<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 4, 1998
REGISTRATION NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-3/S-11
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
AMERICAN RESIDENTIAL EAGLE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 33-0787975
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
</TABLE>
------------------------
445 MARINE VIEW AVENUE, SUITE 100
DEL MAR, CALIFORNIA 92014
(619) 259-6082
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
JAY M. FULLER
AMERICAN RESIDENTIAL INVESTMENT TRUST, INC.
445 MARINE VIEW AVENUE, SUITE 230
DEL MAR, CALIFORNIA 92014
(619) 350-5000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE OF
AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C>
PHILLIP R. POLLOCK, ESQ. JOHN ARNHOLZ, ESQ.
TOBIN & TOBIN BROWN & WOOD LLP
500 SANSOME STREET, 8TH FLOOR 815 CONNECTICUT AVENUE, NW
SAN FRANCISCO, CALIFORNIA 94111 SUITE 701
(415) 433-1400 WASHINGTON, D.C. 20006-4004
(202) 973-0600
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC:
From time to time after the effective date of this Registration Statement as
determined by market conditions.
------------------------
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act") other than securities offered only in
connection with dividend or interest reinvestment plans, check the following
box: [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------
CALCULATION OF REGISTRATION FEE
================================================================================
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED PER UNIT(1) PRICE(1) FEE
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Mortgage-Backed Securities........... $1,000,000 100% $1,000,000 $295.00
=================================================================================================================================
</TABLE>
(1) Estimated for the purpose of calculating the registration fee.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE
ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY
DETERMINE.
================================================================================
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED MARCH 4, 1998
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED , 1998)
$
AMERICAN RESIDENTIAL EAGLE TRUST ONE,
BOND ISSUER
COLLATERALIZED MORTGAGE BONDS
------------------------
The American Residential Eagle Trust One, Collateralized Mortgage Bonds
(the "Bonds"), in the aggregate principal amount of $ , consist of
Class A-1, Class B-1 and Class B-2 Bonds. The Bonds will be collateralized by
-year conventional mortgage loans secured by first liens on one- to
four-family residential properties (the "Mortgage Loans"). The Mortgage Loans
will be acquired from American Residential Investment Trust, Inc. ("AmREIT").
The Bond Issuer will also issue an Investor Certificate (the "Investor
Certificate") as described herein. Only the Class A-1 and Class B-1 Bonds
(collectively, the "Offered Bonds") are offered hereby. Interest on the Bonds
will be payable [monthly on the th day of each month], or if such day is not a
business day, the next succeeding business day (each, a "Distribution Date"),
commencing on , 199 . Interest on the Bonds will be payable in an
amount equal to the interest accrued during each Interest Accrual Period (as
defined herein). Interest accrued on the Bonds during any Interest Accrual
Period will be calculated on the basis of the related Class Principal Amount (as
defined herein) immediately prior to the related Distribution Date. See
"DESCRIPTION OF THE BONDS -- INTEREST" herein. Payments of principal of the
Bonds on each Distribution Date will be made in the manner described herein
under "DESCRIPTION OF THE BONDS -- PRINCIPAL." The Bonds are redeemable only
under the circumstances described herein. See "INDEX OF CERTAIN DEFINITIONS" on
page S- of this Prospectus Supplement and on page of the Prospectus for the
location of the definitions of certain defined terms.
The Class A-1 Bonds are referred to herein as the "Senior Bonds" and the
Class B-1 and Class B-2 Bonds are referred to herein collectively as the
"Subordinated Bonds." The rights of the holders of the Subordinated Bonds to
receive payments of principal and interest will be subject to the priorities
described herein. See "DESCRIPTION OF THE BONDS -- PRIORITY OF PAYMENTS AND
ALLOCATION OF SHORTFALLS" herein.
FOR A DISCUSSION OF CERTAIN RISK FACTORS RELATING TO INVESTMENTS IN THE
BONDS, SEE "RISK FACTORS" COMMENCING ON PAGE S-12 OF THIS PROSPECTUS SUPPLEMENT
AND ON PAGE 18 OF THE PROSPECTUS.
(Cover continued on next page)
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
=======================================================================================================================
ORIGINAL CLASS BOND INTEREST STATED
PRINCIPAL AMOUNT RATE MATURITY(1)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Class A-1................................... $ (2)
- -----------------------------------------------------------------------------------------------------------------------
Class B-1................................... $ (3)
=======================================================================================================================
</TABLE>
(1) Calculated as described herein under "DESCRIPTION OF THE BONDS -- STATED
MATURITY."
(2) The Bond Interest Rate for the Senior Bonds (the "Senior Bond Interest
Rate") and any Interest Accrual Period will equal .
(3) The Bond Interest Rate for the Class B-1 Bonds (the "Class B-1 Bond Interest
Rate") and any Interest Accrual Period will equal . Class A-1
Bonds with original principal amount of $ and all of the Class B-1
Bonds (collectively, the "Underwritten Bonds") will be purchased by
(the "Underwriter") from the Bond Issuer 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. AmREIT has agreed to purchase Class A-1 Bonds with original principal
amount of $ in a negotiated transaction and will initially pledge
its Class A-1 Bonds to secure indebtedness and may, from time to time, offer
such Class A-1 Bonds for sale to the public in negotiated transactions or
otherwise at varying prices to be determined at the time of sale. Proceeds
to the Bond Issuer from the sale of the Offered Bonds are expected to be
approximately % of the aggregate principal amount of the Offered Bonds
plus accrued interest, before deducting issuance expenses payable by the
Bond Issuer.
The Underwritten Bonds are offered by the Underwriter, subject to prior
sale, when, as and if delivered to and accepted by the Underwriter and subject
to its right to reject orders in whole or in part. It is expected that delivery
of the Offered Bonds will be made in book-entry form only through the facilities
of The Depository Trust Company on or about , 199 .
[UNDERWRITER]
, 199
<PAGE> 3
(Cover continued from previous page)
The Bonds will be issued by American Residential Eagle Trust One (the "Bond
Issuer"), a Delaware business trust established by American Residential Eagle,
Inc. (the "Company" or the "Depositor"), a wholly owned subsidiary of AmREIT.
Prior to their sale to the Bond Issuer by the Company, the Mortgage Loans will
be held by AmREIT. The Bonds represent obligations solely of the Bond Issuer and
are not insured or guaranteed by any government agency or instrumentality, the
Company, AmREIT, or any other person or entity. The Bond Issuer is not expected
to have any significant assets other than those pledged as collateral to secure
the Bonds.
All of the Mortgage Loans bear interest at [fixed] rates [that adjust
[annually] based on changes in the level of the Index (as defined herein)]. The
Bonds also will be secured by the Bond Account and the Distribution Account
described herein. Scheduled net payments on the Mortgage Loans will be
sufficient, irrespective of the rate of prepayments on the Mortgage Loans, to
make timely payments of interest on the Bonds and to retire each Class of Bonds
not later than its Stated Maturity.
THE YIELD TO INVESTORS ON EACH CLASS OF OFFERED BONDS WILL BE SENSITIVE IN
VARYING DEGREES TO, AMONG OTHER THINGS, THE RATE AND TIMING OF PRINCIPAL
PAYMENTS (INCLUDING PREPAYMENTS) OF THE MORTGAGE LOANS AND THE LEVEL OF THE
INDEX, EACH OF] WHICH MAY VARY SIGNIFICANTLY OVER TIME. [THE BOND INTEREST RATE
FOR A CLASS OF OFFERED BONDS MAY ALSO CHANGE FROM DISTRIBUTION DATE TO
DISTRIBUTION DATE BASED ON THE NET MORTGAGE RATES (AS DEFINED HEREIN) AND THE
OUTSTANDING PRINCIPAL BALANCES OF THE MORTGAGE LOANS]. THE YIELD TO MATURITY OF
A CLASS OF OFFERED BONDS PURCHASED AT A DISCOUNT OR PREMIUM WILL BE MORE
SENSITIVE TO THE RATE AND TIMING OF PAYMENTS THEREON. HOLDERS OF THE OFFERED
BONDS SHOULD CONSIDER, IN THE CASE OF ANY SUCH BONDS 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 BONDS 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 BONDS
ALSO MAY BE ADVERSELY AFFECTED BY NET INTEREST SHORTFALLS (AS DEFINED HEREIN)
AND, PARTICULARLY IN THE CASE OF THE CLASS B-1 BONDS, REALIZED LOSSES (AS
DEFINED HEREIN). NO REPRESENTATION IS MADE AS TO THE ANTICIPATED RATE OF
PREPAYMENTS ON THE MORTGAGE LOANS, THE AMOUNT AND TIMING OF NET INTEREST
SHORTFALLS OR REALIZED LOSSES, OR AS TO THE RESULTING YIELD TO MATURITY OF ANY
CLASS OF OFFERED BONDS.
The Underwriter intends to make a secondary market in the Offered Bonds,
but has no obligation to do so. There is currently no secondary market for the
Offered Bonds and there can be no assurance that such a market will develop or,
if it does develop, that it will continue or that it will provide Bondholders
with a sufficient level of liquidity of investment. The Bonds will not be listed
on any national securities exchange.
------------------------
This Prospectus Supplement does not contain complete information about the
offering of the Offered Bonds. Additional information is contained in the
Prospectus of the Company dated , 199 and purchasers are urged to
read both this Prospectus Supplement and the Prospectus in full. Sales of the
Bonds may not be consummated unless the purchaser has received both this
Prospectus Supplement and the Prospectus.
The Company will provide without charge to each person to whom this
Prospectus Supplement is delivered, on the written or oral request of such
person, a copy of any or all of the documents referred to in the Prospectus
under "INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE" that have been or may be
incorporated by reference in the Prospectus (not including exhibits to the
information that is incorporated by reference unless such exhibits are
specifically incorporated by reference into the information that the Prospectus
incorporates). Such requests should be directed to the Company at 445 Marine
View Avenue, Suite 100, Del Mar, California 92014, telephone: (619) 259-6082,
facsimile number: (619) 350-6484.
UNTIL 90 DAYS AFTER THE DATE OF THIS PROSPECTUS SUPPLEMENT, ALL DEALERS
EFFECTING TRANSACTIONS IN THE OFFERED BONDS, WHETHER OR NOT PARTICIPATING IN
THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS SUPPLEMENT AND
PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A
PROSPECTUS SUPPLEMENT AND PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH
RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
S-2
<PAGE> 4
SUMMARY
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus Supplement and in
the accompanying Prospectus. Certain capitalized terms used in this Summary are
defined elsewhere in this Prospectus Supplement or in the Prospectus. See "INDEX
OF CERTAIN DEFINITIONS" on page S-42 of this Prospectus Supplement and page 94
of the Prospectus for the location of the definitions of certain capitalized
terms.
Offered Bonds.................... American Residential Eagle Trust One,
Collateralized Mortgage Bonds, Class A-1
and Class B-1 Bonds (collectively, the
"Offered Bonds"). Only the Offered Bonds
are offered hereby.
Securities Other than the Offered
Bonds............................ In addition to the Offered Bonds, the Class
B-2 Bonds and the Investor Certificate will
be issued in the initial amounts and will
bear interest at the interest rates
indicated below, but are not offered
hereby:
<TABLE>
<CAPTION>
INITIAL INTEREST
AMOUNT RATE
------- --------
<S> <C> <C>
Class B-2 Bonds(1)............... $ (2)
Investor Certificate(1).......... $ (3)
</TABLE>
-----------------------------------------------------
(1) The Class B-2 Bonds and the Investor
Certificate will provide limited credit
support for the Offered Bonds as
described herein.
(2) The interest rate for the Class B-2
Bonds (the "Class B-2 Bond Interest
Rate") and any Interest Accrual Period
will equal.
(3) The interest rate for the Investor
Certificate (the "Certificate Interest
Rate") and any Interest Accrual Period
will equal.
Any information contained herein with
respect to the Class B-2 Bonds or the
Investor Certificate is provided only to
permit a better understanding of the
Offered Bonds.
Designations:
Senior Bonds................... Class A-1 Bonds.
Subordinated Bonds............. Class B-1 and Class B-2 Bonds.
Offered Bonds.................. The Senior Bonds and the Class B-1 Bonds.
Book-Entry Bonds............... All Classes of Offered Bonds.
Bond Issuer...................... The Bond Issuer, American Residential Eagle
Trust One, is a statutory business trust
established under the laws of the State of
Delaware by the Deposit Trust Agreement (as
defined herein) for the sole purpose of
issuing the Bonds and the Investor
Certificate. The settlor and sole
beneficiary of the Bond Issuer is American
Residential Eagle, Inc., a Delaware
corporation (the "Company" or the
"Depositor"), and a wholly owned subsidiary
of American Residential Investment Trust,
Inc., a Maryland corporation ("AmREIT").
The Owner Trustee of the Bond Issuer is
S-3
<PAGE> 5
. AmREIT will be the manager of the
Bond Issuer pursuant to a management
agreement (the "Management Agreement")
entered into with the Issuer. None of the
Company, AmREIT or the Owner Trustee has
guaranteed or is otherwise obligated with
respect to payment of the Bonds, and no
person or entity other than the Bond Issuer
is obligated to pay the Bonds. See "THE
BOND ISSUER" herein.
Bond Trustee..................... , a banking corporation
organized under the laws of (the "Bond
Trustee").
Owner Trustee.................... , a banking corporation
organized under the laws of the State of
Delaware (the "Owner Trustee").
Master Servicing Agreement....... The Mortgage Loans will be serviced
pursuant to a master servicing agreement
dated as of 1, 199 (the "Master
Servicing Agreement") among the Bond
Issuer, the Bond Trustee and the Master
Servicer.
Master Servicer.................. will act as Master
Servicer for the Mortgage Loans (the
"Master Servicer"). On or prior to the
Closing Date, as to any Mortgage Loans not
being directly serviced by the Master
Servicer, the Master Servicer will enter
into or be assigned mortgage servicing
agreements (each, a "Servicing Agreement")
with certain servicers (each, a "Servicer")
pursuant to which each Servicer will
perform certain servicing functions with
respect to the Mortgage Loans. See
"SERVICING OF THE MORTGAGE LOANS -- THE
MASTER SERVICER" herein. The Master
Servicer will administer and supervise the
performance of each Servicer, who may in
turn be administering and supervising the
performance of one or more subservicers of
the Mortgage Loans. The Master Servicer
will receive the Master Servicing Fee, and
each Servicer will receive the related
Servicing Fee, from interest collected on
the Mortgage Loans. The Master Servicer
will be obligated to perform the
obligations of a terminated Servicer or
appoint a successor Servicer. See
"SERVICING OF THE MORTGAGE
LOANS -- SERVICING COMPENSATION AND PAYMENT
OF EXPENSES" herein.
Deposit Trust Agreement.......... The Bond Issuer will be established and the
Investor Certificate will be issued
pursuant to an amended and restated deposit
trust agreement dated as of
, 199 (the "Deposit Trust Agreement")
among the Company and the Owner Trustee.
Cut-off Date..................... 1, 199 .
Closing Date..................... On or about , 19 .
Determination Date............... The day of each [month] or, if such day
is not a business day, the first business
day thereafter.
Distribution Date................ The th day of each [month] or, if such
day is not a business day, the first
business day thereafter, commencing in
S-4
<PAGE> 6
, 199 (each, a "Distribution Date").
Payments on each Distribution Date will be
made to Bondholders of record as of the
related Record Date, except that the final
payment on the Bonds will be made only upon
presentment and surrender of the Bonds at
the Corporate Trust Office of the Bond
Trustee.
Record Date...................... The Record Date for any Distribution Date
will be the last business day of the month
preceding the month of such Distribution
Date.
Priority of Payments............. Payments will be made on each Distribution
Date from Available Funds in the following
order of priority: (i) to interest on the
Senior Bonds; (ii) to principal of the
Senior Bonds; (iii) to interest on the
Class B-1 Bonds; (iv) to principal of the
Class B-1 Bonds; (v) to interest on the
Class B-2 Bonds; (vi) to principal of the
Class B-2 Bonds; (vii) to interest on the
Investor Certificate; (viii) to principal
of the Investor Certificate; and (ix) to
the holder of the Investor Certificate, all
remaining Available Funds. Under certain
circumstances described herein, (i)
payments from Available Funds for a
Distribution Date that would otherwise be
made on the Subordinated Bonds may be made
instead on the Senior Bonds, and (ii)
payments from Available Funds for a
Distribution Date that would otherwise be
made on the Class B-2 Bonds may be made
instead on the Class B-1 Bonds. In
addition, under certain circumstances
described herein, payments from Available
Funds for a Distribution Date that would
otherwise be made on the Investor
Certificate may be made instead on the
Senior Bonds and the Subordinated Bonds.
See "DESCRIPTION OF THE BONDS -- PRIORITY
OF PAYMENTS AND ALLOCATION OF SHORTFALLS"
herein.
Payments of Interest............. To the extent funds are available therefor,
each Class of Bonds will be entitled to
receive interest in the amount of the
Interest Payment Amount for such Class. See
"DESCRIPTION OF THE BONDS -- INTEREST"
herein.
A. Interest Payment Amount..... For each Class of Bonds, the amount of
interest accrued during the related
Interest Accrual Period at the applicable
Bond Interest Rate. With respect to each
Distribution Date, the "Interest Accrual
Period" for each Class of Bonds will be the
calendar [month] preceding the month of
such Distribution Date.
