or master servicing
compensation, (ii) amounts retained by the Master Servicer or Servicer (as
defined herein) to be applied to the payment of premiums for certain Mortgage
Pool Insurance Policies and, if applicable, bond insurance policies and (iii)
amounts retained to reimburse the Master Servicer or Servicer for certain
advances it has made, will be payable to the Bond Trustee by the Master Servicer
on or before the monthly remittance date specified in the Prospectus Supplement
relating to the Series of Securities supported by such Mortgage Loans (each, a
"Remittance Date"). See "SERVICING OF THE MORTGAGE LOANS -- PAYMENTS ON MORTGAGE
LOANS" and "-- ADVANCES AND OTHER AMOUNTS PAYABLE BY MASTER SERVICER" herein.
The payment terms of the Mortgage Loans supporting a Series of Securities will
be described in the related Prospectus Supplement and may include any of the
following features or combination thereof or other features described in the
related Prospectus Supplement:
(a) Interest may be payable at a fixed rate, a rate adjustable from
time to time in relation to an index (which will be specified in the
related Prospectus Supplement), a rate that is fixed for a period of time
or under certain circumstances and is followed by an adjustable rate, a
rate that otherwise varies from time to time, or a rate that is convertible
from an adjustable rate to a fixed rate. Changes to an adjustable rate may
be subject to periodic limitations, maximum rates, minimum rates or a
combination of such limitations as set forth in the related Mortgage Note.
Accrued interest may be deferred and added to the principal of a loan for
such periods and under such circumstances as may be specified in the
related Prospectus Supplement. A Mortgage Note may provide for the payment
of interest at a rate lower than the Mortgage Rate specified in such
Mortgage Note for a period of time or for the life of the loan and the
amount of any difference may be contributed from funds supplied by the
seller of the Mortgaged Property or another source.
(b) Principal may be payable on a level debt service basis to fully
amortize the Mortgage Loan over its term, may be calculated on the basis of
an assumed amortization schedule that is significantly longer than the
original term to maturity or on an interest rate that is different from the
Mortgage Rate or may not be amortized during all or a portion of the
original term. Payment of all or a substantial portion of the principal may
be due on maturity ("balloon payments"). Principal may include interest
that has been deferred and added to the principal balance of the Mortgage
Loan.
(c) Monthly payments of principal and interest may be fixed for the
life of the Mortgage Loan, may increase over a specified period of time or
may change from period to period. The terms of a Mortgage Loan may include
limits on periodic increases or decreases in the amount of monthly payments
and may include maximum or minimum amounts of monthly payments.
(d) The Mortgage Loans may be prepaid (i) at any time without the
payment of any prepayment fee or (ii) subject to a prepayment fee, which
may be fixed for the life of any such Mortgage Loan or may decline over
time, and may be prohibited for the life of such Mortgage Loan or for
certain periods ("lockout periods"). Certain Mortgage Loans may permit
prepayments after expiration of the applicable lockout period and may
require the payment of a prepayment fee in connection with any such
subsequent prepayment. Other Mortgage Loans may permit prepayments without
payment of a fee unless the prepayment occurs during specified time
periods. The loans may include "due-on-sale" clauses that permit the
mortgagee to demand payment of the entire Mortgage Loan in connection with
the sale or certain transfers of the related Mortgaged Property. Other
Mortgage Loans may be assumable by persons meeting the then applicable
underwriting standards. See "MORTGAGE LOAN PROGRAM -- UNDERWRITING
STANDARDS" herein.
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The Mortgage Collateral supporting a Series of Securities may include
certain Mortgage Loans ("Buydown Loans") that include provisions whereby a third
party partially subsidizes the monthly payments of the Mortgagors during the
early years of such Mortgage Loans, the difference to be made up from a fund (a
"Buydown Fund") contributed by such third party at the time of origination of
the Mortgage Loan. A Buydown Fund will be in an amount equal either to the
discounted value or full aggregate amount of future payment subsidies. The
underlying assumption of buydown plans is that the income of the Mortgagor will
increase during the buydown period as a result of normal increases in
compensation and inflation, so that the Mortgagor will be able to meet the full
mortgage payments at the end of the buydown period. To the extent that this
assumption as to increased income is not fulfilled, the possibility of defaults
on Buydown Loans is increased. The related Prospectus Supplement will contain
information with respect to any Buydown Loan concerning limitations on the
interest rate paid by the Mortgagor initially, on annual increases in the
interest rate and on the length of the buydown period.
Mortgage Loans will consist of mortgage loans or deeds of trust secured by
first or junior liens on one-to four-family residential properties or other
types of residential or mixed use properties described below under "FREEDOM
PROGRAM." If provided in the related Prospectus Supplement, certain of the
Mortgage Loans may be secured by junior liens where the related senior liens
("Senior Liens") are not to be included as part of the Mortgage Collateral.
Holders of such Mortgage Loans secured by junior liens are subject to the risk
that adequate funds will not be received in connection with a foreclosure of the
related Senior Liens to satisfy fully both the Senior Liens and the Mortgage
Loans. In the event that a holder of a Senior Lien forecloses on a Mortgaged
Property, the proceeds of the foreclosure or similar sale will be applied first
to the payment of court costs and fees in connection with the foreclosure,
second to real estate taxes, third in satisfaction of all principal, interest,
prepayment or acceleration penalties, if any, and any other sums due and owing
to the holder of the Senior Liens. The claims of the holders of the Senior Liens
will be satisfied in full out of proceeds of the liquidation of the related
Mortgaged Property, if such proceeds are sufficient, before the Issuer as holder
of the junior lien receives any payments in respect of the Mortgage Loan. If the
Master Servicer or a Servicer were to foreclose on any such Mortgage Loan, it
would do so subject to any related Senior Liens. In order for the debt related
to the Mortgage Loan to be paid in full at such sale, a bidder at the
foreclosure sale of such Mortgage Loan would have to bid an amount sufficient to
pay off all sums due under the Mortgage Loan and the Senior Liens or purchase
the Mortgaged Property subject to the Senior Liens. In the event that such
proceeds from a foreclosure or similar sale of the related Mortgaged Property
are insufficient to satisfy all Senior Liens and the Mortgage Loan in the
aggregate, the Issuer, as the holder of the junior liens, and, accordingly,
holders of one or more classes of the Securities of the related Series, bear (i)
the risk of delay in distributions while a deficiency judgment against the
borrower is obtained and (ii) the risk of loss if the deficiency judgment is not
realized upon. Moreover, deficiency judgments may not be available in certain
jurisdictions or the Mortgage Loan may be nonrecourse. In addition, a junior
mortgagee may not foreclose on the property securing a junior mortgage unless it
forecloses subject to the senior mortgages.
Each Prospectus Supplement will contain information, as of the date of such
Prospectus Supplement and to the extent then specifically known to the Company,
with respect to the Mortgage Loans supporting the related Series of Securities,
including (i) the aggregate outstanding principal balance and the average
outstanding principal balance of the Mortgage Loans as of the date of issuance
of the related Series of Securities, (ii) the types of property securing the
Mortgage Loans, (iii) the original terms to maturity of the Mortgage Loans, (iv)
the earliest origination date and latest maturity date of any of the Mortgage
Loans, (v) the maximum and minimum per annum Mortgage Rates and (vi) the
geographical distribution of the Mortgage Loans.
If so specified in the related Prospectus Supplement, the Mortgage Loans
may include cooperative apartment loans ("Cooperative Loans") secured by
security interests in shares issued by private, non-profit, cooperative housing
corporations ("Cooperatives") and in the related proprietary leases or occupancy
agreements granting exclusive rights to occupy specific dwelling units in such
Cooperatives' buildings.
The Mortgaged Properties relating to Mortgage Loans will consist of
detached or semi-detached one-family dwelling units, two- to four-family
dwelling units, townhouses, rowhouses, individual condominium units, individual
units in planned unit developments, small multi-family and mixed use properties
and certain
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other dwelling units described under "FREEDOM PROGRAM." Such Mortgaged
Properties may include vacation and second homes, investment properties and
leasehold interests. In the case of leasehold interests, the term of the
leasehold will exceed the scheduled maturity of the Mortgage Loans by at least
five years.
FREEDOM PROGRAM. Under AmREIT's Freedom Program, it will (i) identify
segments of the residential Mortgage Loan market that meet its general criteria
for potential originations, (ii) develop tailored underwriting guidelines for
Mortgage Loans to be generated in each market segment, (iii) arrange for the
acquisition by it of Mortgage Loans directly from the originators
("Correspondents"), hence avoiding certain loan broker or other intermediary
fees, and (iv) arrange for the servicing of the Mortgage Loans by entities
experienced in servicing the particular types of Mortgage Loans involved.
Although AmREIT works with its Correspondents to develop the desired
underwriting guidelines, neither AmREIT nor any of its affiliates originates or
services mortgage loans.
Under the Freedom Program, AmREIT will identify market segments of the
residential Mortgage Loan market that it believes have the potential for
generating Mortgage Loans with higher yields than other Mortgage Loans with
generally comparable risks. These segments generally are present where there is
less competition among Mortgage Loan originators and, hence, fewer resources
available to borrowers. AmREIT has identified a number of such segments and
expects that new opportunities to other market segments will become available as
the Mortgage Loan market continues to change. These emerging market segments
typically will include Mortgage Loans that are not readily available from large,
nationally-based Mortgage Loan originators due to factors related to the
Mortgage Loan underwriting process itself (such as the need to value a complex,
mixed use property) or a limited secondary market for resale of such types of
Mortgage Loans.
AmREIT has identified the following market segments of the residential
Mortgage Loan market for its initial tailored Mortgage Loan products:
- Small Multifamily Home Mortgage Loans. A small multifamily home Mortgage
Loan will be secured by a first lien on a 5-unit to 20-unit residential
property. The underwriting guidelines for small multifamily home Mortgage
Loans will place emphasis on the appraised value, the existence and terms
of underlying leases, a cash flow analysis, the condition of the mortgaged
property and favorable credit reports.
- Manufactured Housing Mortgage Loans. A manufactured housing Mortgage
Loan will be secured by a first lien on an owner occupied manufactured
housing unit (excluding mobile homes) permanently affixed to a foundation
and the underlying lot. The underwriting guidelines for manufactured
housing Mortgage Loans will place emphasis on appraised value (relying on
comparable sales), condition of the property, the quality of the
borrower's income and favorable credit reports.
- Mixed Use Mortgage Loans. A mixed use Mortgage Loan will be secured by a
first lien on a combined commercial and upto-twelve-unit residential
property. The qualifying commercial uses of the properties will be
generally limited to retail, professional, light industrial or office use.
The underwriting guidelines for mixed use Mortgage Loans will place
emphasis on appraised value (relying on comparable sales), condition of
the property (and environmental compliance),cash flow analysis and credit
reports (including credit reports on commercial tenants).
- Rural Home Mortgage Loans. A rural home Mortgage Loan will be secured by
a first lien on a residential property in a rural area where agricultural
use is present but limited to noncommercial use. The underwriting
guidelines for rural home Mortgage Loans will place emphasis on appraised
value (relying on comparable sales), condition of the property, quality of
the borrower's income and favorable credit reports. Rural home Mortgage
Loan amounts will generally be higher with respect to the appraised value
of the residence, and the first five acres and lower with respect to any
additional acreage.
- Mini-Ranch Home Mortgage Loans. A mini-ranch home Mortgage Loan will be
secured by a first lien on a residential ranch property. The underwriting
guidelines for mini-ranch home Mortgage Loans will place emphasis on
appraised value (relying on comparable sales), condition of the property,
the
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quality of the borrower's income (primarily non-ranch income) and
favorable credit reports. Mini-ranch home Mortgage Loan amounts will
generally be higher with respect to the appraised value of the residence
and the first five acres, and lower with respect to any additional
acreage.
- Condominium/Resort Mortgage Loans. A condominium/resort Mortgage Loan
will be secured by a first lien on a vacation property, including those
located in ski, golf and other recreational resort areas. The underwriting
guidelines for condominium/resort Mortgage Loans will place emphasis on
appraised value (relying on comparable sales with same complex comparables
preferred), same complex rental history, the quality of the borrower's
income and favorable credit reports.
AmREIT has created tailored underwriting guidelines for Mortgage Loans in
the initial target market segments. Such Mortgage Loan underwriting guidelines
will set forth the various characteristics (such as combinations of
loan-to-value levels and credit ranking of borrowers) for Mortgage Loans that
AmREIT is prepared to purchase from Correspondents. These Mortgage Loans
generally will be nonconforming, primarily as a result of the property type,
and, to a lesser extent, the borrower's credit characteristics.
AmREIT intends to draw upon the experience of its executive officers in the
residential mortgage industry to build a network of Correspondents with
expertise in market segments targeted by AmREIT. AmREIT will make arrangements
to acquire Mortgage Loans through its relationships with these Correspondents.
AmREIT will identify and work with a number of Correspondents to generate
Mortgage Loan products for the Freedom Program.
The Mortgage Loans acquired pursuant to the Freedom Plan will have certain
distinct risk characteristics and generally lack standardized terms, which may
complicate their structure. The underlying properties themselves may be unique
and more difficult to value than typical residential real estate properties.
Although AmREIT intends to seek geographic diversification of the properties
which are collateral for its Mortgage Loans, it does not intend to set specific
diversification requirements (whether by state, zip code or other geographic
measure). Concentration of the Mortgage Collateral securing a series of Bonds in
any one area will increase exposure to the economic and natural hazard risks
associated with that area.
OTHER PRODUCTS. In addition to the tailored Mortgage Loan products
described above, AmREIT may also acquire conforming Mortgage Loans and
nonconforming jumbo Mortgage Loans from Correspondents, and purchase Mortgage
Loans on a bulk basis. Conforming Mortgage Loans meet underwriting guidelines
with respect to principal balance, loan repayment schedule and borrower credit
history, as defined by certain government sponsored agencies. These Mortgage
Loans will consist of conventional Mortgage Loans that comply with requirements
for inclusion in certain programs sponsored by the FHLMC or FNMA, and FHA Loans
and VA Loans. The nonconforming Mortgage Loans will be conventional Mortgage
Loans that vary in one or more respects from the requirements for participation
in FHLMC or FNMA programs.
AmREIT may invest in sub-prime Mortgage Loans. Sub-prime Mortgage Loans are
residential Mortgage Loans made to borrowers with credit ratings below the
conforming Mortgage Loan guidelines. Additionally, sub-prime Mortgage Loans
generally are subject to greater frequency of loss and delinquency than
conforming Mortgage Loans. Accordingly, lower credit grade Mortgage Loans
normally bear a higher rate of interest than conforming Mortgage Loans. The
Prospectus Supplement relating to any Series of Bonds secured by sub-prime
Mortgage Loans will set forth the matrix of underwriting criteria under which
such Mortgage Loans were originated separately for each credit-quality category
(e.g., "A-," "B," "C" or "D") applicable to such Mortgage Loans.
No assurance can be given that values of the Mortgaged Properties will
remain at their levels on the dates of origination of the related Mortgage
Loans. If the residential real estate market should experience an overall
decline in property values such that the outstanding principal balances of the
Mortgage Loans, and any secondary financing on the Mortgaged Properties,
securing a Series of Bonds become equal to or greater than the value of the
Mortgaged Properties, the actual rates of delinquencies, foreclosures and losses
could be higher than those now generally experienced in the mortgage lending
industry. In addition, adverse economic conditions and other factors (which may
or may not affect real property values) may affect the timely payment by
Mortgagors of scheduled payments of principal and interest on the Mortgage Loans
and,
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accordingly, the actual rates of delinquencies, foreclosures and losses with
respect to any Mortgage Collateral. To the extent that such losses are not
covered by subordination provisions, any other credit enhancement or alternative
arrangements described herein and in the related Prospectus Supplement, such
losses will be borne, at least in part, by the holders of the Securities of the
related Series.
ASSIGNMENT OF MORTGAGE LOANS TO BOND TRUSTEE. Assignments of the mortgages
or deeds of trust in recordable form, naming the Bond Trustee as assignee, will
be executed and, subject to release for recording purposes, delivered to the
Bond Trustee or its Custodian along with certain other original documents
evidencing the Mortgage Loans, including the related Mortgage Notes. The
original mortgage documents will be held by the Bond Trustee or one or more of
its custodians, except to the extent released to the Master Servicer or any
Servicer from time to time in connection with its respective servicing
activities. The Issuer will promptly cause the assignments of the related
Mortgage Loans to be recorded in the appropriate public office for real property
records, except in states in which, in the opinion of counsel acceptable to the
Bond Trustee, such recording is not required to protect the Bond Trustee's
interest in such Mortgage Loans against the claim of any subsequent transferee
or any successor to or creditor of the Issuer or the originator of such Mortgage
Loan. In the event an assignment of a Mortgage Loan to the Bond Trustee is not
recorded or the opinion referred to above is not delivered to the Bond Trustee
within the period specified in the related Prospectus Supplement, the Seller
may, if required by the Bond Trustee in accordance with the terms of the
Indenture, be obligated to (i) purchase such Mortgage Loan at a price equal to
the outstanding principal balance thereof on the date of such purchase plus
accrued and unpaid interest thereon to the first day of the month following the
month in which such Mortgage Loan is purchased and deposit such amount in the
Bond Account for the related Series of Securities or (ii) if permitted by the
applicable provisions of the Indenture and the Mortgage Loan Purchase Agreement
with respect to such Series of Securities, replace such Mortgage Loan with an
eligible replacement mortgage loan (a "Replacement Mortgage Loan"). See
"-- SUBSTITUTION OF MORTGAGE COLLATERAL" herein.
The Master Servicer will service the Mortgage Loans, either directly or
through other mortgage servicing institutions ("Servicers"), pursuant to a
Master Servicing Agreement (as defined herein), and will receive a fee for such
services. See "MORTGAGE LOAN PROGRAM" and "SERVICING OF THE MORTGAGE LOANS"
herein. With respect to Mortgage Loans serviced by the Master Servicer through a
Servicer, the Master Servicer will remain liable for its servicing obligations
under the related Master Servicing Agreement as if the Master Servicer alone
were servicing such Mortgage Loans.
The obligations of the Master Servicer with respect to the Mortgage Loans
will consist principally of its contractual master servicing obligations under
the related Master Servicing Agreement (including its obligation to enforce the
obligations of the Servicers) as more fully described herein under "MORTGAGE
LOAN PROGRAM -- REPRESENTATIONS BY SELLERS; REPURCHASES" and its obligation to
make certain cash advances in the event of delinquencies in payments on or with
respect to the Mortgage Loans in the amounts described herein under "SERVICING
OF THE MORTGAGE LOANS -- ADVANCES AND OTHER AMOUNTS PAYABLE BY MASTER SERVICER"
herein. The obligations of the Master Servicer to make advances may be subject
to limitations, to the extent provided herein and in the related Prospectus
Supplement.
AGENCY SECURITIES
GENERAL. The Agency Securities supporting a Series of Securities will
consist of (i) fully modified pass-through mortgage-backed certificates
guaranteed as to timely payment of principal and interest by the Government
National Mortgage Association ("GNMA Certificates"), (ii) certificates
("Guaranteed Mortgage Pass-Through Certificates") issued and guaranteed as to
timely payment of principal and interest by the Federal National Mortgage
Association ("FNMA Certificates"), (iii) mortgage participation certificates
issued and guaranteed as to timely payment of interest and, unless otherwise
specified in the related Prospectus Supplement, ultimate payment of principal by
the Federal Home Loan Mortgage Corporation ("FHLMC Certificates"), (iv) stripped
mortgage-backed securities representing an undivided interest in all or a 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
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not all of such distributions) on certain GNMA, FNMA or FHLMC Certificates and,
unless otherwise specified in the related Prospectus Supplement, guaranteed to
the same extent as the underlying securities, (v) another type of passthrough
certificate issued or guaranteed by GNMA, FNMA or FHLMC and described in the
related Prospectus Supplement or (vi) a combination of such Agency Securities.
GNMA CERTIFICATES. GNMA is a wholly-owned corporate instrumentality of the
United States with the Department of Housing and Urban Development. Section
306(g) of Title III of the National Housing Act of 1934, as amended (the
"Housing Act"), authorizes GNMA to guarantee the timely payment of the principal
of, and interest on, GNMA Certificates that represent an interest in a pool of
mortgage loans insured by the FHA under the Housing Act or Title V of the
Housing Act of 1949 ("FHA Loans"), or partially guaranteed by the VA under the
Servicemen's Readjustment Act of 1944, as amended, or Chapter 37 of Title 38,
United States Code ("VA Loans").
Section 306(g) of the Housing Act provides that "the full faith and credit
of the United States is pledged to the payment of all amounts which may be
required to be paid under any guaranty under this subsection." In order to meet
its obligations under 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
guaranty.
Each GNMA Certificate included in the Trust Fund Assets a Series of
Securities (which may be issued under either the GNMA I program (each such
certificate, a "GNMA I Certificate") or the GNMA II program (each such
certificate, a "GNMA II Certificate")) will be a "fully modified pass-through"
mortgage-backed certificate issued and serviced by a mortgage banking company or
other financial concern ("GNMA Issuer") approved by GNMA or by FNMA as a
seller-servicer of FHA Loans and/or VA Loans. The mortgage loans underlying the
GNMA Certificates will consist of FHA Loans and/or VA Loans. Each such mortgage
loan is secured by a one- to four-family or multifamily residential property.
GNMA will approve the issuance of each such GNMA Certificate in accordance with
a guaranty agreement (a "Guaranty Agreement") between GNMA and the GNMA Issuer.
Pursuant to its Guaranty Agreement, a GNMA Issuer will be required to advance
its own funds in order to make timely payments of all amounts due on each such
GNMA Certificate if the payments received by the GNMA Issuer on the FHA Loans or
VA Loans underlying each such GNMA Certificate are less than the amounts due on
each such GNMA Certificate.
The full and timely payment of principal of and interest on each GNMA
Certificate will be guaranteed by GNMA, which obligation is backed by the full
faith and credit of the United States. Each such GNMA Certificate will have an
original maturity of not more than 30 years (but may have original maturities of
substantially less than 30 years). Each such GNMA Certificate will be based on
and backed by a pool of FHA Loans or VA Loans secured by one- to four-family
residential properties and will provide for the payment by or on behalf of the
GNMA Issuer to the registered holder of such GNMA Certificate of scheduled
monthly payments of principal and interest equal to the registered holder's
proportionate interest in the aggregate amount of the monthly principal and
interest payment on each FHA Loan or VA Loan underlying such GNMA Certificate,
less the applicable servicing and guaranty fee, which together equal the
difference between the interest on the FHA Loan or VA Loan and the passthrough
rate on the GNMA Certificate. In addition, each payment will include
proportionate pass-through payments of any prepayments 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 promptly 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
payment, the holder of such GNMA Certificate will have recourse only against
GNMA to obtain such payment. The Bond Trustee or its nominee, as registered
holder of the GNMA Certificates securing a Series of Bonds 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.
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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) over the term of the loan. The interest rate on such GNMA I Certificate
will equal the interest rate on the mortgage loans included in the pool of
mortgage loans underlying such GNMA I Certificate, less one-half percentage
point per annum of the unpaid principal balance of the mortgage loans.
Mortgage loans underlying a particular GNMA II Certificate may have per
annum interest rates that vary from each other by up to one percentage point.
The interest rate on each GNMA II Certificate will be between one-half
percentage point and one and one-half percentage points lower than the highest
interest rate on the mortgage loans included in the pool of mortgage loans
underlying such GNMA II Certificate (except for pools of mortgage loans secured
by manufactured homes).
Regular monthly installment payments on each GNMA Certificate supporting a
Series of Securities 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 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 registered holder 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 securing
a Series of Bonds or any other early recovery of principal on such loans will be
passed through to the registered holder of such GNMA Certificate.
GNMA Certificates may be backed by graduated payment mortgage loans or by
Buydown 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 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 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 Loans. GNMA Certificates
related to a Series of Bonds may he held in book-entry form.
The GNMA Certificates supporting a Series of Securities, and the related
underlying mortgage loans, may have characteristics and terms different from
those described above. Any such different characteristics and terms will be
described in the related Prospectus Supplement.
FNMA CERTIFICATES. FNMA is a federally chartered and privately owned
corporation organized and existing under the Federal National Mortgage
Association Charter Act, as amended. FNMA originally was 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.
FNMA provides funds to the mortgage market primarily by purchasing mortgage
loans from lenders, thereby replenishing their funds for additional lending.
FNMA 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, FNMA helps to
redistribute mortgage funds from capital-surplus to capital-short areas.
FNMA Certificates are Guaranteed Mortgage Pass-Through Certificates
representing fractional undivided interests in a pool of mortgage loans formed
by FNMA. Each mortgage loan generally must meet the
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applicable standards of the FNMA purchase program. Mortgage loans comprising a
pool are either provided by FNMA from its own portfolio or purchased pursuant to
the criteria of the FNMA purchase program.
Mortgage loans underlying FNMA Certificates supporting a Series of
Securities will consist of conventional loans, FHA Loans or VA Loans. Original
maturities of substantially all of the conventional, level payment mortgage
loans underlying a FNMA 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.
Mortgage loans underlying a FNMA 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 FNMA Certificate is equal to the lowest interest rate of
any mortgage loan in the related pools, less a specified minimum annual
percentage representing servicing compensation and FNMA'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 FNMA Certificate will be between 50 basis points and
250 basis points greater than is its annual pass-through rate and under a
special servicing option (pursuant to which FNMA assumes the entire risk for
foreclosure losses), the annual interest rates on the mortgage loans underlying
a FNMA Certificate will generally be between 55 basis points and 255 basis
points greater than the annual FNMA Certificate pass-through rate. One "basis
point" is equal to one-hundredth of a percentage point (0.01%). If specified in
the related Prospectus Supplement, FNMA Certificates may be backed by adjustable
rate mortgages.
FNMA guarantees to each registered holder of a FNMA 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 FNMA 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 FNMA under
its guaranties are obligations solely of FNMA 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 FNMA up to
$2.25 billion outstanding at any time, neither the United States nor any agency
thereof is obligated to finance FNMA's operations or to assist FNMA in any other
manner. If FNMA were unable to satisfy its obligations, distributions to holders
of FNMA Certificates would consist solely of payments and other recoveries on
the underlying mortgage loans and accordingly, monthly distributions to holders
of FNMA Certificates would be affected by delinquent payments and defaults on
such mortgage loans.
FNMA Certificates evidencing interests in pools of mortgage loans formed on
or after May 1, 1985 (other than FNMA 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 FNMA Certificate will be made by FNMA on the 25th day of each
month to the persons in whose name the FNMA Certificate is entered in the books
of the Federal Reserve Banks (or registered on the FNMA Certificate register in
the case of fully registered FNMA Certificates) as of the close of business on
the last day of the preceding month. With respect to FNMA Certificates issued in
book-entry form, distributions thereon will be made by wire, and with respect to
fully registered FNMA Certificates, distributions thereon will be made by check.
The FNMA Certificates supporting a Series of Securities, and the related
underlying mortgage loans, may have characteristics and terms different from
those described above. Any such different characteristics and terms will be
described in the related Prospectus Supplement.
FHLMC CERTIFICATES. FHLMC is a corporate instrumentality of the United
States created pursuant to Title III of the Emergency Home Finance Act of 1970,
as amended (the "FHLMC Act"). The common stock of FHLMC is owned by the Federal
Home Loan Banks and its preferred stock is owned by stockholders of the Federal
Home Loan Banks. FHLMC was established primarily for the purpose of increasing
the availability of mortgage credit for the financing of urgently needed
housing. It seeks to provide an enhanced degree of liquidity for residential
mortgage investments primarily by assisting in the development of secondary
markets for conventional mortgages. The principal activity of FHLMC currently
consists of the purchase of
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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 guaranteed mortgage securities, primarily FHLMC Certificates.
FHLMC is confined to purchasing, so far as practicable, mortgage loans that it
deems to be of such quality, type and class as to meet generally the purchase
standards imposed by private institutional mortgage investors.
Each FHLMC Certificate represents an undivided interest in a pool of
mortgage loans that may consist of first lien Conventional Loans, FHA Loans or
VA Loans. FHLMC Certificates are sold under the terms of a Mortgage
Participation Certificate Agreement. A FHLMC Certificate may be issued under
either FHLMC's Cash Program or Guarantor Program.
Mortgage loans underlying the FHLMC Certificates supporting a Series of
Securities will generally consist of mortgage loans with original terms to
maturity of between 10 and 40 years. Each such mortgage loan must meet the
applicable standards set forth in the FHLMC Act. A FHLMC Certificate group may
include whole loans, participation interests in whole loans and undivided
interests in whole loans and/or participations comprising another FHLMC
Certificate group. Under the Guarantor Program, any such FHLMC Certificate group
may include only whole loans or participation interests in whole loans.
FHLMC guarantees to each registered holder of a FHLMC Certificate the
timely payment of interest on the underlying mortgage loans to the extent of the
applicable certificate interest rate on the registered holder's pro rata share
of the unpaid principal balance outstanding on the underlying mortgage loans in
the FHLMC Certificate group represented by such FHLMC Certificate, whether or
not received. FHLMC also guarantees to each registered holder of a FHLMC
Certificate collection by such holder of all principal on the underlying
mortgage loans, without any offset or deduction, to the extent of such holder's
pro rata share thereof, but does not, except if and to the extent specified in
the related Prospectus Supplement for a Series of Bonds, guarantee the timely
payment of scheduled principal. Under FHLMC's Gold PC Program, FHLMC guarantees
the timely payment of principal based on the difference between the pool factor
published in the month preceding the month of distribution and the pool factor
published in such month of distribution. Pursuant to its guaranties, FHLMC
indemnifies holders of FHLMC Certificates against any diminution in principal by
reason of charges for property repairs, maintenance and foreclosure. FHLMC may
remit the amount due on account of its guaranty of collection of principal at
any time after default on an underlying mortgage loan, but not later than (i) 30
days following foreclosure sale, (ii) 30 days following payment of the claim by
any mortgage insurer or (iii) 30 days following the expiration of any right of
redemption, whichever occurs later, but in any event no later than one year
after demand has been made upon the mortgagor for accelerated payment of
principal. In taking actions regarding the collection of principal after default
on the mortgage loans underlying FHLMC Certificates, including the timing of any
demand for acceleration, FHLMC reserves the right to exercise its judgment with
respect to the mortgage loans in the same manner as for mortgage loans that it
has purchased but not sold. The length of time necessary for FHLMC to determine
that a mortgage loan should be accelerated varies with the particular
circumstances of each mortgagor and FHLMC has not adopted standards which
require that the demand be made within any specified period.