B. Bond Interest Rate.......... The Bond Interest Rate for each Class of
Bonds for each Distribution Date will be as
described herein or on the cover page
hereof.
Payments of Principal............ On each Distribution Date, to the extent
funds are available therefor, principal
payments in reduction of the Class
Principal Amount of each Class of Bonds
will be made in the order and subject to
the priorities set forth herein under
"DESCRIPTION OF THE BONDS -- PRINCIPAL" in
S-5
<PAGE> 7
an amount equal to such Class' allocable
portion of the Principal Payment Amount.
Stated Maturity.................. The Stated Maturity for each Class of Bonds
is the date determined by the Company which
is years after the Distribution Date
immediately following the latest maturity
date of any Mortgage Loan. The Stated
Maturity for each Class of Bonds is
, 20 . See "DESCRIPTION
OF THE BONDS -- STATED MATURITY" and
"-- WEIGHTED AVERAGE LIVES OF THE OFFERED
BONDS" herein.
Optional Redemption of Bonds..... The Bonds may be redeemed in whole, but not
in part, at the Bond Issuer's option, on
any Distribution Date on or after the
earlier of (a) years after the initial
issuance of the Bonds and (b) the
Distribution Date on which the sum of (i)
the Senior Class Principal Amount, (ii) the
Class B-1 Principal Amount, (iii) the Class
B-2 Principal Amount and (iv) the Invested
Amount, in each case after giving effect to
payments to be made on such Distribution
Date, is % or less of the aggregate of
the Stated Principal Balances of the
Mortgage Loans as of the Cut-off Date, at a
redemption price equal to 100% of the
unpaid principal amount of such Bonds
(including, in the case of any Class of
Subordinated Bonds, any unpaid Class
Principal Carryover Shortfall relating
thereto), plus accrued and unpaid interest
thereon at the applicable Bond Interest
Rate through the month preceding the month
in which such optional redemption date
occurs. The Bonds are not otherwise subject
to redemption or call at the option of the
Bond Issuer nor are they subject to special
redemption. See "DESCRIPTION OF THE
BONDS -- REDEMPTION AT THE OPTION OF THE
BOND ISSUER" herein.
Credit Enhancement
Subordination.................... Credit enhancement for the Senior Bonds
will be provided by the Subordinated Bonds
and by the Investor Certificate. Credit
enhancement for the Class B-1 Bonds will be
provided by the Class B-2 Bonds and the
Investor Certificate. Credit enhancement
for the Class B-2 Bonds will be provided by
the Investor Certificate.
The rights of holders of the Subordinated
Bonds and the Investor Certificate to
receive payments with respect to the
Mortgage Loans will be subordinated to such
rights of the holders of the Senior Bonds,
the rights of the holders of the Class B-2
Bonds and the Investor Certificate will be
further subordinated to such rights of the
holders of the Class B-1 Bonds, and the
rights of the holder of the Investor
Certificate will be further subordinated to
such rights of the holders of the Class B-2
Bonds, in each case to the extent described
herein. See "DESCRIPTION OF THE
BONDS -- PRIORITY OF PAYMENTS AND
ALLOCATION OF SHORTFALLS" and "CREDIT
ENHANCEMENT" herein.
S-6
<PAGE> 8
Advances......................... The Master Servicer is obligated to make
cash advances ("Advances") with respect to
delinquent payments of principal and
interest on any Mortgage Loan to the extent
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 Master
Servicing Agreement. See "SERVICING OF THE
MORTGAGE LOANS" herein.
Certain Prepayment and Yield
Considerations and Risks;
Reinvestment Risk.............. The effective yields to the holders of the
Offered Bonds will be lower than the yields
otherwise produced by the applicable rate
at which interest is paid to such holders
and the purchase price of such Offered
Bonds because [monthly] distributions will
not be payable to such holders until the
th day (or, if such day is not a business
day, the following business day) of the
month following the [month] in which
interest accrues on the Mortgage Loans
(without any additional payment of interest
or earnings thereon in respect of such
delay). The rate of principal payments on
the Offered Bonds, the aggregate amount of
payments on the Offered Bonds and the
yields to maturity of the Offered Bonds
will be related to the rate and timing of
payments of principal on the Mortgage Loans
[and the level of the Index].
Since the rate of payment of principal on
the Mortgage Loans will depend on future
events, no assurance can be given as to
such rate or the rate of principal
prepayments. The extent to which the yield
to maturity of a Class of Offered Bonds may
vary from the anticipated yield may depend
upon the degree to which it is purchased at
a discount or premium, and the degree to
which the timing of payments thereon is
sensitive to prepayments, liquidations and
purchases of the Mortgage Loans. Further,
an investor should consider the risk that,
in the case of any Offered Bond purchased
at a discount, a slower than anticipated
rate of principal payments (including
prepayments) on the Mortgage Loans could
result in an actual yield to such investor
that is lower than the anticipated yield
and, in the case of any Offered Bond
purchased at a premium, a faster than
anticipated rate of principal payments on
the Mortgage Loans could result in an
actual yield to such investor that is lower
than the anticipated yield.
Because the Mortgage Loans may be prepaid
at any time, it is not possible to predict
the rate at which payments of principal of
the Offered Bonds will be received. Since
prevailing interest rates are subject to
fluctuation, there can be no assurance that
investors in the Offered Bonds will be able
to reinvest the payments thereon at yields
equaling or exceeding the yields on such
Bonds. It is possible that yields on any
such reinvestments will be lower, and may
be significantly lower, than the yields on
the Offered Bonds. See "RISK
S-7
<PAGE> 9
FACTORS -- YIELD, PREPAYMENT AND MATURITY
RISKS" herein and "RISK
FACTORS -- PREPAYMENT AND YIELD
CONSIDERATIONS; REINVESTMENT RISK" in the
Prospectus.
Security for the Bonds........... The Bonds will be secured by collateral
(the "Trust Fund Assets") consisting of the
items set forth below:
A. Mortgage Loans.............. The Mortgage Loans will consist primarily
of a pool (the "Mortgage Loan Pool") of
-year conventional mortgage loans secured
by first liens on one- to four-family
residential properties. Such Mortgage Loans
will bear interest at [fixed] rates [that
adjust [annually] based on changes in the
level of the Index (as defined herein)].
Payments of principal and interest on the
Bonds will be based on payments received on
the Mortgage Loans, as described herein.
See "DESCRIPTION OF THE BONDS -- INTEREST"
and " -- PRINCIPAL" herein and "TRUST FUND
ASSETS -- THE MORTGAGE LOANS" herein and in
the Prospectus.
[The Mortgage Rate for each Mortgage Loan
will adjust [annually] based on (the
"Index"). See "TRUST FUND ASSETS -- THE
MORTGAGE LOANS -- GENERAL", and " -- THE
INDEX" herein.]
B. Bond Account................ On or prior to the Closing Date, the Master
Servicer will establish and maintain or
cause to be established and maintained a
separate account or accounts for the
collection of payments on the Mortgage
Loans (the "Bond Account"). See
"DESCRIPTION OF THE BONDS -- PAYMENTS ON
MORTGAGE LOANS; ACCOUNTS" herein and
"SERVICING OF THE MORTGAGE LOANS" herein
and in the Prospectus.
C. Distribution Account........ On or prior to the Closing Date, the Bond
Trustee will establish an account (the
"Distribution Account") which will be
maintained with the Bond Trustee for the
benefit of the Bondholders. On or prior to
the business day immediately preceding each
Distribution Date, the Master Servicer will
withdraw from the Bond Account the Bond
Distribution Amount (as defined herein) for
such Distribution Date, to the extent of
Available Funds on deposit therein, and
will deposit such amount in the
Distribution Account. See "DESCRIPTION OF
THE BONDS -- PAYMENTS ON MORTGAGE LOANS;
ACCOUNTS" herein and "SERVICING OF THE
MORTGAGE LOANS" herein and in the
Prospectus.
Certain Federal Income Tax
Consequences..................... The Bonds will be treated as debt for
federal income tax purposes, and interest,
including original issue discount with
respect to any Class of Bonds issued with
original issue discount, will be taxable to
non-exempt Bondholders. The prepayment rate
used by the Bond Issuer for purposes of
determining the amount and rate of accrual
of original issue discount on the Bonds
assumes that the Mortgage Loans are
S-8
<PAGE> 10
prepaid at a rate of % of the Prepayment
Assumption. Based upon the assumed
prepayment rate and the expected price to
the public of each Class of Bonds as of the
date hereof (including interest accrued
before the Closing Date, if any), the
Senior Bonds will not be issued with
original issue discount and the
Subordinated Bonds will be treated as
issued with original issue discount.
Pursuant to applicable regulations, the
Bond Issuer intends to treat the stated
interest on the Bonds as "qualified stated
interest payments" (as such term is defined
in the Prospectus under "CERTAIN FEDERAL
INCOME TAX CONSEQUENCES").
Notwithstanding the use of the Prepayment
Assumption in pricing the Offered Bonds, no
representation is made that the Mortgage
Loans will actually prepay at such assumed
prepayment rate or at any other rate. The
amount of original issue discount, if any,
and certain other information with respect
to each Offered Bond will be set forth on
the face of such Offered Bond as required
by applicable regulations. Payments on
Offered Bonds held by foreign persons will
generally be exempt from United States
withholding tax, subject to compliance with
applicable certification procedures. Tax
Counsel to the Bond Issuer has advised the
Bond Issuer that in its opinion the Offered
Bonds will be treated as debt for federal
income tax purposes. The Bond Issuer will
not elect to treat the segregated pool of
assets securing the Bonds as a "real estate
mortgage investment conduit" or a
"financial asset securitization investment
trust" for federal income tax purposes. See
"CERTAIN FEDERAL INCOME TAX CONSEQUENCES"
in the Prospectus.
Offered Bonds owned by a real estate
investment trust will not be treated as
"real estate assets" or "Government
securities" and interest on the Offered
Bonds will not be considered "interest on
obligations secured by mortgages on real
property or on interests in real property."
Similarly, the Offered Bonds will not
constitute "qualifying real property loans"
for mutual savings banks or domestic
building and loan associations and will not
constitute "loans secured by an interest in
real property" or "obligations of the
United States" for domestic building and
loan associations. In addition, Offered
Bonds held by a regulated investment
company will not constitute "Government
securities." See "CERTAIN FEDERAL INCOME
TAX CONSEQUENCES" in the Prospectus.
ERISA Matters.................... Fiduciaries of employee benefit plans and
certain other retirement plans and
arrangements that are subject to the
Employee Retirement Income Security Act of
1974, as amended ("ERISA"), or
corresponding provisions of the Internal
Revenue Code of 1986, as amended (the
"Code"), including individual retirement
accounts and annuities, Keogh plans and
collective investment funds in which such
S-9
<PAGE> 11
plans, accounts, annuities or arrangements
are invested (any of the foregoing a
"Plan"), persons acting on behalf of a
Plan, or persons using the assets of a Plan
("Plan Investors"), should review carefully
with their legal advisors whether the
purchase or holding of the Offered Bonds
could either give rise to a transaction
that is prohibited under ERISA or the Code
or cause the Mortgage Loans securing the
Offered Bonds to be treated as "plan
assets" for purposes of regulations of the
Department of Labor set forth in 29 C.F.R.
2510.3-101 (the "Plan Asset Regulations").
Although certain exceptions from the
application of the prohibited transaction
rules and the Plan Asset Regulations exist,
there can be no assurance that any such
exception will apply with respect to the
acquisition of the Offered Bonds. See
"ERISA MATTERS" herein and in the
Prospectus. Although not entirely free from
doubt, the Bond Issuer believes that the
Offered Bonds will be treated as debt
obligations without significant equity
features for purposes of the Plan Asset
Regulations. Accordingly, a Plan that
acquires the Offered Bonds should not be
treated as having acquired a direct
interest in the assets of the Bond Issuer.
See "ERISA MATTERS" herein and in the
Prospectus. However, there can be no
complete assurance that the Offered Bonds
will be treated as debt obligations without
significant equity features for purposes of
the Plan Asset Regulations.
Legal Investment................. The Offered Bonds will constitute "mortgage
related securities" for purposes of the
Secondary Mortgage Market Enhancement Act
of 1984 ("SMMEA") so long as they are rated
in one of the two highest rating categories
by at least one nationally recognized
statistical rating organization and, as
such, are legal investments for certain
entities to the extent provided for in
SMMEA. Institutions whose investment
activities are subject to review by federal
or state regulatory authorities should
consult with their counsel or the
applicable authorities to determine whether
an investment in the Offered Bonds complies
with applicable guidelines, policy
statements or restrictions. See "LEGAL
INVESTMENT" in the Prospectus.
Ratings.......................... It is a condition of the issuance of the
Senior Bonds that they be rated [AAA] by
(" ") and [AAA] by
(" " and, together with,
the "Rating Agencies"). It is a condition
to the issuance of the Class B-1 Bonds that
they be rated [AA] by .
The ratings of the Offered Bonds of any
Class should be evaluated independently
from similar ratings on other types of
securities. A 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. See "RATINGS" herein.
The Bond Issuer has not requested a rating
of the Offered Bonds by any rating agency
other than the Rating Agencies; there can
be no assurance, however, as to whether any
other
S-10
<PAGE> 12
rating agency will rate the Offered Bonds
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 Bonds could be lower than
the respective ratings assigned by the
Rating Agencies.
Use of Proceeds.................. The Bond Issuer intends to distribute all
of the net proceeds of the issuance of the
Bonds to the Company which will apply such
proceeds to the purchase of the Mortgage
Loans. The Mortgage Loans were purchased by
the Company from AmREIT and sold to the
Bond Issuer by the Company. See "USE OF
PROCEEDS" herein and in the Prospectus and
"METHOD OF DISTRIBUTION" herein.
Risk Factors..................... For a discussion of certain risks
associated with an investment in the Bonds,
see "RISK FACTORS" commencing on page S-
herein and on page in the Prospectus.
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<PAGE> 13
RISK FACTORS
YIELD, PREPAYMENT AND MATURITY RISKS
EFFECT OF DELAYS ON PAYMENT ON THE BONDS. The effective yields to the
holders of the Offered Bonds will be lower than the yields otherwise produced by
the applicable rate at which interest is paid to such holders and the purchase
price of such Offered Bonds because [monthly] payments will not be payable to
such holders until the th day (or, if such day is not a business day, the
following business day) of the month following the month] in which interest
accrues on the Mortgage Loans (without any additional payment of interest or
earnings thereon in respect of such delay).
EFFECT OF DELINQUENCIES ON THE MORTGAGE LOANS. Delinquencies on the
Mortgage Loans which are not advanced by or on behalf of the Master Servicer
(because amounts, if advanced, would be nonrecoverable), may adversely affect
the yield on the Offered Bonds. Because of the priority of distributions,
shortfalls resulting from delinquencies not so advanced will be borne first by
the Investor Certificate, second by the Class B-2 Bonds, third by the Class B-1
Bonds, and fourth by the Senior Bonds. If, as a result of such shortfalls, the
sum of (i) the Senior Class Principal Amount, (ii) the Class B-1 Principal
Amount, (iii) the Class B-2 Principal Amount and (iv) the Invested Amount
exceeds the Pool Principal Balance, the Invested Amount will be reduced by the
amount of such excess until the Invested Amount is reduced to zero, then, the
Class B-2 Principal Amount will be reduced by the remaining amount of such
excess, if any, until the Class B-2 Principal Amount is reduced to zero, and
thereafter, the Class B-1 Principal Amount will be reduced by the remaining
amount of such excess, if any.
[EFFECT OF PERIODIC RATE CAP AND MINIMUM RATE. The Mortgage Rate of each
Mortgage Loan will be subject to a Periodic Rate Cap and a Maximum Rate. If the
Index changes substantially between Adjustment Dates, the adjusted Mortgage Rate
on a related Mortgage Loan may not equal the applicable Index plus the related
Margin due to the constraint of such caps. In such event, the related Net
Mortgage Rate and consequently, each Bond Interest Rate, will be less than would
have been the case in the absence of such caps.]
[EFFECT OF DISPROPORTIONATE PREPAYMENTS. The Bond Interest Rate for each
Class of Offered Bonds will be based upon the weighted average of the Net
Mortgage Rates for the Mortgage Loans. Any disproportionate prepayment of
Mortgage Loans with higher Net Mortgage Rates may adversely affect the yield on
the Offered Bonds. The Bond Interest Rates for each Class of Offered Bonds will
vary from Distribution Date to Distribution Date due to (i) the timing of the
Mortgage Rate readjustments of the Mortgage Loans and (ii) different rates of
payment of principal of such Mortgage Loans bearing different Mortgage Rates.]
EFFECT OF NET INTEREST SHORTFALLS AND REALIZED LOSSES. Net Interest
Shortfalls allocated to the Offered Bonds, if any, will reduce the amount of
interest payable on the Offered Bonds which will adversely affect the yields on
the Offered Bonds. In addition, although all losses initially will be borne by
the Investor Certificate and then by the Class B-2 Bonds, the yields on the
Offered Bonds will depend on the rate and timing of Realized Losses. Realized
Losses could occur at a time when the Investor Certificate and the Class B-2
Bonds are no longer outstanding and available to absorb Realized Losses.
Realized Losses in excess of the sum of the Invested Amount and the Class B-2
Principal Amount will reduce the funds available to make payments to the holders
of the Offered Bonds on the related Distribution Date. As a result, holders of
the Offered Bonds, and particularly holders of the Class B-1 Bonds, may not
receive the full amount of interest and principal on a Distribution Date that
they would have received in the absence of such Realized Losses. In the event
that holders of Offered Bonds do not receive the full amount of accrued interest
for any Distribution Date, the amount which is not paid will be carried forward
and will be payable on future Distribution Dates to the extent funds are
available therefor. Any amount of interest so carried forward will not (except
in the case of the Subordinated Bonds) accrue interest until the Bonds are
declared due and payable upon the occurrence of an Event of Default, as
described herein under "DESCRIPTION OF THE BONDS -- PRIORITY OF PAYMENTS AND
ALLOCATION OF SHORTFALLS." Any shortfall in amounts otherwise payable as
principal of the Subordinated Bonds will be paid on future Distribution Dates to
the extent funds are available
S-12
<PAGE> 14
therefor. So long as the Senior Bonds are outstanding, any shortfall in amounts
available for payments of principal of, or interest on, the Subordinated Bonds
will not constitute an Event of Default.
Under the Indenture, shortfalls in amounts required to be distributed to
Bondholders ("Shortfalls") that affect only the Subordinated Bonds will not
constitute an Event of Default until all the Senior Bonds have been paid in full
and then only if Shortfalls on the Subordinated Bonds have not been paid. In
addition, an Event of Default by reason of any Shortfalls that affect the Senior
Bonds will occur on any Distribution Date only when the Pool Principal Balance
is less than the principal amount of the Senior Bonds outstanding after
application of all available amounts on deposit in the Distribution Account on
such Distribution Date. As described herein, on any Distribution Date on which a
Shortfall occurs, payments of accrued interest on the Class B-1 Bonds will be
subject to the availability of funds in the Distribution Account after payment
of accrued interest on and principal then due on all outstanding Senior Bonds.
On any Distribution Date on which a Shortfall occurs, payments of principal on
the Class B-2 Bonds will be subject to the availability of funds therefor after
payment of interest on all outstanding Senior Bonds and Class B-1 Bonds and
principal of all outstanding Senior Bonds. Also, upon the occurrence of each
Shortfall, the Senior Percentage, the Class B-1 Percentage, the Class B-2
Percentage and the Investor Percentage will shift in the manner described herein
under "DESCRIPTION OF THE BONDS -- PRIORITY OF PAYMENTS AND ALLOCATION OF
SHORTFALLS." Therefore, following the occurrence of any Shortfall allocable to
the Class B-1 Bonds, such Class B-1 Bonds will amortize more slowly than would
otherwise have been the case in the absence of such Shortfall. As a result of
these factors, the yield on the Class B-1 Bonds will be more sensitive than the
yield on the Senior Bonds to the occurrence of Shortfalls.
The weighted average life of, and the yield to maturity on, the Class B-1
Bonds will be 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 losses on the Mortgage Loans is higher than those assumed by a
holder of a Class B-1 Bond, the actual yield to maturity of such Bond may be
lower than the yield expected by such holder based on such assumption. The
timing of 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 Loan Pool are consistent with an investor's expectations.
In general, the earlier a loss occurs, the greater the effect on an investor's
yield to maturity. The yield to maturity of the Class B-1 Bonds will also be
affected by Net Interest Shortfalls allocated to the Class B-1 Bonds, if any,
and other cash shortfalls in Available Funds. See "DESCRIPTION OF THE
BONDS -- PRIORITY OF PAYMENTS AND ALLOCATION OF SHORTFALLS" herein.
EFFECT OF RATE AND TIMING OF PRINCIPAL PAYMENTS. The rate of principal
payments on the Offered Bonds, the aggregate amount of payments on the Offered
Bonds and the yields to maturity of the Offered Bonds will be related to the
rate and timing of payments of principal on the Mortgage Loans. The rate of
principal payments on the Mortgage Loans will in turn be affected by the
amortization schedules of the Mortgage Loans and by the rate of principal
prepayments (including for this purpose prepayments resulting from refinancing,
liquidations of the Mortgage Loans due to defaults, casualties, condemnations
and purchases by AmREIT [or any optional purchase by the Master Servicer or the
Company of a defaulted Mortgage Loan]). [The Mortgage Loans may be prepaid by
the Mortgagors at any time without a prepayment penalty.] [The Mortgage Loans
are subject to the "due-on-sale" provisions included therein]. See "TRUST FUND
ASSETS -- THE MORTGAGE LOANS" herein.
Prepayments, liquidations and purchases of the Mortgage Loans (including
[any optional purchase by the Master Servicer or the Company of a defaulted
Mortgage Loan] and any optional repurchase by the Bond Issuer of the remaining
Mortgage Loans in connection with the optional redemption of the Bonds, in each
case as described herein) will result in payments on the Offered Bonds of
principal amounts which would otherwise be distributed over the remaining terms
of the Mortgage Loans. Since the rate of payment of principal on the Mortgage
Loans will depend on future events, no assurance can be given as to such rate or
the rate of principal prepayments. The extent to which the yield to maturity of
a Class of Offered Bonds may vary from the anticipated yield will depend upon
the degree to which such Bond is purchased at a discount or premium, and the
degree to which the timing of payments thereon is sensitive to prepayments,
liquidations and purchases of the Mortgage Loans. Further, an investor should
consider the risk that, in the case of any Offered Bond
S-13
<PAGE> 15
purchased at a discount, a slower than anticipated rate of principal payments
(including prepayments) on the Mortgage Loans could result in an actual yield to
such investor that is lower than the anticipated yield and, in the case of any
Offered Bond purchased at a premium, a faster than anticipated rate of principal
payments on the Mortgage Loans could result in an actual yield to such investor
that is lower than the anticipated yield.
The rate of principal payments (including prepayments) on pools of mortgage
loans may vary significantly over time and may be influenced by a variety of
economic, geographic, social and other factors, including changes in mortgagors'
housing needs, job transfers, unemployment, mortgagors' net equity in the
mortgaged properties and servicing decisions. In general, if prevailing interest
rates were to fall significantly below the Mortgage Rates on the Mortgage Loans,
the Mortgage Loans could be subject to higher prepayment rates than if
prevailing interest rates were to remain at or above the Mortgage Rates on the
Mortgage Loans. Conversely, if prevailing interest rates were to rise
significantly, the rate of prepayments on the Mortgage Loans would generally be
expected to decrease. No assurances can be given as to the rate of prepayments
on the Mortgage Loans in stable or changing interest rate environments.
The timing of changes in the rate of prepayments on the Mortgage Loans may
significantly affect an investor's actual yield to maturity, even if the average
rate of principal payments is consistent with an investor's expectation. In
general, the earlier a prepayment of principal on the Mortgage Loans, the
greater the effect on an investor's yield to maturity. The effect on an
investor's yield as a result of principal payments occurring at a rate higher
(or lower) than the rate anticipated by the investor during the period
immediately following the issuance of the Bonds may not be offset by a
subsequent like decrease (or increase) in the rate of principal payments.
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 BONDS.
INVESTORS ARE URGED TO MAKE AN INVESTMENT DECISION WITH RESPECT TO THE OFFERED
BONDS BASED ON THE ANTICIPATED YIELD TO MATURITY OF SUCH BONDS RESULTING FROM
THEIR RESPECTIVE PRICES AND EACH INVESTOR'S OWN DETERMINATION AS TO ANTICIPATED
MORTGAGE LOAN PREPAYMENT RATES.
CASH FLOW CONSIDERATIONS AND RISKS
Minimum monthly payments on the Mortgage Loans will at least equal and may
exceed accrued interest thereon. Even assuming that the Mortgaged Properties
provide adequate security for the Mortgage Loans, substantial delays could be
encountered in connection with the liquidation of Mortgage Loans that are
delinquent and resulting shortfalls in distributions to holders of the Offered
Bonds could occur. Further, liquidation expenses (such as legal fees, real
estate taxes, and maintenance and preservation expenses) will reduce the
security for the related Mortgage Loans and could thereby reduce the proceeds
payable to holders of the Offered Bonds. In the event any of the Mortgaged
Properties fail to provide adequate security for the related Mortgage Loans,
holders of the Offered Bonds could experience a loss to the extent that any
applicable credit enhancement has been exhausted.
LIMITED RECOURSE
The Offered Bonds represent obligations solely of the Bond Issuer and are
not insured or guaranteed by any governmental agency or instrumentality, the
Company, AmREIT, the Master Servicer, any Servicer or any other person or
entity.
DELINQUENCIES MAY ADVERSELY AFFECT INVESTMENT
As of the Cut-off Date, (i) not more than % of the Mortgage Loans (by
Cut-off Date Stated Principal Balance) were delinquent by one or more Scheduled
Payments and (ii) not more than % of the Mortgage Loans (by Cut-off Date
Stated Principal Balance) were delinquent by two or more Scheduled Payments.
Investors should consider the risk that the inclusion of such loans in the
Mortgage Loans may effect the rates of defaults and prepayments on such Mortgage
Loans and the yields on the Offered Bonds. See "TRUST FUND ASSETS -- THE
MORTGAGE LOANS" herein.
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<PAGE> 16
MORTGAGE LOAN CONCENTRATION
Approximately % and % of the Mortgage Loans (by Cut-off Date
Stated Principal Balance) are expected to be secured by Mortgaged Properties
located in and , respectively. Consequently, losses and
prepayments on the Mortgage Loans and the resultant payments on the Bonds may be
affected significantly by changes in the housing markets and the regional
economies in these areas, and also by the occurrence of natural disasters (such
as earthquakes, fires and floods) in these areas.
LIMITED LIQUIDITY OF INVESTMENTS
There can be no assurance that a secondary market will develop for the
Offered Bonds, or, if one does develop, that it will provide the holders of the
Offered Bonds with liquidity of investment or that it will continue to exist for
the term of the Offered Bonds.
BANKRUPTCY AND INSOLVENCY RISKS
AmREIT and the Company will treat the transfer of the Mortgage Loans by
AmREIT to the Company as a sale. Nevertheless, in the event of a bankruptcy of
AmREIT the trustee in bankruptcy could attempt to recharacterize the sale of the
Mortgage Loans as a borrowing secured by a pledge of mortgage loans. The Company
and the Bond Issuer will treat the transfer of the Mortgage Loans by the Company
to the Bond Issuer as a sale. Nevertheless, in the event of a bankruptcy of the
Company, the trustee in bankruptcy could attempt to recharacterize the sale of
the Mortgage Loans as a borrowing secured by a pledge of mortgage loans.
In either case, if such an attempt to recharacterize the transfer of the
loans were successful, a trustee in bankruptcy could elect to accelerate payment
of the Bonds and liquidate the Mortgage Loans, with the holders of the Offered
Bonds entitled to no more than the then outstanding Class Principal Amount, if
any, of such Bonds together with interest at the applicable Bond Interest Rates
to the date of payment. In the event of an acceleration of the Bonds, the
holders of the Offered Bonds would lose the right to future payments of
interest, might suffer reinvestment losses in a lower interest rate environment
and may fail to recover their initial investment.
BOOK-ENTRY BONDS
LIMITED LIQUIDITY. Issuance of the Offered Bonds in book-entry form may
reduce the liquidity of such Offered Bonds in the secondary trading market since
investors may be unwilling to purchase Offered Bonds for which they cannot
obtain physical certificates. See "DESCRIPTION OF THE BONDS -- BOOK-ENTRY BONDS"
herein and "RISK FACTORS -- EFFECTS OF BOOK-ENTRY REGISTRATION" in the
Prospectus.
DIFFICULTY IN PLEDGING. Since transactions in the Offered Bonds can be
effected only through DTC, CEDEL, Euroclear, participating organizations,
indirect participants and certain banks, the ability of Bond Owners to pledge an
Offered Bond to persons or entities that do not participate in the DTC, CEDEL or
Euroclear system may be limited due to lack of a physical certificate
representing the Offered Bonds. See "DESCRIPTION OF THE BONDS -- BOOK-ENTRY
BONDS" herein and "RISK FACTORS -- EFFECTS OF BOOK-ENTRY REGISTRATION" in the
Prospectus.
POTENTIAL DELAYS IN PAYMENT. Bond Owners may experience some delay in
their receipt of payments of interest and principal on the Offered Bonds since
such payments will be forwarded by the Bond Trustee to DTC and DTC will credit
such payments to the accounts of its Participants (as defined herein) which will
thereafter credit them to the accounts of Bond Owners either directly or
indirectly through indirect participants. Bond Owners will not be recognized as
Bondholders as such term is used in the Indenture, and Bond Owners will be
permitted to exercise the rights of Bondholders only indirectly through DTC and
its Participants. See "DESCRIPTION OF THE BONDS -- BOOK-ENTRY BONDS" herein and
"RISK FACTORS -- EFFECTS OF BOOK-ENTRY REGISTRATION" in the Prospectus.
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<PAGE> 17
RATINGS
The ratings of the Classes of Offered Bonds will depend primarily on an
assessment by the Rating Agencies of the Mortgage Loans. The rating by the
Rating Agencies of the Classes of Offered Bonds is not a recommendation to
purchase, hold or sell the Offered Bonds, inasmuch as such rating does not
comment as to the market price or suitability for a particular investor. There
is no assurance that the ratings will remain in place for any given period of
time or that the ratings will not be lowered or withdrawn by the Rating
Agencies. In general, ratings assess credit risk and do not address likelihood
of prepayments.
FOR A DISCUSSION OF CERTAIN ADDITIONAL RISK FACTORS RELATING TO INVESTMENTS
IN THE BONDS, SEE "RISK FACTORS" IN THE PROSPECTUS.
THE BOND ISSUER
The Bond Issuer is a statutory business trust established under the laws of
the State of Delaware by an amended and restated deposit trust agreement, dated
as of , 199 . The Bond Issuer was formed for the sole purpose
of issuing the Bonds and the Investor Certificate. The Company is the settlor
and sole beneficiary of the Bond Issuer and is the Owner Trustee
of the Bond Issuer. The Company is a limited purpose finance corporation the
capital stock of which is wholly owned by American Residential Investment Trust,
Inc., a Maryland corporation ("AmREIT"). AmREIT will be the manager of the Bond
Issuer pursuant to a management agreement entered into with the Bond Issuer.
None of the Company, AmREIT, the Bond Trustee or any of their respective
affiliates has guaranteed or is otherwise obligated with respect to payment of
the Bonds and no person or entity other than the Bond Issuer is obligated to pay
the Bonds.
The Bond Issuer's Trust Fund Assets will consist primarily of the Mortgage
Loans which will be pledged to secure the Bonds. If the Mortgage Loans and other
Trust Fund Assets securing the Bonds are insufficient for payment of the Offered
Bonds, it is unlikely that significant other assets of the Bond Issuer will be
available for payment of the Offered Bonds. The amount of funds available to pay
the Offered Bonds may be affected by, among other things, Realized Losses
incurred on defaulted Mortgage Loans. See "RISK FACTORS" herein and in the
Prospectus.
The Indenture prohibits the Bond Issuer from incurring any indebtedness
other than the Bonds, or assuming or guaranteeing the indebtedness of any other
person.
USE OF PROCEEDS
The Bond Issuer intends to distribute all of the net proceeds of the
issuance of the Offered Bonds to the Company which will use such proceeds to pay
certain indebtedness incurred by AmREIT in connection with the acquisition of
the Mortgage Loans. See "USE OF PROCEEDS" in the Prospectus and "UNDERWRITING"
herein.
TRUST FUND ASSETS
GENERAL
The Bonds will be secured by assignments to the Bond Trustee of Trust Fund
Assets consisting of (i) the Mortgage Loans, (ii) funds on deposit in the Bond
Account and the Distribution Account, (iii) the Bond Issuer's rights under the
Master Servicing Agreement, (iv) [the Bond Issuer's rights under any Servicing
Agreement,] (v) the Bond Issuer's rights under the Mortgage Loan Purchase
Agreement (as defined herein), and (vi) the proceeds of all of the foregoing.
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<PAGE> 18
THE MORTGAGE LOANS
The Bonds will be secured by a pool (the "Mortgage Pool") of 30-year
conventional mortgage loans secured by first liens on one- to four-family
residential properties (each, a "Mortgaged Property"). 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 Company which, in turn,
will have acquired them from AmREIT pursuant to an agreement (the "Mortgage Loan
Purchase Agreement") between the Company 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.
GENERAL. Under the Mortgage Loan Purchase Agreement, AmREIT will make
certain representations, warranties and covenants to the Company 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.
Under the Deposit Trust Agreement, the Company will assign all of its rights
under the Mortgage Loan Purchase Agreement to the Bond Issuer. Under the
Indenture, the Issuer will pledge all its right, title and interest in and to
such representations, warranties and covenants (including AmREIT's purchase
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 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 Bond Issuer 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 Pool may vary. Unless otherwise indicated,
information presented below expressed as a percentage (other than rates of
interest) are approximate percentages based on the Stated Principal Balances of
the Mortgage Loans as of the Cut-off Date.
As of the Cut-off Date, the aggregate of the Stated Principal Balances of
the Mortgage Loans is expected to be approximately $ (the "Cut-off
Date Pool Principal Balance"). [The Mortgage Loans provide for the amortization
of the amount financed over a series of substantially equal monthly payments.]
All of the Mortgage Loans provide for payments due on the first day of each
month (the "Due Date"). At origination, substantially all of the Mortgage Loans
had stated terms to maturity of years. Scheduled monthly payments made
by the Mortgagors on the Mortgage Loans ("Scheduled Payments") either earlier or
later than the scheduled Due Dates thereof will not affect the amortization
schedule or the relative application of such payments to principal and interest.