FHLMC Certificates are not guaranteed by the United States or by any
Federal Home Loan Bank and do not constitute debts or obligations of the United
States or any Federal Home Loan Bank. The obligations of FHLMC under its
guaranty are obligations solely of FHLMC and are not backed by, or entitled to,
the full faith and credit of the United States. If FHLMC were unable to satisfy
such obligations, distributions to holders of FHLMC Certificates would consist
solely of payments and other recoveries on the underlying mortgage loans and,
accordingly, monthly distributions to holders of FHLMC Certificates would be
affected by delinquent payments and defaults on such mortgage loans.
Registered holders of FHLMC Certificates are entitled to receive their
monthly pro rata share of all principal payments on the underlying mortgage
loans received by FHLMC, including any scheduled principal payments, full and
partial prepayments of principal and principal received by FHLMC by virtue of
condemnation, insurance, liquidation or foreclosure and repurchases of the
mortgage loans by FHLMC or the seller thereof. FHLMC is required to remit each
registered FHLMC certificateholder's pro rata share of principal payments on the
underlying mortgage loans, interest at the FHLMC pass-through rate and any other
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sums such as prepayment fees, within 60 days of the date on which such payments
are deemed to have been received by FHLMC.
Under FHLMC's Cash Program, there is no limitation on the amount by which
interest rates on the mortgage loans underlying a FHLMC Certificate may exceed
the pass-through rate on the FHLMC Certificate. Under such program, FHLMC
purchases groups of whole mortgage loans from sellers at specified percentages
of their unpaid principal balances, adjusted for accrued or prepaid interest,
which when applied to the interest rate of the mortgage loans and participations
purchased results in the yield (expressed as a percentage) required by FHLMC.
The required yield, which includes a minimum servicing fee retained by the
servicer, is calculated using the outstanding principal balance. The range of
interest rates on the mortgage loans and participations in a FHLMC Certificate
group under the Cash Program will vary since mortgage loans and participations
are purchased and assigned to a FHLMC Certificate group based upon their yield
to FHLMC rather than on the interest rate on the underlying mortgage loans.
Under FHLMC's Guarantor Program, the pass-through rate on a FHLMC Certificate is
established based upon the lowest interest rate on the underlying mortgage
loans, minus a minimum servicing fee and the amount of FHLMC's management and
guaranty income as agreed upon between the seller and FHLMC.
FHLMC Certificates duly presented for registration of ownership on or
before the last business day of a month are registered effective as of the first
day of the month. The first remittance to a registered holder of a FHLMC
Certificate will be distributed so as to be received normally by the 15th day of
the second month following the month in which the purchaser became a registered
holder of such FHLMC Certificate. Thereafter, such remittance will be
distributed monthly to the registered holder so as to be received normally by
the 15th day of each month. The Federal Reserve Bank of New York maintains
book-entry accounts with respect to FHLMC Certificates sold by FHLMC on or after
January 2, 1985, and makes payments of principal and interest each month to the
registered holders thereof in accordance with such holders' instructions.
SUBSTITUTION OF MORTGAGE COLLATERAL
Substitution of Mortgage Collateral (the "Substitute Collateral") will be
permitted in the event of breaches of representations and warranties with
respect to any original Mortgage Collateral or in the event the documentation
with respect to any Mortgage Collateral is determined by the Bond Trustee to be
incomplete. The period during which such substitution will be permitted
generally will be indicated in the Prospectus Supplement for a Series of
Securities. The Prospectus Supplement for a Series of Securities will describe
the conditions upon which Mortgage Collateral may be substituted for Mortgage
Collateral initially supporting such Series.
OPTIONAL PURCHASE OF DEFAULTED MORTGAGE LOANS
If so provided in the related Prospectus Supplement, the Master Servicer,
the Seller and/or the Company may, at its option, purchase from the Issuer any
Mortgage Loan which is delinquent in payment by more than the number of days
specified in such Prospectus Supplement, at a price specified in such Prospectus
Supplement.
BOND AND DISTRIBUTION ACCOUNTS
A separate Bond Account will be established with the Bond Trustee for each
Series of Securities for receipt of (i) all interest and principal payments
(including, to the extent applicable, any required advances by the Master
Servicer and any Servicers) and all prepayments on the Mortgage Collateral
supporting such Series required to be remitted to the Bond Trustee (including,
to the extent applicable, Insurance Proceeds required to be remitted to the Bond
Trustee and Liquidation Proceeds); (ii) the amount of cash, if any, withdrawn
from any related Reserve Fund; and (iii) if so specified in the related
Prospectus Supplement, the reinvestment income on all of the foregoing. On or
prior to the date specified in the related Prospectus Supplement (each, a
"Distribution Account Deposit Date"), the Master Servicer shall withdraw from
the
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Bond Account the Security Distribution Amount for such Distribution Date, to the
extent of funds available for such purpose on deposit therein, and will deposit
such amount in the Distribution Account.
The Bond Trustee will invest the funds in the Bond Account and the
Distribution Account in Permitted Investments maturing no later than the next
Distribution Date for the related Series of Securities. "Permitted Investments"
may include (i) obligations of the United States or any agency thereof, provided
such obligations are backed by the full faith and credit of the United States;
(ii) general obligations of or obligations guaranteed by any state of the United
States or the District of Columbia receiving the highest long-term debt rating
of each applicable Rating Agency, or such lower rating which will not result in
a change in the rating then assigned to each related Series of Securities by
each applicable Rating Agency, (iii) commercial paper or finance company paper
which is then receiving the highest commercial or finance company paper rating
of each applicable Rating Agency, or such lower rating as will not result in a
change in the rating then assigned to each related Series of Securities by each
applicable Rating Agency; (iv) certificates of deposit, demand or time deposits,
or bankers' acceptances issued by any depository institution or trust company
incorporated under the laws of the United States or of any state thereof and
subject to supervision and examination by federal and/or state banking
authorities, provided that the commercial paper and/or long term unsecured debt
obligations of such depository institution or trust company (or in the case of
the principal depository institution in a holding company system, the commercial
paper or long-term unsecured debt obligations of such holding company, but only
if Moody's Investors Service, Inc. ("Moody's") is not an applicable Rating
Agency) are then rated one of the two highest long-term and the highest
short-term ratings of each such Rating Agency for such securities, or such lower
ratings as will not result in a change in the rating then assigned to each
related Series of Securities by each Rating Agency; (v) demand or time deposits
or certificates of deposit issued by any bank or trust company or savings
institution to the extent such deposits are fully insured by the FDIC; (vi)
guaranteed reinvestment agreements issued by any bank, insurance company or
other corporation containing, at the time of the issuance of such agreements,
such terms and conditions as will not result in a change in the rating then
assigned to each related Series of Securities by each applicable Rating Agency;
(vii) repurchase obligations with respect to any security described in clauses
(i) and (ii) above, in either case entered into with a depository institution or
trust company (acting as principal) described in clause (iv) above; (viii)
securities (other than stripped bonds, stripped coupons or instruments sold at a
purchase price in excess of 115% of the face amount thereof) bearing interest or
sold at a discount issued by any corporation incorporated under the laws of the
United States or any state thereof which, at the time of such investment, have
one of the two highest ratings of each applicable Rating Agency (except if the
Rating Agency is Moody's, such rating shall be the highest commercial paper
rating of Moody's for any such securities), or such lower rating as will not
result in a change in the rating then assigned to each related Series of
Securities by each applicable Rating Agency, as evidenced by a signed writing
delivered by each such Rating Agency; (ix) interests in any money market fund
which at the date of acquisition of the interests in such fund and throughout
the time such interests are held in such fund has the highest applicable rating
by each applicable Rating Agency or such lower rating as will not result in a
change in the rating then assigned to each related Series of Securities by each
such Rating Agency; and (x) short term investment funds sponsored by any trust
company or national banking association incorporated under the laws of the
United States or any state thereof which on the date of acquisition has been
rated by each applicable Rating Agency in their respective highest applicable
rating category or such lower rating as will not result in a change in the
rating then assigned to each related Series of Securities by each such Rating
Agency; provided that no such instrument shall be a Permitted Investment if such
instrument evidences the right to receive interest only payments with respect to
the obligations underlying such instrument; and provided, further, that no
investment specified in clause (ix) or clause (x) above shall be a Permitted
Investment for any Pre-Funding Account or any related Capitalized Interest
Account (as defined herein). If a letter of credit is deposited with the Bond
Trustee, such letter of credit will be irrevocable, will name the Bond Trustee,
in its capacity as trustee for the Securityholders, as the sole beneficiary and
will be issued by a bank acceptable to each applicable Rating Agency.
(Indenture, Section 1.01)
Unless an Event of Default or an event which if not timely cured will
constitute an Event of Default with respect to a Series of Securities has
occurred and is continuing, funds remaining in the related Bond Account
following a Distribution Date for such Bonds (other than certain amounts not
constituting Available Funds if
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so specified in the related Prospectus Supplement or any funds required to be
deposited in a related Reserve Fund) will be subject to withdrawal upon the
order of the Issuer free from the lien of the Indenture.
PRE-FUNDING ACCOUNT
If so specified in the related Prospectus Supplement, the Master Servicer
will establish and maintain a Pre-Funding Account, in the name of the related
Bond Trustee on behalf of the related Securityholders, into which the Depositor
will deposit cash in an amount equal to the Pre-Funded Amount on the related
Closing Date. The Pre-Funding Account will be maintained with the Bond Trustee
for the related Series of Securities and is designed solely to hold funds to be
applied by such Bond Trustee during the Funding Period to pay to the Depositor
the purchase price for Subsequent Mortgage Collateral. Prior to inclusion in the
Collateral supporting a Series of Securities, in accordance with the provisions
of the related Indenture, the Subsequent Mortgage Collateral will be subject to
review by the same parties as reviewed the initial Mortgage Collateral.
Specifically, the Bond Trustee will be required to perform a document review and
an independent firm will certify the fair value of the Subsequent Mortgage
Collateral. In addition, the Issuer will be required to deliver to the Bond
Trustee a legal opinion to the effect that all Indenture requirements have been
met for including the Subsequent Mortgage Collateral in the Collateral.
Monies on deposit in the Pre-Funding Account will not be available to cover
losses on or in respect of the related Mortgage Collateral. The Pre-Funded
Amount will not exceed 50% of the initial aggregate principal amount of the
Securities of the related Series. The Pre-Funded Amount will be used by the
related Bond Trustee to purchase Subsequent Mortgage Collateral from the
Depositor from time to time during the Funding Period. The Funding Period, if
any, for a Series of Securities will begin on the related Closing Date and will
end on the date specified in the related Prospectus Supplement, which in no
event will be later than the date that is one year after the related Closing
Date. Monies on deposit in the Pre-Funding Account may be invested in Permitted
Investments (as such term is defined above under "-- BOND AND DISTRIBUTION
ACCOUNTS") under the circumstances and in the manner described in the related
Agreement. Earnings on investment of funds in the Pre-Funding Account will be
deposited into the related Bond Account or such other trust account as is
specified in the related Prospectus Supplement and losses will be charged
against the funds on deposit in the Pre-Funding Account. Any amounts remaining
in the Pre-Funding Account at the end of the Funding Period will be paid to the
related Securityholders in the manner and priority specified in the related
Prospectus Supplement, as a prepayment of principal of the related Securities.
Certain information with respect to the Subsequent Mortgage Collateral will be
filed with the Commission on Form 8-K within fifteen days after the date such
Subsequent Mortgage Collateral is conveyed to the related Trust.
In addition, if so specified in the related Prospectus Supplement, on the
related Closing Date the Depositor will deposit in an account (the "Capitalized
Interest Account") cash in such amount as is necessary to cover shortfalls in
interest on the related Series of Securities that may arise as a result of
utilization of the Pre-Funding Account as described above. The Capitalized
Interest Account shall be maintained with the applicable Trustee for the related
Series of Securities and is designed solely to cover the above-mentioned
interest shortfalls. Monies on deposit in the Capitalized Interest Account will
not be available to cover losses on or in respect of the related Mortgage
Collateral. To the extent that the entire amount on deposit in the Capitalized
Interest Account has not been applied to cover shortfalls in interest on the
related Series of Securities by the end of the Funding Period, any amounts
remaining in the Capitalized Interest Account will be paid to the Depositor.
DESCRIPTION OF THE SECURITIES
Each Series of Bonds will be issued pursuant to an indenture ("Indenture")
between the related Bond Issuer and the entity named in the related Prospectus
Supplement as Bond Trustee with respect to such Series, and the related Mortgage
Loans will be serviced by the Master Servicer pursuant to a Master Servicing
Agreement. A form of Indenture and Master Servicing Agreement has been filed as
an exhibit to the Registration Statement of which this Prospectus forms a part.
Each Series of Certificates will be issued pursuant to a separate agreement (a
"Trust Agreement") between the Depositor and the Certificate Trustee.
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A form of Trust Agreement has been filed as an exhibit to the Registration
Statement of which this Prospectus forms a part.
The Indentures and Trust Agreements for Series of Securities offered hereby
are referred to collectively as "Agreements" and individually as an "Agreement."
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
Assets. The following are descriptions of the material provisions which may
appear in each Agreement. The descriptions are subject to, and are qualified in
their entirety by reference to, all of the provisions of the Agreement for each
Series of Securities. The Depositor will provide a copy of the Agreement
(without exhibits) relating to any Series without charge upon written request of
a holder of record of a Security of such Series addressed to American
Residential Eagle, Inc., 445 Marine View Avenue, Suite 100, Del Mar, California
92014.
GENERAL
Unless otherwise described in the related Prospectus Supplement, the
Securities of each Series will be issued in book-entry or fully registered form,
in the authorized denominations specified in the related Prospectus Supplement,
will, in the case of Certificates, evidence specified beneficial ownership
interests in, and in the case of Bonds, be secured by, the related Trust Fund
Assets pursuant to the terms of each Agreement and will not be entitled to
payments in respect of the assets included in any other Issuer established by
the Depositor. Unless otherwise specified in the Prospectus Supplement, the
Securities will not represent obligations of the Depositor or any affiliate of
the Depositor. The assets of each Issuer will consist of, to the extent provided
in the related Agreement, (i) the Trust Fund Assets as are subject to the
related Agreement (exclusive of any amounts specified in the related Prospectus
Supplement ("Retained Interest")), including all payments of interest and
principal received with respect to the Mortgage Loans after the Cut-off Date (to
the extent not applied in computing the principal balance of such Mortgage Loans
as of the Cut-off Date (the "Cut-off Date Principal Balance")); (ii) such assets
as from time to time are required to be deposited in the related Account, as
described below under "TRUST FUND ASSETS -- BOND AND DISTRIBUTION ACCOUNTS";
(iii) property which secured a Mortgage Loan and which is acquired on behalf of
the Securityholders by foreclosure or deed in lieu of foreclosure and (iv) any
insurance policies or other forms of credit enhancement required to be
maintained pursuant to the related Agreement. If so specified in the related
Prospectus Supplement, Trust Fund Assets may also include one or more of the
following: reinvestment income on payments received on the Trust Fund Assets, a
Reserve Account, a mortgage pool insurance policy, a special hazard insurance
policy, a bankruptcy bond, one or more letters of credit, a surety bond,
guaranties or similar instruments.
Each Series of Securities will be issued in one or more Classes. Each Class
of Bonds of a Series will be secured by, and each Class of Certificates of a
Series will evidence beneficial ownership of, a specified percentage (which may
be 0%) or portion of future interest payments and a specified percentage (which
may be 0%) or portion of future principal payments on, the related Trust Fund
Assets. A Series of Securities may include one or more Classes that are senior
in right to payment to one or more other Classes of Securities of such Series.
Certain Series or Classes of Securities may be covered by insurance policies,
surety bonds or other forms of credit enhancement, in each case as described
under "Credit Enhancement" herein and in the related Prospectus Supplement. One
or more Classes of Securities of a Series may be entitled to receive
distributions of principal, interest or any combination thereof. Distributions
on one or more Classes of a Series of Securities may be made prior to one or
more other Classes, after the occurrence of specified events, in accordance with
a schedule or formula or on the basis of collections from designated portions of
the related Trust Fund Assets, in each case as specified in the related
Prospectus Supplement. The timing and amounts of such distributions may vary
among Classes or over time as specified in the related Prospectus Supplement.
Distributions of principal and interest (or, where applicable, of principal
only or interest only) on the related Securities will be made by the applicable
Trustee on each Distribution Date (i.e., monthly, quarterly, semi-annually or at
such other intervals and on the dates as are specified in the related Prospectus
Supplement) in proportion to the percentages specified in the related Prospectus
Supplement. Distributions will be made to the persons in whose names the
Securities are registered at the close of business on the dates specified in the
related Prospectus Supplement (each, a "Record Date"). Distributions will be
made in the
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manner specified in the related Prospectus Supplement to the persons entitled
thereto at the address appearing in the register maintained for Securityholders
(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 office or agency of the applicable Trustee or other
person specified in the notice to Securityholders of such final distribution.
The Securities will be transferable and exchangeable at the Corporate Trust
Office of the applicable Trustee as set forth in the related Prospectus
Supplement. No service charge will be made for any registration of exchange or
transfer of Securities of any Series, but the Trustee may require payment of a
sum sufficient to cover any related tax or other governmental charge.
Under current law the purchase and holding of a Class of Securities
entitled only to a specified percentage of payments of either interest or
principal or a notional amount of other interest or principal on the related
Mortgage Loans or a Class of Securities entitled to receive payments of interest
and principal on the Mortgage Loans only after payments to other Classes or
after the occurrence of certain specified events by or on behalf of any employee
benefit plan or other retirement arrangement (including individual retirement
accounts and annuities, Keogh plans and collective investment funds in which
such plans, accounts or arrangements are invested) subject to provisions of
ERISA or the Code may result in prohibited transactions within the meaning of
ERISA and the Code. See "ERISA MATTERS." Unless otherwise specified in the
related Prospectus Supplement, the transfer of Securities of such a Class will
not be registered unless the transferee (i) represents that it is not, and is
not purchasing on behalf of, any such plan, account or arrangement or (ii)
provides an opinion of counsel satisfactory to the applicable Trustee and the
Depositor that the purchase of Securities of such a class by or on behalf of
such plan, account or arrangement is permissible under applicable law and will
not subject the Bond Trustee, the Certificate Trustee, the Master Servicer or
the Depositor to any obligation or liability in addition to those undertaken in
the Agreements.
DISTRIBUTIONS ON SECURITIES
General. In general, the method of determining the amount of distributions
on a particular Series of Securities will depend on the type of credit support,
if any, that is used with respect to such Series. See "CREDIT ENHANCEMENT." Set
forth below are descriptions of various methods that may be used to determine
the amount of distributions on the Securities of a particular Series. The
Prospectus Supplement for each Series of Securities will describe the method to
be used in determining the amount of distributions on the Securities of such
Series.
Distributions allocable to principal and interest on the Securities will be
made by the applicable Trustee out of, and only to the extent of, funds in the
related Distribution Account, including any funds transferred from the Bond
Account and any Reserve Account (a "Reserve Account"). As between Securities of
different classes and as between distributions of principal (and, if applicable,
between distributions of Principal Prepayments, as defined below, and scheduled
payments of principal) and interest, distributions made on any Distribution Date
will be applied as specified in the related Prospectus Supplement. The
Prospectus Supplement will also describe the method for allocating distributions
among Securities of a particular class.
Available Funds. All distributions on the Securities of each Series on
each Distribution Date will be made from the Available Funds described below, in
accordance with the terms described in the related Prospectus Supplement and
specified in the applicable Agreement. "Available Funds" for each Distribution
Date will generally equal the amount on deposit in the related Bond Account on
such Distribution Date (net of related fees and expenses payable by the related
Issuer) other than amounts to be held therein for distribution on future
Distribution Dates.
Distributions of Interest. Interest will accrue on the aggregate principal
balance of the Securities (or, in the case of Securities entitled only to
distributions allocable to interest, the aggregate notional amount) of each
Class of Securities (the "Class Security Balance") entitled to interest from the
date, at the applicable interest rate (which may be a fixed rate or rate
adjustable as specified in such Prospectus Supplement), and for the periods
specified in such Prospectus Supplement. To the extent funds are available
therefor, interest accrued during each such specified period on each class of
Securities entitled to interest (other than a class of
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Securities that provides for interest that accrues, but is not currently
payable, referred to hereafter as "Deferred Interest Securities") will be
distributable on the Distribution Dates specified in the related Prospectus
Supplement until the aggregate Class Security Balance of the Securities of such
class has been distributed in full or, in the case of Securities entitled only
to distributions allocable to interest, until the aggregate notional amount of
such Securities is reduced to zero or for the period of time designated in the
related Prospectus Supplement. Except in the case of the Deferred Interest
Securities, the original Class Security Balance of each Security will equal the
aggregate distributions allocable to principal to which such Security is
entitled. Distributions allocable to interest on each Security that is not
entitled to distributions allocable to principal will be calculated based on the
notional amount of such Security. The notional amount of a Security will not
evidence an interest in or entitlement to distributions allocable to principal
but will be used solely for convenience in expressing the calculation of
interest and for certain other purposes.
Interest payable on the Securities of a Series on a Distribution Date will
include all interest accrued during the period specified in the related
Prospectus Supplement. In the event interest accrues over a period ending two or
more days prior to a Distribution Date, the effective yield to Securityholders
will be reduced from the yield that would otherwise be obtainable if interest
payable on the Security were to accrue through the day immediately preceding
such Distribution Date, and the effective yield (at par) to Securityholders will
be less than the indicated coupon rate.
With respect to any Class of Deferred Interest Securities, if specified in
the related Prospectus Supplement, any interest that has accrued but is not paid
on a given Distribution Date will be added to the aggregate Class Security
Balance of such Class of Securities on that Distribution Date. Distributions of
interest on any Class of Deferred Interest Securities will commence only after
the occurrence of the events specified in such Prospectus Supplement. Prior to
such time, the beneficial ownership interest in the Trust Fund Assets or the
principal balance, as applicable, of such Class of Deferred Interest Securities,
as reflected in the aggregate Class Security Balance of such Class of Deferred
Interest Securities, will increase on each Distribution Date by the amount of
interest that accrued on such Class of Deferred Interest Securities during the
preceding interest accrual period but that was not required to be distributed to
such Class on such Distribution Date. Any such Class of Deferred Interest
Securities will thereafter accrue interest on its outstanding Class Security
Balance as so adjusted.
Distributions of Principal. The related Prospectus Supplement will specify
the method by which the amount of principal to be distributed on the Securities
on each Distribution Date will be calculated and the manner in which such amount
will be allocated among the Classes of Securities entitled to distributions of
principal. The aggregate Class Security Balance of any Class of Securities
entitled to distributions of principal generally will be in the aggregate
original Class Security Balance of such Class of Securities specified in such
Prospectus Supplement, reduced by all distributions reported to the holders of
such Securities as allocable to principal and, (i) in the case of Deferred
Interest Securities, as specified in the related Prospectus Supplement,
increased by all interest accrued but not then distributable on such Deferred
Interest Securities and (ii) in the case of adjustable rate Securities, subject
to the effect of negative amortization, if applicable.
If so provided in the related Prospectus Supplement, one or more classes of
Securities will be entitled to receive all or a disproportionate percentage of
the payments of principal which are received from borrowers in advance of their
scheduled due dates and are not accompanied by amounts representing scheduled
interest due after the month of such payments ("Principal Prepayments") in the
percentages and under the circumstances or for the periods specified in such
Prospectus Supplement. Any such allocation of Principal Prepayments to such
Class or Classes of Securities will have the effect of accelerating the
amortization of such Securities while increasing the interests of one or more
other classes of Securities in the related Trust Fund Assets. Increasing the
interests of the other Classes of Securities relative to that of certain
Securities is intended to preserve the availability of the subordination
provided by such other Securities. See "CREDIT ENHANCEMENT -- SUBORDINATION."
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REDEMPTION OF BONDS
Special Redemption. If so specified in the related Prospectus Supplement,
the Bonds of each Series or Class may be subject to special redemption, in whole
or in part, under the circumstances and in the manner described below or in the
related Prospectus Supplement. If applicable, the Issuer will be required to
redeem, on the day of any month specified in the related Prospectus Supplement,
outstanding Bonds of a Series in the amount described below if, as a result of
substantial payments of principal on the Mortgage Loans or the mortgage loans
underlying the Agency Securities pledged as security for such Series of Bonds or
low reinvestment yields, or both, the Bond Trustee determines, based on the
procedures and assumptions specified in the Indenture, that, in the absence of
such special redemption, the amount of cash to be on deposit in the related Bond
Account on the next Distribution Date for such Series of Bonds would be
insufficient to make required payments on the Bonds of such Series on such
Distribution Date. The amount of Bonds required to be so redeemed will not
exceed the distributions on the Mortgage Collateral securing such Series of
Bonds received during the Due Period that would otherwise be required to be
applied to the payment of principal of such Series of Bonds on the following
Distribution Date.
All payments of principal pursuant to any special redemption will be made
in the priority and manner specified in the related Prospectus Supplement. Bonds
of the same Class will be redeemed in the manner specified in the related
Prospectus Supplement. Notice of any such redemption must be mailed by the
Issuer or the Bond Trustee at least five days prior to the special redemption
date. The redemption price required to be paid for any Bond to be so redeemed
will be equal to 100% of the principal amount thereof together with accrued
interest.
Optional Redemption. If so provided in the related Prospectus Supplement,
the Bonds of any Class of a Series may be subject to redemption at the option of
the Issuer. Unless otherwise provided in the related Prospectus Supplement,
notice of any such redemption must be given by the Issuer to the Bond Trustee
not less than 30 days prior to the redemption date and must be mailed by the
Issuer or the Bond Trustee to affected Bondholders at least five days prior to
the redemption date. The Prospectus Supplement for each Series will specify the
circumstances, if any, under which the Bonds of such Series may be so redeemed,
the manner of effecting such redemption, the conditions to which such redemption
are subject and the redemption prices for each Class of Bonds to be redeemed
(which will be no lower than 100% of the principal amount of outstanding Bonds,
plus accrued interest).
The Master Servicer or other party specified in the related Prospectus
Supplement, may have the option to purchase the remaining Trust Fund Assets
supporting a Series of Bonds, subject to the principal balance of the related
Trust Fund Assets being less than the percentage specified in the related
Prospectus Supplement of the aggregate principal balance of the Trust Fund
Assets at the Cut-off Date for the Series. Any such purchase of Trust Fund
Assets and property acquired in respect of Trust Fund Assets evidenced by a
Series of Securities by the Master Servicer or such other person will be at a
price specified in the related Prospectus Supplement (which will be no lower
than 100% of the principal amount of outstanding Bonds, plus accrued interest).
The exercise of such right may cause the Issuer to call for redemption of all or
a portion of the related Series of Bonds secured by such Trust Fund Assets.
EARLY TERMINATION
If the Series of Bonds included in the Trust Fund Assets for a Series of
Certificates are redeemed in full pursuant to a special redemption or optional
redemption, the related Series of Certificates will be retired earlier than
would otherwise be the case. In addition, the Depositor may have the option to
purchase the remaining outstanding Securities or the Trust Fund Assets
supporting a Series of Certificates, subject to the principal balance of such
Trust Fund Assets being less than the percentage specified in the related
Prospectus Supplement of the Trust Fund Assets at the Cut-off Date for the
Series. The purchase price for such remaining outstanding Securities or the
Trust Fund Assets will be at least equal to 100% of the aggregate principal
balance of the outstanding Certificates, together with accrued interest thereon.
In any such event, the related Issuer of such Series of Certificates may be
terminated and Certificateholders will receive final
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distributions as described in the related Prospectus Supplement. There will be
no continuing direct or indirect liability of the Issuer or the
Certificateholders as sellers of the Trust Fund Assets.
CALL PROTECTION AND GUARANTEES
The Issuer may, at its option, obtain for any Series of Securities one or
more guarantees from a company or companies acceptable to each applicable Rating
Agency, which guarantees may provide for (i) call protection (which may include
yield maintenance) for any Class of Securities of such Series or (ii) a
guarantee of a certain prepayment rate with respect to some or all of the
Mortgage Loans or mortgage loans underlying the Agency Securities included in
the Trust Fund Assets for such Series. Any call protection or guarantees may
affect the weighted average life of the Securities of such Series.
WEIGHTED AVERAGE LIFE OF THE SECURITIES
All of the Mortgage Loans supporting a Series of Securities will consist of
mortgage loans which are neither insured nor guaranteed by any governmental
agency ("Conventional Loans"). See "TRUST FUND ASSETS -- THE MORTGAGE LOANS"
herein. The mortgage loans underlying FHLMC Certificates and FNMA Certificates
supporting a Series of Securities will consist of either Conventional Loans, FHA
Loans (as defined herein) or VA Loans (as defined herein), or any combination
thereof. The mortgage loans underlying the GNMA Certificates supporting a Series
of Securities will consist of FHA Loans or VA Loans. Each Mortgage Loan and each
Agency Security will provide by its terms for monthly payments of principal and
interest in the amounts described in "TRUST FUND ASSETS -- THE MORTGAGE LOANS,"
and "-- AGENCY SECURITIES."
Since the aggregate amount of the principal payment required to be made on
a Series of Securities on a Distribution Date will depend on the amount of the
principal payments (including for this purpose prepayments resulting from
refinancing or liquidations due to defaults, casualties, condemnations and
repurchases by the Issuer or AmREIT or other Seller or purchases by the Master
Servicer or the Company) received on the related Mortgage Loans or Agency
Securities, as the case may be, in the related Due Period, the prepayment
experience on the underlying mortgage loans (with respect to a Series of
Securities supported by Agency Securities) or on the Mortgage Loans (with
respect to a Series of Securities supported by Mortgage Loans) will affect (i)
the weighted average life of each Class of Securities and (ii) the extent to
which such Class is paid prior to its Stated Maturity. The prepayment experience
on the Mortgage Loans which support a Series of Securities may be affected by
recoveries on foreclosures or other liquidations of Mortgage Loans and by losses
from defaults and delinquencies on Mortgage Loans. See "SERVICING OF THE
MORTGAGE LOANS" herein. The weighted average life of each outstanding Class of
Securities also may be affected by the actual reinvestment income earned on the
payments on the Mortgage Collateral, if applicable, if a portion of the Spread
is paid as a principal payment on such Securities and by the exercise by the
Issuer of its right to substitute other Mortgage Collateral for the Mortgage
Collateral originally supporting such Securities. Although any substitute
Mortgage Collateral will have payment terms anticipated to result in a cash flow
substantially similar to, but in no event less than, the anticipated cash flow
of the Mortgage Collateral it replaces, such substitutions may, individually or
in the aggregate, affect the weighted average life of such Bonds. See "TRUST
FUND ASSETS -- SUBSTITUTION OF MORTGAGE COLLATERAL" herein. Further, the
weighted average life of each Class of a Series of Securities supported by FNMA
Certificates may be affected by the exercise by FNMA of its right to repurchase
the mortgage loans backing such FNMA Certificates, as described under "TRUST
FUND ASSETS -- AGENCY SECURITIES" herein. The Stated Maturity for each Class of
Securities is the date determined by the Company to fall a specified period
after the date on which the principal thereof will be fully paid, assuming (i)
timely receipt of scheduled payments (with no prepayments) on the Mortgage
Collateral, (ii) if applicable, such scheduled payments are reinvested at the
Assumed Reinvestment Rate for such Series, (iii) no Mortgage Collateral is
substituted by the Issuer or the Seller in place of the Mortgage Collateral
initially included in the Trust Fund Assets for such Securities and (iv) if
applicable, no portion of the Spread is applied to the payment of the
Securities, unless the related Prospectus Supplement provides otherwise, in
which event such Stated Maturities will be based on the assumptions specified in
such Prospectus Supplement. If so provided in the
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related Prospectus Supplement, holders of one or more Classes of Securities of a
Series may have the right, at their option, to receive full payment in respect
of such Securities prior to Stated Maturity, in each case to the extent and
subject to the conditions specified in such Prospectus Supplement.