[Mortgagors may prepay their Mortgage Loans at any time without penalty.]
Each Mortgage Loan will bear interest at a [fixed][adjustable] Mortgage
Rate. [Each Mortgage Loan will bear interest at a Mortgage Rate, subject to
annual adjustment on the first day of the month specified in the related
Mortgage Note (each such date, an "Adjustment Date"), equal to the sum, rounded
to the nearest of one percentage point ( %), of (i)
(the "Index") as made available by the and most recently
available as of days prior to the Adjustment Date and (ii) a fixed percentage
amount specified in the related Mortgage Note (the "Margin") provided, however,
that the Mortgage Rate will not increase or decrease by more than percentage
points ( %), except for Mortgage Loans, representing
approximately % of the Cut-off Date Pool Principal Balance which will not
increase or decrease by more than percentage points ( %), on the first
Adjustment Date or more than
S-17
<PAGE> 19
percentage points ( %) on any Adjustment Date thereafter (the "Periodic Rate
Cap"). The Index with respect to any Bond Interest Rate and any Distribution
Date shall be the Index in effect as of the first day of the month preceding the
month in which such Distribution Date occurs.]
[All of the Mortgage Loans provide that over the life of the Mortgage Loan
the Mortgage Rate will in no event increase by more than the Mortgage Rate fixed
at origination plus a fixed number of percentage points specified in the related
Mortgage Note (such rate, the "Maximum Rate"). None of the Mortgage Loans are
subject to minimum Mortgage Rates. Effective with the first payment due on a
Mortgage Loan after each related Adjustment Date, the Scheduled Payment will be
adjusted to an amount which will pay interest at the adjusted rate and fully
amortize the then-outstanding principal balance of the Mortgage Loan over its
remaining term. If the Index ceases to be published or is otherwise unavailable,
the Master Servicer will select an alternative index based upon comparable
information.]
Each Mortgage Loan is, by its terms, assumable in connection with a
transfer of the related Mortgaged Property if the proposed transferee submits
certain information to the Master Servicer required to enable it to evaluate the
transferee's ability to repay the Mortgage Loan and if the Master Servicer
reasonably determines that the security for the Mortgage Loan would not be
impaired by the assumption. See "RISK FACTORS" herein and in the Prospectus.
Each Mortgage Loan was originated on or after , 19 .
The latest stated maturity date of any Mortgage Loan is ,
20 . The earliest stated maturity date of any Mortgage Loan is ,
20 .
[As of the Cut-off Date, no Mortgage Loan was delinquent more than days.]
[None of the Mortgage Loans are subject to buydown agreements.] [No
Mortgage Loan provides for deferred interest or negative amortization.]
No Mortgage Loan had a Loan-to-Value Ratio at origination of more than %.
[Except for Mortgage Loans, representing approximately % of the
Cut-off Date Pool Principal Balance,] each Mortgage Loan with a Loan-to-Value
Ratio at origination of greater than 80% is covered by a primary mortgage
insurance policy (each a "Primary Mortgage Insurance Policy") issued by a
mortgage insurance company acceptable to the Federal National Mortgage
Association ("FNMA"), the Federal Home Loan Mortgage Corporation ("FHLMC") or
any nationally recognized statistical rating organization, which policy provides
coverage of a portion of the original principal balance of the related Mortgage
Loan equal to the product of the original principal balance thereof and a
fraction, the numerator of which is the excess of the original principal balance
of the related Mortgage Loan over 75% of the lesser of the appraised value and
selling price of the related Mortgage Property and the denominator of which is
the original principal balance of the related Mortgage Loan, plus accrued
interest thereon and related foreclosure expenses. No such Primary Mortgage
Insurance Policy will be required with respect to any such Mortgage Loan after
the date on which the related Loan-to-Value Ratio is 80% or less or, based on a
new appraisal, the principal balance of such Mortgage Loan represents 80% or
less of the new appraised value. See "MORTGAGE LOAN PROGRAM -- UNDERWRITING
STANDARDS" herein.
The "Loan-to-Value Ratio" of a Mortgage Loan at any given time is a
fraction, expressed as a percentage, the numerator of which is the principal
balance of the related Mortgage Loan at the date of determination and the
denominator of which is (a) in the case of a purchase, the lesser of the selling
price of the Mortgaged Property and its appraised value determined in an
appraisal obtained by the originator at origination of such Mortgage Loan, or
(b) in the case of a refinance, the appraised value of the Mortgaged Property at
the time of such refinance. No assurance can be given that the value of any
Mortgaged Property has remained or will remain at the level that existed on the
appraisal or sales date. If residential real estate values generally or in a
particular geographic area decline, the Loan-to-Value Ratios might not be a
reliable indicator of the rates of delinquencies, foreclosures and losses that
could occur with respect to such Mortgage Loans.
S-18
<PAGE> 20
The following information sets forth in tabular format certain information,
as of the Cut-off Date, as to the Mortgage Loans. Other than with respect to
rates of interest, percentages (approximate) are stated by Stated Principal
Balance of the Mortgage Loans as of the Cut-off Date and have been rounded in
order to total 100%.
ORIGINAL LOAN-TO-VALUE RATIOS(1)
<TABLE>
<CAPTION>
AGGREGATE
NUMBER OF PRINCIPAL PERCENT OF
ORIGINAL LOAN-TO-VALUE MORTGAGE BALANCE MORTGAGE
RATIOS(%) LOANS OUTSTANDING POOL
---------------------- --------- ----------- ----------
<S> <C> <C> <C>
$ %
-------- ------
Total................................................. $ %
======== ======
</TABLE>
- ---------------
(1) The weighted average original Loan-to-Value Ratio of the Mortgage Loans is
expected to be approximately %.
ORIGINAL TERMS TO MATURITY(1)
<TABLE>
<CAPTION>
AGGREGATE
NUMBER OF PRINCIPAL PERCENT OF
ORIGINAL TERM TO MORTGAGE BALANCE MORTGAGE
MATURITY (MONTHS) LOANS OUTSTANDING POOL
----------------- --------- ----------- ----------
<S> <C> <C> <C>
$ %
-------- ------
Total................................................. $ %
======== ======
</TABLE>
- ---------------
(1) As of the Cut-off Date, the weighted average remaining term to maturity of
the Mortgage Loans is expected to be approximately months.
CURRENT MORTGAGE LOAN PRINCIPAL BALANCES(1)
<TABLE>
<CAPTION>
AGGREGATE
RANGE OF CURRENT NUMBER OF PRINCIPAL PERCENT OF
MORTGAGE LOAN MORTGAGE BALANCE MORTGAGE
PRINCIPAL BALANCES LOANS OUTSTANDING POOL
------------------ --------- ----------- ----------
<S> <C> <C> <C>
$ %
-------- ------
Total................................................. $ %
======== ======
</TABLE>
- ---------------
(1) As of the Cut-off Date, the average current Mortgage Loans principal balance
is expected to be approximately $ .
CURRENT MORTGAGE RATES(1)
<TABLE>
<CAPTION>
AGGREGATE
NUMBER OF PRINCIPAL PERCENT OF
MORTGAGE BALANCE MORTGAGE
CURRENT MORTGAGE RATES (%) LOANS OUTSTANDING POOL
-------------------------- --------- ----------- ----------
<S> <C> <C> <C>
$ %
-------- ------
Total................................................. $ %
======== ======
</TABLE>
- ---------------
(1) As of the Cut-off Date, the weighted average Mortgage Rate of the Mortgage
Loans is expected to be approximately % per annum.
S-19
<PAGE> 21
PURPOSE OF MORTGAGE LOANS
<TABLE>
<CAPTION>
AGGREGATE
NUMBER OF PRINCIPAL PERCENT OF
MORTGAGE BALANCE MORTGAGE
LOAN PURPOSE LOANS OUTSTANDING POOL
------------ --------- ----------- ----------
<S> <C> <C> <C>
$ %
Purchase...................................................
Refinance (Rate or Term)...................................
Refinance (Cash-out).......................................
-------- ------
Total................................................. $ %
======== ======
</TABLE>
STATE DISTRIBUTION OF MORTGAGED PROPERTIES(1)
<TABLE>
<CAPTION>
AGGREGATE
NUMBER OF PRINCIPAL PERCENT OF
MORTGAGE BALANCE MORTGAGE
STATE LOANS OUTSTANDING POOL
----- --------- ----------- ----------
<S> <C> <C> <C>
$ %
Other(1)...................................................
-------- ------
Total................................................. $ %
======== ======
</TABLE>
- ---------------
(1) Other includes other states, and the District of Columbia, with under %
concentrations individually. No more than approximately % of the Mortgage
Loans will be secured by Mortgaged Properties located in any one postal zip
code area.
DOCUMENTATION FOR MORTGAGE LOANS
<TABLE>
<CAPTION>
AGGREGATE
NUMBER OF PRINCIPAL PERCENT OF
MORTGAGE BALANCE MORTGAGE
TYPE OF PROGRAM LOANS OUTSTANDING POOL
--------------- --------- ----------- ----------
<S> <C> <C> <C>
$ %
Full.......................................................
Alternative................................................
Reduced....................................................
-------- ------
Total................................................. $ %
======== ======
</TABLE>
OCCUPANCY TYPES(1)
<TABLE>
<CAPTION>
AGGREGATE PERCENT
NUMBER OF PRINCIPAL OF
MORTGAGE BALANCE MORTGAGE
OCCUPANCY TYPE LOANS OUTSTANDING POOL
-------------- --------- ----------- ----------
<S> <C> <C> <C>
$ %
Primary Home...............................................
Investor...................................................
Second Home................................................
-------- ------
Total................................................. $ %
======== ======
</TABLE>
- ---------------
(1) Based upon representations of the related Mortgagors at the time of
origination.
S-20
<PAGE> 22
PROPERTY TYPE
<TABLE>
<CAPTION>
AGGREGATE
NUMBER OF PRINCIPAL PERCENT OF
MORTGAGE BALANCE MORTGAGE
PROPERTY TYPE LOANS OUTSTANDING POOL
------------- --------- ----------- ----------
<S> <C> <C> <C>
$ %
Single Family..............................................
Planned Unit Development Condominium.......................
2-4 Units..................................................
-------- ------
Total................................................. $ %
======== ======
</TABLE>
MAXIMUM MORTGAGE RATES(1)
<TABLE>
<CAPTION>
AGGREGATE
NUMBER OF PRINCIPAL PERCENT OF
MORTGAGE BALANCE MORTGAGE
LIFETIME CAPS (%) LOANS OUTSTANDING POOL
----------------- --------- ----------- ----------
<S> <C> <C> <C>
$ %
-------- ------
Total................................................. $ %
======== ======
</TABLE>
- ---------------
(1) As of the Cut-off Date, the weighted average Lifetime Cap of the Mortgage
Loans is expected to be approximately % per annum.
MARGIN(1)
<TABLE>
<CAPTION>
AGGREGATE
NUMBER OF PRINCIPAL PERCENT OF
MORTGAGE BALANCE MORTGAGE
MARGIN LOANS OUTSTANDING POOL
------ --------- ----------- ----------
<S> <C> <C> <C>
$ %
-------- ------
Total................................................. $ %
======== ======
</TABLE>
- ---------------
(1) As of the Cut-off Date, the weighted average margin of the Mortgage Loans is
expected to be approximately %.
NEXT NOTE RATE ADJUSTMENT DATES(1)
<TABLE>
<CAPTION>
AGGREGATE
NUMBER OF PRINCIPAL PERCENT OF
MORTGAGE BALANCE MORTGAGE
MONTHS LOANS OUTSTANDING POOL
------ --------- ----------- ----------
<S> <C> <C> <C>
$ %
-------- ------
Total................................................. $ %
======== ======
</TABLE>
- ---------------
(1) As of the Cut-off Date, the weighted average months to the next Adjustment
Date of the Mortgage Loans was approximately months.
THE INDEX
[DESCRIPTION OF INDEX]
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 Bondholders all right, title
S-21
<PAGE> 23
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 Trust Fund Assets,
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 one or more custodians
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 Bond Trustee will review each Mortgage File within days of
the Closing Date (or promptly after the Bond Trustee's 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 days of notice thereof
from the Bond Trustee (or within such longer period not to exceed 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 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 % less than, the Stated 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 % 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
Bondholders or the Bond Trustee for omission of, or a material defect in, a
Mortgage Loan document.
DESCRIPTION OF THE BONDS
GENERAL
The Bonds will be issued pursuant to the Indenture. Set forth below are
summaries of the specific terms and provisions pursuant to which the Bonds will
be issued. The following summaries are subject to, and are qualified in their
entirety by reference to, the provisions of the Indenture. When particular
provisions or terms used in the Indenture are referred to, the actual provisions
(including definitions of terms) are incorporated by reference.
The American Residential Eagle Trust One, Collateralized Mortgage Bonds
(the "Bonds"), will consist of the Class A-1 Bonds (the "Senior Bonds") and the
Class B-1 and Class B-2 Bonds (collectively, the "Subordinated Bonds"). The Bond
Issuer will also issue the Investor Certificate (the "Investor Certificate") as
described herein. The Senior Bonds and the Class B-1 Bonds are collectively
referred to herein as the
S-22
<PAGE> 24
"Offered Bonds." Only the Offered Bonds are offered hereby. The Classes of
Offered Bonds will have the respective Bond Interest Rates described on the
cover hereof. The Class B-2 Bonds and the Investor Certificate will bear
interest at the Bond Interest Rate and Certificate Interest Rate, respectively,
described herein.
The "Class Principal Amount" of (a) the Senior Bonds (the "Senior Class
Principal Amount") as of any Distribution Date is the Original Senior Class
Principal Amount reduced by all amounts previously distributed to holders of the
Senior Bonds as payments of principal, (b) the Class B-1 Bonds (the "Class B-1
Principal Amount") as of any Distribution Date is the lesser of (i) the
aggregate of the Stated Principal Balances of the Mortgage Loans, less the
Senior Class Principal Amount immediately prior to such date, and (ii) the
Original Class B-1 Principal Amount reduced by all amounts previously
distributed to holders of the Class B-1 Bonds as payments of principal and (c)
the Class B-2 Bonds (the "Class B-2 Principal Amount") as of any Distribution
Date is the lesser of (i) the aggregate of the Stated Principal Balances of the
Mortgage Loans, less the sum of the Senior Class Principal Amount and the Class
B-1 Principal Amount, in each case immediately prior to such date, and (ii) the
Original Class B-2 Principal Amount reduced by all amounts previously
distributed to holders of the Class B-2 Bonds as payments of principal. The
Senior Bonds will have an original Senior Class Principal Amount of $
(the "Original Senior Class Principal Amount"), the Class B-1 Bonds will have an
original Class B-1 Principal Amount of $ (the "Original Class B-1
Principal Amount") and the Class B-2 Bonds will have an original Class B-2
Principal Amount of $ (the "Original Class B-2 Principal Amount"). The
"Invested Amount" of the Investor Certificate as of any Distribution Date is the
lesser of (i) the aggregate of the Stated Principal Balances of the Mortgage
Loans, less the sum of (x) the Senior Class Principal Amount, (y) the Class B-1
Principal Amount and (z) the Class B-2 Principal Amount, in each case
immediately prior to such date, and (ii) the Original Invested Amount reduced by
all amounts previously distributed to the holder of the Investor Certificate in
reduction of the Invested Amount. The Investor Certificate will have an original
Invested Amount of approximately $ (the "Original Invested Amount").
PAYMENTS ON MORTGAGE LOANS; ACCOUNTS
On or prior to the Closing Date, the Master Servicer will establish and
maintain or cause to be established and maintained a separate account or
accounts for the collection of payments on the Mortgage Loans (the "Bond
Account"). On or prior to the Closing Date, the Bond Trustee will establish an
account (the "Distribution Account"), which will be maintained with the Bond
Trustee in trust for the benefit of the Bondholders. On or prior to the business
day immediately preceding each Distribution Date, the Master Servicer will
withdraw from the Bond Account the Bond Distribution Amount for such
Distribution Date, to the extent of Available Funds on deposit therein, and will
deposit such amount in the Distribution Account. The "Bond Distribution Amount"
for any Distribution Date will equal the sum of (i) the Senior Interest Payment
Amount, (ii) the Senior Principal Payment Amount, (iii) the Class B-1 Interest
Payment Amount, (iv) the Class B-1 Principal Payment Amount, (v) the Class B-2
Interest Payment Amount and (vi) the Class B-2 Principal Payment Amount (as each
such term is defined herein). Funds credited to the Bond Account or the
Distribution Account may be invested at the direction of the Company for the
benefit and at the risk of the Company in Permitted 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.
PAYMENTS
Payments on the Bonds will be made by the Bond Trustee on [the th day
of each month], or if such day is not a business day, on the first business day
thereafter, commencing in , 199 (each, a "Distribution Date"), to
the persons in whose names such Bonds are registered at the close of business on
the last business day of the month preceding the month of such Distribution Date
(the "Record Date").
Payments on each Distribution Date will be made by check mailed to the
address of the person entitled thereto as it appears on the applicable bond
register or, in the case of a Bondholder who holds 100% of a Class of Bonds or
who holds Bonds with an aggregate initial Class Principal Amount of $1,000,000
or more and who has so notified the Bond Trustee in writing in accordance with
the Indenture, by wire transfer in immediately
S-23
<PAGE> 25
available funds to the account of such Bondholder at a bank or other depository
institution having appropriate wire transfer facilities; provided, however, that
the final payment in retirement of the Bonds will be made only upon presentment
and surrender of such Bonds at the Corporate Trust Office of the Bond Trustee.
As more fully described herein, payments will be made on each Distribution
Date from Available Funds in the following order of priority: (i) to interest on
the Senior Bonds; (ii) to principal of the Senior Bonds; (iii) to interest on
the Class B-1 Bonds; (iv) to principal of the Class B-1 Bonds; (v) to interest
on the Class B-2 Bonds; (vi) to principal of the Class B-2 Bonds; (vii) to
interest on the Investor Certificate; (viii) to principal of the Investor
Certificate; and (ix) to the holder of the Investor Certificate, all remaining
Available Funds, subject to certain limitations set forth herein under
"-- PRINCIPAL."
"Available Funds" with respect to any Distribution Date will be equal to
the sum of (i) all scheduled installments of interest (net of the related
Expense Fees) and principal due [on the Due Date in the month] in which such
Distribution Date occurs and received prior to the related Determination Date,
together with any Advances in respect thereof; (ii) all proceeds of any primary
mortgage guaranty insurance policies and any other insurance policies with
respect to the Mortgage Loans, to the extent such proceeds are not applied to
the restoration of the related Mortgaged Property or released to the Mortgagor
in accordance with the applicable Servicer's or the Master Servicer's normal
servicing procedures (collectively, "Insurance Proceeds") and all other cash
amounts received and retained in connection with the liquidation of defaulted
Mortgage Loans, by foreclosure or otherwise ("Liquidation Proceeds"), during the
[month] preceding the month of such Distribution Date (in each case, net of
unreimbursed expenses incurred in connection with a liquidation or foreclosure
and unreimbursed Advances, if any); (iii) all partial or full prepayments
received during the [month] preceding the month of such Distribution Date; and
(iv) amounts received with respect to such Distribution Date as the Substitution
Adjustment Amount or purchase price in respect of a Deleted Mortgage Loan or a
Mortgage Loan purchased by AmREIT [or by the Master Servicer or the Company] as
of such Distribution Date, reduced by amounts in reimbursement for Advances
previously made and other amounts as to which the applicable Servicer or the
Master Servicer is entitled to be reimbursed pursuant to the Master Servicing
Agreement.
INTEREST
The Bond Interest Rate for each Class of Bonds for each Distribution Date
(each, a "Bond Interest Rate") is described herein or on the cover hereof. On
each Distribution Date, to the extent of funds available therefor, each Class of
Bonds and the Investor Certificate will be entitled to receive an amount
allocable to interest as described below (as to each such Class or the Investor
Certificate, as applicable, the "Interest Payment Amount") with respect to the
related Interest Accrual Period. With respect to each Distribution Date, the
"Interest Accrual Period" for each Class of Bonds and the Investor Certificate
will be the [calendar month] preceding the month of such Distribution Date.
The Interest Payment Amount for the Senior Bonds (the "Senior Interest
Payment Amount") will be equal to the sum of (i) interest at the Senior Bond
Interest Rate on the Senior Class Principal Amount, and (ii) the sum of the
amounts, if any, by which the amount described in clause (i) above on each prior
Distribution Date exceeded the amount actually distributed as interest on such
prior Distribution Dates and not subsequently distributed. The Interest Payment
Amount for the Class B-1 Bonds (the "Class B-1 Interest Payment Amount") will be
equal to the sum of (i) interest at the Class B-1 Bond Interest Rate on the
Class B-1 Principal Amount, (ii) interest at the Class B-1 Bond Interest Rate on
any Class B-1 Principal Carryover Shortfall, (iii) the sum of the amounts, if
any, by which the sum of the amounts described in clauses (i) and (ii) above on
each prior Distribution Date exceeded the amount actually distributed as
interest on such prior Distribution Dates and not subsequently distributed (the
"Class B-1 Interest Carryover Shortfall") and (iv) interest at the Class B-1
Bond Interest Rate on any Class B-1 Interest Carryover Shortfall (to the extent
permitted by applicable law). The Interest Payment Amount for the Class B-2
Bonds (the "Class B-2 Interest Payment Amount") will be equal to the sum of (i)
interest at the Class B-2 Bond Interest Rate on the Class B-2 Principal Amount,
(ii) interest at the Class B-2 Bond Interest Rate on any Class B-2 Principal
Carryover Shortfall, (iii) the sum of the amounts, if any, by which the sum of
the amounts described in clauses (i) and (ii) above on each prior Distribution
Date exceed the amount actually distributed
S-24
<PAGE> 26
as interest on such prior Distribution Dates and not subsequently distributed
(the "Class B-2 Interest Carryover Shortfall") and (iv) interest at the Class
B-2 Bond Interest Rate on any Class B-2 Interest Carryover Shortfall (to the
extent permitted by applicable law). The Interest Payment Amount for the
Investor Certificate (the "Certificate Interest Payment Amount") will be equal
to interest at the Certificate Interest Rate on the Invested Amount. The Senior
Bonds will not be entitled to interest on any Senior Interest Payment Amount not
paid when due prior to such time as the Bonds are declared immediately due and
payable upon the occurrence of an Event of Default as described herein under
"-- PRIORITY OF PAYMENTS AND ALLOCATION OF SHORTFALLS." The Investor Certificate
will not be entitled to interest on any Certificate Interest Payment Amount not
paid when due.
The interest payable on any Distribution Date as described above, but not
the entitlement thereto, for each Class of Bonds will be reduced by their
respective proportionate amounts of "Net Interest Shortfalls" for such
Distribution Date, if any, based on the amount of interest each Class of Bonds
would otherwise be entitled to receive on such Distribution Date before taking
into account any reduction in such amounts resulting from such Net Interest
Shortfalls. With respect to any Distribution Date, the "Net Interest Shortfall"
is equal to the amount by which the sum of (i) the amount of interest which
would otherwise have been received with respect to any Mortgage Loan that was
the subject of a Relief Act Reduction and (ii) any Prepayment Interest
Shortfalls, in each case during the calendar month preceding the month of such
Distribution Date, exceeds the sum of (i) the Master Servicing Fee for such
period and (ii) the amounts otherwise payable on such Distribution Date to the
holder of the Investor Certificate as described in clauses "SEVENTH", "EIGHTH"
and "ninth" under "-- PRIORITY OF PAYMENTS AND ALLOCATION OF SHORTFALLS" below.
A "Relief Act Reduction" is a reduction in the amount of monthly interest
payment on a Mortgage Loan pursuant to the Soldiers' and Sailors' Civil Relief
Act of 1940. See "CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS -- SOLDIERS AND
SAILORS' CIVIL RELIEF ACT" in the Prospectus. A "Prepayment Interest Shortfall"
is the amount by which interest paid by a borrower in connection with a
prepayment of principal on a Mortgage Loan is less than one month's interest at
the related Mortgage Rate on the Stated Principal Balance of such Mortgage Loan.
Accrued interest to be paid on any Distribution Date will be calculated, in
the case of each Class of Bonds and the Investor Certificate, on the basis of
the related Class Principal Amount or Invested Amount, as applicable,
immediately prior to such Distribution Date. Interest will be calculated and
payable on the basis of a 360-day year divided into twelve 30-day months.
PRINCIPAL
GENERAL. All payments and other amounts received in respect of principal
of the Mortgage Loans will be allocated among the Senior Bonds, the Subordinated
Bonds and the Investor Certificate.
SENIOR PRINCIPAL PAYMENT AMOUNT. On each Distribution Date, the Available
Funds remaining after payment of interest with respect to the Senior Bonds, up
to the amount of the Senior Principal Payment Amount for such Distribution Date,
will be distributed as principal of the Senior Bonds. The "Senior Principal
Payment Amount" for any Distribution Date will equal the Senior Percentage of
the sum of (a) the principal portion of the Scheduled Payment due on each
Mortgage Loan [on the related Due Date], (b) the principal portion of the
purchase price of each Mortgage Loan that was purchased by AmREIT or another
person pursuant to the Mortgage Loan Purchase Agreement (as defined herein) [or
any optional purchase by the Master Servicer or the Company of a defaulted
Mortgage Loan] as of such Distribution Date, (c) the Substitution Adjustment
Amount in connection with any Deleted Mortgage Loan received with respect to
such Distribution Date, (d) any Insurance Proceeds or Liquidation Proceeds
allocable to recoveries of principal of Mortgage Loans that are not yet
Liquidated Mortgage Loans received during the [calendar month] preceding the
month of such Distribution Date, (e) with respect to each Mortgage Loan that
became a Liquidated Mortgage Loan during the [calendar month] preceding the
month of such Distribution Date, the Stated Principal Balance of such Mortgage
Loan, and (f) all partial and full principal prepayments by borrowers received
during the [calendar month] preceding the month of such Distribution Date.
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<PAGE> 27
"Stated Principal Balance" means, as to any Mortgage Loan and Due Date, the
unpaid principal balance of such Mortgage Loan as of such Due Date, as specified
in the amortization schedule at the time relating thereto (before any adjustment
to such amortization schedule by reason of any moratorium or similar waiver or
grace period), after giving effect to any previous partial principal prepayments
and Liquidation Proceeds received and to the payment of principal due on such
Due Date and irrespective of any delinquency in payment by the related
Mortgagor. The "Pool Principal Balance" with respect to any Distribution Date
equals the aggregate of the Stated Principal Balances of the Mortgage Loans
outstanding on the Due Date in the month preceding the month of such
Distribution Date.
The "Senior Percentage" for any Distribution Date is the percentage
equivalent of a fraction the numerator of which is the Senior Class Principal
Amount immediately prior to such date and the denominator of which is the sum of
(i) the Senior Class Principal Amount, (ii) the Class B-1 Principal Amount,
(iii) the Class B-2 Principal Amount and (iv) the Invested Amount, in each case
immediately prior to such date. The "Class B-1 Percentage" for any Distribution
Date is the percentage equivalent of a fraction the numerator of which is the
Class B-1 Principal Amount immediately prior to such date and the denominator of
which is the sum of (i) the Senior Class Principal Amount, (ii) the Class B-1
Principal Amount, (iii) the Class B-2 Principal Amount and (iv) the Invested
Amount, in each case immediately prior to such date. The "Class B-2 Percentage"
for any Distribution Date is the percentage equivalent of a fraction the
numerator of which is the Class B-2 Principal Amount immediately prior to such
date and the denominator of which is the sum of (i) the Senior Class Principal
Amount, (ii) the Class B-1 Principal Amount, (iii) the Class B-2 Principal
Amount and (iv) the Invested Amount, in each case immediately prior to such
date. The "Investor Percentage" for any Distribution Date will be calculated as
the difference between 100% and the sum of the Senior Percentage, the Class B-1
Percentage and the Class B-2 Percentage for such date.
SUBORDINATED PRINCIPAL PAYMENT AMOUNT. On each Distribution Date, to the
extent of Available Funds therefor, the Class B-1 and Class B-2 Principal
Payment Amounts for such Distribution Date will be distributed as principal of
the Class B-1 and Class B-2 Bonds, respectively. The "Class B-1 Principal
Payment Amount" and the "Class B-2 Principal Payment Amount" for any
Distribution Date will equal the sum of (i) the Class B-1 Percentage or the
Class B-2 Percentage, as applicable, of the sum of (a) the principal portion of
the Scheduled Payment due on each Mortgage Loan [on the related Due Date], (b)
the principal portion of the purchase price of each Mortgage Loan that was
purchased by AmREIT or another person pursuant to the Mortgage Loan Purchase
Agreement [or by the Master Servicer in connection with any optional purchase by
the Master Servicer or the Company of a defaulted Mortgage Loan] as of such
Distribution Date, (c) the Substitution Adjustment Amount in connection with any
Deleted Mortgage Loan received with respect to such Distribution Date, (d) any
Insurance Proceeds or Liquidation Proceeds allocable to recoveries of principal
of Mortgage Loans that are not yet Liquidated Mortgage Loans received during the
[calendar month] preceding the month of such Distribution Date, (e) with respect
to each Mortgage Loan that became a Liquidated Mortgage Loan during the
[calendar month] preceding the month of such Distribution Date, the Stated
Principal Balance of such Mortgage Loan and (f) all partial and full principal
prepayments by borrowers received during the [calendar month] preceding the
month of such Distribution Date and (ii) any Class B-1 Principal Carryover
Shortfall or Class B-2 Principal Carryover Shortfall, as the case may be. The
"Class B-1 Principal Carryover Shortfall" for any Distribution Date will equal
the excess of (a) the Original Class B-1 Principal Amount reduced by all amounts
previously distributed to holders of the Class B-1 Bonds as payments of
principal or Class B-1 Principal Carryover Shortfall, over (b) the Class B-1
Principal Amount immediately prior to such date. The "Class B-2 Principal
Carryover Shortfall" for any Distribution Date will equal the excess of (a) the
Original Class B-2 Principal Amount reduced by all amounts previously
distributed to holders of the Class B-2 Bonds as payments of principal or Class
B-2 Principal Carryover Shortfall, over (b) the Class B-2 Principal Amount
immediately prior to such date.
INVESTED AMOUNT PAYMENT. On each Distribution Date, to the extent of
Available Funds therefor, the Invested Amount Payment for such Distribution Date
will be distributed in reduction of the Invested Amount of the Investor
Certificate. The "Invested Amount Payment" for any Distribution Date will equal
the sum of (i) the Investor Percentage of the sum of (a) the principal portion
of the Scheduled Payment due on each Mortgage Loan [on the related Due Date],
(b) the principal portion of the purchase price of each Mortgage
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<PAGE> 28
Loan that was purchased by AmREIT or another person pursuant to the Mortgage
Loan Purchase Agreement (as defined herein)[or any optional purchase by the
Master Servicer or the Company of a defaulted Mortgage Loan] as of such
Distribution Date, (c) the Substitution Adjustment Amount in connection with any
Deleted Mortgage Loan received with respect to such Distribution Date, (d) any
Insurance Proceeds or Liquidation Proceeds allocable to recoveries of principal
of Mortgage Loans that are not yet Liquidated Mortgage Loans received during the
[calendar month] preceding the month of such Distribution Date, and (e) all
partial and full principal prepayments by borrowers received during the
[calendar month] preceding the month of such Distribution Date, and (ii) with
respect to each Mortgage Loan that became a Liquidated Mortgage Loan during the
[calendar month] preceding the month of such Distribution Date, the Liquidation
Proceeds allocable to principal received with respect to such Mortgage Loan,
after application of such amounts pursuant to clause (e) of the definition of
Senior Principal Payment Amount, clause (e) of the definition of Class B-1
Principal Payment Amount and clause (e) of the definition of Class B-2 Principal
Payment Amount.
PRIORITY OF PAYMENTS AND ALLOCATION OF SHORTFALLS
Prior to the declaration that the Bonds are due and payable, on any
Distribution Date Available Funds will be applied in the following order of
priority:
first, to the Senior Interest Payment Amount;
second, to the Senior Principal Payment Amount;
third, to the Class B-1 Interest Payment Amount;
fourth, to the Class B-1 Principal Payment Amount;
fifth, to the Class B-2 Interest Payment Amount;
sixth, to the Class B-2 Principal Payment Amount;
seventh, to the Certificate Interest Payment Amount;
eighth, to the Invested Amount Payment; and
ninth, to the holder of the Investor Certificate, the balance of any
Available Funds remaining in the Bond Account.
If a Realized Loss results in the Stated Principal Balances of the Mortgage
Loans declining in an amount greater than the sum of (i) the payments of
principal on the Senior Bonds, (ii) the payments of principal on the Class B-1
Bonds, (iii) the payments of principal on the Class B-2 Bonds and (iv) the
payment in reduction of the Invested Amount, the Senior Percentage, the Class
B-1 Percentage, the Class B-2 Percentage and the Investor Percentage may shift
(as a result of their methods of computation as described above under
"-- PRINCIPAL") such that funds available in the Distribution Account for
payments of principal on each future Distribution Date may be allocated in a
higher ratio to the Offered Bonds as a result of such shortfall. This shift of
the Senior Percentage, the Class B-1 Percentage, the Class B-2 Percentage and
the Investor Percentage may cause the Offered Bonds to amortize more rapidly,
and the Class B-2 Bonds and the Investor Certificate to amortize more slowly,
than would otherwise have been the case in the absence of such shortfalls. An
investor should consider the risk that, in the case of any Offered Bond
purchased at a discount, a slower than anticipated rate of principal payments on
the Mortgage Loans could result in an actual yield to such investor that is
lower than the anticipated yield and, in the case of any Offered Bond purchased
at a premium, a faster than anticipated rate of principal payments on the
Mortgage Loans could result in an actual yield to such investor that is lower
than the anticipated yield. In addition, an investor in the Offered Bonds should
consider the risk that there can be no assurance that investors in the Offered
Bonds will be able to reinvest the payments thereon at yields equaling or
exceeding the yields on such Bonds. It is possible that yields on any such
reinvestments will be lower, and may be significantly lower, than the yields on
the Offered Bonds. See "RISK FACTORS -- YIELD, PREPAYMENT AND MATURITY RISKS"
herein and "RISK FACTORS -- PREPAYMENT AND YIELD CONSIDERATIONS; REINVESTMENT
RISK" in the Prospectus. In general, a "Realized Loss" means, with respect to a
Liquidated Mortgage Loan, the amount by
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<PAGE> 29
which the remaining unpaid principal balance of the related Mortgage Loan
exceeds the amount of Liquidation Proceeds applied to the principal balance of
the related Mortgage Loan. A "Liquidated Mortgage Loan" is a defaulted Mortgage
Loan as to which the Master Servicer has determined that all recoverable
liquidation and insurance proceeds have been received.