The rate of principal prepayments on pools of mortgage loans is influenced
by a variety of economic, geographic, social and other factors including,
without limitation, homeowner mobility, economic conditions, the presence and
enforceability of "due-on-sale" clauses, mortgage market interest rates and the
availability of mortgage funds, and no assurance can be given as to the actual
prepayment experience of the Mortgage Collateral. In general, however, if
interest rates vary significantly from those prevailing when the Mortgage Loans
or the mortgage loans underlying the Agency Securities included in the Trust
Fund Assets for a Series of Securities were originated, such Mortgage Loans and
mortgage loans are likely to be subject to higher or lower principal prepayments
than if interest rates remain at or near those prevailing when such Mortgage
Loans and mortgage loans were originated. It should be noted that certain Agency
Securities supporting a Series of Securities may be backed by mortgage loans
with different interest rates, and, similarly, that not all of the Mortgage
Loans supporting a Series of Securities are likely to bear the same interest
rate. Accordingly, the prepayment experience of these Agency Securities and
Mortgage Loans will to some extent be a function of the mix of interest rates of
the underlying mortgage loans and of the Mortgage Loans. Furthermore, the stated
certificate rate on certain Certificates may be less than the weighted average
interest rate of the underlying mortgage loans. See "TRUST FUND ASSETS" herein.
CATEGORIES OF CLASSES OF SECURITIES
The Securities of any Series may be comprised of one or more Classes. Such
Classes, in general, fall into different categories. The following chart
identifies and generally defines certain of the more typical categories. The
Prospectus Supplement for a Series of Securities may identify the Classes which
comprise such Series by reference to the following categories.
<TABLE>
<CAPTION>
CATEGORIES OF CLASSES DEFINITION
--------------------- ----------
<S> <C>
PRINCIPAL TYPES
Accretion Directed........................ A Class that receives principal payments from the
accreted interest from specified Classes of Deferred
Interest Securities. For example, if the aggregate
amount of interest that accrues on a Class of Deferred
Interest Securities in a given period is $100, the cash
saved by not paying such interest in the current period
is used to pay principal of $100 on an Accretion
Directed Class. The amount of accrued and unpaid
interest on the Class of Deferred Interest Securities is
added to the principal balance of such Class. An
Accretion Directed Class also may receive principal
payments from principal paid on the underlying Trust
Fund Assets for the related Series.
Component Securities...................... A Class consisting of "Components." The Components of a
Class of Component Securities may have different
principal and/or interest payment characteristics but
together constitute a single Class. Each Component of a
Class of Component Securities may be identified as
falling into one or more of the categories of this
chart.
Notional Amount Securities................ A Class having little or no principal balance and
bearing interest on the related notional amount. The
notional amount is used for purposes of the
determination of interest distributions.
</TABLE>
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<TABLE>
<CAPTION>
CATEGORIES OF CLASSES DEFINITION
--------------------- ----------
<S> <C>
Planned Principal Class (also sometimes
referred to as "PACs").................. A Class that is designated to receive principal payments
using a predetermined principal balance schedule derived
by assuming two constant prepayment rates for the
underlying Trust Fund Assets. These two rates are the
endpoints for the "structuring range" for the Planned
Principal Class. For example, if a structuring range for
the PAC is set at constant prepayment rates generally
between 15% and 25%, that Class generally will receive a
predetermined principal amount (as set forth on the
schedule included in the related Prospectus Supplement)
on each distribution date with respect to which the
constant prepayment rate on the underlying Trust Fund
Assets falls between 15% and 25%. To the extent the
prepayment experience of the Trust Fund Assets is less
than 15%, an amount of principal less than the scheduled
amount may be paid, and to the extent the prepayment
experience is higher than 25%, additional amounts of
principal may be distributed to the PAC holders. 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.
Sequential Pay............................ Classes that receive principal payments in a prescribed
sequence, that do not have predetermined principal
balance schedules and that under all circumstances
receive payments of principal continuously from the
first Distribution Date on which they receive principal
until they are retired. A single Class that receives
principal payments before or after all other Classes in
the same Series of Securities may be identified as a
Sequential Pay Class.
Support Class (also sometimes referred to
as "Companion Classes")................. A Class that receives principal payments on any
Distribution Date only if scheduled payments have been
made on specified Planned Principal Classes and/or
Targeted Principal Classes. For example, if a Series of
Securities has a PAC with a structuring range generally
between 15% and 25% constant prepayment rate, for any
given period if the underlying Trust Fund Assets
generally prepay at a 15% constant prepayment rate there
will be just enough principal collected to satisfy the
scheduled principal payable to the PAC holders. In that
case, the Support Class for such Series would receive
little or no principal for that period. On the other
hand, if the underlying Trust Fund Assets generally
experience a 25% constant prepayment rate for a given
period, more principal will be collected than is needed
to satisfy the PAC scheduled payment and such principal
will be paid to the Support Class holders.
</TABLE>
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<TABLE>
<CAPTION>
CATEGORIES OF CLASSES DEFINITION
--------------------- ----------
<S> <C>
Targeted Principal Class (also sometimes
referred to as "TACs").................. A Class that is designated to receive principal payments
using a predetermined principal balance schedule derived
by assuming a single constant prepayment rate for the
underlying Trust Fund Assets. For example, a principal
schedule could be created based on the underlying Trust
Fund Assets generally prepaying at a 20% constant
prepayment rate for the life of the assets. The TAC
holders would then generally receive the scheduled
principal amount if the actual prepayment rate for a
given period was 20%. To the extent the actual
prepayment rate is less than 20%, the TAC holders may
receive less than the scheduled amount, and to the
extent the actual prepayment rate is greater, they may
receive more than the scheduled amount.
INTEREST TYPES
Deferred Interest......................... A Class that accretes the amount of accrued interest
otherwise distributable on such Class, which amount will
be added as principal to the principal balance of such
Class on each applicable Distribution Date. Such
accretion may continue until some specified event has
occurred or until such Deferred Interest Class is
retired.
Fixed Rate................................ A Class with an interest rate that is fixed throughout
the life of the Class.
Floating Rate............................. A Class with an interest rate that resets periodically
based upon a designated index and that varies directly
with changes in such index.
Inverse Floating Rate..................... A Class with an interest rate that resets periodically
based upon a designated index and that varies inversely
with changes in such index.
Interest Only............................. A Class that receives some or all of the interest
payments made on the underlying Trust Fund Assets and
little or no principal. Interest Only Classes have a
nominal principal balance and/or a notional amount. A
nominal principal balance represents actual principal
that will be paid on the Class. It is referred to as
nominal since it is extremely small compared to other
Classes. A notional amount is the amount used as a
reference to calculate the amount of interest due on an
Interest Only Class.
Variable Rate............................. 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).
Principal Only............................ A Class that does not bear interest and is entitled to
receive only distributions in respect of principal.
Partial Deferred Interest................. A Class that accretes a portion of the amount of accrued
interest thereon, which amount will be added to the
principal balance of such Class on each applicable
Distribution Date, with the remainder of such accrued
interest to be distributed currently as interest on such
Class. Such accretion may continue until a specified
event has occurred or until such Partial Deferred
Interest Class is retired.
</TABLE>
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REPORTS TO SECURITYHOLDERS
Prior to or concurrently with each distribution on a Distribution Date the
Master Servicer or the applicable Trustee will furnish to each Securityholder of
record of the related Series a statement setting forth, to the extent applicable
to such Series of Securities, among other things:
(i) the amount of such distribution allocable to principal, separately
identifying the aggregate amount of any Principal Prepayments and if so
specified in the related Prospectus Supplement, any applicable prepayment
penalties included therein;
(ii) the amount of such distribution allocable to interest;
(iii) the amount of any Advance;
(iv) the aggregate amount (a) otherwise allocable to the Subordinated
Securityholders on such Distribution Date, and (b) withdrawn from the
Reserve Account, if any, that is included in the amounts distributed to the
Senior Securityholders;
(v) the outstanding principal balance or notional amount of each Class
of the related Series after giving effect to the distribution of principal
on such Distribution Date;
(vi) the percentage of principal payments on the Mortgage Loans
(excluding prepayment), if any, which each such Class will be entitled to
receive on the following Distribution Date;
(vii) the percentage of Principal Prepayments on the Mortgage Loans,
if any, which each such Class will be entitled to receive on the following
Distribution Date;
(viii) the related amount of the servicing compensation retained or
withdrawn from the Bond Account by the Master Servicer, and the amount of
additional servicing compensation received by the Master Servicer
attributable to penalties, fees, excess Liquidation Proceeds and other
similar charges and items;
(ix) the number and aggregate principal balances of Mortgage Loans (A)
delinquent (exclusive of Mortgage Loans in foreclosure) (1) 1 to 30 days,
(2) 31 to 60 days, (3) 61 to 90 days and (4) 91 or more days and (B) in
foreclosure and delinquent (1) 1 to 30 days, (2) 31 to 60 days, (3) 61 to
90 days and (4) 91 or more days, as of the close of business on the last
day of the calendar month preceding such Distribution Date;
(x) the book value of any real estate acquired through foreclosure or
grant of a deed in lieu of foreclosure;
(xi) the applicable interest rate, if adjusted from the date of the
last statement, of any such Class expected to be applicable to the next
distribution to such Class;
(xii) if applicable, the amount remaining in any Reserve Account at
the close of business on the Distribution Date;
(xiii) the applicable interest rate as of the day prior to the
immediately preceding Distribution Date; and
(xiv) any amounts remaining under letters of credit, Pool policies or
other forms of credit enhancement.
Where applicable, any amount set forth above may be expressed as a dollar
amount per single Security of the relevant Class specified in the related
Prospectus Supplement. The report to Securityholders for any Series of
Securities may include additional or other information of a similar nature to
that specified above.
In addition, within a reasonable period of time after the end of each
calendar year, the Master Servicer or the applicable Trustee will mail to each
Securityholder of record at any time during such calendar year a report (a) as
to the aggregate amounts reported pursuant to (i) and (ii) above for such
calendar year or, in the event such person was a Securityholder of record during
a portion of such calendar year, for the applicable
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portion of such year and (b) such other customary information as may be deemed
necessary or desirable for Securityholders to prepare their tax returns.
BOOK-ENTRY SECURITIES
As described in the related Prospectus Supplement, if not issued in fully
registered form, one or more Classes of Securities of any Series (each, a Class
of "Book-Entry Securities") will be registered as book-entry certificates.
Persons acquiring beneficial ownership interests in the Securities ("Security
Owners") will hold their Securities through the Depository Trust Company ("DTC")
in the United States, or CEDEL or Euroclear (in Europe) if they are participants
of such systems, or indirectly through organizations which are participants in
such systems. The Book-Entry Securities will be issued in one or more
certificates which equal the aggregate principal balance of the Securities and
will initially be registered in the name of Cede & Co., the nominee of DTC.
CEDEL and Euroclear will hold omnibus positions on behalf of their participants
through customers' securities accounts in CEDEL's and Euroclear's names on the
books of their respective depositaries which in turn will hold such positions in
customers' securities accounts in the depositaries' names on the books of DTC.
Citibank, N.A., will act as depositary for CEDEL and The Chase Manhattan Bank
will act as depositary for Euroclear (in such capacities, individually the
"Relevant Depositary" and collectively the "European Depositaries"). Except as
described below, no person acquiring a Book-Entry Security (each, a "beneficial
owner") will be entitled to receive a physical certificate representing such
Security (a "Definitive Security"). Unless and until Definitive Securities are
issued, it is anticipated that the only "Securityholders" of the Securities will
be Cede & Co., as nominee of DTC. Security Owners are only permitted to exercise
their rights indirectly through Participants and DTC.
The beneficial owner's ownership of a Book-Entry Security will be recorded
on the records of the brokerage firm, bank, thrift institution or other
financial intermediary (each, a "Financial Intermediary") that maintains the
beneficial owner's account for such purpose. In turn, the Financial
Intermediary's ownership of such Book-Entry Security will be recorded on the
records of DTC (or of a participating firm that acts as agent for the Financial
Intermediary, whose interest will in turn be recorded on the records of DTC, if
the beneficial owner's Financial Intermediary is not a DTC participant, and on
the records of CEDEL or Euroclear, as appropriate).
Security Owners will receive all distributions of principal of, and
interest on, the Securities from the applicable Trustee through DTC and DTC
participants. While the Securities are outstanding (except under the
circumstances described below), under the rules, regulations and procedures
creating and affecting DTC and its operations (the "Rules"), DTC is required to
make book-entry transfers among Participants on whose behalf it acts with
respect to the Securities and is required to receive and transmit distributions
of principal of, and interest on, the Securities. Participants and indirect
participants with whom Security Owners have accounts with respect to Securities
are similarly required to make book-entry transfers and receive and transmit
such distributions on behalf of their respective Security Owners. Accordingly,
although Security Owners will not possess certificates, the Rules provide a
mechanism by which Security Owners will receive distributions and will be able
to transfer their interest.
Security Owners will not receive or be entitled to receive certificates
representing their respective interests in the Securities, except under the
limited circumstances described below. Unless and until Definitive Securities
are issued, Security Owners who are not Participants may transfer ownership of
Securities only through Participants and indirect participants by instructing
such Participants and indirect participants to transfer Securities, by
book-entry transfer, through DTC for the account of the purchasers of such
Securities, which account is maintained with their respective Participants.
Under the Rules and in accordance with DTC's normal procedures, transfers of
ownership of Bonds will be executed through DTC and the accounts of the
respective Participants at DTC will be debited and credited. Similarly, the
Participants and indirect participants will make debits or credits, as the case
may be, on their records on behalf of the selling and purchasing Security
Owners.
Because of time zone differences, credits of securities received in CEDEL
or Euroclear as a result of a transaction with a Participant will be made during
subsequent securities settlement processing and dated the
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business day following the DTC settlement date. Such credits or any transactions
in such securities settled during such processing will be reported to the
relevant Euroclear or CEDEL Participants on such business day. Cash received in
CEDEL or Euroclear as a result of sales of securities by or through a CEDEL
Participant (as defined herein) or Euroclear Participant (as defined herein) to
a DTC Participant will be received with value on the DTC settlement date but
will be available in the relevant CEDEL or Euroclear cash account only as of the
business day following settlement in DTC.
Transfers between Participants will occur in accordance with DTC Rules.
Transfers between CEDEL Participants and Euroclear Participants will occur in
accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through CEDEL
Participants or Euroclear Participants, on the other, will be effected in DTC in
accordance with DTC rules on behalf of the relevant European international
clearing system by the Relevant Depositary; however, such cross-market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in such system in accordance
with its rules and procedures and within its established deadlines (European
time). The relevant European international clearing system will, if the
transaction meets its settlement requirements, deliver instructions to the
Relevant Depositary to take action to effect final settlement on its behalf by
delivering or receiving securities in DTC, and making or receiving payment in
accordance with normal procedures for same day fund settlement applicable to
DTC. CEDEL Participants and Euroclear Participants may not deliver instructions
directly to the European Depositaries.
CEDEL is incorporated under the laws of Luxembourg as a professional
depository. CEDEL holds securities for its participating organizations ("CEDEL
Participants") and facilitates the clearance and settlement of securities
transactions between CEDEL Participants through electronic book-entry changes in
accounts of CEDEL Participants, thereby eliminating the need for physical
movement of certificates. Transactions may be settled in CEDEL in any of 28
currencies, including United States dollars. CEDEL provides to its CEDEL
Participants, among other things, services for safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. CEDEL interfaces with domestic markets in several
countries. As a professional depository, CEDEL is subject to regulation by the
Luxembourg Monetary Institute. CEDEL participants are recognized financial
institutions around the world, including underwriters, securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations. Indirect access to CEDEL is also available to others, such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a CEDEL Participant, either directly or indirectly.
Euroclear was created in 1968 to hold securities for its participants
("Euroclear Participants") and to clear and settle transactions between
Euroclear Participants through simultaneous electronic book-entry delivery
against payment, thereby eliminating the need for physical movement of
certificates and any risk from lack of simultaneous transfers of securities and
cash. Transactions may be settled in any of 32 currencies, including United
States dollars. Euroclear includes various other services, including securities
lending and borrowing and interfaces with domestic markets in several countries
generally similar to the arrangements for cross-market transfers with DTC
described above. Euroclear is operated by the Brussels, Belgium office of Morgan
Guaranty Trust Company of New York ("Morgan" and in such capacity, the
"Euroclear Operator"), under contract with Euroclear Clearance Systems S.C., a
Belgian cooperative corporation (the "Belgian Cooperative"). All operations are
conducted by Morgan, and all Euroclear securities clearance accounts and
Euroclear cash accounts are accounts with the Euroclear Operator, not the
Belgian Cooperative. The Belgian Cooperative establishes policy for Euroclear on
behalf of Euroclear Participants. Euroclear Participants include banks
(including central banks), securities brokers and dealers and other professional
financial intermediaries. Indirect access to Euroclear is also available to
other firms that clear through or maintain a custodial relationship with a
Euroclear Participant, either directly or indirectly.
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Morgan is the Belgian branch of a New York banking corporation which is a
member bank of the Federal Reserve System. As such, it is regulated and examined
by the Board of Governors of the Federal Reserve System and the New York State
Banking Department, as well as the Belgian Banking Commission.
Securities clearance accounts and cash accounts with Morgan are governed by
the Terms and Conditions Governing Use of Euroclear and the related Operating
Procedures of the Euroclear System and applicable Belgian law (collectively, the
"Terms and Conditions"). The Terms and Conditions govern transfers of securities
and cash within Euroclear, withdrawals of securities and cash from Euroclear,
and receipts of payments with respect to securities in Euroclear. All securities
in Euroclear are held on a fungible basis without attribution of specific
certificates to specific securities clearance accounts. The Euroclear Operator
acts under the Terms and Conditions only on behalf of Euroclear Participants,
and has no record of or relationship with persons holding through Euroclear
Participants.
Under a book-entry format, beneficial owners of the Book-Entry Securities
may experience some delay in their receipt of payments, since such payments will
be forwarded by the Security Trustee to Cede & Co., as nominee of DTC.
Distributions with respect to Securities held through CEDEL or Euroclear will be
credited to the cash accounts of CEDEL Participants or Euroclear Participants in
accordance with the relevant system's rules and procedures, to the extent
received by the Relevant Depositary. Such distributions will be subject to tax
reporting in accordance with relevant United States tax laws and regulations.
See "FEDERAL INCOME TAX CONSEQUENCES -- WITHHOLDING WITH RESPECT TO CERTAIN
FOREIGN INVESTORS" and "-- BACKUP WITHHOLDING" herein. Because DTC can only act
on behalf of Financial Intermediaries, the ability of a beneficial owner to
pledge Book-Entry Securities to persons or entities that do not participate in
the depository system may be limited due to the lack of physical certificates
for such Book-Entry Securities. In addition, issuance of the Book-Entry
Securities in book-entry form may reduce the liquidity of such Securities in the
secondary market since certain potential investors may be unwilling to purchase
Securities for which they cannot obtain physical certificates.
Monthly and annual reports on the Issuer will be provided to Cede & Co., as
nominee of DTC, and may be made available by Cede & Co. to beneficial owners
upon request, in accordance with the rules, regulations and procedures creating
and affecting DTC, and to the Financial Intermediaries to whose DTC accounts the
Book-Entry Securities or such beneficial owners are credited.
DTC has advised the Bond Trustee and Certificate Trustee that, unless and
until Definitive Securities are issued, DTC will take any action permitted to be
taken by the holders of the Book-Entry Securities under the applicable Agreement
only at the direction of one or more Financial Intermediaries to whose DTC
accounts the Book-Entry Bonds are credited, to the extent that such actions are
taken on behalf of Financial Intermediaries whose holdings include such
Book-Entry Securities. CEDEL or the Euroclear Operator, as the case may be, will
take any other action permitted to be taken by a Securityholder under the
applicable Agreement on behalf of a CEDEL Participant or Euroclear Participant
only in accordance with its relevant rules and procedures and subject to the
ability of the Relevant Depositary to effect such actions on its behalf through
DTC. DTC may take actions with respect to some Securities, at the direction of
the related Participants, which conflict with actions taken with respect to
other Securities.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the applicable Trustee will be required to notify all
beneficial owners of the occurrence of such event and the availability through
DTC of the Definitive Securities. Upon surrender by DTC of the global
certificate or certificates representing the Book-Entry Securities and
instructions for re-registration, the applicable Trustee will issue Definitive
Securities, and thereafter the applicable Trustee will recognize the holders of
such Definitive Securities as Securityholders under the applicable Agreement.
Although DTC, CEDEL and Euroclear have agreed to the foregoing procedures
in order to facilitate transfers of Securities among participants of DTC, CEDEL
and Euroclear, they are under no obligation to perform or continue to perform
such procedures and such procedures may be discontinued at any time.
None of the Master Servicer, the Depositor, the Issuer, the Bond Trustee or
the Certificate Trustee will have any responsibility for any aspect of the
records relating to or payments made on account of beneficial
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ownership interests of the Book-Entry Securities held by Cede & Co., as nominee
of DTC, or for maintaining, supervising or reviewing any records relating to
such beneficial ownership interests.
CREDIT ENHANCEMENT
GENERAL
Credit enhancement may be provided with respect to one or more Classes of a
Series of Securities or with respect to the related Mortgage Collateral for the
purpose of (i) maintaining timely payments or providing additional protection
against losses on the Collateral securing such Series of Securities, (ii) paying
administrative expenses or (iii) establishing a minimum reinvestment rate on the
payments made in respect of such Collateral or principal payment rate on such
Collateral. Credit enhancement may be in the form of the subordination of one or
more Classes of such Securities, the establishment of one or more Reserve Funds,
use of a Mortgage Pool Insurance Policy, a Special Hazard Insurance Policy,
Bankruptcy Bond, cash account, insurance policy, surety bond, guaranteed
investment contract, cross-collateralization, reinvestment income, guaranty,
letter of credit or derivative arrangement as described herein and in the
related Prospectus Supplement, or any combination of the foregoing. Unless
otherwise specified in the related Prospectus Supplement, no credit enhancement
will provide protection against all risks of loss or guarantee repayment of the
entire principal balance of the Securities and interest thereon. If losses occur
which exceed the amount covered by credit enhancement or which are not covered
by the credit enhancement, Securityholders will bear their allocable share of
any deficiencies.
SUBORDINATION
If so specified in the related Prospectus Supplement, a Series of
Securities may consist of one or more Classes of Senior Securities and one or
more Classes of Subordinated Securities. The rights of the holders of the
Subordinated Bonds of a Series (the "Subordinated Securityholders") to receive
payments of principal and/or interest (or any combination thereof) will be
subordinated to such rights of the holders of the Senior Securities of the same
Series (the "Senior Securityholders") to the extent described in the related
Prospectus Supplement. This subordination is intended to enhance the likelihood
of regular receipt by the Senior Securityholders of the full amount of their
scheduled payments of principal and/or interest. The protection afforded to the
Senior Securityholders of a Series by means of the subordination feature will be
accomplished by (i) the preferential right of such holders to receive, prior to
any payment being made on the related Subordinated Securities, the amounts of
principal and/or interest due them on each Distribution Date out of the funds
available for payment on such date in the related Distribution Account and, to
the extent described in the related Prospectus Supplement, by the right of such
holders to receive future payments that would otherwise have been payable to the
Subordinated Securityholders; or (ii) as otherwise described in the related
Prospectus Supplement. If so specified in the related Prospectus Supplement,
subordination may apply only in the event of certain types of losses not covered
by other forms of credit support, such as hazard losses not covered by standard
hazard insurance policies or losses due to the bankruptcy or fraud of the
borrower. The related Prospectus Supplement will set forth information
concerning, among other things, the amount of subordination of a Class or
Classes of Subordinated Securities in a Series, the circumstances in which such
subordination will be applicable and the manner, if any, in which the amount of
subordination will decrease over time.
If so specified in the related Prospectus Supplement, delays in receipt of
scheduled payments on the Mortgage Collateral and losses with respect to the
Mortgage Collateral will be borne first by the various Classes of Subordinated
Securities and thereafter by the various Classes of Senior Securities, in each
case under the circumstances and subject to the limitations specified in such
Prospectus Supplement. The aggregate payments in respect of delinquent payments
on the Mortgage Collateral over the lives of the Securities or at any time, the
aggregate losses in respect of Mortgage Collateral which must be borne by the
Subordinated Securities by virtue of subordination and the amount of payments
otherwise distributable to the Subordinated Securityholders that will be
distributable to Senior Securityholders on any Distribution Date may be limited
as specified in the related Prospectus Supplement. If aggregate payments in
respect of
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delinquent payments on the Mortgage Collateral or aggregate losses in respect of
such Mortgage Collateral were to exceed the amount specified in the related
Prospectus Supplement, Senior Securityholders would experience losses on the
Securities.
If so specified in the related Prospectus Supplement, various Classes of
Senior Securities and Subordinated Securities may themselves be subordinate in
their right to receive certain payments to other Classes of Senior and
Subordinated Securities, respectively.
As between Classes of Senior Securities and as between Classes of
Subordinated Securities, payments may be allocated among such Classes (i) in
accordance with a schedule or formula, (ii) in relation to the occurrence of
events or (iii) otherwise, in each case as specified in the related Prospectus
Supplement. As between Classes of Subordinated Securities, payments to Senior
Securityholders on account of delinquencies or losses and payments to the
Reserve Fund will be allocated as specified in the related Prospectus
Supplement.
RESERVE FUNDS
If so specified in the related Prospectus Supplement, the Issuer will
deposit in one or more accounts to be established with the applicable Trustee
(each, a "Reserve Fund") cash, certificates of deposit, letters of credit,
surety bonds, guaranteed investment contracts or any combination thereof, which
may be used by the applicable Trustee to make payments on such Series of
Securities to the extent funds are not otherwise available. Reserve Funds will
be established if they are deemed by the Issuer to be required to assure timely
payment of principal of, and interest on, its Series of Securities or are
otherwise required as a condition to the rating of such Securities by any Rating
Agency, or if the Issuer chooses to reduce the likelihood of a special
redemption of such Securities. The applicable Trustee will invest any cash in
any Reserve Fund in Permitted Investments maturing no later than the dates
specified in the related Prospectus Supplement. If a letter of credit is
deposited with the applicable Trustee, such letter of credit will be
irrevocable, will name such Trustee, in its capacity as trustee for the
Securityholders, as the sole beneficiary and will be issued by a bank acceptable
to each Rating Agency. If a surety bond is deposited with the applicable
Trustee, such surety bond will represent an obligation of an insurance company
or other corporation whose credit standing is acceptable to each Rating Agency
and will provide that such Trustee may exercise all of the rights of the Issuer
under such surety bond without the necessity of the taking of any action by the
Issuer. Following each Distribution Date for such Series of Securities, amounts
may be withdrawn from the related Reserve Funds and remitted to the Issuer free
from the terms of the applicable Agreement under the conditions and to the
extent specified in the related Prospectus Supplement. Additional information
concerning any Reserve Fund securing a Series of Securities, including without
limitation the manner in which such Reserve Fund shall be funded and the
conditions under which the amounts on deposit therein will be used to make
payments to holders of Securities of a particular Class of the related Series
will be set forth in the related Prospectus Supplement.
MORTGAGE POOL INSURANCE POLICIES
If so specified in the related Prospectus Supplement, a separate mortgage
pool insurance policy or policies ("Mortgage Pool Insurance Policy") may be
obtained for a Series of Securities supported by Mortgage Loans and issued by
the insurer (the "Pool Insurer") named in such Prospectus Supplement. Each
Mortgage Pool Insurance Policy will, subject to the limitations described below,
cover loss by reason of default in payment on the related Mortgage Loans in an
amount equal to a percentage specified in such Prospectus Supplement of the
aggregate principal balance of such Mortgage Loans on the Cut-off Date which are
not covered as to their entire outstanding principal balances by Primary
Mortgage Insurance Policies. As more fully described below, the Master Servicer
will present claims thereunder to the Pool Insurer on behalf of itself, the
applicable Trustee and the Securityholders. The Mortgage Pool Insurance
Policies, however, are not blanket policies against loss, since claims
thereunder may be made only respecting particular defaulted Mortgage Loans and
only upon satisfaction of certain conditions precedent described below. Unless
otherwise specified in the related Prospectus Supplement, the Mortgage Pool
Insurance Policies will not cover losses due to a failure to pay or denial of a
claim under a Primary Mortgage Insurance Policy.
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Unless otherwise specified in the related Prospectus Supplement, each
Mortgage Pool Insurance Policy will provide that no claims may be validly
presented unless (i) any required Primary Mortgage Insurance Policy is in effect
for the defaulted Mortgage Loan and a claim thereunder has been submitted and
settled; (ii) hazard insurance on the related Mortgaged Property has been kept
in force and real estate taxes and other protection and preservation expenses
have been paid; (iii) if there has been physical loss or damage to the Mortgaged
Property, it has been restored to its physical condition (reasonable wear and
tear excepted) at the time of issuance of the policy; and (iv) the insured has
acquired good and merchantable title to the Mortgaged Property free and clear of
liens except certain permitted encumbrances. Upon satisfaction of these
conditions, the Pool Insurer will have the option either (a) to purchase the
Mortgaged Property at a price equal to the principal balance of the related
Mortgage Loan plus accrued and unpaid interest at the Mortgage Rate to the date
of such purchase and certain expenses incurred by the Master Servicer on behalf
of the applicable Trustee and Securityholders or (b) to pay the amount by which
the sum of the principal balance of the defaulted Mortgage Loan plus accrued and
unpaid interest at the Mortgage Rate to the date of payment of the claim and the
aforementioned expenses exceeds the proceeds received from an approved sale of
the Mortgaged Property, in either case net of certain amounts paid or assumed to
have been paid under the related Primary Mortgage Insurance Policy. If any
Mortgaged Property is damaged, and proceeds, if any, from the related standard
hazard insurance policy or the applicable Special Hazard Insurance Policy are
insufficient to restore the damaged property to a condition sufficient to permit
recovery under the Mortgage Pool Insurance Policy, the Master Servicer will not
be required to expend its own funds to restore the damaged property unless it
determines that (i) 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) such expenses will be recoverable by
it through proceeds of the sale of the Mortgaged Property or proceeds of the
related Mortgage Pool Insurance Policy or any related Primary Mortgage Insurance
Policy.