Under the Indenture, an Event of Default will not occur solely due to the
occurrence of Shortfalls that affect only the Subordinated Bonds until all the
Senior Bonds have been paid in full and then only if Shortfalls on the
Subordinated Bonds have not been paid. In addition, an Event of Default by
reason of any Shortfalls that affect the Senior Bonds will occur on any
Distribution Date only when the Pool Principal Balance is less than the
principal amount of the Senior Bonds outstanding after application of all
available amounts on deposit in the Distribution Account on such Distribution
Date. Nevertheless, at any time following an Event of Default arising from a
Shortfall affecting the Senior Bonds, the holders of outstanding Bonds, whether
Senior Bonds or Subordinated Bonds, representing more than 50% in principal
amount of all Bonds then outstanding, may declare the Bonds due and payable or
take any other action pursuant to the terms of the Indenture. Until the Bonds
have been declared due and payable following an Event of Default, the holders of
the Subordinated Bonds may not request the Bond Trustee to take any action,
other than the application of available funds in the Distribution Account to pay
principal and interest as provided herein, and may not otherwise cause any
action to be taken to enforce the obligation of the Bond Issuer to pay principal
and interest on the Subordinated Bonds. Additionally, prior to the Bonds being
declared due and payable following an Event of Default, the Senior Bonds will
not accrue interest in any form on the interest component of any Shortfall
attributable to the Senior Bonds. Should an Event of Default occur, payments
will be allocated on each Distribution Date in accordance with the priorities
described herein under "-- PRINCIPAL", which would otherwise be applicable on
such Distribution Date had an Event of Default not occurred. See "THE
AGREEMENTS" in the Prospectus.
STATED MATURITY
The Stated Maturity for each Class of Bonds is the date determined by the
Company which is years after the Distribution Date immediately
following the latest maturity date of any Mortgage Loan. The Stated Maturity of
each Class of Bonds is , 20 . See "TRUST FUND ASSETS --
WEIGHTED AVERAGE LIFE OF THE OFFERED BONDS" and "SECURITY FOR THE BONDS" herein
and in the Prospectus.
STRUCTURING ASSUMPTIONS
Unless otherwise specified, the information in the tables in this
Prospectus Supplement has been prepared on the basis of the following assumed
characteristics of the Mortgage Loans and the following additional assumptions
(collectively, the "Structuring Assumptions"): (i) the Mortgage Pool consists of
one Mortgage Loan with the following characteristics:
<TABLE>
<CAPTION>
REMAINING
ORIGINAL TERM TERM
NET MORTGAGE IN MATURITY TO MATURITY
PRINCIPAL BALANCE MORTGAGE RATE RATE (IN MONTHS) (IN MONTHS)
- ----------------- ------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
$ % %
</TABLE>
(ii) the Mortgage Loans prepay at the specified constant Prepayment Assumptions,
(iii) no defaults in the payment by Mortgagors of principal of and interest on
the Mortgage Loans are experienced, (iv) scheduled payments on the Mortgage
Loans are received on the first day of each month commencing in the calendar
month following the Closing Date and are computed prior to giving effect to
prepayments received on the last day of the prior month, (v) prepayments are
allocated as described herein without giving effect to loss and delinquency
tests, (vi) there are no Net Interest Shortfalls and prepayments represent
prepayments in full of individual Mortgage Loans and are received on the last
day of each month, commencing in the calendar month of the Closing Date, (vii)
the scheduled monthly payment for each Mortgage Loan has been calculated based
on the assumed mortgage loan characteristics described in item (i) above such
that each such mortgage loan will amortize in amounts sufficient to repay the
principal balance of such assumed mortgage loan by its
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<PAGE> 30
remaining term to maturity, (viii) the initial Class Principal Amount or
Invested Amount, as applicable, of each Class of Bonds and the Investor
Certificate, respectively, is as set forth on the cover page hereof and under
"SUMMARY -- SECURITIES OTHER THAN THE OFFERED BONDS" herein, (ix) interest
accrues on each Class of Bonds and the Investor Certificate at the applicable
interest rate described on the cover hereof or described herein, (x) payments in
respect of the Bonds and the Investor Certificate are received in cash on the
th day of each month commencing in the calendar month following the Closing
Date, (xi) the closing date of the sale of the Offered Bonds is ,
199 , (xii) AmREIT is not required to purchase or substitute for any
Mortgage Loan and (xiii) [the Master Servicer or the Company does not exercise
any option to purchase any Mortgage Loans described herein under "-- OPTIONAL
PURCHASE OF DEFAULTED LOANS"] and the Bond Issuer does not exercise any option
to redeem the Bonds as described herein under "-- REDEMPTION AT THE OPTION OF
THE BOND ISSUER." While it is assumed that each of the Mortgage Loans prepays at
the specified constant Prepayment Assumptions, this is not likely to be the
case. Moreover, discrepancies exist between the characteristics of the actual
Mortgage Loans which will be delivered to the Bond Trustee and characteristics
of the Mortgage Loans assumed in preparing the tables herein.
Prepayments of mortgage loans commonly are measured relative to a
prepayment standard or model. The model used in this Prospectus Supplement (the
"Prepayment Assumption") represents an assumed rate of prepayment each month
relevant to the then outstanding principal balance of a pool of mortgage loans.
The Prepayment Assumption does not purport to be either an historical
description of the prepayment experience of any pool of mortgage loans or a
prediction of the anticipated rate of prepayment of any pool of mortgage loans,
including the Mortgage Loans. A 100% Prepayment Assumption assumes a Constant
Prepayment Rate ("CPR") of % per annum of the then outstanding principal
balance of such mortgage loans in the first month of the life of the mortgage
loans and an additional % per annum in each month thereafter until the
month. Beginning in the month and in each month
thereafter during the life of such mortgage loans, a 100% Prepayment Assumption
assumes a CPR of % per annum each month. As used in the tables below, a
% Prepayment Assumption assumes a prepayment rate equal to % of the
Prepayment Assumption. Correspondingly, a % Prepayment Assumption assumes a
prepayment rate equal to % of the Prepayment Assumption, and so forth.
[OPTIONAL PURCHASE OF DEFAULTED LOANS
The Master Servicer or the Company may, at its option, purchase from the
Bond Issuer any Mortgage Loan which is delinquent in payment by days
or more. Any such purchase will be at a price equal to 100% of the Stated
Principal Balance of such Mortgage Loan plus accrued interest thereon at the
applicable Mortgage Rate from the date through which interest was last paid by
the related Mortgagor or advanced to the first day of the month in which such
amount is to be distributed.]
WEIGHTED AVERAGE LIVES OF THE OFFERED BONDS
The weighted average life of an Offered Bond is determined by (a)
multiplying the amount of the reduction, if any, of the Class Principal Amount
of such Bond on each Distribution Date by the number of years from the date of
issuance to such Distribution Date, (b) summing the results and (c) dividing the
sum by the aggregate amount of the reductions in Class Principal Amount of such
Bond referred to in clause (a).
For a discussion of the factors which may influence the rate of payments
(including prepayments) of the Mortgage Loans, see "RISK FACTORS -- YIELD,
PREPAYMENT AND MATURITY RISKS" herein and "RISK FACTORS -- PREPAYMENT AND YIELD
CONSIDERATIONS" in the Prospectus.
In general, the weighted average lives of the Offered Bonds will be
shortened if the level of prepayments of principal of the Mortgage Loans
increases. However, the weighted average lives of the Offered Bonds will depend
upon a variety of other factors, including the timing of changes in such rate of
principal payments and the priority sequence of distributions of principal of
the Classes of Bonds. See "DESCRIPTION OF THE BONDS -- PRINCIPAL" herein.
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<PAGE> 31
The interaction of the foregoing factors may have different effects on the
Senior Bonds and the Class B-1 Bonds and the effects on any Class may vary at
different times during the life of such Class. Accordingly, no assurance can be
given as to the weighted average life of any Class of Offered Bonds. Further, to
the extent the prices of the Offered Bonds represent discounts or premiums to
their respective original Class Principal Amounts, variability in the weighted
average lives of such Classes of Bonds will result in variability in the related
yields to maturity. For an example of how the weighted average lives of the
Classes of Offered Bonds may be affected at various constant Prepayment
Assumptions, see the Decrement Tables below.
DECREMENT TABLES
The following tables indicate the percentages of the initial Class
Principal Amounts of the Classes of Offered Bonds that would be outstanding
after each of the dates shown at various constant Prepayment Assumptions and the
corresponding weighted average lives of such Classes. The tables have been
prepared on the basis of the Structuring Assumptions. It is not likely that (i)
all of the Mortgage Loans will have the characteristics assumed, (ii) all of the
Mortgage Loans will prepay at the constant Prepayment Assumptions specified in
the tables or at any constant Prepayment Assumption or (iii) all of the Mortgage
Loans will prepay at the same rate. Moreover, the diverse remaining terms to
maturity of the Mortgage Loans could produce slower or faster principal payments
than indicated in the tables at the specified constant Prepayment Assumptions,
even if the weighted average remaining term to maturity of the Mortgage Loans is
consistent with the remaining terms to maturity of the Mortgage Loans specified
in the Structuring Assumptions.
PERCENT OF INITIAL CLASS PRINCIPAL AMOUNTS OUTSTANDING
[DECREMENT TABLES]
REDEMPTION AT THE OPTION OF THE BOND ISSUER
The Bonds may be redeemed in whole, but not in part, at the Bond Issuer's
option, on any Distribution Date on or after the earlier of (a) years
after the initial issuance of the Bonds and (b) the Distribution Date on which
the sum of (i) the Senior Class Principal Amount (ii) the Class B-1 Principal
Amount, (iii) the Class B-2 Principal Amount and (iv) the Invested Amount, after
giving effect to payments to be made on such Distribution Date, is
or less of the aggregate of the Stated Principal Balances of the Mortgage Loans
as of the Cut-off Date, at a redemption price equal to 100% of the unpaid
principal amount of such Bonds (including, in the case of the Class B-1 or Class
B-2 Bonds, any unpaid Class B-1 or Class B-2 Principal Carryover Shortfall),
plus accrued and unpaid interest at the applicable Bond Interest Rate through
the month preceding the month in which such optional redemption date occurs. The
Bonds are not otherwise subject to call or redemption at the option of the Bond
Issuer nor are they subject to special redemption. See "DESCRIPTION OF THE
SECURITIES -- REDEMPTION AT THE OPTION OF THE ISSUER" in the Prospectus.
Notice of any redemption to be made at the option of the Bond Issuer must
be given by the Bond Issuer to the Bond Trustee not less than 30 days prior to
the redemption date and must be mailed by the Bond Issuer or the Bond Trustee to
affected Bondholders at least ten days prior to the redemption date.
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<PAGE> 32
CONTROLLING CLASS UNDER THE INDENTURE
For the purposes described in the Prospectus under the headings "THE
AGREEMENTS -- MODIFICATION OF AGREEMENTS," "-- EVENTS OF DEFAULT" and "RIGHTS
UPON EVENT OF DEFAULT," the "Controlling Class" shall be the Class A-1
Bondholders or, if the Class A-1 Bonds are no longer outstanding, the holders of
the most senior Class of Subordinated Bonds then outstanding.
BOOK-ENTRY BONDS
The Offered Bonds will be book-entry Bonds (each, a Class of "Book-Entry
Bonds"). Persons acquiring beneficial ownership interests in the Offered Bonds
("Bond Owners") may elect to hold their Offered Bonds 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 Bonds will be issued in one or
more certificates which equal the aggregate principal amount of the Offered
Bonds 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"). Investors may hold such beneficial interests in the Book-Entry
Bonds in minimum denominations representing Class Principal Amounts of
$ and in multiples of $1,000 in excess thereof. Except as described
below, no person acquiring a Book-Entry Bond (each, a "beneficial owner") will
be entitled to receive a physical certificate representing such Offered Bond (a
"Definitive Bond"). Unless and until Definitive Bonds are issued, it is
anticipated that the only "Bondholders" of the Offered Bonds will be Cede & Co.,
as nominee of DTC. Bond Owners will not be Bondholders as that term is used in
the Indenture. Bond Owners are only permitted to exercise their rights
indirectly through the participating organizations that utilize the services of
DTC, including securities brokers and dealers, banks and trust companies and
clearing corporations and certain other organizations ("Participants") and DTC.
The beneficial owner's ownership of a Book-Entry Bond 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 Bond 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).
Bond Owners will receive all payments of principal of, and interest on, the
Offered Bonds from the Bond Trustee through DTC and DTC participants. While the
Offered Bonds 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 Bonds and is
required to receive and transmit payments of principal of, and interest on, the
Bonds. Participants and indirect participants which have indirect access to the
DTC system, such as banks, brokers, dealers and trust companies that clear
through or maintain a custodial relationship with a Participant, either directly
or indirectly ("Indirect Participants"), with whom Bond Owners have accounts
with respect to Offered Bonds are similarly required to make book-entry
transfers and receive and transmit such payments on behalf of their respective
Bond Owners. Accordingly, although Bond Owners will not possess certificates,
the Rules provide a mechanism by which Bond Owners will receive payments and
will be able to transfer their interest.
Bond Owners will not receive or be entitled to receive certificates
representing their respective interests in the Bonds, except under the limited
circumstances described below. Unless and until Definitive Bonds are issued,
Bond Owners who are not Participants may transfer ownership of Offered Bonds
only through Participants and Indirect Participants by instructing such
Participants and Indirect Participants to transfer Offered Bonds, by book-entry
transfer, through DTC for the account of the purchasers of such Offered Bonds,
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<PAGE> 33
which account is maintained with their respective Participants. Under the Rules
and in accordance with DTC's normal procedures, transfers of ownership of
Offered 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 Bond 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. 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. For information relating to tax documentation procedures
relating to the Offered Bonds, see "CERTAIN FEDERAL INCOME TAX
CONSEQUENCES -- WITHHOLDING WITH RESPECT TO CERTAIN FOREIGN INVESTORS" and
"-- BACKUP WITHHOLDING" in the Prospectus 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 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.
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 Bonds, whether held for
its own account or as nominee for another person. In general, beneficial
ownership of Book-Entry Bonds 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,
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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 "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.
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 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.
Payments on the Book-Entry Bonds will be made on each Distribution Date by
the Bond 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 payments to the beneficial owners of the Book-Entry Bonds 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 Bonds that it represents.
Under a book-entry format, beneficial owners of the Book-Entry Bonds may
experience some delay in their receipt of payments, since such payments will be
forwarded by the Bond Trustee to Cede & Co., as nominee of DTC. Payments with
respect to Offered Bonds 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 payments will be subject to tax reporting in
accordance with relevant United States tax laws and regulations. See "CERTAIN
FEDERAL INCOME TAX CONSEQUENCES -- WITHHOLDING WITH RESPECT TO CERTAIN FOREIGN
INVESTORS" and " -- BACKUP WITHHOLDING" in the Prospectus. Because DTC can only
act on behalf of Financial Intermediaries, the ability of a beneficial owner to
pledge Book-Entry Bonds to persons or entities that do not participate in the
depository system, or otherwise take actions in respect of such Book-Entry Bond,
may be limited due to the lack of physical certificates for such Book-Entry
Bonds. In addition, issuance of the Offered Bonds in book-entry form may reduce
the liquidity of such Offered Bonds in the secondary market since certain
potential investors may be unwilling to purchase Offered Bonds for which they
cannot obtain physical certificates.
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<PAGE> 35
Monthly and annual reports on the Bond 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 or the Relevant Depositary, and to the Financial
Intermediaries to whose DTC accounts the Book-Entry Bonds of such beneficial
owners are credited.
DTC has advised the Issuer and the Bond Trustee that, unless and until
Definitive Bonds are issued in respect of the Offered Bonds, DTC will take any
action permitted to be taken by the holders of the Book-Entry Bonds under the
Indenture 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 Bonds. CEDEL or the Euroclear Operator, as the case may be, will take
any other action permitted to be taken by a Bondholder under the Indenture 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
Offered Bonds which conflict with actions taken with respect to other Offered
Bonds.
Definitive Bonds will be issued to beneficial owners of the Book-Entry
Bonds, or their nominees rather than to DTC, only if (a) DTC or the Bond Issuer
advises the Bond Trustee in writing that DTC is no longer willing, qualified or
able to discharge properly its responsibilities as nominee and depositary with
respect to the Book-Entry Bonds and the Bond Issuer or the Bond Trustee is
unable to locate a qualified successor or (b) the Bond Issuer, at its sole
option, elects to terminate a book-entry system through DTC.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Bond Trustee will be required to notify all beneficial
owners of the occurrence of such event and the availability through DTC of the
Definitive Bonds. Upon surrender by DTC of the global certificate or
certificates representing the Book-Entry Bonds and instructions for
re-registration, the Bond Trustee will issue Definitive Bonds, and thereafter
the Bond Trustee will recognize the holders of such Definitive Bonds as
Bondholders under the Indenture.
Although DTC, CEDEL and Euroclear have agreed to the foregoing procedures
in order to facilitate transfers of Offered Bonds 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 Company, the Bond Issuer or the Bond
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
Bonds held by Cede & Co., as nominee of DTC, or for maintaining, supervising or
reviewing any records relating to such beneficial ownership interests.
For a description of the procedures generally applicable to the Book-Entry
Bonds, see "DESCRIPTION OF THE SECURITIES -- BOOK-ENTRY BONDS" in the
Prospectus.
CREDIT ENHANCEMENT
Credit enhancement for the Senior Bonds will be provided by the
Subordinated Bonds and by the Investor Certificate. Credit enhancement for the
Class B-1 Bonds will be provided by the Class B-2 Bonds and by the Investor
Certificate. Credit Enhancement for the Class B-2 Bonds will be provided by the
Investor Certificate. The rights of holders of the Subordinated Bonds and the
Investor Certificate to receive payments with respect to the Mortgage Loans will
be subordinated to such rights of the holders of the Senior Bonds, the rights of
the holders of the Class B-2 Bonds and the Investor Certificate will be
subordinated to such rights of the holders of the Class B-1 Bonds, and the
rights of the holder of the Investor Certificate will be subordinated to such
rights of the holders of the Class B-2 Bonds, in each case only to the extent
described herein.
The subordination of (i) the Subordinated Bonds and the Investor
Certificate to the Senior Bonds, (ii) the Class B-2 Bonds and the Investor
Certificate to the Class B-1 Bonds and (iii) the Investor Certificate to the
Class B-2 Bonds are each intended to increase the likelihood of timely receipt
by the holders of Bonds with higher relative payment priority of the maximum
amount to which they are entitled on any Distribution
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<PAGE> 36
Date and to provide such holders protection against losses resulting from
defaults on Mortgage Loans to the extent described herein. However, the amount
of protection afforded by subordination may be exhausted and Shortfalls in
payments on the Offered Bonds could result. Any losses realized on the Mortgage
Loans in excess of the related available subordination amount will result in
losses on the Offered Bonds. See "DESCRIPTION OF THE BONDS -- PRIORITY OF
PAYMENTS AND ALLOCATION OF SHORTFALLS" herein.
MORTGAGE LOAN PROGRAM
UNDERWRITING STANDARDS
All of the Mortgage Loans have been purchased by AmREIT in the ordinary
course of business directly from banks, savings and loan associations, mortgage
bankers and other mortgage loan originators (each, an "Originator"), 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 will
represent and warrant 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.
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 condition, the borrower
generally is required to provide a current list of assets and liabilities and a
statement of income and expense, 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 may also be required to authorize
verification of deposits at financial institutions where the borrower has demand
or savings accounts. See "MORTGAGE LOAN PROGRAM -- UNDERWRITING STANDARDS" in
the Prospectus.
SERVICING OF THE MORTGAGE LOANS
THE MASTER SERVICER
will act as Master Servicer. The principal executive offices
of are located at .
The Master Servicer will be responsible for servicing the Mortgage Loans in
accordance with the terms set forth in the Master Servicing Agreement. The
Master Servicer intends to perform its servicing obligations under the Master
Servicing Agreement directly or through one or more servicers (each, a
"Servicer"). On or prior to the Closing Date, the Master Servicer will enter
into or be assigned a mortgage servicing agreement (each, a "Servicing
Agreement") with each Servicer pursuant to which such Servicer will perform
certain servicing functions with respect to the Mortgage Loans. The Master
Servicer will administer and supervise the performance of each Servicer, who may
in turn be administering and supervising the performance of the subservicers of
the Mortgage Loans. Notwithstanding any such servicing arrangements, the Master
Servicer will remain liable for its servicing duties and obligations under the
Master Servicing Agreement.
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<PAGE> 37
SERVICING AND COLLECTION PROCEDURES
On or prior to the Closing Date, the Master Servicer may enter into a
separate Servicing Agreement with each Servicer to perform, as independent
contractor, servicing functions for the Master Servicer subject to its
supervision. Such servicing functions include 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 Servicers will not
thereby be released from their obligations under the Servicing Agreement. The
Master Servicer also may enter into subservicing agreements 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 Servicer directly or through an agent or independent
contractor and the Master Servicer will be responsible for administering and
servicing the Mortgage Loans pursuant to the Master Servicing Agreement.
On or before the Closing Date, the Master Servicer will establish one or
more accounts (the "Bond Account") into which each Servicer will remit
collections on the mortgage loans serviced by it (net of its related servicing
compensation). 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
has reserved the right to remove the Servicer servicing any Mortgage Loan at any
time and will exercise that right if it considers such removal to be in the best
interest of the Bondholders. In the event that the Master Servicer removes a
Servicer, the Master Servicer will continue to be responsible for servicing the
related Mortgage Loans.
FORECLOSURE, DELINQUENCY AND LOSS EXPERIENCE
The following table summarizes the delinquency, foreclosure and loss
experience, respectively, as of December 31, 199 , December 31, 199 and December
31, 199 on approximately $ , $ and $ , respectively,
in outstanding principal balance of conventional mortgage loans master serviced
by , commenced master servicing conventional mortgage
loans during . The delinquency and foreclosure percentages and the
loss experience may be affected by the size and relative lack of seasoning of
the servicing portfolio because many of such mortgage loans were not outstanding
long enough to give rise to some or all of the indicated periods of delinquency.
Accordingly, the information should not be considered as a basis for assessing
the likelihood, amount or severity of delinquency or losses on the
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<PAGE> 38
Mortgage Loans, and no assurances can be given that the foreclosure, delinquency
and loss experience presented in the table below will be indicative of such
experience on the Mortgage Loans in the future:
<TABLE>
<CAPTION>
AS OF AS OF AS OF
DECEMBER 31, DECEMBER 31, DECEMBER 31,
199 199 199
------------ ------------ ------------
<S> <C> <C> <C>
Total Number of Conventional Mortgage Loans in
Portfolio...................................
Delinquent Mortgage Loans and Pending
Foreclosures at Period End(1):..............
30-59 days..................................
60-89 days..................................
90 days or more (excluding foreclosures)....
Total Delinquencies.........................
Foreclosures pending........................
Total delinquencies and foreclosures
pending..................................
Net Loss(2).................................
</TABLE>
- ---------------
(1) As a percentage of the total number of loans master serviced.
(2) There is no material difference between gross loss and net loss.
There can be no assurance that factors beyond the Master Servicer's
control, such as national or local economic conditions or downturns in the real
estate markets of its lending areas, will not result in increased rates of
delinquencies and foreclosure losses in the future. [For example, over the last
several years there has been a general deterioration of the real estate market
and weakening of the economy in many regions of the country, including
California. The general deterioration of the real estate market has been
reflected in increases in delinquencies of loans secured by real estate, slower
absorption rates of real estate into the market and lower sales prices for real
estate. The general weakening of the economy has been reflected in decreases in
the financial strength of borrowers and decreases in the value of collateral
serving as collateral for loans. If the real estate market and economy continue
to decline, the Master Servicer may experience an increase in delinquencies on
the loans it services and higher net losses on liquidated loans.]
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
The Expense Fees with respect to the Mortgage Loans are payable out of the
interest payments on each Mortgage Loan. The Expense Fees will vary from
Mortgage Loan to Mortgage Loan. The rate at which the Expense Fees accrue (the
"Expense Fee Rate") will range from % to % per annum, in each case of
the Stated Principal Balance of the related Mortgage Loan. As of the Cut-off
Date, the weighted average Expense Fee Rate equaled approximately %. The
Expense Fees consist of (a) master servicing compensation payable to the Master
Servicer in respect of its master servicing activities (the "Master Servicing
Fee"), (b) servicing compensation payable to the Servicers in respect of their
servicing activities (the "Servicing Fee") and (c) fees payable to the Bond
Trustee in respect of its activities as trustee under the Indenture. The Master
Servicing Fee will be % per annum of the Stated Principal Balance of each
Mortgage Loan. The Servicing Fee payable to each Servicer will vary from
Mortgage Loan to Mortgage Loan and will range from % to % per annum,
in each case of the Stated Principal Balance of the related Mortgage Loan
serviced by such Servicer. The Master Servicer is obligated to pay certain
ongoing expenses associated with the Mortgage Loans and incurred by the Master
Servicer in connection with its responsibilities under the Master Servicing
Agreement and such amounts will be paid by the Master Servicer out of the Master
Servicing Fee. The amount of the Master Servicing Fee is subject to adjustment
with respect to prepaid Mortgage Loans, as described herein under
" -- ADJUSTMENT TO MASTER SERVICING FEE AND INVESTED AMOUNT IN CONNECTION WITH
CERTAIN PREPAID MORTGAGE LOANS." The Master Servicer or the related Servicer
will also be entitled to receive late payment fees, assumption fees and other
similar charges. The Master Servicer will be entitled to receive all
reinvestment
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<PAGE> 39
income earned on amounts on deposit in the Bond Account and the Distribution
Account. The Net Mortgage Rate of a Mortgage Loan is the Mortgage Rate thereof
minus the related Expense Fee Rate.
ADJUSTMENT TO MASTER SERVICING FEE AND INVESTED AMOUNT IN CONNECTION WITH
CERTAIN PREPAID MORTGAGE LOANS
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. Principal prepayments by borrowers received during a
calendar month will be distributed to Bondholders on the Distribution Date in
the month following the month of receipt. Pursuant to the Master Servicing
Agreement, the Master Servicing Fee for any month may be reduced by an amount
with respect to each such prepaid Mortgage Loan sufficient to pay to Bondholders
the full amount of interest to which they would be entitled in respect of such
Mortgage Loan on the related Distribution Date. If shortfalls in interest as a
result of prepayments in any month exceed the sum of (i) amount of the Master
Servicing Fee for such month and (ii) the amounts otherwise payable on such
Distribution Date to the holder of the Investor Certificate as described in
clauses "seventh", "eighth" and "ninth" under "DESCRIPTION OF THE
BONDS -- PRIORITY OF PAYMENTS AND ALLOCATION OF SHORTFALLS" herein, the amount
of funds available to be paid to Bondholders in respect of interest on such
Distribution Date will be reduced by the amount of such excess. See "DESCRIPTION
OF THE BONDS -- INTEREST" herein.
ADVANCES
Subject to the following limitations, the Master Servicer will be required
to advance prior to each Distribution Date, from its own funds, funds advanced
by the related Servicer or amounts received with respect to the Mortgage Loans
that do not constitute Available Funds for such Distribution Date, an amount
equal to the aggregate of payments of principal of and interest on the Mortgage
Loans (net of the Master Servicing Fee and the applicable Servicing Fee with
respect to the related Mortgage Loans) which were due on the related Due Date
and which were delinquent on the related Determination Date, together with an
amount equivalent to interest on each Mortgage Loan as to which the related
Mortgaged Property has been acquired by the Bond Trustee through foreclosure or
deed-in-lieu of foreclosure ("REO Property") (any such advance, an "Advance").
Advances are intended to maintain a regular flow of scheduled interest and
principal payments on the Bonds and the Investor Certificate rather than to
guarantee or insure against losses. The Master Servicer is obligated to make
Advances with respect to delinquent payments of principal of or interest on each
Mortgage Loan to the extent that such Advances are, in its reasonable judgment,
recoverable from future payments and collections or insurance payments or
proceeds of liquidation of the related Mortgage Loan. If the Master Servicer
determines on any Determination Date to make an Advance, such Advance will be
included with the payment to Bondholders and the holder of the Investor
Certificate on the related Distribution Date. [Any failure by a Servicer to
advance funds as required under the related Servicing Agreement will constitute
a default thereunder, in which case the Master Servicer will be obligated to
make any such advance in accordance with the terms of the Master Servicing
Agreement.] Any failure by the Master Servicer to make an Advance as required
under the Master Servicing Agreement with respect to the Bonds and the Investor
Certificate will constitute a Servicing Default thereunder, in which case the
Bond Trustee or the successor master servicer will be obligated to make any such
Advance, in accordance with the terms of the Master Servicing Agreement.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Jeffers, Wilson, Shaff & Falk, LLP has advised the Company that, in its
opinion the Bonds will be treated as debt for federal income tax purposes, and
not as an ownership interest in the Mortgage Collateral, the Bond Issuer or a
separate association taxable as a corporation. Interest, including original
issue discount with respect to any Class of Offered Bonds issued with original
issue discount, will be taxable to non-exempt Bondholders. The Tax Prepayment
Assumption (as defined in the Prospectus under "CERTAIN FEDERAL INCOME
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<PAGE> 40
TAX CONSEQUENCES -- INTEREST AND ORIGINAL ISSUE DISCOUNT") for the purposes of
determining the amount and rate of accrual of original issue discount on the
Bonds assumes that the Mortgage Loans are prepaid at a rate of % of the
Prepayment Assumption. Based upon (i) [the assumed prepayment rate] and (ii) the
expected price to the public of each Class of the Offered Bonds as of the date
hereof (including interest accrued before the issue date, if any), the Class A-1
Bonds will not be issued with original issue discount and the Class B-1 Bonds
will be treated as issued with original issue discount. Pursuant to applicable
regulations the Bond Issuer intends to treat the stated interest on the Bonds as
"qualified stated interest payments" (as such term is defined in the Prospectus
under "CERTAIN FEDERAL INCOME TAX CONSEQUENCES").
Notwithstanding the use of the above prepayment assumption in pricing the
Offered Bonds, 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 Bond will be
set forth on the face of such Bond as required by applicable regulations and as
described in the Prospectus. See "DESCRIPTION OF THE BONDS -- WEIGHTED AVERAGE
LIFE OF THE OFFERED BONDS" herein and "CERTAIN FEDERAL TAX CONSEQUENCES" in the
Prospectus.
The Bond Issuer will not elect to treat the segregated pool of assets
securing the Bonds as a real estate mortgage investment conduit ("REMIC") or a
financial asset securitization investment trust ("FASIT") for federal income tax
purposes. Jeffers, Wilson, Shaff & Falk, LLP has further advised the Company
that, in its opinion, the Bond Issuer will not be classified as a taxable
mortgage pool.
ERISA MATTERS
Fiduciaries of employee benefit plans and certain other retirement plans
and arrangements, including individual retirement accounts and annuities, Keogh
plans, and collective investment funds in which such plans, accounts, annuities
or arrangements are invested, that are subject to the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), or corresponding provisions of the
Internal Revenue Code of 1986, as amended (the "Code") (any of the foregoing a
"Plan"), persons acting on behalf of a Plan, or persons using the assets of a
Plan ("Plan Investors"), should carefully review with their legal advisors
whether the purchase or holding of the Offered Bonds could give rise to a
transaction that is prohibited under ERISA or the Code or cause the Mortgage
Loans securing the Offered Bonds to be treated as "plan assets" for purposes of
regulations of the Department of Labor set forth in 29 C.F.R. 2510.3-101 (the
"Plan Asset Regulations"). Prospective investors should be aware that, although
certain exceptions from the application of the prohibited transaction rules and
the Plan Asset Regulations exist, there can be no assurance that any such
exception will apply with respect to the acquisition of the Offered Bonds. See
"ERISA MATTERS" in the Prospectus.
If the Offered Bonds are treated as equity for purposes of ERISA, the
purchaser of the Offered Bonds could be treated as having acquired a direct
interest in the Mortgage Loans securing the Offered Bonds. In that event, the
purchase, holding, or resale of the Offered Bonds could result in a transaction
that is prohibited under ERISA or the Code. Furthermore, regardless of whether
the Offered Bonds are treated as equity for purposes of ERISA, the acquisition
or holding of the Offered Bonds by or on behalf of a Plan could still be
considered to give rise to a prohibited transaction if the Bond Issuer, the Bond
Trustee, the Master Servicer, any Servicer or any of their respective Affiliates
is or becomes a party in interest or a disqualified person with respect to such
Plan. However, one or more alternative exemptions may be available with respect
to certain prohibited transaction rules of ERISA that might apply in connection
with the initial purchase, holding and resale of the Offered Bonds, depending in
part upon the type of Plan fiduciary making the decision to acquire the Offered
Bonds and the circumstances under which such decision is made. Those exemptions
include, but are not limited to: (i) Prohibited Transaction Class Exemption
("PTCE") 95-60, regarding investments by insurance company general accounts;
(ii) PTCE 91-38, regarding investments by bank collective investment funds;
(iii) PTCE 90-1, regarding investments by insurance company pooled separate
accounts; (iv) PTCE 84-14, regarding transactions negotiated by qualified
professional asset managers; or (v) PTCE 96-23 regarding transactions effected
by an in-house asset manager. Before purchasing the Offered Bonds, a Plan
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<PAGE> 41
subject to the fiduciary responsibility provisions of ERISA or described in
Section 4975(e)(1) (and not exempt under Section 4975(g)) of the Code should
consult with its counsel to determine whether the conditions of any exemption
would be met. A purchaser of the Offered Bonds should be aware, however, that
even if the conditions specified in one or more exemptions are met, the scope of
the relief provided by an exemption might not cover all acts that might be
construed as prohibited transactions. See "ERISA MATTERS" in the Prospectus.