Unless otherwise specified in the related Prospectus Supplement, no
Mortgage Pool Insurance Policy will insure (and many Primary Mortgage Insurance
Policies do not insure) against loss sustained by reason of a default arising
from, among other things, (i) fraud or negligence in the origination or
servicing of a Mortgage Loan, including misrepresentation by the Mortgagor, the
originator or persons involved in the origination thereof, or (ii) failure to
construct a Mortgaged Property in accordance with plans and specifications. A
failure of coverage attributable to one of the foregoing events might result in
a breach of the related Seller's representations described above and, in such
event, might give rise to an obligation on the part of such Seller to repurchase
the defaulted Mortgage Loan if the breach cannot be cured by such Seller. No
Mortgage Pool Insurance Policy will cover (and many Primary Mortgage Insurance
Policies do not cover) a claim in respect of a defaulted Mortgage Loan occurring
when the servicer of such Mortgage Loan, at the time of default or thereafter,
was not approved by the applicable insurer.
Unless otherwise specified in the related Prospectus Supplement, the
original amount of coverage under each Mortgage Pool Insurance Policy will be
reduced over the life of the related Securities by the aggregate dollar amount
of claims paid less the aggregate of the net amounts realized by the Pool
Insurer upon disposition of all foreclosed properties. The amount of claims paid
will include certain expenses incurred by the Master Servicer as well as accrued
interest on delinquent Mortgage Loans to the date of payment of the claim,
unless otherwise specified in the related Prospectus Supplement. Accordingly, if
aggregate net claims paid under any Mortgage Pool Insurance Policy reach the
original policy limit, coverage under that Mortgage Pool Insurance Policy will
be exhausted and any further losses will be borne by the Securityholders.
SPECIAL HAZARD INSURANCE POLICIES
If so specified in the related Prospectus Supplement, a separate Special
Hazard Insurance Policy may be obtained for a Series of Securities supported by
Mortgage Loans and will be issued by the insurer (the "Special Hazard Insurer")
named in such Prospectus Supplement. Each Special Hazard Insurance Policy will,
subject to limitations described below, protect holders of the related
Securities from (i) loss by reason of damage to Mortgaged Properties caused by
certain hazards (including earthquakes and, to a limited extent, tidal waves and
related water damage or as otherwise specified in the related Prospectus
Supplement) not insured against under the standard form of hazard insurance
policy for the respective states in which the
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Mortgaged Properties are located or under a flood insurance policy (unless the
Mortgaged Property is located in a federally designated flood area) and (ii)
loss caused by reason of the application of the coinsurance clause contained in
standard hazard insurance policies. No Special Hazard Insurance Policy will
cover losses occasioned by fraud or conversion by either Trustee or the Master
Servicer, war, insurrection, civil war, certain governmental action, errors in
design, faulty workmanship or materials (except under certain circumstances),
nuclear or chemical reaction, flood (if the Mortgaged Property is located in a
federally designated flood area), nuclear or chemical contamination and certain
other risks. The amount of coverage under any Special Hazard Insurance Policy
will be specified in the related Prospectus Supplement. Each Special Hazard
Insurance Policy will provide that no claim may be paid unless hazard and, if
applicable, flood insurance on the property securing the Mortgage Loan have been
kept in force and other protection and preservation expenses have been paid.
Subject to the foregoing limitations, and unless otherwise specified in the
related Prospectus Supplement, each Special Hazard Insurance Policy will provide
that where there has been damage to property securing a foreclosed Mortgage Loan
(title to which has been acquired by the insured) and to the extent such damage
is not covered by the standard hazard insurance policy or flood insurance
policy, if any, maintained by the mortgagor or the Master Servicer, the Special
Hazard Insurer will pay the lesser of (i) the cost of repair or replacement of
such property or (ii) upon transfer of the property to the Special Hazard
Insurer, the unpaid principal balance of such Mortgage Loan at the time of
acquisition of such property by foreclosure or deed in lieu of foreclosure, plus
accrued interest to the date of claim settlement and certain expenses incurred
by the Master Servicer with respect to such property. If the unpaid principal
balance of a Mortgage Loan plus accrued interest and certain expenses is paid by
the Special Hazard Insurer, the amount of further coverage under the related
Special Hazard Insurance Policy will be reduced by such amount less any net
proceeds from the sale of the property. Any amount paid as the cost of repair of
such property will further reduce coverage by such amount. So long as a Mortgage
Pool Insurance Policy remains in effect, the payment by the Special Hazard
Insurer of the cost of repair or of the unpaid principal balance of the related
Mortgage Loan plus accrued interest and certain expenses will not affect the
total insurance proceeds paid to Securityholders, but will affect the relative
amounts of coverage remaining under the related Special Hazard Insurance Policy
and Mortgage Pool Insurance Policy.
To the extent specified in the related Prospectus Supplement, the Master
Servicer may deposit cash, an irrevocable letter of credit or a guaranteed
investment contract in a special trust account to provide protection in lieu of
or in addition to that provided by a Special Hazard Insurance Policy. The amount
of any Special Hazard Insurance Policy or of the deposit to the special trust
account in lieu thereof relating to such Securities may be reduced so long as
any such reduction will not result in a downgrading of the rating of such
Securities by any applicable Rating Agency.
BANKRUPTCY BONDS
If so specified in the related Prospectus Supplement, a bankruptcy bond or
bonds (the "Bankruptcy Bond") may be obtained for a Series of Securities
supported by Mortgage Loans to cover losses resulting from proceedings under the
federal Bankruptcy Code with respect to a Mortgage Loan will be issued by an
insurer named in such Prospectus Supplement. Each Bankruptcy Bond will cover, to
the extent specified in the related Prospectus Supplement, certain losses
resulting from a reduction by a bankruptcy court of scheduled payments of
principal and interest on a Mortgage Loan or a reduction by such court of the
principal amount of a Mortgage Loan and will cover certain unpaid interest on
the amount of such a principal reduction from the date of the filing of a
bankruptcy petition. The required amount of coverage under each Bankruptcy Bond
will be set forth in the related Prospectus Supplement. Coverage under a
Bankruptcy Bond may be cancelled or reduced by the Master Servicer if such
cancellation or reduction would not adversely affect the then current rating or
ratings of the related Securities. See "CERTAIN LEGAL ASPECTS OF THE MORTGAGE
LOANS -- ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS" herein.
To the extent specified in the related Prospectus Supplement, the Master
Servicer may deposit cash, an irrevocable letter of credit or a guaranteed
investment contract in a special trust account to provide protection
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in lieu of or in addition to that provided by a Bankruptcy Bond. The amount of
any Bankruptcy Bond or of the deposit to the special trust account in lieu
thereof relating to such Securities may be reduced so long as any such reduction
will not result in a downgrading of the then current rating of such Securities
by any such Rating Agency.
SECURITY INSURANCE POLICIES, SURETY BONDS AND GUARANTIES
If specified in the related Prospectus Supplement, deficiencies in amounts
otherwise payable on Securities of a Series or certain Classes thereof will be
covered by 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 of the related Series, timely payments of interest
and/or full payments of principal on the basis of a schedule of principal
payments set forth in or determined in the manner specified in the related
Prospectus Supplement. In addition, if specified in the related Prospectus
Supplement, a Series of Securities may also be covered by insurance or
guaranties for the purpose of (i) maintaining timely payments or providing
additional protection against losses on the Mortgage Collateral supporting such
Series, (ii) paying administrative expenses or (iii) establishing a minimum
reinvestment rate on the payments made in respect of such Mortgage Collateral or
principal payment rate on such Mortgage Collateral. Such arrangements may
include agreements under which Securityholders are entitled to receive amounts
deposited in various accounts held by the applicable Trustee upon the terms
specified in such 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 of the related
Series.
LETTER OF CREDIT
If so specified in the related Prospectus Supplement, credit enhancement
may be provided by a letter of credit. The letter of credit, if any, with
respect to a Series of Securities will be issued by the bank or financial
institution specified in the related Prospectus Supplement (the "L/C Bank").
Under the letter of credit, the L/C Bank will be obligated to honor drawings
thereunder in an aggregate fixed dollar amount, net of unreimbursed payments
thereunder, equal to the percentage specified in the related Prospectus
Supplement of the aggregate principal balance of the Mortgage Collateral
supporting the related Series of Securities on the related Cut-off Date or of
one or more Classes of Securities (the "L/C Percentage"). If so specified in the
related Prospectus Supplement, the letter of credit may permit drawings in the
event of losses not covered by insurance policies or other credit support, such
as losses arising from damage not covered by standard hazard insurance policies,
losses resulting from the bankruptcy of a borrower and the application of
certain provisions of the federal Bankruptcy Code, or losses resulting from
denial of insurance coverage due to misrepresentations in connection with the
origination of a Mortgage Loan. The amount available under the letter of credit
will, in all cases, be reduced to the extent of the unreimbursed payments
thereunder. The obligations of the L/C Bank under the letter of credit for each
Series of Securities will expire at the date specified in the related Prospectus
Supplement. A copy of the letter of credit for a Series, if any, 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 of the related Series.
OVER-COLLATERALIZATION
If so specified in the related Prospectus Supplement, credit enhancement
may consist of over-collateralization whereby the aggregate principal balance of
the related Mortgage Collateral exceeds the aggregate principal balance of the
Securities of the related Series. Such over-collateralization may exist on the
related Closing Date or develop thereafter as a result of the application of a
portion of the interest payments on each Mortgage Loan or Agency Security, as
the case may be, as an additional payment in respect of principal to reduce the
principal balance of a certain Class or Classes of Securities and, thus,
accelerate the rate of payment of principal on such Class or Classes of
Securities.
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CROSS-COLLATERALIZATION
If so specified in the related Prospectus Supplement, separate groups of
Mortgage Collateral may support separate Classes of the related Series of
Securities. In such case, credit support may be provided by a cross-
collateralization feature which requires that payments be made with respect to
Securities supported by one or more groups of Mortgage Collateral prior to
distributions to Subordinated Securities secured by one or more other groups of
Mortgage Collateral. Cross-collateralization may be provided by (i) the
allocation of certain excess amounts generated by one or more groups of Mortgage
Collateral to one or more other groups of Mortgage Collateral or (ii) the
allocation of losses with respect to one or more groups of Mortgage Collateral,
to one or more other groups of Mortgage Collateral. Such excess amounts will be
applied and/or such losses will be allocated to the Class or Classes of
Subordinated Securities of the related Series then outstanding having the lowest
rating assigned by any applicable Rating Agency or the lowest payment priority,
in each case to the extent and in the manner more specifically described in the
related Prospectus Supplement. The Prospectus Supplement for a Series which
includes a cross-collateralization feature will describe the manner and
conditions for applying such cross-collateralization feature.
EXCESS SPREAD
"Excess Spread" refers to the positive spread that may exist to the extent
specified in the related Prospectus Supplement between the weighted average of
the interest rates (less servicing or other applicable fees) on the Mortgage
Collateral and the weighted average of the Security Interest Rates. Whether at
any time any such positive spread exists will depend on a variety of factors,
including, with respect to a Series of Securities with respect to which both the
Securities and the Mortgage Collateral bear interest at adjustable rates, the
relationship of the movements in the indices applicable to the Mortgage
Collateral and those applicable to the Securities, over which no prediction can
be made or assurance given.
If so specified in the related Prospectus Supplement, the coverage provided
by one or more of the forms of credit enhancement described in this Prospectus
may apply concurrently to two or more separate Series of Securities. If
applicable, the related Prospectus Supplement will identify the Series of
Securities to which such credit enhancement relates and the manner of
determining the amount of coverage provided to such Series of Securities thereby
and of the application of such coverage to the identified Series of Securities.
MINIMUM PRINCIPAL PAYMENT AGREEMENT
If so specified in the related Prospectus Supplement, an Issuer may enter
into an agreement with an institution pursuant to which such institution will
provide such funds as may be necessary to enable such Issuer to make principal
payments on the Securities of the related Series at a minimum rate set forth in
such Prospectus Supplement.
DERIVATIVE ARRANGEMENTS
If so specified in the related Prospectus Supplement, credit enhancement
may be provided with respect to one or more Classes of Securities of a Series or
with respect to the Mortgage Collateral securing a Series of Securities in the
form of one or more derivative arrangements. A derivative arrangement is a
contract or agreement, the price of which is directly dependent upon (i.e.,
"derived from") the value of one or more underlying assets, including
securities, equity indices, debt instruments, commodities, other derivative
instruments, or any agreed upon pricing index or arrangement (e.g., the movement
over time of the Consumer Price Index or interest rates). Derivatives involve
rights or obligations based on the underlying asset, but do not necessarily
result in a transfer of the underlying asset. Derivative arrangements include
swap agreements, interest rate swaps, interest rate caps, interest rate floors,
interest rate collars and currency swap agreements. A "swap agreement" is a
contractual agreement providing for a series of exchanges of principal and/or
interest in the same or different currencies. At a more general level, the term
"swap agreement" includes the exchange of fixed-for-floating payments on a given
quantity of a specified commodity, security or other asset. An "interest rate
swap" is a swap agreement between two parties to engage in a series of exchanges
of interest payments on the same notional principal amount denominated in the
same currency based, respectively, on variable and
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fixed rates of interest. An "interest rate cap" is an agreement providing for
multi-period cash settled options on interest rates. The cap purchaser receives
a cash payment whenever the reference rate exceeds the ceiling rate on a fixing
date. An "interest rate floor" is an agreement providing for a multi-period
interest rate option that provides a cash payment to the holder of the option
whenever the reference rate is below the floor on a fixing date. An "interest
rate collar" is an agreement providing for a combination of an interest rate cap
and an interest rate floor such that a cap is purchased and a floor is sold or
vice versa. The effect of an interest rate collar is to place upper and lower
bounds on the cost of funds. A "currency swap agreement" is a swap agreement
between two parties for the exchange of a future series of interest and
principal payments in which one party pays in one currency and the other party
pays in a different currency. The exchange rate is fixed over the life of the
currency swap agreement.
The derivative arrangements described above will support the payments on
the Securities to the extent and under the conditions specified in the related
Prospectus Supplement. Unless otherwise specified in the related Prospectus
Supplement, no credit enhancement will provide protection against all risks of
loss or guarantee repayment of the entire principal balance of the Securities
and interest thereon. If losses occur which exceed the amount covered by credit
enhancement or which are not covered by the credit enhancement, Securityholders
will bear their allocable share of any deficiencies.
MORTGAGE LOAN PROGRAM
The Mortgage Loans will have been purchased by the Depositor, either
directly or through affiliates, from Sellers (including AmREIT). The Mortgage
Loans so acquired by the Depositor will have been originated substantially in
accordance with the underwriting criteria specified below under "Underwriting
Standards." All Mortgage Loans will have been originated by entities that
satisfy the criteria for originators of loans that are eligible for inclusion in
"mortgage-related securities."
UNDERWRITING STANDARDS
Unless otherwise specified in the related Prospectus Supplement, each
Seller will represent and warrant that all Mortgage Loans originated and/or sold
by it to the Depositor or one of its affiliates will have been underwritten in
accordance with standards consistent with those utilized by mortgage lenders
generally during the period of origination. For Mortgage Loans acquired from
AmREIT that have been originated by Correspondents under the Freedom Program (as
described above under "TRUST FUND ASSETS -- THE MORTGAGE LOANS"), the Prospectus
Supplement will set forth the matrix of specific underwriting standards applied
to such Mortgage Loans, based on the applicable combination of underwriting
characteristics described below. For Mortgage Loans acquired from AmREIT that it
has purchased as described under "TRUST FUND ASSETS -- THE MORTGAGE
LOANS -- OTHER PRODUCTS," the related Prospectus Supplement will include
detailed information with respect to the underwriting standards employed by the
applicable originators of the Mortgage Loans, to the extent such information is
reasonably available to the Depositor. Such information may include, as
applicable, underwriting guidelines with respect to required borrower income,
debt to income ratios, credit histories, loan-to-value ratios and documentation
and verification requirements.
Underwriting standards are applied by or on behalf of a lender to evaluate
the borrower's credit standing and repayment ability, and the value and adequacy
of the related Mortgaged Property as collateral. In general, a prospective
borrower applying for a loan is required to fill out a detailed application
designed to provide to the underwriting officer pertinent credit information. As
part of the description of the borrower's financial conditions, the borrower
generally is required to provide a current list of assets and liabilities and a
statement of income and expenses, as well as an authorization to apply for a
credit report which summarizes the borrower's credit history with local
merchants and lenders and any record of bankruptcy. In most cases, an employment
verification is obtained from an independent source (typically the borrower's
employer) which verification reports, among other things, the length of
employment with that organization, the current salary, and whether it is
expected that the borrower will continue such employment in the future. If a
prospective borrower is self-employed, the borrower may be required to submit
copies of signed tax returns. The borrower
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may also be required to authorize verification of deposits at financial
institutions where the borrower has demand or savings accounts.
The Company may elect to have the borrower's credit report reviewed, and a
credit score produced, by an independent credit-scoring firm, such as Fair,
Issac and Company ("FICO"). The Company has not engaged FICO or discussed any
such engagement with FICO. Credit scores estimate, on a relative basis, which
borrowers are most likely to default on Mortgage Loans. Lower scores imply
higher default risks relative to higher scores. FICO scores are empirically
derived from historical credit bureau data and represent a numerical weighing of
a borrower's credit characteristics over a two-year period. A FICO score is
generated through the statistical analysis of a number of credit-related
characteristics or variables. Common characteristics include the following: the
number of credit lines (trade lines), payment history, past delinquencies,
severity of delinquencies, current levels of indebtedness, types of credit and
length of credit history. Attributes are the specific values of each
characteristic. A scoreboard (the model) is created with weights or points
assigned to each attribute. An individual loan applicant's credit score is
derived by summing together the attribute weights for that applicant.
In determining the adequacy of the Mortgaged Property as collateral, an
appraisal is made of each property considered for financing. The appraiser is
required to inspect the property and verify that it is in good condition and
that construction, if new, has been completed. The appraisal is based on the
market value of comparable homes, the estimated rental income (if considered
applicable by the appraiser) and the cost of replacing the home. The value of
the property being financed, as indicated by the appraisal, must be such that it
currently supports, and is anticipated to support in the future, the outstanding
loan balance. The maximum Loan-to-Value Ratio is generally not expected to
exceed 95%. Mortgage Loans with Loan-to-Value Ratios in excess of 80% at
origination may be covered by private mortgage insurance insuring the balance
thereof down to a 75% Loan-to-Value Ratio. The method of calculating the
"Loan-to-Value Ratio" of a Mortgage Loan will be described in the Prospectus
Supplement for a Series of Securities supported by Mortgage Loans.
Once all applicable employment, credit and property information is
received, a determination generally is made as to whether the prospective
borrower has sufficient monthly income available (i) to meet the borrower's
monthly obligations on the proposed mortgage loan (determined on the basis of
the monthly payments due in the year of origination) and other expenses related
to the Mortgaged Property (such as property taxes and hazard insurance) and (ii)
to meet monthly housing expenses and other financial obligations and monthly
living expenses. The maximum housing expense to income ratio referred to in (i)
is generally not expected to exceed 40% and the maximum debt to income ratio
described in (ii) is generally not expected to exceed 55%. The underwriting
standards applied by Sellers may be varied in appropriate cases where factors
such as low Loan-to-Value Ratios or other favorable credit issues exist.
The Depositor expects that a portion of the Mortgage Loans it purchases
will be "jumbo" loans, i.e., loans that exceed the maximum balance for purchase
by FNMA or FHLMC. Under current regulations, the maximum principal balance
allowed on loans eligible for purchase by FNMA or FHLMC ranges from $227,150
($340,725 for mortgage loans secured by mortgaged properties located in either
Alaska or Hawaii) for one-unit to $436,600 ($654,900 for mortgage loans secured
by mortgaged properties located in either Alaska or Hawaii) for four-unit
residential loans. The maximum loan amount is generally not expected to exceed
$1,500,000 in the case of any of the foregoing types of loans.
A lender may originate mortgage loans under a reduced documentation
program. A reduced documentation program is designed to facilitate the loan
approval process and thereby improve the lender's competitive position among
other loan originators. Under a reduced documentation program, relatively more
emphasis is placed on property underwriting than on credit underwriting and
certain underwriting documentation concerning income and employment verification
is waived.
In the case of a loan secured by a leasehold interest in a real property,
the title to which is held by a third party lessor, generally, the Seller will
be required to represent and warrant, among other things, that the remaining
term of the lease and any sublease is at least five years longer than the
remaining term of the mortgage loan.
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Certain of the types of loans which may be included in the Mortgage
Collateral are recently developed and may involve additional uncertainties not
present in traditional types of loans. For example, certain of such Mortgage
Loans may provide for escalating or variable payments by the mortgagor or
obligor. These types of Mortgage Loans are underwritten on the basis of a
judgment that mortgagors or obligors will have the ability to make monthly
payments required initially. In some instances, however, a mortgagor's or
obligor's income may not be sufficient to permit continued loan payments as such
payments increase. These types of loans may also be underwritten primarily upon
the basis of Loan-to-Value Ratios or other favorable credit factors rather than
on the borrower's credit standing or income ratios.
QUALITY CONTROL
The Depositor's parent, AmREIT, has developed a quality control program to
monitor the quality of loan underwriting at the time of acquisition and on an
ongoing basis. All loans purchased by the Depositor will be subject to this
quality control program. A legal document review of each loan acquired will be
conducted to verify the accuracy and completeness of the information contained
in the mortgage notes, security instruments and other pertinent documents in the
file. A sample of loans to be acquired, selected by focusing on those loans with
higher risk characteristics, will normally be submitted to a third party
nationally recognized underwriting review firm for a compliance check of
underwriting and review of income, asset and appraisal information.
REPRESENTATIONS BY SELLERS; REPURCHASES
Each Seller will have made representations and warranties in respect of the
mortgage loans sold by such Seller and included in the Mortgage Loans supporting
a Series of Securities. Except as otherwise provided in the related Prospectus
Supplement, such representations and warranties generally include, among other
things: (i) that title insurance (or in the case of Mortgaged Properties located
in areas where such policies are generally not available, an attorney's
certificate of title) and any required hazard insurance policy and Primary
Mortgage Insurance Policy (as defined herein) were effective at the origination
of each mortgage loan other than Cooperative Loans, and that each policy (or
certificate of title as applicable) remained in effect on the date of purchase
of the mortgage loan from the Seller by or on behalf of the Company; (ii) that
the Seller had good title to each such mortgage loan and such mortgage loan was
subject to no offsets, defenses, counterclaims or rights of rescission except to
the extent that any buydown agreement described herein may forgive certain
indebtedness of the obligors on such Mortgage Loans (each, a "Mortgagor"); (iii)
that each mortgage loan constituted a valid first or junior lien, as the case
may be, on the Mortgaged Property (subject only to permissible title insurance
exceptions, if applicable, and certain other exceptions described in the Master
Servicing Agreement) and that the Mortgaged Property was free from damage and
was in good repair; (iv) that there were no delinquent tax or assessment liens
against the Mortgaged Property; (v) that no required payment on a mortgage loan
was 60 or more days delinquent at any time during the twelve months prior to the
date it is pledged to secure the related Series of Bonds; and (vi) that each
mortgage loan was made in compliance with, and is enforceable under, all
applicable local, state and federal laws and regulations in all material
respects.
If the Seller cannot cure a breach of any representation or warranty made
by it in respect of a Mortgage Loan that materially and adversely affects the
interests of the Securityholders in such Mortgage Loan within 90 days after
notice of such breach, then such Seller will be obligated to either (i)
substitute a similar mortgage loan for such Mortgage Loan under the conditions
specified in the related Prospectus Supplement or (ii) repurchase such Mortgage
Loan from the Issuer at a price (the "Purchase Price") equal to 100% of the
outstanding principal balance thereof as of the date of the repurchase plus
accrued interest thereon to the first day of the month following the month in
which such Mortgage Loan is repurchased at the Mortgage Rate (less any
unreimbursed advances or amount payable as related master servicing compensation
if the Seller is the Master Servicer with respect to such Mortgage Loan). The
Master Servicer will be required under the applicable Master Servicing Agreement
and Indenture to enforce this obligation for the benefit of the Securityholders,
following the practices it would employ in its good faith business judgment were
it the owner
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of such Mortgage Loan. These substitution or repurchase obligations will
constitute the sole remedies available to Securityholders for a breach of
representation by a Seller.
Each Series of Bonds will be issued pursuant to an indenture (the
"Indenture") between the related Bond Issuer and the entity named in the related
Prospectus Supplement as Bond Trustee with respect to such Series, and the
related Mortgage Loans will be serviced by the Master Servicer pursuant to a
Master Servicing Agreement. A form of Indenture and Master Servicing Agreement
has been filed as an exhibit to the Registration Statement on which this
Prospectus forms a part.
SERVICING OF THE MORTGAGE LOANS
GENERAL
The Master Servicer of the Mortgage Loans, if any, securing a Series of
Securities will be responsible for servicing such Mortgage Loans in accordance
with the terms set forth in a master servicing agreement (the "Master Servicing
Agreement") among the Issuer, the Master Servicer and the Bond Trustee. The
Master Servicer with respect to a Series of Securities will be identified in the
related Prospectus Supplement. The Master Servicer may perform certain servicing
obligations directly pursuant to the Master Servicing Agreement through one or
more servicers (each, a "Servicer") pursuant to one or more mortgage servicing
agreements (each, a "Servicing Agreement"). Notwithstanding any such servicing
arrangements, unless otherwise provided in the related Prospectus Supplement,
the Master Servicer will remain liable for its servicing duties and obligations
under the Master Servicing Agreement.
No Servicing Agreement will contain any terms inconsistent with the related
Master Servicing Agreement. For Mortgage Loans acquired from AmREIT, each
Servicing Agreement will typically be a contract solely between AmREIT and the
Servicer. AmREIT will assign all of its rights under each Servicing Agreement to
the Depositor under the related Mortgage Loan Purchase Agreement and such rights
will be assigned to the Bond Trustee pursuant to the Indenture. The Master
Servicing Agreement relating to a Series of Securities will provide that the
Master Servicer and, if for any reason such Master Servicer is no longer the
Master Servicer of the related Mortgage Loans, the Bond Trustee or any successor
Master Servicer must recognize the Servicer's rights and obligations under such
Servicing Agreement. As an independent contractor, each Servicer will perform
servicing functions for the Mortgage Loans including collection and remittance
of principal and interest payments, administration of mortgage escrow accounts,
collection of certain insurance claims and, if necessary, foreclosure.
The Master Servicer may permit Servicers to contract with subservicers to
perform some or all of the Servicer's servicing duties, but the Servicer will
not thereby be released from its obligations under the related Servicing
Agreement. The Master Servicer also may enter into servicing contracts directly
with an affiliate of a Servicer or permit a Servicer to transfer its servicing
rights and obligations to a third party. In such instances, the affiliate or
third party, as the case may be, will perform servicing functions comparable to
those normally performed by the Servicer as described above, and the Servicer
will not be obligated to perform such servicing functions. When used herein with
respect to servicing obligations, the term Servicer includes any such affiliate
or third party. The Master Servicer may perform certain supervisory functions
with respect to servicing by the Servicers directly or through an agent or
independent contractor.
On or before the related Closing Date, the Master Servicer will establish
into which each Servicer will remit collections on the Mortgage Loans serviced
by it (net of its related servicing compensation, amounts retained to pay
certain insurance premiums and amounts retained by such Servicer as
reimbursement for certain advances it has made). For purposes of the Master
Servicing Agreement, the Master Servicer will be deemed to have received any
amounts with respect to the Mortgage Loans that are received by a Servicer
regardless of whether such amounts are remitted by the Servicer to the Master
Servicer. The Master Servicer will have the right under the Master Servicing
Agreement to remove the Servicer servicing any Mortgage Loans in the event such
Servicer defaults under its Servicing Agreement and will exercise that right if
the Master Servicer considers such removal to be in the best interest of the
Securityholders. In the event that the
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Master Servicer removes a Servicer, the Master Servicer will continue to be
responsible for servicing the related Mortgage Loans.
A form of Master Servicing Agreement has been filed as an exhibit to the
Registration Statement of which this Prospectus forms a part. The Master
Servicing Agreement with respect to a Series of Securities secured by Mortgage
Loans will be assigned to the Bond Trustee as security for such Series. The
following summaries describe certain provisions of the form of Master Servicing
Agreement. The summaries are qualified in their entirety by reference to the
form of Master Servicing Agreement. Where particular provisions or terms used in
the form of Master Servicing Agreement are referred to, the actual provisions
(including definitions of terms) are incorporated by reference as part of such
summaries.
PAYMENTS ON MORTGAGE LOANS
Pursuant to the Master Servicing Agreement with respect to a Series of
Securities, the Master Servicer will be required to establish and maintain the
Bond Account as a separate Eligible Account or Eligible Accounts into which it
will deposit or cause to be deposited on a daily basis, or such other basis as
may be specified in the related Prospectus Supplement, payments of principal and
interest (net of servicing compensation, amounts retained to pay certain
insurance premiums and amounts retained by the Master Servicer or any Servicer
as reimbursement for certain advances it has made) received with respect to the
related Mortgage Loans. Such amounts will include principal prepayments, certain
Insurance Proceeds and Liquidation Proceeds and amounts paid by the Servicer or
the Company in connection with any optional purchase by the Servicer or the
Company of any defaulted Mortgage Loans.
An "Eligible Account" is an account either (i) maintained with a depository
institution the short-term debt obligations of which (or in the case of a
depository institution that is the principal subsidiary of a holding company,
the short-term debt obligations of which, but only if Moody's is not an
applicable Rating Agency) are rated in the highest short-term rating category by
each applicable Rating Agency, (ii) an account or accounts the deposits in which
are fully insured by either the BIF or SAIF, (iii) an account or accounts the
deposits in which are insured by the BIF or SAIF to the limits established by
the FDIC, and the uninsured deposits in which are otherwise secured such that,
as evidenced by an opinion of counsel, the Securityholders have a claim with
respect to the funds in the Bond 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 depository
institution with which the Bond Account is maintained, (iv) a trust account or
accounts maintained with the trust department of a federal or a state chartered
depository institution or trust company, acting in a fiduciary capacity or (v)
an account or accounts otherwise acceptable to each applicable Rating Agency.
The collateral eligible to secure amounts in the Bond Account is limited to
Permitted Investments. A Bond Account may be maintained as an interest bearing
account or the funds held therein may be invested pending each succeeding
Distribution Date in Permitted Investments. If so specified in the related
Prospectus Supplement, the Master Servicer or its designee will be entitled to
receive any such interest or other income earned on funds in the Bond Account as
additional compensation and will be obligated to deposit in the Bond Account the
amount of any loss immediately as realized.
Pursuant to the Master Servicing Agreement, the Master Servicer will be
required to remit to the applicable Trustee (to the extent not previously
remitted), on or before each Distribution Account Deposit Date, the Security
Distribution Amount for the related Distribution Date for deposit in the
Distribution Account for such Series of Securities maintained with the
applicable Trustee.
Any amounts received by the Master Servicer as Insurance Proceeds or as
Liquidation Proceeds, net of any expenses and other amounts reimbursable to the
Master Servicer pursuant to the Master Servicing Agreement, will (unless applied
to the repair or restoration of a Mortgaged Property) be deemed to be payments
received with respect to the Mortgage Loans securing the related Series of
Securities and will be deposited in the related Bond Account.
Prior to each Distribution Date for a Series of Securities, the Master
Servicer will furnish to the applicable Trustee a statement setting forth
certain information with respect to payments received with respect to the
Mortgage Loans.
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COLLECTION PROCEDURES
The Master Servicer, directly or through one or more Servicers, will make
reasonable efforts to collect all payments called for under the Mortgage Loans
and will, consistent with each Master Servicing Agreement and any Mortgage Pool
Insurance Policy, Primary Mortgage Insurance Policy and Bankruptcy Bond or
alternative arrangements, follow such collection procedures as are customary
with respect to mortgage loans that are comparable to the Mortgage Loans.
Consistent with the above, the Master Servicer or applicable Servicer may, in
its discretion, (i) waive any assumption fee, late payment or other charge in
connection with a Mortgage Loan and (ii) to the extent not inconsistent with the
coverage of such Mortgage Loan by a Mortgage Pool Insurance Pool Policy, Primary
Mortgage Insurance Policy or Bankruptcy Bond or alternative arrangements, if
applicable, arrange with a Mortgagor a schedule for the liquidation of
delinquencies running for no more than 180 days (unless a longer period is
specified in the related Prospectus Supplement) after the applicable due date
for each payment. To the extent the Master Servicer is obligated to make or to
cause to be made advances, such obligation will remain during any period of such
an arrangement.
Unless otherwise specified in the related Prospectus Supplement, in any
case in which property securing a Mortgage Loan has been, or is about to be,
conveyed by the Mortgagor, the Master Servicer will, to the extent it has
knowledge of such conveyance or proposed conveyance, exercise or cause to be
exercised its rights to accelerate the maturity of such Mortgage Loan under any
due-on-sale clause applicable thereto, but only if the exercise of such rights
is permitted by applicable law and will not impair or threaten to impair any
recovery under any related Primary Mortgage Insurance Policy. If these
conditions are not met or if the Master Servicer reasonably believes it is
unable under applicable law to enforce such due-on-sale clause, the Master
Servicer will enter into or cause to be entered into an assumption and
modification agreement with the person to whom such property has been or is
about to be conveyed, pursuant to which such person becomes liable for repayment
of the Mortgage Loan and, to the extent permitted by applicable law, the
Mortgagor also remains liable thereon. If a Mortgaged Property is sold or
transferred, the Master Servicer will be required promptly to notify the Bond
Trustee and the respective issuers of any hazard insurance policies, mortgagor
bankruptcy insurance and mortgage insurance policies to assure that all required
endorsements to each insurance policy are obtained and that coverage under each
such policy will remain in effect after the occurrence of such sale or transfer.
Any fee 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" Clauses" herein. In connection with any such assumption,
the terms of the related Mortgage Loan may not be changed.
With respect to Cooperative Loans, any prospective purchaser will generally
have to obtain the approval of the board of directors of the relevant
Cooperative before purchasing the shares and acquiring rights under the related
proprietary lease or occupancy agreement. See "CERTAIN LEGAL ASPECTS OF MORTGAGE
LOANS" herein. This approval is usually based on the purchaser's income and net
worth and numerous other factors. Although the Cooperative's approval is
unlikely to be unreasonably withheld or delayed, the necessity of acquiring such
approval could limit the number of potential purchasers for those shares and
otherwise limit the ability to sell and realize the value of those shares.
In general, a "tenant-stockholder" (as defined in Code Section 216(b)(2))
of a corporation that qualifies as a "cooperative housing corporation" within
the meaning of Code Section 216(b)(1) is allowed a deduction for amounts paid or
accrued within his taxable year to the corporation representing his
proportionate share of certain interest expenses and certain real estate taxes
allowable as a deduction under Code Section 216(a) to the corporation under Code
Sections 163 and 164. In order for a corporation to qualify under Code Section
216(b)(1) for its taxable year in which such items are allowable as a deduction
to the corporation, such Section requires, among other things, that at least 80%
of the gross income of the corporation be derived from its tenant-stockholders
(as defined in Code Section 216(b)(2)). By virtue of this requirement, the
status of a corporation for purposes of Code Section 216(b)(1) must be
determined on a year-to-year basis. Consequently, there can be no assurance that
Cooperatives relating to the Cooperative Loans will qualify under such Section
for any particular year. In the event that such a Cooperative fails to qualify
for one or more years, the value of the collateral securing any related
Cooperative Loans could be significantly impaired because no deduction would be
allowable to tenant-stockholders under Code Section 216(a) with respect to
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those years. In view of the significance of the tax benefits accorded
tenant-stockholders of a corporation that qualifies under Code Section
216(b)(1), the likelihood that such a failure would be permitted to continue
over a period of years appears remote.
JUNIOR MORTGAGES
In the case of single family loans secured by junior liens on the related
Mortgaged Properties, the Master Servicer will be required to file (or cause to
be filed) of record a request for notice of any action by a superior lienholder
under the Senior Lien for the protection of the related Bond Trustee's interest,
where permitted by local law and whenever applicable state law does not require
that a junior lienholder be named as a party defendant in foreclosure
proceedings in order to foreclose such junior lienholder's equity of redemption.
The Master Servicer also will be required to notify any superior lienholder in
writing of the existence of the Mortgage Loan and request notification of any
action (as described below) to be taken against the Mortgagor or the Mortgaged
Property by the superior lienholder. If the Master Servicer is notified that any
superior lienholder has accelerated or intends to accelerate the obligations
secured by the related Senior Lien, or has declared or intends to declare a
default under the mortgage or the promissory note secured thereby, or has filed
or intends to file an election to have the related Mortgaged Property sold or
foreclosed, then the Master Servicer will be required to take, on behalf of the
related Issuer, whatever actions are necessary to protect the interests of the
related Securityholders, and/or to preserve the security of the related Mortgage
Loan. The Master Servicer will generally be required to advance the necessary
funds to cure the default or reinstate the superior lien, if such advance is in
the best interests of the related Securityholders and the Master Servicer
determines such advances are recoverable out of payments on or proceeds of the
related Mortgage Loan.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
The principal servicing compensation to be paid to the Master Servicer in
respect of its master servicing activities for each Series of Securities will be
equal to a percentage per annum (which may vary under certain circumstances) of
the outstanding principal balance of each Mortgage Loan supporting such Series
of Securities or such other amount, all as described in the related Prospectus
Supplement (the "Master Servicing Fee"). As compensation for its servicing
duties, any Servicer or subservicer will generally be entitled to a monthly
servicing fee as described in the related Prospectus Supplement. In addition,
the Master Servicer, any Servicer or any subservicer will retain as additional
compensation all prepayment charges, assumption fees and late payment charges,
to the extent collected from Mortgagors, and any benefit that may accrue as a
result of the investment of funds in the applicable Bond Account (unless
otherwise specified in the related Prospectus Supplement).
The Master Servicer will pay or cause to be paid certain ongoing expenses
associated with each Series of Securities and incurred by it in connection with
its responsibilities under the related Master Servicing Agreement, including,
without limitation, payment of any fee or other amount payable in respect of any
credit enhancement arrangements, payment of the fees and disbursements of the
Bond Trustee and the Certificate Trustee, any custodian appointed by the Bond
Trustee, the certificate registrar and any paying agent, and payment of expenses
incurred in enforcing the obligations of Servicers and Sellers. The Master
Servicer will be entitled to reimbursement of expenses incurred in enforcing the
obligations of Servicers under certain limited circumstances. In addition, as
indicated in the preceding section, the Master Servicer will be entitled to
reimbursement of expenses incurred by it in connection with any defaulted
Mortgage Loan as to which it has determined that all recoverable Liquidation
Proceeds and Insurance Proceeds have been received (a "Liquidated Mortgage"),
and in connection with the restoration of Mortgaged Properties, such right of
reimbursement being prior to the rights of Securityholders to receive any
related Liquidation Proceeds (including Insurance Proceeds).
PREPAYMENTS
In general, when a borrower prepays a mortgage loan between due dates, the
borrower is required to pay interest on the amount prepaid only to the date of
prepayment and not thereafter. In the event such prepayments, together with
other prepayments (including for this purpose prepayments resulting from
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refinancing or liquidations of the Mortgage Loans or the mortgage loans
underlying the Agency Securities, as the case may be, due to defaults,
casualties, condemnations, repurchases by the Seller, the Issuer or AmREIT or
purchases thereof by the Master Servicer or the Company), result in a shortfall
in the amount of interest available on a Distribution Date for the Securities of
a Series, the Master Servicer may be required to cover the shortfall, but only
if and to the extent specified in the related Prospectus Supplement.
EVIDENCE AS TO COMPLIANCE
Each Master Servicing Agreement and Indenture will provide that on or
before a specified date in each year, a firm of independent public accountants
will furnish a statement to the Issuer and the Bond 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
Audit Program for Mortgages serviced for FHLMC or such other procedures as may
be specified in the related Prospectus Supplement, the servicing by or on behalf
of the Master Servicer of Mortgage Loans under agreements substantially similar
to each other (including the related Master Servicing Agreement) was conducted
in compliance with such agreements except for any significant exceptions or
errors in records that, in the opinion of the firm, the Audit Program for
Mortgages serviced for FHLMC, the Uniform Single Attestation Program for
Mortgage Bankers or such other procedure, requires it to report. In rendering
its statement such firm may rely, as to matters relating to the direct servicing
of Mortgage Loans by Servicers, upon comparable statements for examinations
conducted substantially in compliance with the Uniform Single Attestation
Program for Mortgage Bankers, the Audit Program for Mortgages serviced for FHLMC
or such other procedure, (rendered within one year of such statement) of firms
of independent public accountants with respect to the related Servicer.
Each Master Servicing Agreement and Indenture will also provide for
delivery to the Issuer and the Bond 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
Master Servicing Agreement throughout the preceding year.
Copies of the annual accountants' statement and the statement of officers
of the Master Servicer may be obtained by Securityholders of the related Series
without charge upon written request to the Company at its principal executive
offices.
ADVANCES AND OTHER AMOUNTS PAYABLE BY MASTER SERVICER
Subject to any limitations set forth in the related Prospectus Supplement,
each Master Servicing Agreement will require the Master Servicer to advance on
or before each Distribution Date (from its own funds, funds advanced by
Servicers or funds held in the Bond Account for future distribution to
Securityholders), an amount equal to the aggregate of payments of principal and
interest that were delinquent on the related Determination Date, subject to the
Master Servicer's determination that such advances will be recoverable out of
late payments by obligors on the Mortgage Collateral, Liquidation Proceeds,
Insurance Proceeds or otherwise. In the case of Cooperative Loans, the Master
Servicer also will be required to advance any unpaid maintenance fees and other
charges under the related proprietary leases as specified in the related
Prospectus Supplement.
In making Advances, the Master Servicer will endeavor to maintain a regular
flow of scheduled interest and principal payments to Securityholders, rather
than to guarantee or insure against losses. If Advances are made by the Master
Servicer from cash being held for future distribution to Securityholders, the
Master Servicer will replace such funds on or before any future Distribution
Date to the extent that funds in the applicable Bond Account on such
Distribution Date would be less than the amount required to be available for
distributions to Securityholders on such date. Any Advances will be reimbursable
to the Master Servicer out of recoveries on the specific Mortgage Collateral
with respect to which such Advances were made (e.g., late payments made by the
related obligors, any related Insurance Proceeds, Liquidation Proceeds or
proceeds of any Mortgage Loan repurchased pursuant to the related Master
Servicing Agreement). In addition, Advances by the Master Servicer (and any
advances by a Servicer) also will be reimbursable to the Master Servicer (or
Servicer) from cash otherwise distributable to Securityholders to the extent
that the Master Servicer
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determines that any such Advances previously made are not ultimately recoverable
as described in the immediately preceding sentence. The Master Servicer also
will be obligated to make Advances, to the extent recoverable out of Insurance
Proceeds, Liquidation Proceeds or otherwise, in respect of certain taxes and
insurance premiums not paid by Mortgagors on a timely basis. Funds so advanced
are reimbursable to the Master Servicer to the extent permitted by the Master
Servicing Agreement. If specified in the related Prospectus Supplement, the
obligations of the Master Servicer to make Advances may be supported by a cash
advance reserve fund, a surety bond or a letter of credit, in each case as
described in such Prospectus Supplement.
RESIGNATION OF MASTER SERVICER
A Master Servicer may not resign from its obligations and duties under a
Master Servicing Agreement or assign or transfer such duties or obligations
except (i) upon a determination that its duties thereunder are no longer
permissible under applicable law or (ii) upon a sale of its servicing rights
with respect to the Mortgage Loans with the prior written consents of the Bond
Trustee, the Issuer and any applicable Mortgage Insurer. No such resignation
will become effective until the Bond Trustee, as Stand-by Master Servicer, or a
Successor Master Servicer (as such terms are defined below) has assumed the
Master Servicer's obligations and duties under such Master Servicing Agreement.
Each Master Servicing Agreement will provide that such a successor master
servicer (the "Successor Master Servicer") must be satisfactory to the Issuer,
the Bond Trustee and any applicable Mortgage Insurer, in the exercise of their
reasonable discretion and must be approved to act as a mortgage servicer for
FHLMC or FNMA.
STAND-BY MASTER SERVICER
If so specified in the related Prospectus Supplement, the Bond Trustee will
act as stand-by Master Servicer (the "Stand-by Master Servicer") with respect to
each Series of Securities supported by Mortgage Loans. As Stand-by Master
Servicer, the Bond Trustee will succeed to the rights and obligations of the
Master Servicer with respect to the Mortgage Loans securing such Series upon a
default by the Master Servicer or upon resignation by the Master Servicer until
the appointment of a Successor Master Servicer.
SPECIAL SERVICING AGREEMENT
The Company may appoint a Special Servicer to undertake certain
responsibilities with respect to certain defaulted Mortgage Loans securing a
Series. The Special Servicer may engage various independent contractors to
perform certain of its responsibilities, provided, however, the Special Servicer
remains fully responsible and liable for all its requirements under the special
servicing agreement (the "Special Servicing Agreement"). As may be further
specified in the related Prospectus Supplement, the Special Servicer, if any,
may be entitled to various fees, including, but not limited to, (i) a monthly
engagement fee applicable to each Mortgage Loan, (ii) a special servicing fee,
or (iii) a performance fee applicable to each liquidated Mortgage Loan, in each
case calculated as set forth in the related Prospectus Supplement.
CERTAIN MATTERS REGARDING THE MASTER SERVICER AND THE COMPANY
Each Master Servicing Agreement will provide that neither the Master
Servicer, the Company, the applicable Trustee nor any director, officer,
employee or agent of the Master Servicer, the Company or the applicable Trustee
will be under any liability to the related Securityholders for any action taken
or for refraining from the taking of any action in good faith pursuant to the
Master Servicing Agreement, or for errors in judgment; provided, however, that
neither the Master Servicer, the Company, the applicable Trustee nor any such
person will be protected against any liability that would otherwise be imposed
by reason of willful misfeasance, bad faith or negligence in the performance of
duties thereunder or by reason of reckless disregard of obligations and duties
thereunder. Each Master Servicing Agreement will further provide that the Master
Servicer, the Company, the applicable Trustee and any director, officer,
employee or agent of the Master Servicer, the Company or the applicable Trustee
will be entitled to indemnification by the related Issuer and
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will be held harmless against any loss, liability or expense incurred in
connection with any legal action relating to the Master Servicing Agreement or
the Securities, other than any loss, liability or expense related to any
specific Mortgage Collateral (except any such loss, liability or expense
otherwise reimbursable pursuant to the Master Servicing Agreement) and any loss,
liability or expense incurred by reason of willful misfeasance, bad faith or
negligence in the performance of duties thereunder or by reason of reckless
disregard of obligations and duties thereunder. In addition, each Master
Servicing Agreement will provide that neither the Master Servicer, the Company
nor the applicable Trustee will be under any obligation to appear in, prosecute
or defend any legal action which is not incidental to its respective
responsibilities under the Master Servicing Agreement and which in its opinion
may involve it in any expense or liability. The Master Servicer, the Company or
the applicable Trustee may, however, in its discretion undertake any such action
which it may deem necessary or desirable with respect to the Master Servicing
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 related Issuer, and the Master Servicer, the Company or the
applicable Trustee, as the case may be, will be entitled to be reimbursed
therefor out of funds otherwise distributable to Securityholders.
Any person into which the Master Servicer may be merged or consolidated, or
any person resulting from any merger or consolidation to which the Master
Servicer is a party, or any person succeeding to the business of the Master
Servicer, will be the successor of the Master Servicer under each Master
Servicing Agreement, provided that such person is qualified to sell mortgage
loans to, and service mortgage loans on behalf of, FNMA or FHLMC and further
provided that such merger, consolidation or succession does not adversely affect
the then current rating or ratings of the Securities of such Series.
SERVICING DEFAULTS
Events of default under the Master Servicing Agreement (each, a "Servicing
Default") for a Series of Securities will include (i) any failure of the Master
Servicer to deposit in the Bond Account or remit to the applicable Trustee any
required payment (other than an Advance) which continues unremedied for one
business day after the giving of written notice of such failure to the Master
Servicer by the applicable Trustee or the Issuer; (ii) any failure by the Master
Servicer to make an Advance as required under the Master Servicing Agreement,
unless cured as specified therein; (iii) any failure by the Master Servicer duly
to observe or perform in any material respect any of its other covenants or
agreements in the Master Servicing Agreement which continues unremedied for
thirty days after the giving of written notice of such failure to the Master
Servicer by the applicable Trustee or the Issuer; and (iv) certain events of
insolvency, readjustment of debt, marshalling of assets and liabilities or
similar proceeding and certain actions by or on behalf of the Master Servicer
indicating its insolvency, reorganization or inability to pay its obligations.
RIGHTS UPON SERVICING DEFAULT
If a Servicing Default under a Master Servicing Agreement shall have
occurred and be continuing, the Bond Trustee may terminate all of the rights and
obligations of the Master Servicer under such Master Servicing Agreement,
including the Master Servicer's rights to receive any Master Servicing Fees.
Upon such termination, the Bond Trustee, as Stand-by Master Servicer, or any
Successor Master Servicer duly appointed by the Bond Trustee will succeed to all
the responsibilities, duties and liabilities of the Master Servicer under such
Master Servicing Agreement and will be entitled to similar compensation
arrangements. Neither the Issuer nor the Bond Trustee shall have any right to
waive any Servicing Default, except under certain circumstances specified in the
Master Servicing Agreement.
AMENDMENT OF MASTER SERVICING AGREEMENT
A Master Servicing Agreement with respect to any Series of Securities
supported by Mortgage Loans may not be amended, changed, modified, terminated or
discharged, except by an instrument in writing signed by all parties thereto,
and with prior written notice to any applicable Mortgage Insurer.
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THE AGREEMENTS
The following is a general summary of certain provisions of the Agreements
for each Series of Securities not described elsewhere in this Prospectus. The
summaries are qualified in their entirety by reference to the respective
provisions of the Agreements. Where 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. The final
Agreements relating to each Series of Securities will be filed with the
Securities and Exchange Commission within fifteen days of the closing of the
sale of such Series of Securities. In connection with the following summaries,
it should be noted that for each Series of Certificates, any actions or votes
required or permitted to be taken by Bondholders under the Indenture for the
Bonds included in the Trust Fund Assets for such Series of Certificates will be
authorized to be taken by Certificateholders of such Series, as beneficial
holders of the Bonds.
MODIFICATION OF AGREEMENTS
With the consent of the holders of not less than 66 2/3% of the then
outstanding principal amount of the Class of Securities of the related Series
specified in the related Prospectus Supplement to be the "Controlling Class",
the applicable Trustee and the Issuer may execute an amendment to the related
Agreements to add provisions to, or change in any manner or eliminate any
provisions of, the Agreements with respect to the Securities of such Series or
modify (except as provided below) in any manner the rights of the
Securityholders.
Without the consent of the holder of each outstanding Security affected,
however, no such amendment shall (a) change the Stated Maturity of the principal
of, or any installment of interest on, any Security or reduce the principal
amount thereof, the interest rate specified thereon or the redemption price with
respect thereto, or change the earliest date on which any Security may be
redeemed at the option of the Issuer, or any place of payment where, or the coin
or currency in which, any affected Security or any interest thereon is payable,
or impair the right to institute suit for the enforcement of the provisions of
the Agreement regarding payment, (b) reduce the percentage of the aggregate
amount of the outstanding Securities, the consent of the holders of which is
required for any such amendment, or the consent of the holders of which is
required for any waiver of compliance with certain provisions of the Agreements
or certain defaults thereunder and their consequences provided for in the
Agreements, (c) modify the provisions of the Agreements specifying the
circumstances under which such an amendment may not change the provisions of the
Agreement without the consent of each outstanding Security affected thereby, or
the provisions of the Agreements with respect to certain remedies available in
an Event of Default (as defined herein), except to increase any percentage
specified therein or to provide that certain other provisions of the Agreements
cannot be modified or waived without the consent of the holder of each
outstanding Security affected thereby, (d) modify or alter the provisions of the
Agreements defining when Securities are outstanding, (e) permit the creation of
any lien (other than certain permitted liens) ranking prior to or on a parity
with the lien of the Indenture with respect to any part of the property subject
to lien under the Indenture, or terminate the lien of the Indenture on any
property at any time subject thereto or deprive the holder of any Security of
the security afforded by the lien of the Indenture (other than in connection
with a permitted substitution of Mortgage Collateral) or (f) modify any of the
provisions of the Agreements in such manner as to affect the calculation of the
debt service requirement for any Security or the rights of the Securityholders
to the benefits of any provisions for the mandatory redemption of Securities
contained therein.
The Issuer and the applicable Trustee may also enter into amendments to the
Agreements, without obtaining the consent of Securityholders (i) to cure any
ambiguity; (ii) to correct a defective provision or correct or supplement any
provision therein which may be inconsistent with any other provision therein;
(iii) to make any other revisions with respect to matters or questions arising
under the Agreements which are not inconsistent with the provisions thereof; or
(iv) to comply with any requirements imposed by the Code or any regulation
thereunder, provided, however, that no such amendments (except those pursuant to
clause (iv)) will adversely affect in any material respect the interests of any
Securityholder of that Series. An amendment will be deemed not to adversely
affect in any material respect the interests of the Securityholders if the
applicable Trustee receives a letter from each Rating Agency requested to rate
the class or classes of
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Securities of such Series stating that such amendment will not result in the
downgrading or withdrawal of the respective ratings then assigned to such
Securities.
EVENTS OF DEFAULT
An event of default (an "Event of Default") with respect to any Series of
Bonds will be defined in the Indenture as being: (a) the failure (i) to pay any
principal of, or interest on, any Bond of such Series then due, (ii) if
applicable, to call for special redemption any Bonds that are required to be so
redeemed or (iii) to pay the redemption price of any Bonds called for
redemption; (b) a default in the observance of certain negative covenants in the
Indenture; (c) a default in the observance of any other covenant of the Issuer,
and the continuation of any such default for a period of 30 days after notice
thereof is given to the Issuer by the Bond Trustee or by the holders of more
than 50% in outstanding principal amount of the Controlling Class of Bonds of
such Series; (d) any representation or warranty made by the Issuer in the
Indenture or in any certificate delivered pursuant thereto being incorrect in a
material respect as of the time made, and the circumstances in respect of which
such representation or warranty is incorrect are not cured within 30 days after
notice thereof is given to the Issuer by the Bond Trustee or by the holders of
more than 50% in outstanding principal amount of the Controlling Class of Bonds
of such Series; or (e) certain events of bankruptcy, insolvency, receivership or
reorganization of the Issuer.
RIGHTS UPON EVENTS OF DEFAULT
In case an Event of Default shall occur and be continuing with respect to a
Series of Bonds, the applicable Trustee or holders of more than 50% in
outstanding principal amount of the Controlling Class of Securities of the
related Series of Securities may declare the principal of such Series of Bonds
to be due and payable. Such declaration may under certain circumstances be
rescinded by the holders of a majority in principal amount of the outstanding
Securities of such Series.
Upon an Event of Default and the acceleration of the payments due on the
Bonds, the Bond Trustee may, in its discretion, sell the Collateral for such
Series, in which event the Bonds of such Series will be payable pro rata,
without regard to their Stated Maturities, or in such other manner as is
specified in the related Prospectus Supplement, out of the collections on, or
the proceeds from the sale of, such Collateral and will, to the extent permitted
by applicable law, bear interest at the interest rate specified in the
Indenture. If so specified in the related Prospectus Supplement, following an
Event of Default and acceleration of the payments due on the Bonds, the Bond
Trustee may, in its discretion, refrain from selling the Collateral, including
the Mortgage Collateral, for such Series and continue to apply all amounts
received on the Collateral to payments due on the Bonds of such Series in
accordance with their terms, notwithstanding the acceleration of the maturity of
such Bonds. (Indenture, Section 5.05) Each Trust Fund will allocate payments
received on the related Bonds among the Classes of Certificates pro rata, or in
such other manner as is specified in the related Prospectus Supplement.
In case an Event of Default shall occur and be continuing, the Bond Trustee
shall be under no obligation to expend or risk its own funds or otherwise incur
any financial liability in the performance of its duties under the Indenture if
it has reasonable grounds for believing that it has not been assured of adequate
security or indemnity. Subject to such provisions for indemnification and
certain limitations contained in the Indenture, the holders of a majority in
principal amount outstanding of the Controlling Class of outstanding Securities
of a Series shall have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Bond Trustee or
exercising any trust or power conferred on the Bond Trustee with respect to the
Securities of such Series; and the holders of a majority in principal amount of
the Controlling Class of Securities of a Series then outstanding may, in certain
cases, waive any default with respect thereto, except a default in payment of
principal or interest or a default in respect of a covenant or provision of the
Agreements that cannot be modified without the consent of each holder of
Securities affected.
No holder of Securities will have the right to institute any proceeding
with respect to the Agreements, unless (a) such holder previously has given to
the applicable Trustee written notice of an Event of Default, (b) the holders of
more than 50% in outstanding principal amount of the Controlling Class of Class
of
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Securities of the Series have made written request upon the Bond Trustee to
institute such proceedings in its own name as Bond Trustee and have offered the
Bond Trustee indemnity in full, (c) the Bond Trustee has for 60 days neglected
or refused to institute any such proceeding and (d) no direction inconsistent
with such written request has been given to the Bond Trustee during such 60-day
period by the holders of a majority in principal amount of the outstanding
Securities of such Series, but the holder of a Bond has a right which is
absolute and unconditional to receive payment of principal and interest on or
after the due dates thereof and to institute suit for the enforcement thereof.
CERTAIN INDENTURE COVENANTS OF THE ISSUER
Each Bond Issuer covenants in the Indenture, among other matters, that it
will not (a) sell, exchange or otherwise dispose of any portion of the
Collateral for a Series of Bonds except as expressly permitted by the Indenture
or the Master Servicing Agreement, (b) amend certain sections of the Bond
Issuer's trust agreement described below without the consent of the holders of
66 2/3% in outstanding principal amount of each Class of Securities affected
thereby or (c) incur, assume or guarantee any indebtedness other than in
connection with the issuance of the Bonds. Each Bond Issuer's trust agreement
further provides that the trust shall not have the power to perform any act or
engage in any business whatsoever except to issue and administer the Bonds of a
Series, to receive and own the Collateral, to maintain and administer the
Collateral, to pledge the Collateral to support such Bonds pursuant to the
Indenture and to take certain other actions incidental thereto. Section 11.01 of
the Issuer's trust agreement prohibits the amendment of the trust agreement if
the trustee thereunder determines that such amendment will adversely affect any
right, duty or liability of, or immunity or indemnity in favor of, such trustee
under the Issuer's trust agreement, or will cause or result in any conflict with
or breach of any terms of, or default under, the charter documents or bylaws of
such trustee or any document to which such trustee is a party.
ISSUER'S ANNUAL COMPLIANCE STATEMENT
Each Issuer will be required to file annually with the applicable Trustee a
written statement as to fulfillment of its obligations under the related
Agreement.
BOND TRUSTEE'S ANNUAL REPORT
Each Bond Trustee will be required to mail each year to all Securityholders
a brief report relating to its eligibility and qualifications to continue as the
Bond 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 Issuer to the Bond Trustee in its individual capacity, the property
and funds physically held by the Bond Trustee as such, and any action taken by
it which materially affects the Bonds and which has not been previously
reported.
SATISFACTION AND DISCHARGE OF INDENTURE
The Indenture will be discharged with respect to the Collateral securing
the Bonds of a Series upon the delivery to the Bond Trustee for cancellation of
all of the Bonds of such Series or, with certain limitations, upon deposit with
the Bond Trustee of funds sufficient for the payment in full of all of the Bonds
of such Series.
TERMINATION OF TRUST AGREEMENT
Unless otherwise specified in the related Trust Agreement, the obligations
created by each Trust Agreement for each Series of Securities will terminate
upon the payment to the related Securityholders of all amounts held in the Bond
Account or by the Master Servicer and required to be paid to them pursuant to
such Agreement following the earlier of (i) the final payment of or other
liquidation of the last of the Trust Fund Assets subject thereto or the
disposition of all property acquired upon foreclosure of any such Trust Fund
Assets and (ii) if specified in the related Prospectus Supplement, the purchase
by the holder of the FASIT ownership interest or any other party specified to
have such rights (see "FEDERAL INCOME TAX
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CONSEQUENCES" below), of all of the remaining Trust Fund Assets and all property
acquired in respect of such Trust Fund Assets.
Any such purchase of Trust Fund Assets and property acquired in respect of
Trust Fund Assets evidenced by a Series of Securities will be made at a price
specified in the related Prospectus Supplement (which will be no lower then 100%
of the principal amount of outstanding Securities plus accrued interest. The
exercise of such right will effect early retirement of the Securities of that
Series, but the right to so purchase is subject to the principal balance of the
related Trust Fund Assets being less than the percentage specified in the
related Prospectus Supplement of the aggregate principal balance of the Trust
Fund Assets at the Cut-off Date for the Series.
THE TRUSTEES
The applicable Trustee under each Agreement will be named in the Prospectus
Supplement. The same entity may serve as both the Bond Trustee and the
Certificate Trustee for the same Series of Securities. Any entity selected to
serve as a Trustee may have normal banking relationships with the Depositor, the
Master Servicer and any of their respective affiliates.
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS
The following discussion contains general summaries of certain legal
aspects of mortgage loans. Because such legal aspects are governed primarily by
applicable state law (which laws may differ substantially from state to state),
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 Mortgaged
Properties may be located. The summaries are qualified in their entirety by
reference to the applicable federal and state laws governing the Mortgage Loans.
If any Series of Securities is supported by manufactured housing Mortgage Loans,
the related Prospectus Supplement will describe the material legal aspects of
such loans.
GENERAL
The Mortgage Loans will consist of notes and either mortgages, deeds of
trust, security deeds or deeds to secure debts, depending upon the prevailing
practice in the state in which the underlying Mortgaged Property is located.
Deeds of trust are used almost exclusively in California instead of mortgages. A
mortgage creates a lien upon the real property encumbered by the mortgage, which
lien is generally not prior to the lien for real estate taxes and assessments.
Priority between mortgages depends on their terms and generally on the order of
recording with a state or county office. There are two parties to a mortgage:
the mortgagor, who is the borrower and owner of the mortgaged property; and the
mortgagee, who is the lender. Under a mortgage instrument, the mortgagor
delivers to the mortgagee (i) a note or bond evidencing the loan and (ii) the
mortgage. Although a deed of trust is similar to a mortgage, a deed of trust has
three parties: the borrower-property owner, called the trustor (similar to a
mortgagor); a lender (similar to a mortgagee) called the beneficiary; and a
third-party grantee called the trustee. Under a deed of trust, the borrower
grants the property, irrevocably until the debt is paid, in trust, generally
with a power of sale, to the trustee to secure payment of the obligation. A
security deed and a deed to secure debt are special types of deeds which
indicate on their face that they are granted to secure an underlying debt. By
executing a security deed or deed to secure debt, the grantor conveys title to,
as opposed to merely creating a lien upon, the subject property to the grantee
until such time as the underlying debt is repaid. The trustee's authority under
a deed of trust, the mortgagee's authority under a mortgage and the grantee's
authority under a security deed or deed to secure a debt are governed by law,
and, with respect to some deeds of trust, the directions of the beneficiary.
COOPERATIVES. Certain of the Mortgage Loans may be Cooperative Loans. The
Cooperative owns all the real property that comprises the project, including the
land, separate dwelling units and all common areas. The Cooperative is directly
responsible for project management and, in most cases, payment of real estate
taxes and hazard and liability insurance. If there is a blanket mortgage on the
Cooperative and/or underlying land, as is generally the case, the Cooperative,
as project mortgagor, is also responsible for meeting these mortgage
obligations. A blanket mortgage is ordinarily incurred by the Cooperative in
connection with the construction
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or purchase of the Cooperative's apartment building. The interest of the
occupant under proprietary leases or occupancy agreements to which that
Cooperative is a party are generally subordinate to the interest of the holder
of the blanket mortgage in that building. If the Cooperative is unable to meet
the payment obligations arising under its blanket mortgage, the mortgagee
holding the blanket mortgage could foreclose on that mortgage and terminate all
subordinate proprietary leases and occupancy agreements. In addition, the
blanket mortgage on a Cooperative may provide financing in the form of a
mortgage that does not fully amortize with a significant portion of principal
being due in one lump sum at final maturity. The inability of the Cooperative to
refinance this mortgage and its consequent inability to make such final payment
could lead to foreclosure by the mortgagee providing the financing. A
foreclosure in either event by the holder of the blanket mortgage could
eliminate or significantly diminish the value of any collateral held by the
lender who financed the purchase by an individual tenant-stockholder of
Cooperative shares or, in the case of any Mortgage Collateral supporting a
Series of Securities that includes Cooperative Loans, the collateral securing
the Cooperative Loans.
The Cooperative is owned by tenant-stockholders who, through ownership of
stock, shares or membership certificates in the corporation, receive proprietary
leases or occupancy agreements which confer exclusive rights to occupy specific
units. Generally, a tenant-stockholder of a Cooperative must make a monthly
payment to the Cooperative representing such tenant-stockholder's pro rata share
of the Cooperative's payments for its blanket mortgage, real property taxes,
maintenance expenses and other capital or ordinary expenses. An ownership
interest in a Cooperative and accompanying rights is financed through a
Cooperative share loan evidenced by a promissory note and secured by a security
interest in the occupancy agreement or proprietary lease and in the related
Cooperative shares. The lender takes possession of the share certificate and a
counterpart of the proprietary lease or occupancy agreement, and a financing
statement covering the proprietary lease or occupancy agreement and the
Cooperative shares if filed in the appropriate state and local offices to
perfect the lender's interest in its collateral. Subject to the limitations
discussed below, upon default of the tenant-stockholder, the lender may sue for
judgment on the promissory note, dispose of the collateral at a public or
private sale or otherwise proceed against the collateral or tenant-stockholder
as an individual as provided in the security agreement covering the assignment
of the proprietary lease or occupancy agreement and the pledge of Cooperative
shares.
JUNIOR MORTGAGES
Certain of the Mortgage Loans may be secured by junior mortgages or deeds
of trust, which are junior to senior mortgages or deeds of trust which are not
part of the Mortgage Collateral. The rights of the Securityholders as the
beneficiaries of a junior deed of trust or a junior mortgage are subordinate in
lien priority and in payment priority to those of the holder of the senior
mortgage or deed of trust, including the prior rights of the senior mortgagee or
beneficiary to receive and apply hazard insurance and condemnation proceeds and,
upon default of the mortgagor, to cause a foreclosure on the property. Upon
completion of the foreclosure proceedings by the holder of the senior mortgage
or the sale pursuant to the deed of trust, the junior mortgagee's or junior
beneficiary's lien will be extinguished unless the junior lienholder satisfies
the defaulted senior loan or asserts its subordinate interest in a property in
foreclosure proceedings. See "-- FORECLOSURE/REPOSSESSION" below.
Furthermore, the terms of the junior mortgage or deed of trust are
subordinate to the terms of the senior mortgage or deed of trust. In the event
of a conflict between the terms of the senior mortgage or deed of trust and the
junior mortgage or deed of trust, the terms of the senior mortgage or deed of
trust will govern generally. Upon a failure of the mortgagor or trustor to
perform any of its obligations, the senior mortgagee or beneficiary, subject to
the terms of the senior mortgage or deed of trust, may have the rights to
perform the obligation itself. Generally, all sums so expended by the mortgagee
or beneficiary become part of the indebtedness secured by the mortgage or deed
of trust. To the extent a senior mortgagee expends such sums, such sums will
generally have priority over all sums due under the junior mortgage.
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FORECLOSURE/REPOSSESSION
DEED OF TRUST. Foreclosure of a deed of trust is generally accomplished by
a non-judicial sale under a specific provision in the deed of trust which
authorizes the trustee to sell the property at public auction upon any default
by the borrower under the terms of the note or deed of trust. In certain states,
such foreclosure also may be accomplished by judicial action in the manner
provided for foreclosure of mortgages. In addition to any notice requirements
contained in a deed of trust, in some states, such as California, the trustee
must record a notice of default and send a copy to the borrower-trustor and to
any person who has recorded a request for a copy of any notice of default and
notice of sale, to any successor in interest to the borrower-trustor, to the
beneficiary of any junior deed of trust and to certain other persons. In some
states, including California, the borrower-trustor has the right to reinstate
the loan at any time following default until shortly before the trustee's sale.
In general, the borrower, or any other person having a junior encumbrance on the
real estate, may, during a statutorily prescribed reinstatement period, cure a
monetary default by paying the entire amount in arrears plus other designated
costs and expenses incurred in enforcing the obligation. Generally, state law
controls the amount of foreclosure expenses and costs, including attorney's
fees, which may be recovered by a lender. After the reinstatement period has
expired without the default having been cured, the borrower or junior lienholder
no longer has the right to reinstate the loan and must pay the loan in full to
prevent the scheduled foreclosure sale. If the deed of trust is not reinstated
within any applicable cure period, a notice of sale must be posted in a public
place and, in most states, including California, published for a specific period
of time in one or more newspapers. In addition, some state laws require that a
copy of the notice of sale be posted on the property and sent to all parties
having an interest of record in the real property. In California, the entire
process from recording a notice of default to a non-judicial sale usually takes
four to five months.
MORTGAGES. Foreclosure of a mortgage is generally accomplished by judicial
action. The action is initiated by the service of legal pleadings upon all
parties having an interest in the real property. Delays in completion of the
foreclosure may occasionally result from difficulties in locating necessary
parties. Judicial foreclosure proceedings are often not contested by any of the
parties. When the mortgagee's right to foreclosure is contested, the legal
proceedings necessary to resolve the issue can be time consuming. After the
completion of a judicial foreclosure proceeding, the court generally issues a
judgment of foreclosure and appoints a referee or other court officer to conduct
the sale of the property. In some states, mortgages may also be foreclosed by
advertisement, pursuant to a power of sale provided in the mortgage.
Although foreclosure sales are typically public sales, frequently no third
party purchaser bids in excess of the lender's lien because of the difficulty of
determining the exact status of title to the property, the possible
deterioration of the property during the foreclosure proceedings and a
requirement that the purchaser pay for the property in cash or by cashier's
check. Thus the foreclosing lender often purchases the property from the trustee
or referee for an amount equal to the principal amount outstanding under the
loan, accrued and unpaid interest and the expenses of foreclosure in which event
the mortgagor's debt will be extinguished, or the lender may purchase for a
lesser amount in order to preserve its right against a borrower to seek a
deficiency judgment in states where such judgment is available. Thereafter,
subject to the right of the borrower in some states to remain in possession
during the redemption period, the lender will assume the burden of ownership,
including obtaining hazard insurance and making such repairs at its own expense
as are necessary to render the property suitable for sale. The lender will
commonly obtain the services of a real estate broker and pay the broker's
commission in connection with the sale of the property. Depending upon market
conditions, the ultimate proceeds of the sale of the property may not equal the
lender's investment in the property. See "TRUST FUND ASSETS" herein.
A junior mortgagee may not foreclose on the property securing a junior
mortgage unless it forecloses subject to the senior mortgages, in which case it
must either pay the entire amount due on the senior mortgages to the senior
mortgagees prior to or at the time of the foreclosure sale or undertake the
obligation to make payments on the senior mortgages in the event the mortgagor
is in default thereunder, in either event adding the amounts expended to the
balance due on the junior loan, and may be subrogated to the rights of the
senior mortgagees. In addition, in the event that the foreclosure of a junior
mortgage triggers the enforcement of a "due-on-sale" clause, the junior
mortgagee may be required to pay the full amount of the senior mortgages to the
senior mortgagees. Accordingly, with respect to those mortgage loans which are
junior
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mortgage loans, if the lender purchases the property, the lender's title will be
subject to all senior liens and claims and certain governmental liens. 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 or deed of trust under which the sale was
conducted. Any remaining proceeds are generally payable to the holders of junior
mortgages or deeds of trust and other liens and claims in order of their
priority, whether or not the borrower is in default. Any additional proceeds are
generally payable to the mortgagor or trustor. The payment of the proceeds to
the holders of junior mortgages may occur in the foreclosure action of the
senior mortgagee or may require the institution of separate legal proceeds.
Courts have imposed general equitable principles upon foreclosure, which
are generally designed to mitigate the legal consequences to the borrower of the
borrower's defaults under the loan documents. Some courts have been faced with
the issue of whether federal or state constitutional provisions reflecting due
process concerns for fair notice require that borrowers under deeds of trust
receive notice longer than that prescribed by statute. For the most part, these
cases have upheld the notice provisions as being reasonable or have found that
the sale by a trustee under a deed of trust does not involve sufficient state
action to afford constitutional protection to the borrower.
COOPERATIVE LOANS. The Cooperative shares owned by the tenant-stockholder
and pledged to the lender are, in almost all cases, subject to restrictions on
transfer as set forth in the Cooperative's certificate of incorporation and
bylaws, as well as the proprietary lease or occupancy agreement, and may be
cancelled by the Cooperative for failure by the tenant-stockholder to pay rent
or other obligations or charges owed by such tenant-stockholder, including
mechanics' liens against the cooperative apartment building incurred by such
tenant-stockholder. The proprietary lease or occupancy agreement generally
permits the Cooperative to terminate such lease or agreement in the event an
obligor fails to make payments or defaults in the performance of covenants
required thereunder. Typically, the lender and the Cooperative enter into a
recognition agreement which establishes the rights and obligations of both
parties in the event of a default by the tenant-stockholder on its obligations
under the proprietary lease or occupancy agreement. A default by the
tenant-stockholder under the proprietary lease or occupancy agreement will
usually constitute a default under the security agreement between the lender and
the tenant-stockholder.
The recognition agreement generally provides that, in the event that the
tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the Cooperative will take no action to terminate such lease or
agreement until the lender has been provided with an opportunity to cure the
default. The recognition agreement typically provides that if the proprietary
lease or occupancy agreement is terminated, the Cooperative will recognize the
lender's lien against proceeds from the sale of the Cooperative apartment,
subject, however, to the Cooperative's right to sums due under such proprietary
lease or occupancy agreement. The total amount owed to the Cooperative by the
tenant-stockholder, which the lender generally cannot restrict and does not
monitor, could reduce the value of the collateral below the outstanding
principal balance of the Cooperative Loan and accrued and unpaid interest
thereon.
Recognition agreements also provide that in the event of a foreclosure on a
Cooperative Loan, the lender must obtain the approval or consent of the
Cooperative as required by the proprietary lease before transferring the
Cooperative shares or assigning the proprietary lease. Generally, the lender is
not limited in any rights it may have to dispossess the tenant-stockholders.
In some states, foreclosure on the Cooperative shares is accomplished by a
sale in accordance with the provisions of Article 9 of the Uniform Commercial
Code (the "UCC") and the security agreement relating to those shares. Article 9
of the UCC requires that a sale be conducted in a "commercially reasonable"
manner. Whether a foreclosure sale has been conducted in a "commercially
reasonable" manner will depend on the facts in each case. In determining
commercial reasonableness, a court will look to the notice given the debtor and
the method, manner, time, place and terms of the foreclosure. Generally, a sale
conducted according to the usual practice of banks selling similar collateral
will be considered reasonably conducted.
Article 9 of the UCC provides that the proceeds of the sale will be applied
first to pay the costs and expenses of the sale and then to satisfy the
indebtedness secured by the lender's security interest. The recognition
agreement, however, generally provides that the lender's right to reimbursement
is subject to the
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right of the Cooperative to receive sums due under the proprietary lease or
occupancy agreement. If there are proceeds remaining, the lender must account to
the tenant-stockholder for the surplus. Conversely, if a portion of the
indebtedness remains unpaid, the tenant-stockholder is generally responsible for
the deficiency. See "-- Anti-Deficiency Legislation and Other Limitations on
Lenders" below.
In the case of foreclosure on a building which was converted from a rental
building to a building owned by a Cooperative under a non-eviction plan, some
states require that a purchaser at a foreclosure sale take the property subject
to rent control and rent stabilization laws which apply to certain tenants who
elected to remain in the building but who did not purchase shares in the
Cooperative when the building was so converted.
RIGHTS OF REDEMPTION
In some states, after sale pursuant to a deed of trust or foreclosure of a
mortgage, the borrower and certain foreclosed junior lienholders are given a
statutory period in which to redeem the property from the foreclosure sale. In
certain other states, including California, this right of redemption applies
only to sales following judicial foreclosure, and not to sales pursuant to a
non-judicial power of sale. In most states where the right of redemption is
available, statutory redemption may occur upon a payment of the foreclosure
purchase price, accrued interest and taxes. In some states, the right to redeem
is an equitable right. The effect of a right of redemption is to diminish the
ability of the lender to sell the foreclosed property. The exercise of a right
of redemption would defeat the title of any purchaser at a foreclosure sale, or
of any purchaser from the lender subsequent to judicial foreclosure or sale
under a deed of trust. Consequently, the practical effect of the redemption
right is to force the lender to retain the property and pay the expenses of
ownership until the redemption period has run.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
Certain states have imposed statutory restrictions that limit the remedies
of a beneficiary under a deed of trust or a mortgagee under a mortgage. In some
states, including California, statutes limit the right of the beneficiary or
mortgagee to obtain a deficiency judgment against the borrower following
foreclosure or sale under a deed of trust. A deficiency judgment is a personal
judgment against the former borrower equal in most cases to the difference
between the amount due to the lender and the current fair market value of the
property at the time of the foreclosure sale. As a result of these prohibitions,
it is anticipated that in most instances the Master Servicer will utilize the
non-judicial foreclosure remedy and will not seek deficiency judgments against
defaulting mortgagors.
Some state statutes may require the beneficiary or mortgagee to exhaust the
security afforded under a deed of trust or mortgage by foreclosure in an attempt
to satisfy the full debt before bringing a personal action against the borrower.
In certain other states, the lender has the option of bringing a personal action
against the borrower on the debt without first exhausting such security;
however, in some of these states, the lender, following judgment on such
personal action, may be deemed to have elected a remedy and may be precluded
from exercising remedies with respect to the security. Consequently, the
practical effect of the election requirement, when applicable, is that lenders
will usually proceed first against the security rather than bringing a personal
action against the borrower.
In some states, exceptions to the anti-deficiency statutes are provided for
in certain instances where the value of the lender's security has been impaired
by acts or omissions of the borrower, for example, in the event of waste of the
property. Finally, other statutory provisions limit any deficiency judgment
against the former borrower following a foreclosure sale to the excess of the
outstanding debt over the fair market value of the property at the time of the
public sale. The purpose of these statutes is generally to prevent a beneficiary
or a mortgagee from obtaining a large deficiency judgment against the former
borrower as a result of low or no bids at the foreclosure sale.
In addition to anti-deficiency and related legislation, numerous other
federal and state statutory provisions, including the federal bankruptcy laws,
the federal Soldiers' and Sailors' Civil Relief Act of 1940 and state laws
affording relief to debtors, may interfere with or affect the ability of the
secured mortgage lender to realize upon its security. For example, in a
proceeding under the federal Bankruptcy Code, a lender
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may not foreclose on a mortgaged property without the permission of the
bankruptcy court. In certain instances, a rehabilitation plan proposed by the
debtor may reduce the secured indebtedness to the value of the mortgaged
property as of the date of the commencement of the bankruptcy, rendering the
lender a general unsecured creditor for the difference, and also may reduce the
monthly payments due under such mortgage loan, change the rate of interest and
alter the mortgage loan repayment schedule. The effect of any such proceedings
under the federal Bankruptcy Code, including but not limited to any automatic
stay, could result in delays in receiving payments on the Mortgage Loans
supporting a Series of Securities and possible reductions in the aggregate
amount of such payments.
The federal tax laws provide priority to certain tax liens over the lien of
a mortgage or secured party. Numerous federal and state consumer protection laws
impose substantive requirements upon mortgage lenders in connection with the
origination, servicing and enforcement of mortgage loans. These laws include the
federal Truth-in-Lending Act, Real Estate Settlement Procedures Act, Equal
Credit Opportunity Act, Fair Credit Billing Act, Fair Credit Reporting Act and
related statutes and regulations. These federal and state laws impose specific
statutory liabilities upon lenders who fail to comply with the provisions of the
law. In some cases, this liability may affect assignees of the loans. In
particular, liability extends to assignees with respect to "consumer credit
contracts" and "purchase money loans" as defined in 16 C.F.R. Section 433.1 and
to certain "mortgages" as defined in 15 U.S.C. 1602(aa)
Generally, Article 9 of the UCC governs foreclosure on Cooperative shares
and the related proprietary lease or occupancy agreement. Some courts have
interpreted section 9-504 of the UCC to prohibit a deficiency award unless the
creditor establishes that the sale of the collateral (which, in the case of a
Cooperative Loan, would be the shares of the Cooperative and the related
proprietary lease or occupancy agreement) was conducted in a commercially
reasonable manner.
Multifamily and mixed use mortgage loan transactions often provide for an
assignment of the leases and rents pursuant to which the borrower typically
assigns its right, title and interest, as landlord under each lease and the
income derived therefrom, to the lender while either obtaining a license to
collect rents for so long as there is no default or providing for the direct
payment to the lender. Local law, however, may require that the lender take
possession of the property and appoint a receiver before becoming entitled to
collect the rents under the lease.
FEDERAL BANKRUPTCY AND OTHER LAWS AFFECTING CREDITORS' RIGHTS
GENERAL. In addition to laws limiting or prohibiting deficiency judgments,
numerous other statutory provisions, including the federal bankruptcy laws, the
federal Soldiers' and Sailors' Relief Act, and state laws affording relief to
debtors, may interfere with or affect the ability of the secured lender to
realize upon collateral and/or enforce a deficiency judgment. For example, with
respect to federal bankruptcy law, the filing of a petition acts as a stay
against the enforcement of remedies for collection of a debt. Moreover, a court
with federal bankruptcy jurisdiction may permit a debtor through a Chapter 13
under the Bankruptcy Code rehabilitative plan to cure a monetary default with
respect to a loan on a debtor's residence by paying arrearages within a
reasonable time period and reinstating the original loan payment schedule even
though the lender accelerated the loan and the lender has taken all steps to
realize upon his security (provided no sale of the property has yet occurred)
prior to the filing of the debtor's Chapter 13 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 loan default by
permitting the obligor to pay arrearages over a number of years.
Courts with federal bankruptcy jurisdiction have also indicated that the
terms of a loan secured by property of the debtor may be modified if the
borrower has filed a petition under Chapter 13. These courts have suggested that
such modifications may include reducing the amount of each monthly payment,
changing the rate of interest, altering the repayment schedule and reducing the
lender's security interest to the value of the 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. Federal bankruptcy law and
limited case law indicate that the foregoing modifications could not be applied
to the terms of a loan secured by property that is the principal
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residence of the debtor. In all cases, the secured creditor is entitled to the
value of its security plus post-petition interest, attorney's fees and costs to
the extent the value of the security exceeds the debt.
In a Chapter 11 case under the Bankruptcy Code, the lender is precluded
from foreclosing without authorization from the bankruptcy court. The lender's
lien may be transferred to the other collateral and/or be limited in amount to
the value of the lender's interest in the collateral as of the date of the
bankruptcy. The loan term may be extended, the interest rate may be adjusted to
market rates and the priority of the loan may be subordinated to bankruptcy
court-approved financing. The bankruptcy court can, in effect, invalidate due-
on-sale clauses through confirmed Chapter 11 plans of reorganization.
The Bankruptcy Code provides priority to certain tax liens over the
lender's security. This may delay or interfere with the enforcement of rights in
respect of a defaulted Loan. In addition, substantive requirements are imposed
upon lenders in connection with the origination and the servicing of mortgage
loans by numerous federal and some state consumer protection laws. The laws
include the federal Truth-in-Lending Act, Real Estate Settlement Procedures Act,
Equal Credit Opportunity Act, Fair Credit Billing Act, Fair Credit Reporting Act
and related statutes and regulations. These federal laws impose specific
statutory liabilities upon lenders who originate loans and who fail to comply
with the provisions of the law. In some cases, this liability may affect
assignees of the loans.
FEDERAL BANKRUPTCY LAWS RELATING TO MORTGAGE LOANS SECURED BY MULTIFAMILY
AND MIXED USE PROPERTY. Certain provisions of the Bankruptcy Code may apply in
the case of Multifamily and Mixed Use Mortgage Loans. Section 365(a) of the
Bankruptcy Code generally provides that a trustee or a debtor-in-possession in a
bankruptcy or reorganization case under the Bankruptcy Code has the power to
assume or to reject an executory contract or an unexpired lease of the debtor,
in each case subject to the approval of the bankruptcy court administering such
case. If the trustee or debtor-in-possession rejects an executory contract or an
unexpired lease, such rejection generally constitutes a breach of the executory
contract or unexpired lease immediately before the date of the filing of the
petition. As a consequence, the other party or parties to such executory
contract or unexpired lease, such as the Mortgagor, as lessor under a lease,
would have only an unsecured claim against the debtor for damages resulting from
such breach, which could adversely affect the security for the related Mortgage
Loan. Moreover, under Section 502(b)(6) of the Bankruptcy Code, the claim of a
lessor for such damages from the termination of a lease of property will be
limited to the sum of (i) the rent reserved by such lease, without acceleration,
for the greater of one year or 15 percent, not to exceed three years, of the
remaining term of such lease, following the earlier of the date of the filing of
the petition and the date on which such lender repossessed, or the lessee
surrendered, the leased property, and (ii) any unpaid rent due under such lease,
without acceleration, on the earlier of such dates.
Under Section 365(h) of the Bankruptcy Code, if a trustee for a lessor, or
a lessor as a debtor-in-possession, rejects an unexpired lease of real property,
the lessee may treat such lease as terminated by such rejection or, in the
alternative, may remain in possession of the leasehold for the balance of such
term and for any renewal or extension of such term that is enforceable by the
lessee under applicable nonbankruptcy law. The Bankruptcy Code provides that if
a lessee elects to remain in possession after such rejection of a lease, the
lessee may offset against rents reserved under the lease for the balance of the
term after the date of rejection of the lease, and any such renewal or extension
thereof, any damages occurring after such date caused by the nonperformance of
any obligation of the lessor under the lease after such date.
Under Section 365(f) of the Bankruptcy Code, if a trustee assumes an
executory contract or an unexpired lease of the debtor, the trustee or
debtor-in-possession generally may assign such executory contract or unexpired
lease, notwithstanding any provision therein or in applicable law that
prohibits, restricts or conditions such assignment, provided that the trustee or
debtor-in-possession provides adequate assurance of future performance by the
assignee. In addition, no party to an executory contract or an unexpired lease
may terminate or modify any rights or obligations under an executory contract or
an unexpired lease at any time after the commencement of a case under the
Bankruptcy Code solely because of a provision in the executory contract or
unexpired lease or in applicable law conditioned upon the assignment of the
executory contract or unexpired lease. Thus, an undetermined third party may
assume the obligations of the lessee or a Mortgagor
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under a lease in the event of commencement of a proceeding under the Bankruptcy
Code with respect to the lessee or a Mortgagor, as applicable.
Under Sections 363(b) and (f) of the Bankruptcy Code, a trustee for a
lessor, or a lessor as debtor-in-possession, may, despite the provisions of the
related Mortgage Loan to the contrary, sell the Mortgaged Property free and
clear of all liens, which liens would then attach to the proceeds of such sale.
ENVIRONMENTAL RISKS
Real property pledged as security to a lender may be subject to unforeseen
environmental risks. Under the laws of certain states, contamination of a
property may give rise to a lien on the property to assure the payment of the
costs of clean-up. In several states, such a lien has priority over the lien of
an existing mortgage against such property. In addition, under the federal
Comprehensive Environmental Response, Compensation and Liability Act of 1980
("CERCLA"), the United States Environmental Protection Agency ("EPA") may impose
a lien on property where the EPA has incurred cleanup costs. However, a CERCLA
lien is subordinate to pre-existing, perfected security interests.
Under the laws of some states, and under CERCLA, it is conceivable that a
secured lender may be held liable as an "owner or operator" for the costs of
addressing releases or threatened releases of hazardous substances at a
Mortgaged Property even though the environmental damage or threat was caused by
a prior or current owner or operator or a third-party. CERCLA imposes liability
for such costs on any and all "responsible parties," including "owners or
operators." However, CERCLA excludes from the definition of "owner or operator"
a secured creditor "who without participating in the management of the
facility," holds indicia of ownership primarily to protect its security interest
(the "secured creditor exclusion"). Thus, if a lender's activities begin to
encroach on the actual management of a contaminated facility or property, the
lender may incur liability as an "owner or operator" under CERCLA. Similarly, if
a lender forecloses and takes title to a contaminated facility or property, the
lender may incur CERCLA liability in various circumstances, including, but not
limited to, when it holds the facility or property as an investment (including
leasing the facility or property to a third party), or fails to market the
property in a timely fashion.
Whether actions taken by a lender would constitute participation in the
management of a mortgaged property, or the business of a borrower, so as to
render the secured creditor exemption unavailable to a lender has been a matter
of judicial interpretation of the statutory language, and court decisions have
been inconsistent. In 1990, the Court of Appeals for the Eleventh Circuit
suggested that the mere capacity of the lender to influence a borrower's
decisions regarding disposal of hazardous substances was sufficient
participation in the management of the borrower's business to deny the
protection of the secured creditor exemption to the lender.
This ambiguity appears to have been resolved by the enactment of the Asset
Conservation, Lender Liability and Deposit Insurance Protection Act of 1996,
which was signed into law by President Clinton on September 30, 1996. The new
legislation provides that in order to be deemed to have participated in the
management of a mortgaged property, a lender must actually participate in the
operational affairs of the property or the borrower. The legislation also
provides that participation in the management of the property does not include
"merely having the capacity to influence, or unexercised right to control"
operations. Rather, a lender will lose the protection of the secured creditor
exemption only if it exercises decision-making control over the day-to-day
management of all operational functions of the mortgaged property.
If a lender is or becomes liable, it can bring an action for contribution
against any other "responsible parties," including a previous owner or operator,
who created the environmental hazard, but those persons or entities may be
bankrupt or otherwise judgment proof. The costs associated with environmental
cleanup may be substantial. It is conceivable that such costs arising from the
circumstances set forth above would become a liability of the Issuer and
occasion a loss to Securityholders.
CERCLA does not apply to petroleum products, and the secured creditor
exclusion does not govern liability for cleanup costs under federal laws other
than CERCLA, in particular Subtitle I of the federal Resource Conservation and
Recovery Act ("RCRA"), which regulates underground petroleum storage tanks
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(except heating oil tanks). The EPA has adopted a lender liability rule for
underground storage tanks under Subtitle I of RCRA. Under such rule, a holder of
a security interest in an underground storage tank or real property containing
an underground storage tank is not considered an operator of the underground
storage tank as long as petroleum is not added to, stored in or dispensed from
the tank. In addition, under the Asset Conservation, Lender Liability and
Deposit Insurance Protection Act of 1996, the protections accorded to lenders
under CERCLA are also accorded to the holders of security interests in
underground storage tanks. It should be noted, however, that liability for
cleanup of petroleum contamination may be governed by state law, which may not
provide for any specific protection for secured creditors.
Except as otherwise specified in the applicable Prospectus Supplement, at
the time the Mortgage Loans or the mortgage loans underlying the Agency
Securities, as the case may be, were originated, no environmental assessment or
a very limited environmental assessment of the Mortgage Properties or the real
property constituting security for such mortgage loans, respectively, was
conducted.
DUE-ON-SALE CLAUSES
Unless otherwise provided in the related Prospectus Supplement, each
Mortgage Loan will contain a due-on-sale clause which will generally provide
that if the mortgagor or obligor sells, transfers or conveys the Mortgaged
Property, the loan may be accelerated by the mortgagee. In recent years, court
decisions and legislative actions have placed substantial restriction on the
right of lenders to enforce such clauses in many states. For instance, the
California Supreme Court in August 1978 held that due-on-sale clauses were
generally unenforceable. However, the Garn-St Germain Depository Institutions
Act of 1982 (the "Garn-St Germain Act"), subject to certain exceptions, preempts
state constitutional, statutory and case law prohibiting the enforcement of
due-on-sale clauses. As a result, due-on-sale clauses have become generally
enforceable except in those states whose legislatures exercised their authority
to regulate the enforceability of such clauses with respect to mortgage loans
that were (i) originated or assumed during the "window period" under the Garn-St
Germain Act which ended in all cases not later than October 15, 1982, and (ii)
originated by lenders other than national banks, federal savings institutions
and federal credit unions. FHLMC has taken the position in its published
mortgage servicing standards that, out of a total of eleven "window period
states," five states (Arizona, Michigan, Minnesota, New Mexico and Utah) have
enacted statutes extending, for various terms and for varying periods, the
prohibition on enforcement of due-on-sale clauses with respect to certain
categories of window period loans. Also, the Garn-St Germain Act does
"encourage" lenders to permit assumption of loans at the original rate of
interest or at some other rate less than the average of the original rate and
the market rate.
As to loans secured by an owner-occupied residence, the Garn-St Germain Act
sets forth nine specific instances in which a mortgagee covered by the Garn-St
Germain Act may not exercise its rights under a due-on-sale clause,
notwithstanding the fact that a transfer of the property may have occurred. The
inability to enforce a due-on-sale clause may result in transfer of the related
Mortgaged Property to an uncreditworthy person, which could increase the
likelihood of default or may result in a mortgage bearing an interest rate below
the current market rate being assumed by a new home buyer, which may affect the
average life of the Mortgage Loans and the number of Mortgage Loans which may
extend to maturity.
ENFORCEABILITY OF PREPAYMENT CHARGES AND LATE PAYMENT FEES
Forms of notes, mortgages and deeds of trust used by lenders may contain
provisions obligating the borrower to pay a late charge if payments are not
timely made, and in some circumstances may provide for prepayment fees or
penalties if the obligation is paid prior to maturity. In certain states, there
are or may be specific limitations upon the late charges which a lender may
collect from a borrower for delinquent payments. Certain states also limit the
amounts that a lender may collect from a borrower as an additional charge if the
loan is prepaid.
Under certain state laws, prepayment charges may not be imposed after a
certain period of time following the origination of mortgage loans with respect
to prepayments on loans secured by liens encumbering owner-occupied residential
properties. Since many of the Mortgaged Properties will be owner-occupied, it is
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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 interest rates, may
increase the likelihood of refinancing or other early retirement of such loans
or contracts. Late charges and prepayment fees are typically retained by
servicers as additional servicing compensation.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980, enacted in March 1980 ("Title V"), provides that state usury
limitations shall not apply to certain types of residential first mortgage loans
originated by certain lenders after March 31, 1980. The Office of Thrift
Supervision, as successor to the Federal Home Loan Bank Board, is authorized to
issue rules and regulations and to publish interpretations governing
implementation of Title V. The statute authorized the states to reimpose
interest rate limits by adopting, before April 1, 1983, a law or constitutional
provision which expressly rejects an application of the federal law. In
addition, even where Title V is not so rejected, any state is authorized by the
law to adopt a provision limiting discount points or other charges on mortgage
loans covered by Title V. Certain states have taken action to reimpose interest
rate limits and/or to limit discount points or other charges.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT
Generally, under the terms of the Soldiers' and Sailors' Civil Relief Act
of 1940, as amended (the "Relief Act"), a borrower who enters military service
after the origination of such borrower's mortgage loan (including a borrower who
is a member of the National Guard or is in reserve status at the time of the
origination of the mortgage loan and is later called to active duty) may not be
charged interest above an annual rate of 6% during the period of such borrower's
active duty status, unless a court orders otherwise upon application of the
lender. It is possible that such interest rate limitation could have an effect,
for an indeterminate period of time, on the ability of the Master Servicer to
collect full amounts of interest on certain of the Mortgage Loans. Any shortfall
in interest collections resulting from the application of the Relief Act could
result in losses to the holders of the Securities. In addition, the Relief Act
imposes limitations which would impair the ability of the Master Servicer to
foreclose on an affected Mortgage Loan during the borrower's period of active
duty status. Thus, in the event that such a Mortgage Loan goes into default,
there may be delays and losses occasion by the inability to realize upon the
Mortgaged Property in a timely fashion.
SUBORDINATE FINANCING
When the 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 an 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 or delay the taking of action by the senior lender. Moreover, the
bankruptcy of a junior lender may operate to stay foreclosure or similar
proceeds by the senior lender.
FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of the material federal income tax consequences
of the purchase, ownership and disposition of the Securities. This summary has
been reviewed by Jeffers, Wilson, Shaff & Falk, LLP, tax counsel to the Company
and the Issuer, and, to the extent that it states legal conclusions, represents
the opinion of such tax counsel, subject to the limitations and qualifications
set forth herein and in the applicable
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Prospectus Supplement. In particular, based on certain factual representations
on behalf of the Company relating to the issuance, terms and treatment of the
Bonds, and when applicable, the timely election of FASIT treatment, as described
in the related Prospectus Supplement and based on the assumptions of the legal
capacity of all natural persons, the genuineness of all signatures, the
authenticity of all documents submitted to tax counsel as originals, the
conformity to original documents of all documents submitted to tax counsel as
certified, conformed or other copies, and the authenticity of the originals of
such copies, tax counsel is of the opinion that (a) the Bonds issued by the
Issuer will be treated as indebtedness for federal income tax purposes, and (b),
in connection with a series of Securities issued as a FASIT, that the applicable
Trust Fund Assets will be classified as a FASIT for federal income tax purposes.
The summary is based on the Internal Revenue Code of 1986, as amended (the
"Code"), regulations, rulings and decisions in effect as of the date of this
Prospectus, all of which are subject to change. The summary in particular takes
into account the Treasury regulations regarding the taxation of debt instruments
with original issue discount (the "OID Regulations"). The summary does not
purport to address federal income tax consequences applicable to all categories
of investors, some of which may be subject to special rules. In addition, the
summary is limited to investors who will hold the Securities as "capital assets"
(generally, property held for investment) as defined in Section 1221 of the
Code. Investors should consult their own tax advisors in determining the
federal, state, local and any other tax consequences to them of the purchase,
ownership and disposition of the Securities. As applied to any particular
Security, the summary is subject to further discussion or change as provided in
the related Prospectus Supplement.
CLASSIFICATION OF THE ISSUER AND THE BONDS
No regulations, published rulings or judicial decisions discuss the
characterization for federal income tax purposes of securities with terms
substantially the same as the Bonds. Upon the issuance of each Series of Bonds,
however, Jeffers, Wilson, Shaff & Falk, LLP, tax counsel to the Issuer, will
advise the Issuer that in its opinion such Bonds will be treated for federal
income tax purposes as indebtedness and not as an ownership interest in the
Trust Fund Assets of the Issuer (the "Trust Fund"), or an equity interest in the
Issuer or in a separate association taxable as a corporation.
Under the taxable mortgage pool ("TMP") rules in the Code, certain entities
that issue debt secured by real estate mortgages are subject to special tax
treatment that can result in entity level federal income taxation. An entity
will be classified as a TMP if it does not make an election to be classified as
a "real estate mortgage investment conduit" (a "REMIC") and (i) substantially
all of its assets consist of debt obligations and more than 50% of such debt
obligations are real estate mortgages or interests therein, (ii) the entity
issues debt obligations with two or more maturities and (iii) payments on the
debt obligations issued by it bear a relationship to payments received on the
debt obligations owned by it. In certain situations, pools of assets within an
entity can also be treated as separate TMPs.
The Company does not intend to make an election for any Issuer to be
classified as a REMIC. Further, the Company intends to structure all issuances
of Bonds, unless otherwise specified in the related Prospectus Supplement, so as
to not constitute a TMP. However, it is possible that the Issuer or a portion of
the Issuer relating to a specific pool of Mortgage Collateral and the Bonds
related thereto could be treated as a TMP. If an Issuer were to be classified as
a TMP, it is anticipated that it would nonetheless qualify as a "qualified REIT
subsidiary" (within the meaning of Section 856(i) of the Code) and thus would
not be subject to entity level federal income taxes. If so, only AmREIT or its
shareholders would be required to include in income any "excess inclusion
income" generated by the TMP. On the other hand, if the Issuer were to be
classified as a TMP but did not maintain its status as a "qualified REIT
subsidiary", it would not be permitted to be included in the consolidated
federal income tax return of any other corporation and its net income would be
subject to entity level federal income taxes. Each Prospectus Supplement will
specify whether or not the Issuer for that Series of Bonds is expected to be
classified as a TMP. No assurance is given in this discussion as to whether any
Issuer classified as a TMP will continue to qualify as a "qualified REIT
subsidiary" or whether AmREIT will continue to qualify as a REIT for federal
income tax purposes.
Because the Bonds will be treated as indebtedness of the Issuer for federal
income tax purposes, (i) Bonds held by a thrift institution taxed as a domestic
building and loan association will not constitute
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"loans . . . secured by an interest in real property" within the meaning of Code
Section 7701(a)(19)(C)(v), (ii) interest on 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), and Bonds will not constitute "real estate assets"
or "Government securities" within the meaning of Code Section 856(c)(5)(A), and
(iii) Bonds held by a regulated investment company will not constitute
"Government securities" within the meaning of Code Section 851(b)(4)(A)(i).
TAXATION OF THE FASIT AND ITS HOLDERS
If a FASIT election is made with respect to a Series of Securities and such
Series is issued, treated and maintained as the Company has determined herein
and in the related Prospectus Supplement, then the arrangement by which the
Securities of that Series are issued will be treated as a FASIT. The regular
FASIT interests will be treated as debt for federal income tax purposes.
Sections 860H through 860L of the Code (the "FASIT Provisions") provide for
an entity for federal income tax purposes known as a "financial asset
securitization investment trust" (a "FASIT"). Although the FASIT Provisions of
the Code became effective on September 1, 1997, no Treasury regulations or other
administrative guidance have been issued with respect to those provisions.
Accordingly, definitive guidance cannot be provided with respect to many aspects
of the tax treatment of FASIT regular interest holders. Investors should also
note that the FASIT discussion contained herein constitutes only a summary of
the U.S. federal income tax consequences to holders of FASIT interests. With
respect to each Series of FASIT regular interests, the related Prospectus
Supplement will provide a detailed discussion regarding the federal income tax
consequences associated with the particular transaction.
FASIT interests will be classified as either FASIT regular interests, which
generally will be treated as debt for federal income tax purposes, or FASIT
ownership interests, 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 FASIT. The Prospectus Supplement for each
Series of Securities will indicate which Securities of such Series will be
designated as regular interests, and which, if any, will be designated as the
ownership interest.
Qualification as a FASIT. A Trust Fund will qualify as a FASIT if (i) a
FASIT election is in effect, (ii) certain tests concerning (A) the composition
of the FASIT's assets and (B) the nature of the investors' interests in the
FASIT are met on a continuing basis, and (iii) the Trust Fund is not a regulated
investment company as defined in Section 851(a) of the Code.
Asset Composition. For a Trust Fund to be eligible for FASIT status,
substantially all of the Trust Fund Assets must consist of "permitted assets" as
of the close of the third month beginning after the closing date and at all
times thereafter (the "FASIT Qualification Test"). Permitted assets include (i)
cash or cash equivalents, (ii) debt instruments with fixed terms that would
qualify as regular interests if issued by a REMIC (generally, instruments that
provide for interest at a fixed rate, a qualifying variable rate, or a
qualifying interest-only ("IO") type rate), (iii) foreclosure property, (iv)
certain hedging instruments (generally interest and currency rate swaps and
credit enhancement contracts) that are reasonably required to guarantee or hedge
against the FASIT's risks associated with being the obligor on FASIT interests,
(v) contract rights to acquire qualifying debt instruments or qualifying hedging
instruments, (vi) FASIT regular interest, and (vii) REMIC regular interests.
Permitted assets do not include any debt instruments issued by the holder of the
FASIT's ownership interest or by any person related to such holder. Neither the
Company nor AmREIT will be permitted to hold ownership interests in a FASIT.
Interests in a FASIT. In addition to the foregoing asset qualification
requirements, the interests in a FASIT also must meet certain requirements. All
of the interests in a FASIT must belong to either of the following: (i) one or
more classes of regular interest or (ii) a single class of ownership interest
that is held by a fully taxable domestic C Corporation (and not by a REIT such
as AmREIT).
A FASIT interest generally qualifies as a regular interest if (i) it is
designated as a regular interest, (ii) it has a stated maturity no greater than
thirty years, (iii) it entitles its holder to a specified principal amount,
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(iv) the issue price of the interest does not exceed 125% of its stated
principal amount, (iv) the yield to maturity of the interest is less than the
applicable federal rate published by the IRS for the month of issue, plus 5%,
and (vi) if it pays interest, such interest is payable at either (A) a fixed
rate with respect to the principal amount of the regular interest or (B) a
permissible variable rate with respect to such principal amount. Permissible
variable rates for FASIT regular interests are the same as those for REMIC
regular interests (certain qualified floating rates and weighted average rates).
Interest will be considered to be based on a permissible variable rate if
generally, (i) such interest is unconditionally payable at least annually, (ii)
the issue price of the debt instrument does not exceed the total noncontingent
principal payments and (iii) interest is based on a "qualified floating rate,"
an "objective rate," a combination of a single fixed rate and one or more
"qualified floating rate," one "qualified inverse floating rate," or a
combination of "qualified floating rates" that do not operate in a manner that
significantly accelerates or defers interest payments on such FASIT regular
interest.
If an interest in a FASIT fails to meet one or more of the requirements set
out in clauses (iii), (iv), or (v) in the immediately preceding paragraph, but
otherwise meets all requirements to be treated as a FASIT, it may still qualify
as a type of regular interest known as a "High-Yield Interest." In addition, if
an interest in a FASIT fails to meet the requirement of clause (vi), but the
interest payable on the interest consists of a specified portion of the interest
payments on permitted assets and that portion does not vary over the life of the
security, the interest will also qualify as a High-Yield Interest. A High-Yield
Interest may be held only by domestic C Corporations that are fully subject to
corporate income tax ("Eligible Corporations"), other FASITs, and dealers in
securities who acquire such interests as inventory, rather than for investment.
In addition, holders of High-Yield Interests are subject to limitations on
offset of income derived from such interest. See "-- TAXATION OF HIGH-YIELD
INTERESTS."
Consequences of Disqualification. If a Trust Fund fails to comply with one
or more ongoing requirements for FASIT status during any taxable year, the Code
provides that its FASIT status may be lost for that year and thereafter. If
FASIT status is lost, the treatment of the former FASIT and interests therein
for federal income tax purposes is uncertain. Although the Code authorizes the
Treasury to issue regulations that address situations where a failure to meet
the requirements for FASIT status occurs inadvertently and in good faith, such
regulations have not yet been issued. It is possible that disqualification
relief might be accompanied by sanctions, such as the imposition of a corporate
tax on all or a portion of the FASIT's income for the period of time in which
requirements for FASIT status are not satisfied.
TREATMENT OF FASIT REGULAR SECURITIES
Payments received by holders of FASIT regular interests generally will be
accorded the same tax treatment under the Code as payments received on other
taxable debt instruments. Holders of FASIT regular interests 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. If the
FASIT regular interest is sold, the Holder generally will recognize gain or loss
upon the sale. See "TAXATION OF DEBT SECURITIES" above.
TAXATION OF HIGH-YIELD INTERESTS
High-Yield Interests are subject to special rules regarding eligibility of
holders of such interest, and the ability of such holders to offset income
derived from those interests with losses. High-Yield Interests only may be held
by Eligible Corporations, other FASITs, and dealers in securities who acquire
such interests as inventory. If a securities dealer (other than an Eligible
Corporation) initially acquires a High-Yield Interest as inventory, but later
begins to hold it for investment, the dealer will be subject to an excise tax
equal to the income from the High-Yield Interest multiplied by the highest
corporate income tax rate. In addition, transfers of High-Yield Interests to
disqualified holders will be disregarded for federal income tax purposes, and
the transferor will continue to be treated as the holder of the High-Yield
Interest.
The Holder of a High-Yield Interest may not use non-FASIT current losses or
net operating loss carryforwards or carrybacks to offset any income derived from
the High-Yield Interest, for either regular
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federal income tax purposes or for alternative minimum tax purposes. In
addition, the FASIT provisions contain an anti-abuse rule that imposes corporate
income tax on income derived from a FASIT regular interest that is held by a
pass-through entity (other than another FASIT) that issues debt or equity
securities backed by the FASIT regular interest and that have the same features
as High-Yield Interests.
TAXATION OF FASIT OWNERSHIP SECURITIES
A FASIT ownership interest represents the residual equity interest in a
FASIT. As such, the holder of a FASIT ownership interest determines its taxable
income by taking into account all assets, liabilities, and items of income,
gain, deduction, loss, and credit of a FASIT. In general, the character of the
income to the holder of a FASIT ownership interest will be the same as the
character of such income to the FASIT, except that any tax-exempt interest
income taken into account by the holder of a FASIT ownership interest is treated
as ordinary income. In determining that taxable income, the holder of a FASIT
ownership interest must determine the amount of interest, OID, market discount,
and premium recognized with respect to the FASIT's assets and the FASIT regular
interests issued by the FASIT according to a constant yield methodology and
under an accrual method of accounting. In addition, holders of FASIT Ownership
Securities are subject to the same limitations on their ability to use losses to
offset income from their FASIT regular interests as are holders of High-Yield
Interest.
Rules similar to the wash sale rules applicable to REMIC residual interests
also will apply to FASIT ownership interests. Accordingly, losses on
dispositions of a FASIT ownership generally will be disallowed where within six
months before or after the disposition, the seller of such interest acquires any
other FASIT ownership interest that is economically comparable in the disposed
FASIT ownership interest. In addition, if any security that is sold or
contributed to a FASIT by the holders of the related FASIT ownership interest
was required to be marked-to-market under Section 475 of the Code by such
holder, then Section 475 of the Code generally will continue to apply to such
securities. Special valuation rules generally require that the value of debt
instruments that are not traded on an established securities market be
determined by calculating the present value of the reasonably expected payments
under the instrument using a discount rate of 120% of the applicable Federal
rate, compounded semi-annually, until another discount rate is issued by
regulations.
The holder of a FASIT ownership interest will be subject to a tax equal to
100% of the net income derived by the FASIT from any "prohibited transactions."
Prohibited transactions include (i) the receipt of income derived from assets
that are not permitted assets, (ii) certain dispositions of permitted assets,
(iii) the receipt of any income derived from any loan originated by a FASIT, and
(iv) in certain cases, the receipt of income representing a servicing fee or
other compensation. Any Series of Securities for which a FASIT election is made
generally will be structured in order to avoid application of the prohibited
transaction tax.
INTEREST AND ORIGINAL ISSUE DISCOUNT
GENERAL. The Prospectus Supplement for each Series of Securities will
disclose whether any Class of such Bonds is anticipated to be issued with
"original issue discount" within the meaning of Code Section 1273(a) ("OID").
Interest on any Class of Securities other than OID will be includible in income
by the Holder thereof in accordance with such Holder's applicable method of
accounting. Holders of any Class of Securities having OID must generally include
OID in ordinary gross income for federal income tax purposes as it accrues, in
advance of receipt of the cash attributable to such income. Each Issuer will
indicate on the face of each Security issued by it information concerning the
application of the OID rules to such Security and certain other information that
may be required. The Issuer will report annually to the Internal Revenue Service
(the "IRS") and to holders of record of such Securities information with respect
to the OID accruing on such Securities during the reporting period.
Rules governing OID are set forth in Code Sections 1271 through 1273, 1275
and 1281 through 1283. In addition, the discussion of federal income tax
consequences set forth below is based in part on the OID Regulations. The Code
or the OID Regulations either do not address, or are subject to varying
interpretations with respect to, several issues relevant to obligations, such as
the Securities, that are subject to prepayment.
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Therefore, there is some uncertainty as to the manner in which the OID rules of
the Code will be applied to the Securities.
ORIGINAL ISSUE DISCOUNT DEFINED. In general, each Security will be treated
as a single installment obligation for purposes of determining the OID
includible in a Securityholder's income. The amount of OID on such a Security is
the excess of the stated redemption price at maturity of the Security over its
issue price. The issue price of a Security is the initial offering price to the
public at which a substantial amount of the Securities of that Class are first
sold to the public (excluding bond houses, brokers, underwriters or
wholesalers), generally as set forth on the cover page of the Prospectus
Supplement for a Series of Securities. (The portion of the initial offering
price which consists of interest accrued on the Securities from the date of
issuance to the Closing Date may, at the option of the Securityholder, be
subtracted from the issue price of the Securities and treated as an offset of
interest received on the first Distribution Date.) The stated redemption price
at maturity of a Security is equal to the total of all payments to be made on
the Security other than "qualified stated interest payments." "Qualified stated
interest payments" are payments on the Securities which are paid at least
annually and are based on either a fixed rate or a "qualified variable rate."
Under the OID Regulations, interest is treated as payable at a "qualified
variable rate" and not as contingent interest if, generally, (i) such interest
is unconditionally payable at least annually, (ii) the issue price of the
Security does not exceed the total noncontingent principal payments and (iii)
interest is based on a "qualified floating rate," an "objective rate," or a
combination of "qualified floating rates" that do not operate in a manner that
significantly accelerates or defers interest payments on such Security.
Generally, the stated redemption price at maturity of a Security (other than a
Deferred Interest Security or a Payment Lag Security, as defined below) is its
stated principal amount; the stated redemption price at maturity of a Deferred
Interest Security is the sum of all payments (regardless of how denominated)
scheduled to be received on such Security under the Tax Prepayment Assumption
(as defined below). Any payment of interest that is not a qualified stated
interest payment is a "contingent interest payment." The related Prospectus
Supplement will discuss whether the payments of interest on a Security are
qualified stated interest payments and the treatment for federal income tax
purposes of any contingent interest payments.
DE MINIMIS ORIGINAL ISSUE DISCOUNT. Notwithstanding the general definition
of OID above, any OID with respect to a Security will be considered to be zero
if such discount is less than 0.25% of the stated redemption price at maturity
of the Security multiplied by its weighted average life (a "de minimis" amount).
The weighted average life of a Security for this purpose is the sum of the
following amounts (computed for each payment included in the stated redemption
price at maturity of the Security): (i) the number of complete years (rounded
down for partial years) from the Closing Date until the date on which each such
payment is scheduled to be made under the Tax Prepayment Assumption, multiplied
by (ii) a fraction, the numerator of which is the amount of the payment, and the
denominator of which is the Security's stated redemption price at maturity.
Securityholders generally must report de minimis OID pro rata as principal
payments are received, and such income will be capital gain if the Security is
held as a capital asset. However, accrual method holders may elect to accrue all
interest on a Security, including de minimis OID and market discount and as
adjusted by any premium, under a constant yield method.
ACCRUAL OF ORIGINAL ISSUE DISCOUNT. The amount and rate of accrual of OID
must be calculated based on a reasonable assumed prepayment rate for the
Mortgage Loans, the mortgage loans underlying the Agency Securities and/or other
Mortgage Collateral supporting the Securities (the "Tax Prepayment Assumption")
and to prescribe a method for adjusting the amount and rate of accrual of such
discount. However, if such mortgage loans prepay at a rate slower than the Tax
Prepayment Assumption, no deduction for OID previously accrued, based on the Tax
Prepayment Assumption, is allowed. The Tax Prepayment Assumption will be
determined in the manner prescribed by regulations that have not yet been
issued. It is anticipated that the regulations will require that the Tax
Prepayment Assumption be the prepayment assumption that is used in determining
the initial offering price of such Securities. The related Prospectus Supplement
for each Series of Securities will specify the Tax Prepayment Assumption
determined by the Issuer for the purposes of determining the amount and rate of
accrual of OID. No representation is made that the Mortgage Collateral will
prepay at the Tax Prepayment Assumption or at any other rate.
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Generally, a Securityholder must include in gross income the sum of the
"daily portions," as determined below, of the OID that accrues on a Security for
each day the Securityholder holds that Security, including the purchase date but
excluding the disposition date. In the case of an original holder of a Security,
a calculation will be made of the portion of the OID that accrues during each
successive period (or shorter period from date of original issue) (an "accrual
period") that ends on the day in the calendar year corresponding to each of the
Distribution Dates on the Securities (or the date prior to each such date). This
will be done, in the case of each full accrual period, by adding (A) the present
value at the end of the accrual period of all remaining payments to be received
(based on (i) the yield to maturity of the Security at the issue date, (ii)
events (including actual prepayments) that have occurred prior to the end of the
accrual period, and (iii) the Tax Prepayment Assumption) and (B) any payments
received during such accrual period, other than payments of qualified stated
interest, and subtracting from that total the "adjusted issue price" of the
Securities at the beginning of such accrual period. The adjusted issue price of
a Security at the beginning of the initial accrual period is its issue price;
the adjusted issue price of a Security at the beginning of a subsequent accrual
period is the adjusted issue price at the beginning of the immediately preceding
accrual period plus the amount of OID allocable to the accrual period and
reduced by the amount of any payment other than a payment of qualified stated
interest made at the end of or during that accrual period. The OID accrued
during such accrual period will then be divided by the number of days in the
period to determine the daily portion of OID for each day in the period. With
respect to an initial accrual period shorter than a full accrual period, the
daily portions of OID must be determined according to any reasonable method,
provided that such method is consistent with the method used to determine yield
on the Securities.
With respect to any Security that is a variable rate debt instrument, the
sum of the daily portions of OID that is includible in the holder's gross income
is determined under the same principles described above, with the following
modifications: the yield to maturity on the Securities should be calculated as
if the interest index remained at its value as of the issue date of such
Securities. Because the proper method of adjusting accruals of OID on a variable
rate debt instrument as a result of prepayments is uncertain, holders of such
instruments should consult their own tax advisors regarding the appropriate
treatment of such Securities for federal income tax purposes.
Purchasers of Securities with the above key features for which the period
between the Closing Date and the first Distribution Date does not exceed the
Distribution Date Interval would nevertheless pay upon purchase of the
Securities an additional amount of accrued interest as compared with the accrued
interest that would be paid if interest accrued from Distribution Date to
Distribution Date. This accrued interest (together with any accrued interest
with respect to which the Securityholder chooses not to treat as an offset to
interest paid on the first Distribution Date, as described above) should be
treated for federal income tax purposes as part of the initial purchase price of
the Securities. Securities described in this paragraph issued or purchased at a
discount would be treated as being issued or purchased at a smaller discount or
at a premium, and such Securities issued or purchased at a premium would be
treated as being issued or purchased at a larger premium.
SUBSEQUENT PURCHASERS. A subsequent purchaser of a Deferred Interest
Security or a subsequent purchaser of any other Security issued with OID who
purchases the Security at a cost less than the remaining stated redemption price
at maturity, will also be required to include in gross income for all days
during his or her taxable year on which such Security is held, the sum of the
daily portions of OID on the Security. In computing the daily portions of OID
with respect to a Security for such a subsequent purchaser, however, the daily
portion for any day shall be reduced by the amount that would be the daily
portion for such day (computed in accordance with the rules set forth above)
multiplied by a fraction, the numerator of which is the amount, if any, by which
the price paid by such holder for the Security exceeds its adjusted issue price
(the "acquisition premium"), and the denominator of which is the amount by which
the remaining stated redemption price at maturity exceeds the adjusted issue
price.
PREMIUM
A holder who purchases a Security at a cost greater than its stated
redemption price at maturity generally will be considered to have purchased the
Security at a premium, which it may elect to amortize as an offset to
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interest income on such Security (and not as a separate deduction item) on a
constant yield method. Under the applicable Treasury regulations, bond premium
is to be accrued on a constant yield basis similar to OID. Accordingly, it
appears that the accrual of premium on a Class of Securities of a Series will be
calculated using the prepayment assumption used in pricing such Class. If a
holder makes an election to amortize premium on a Security, such election will
apply to all taxable debt instruments (including all FASIT 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 IRS. Purchasers who pay a
premium for the Securities should consult their tax advisers regarding the
election to amortize premium and the method to be employed.
ELECTION TO TREAT ALL INTEREST AS ORIGINAL ISSUE DISCOUNT
The OID Regulations permit a holder of a Security to elect to accrue all
interest, discount (including de minimis market or OID) and premium in income as
interest, based on a constant yield method for the Securities. If such an
election were to be made with respect to a Security with market discount, the
holder of the Security would be deemed to have made an election to include in
income currently market discount with respect to all other debt instruments
having market discount that such holder of the Securities acquires during the
year of the election or thereafter. Similarly, a holder of a Security that makes
this election for a Security that is acquired at a premium will be deemed to
have made an election to amortize bond premium with respect to all debt
instruments having amortizable bond premium that such holder owns or acquires.
The election to accrue interest, discount and premium on a constant yield method
with respect to a Security is irrevocable.
REALIZED LOSSES
Securityholders generally are required to accrue interest and OID with
respect to the Securities without giving effect to any reductions in
distributions attributable to defaults or delinquencies on the Mortgage
Collateral until it can be established that any such reductions ultimately will
not be recoverable. Although a holder of a Security will eventually be entitled
to recognize a loss or reduce income attributable to the Securities if
distribution reductions are ultimately not recovered, the law is unclear with
respect to the timing and the character thereof and mismatches may result that
further compound the economic losses associated with reduced distributions on
the Securities.
SALE OR REDEMPTION
If a Security is sold, the seller will recognize gain or loss equal to the
difference between the amount realized on the sale and the seller's adjusted
basis in the Security. Such adjusted basis generally will equal the cost of the
Security to the seller, increased by any OID and market discount included in the
seller's gross income with respect to the Security and reduced by payments,
other than payments of qualified stated interest, previously received by the
seller and by any amortized premium. If a Securityholder is a bank, thrift or
similar institution described in Section 582(c) of the Code, gain or loss
realized on the sale or exchange of a Security will be taxable as ordinary
income or loss. Any such gain or loss recognized by any other seller will be
capital gain or loss, provided that the Security is held by the seller as a
"capital asset" (generally, property held for investment) within the meaning of
Code Section 1221.
MARKET DISCOUNT
The Securities are subject to the market discount provisions of Code
Sections 1276 through 1278. These rules provide that if a subsequent holder of a
Security purchases it at a market discount, some or all of any principal payment
or of any gain recognized upon the disposition of the Security will be taxable
as ordinary interest income. Market discount on a Security means the excess, if
any, of (1) the sum of its issue price and the aggregate amount of OID
includible in the gross income of all holders of the Security prior to the
acquisition by the subsequent holder (presumably adjusted to reflect prior
principal payments), over (2) the price paid by the holder for the Security.
Market discount on a Security will be considered to be zero if such discount is
less than .25% of the stated redemption price at maturity of such Security
multiplied by its
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weighted average life, which presumably would be calculated in a manner similar
to weighted average life (described above), taking into account distributions
(including prepayments) prior to the date of acquisition of such Security by the
subsequent purchaser. If market discount on a Security is treated as zero under
this rule, the actual amount of such discount must be allocated to the remaining
principal distributions on such Security and when each such distribution is
made, gain equal to the discount allocated to such distribution will be
recognized.
Any principal payment (whether a scheduled payment or a prepayment) or any
gain on the disposition of a market discount bond is to be treated as ordinary
income to the extent that it does not exceed the accrued market discount at the
time of such payment or disposition. The amount of accrued market discount for
purposes of determining the tax treatment of subsequent principal payments or
dispositions of the Securities is to be reduced by the amount so treated as
ordinary income.
The Code grants authority to the U.S. Treasury to issue regulations
providing for the computation of accrued market discount on debt instruments,
the principal of which is payable in more than one installment. Until such time
as regulations are issued by the U.S. Treasury, certain rules described in the
legislative history accompanying the Tax Reform Act of 1986 will apply. Under
those rules, the holder of a market discount bond may elect to accrue market
discount either on the basis of a constant interest rate or using one of the
following methods. For bonds issued with OID, the amount of market discount that
accrues during a period is equal to the product of (i) the total remaining
market discount, multiplied by (ii) a fraction, the numerator of which is the
OID accruing during the period and the denominator of which is the total
remaining OID at the beginning of the period. For bonds issued without OID, the
amount of market discount that accrues during a period is equal to the product
of (i) the total remaining market discount, multiplied by (ii) a fraction, the
numerator of which is the amount of stated interest paid during the accrual
period and the denominator of which is the total amount of stated interest
remaining to be paid at the beginning of the period. For purposes of calculating
market discount under any of the above methods in the case of instruments (such
as the Securities) that provide for payments that may be accelerated by reason
of prepayments of other obligations securing such instruments, the same
prepayment assumption applicable to calculating the accrual of OID shall apply.
Regulations are to provide similar rules for computing the accrual of
amortizable bond premium on instruments payable in more than one principal
installment. As an alternative to the inclusion of market discount in income on
the foregoing basis, the holder may elect to include such market discount in
income currently as it accrues on all market discount instruments acquired by
such holder in that taxable year or thereafter. In addition, accrual method
holders may elect to accrue all interest on a Security, including de minimis OID
and market discount and as adjusted by any premium, under a constant yield
method.
A subsequent holder of a Security who acquired the Security at a market
discount also may be required to defer, until the maturity date of the Security
or the earlier disposition of the Security in a taxable transaction, the
deduction of a portion of the amount of interest that the holder paid or accrued
during the taxable year on indebtedness incurred or maintained to purchase or
carry the Security in excess of the aggregate amount of interest (including OID)
includible in his or her gross income for the taxable year with respect to such
Security. The amount of such net interest expense deferred in a taxable year may
not exceed the amount of market discount accrued on the Security for the days
during the taxable year on which the subsequent holder held the Security, and
the amount of such deferred deduction to be taken into account in the taxable
year in which the Security is disposed of in a transaction in which gain or loss
is not recognized in whole or in part is limited to the amount of gain
recognized on the disposition. This deferral rule does not apply to a holder
that elects to include market discount in income currently as it accrues on all
market discount instruments acquired by such holder in that taxable year or
thereafter.
Because the regulations described above with respect to market discounts
and premiums have not been issued, it is impossible to predict what effect those
regulations might have on the tax treatment of a Security purchased at a
discount or premium in the secondary market.
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WITHHOLDING WITH RESPECT TO CERTAIN FOREIGN INVESTORS
Interest and OID income received with respect to the Securities by
Securityholders who are nonresident alien individuals, foreign corporations or
other non-United States persons unrelated to the Issuer ("foreign persons")
generally will not be subject to the 30% withholding tax imposed by Code
Sections 1441 and 1442 on certain income of foreign persons, provided the
procedural requirements of Code Section 871(h)(5) are met.
The 30% withholding tax will apply, however, in certain situations where
contingent interest is paid or the IRS determines that withholding is required
in order to prevent tax evasion by United States persons. If the 30% withholding
tax is applicable, interest payments made to Securityholders who are foreign
persons will be subject to withholding. In addition, a tax equal to 30% of the
OID accrued with respect to a Security since the last payment of interest
thereon will be withheld from each interest payment made to a foreign person.
The Code provides, for purposes of determining the amount of OID subject to the
withholding tax on foreign persons, that OID shall accrue at a constant interest
rate pursuant to the rules applicable to United States persons described above.
Securityholders to whom withholding with respect to foreign persons applies
also will be subject to a 30% tax on a portion of the gain, if any, recognized
upon the payment by the Issuer of principal on a Security or upon the sale or
exchange of a Security. Code Sections 871 and 881 provide, for purposes of
determining the amount of OID subject to the withholding tax, that the 30% tax
will apply to the amount of gain not in excess of the OID that accrued, on a
constant interest basis, while the foreign person held the Security (reduced by
the accrued OID on account of which the tax had already been withheld).
The 30% withholding tax imposed on a foreign person may be subject to
reduction or elimination under applicable tax treaties and does not apply if the
interest, OID or gain treated as ordinary income, as the case may be, is
effectively connected with the conduct by such foreign person of a trade or
business within the United States. Foreign persons who hold a Security should
consult their tax advisors regarding their qualification for reduced rate of, or
exemption from, withholding and the procedure for obtaining such a reduction or
exemption.
BACKUP WITHHOLDING
Federal income tax law provides for "backup withholding" of tax at a rate
of 31% in certain circumstances on "reportable payments," which include payments
of principal, interest and OID (determined in any case as if the Securityholder
were the original holder of the Security), but not market discount, on a
Security and of the proceeds of the disposition of a Security. Persons subject
to the requirement to backup withhold include, in certain circumstances, the
Issuer, the paying agent of the Issuer, a person who collects a payment of
interest or OID as a custodian or nominee on behalf of the Securityholder, and a
"broker" (as defined in applicable Treasury regulations) through which the
Securityholder receives the proceeds of the retirement or other disposition of a
Security. Backup withholding applies only if the Securityholder, among other
things, (1) fails to furnish a social security number or other taxpayer
identification number ("TIN") to the person subject to the requirement to backup
withhold, (2) furnishes an incorrect TIN to such person, (3) fails to report
properly interest or dividends or (4) under certain circumstances, fails to
provide to such person a certified statement, signed under penalty of perjury,
that the TIN furnished is the correct number and that such Securityholder is not
subject to backup withholding.
Backup withholding will not apply, however, with respect to certain
payments made to Securityholders, including payments to certain exempt
recipients (such as corporations and tax-exempt organizations) and to certain
foreign persons. Securityholders should consult their tax advisors regarding
their qualification for exemption from backup withholding and the procedure for
obtaining such an exemption.
Each Issuer will report to the Securityholders and the IRS for each
calendar year the amount of any "reportable payments" by the Issuer during such
year and the amount of tax withheld, if any, with respect to payments on the
Securities issued by it.
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DUE TO THE COMPLEXITY OF THE FEDERAL INCOME TAX RULES APPLICABLE TO
SECURITYHOLDERS AND THE CONSIDERABLE UNCERTAINTY THAT EXISTS WITH RESPECT TO
MANY ASPECTS OF THOSE RULES, POTENTIAL INVESTORS SHOULD CONSULT THEIR OWN TAX
ADVISORS REGARDING THE TAX TREATMENT OF THE ACQUISITION, OWNERSHIP, AND
DISPOSITION OF THE SECURITIES.
STATE TAX CONSIDERATIONS
In addition to the federal income tax consequences described above under
"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.
LEGAL INVESTMENT
The Prospectus Supplement for each Series of Bonds will specify which, if
any, of the Classes of Securities offered thereby will constitute "mortgage
related securities" for purposes of SMMEA. Classes of Securities that qualify as
"mortgage related securities" will be legal investments for persons, trusts,
corporations, partnerships, associations, business trusts and business entities
(including depository institutions, life insurance companies and pension funds)
created pursuant to or existing under the laws of the United States or any state
(including the District of Columbia and Puerto Rico) whose authorized
investments are subject to state regulation to the same extent as, under
applicable law, obligations issued by or guaranteed as to principal and interest
by the United States or any such entities. Under SMMEA, if a state enacts
legislation prior to October 4, 1991 specifically limiting the legal investment
authority of any of such entities with respect to "mortgage related securities,"
the Securities will constitute legal investments for entities subject to such
legislation only to the extent provided therein. Approximately twenty-one states
adopted such legislation prior to the October 4, 1991 deadline. SMMEA provides,
however, that in no event will the enactment of any such legislation affect the
validity of any contractual commitment to purchase, hold or invest in
Securities, or require the sale or other disposition of Securities, so long as
such contractual commitment was made or such Securities were acquired prior to
the enactment of such legislation.
SMMEA also amended the legal investment authority of federally-chartered
depository institutions as follows: federal savings and loan associations and
federal savings banks may invest in, sell or otherwise deal in Securities
without limitations as to the percentage of their assets represented thereby,
federal credit unions may invest in mortgage related securities, and national
banks may purchase Securities for their own account without regard to the
limitations generally applicable to investment securities set forth in 12 U.S.C.
24 (Seventh), subject in each case to such regulations as the applicable federal
authority may prescribe. In this connection, federal credit unions should review
the National Credit Union Administration ("NCUA") Letter to Credit Unions No.
96, as modified by Letter to Credit Unions No. 108, which includes guidelines to
assist federal credit unions in making investment decisions for mortgage related
securities, and the NCUA's regulation "Investment and Deposit Activities" (12
C.F.R. Part 703) (whether or not the Class of Securities under consideration for
purchase constitutes a "mortgage related security").
All depository institutions considering an investment in the
Securities(whether or not the Class of Securities under consideration for
purchase constitutes a "mortgage related security") should review the Federal
Financial Institutions Examination Council's Supervisory Policy Statement on
Securities Activities (to the extent adopted by their respective regulators)
(the "Policy Statement"), setting forth, in relevant part, certain securities
trading and sales practices deemed unsuitable for an institution's investment
portfolio, and guidelines for (and restrictions on) investing in mortgage
derivative products, including "mortgage related securities" that are "high-risk
mortgage securities" as defined in the Policy Statement. According to the Policy
Statement, such "high-risk mortgage securities" include securities such as
Securities not entitled to distributions allocated to principal or interest, or
Subordinated Securities. Under the Policy Statement, it is
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the responsibility of each depository institution to determine, prior to
purchase (and at stated intervals thereafter), whether a particular mortgage
derivative product is a "high-risk mortgage security," and whether the purchase
(or retention) of such a product would be consistent with the Policy Statement.
The foregoing does not take into consideration the applicability of
statutes, rules, regulations, orders, guidelines, or agreements generally
governing investments made by a particular investor, including, but not limited
to, "prudent investor" provisions, percentage-of-assets limits and provisions
that may restrict or prohibit investment in securities that are not "interest
bearing" or "income paying."
There may be other restrictions on the ability of certain investors,
including depository institutions, either to purchase Securities or to purchase
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 the Securities constitute legal investments for such
investors.
ERISA MATTERS
GENERAL
The Employee Retirement Income Security Act of 1974, as amended ("ERISA")
and section 4975 of the Code impose certain restrictions on employee benefit
plans subject to ERISA or plans or arrangements subject to Section 4975 of the
Code ("Plans") and on persons who are parties in interest or disqualified
persons ("parties in interest") with respect to such Plans. Certain employee
benefit plans, such as governmental plans and church plans (if no election has
been made under section 410(d) of the Code), are not subject to the restrictions
of ERISA, and assets of such plans may be invested in the Securities without
regard to the ERISA considerations described below, subject to other applicable
federal and state law. However, any such governmental or church plan which is
qualified under section 401(a) of the Code and exempt from taxation under
section 501(a) of the Code is subject to the prohibited transaction rules set
forth in section 503 of the Code. Any Plan fiduciary which proposes to cause a
Plan to acquire any of the Securities should consult with its counsel with
respect to the potential consequences under ERISA, and the Code, of the Plan's
acquisition and ownership of the Securities. Investments by Plans are also
subject to ERISA's general fiduciary requirements, including the requirement of
investment prudence and diversification and the requirement that a Plan's
investments be made in accordance with the documents governing the Plan.
PROHIBITED TRANSACTIONS
GENERAL. Section 406 of ERISA prohibits parties in interest with respect
to a Plan from engaging in certain transactions (including loans) involving a
Plan and its assets unless a statutory or administrative exemption applies to
the transaction. Section 4975 of the Code imposes certain excise taxes (or, in
some cases, a civil penalty may be assessed pursuant to section 502(i) of ERISA)
on parties in interest which engage in non-exempt prohibited transactions.
PLAN ASSET REGULATION. The United States Department of Labor ("Labor") has
issued final regulations concerning the definition of what constitutes the
assets of a Plan for purposes of ERISA and the prohibited transaction provisions
of the Code (the "Plan Asset Regulation"). The Plan Asset Regulation describes
the circumstances under which the assets of an entity in which a Plan invests
will be considered to be "plan assets" such that any person who exercises
control over such assets would be subject to ERISA's fiduciary standards. Under
the Plan Asset Regulation, generally when a Plan invests in another entity's
debt securities, the Plan's assets do not include, solely by reason of such
investment, any of the underlying assets of the entity.
However, the Plan Asset Regulation provides that, if a Plan acquires an
"equity interest" in an entity that is neither a "publicly-offered security" (as
defined therein) nor a security issued by an investment company registered under
the Investment Company Act of 1940, the assets of the entity will be treated as
assets of the Plan investor unless certain exceptions apply. The Plan Asset
Regulations state that the underlying assets of an entity will not be considered
"plan assets" if, immediately after the most recent acquisition of any equity
interest in the entity, whether from the issuer or an underwriter, less than
twenty-five percent (25%) of the
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value of each class of equity interest is held by "benefit plan investors,"
individual retirement accounts, and other employee benefit plans not subject to
ERISA (for example, governmental plans). If the Securities were deemed to be
equity interests and no statutory, regulatory or administrative exemption
applies, the Issuer could be considered to hold plan assets by reason of a
Plan's investment in the Securities. Such plan assets would include an undivided
interest in any assets held by the Issuer. In such an event, the applicable
Trustee and other persons, in providing services with respect to the Issuer's
assets, may be parties in interest with respect to such Plans, subject to the
fiduciary responsibility provisions of Title I of ERISA, including the
prohibited transaction provisions of section 406 of ERISA, and section 4975 of
the Code with respect to transactions involving the Issuer's assets.
Under the Plan Asset Regulation, the term "equity interest" is defined as
any interest in an entity other than an instrument that is treated as
indebtedness under "applicable local law" and which has no "substantial equity
features." Although the Plan Assets Regulation is silent with respect to the
question of which law constitutes "applicable local law" for this purpose, Labor
has stated that this determination should be made under the state law governing
interpretation of the instrument in question. In the preamble to the Plan Assets
Regulation, Labor declined to provide a precise definition of what features are
equity features or the circumstances under which such features would be
considered "substantial," noting that the question of whether a plan's interest
has substantial equity features is an inherently factual one, but that in making
a determination it would be appropriate to take into account whether the equity
features are such that a Plan's investment would be a practical vehicle for the
indirect provision of investment management services. If the Securities are
deemed to be equity interests in the Issuer and no statutory, regulatory or
administrative exemption applies, the Issuer could be considered to hold plan
assets by reason of a Plan's investment in the Securities. Those exemptions
potentially include Prohibited Transaction Class Exemption ("PTCE") 90-1,
regarding investments by insurance company pooled separate accounts, PTCE 91-38,
regarding investments by bank collective investment funds, PTCE 84-14, regarding
transactions effected by a "qualified professional asset manager," PTCE 95-60,
regarding investments by insurance company general accounts, or PTCE 96-23,
regarding transactions effected by an "in house asset manager".
REVIEW BY PLAN FIDUCIARIES. Any Plan fiduciary considering whether to
purchase any Securities on behalf of a Plan should consult with its counsel
regarding the applicability of the fiduciary responsibility and prohibited
transaction provisions of ERISA and the Code to such investment. Among other
things, before purchasing any Securities, a fiduciary of a Plan should make its
own determination as to whether the Issuer, as issuer of the Securities, is a
party in interest with respect to the Plan, the availability of the exemptive
relief provided in the Plan Asset Regulations and the availability of any other
prohibited transaction exemptions. The Prospectus Supplement for each Series of
Securities will discuss the potential applicability of ERISA and Section 4975 of
the Code, the availability of exemptions therefrom and any limitations on
investment in any Class of such Securities by Plans.
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 (two highest if such Securities are Certificates) rating
categories by the nationally recognized statistical rating agency or agencies
(each, a "Rating Agency") specified in the related Prospectus Supplement.
Any such rating would be based on, among other things, the adequacy of the
value of the Mortgage Collateral supporting a Series of Securities and any
credit enhancement with respect to such Class and will reflect such Rating
Agency's assessment solely of the likelihood that holders of a Class of
Securities will receive payments to which such Securityholders are entitled
under the related Security. Such rating will not constitute an assessment of the
likelihood that principal prepayments on the related Mortgage Collateral 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
Series of Securities. Such rating should not be deemed a recommendation to
purchase, hold or sell Securities, inasmuch as it does not address market price
or suitability for a particular investor. Each security rating should be
evaluated independently of any other
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security rating. 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 a
security at a significant premium might fail to recoup its initial investment
under certain prepayment scenarios.
There is also no assurance that any such rating will remain in effect for
any given period of time or that it may not be lowered or withdrawn entirely by
the applicable Rating Agency in the future if in its judgment circumstances in
the future so warrant. In addition to being lowered or withdrawn due to any
erosion in the adequacy of the value of the Mortgage Collateral securing a
Series of Securities or any credit enhancement with respect to a Series of
Securities, such rating might also be lowered or withdrawn among other reasons,
because of an adverse change in the financial or other condition of a credit
enhancement provider or a change in the rating of such credit enhancement
provider's long term debt.
The amount, type and nature of credit enhancement, if any, established with
respect to a Series of Securities will be determined on the basis of criteria
established by each Rating Agency rating Classes of such Series of Securities.
Such criteria are sometimes based upon an actuarial analysis of the behavior of
mortgage loans in a larger group. Such analysis is often the basis upon which
each Rating Agency determines the amount of credit enhancement required with
respect to each such Class. 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 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 Mortgage Collateral. No
assurance can be given that values of any Mortgaged Properties or mortgaged
properties securing the mortgage loans underlying any Agency Securities, as the
case may be, have remained or will remain at their levels on the respective
dates of origination of the related mortgage loans. If the residential real
estate markets should experience an overall decline in property values such that
the outstanding principal balances of the Mortgage Collateral securing a
particular Series of Securities and any secondary financing on the related
Mortgaged Properties become equal to or greater than the value of the Mortgaged
Properties or mortgaged properties securing the mortgage loans underlying any
Agency Securities, as the case may be, the rates of delinquencies, foreclosures
and losses could be higher than those now generally experienced in the mortgage
lending industry. In addition, adverse economic conditions (which may or may not
affect real property values) may affect the timely payment by mortgagors of
scheduled payments of principal and interest on the Mortgage Collateral and,
accordingly, the rates of delinquencies, foreclosures and losses with respect to
any Mortgage Collateral securing a particular Series of Securities. To the
extent that such losses are not covered by credit enhancement, such losses will
be borne, at least in part, by the holders of one or more Classes of Securities.
PLAN OF DISTRIBUTION
The Issuer may sell the Securities offered hereby either directly or
through an underwriter or underwriters or through underwriting syndicates
managed by an underwriter or underwriters. The Prospectus Supplement for each
Series will set forth the terms of the offering of such Series and of each Class
within such Series, including the name or names of the underwriters, the
proceeds to and their use by the Issuer, and either the initial public offering
price, the discounts and commissions to the underwriters and any discounts or
concessions allowed or reallowed to certain dealers or the method by which the
price at which the underwriters will sell the Securities will be determined.
The Securities of a Series 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 Securities of a
Series described in the related Prospectus Supplement, if any are purchased. If
Securities of a Series are offered other 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 Issuer and purchasers
of Securities of such Series.
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AmREIT or other affiliate of the Issuer may purchase Securities and pledge
them to secure indebtedness or, together with its pledgees, donees, transferees
or other successors in interest, sell the Securities, from time to time, either
directly or through one or more underwriters, underwriting syndicates or
designated agents.
The place and time of delivery for the Securities of a Series in respect of
which this Prospectus is delivered will be set forth in the related Prospectus
Supplement.
LEGAL MATTERS
The validity of the Bonds will be passed upon for the Issuer by Tobin &
Tobin, a professional corporation, San Francisco, California. Certain tax
matters will be passed upon by Jeffers, Wilson, Shaff & Falk, LLP, California.
Brown & Wood LLP, Washington, D.C., will act as counsel for the underwriters.
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INDEX OF CERTAIN DEFINITIONS
Set forth below is a list of certain terms used in this Prospectus,
together with the pages on which the terms are defined herein.
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Accretion Directed.......................................... 47
Accrual Period.............................................. 88
Advance..................................................... 15
Agency Securities........................................... Cover, 4
Agreements.................................................. 4, 27, 42
AmREIT...................................................... Cover, 5, 27
Applicable Trustee.......................................... 3
Acquisition Premium......................................... 88
Available Funds............................................. 43
Balloon payments............................................ 9, 30
Bankruptcy Bond............................................. 13, 57
Belgian Cooperative......................................... 52
Beneficial owner............................................ 51
Bond Account................................................ 11
Bond Issuer................................................. 27
Bond Trustee................................................ 4, 27
Bondholders................................................. 4
Bonds....................................................... Cover, 4
Book-Entry Securities....................................... 51
Buydown Fund................................................ 31
Buydown Loans............................................... 31
Capitalized Interest Account................................ 41
CEDEL Participants.......................................... 52
CERCLA...................................................... 21, 80
Certificate Issuer.......................................... 27
Certificate Trustee......................................... 4, 27
Certificateholders.......................................... 4
Certificates................................................ 4
Class Security Balance...................................... 43
Closing Date................................................ 11
Code........................................................ 5, 27, 83
Collateral.................................................. 28
Commission.................................................. 2
Companion Classes........................................... 48
Company..................................................... Cover, 5, 27
Component Securities........................................ 47
Controlling Class........................................... 70
Conventional Loans.......................................... 46
Cooperative Loans........................................... 8, 31
Cooperatives................................................ 8, 31
Correspondents.............................................. 32
Cut-off Date................................................ 13
Cut-off Date Principal Balance.............................. 42
Deferred Interest Securities................................ 44
</TABLE>
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<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Definitive Security......................................... 51
Depositor................................................... Cover, 5, 27
Detailed Description........................................ 29
Distribution Account........................................ 11
Distribution Account Deposit Date........................... 11, 39
Distribution Date........................................... 6
DTC......................................................... 22, 51
Eligible Account............................................ 64
Eligible Corporations....................................... 85
Eligible Substitute Mortgage Loan........................... 34
EPA......................................................... 80
ERISA....................................................... 17, 93
Euroclear Operator.......................................... 52
Euroclear Participants...................................... 52
European Depositaries....................................... 51
Event of Default............................................ 71
Excess Spread............................................... 59
Exchange Act................................................ 3
FASIT....................................................... Cover, 84
FASIT Provisions............................................ 84
FASIT Qualification Test.................................... 84
FHA Loans................................................... 35
FHLMC....................................................... Cover, 4
FHLMC Act................................................... 37
FHLMC Certificates.......................................... 10, 34
FICO........................................................ 61
Financial Intermediary...................................... 51
Fixed Rate Mortgage Loans................................... 4
Floating Rate Mortgage Loans................................ 4
FNMA........................................................ Cover, 4
FNMA Certificates........................................... 10, 34
Foreign persons............................................. 90
Funding Period.............................................. 12, 25
Garn-St Germain Act......................................... 81
GNMA........................................................ Cover, 4
GNMA Certificates........................................... 10, 34
GNMA I Certificate.......................................... 35
GNMA II Certificate......................................... 35
GNMA Issuer................................................. 35
Guaranteed Mortgage Pass-Through Certificates............... 10, 34
Guaranty Agreement.......................................... 35
Housing Act................................................. 35
Indenture................................................... 27, 41, 63
Insurance Proceeds.......................................... 28
Interest Only............................................... 47
IO.......................................................... 84
IRS......................................................... 86
Issuer...................................................... Cover, 26
</TABLE>
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<TABLE>
<CAPTION>
PAGE
----
<S> <C>
L/C Bank.................................................... 14, 58
L/C Percentage.............................................. 58
Labor....................................................... 93
Liquidated Mortgage......................................... 66
Liquidation Proceeds........................................ 28
Lockout periods............................................. 10, 30
Master Servicer............................................. 5
Master Servicing Agreement.................................. 5, 63
Master Servicing Fee........................................ 66
Mixed Use Mortgage Loans.................................... 8
Moody's..................................................... 40
Morgan...................................................... 52
Mortgage Collateral......................................... Cover, 4
Mortgage Loans.............................................. Cover, 4
Mortgage Note............................................... 9
Mortgage Pool Insurance Policy.............................. 13, 55
Mortgage Rate............................................... 6, 9
Mortgaged Property.......................................... 10, 29
Mortgagor................................................... 62
Multifamily Mortgage Loans.................................. 8
NCUA........................................................ 92
Offered Securities.......................................... 2
OID......................................................... 16, 86
OID Regulations............................................. 83
PACs........................................................ 48
Parties in interest......................................... 17, 93
Permitted Investments....................................... 40
Plan Asset Regulation....................................... 93
Plans....................................................... 17, 93
Policy Statement............................................ 92
Pool Insurer................................................ 55
Pre-Funded Amount........................................... 25
Pre-Funding Account......................................... 12, 25
Primary Mortgage Insurance Policy........................... 30
Principal Prepayments....................................... 44
PTCE........................................................ 94
Purchase Price.............................................. 62
Qualified REIT subsidiary................................... 83
Rating Agency............................................... 94
RCRA........................................................ 80
Record Date................................................. 42
REIT........................................................ 16
Relevant Depositary......................................... 51
Relief Act.................................................. 82
REMIC....................................................... 83
Remittance Date............................................. 30
Replacement Mortgage Loan................................... 34
Reserve Account............................................. 43
</TABLE>
99
<PAGE> 176
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Reserve Fund................................................ 55
Retained Interest........................................... 42
Rules....................................................... 51
Secured Creditor Exclusion.................................. 80
Security Distribution Amount................................ 11
Security Insurance Policy................................... 14
Security Owners............................................. 51
Security Register........................................... 43
Securities.................................................. Cover
Securities Act.............................................. 2
Seller...................................................... 27
Senior Securities........................................... 4, 6
Senior Securityholders...................................... 12, 54
Senior Liens................................................ 31
Servicer.................................................... 5, 63
Servicers................................................... 34
Servicing Agreement......................................... 63
Servicing Default........................................... 69
Single-Family Mortgage Loans................................ 8
SMMEA....................................................... 17
Special Hazard Insurance Policy............................. 13
Special Hazard Insurer...................................... 56
Special Servicer............................................ 5
Special Servicing Agreement................................. 68
Stand-by Master Servicer.................................... 68
Subordinated Securities..................................... 4, 6
Subordinated Securityholders................................ 12, 54
Subsequent Mortgage Collateral.............................. 25
Substitute Collateral....................................... 39
Successor Master Servicer................................... 68
TACs........................................................ 49
Tax Prepayment Assumption................................... 87
Terms and Conditions........................................ 53
TIN......................................................... 91
Title V..................................................... 82
TMP......................................................... 83
Trust Agreement............................................. 27, 41
Trust Fund.................................................. 83
Trust Fund Assets........................................... Cover
UCC......................................................... 76
VA Loans.................................................... 35
Weighted Average Life....................................... 20
</TABLE>
100
<PAGE> 177
================================================================================
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS SUPPLEMENT OR THE
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON. THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS DO NOT CONSTITUTE AN
OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE
SECURITIES OFFERED HEREBY NOR AN OFFER OF SUCH SECURITIES TO ANY PERSON IN ANY
STATE OR OTHER JURISDICTION IN WHICH SUCH OFFER WOULD BE UNLAWFUL. THE DELIVERY
OF THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS AT ANY TIME DOES NOT IMPLY THAT
INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THEIR DATES.
------------------------
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary of Terms...................... S-5
Risk Factors.......................... S-16
Use of Proceeds....................... S-20
Trust Fund Assets..................... S-20
Description of the Certificates....... S-35
Description of the Underlying Bond.... S-51
Prepayment and Yield Considerations... S-53
Servicing of the Mortgage Loans....... S-59
Federal Income Tax Consequences....... S-64
ERISA Matters......................... S-65
Underwriting.......................... S-66
Legal Matters......................... S-67
Ratings............................... S-67
Index to Defined Terms................ S-68
Prospectus
Prospectus Supplement................. 2
Available Information................. 2
Incorporation of Certain Documents by
Reference........................... 3
Summary............................... 4
Risk Factors.......................... 18
Introduction.......................... 27
Use of Proceeds....................... 28
Trust Fund Assets..................... 28
Description of the Securities......... 41
Credit Enhancement.................... 54
Mortgage Loan Program................. 60
Servicing of the Mortgage Loans....... 63
The Agreements........................ 70
Certain Legal Aspects of Mortgage
Loans............................... 73
Federal Income Tax Consequences....... 82
State Tax Considerations.............. 92
Legal Investment...................... 92
ERISA Matters......................... 93
Ratings............................... 94
Plan of Distribution.................. 95
Legal Matters......................... 96
Index of Certain Definitions.......... 97
</TABLE>
================================================================================
================================================================================
$422,092,000
(APPROXIMATE)
[LOGO]
AMERICAN RESIDENTIAL EAGLE CERTIFICATE TRUST 1998-1,
CERTIFICATE ISSUER
MORTGAGE-BACKED
CALLABLE CERTIFICATES,
SERIES 1998-1
NORWEST BANK MINNESOTA,
NATIONAL ASSOCIATION,
MASTER SERVICER
------------------------
PROSPECTUS SUPPLEMENT
June 15, 1998
------------------------
LEHMAN BROTHERS
================================================================================