Although not entirely free from doubt, the Bond Issuer believes that the
Offered Bonds will be treated as debt obligations without significant equity
features for purposes of the Plan Asset Regulations. Accordingly, a Plan that
acquires the Offered Bonds should not be treated as having acquired a direct
interest in the assets of the Bond Issuer. However, there can be no complete
assurance that the Offered Bonds will be treated as debt obligations without
significant equity features for purposes of the Plan Asset Regulations.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in the Underwriting Agreement
between the Company, AmREIT and the Underwriter, the Company has agreed to cause
the Bond Issuer to sell to the Underwriter, and the Underwriter has agreed to
purchase from the Bond Issuer, the Underwritten Bonds. Distribution of the
Underwritten Bonds will be made by the Underwriter from time to time in
negotiated transactions or otherwise at varying prices to be determined at the
time of sale. In connection with the sale of the Underwritten Bonds, the
Underwriter may be deemed to have received compensation from the Bond Issuer in
the form of underwriting discounts.
The Bond Issuer proposes to offer the Class A-1 Bonds with original
principal balance of $ for sale to AmREIT in a privately negotiated
transaction. AmREIT will initially pledge it's Class A-1 Bonds to [name of
lender] to secure indebtedness. AmREIT or its pledgees, donees, transferees or
other successors in interest may, from time to time, offer such Class A-1 Bonds
for sale to the public in negotiated transactions or otherwise at varying prices
to be determined at the time of sale.
The Underwriter intends to make a secondary market in the Offered Bonds,
but has no obligation to do so. There can be no assurance that a secondary
market for the Offered Bonds will develop or, if it does develop, that it will
continue or that it will provide Bondholders with a sufficient level of
liquidity of investment. The Offered Bonds will not be listed on any national
securities exchange.
The Company and AmREIT have agreed to indemnify the Underwriter against, or
make contributions to the Underwriter with respect to, certain liabilities,
including liabilities under the Securities Act of 1933, as amended.
LEGAL MATTERS
The validity of the Bonds will be passed upon for the Bond Issuer by Tobin
& Tobin, a professional corporation, San Francisco, California. Certain tax
matters will be passed upon by for the Bond Issuer 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 of the issuance of the Senior Bonds that they be rated
AAA by and AAA by ( and, together, the
"Rating Agencies"). It is a condition to the issuance of the Class B-1 Bonds
that they be rated [AA] by .
The ratings assigned by to collateralized mortgage obligations
address the likelihood of the receipt of all payments on the mortgage loans by
the related bondholders under the agreements pursuant to which such bonds are
issued. 's ratings take into consideration the credit quality of the
related mortgage pool, including any credit support providers, structural and
legal aspects associated with such bonds,
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and the extent to which the payment stream on the mortgage pool is adequate to
make the payments required by such bonds. 's ratings on such bonds
do not, however, constitute a statement regarding frequency of prepayments of
the mortgage loans.
The ratings assigned by to the senior bonds address the
likelihood of the receipt of all payments on the mortgage loans by the related
bondholders under the agreements pursuant to which such bonds are issued.
's ratings take into consideration the credit quality of the related
mortgage pool, including any credit support providers, structural and legal
aspects associated with such bonds, and the extent to which the payment stream
on such mortgage pool is adequate to make payments required by such bonds.
's ratings on such bonds do not, however, constitute a statement regarding
frequency of prepayments on the related mortgage loans.
The ratings of the Rating Agencies do not address the possibility that, as
a result of principal prepayments, Bondholders may receive a lower than
anticipated yield.
The ratings assigned to the Offered Bonds should be evaluated independently
from similar ratings on other types of securities. A 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 Bond Issuer has not requested a rating of the Offered Bonds 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 Bonds 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 Bonds could be lower
than the respective ratings assigned by the Rating Agencies.
S-41
<PAGE> 43
INDEX OF CERTAIN DEFINITIONS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Adjustment Date............................................. S-17
Advance..................................................... S-38
Advances.................................................... S-7
AmREIT...................................................... Cover, S-3, S-16
Available Funds............................................. S-24
Beneficial owner............................................ S-31
Bond Account................................................ S-8, S-23, S-36
Bond Distribution Amount.................................... S-23
Bond Interest Rate.......................................... S-24
Bond Issuer................................................. S-2
Bond Owners................................................. S-31
Bond Trustee................................................ S-4
Bonds....................................................... S-22
Book-Entry Bonds............................................ S-31
CEDEL Participants.......................................... S-32
Certificate Interest Payment Amount......................... S-25
Certificate Interest Rate................................... S-3
Class B-1 Bond Interest Rate................................ Cover
Class B-1 Interest Carryover Shortfall...................... S-25, S-26
Class B-1 Interest Payment Amount........................... S-25
Class B-1 Percentage........................................ S-26
Class B-1 Principal Amount.................................. S-23
Class B-1 Principal Carryover Shortfall..................... S-26
Class B-1 Principal Payment Amount.......................... S-26
Class B-2 Interest Carryover Shortfall...................... S-25
Class B-2 Interest Payment Amount........................... S-24
Class B-2 Bond Interest Rate................................ S-3
Class B-2 Percentage........................................ S-26
Class B-2 Principal Amount.................................. S-22
Class B-2 Principal Carryover Shortfall..................... S-24, S-26
Class B-2 Principal Payment Amount.......................... S-26
Class Principal Amount...................................... S-23
Code........................................................ S-9, S-39
Company..................................................... S-2, S-3
Controlling Class........................................... S-31
Cooperative................................................. S-33
CPR......................................................... S-29
Cut-off Date Pool Principal Balance......................... S-17
Definitive Bond............................................. S-31
Deleted Mortgage Loan....................................... S-22
Deposit Trust Agreement..................................... S-4
Depositor................................................... S-2, S-3
Distribution Account........................................ S-8, S-23
Distribution Date........................................... Cover, S-5, S-23
DTC......................................................... S-31
</TABLE>
S-42
<PAGE> 44
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Due Date.................................................... S-17
ERISA....................................................... S-9, S-39
Euroclear Operator.......................................... S-33
Euroclear Participants...................................... S-33
European Depositaries....................................... S-31
Expense Fee Rate............................................ S-37
FASIT....................................................... S-39
FHLMC....................................................... S-18
Financial Intermediary...................................... S-31
FNMA........................................................ S-18
Index....................................................... S-8, S-17
Indirect Participants....................................... S-31
Insurance Proceeds.......................................... S-24
Interest Accrual Period..................................... S-24
Interest Payment Amount..................................... S-5
Invested Amount............................................. S-23
Invested Amount Payment..................................... S-26
Investor Certificate........................................ Cover, S-22
Investor Percentage......................................... S-26
Liquidated Mortgage Loan.................................... S-28
Liquidation Proceeds........................................ S-24
Loan-to-Value Ratio......................................... S-18
Management Agreement........................................ S-4
Margin...................................................... S-17
Master Servicer............................................. S-4
Master Servicing Agreement.................................. S-4
Master Servicing Fee........................................ S-37
Maximum Rate................................................ S-18
Morgan...................................................... S-33
Mortgage.................................................... S-22
Mortgage File............................................... S-22
Mortgage Loan Pool.......................................... S-8
Mortgage Loan Purchase Agreement............................ S-17
Mortgage Loans.............................................. Cover
Mortgage Note............................................... S-22
Mortgage Pool............................................... S-17
Mortgaged Property.......................................... S-17
Net Interest Shortfall...................................... S-25
Net Interest Shortfalls..................................... S-25
Offered Bonds............................................... Cover, S-3, S-23
Original Class B-1 Principal Amount......................... S-23
Original Class B-2 Principal Amount......................... S-23
Original Invested Amount.................................... S-23
Original Senior Class Principal Amount...................... S-23
Originator.................................................. S-35
Owner Trustee............................................... S-4
Participants................................................ S-31
Periodic Rate Cap........................................... S-18
</TABLE>
S-43
<PAGE> 45
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Plan........................................................ S-10, S-39
Plan Asset Regulations...................................... S-10, S-39
Plan Investors.............................................. S-10, S-39
Pool Principal Balance...................................... S-26
Prepayment Assumption....................................... S-29
Prepayment Interest Shortfall............................... S-25
Primary Mortgage Insurance Policy........................... S-18
PTCE........................................................ S-39
Rating Agencies............................................. S-40
Realized Loss............................................... S-27
Record Date................................................. S-23
Relevant Depository......................................... S-31
Relief All Reduction........................................ S-25
REMIC....................................................... S-39
REO Property................................................ S-38
Replacement Mortgage Loan................................... S-22
Rules....................................................... S-31
Scheduled Payments.......................................... S-17
Senior Bond Interest Rate................................... Cover
Senior Bonds................................................ Cover, S-22
Senior Class Principal Amount............................... S-23
Senior Interest Payment Amount.............................. S-24
Senior Percentage........................................... S-26
Senior Principal Payment Amount............................. S-25
Servicer.................................................... S-35
Servicing Agreement......................................... S-35
Servicing Fee............................................... S-37
Shortfalls.................................................. S-13
SMMEA....................................................... S-10
Stated Principal Balance.................................... S-26
Structuring Assumptions..................................... S-28
Subordinated Bonds.......................................... Cover, S-22
Substitution Adjustment Amount.............................. S-22
Terms and Conditions........................................ S-33
Trust Fund Assets........................................... S-8
Underwriter................................................. Cover
Underwriters Bonds.......................................... Cover
Variable Rate Debt Instruments.............................. S-9
</TABLE>
S-44
<PAGE> 46
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered American
Residential Eagle Trust One, Collateralized Mortgage Bonds (the "Global Bonds")
will be available only in book-entry form. Investors in the Global Bonds may
hold such Global Bonds through any of The Depository Trust Company ("DTC"),
CEDEL or Euroclear. The Global Bonds will be tradable 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 Bonds 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 Bonds through DTC
will be conducted according to the rules and procedures applicable to U.S.
corporate debt obligations and prior collateralized mortgage bond issues.
Secondary cross-market trading between CEDEL or Euroclear and DTC
Participants holding Global Bonds 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 Bonds 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 Bonds will be held in book-entry form by DTC in the name of Cede
& Co. as nominee of DTC. Investors' interests in the Global Bonds will be
represented through financial institutions acting on their behalf as direct and
indirect participants in DTC (each, a "DTC Participant"). 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 Bonds through DTC will follow the
settlement practices' applicable to other collateralized mortgage bond 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 Bonds 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 Bonds 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
collateralized mortgage bond 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
Bonds are to be transferred from the account of a DTC Participant to the account
of a CEDEL Participant or a Euroclear Participant, the purchaser will send
instructions to CEDEL or Euroclear through a CEDEL Participant or
S-45
<PAGE> 47
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 Bonds against payment. Payment will include interest accrued
on the Global Bonds from and including the last coupon payment date to and
excluding the settlement date, on the basis of the actual number of days in such
accrual period and a year assumed to consist of 360 days. 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 Bonds. After settlement has been completed, the Global Bonds 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
Bonds 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 Bonds
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
Bonds would incur overdraft charges for one day, assuming they cleared the
overdraft when the Global Bonds were credited to their accounts. However,
interest on the Global Bonds would accrue from the value date. Therefore, in
many cases the investment income on the Global Bonds 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 Bonds to the
respective European Depository 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 Bonds 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 Bonds
to the DTC Participant's account against payment. Payment will include interest
accrued on the Global Bonds from and including the last coupon payment to and
excluding the settlement date on the basis of the actual number of days in such
accrual period and a year assumed to consist of 360 days. 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 valued 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.
S-46
<PAGE> 48
Finally, day traders that use CEDEL or Euroclear and that purchase Global
Bonds 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 Bonds in the U.S. from a DTC Participant no
later than one day prior to settlement, which would give the Global Bonds
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 Participant
or Euroclear Participant.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of the Global Bonds 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 the Global
Bonds 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 Bond 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 Bond Owner 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 Bond Owner of a Global
Bond 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.
The term "U.S. Person" means a citizen or resident of the United States, a
corporation, partnership or other entity created or organized in or under the
laws of the United States or any political subdivision thereof, or an estate
whose income is subject to U.S. federal income tax regardless of its source of
income, or a trust if a court within the United States is able to exercise
primary supervision of the administration of the trust and one or more United
States fiduciaries have the authority to control all substantial decisions of
the trust. This
S-47
<PAGE> 49
summary does not deal with all aspects of U.S. federal income tax withholding
that may be relevant to foreign holders of the Global Bonds. Investors are
advised to consult their own tax advisors for specific tax advice concerning
their holding and disposing of the Global Bonds.
S-48
<PAGE> 50
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED MARCH 4, 1998
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED , 1998)
$
AMERICAN RESIDENTIAL EAGLE, INC.
DEPOSITOR
MORTGAGE-BACKED CERTIFICATES, SERIES 1998-
DISTRIBUTIONS PAYABLE ON THE DAY OF EACH MONTH, COMMENCING ON
, 1998
------------------------
The Mortgage-Backed Certificates, Series 1998- (the "Certificates") will
represent the entire beneficial ownership interest in a trust (the "Certificate
Issuer") to be created pursuant to a Trust Agreement, dated as of ,
1998 (the "Trust Agreement"), among American Residential Eagle, Inc. (the
"Depositor") and , as trustee (the "Certificate Trustee").
The trust fund assets supporting the Certificates (the "Trust Fund Assets") will
consist primarily of a single Collateralized Mortgage Bond (the "Underlying
Bond") issued by American Residential Eagle Mortgage Trust One (the "Bond
Issuer"). The Underlying Bond is secured by and represents the right to receive
all of the payments received on a pool (the "Mortgage Pool") of conventional
[fixed-adjustable] rate mortgage loans (the "Mortgage Loans") secured by first
liens on one- to four-family residential properties. The Mortgage Loans will be
acquired from American Residential Trust, Inc. ("AmREIT"). Only the Classes
identified in the table below (the "Offered Certificates") are offered hereby.
On the th day of each month or, if such th day is not a business day,
on the first business day thereafter (each, a "Distribution Date"), commencing
on , 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.
<TABLE>
<CAPTION>
===============================================================================================================================
INITIAL
CLASS CERTIFICATE PRINCIPAL INTEREST PRICE TO UNDERWRITING
CLASS BALANCE(1) TYPE TYPE PASS-THROUGH RATE PUBLIC(4) DISCOUNT(4)
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
A-1.................. $ [ %] [Variable Rate(2)] $ $
- -------------------------------------------------------------------------------------------------------------------------------
X.................... $ (3) $ $
- -------------------------------------------------------------------------------------------------------------------------------
M-1.................. $ [ %] [Variable Rate(2)] $ $
- -------------------------------------------------------------------------------------------------------------------------------
Total................ $ N/A $ $
===============================================================================================================================
<CAPTION>
===================== ================
PROCEEDS TO
CLASS DEPOSITOR
- --------------------- ----------------
<S> <C>
A-1.................. $
- --------------------------------------------------------
X.................... $
- -------------------------------------------------------------------------
M-1.................. $
- ------------------------------------------------------------------------------------------
Total................ $
- -----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The aggregate initial Class Certificate Balance of the Offered Certificates
is subject to a permitted variance in the aggregate of plus or minus %.
[(2) The Pass-Through Rate for any Distribution Date will equal the weighted
average of the Net Mortgage Rates then in effect for each Mortgage Loan.
The Net Mortgage Rate for each Mortgage Loan will equal the Mortgage Rate
thereon on the first day of the month preceding the month of the related
Distribution Date less the related Expense Rate. The Pass-Through Rate for
the first Distribution Date is expected to be approximately % per annum.]
(3) The Pass-Through Rate for this Class for any Distribution Date will be equal
to the excess of (a) the weighted average of the Net Mortgage Rates of the
Mortgage Loans over (b) %.
(4)
- --------------------------------------------------------------------------------
PROSPECTIVE INVESTORS IN THE OFFERED CERTIFICATES SHOULD REVIEW THE
INFORMATION SET FORTH UNDER "RISK FACTORS" ON PAGE S-10 OF THIS PROSPECTUS
SUPPLEMENT AND IN THE PROSPECTUS ON PAGE 18. THESE RISKS INCLUDE:
<TABLE>
<S> <C>
- - YIELD AND PREPAYMENT CONSIDERATIONS - MORTGAGE LOAN CONCENTRATION
- - NATURE OF MORTGAGES - LIMITED LIQUIDITY OF INTEREST
- - LIMITED RECOURSE - BANKRUPTCY AND INSOLVENCY RISKS
</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 PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
The Offered Certificates other than those to be purchased by AmREIT (the
"Underwritten Certificates") will be purchased by (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. AmREIT has agreed to purchase Class A-1 Certificates with original
principal amount of $ in a negotiated transaction and will initially
pledge its Class A-1 Certificates to secure indebtedness and may, from time to
time, offer such Class A-1 Certificates for sale to the public in negotiated
transactions or otherwise at varying prices to be determined at the time of
sale.
The Underwritten Certificates are offered by the Underwriter, subject to
prior sale, when, as and if delivered to and accepted by the Underwriter and
subject to its right to reject orders in whole or in part. It is expected that
delivery of the Offered Certificates will be made in book-entry form only
through the facilities of The Depository Trust Company on or about [date].
[UNDERWRITER]
, 1998
<PAGE> 51
Each of the Mortgage Loans was purchased from AmREIT which in turn had
acquired the Mortgage Loans directly from the originator or in the secondary
mortgage market. The Bond Issuer pledged the Mortgage Loans to secure the
Underlying Bond and assigned the Underlying Bond to the Depositor for deposit to
the Trust Fund prior to the date of initial issuance of the Certificates.
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 "CERTAIN 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 OR
ANY OF THEIR RESPECTIVE AFFILIATES, EXCEPT AS SET FORTH HEREIN. NEITHER THE
CERTIFICATES NOR THE 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. THE YIELD TO
MATURITY 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. HOLDERS OF CERTIFICATES SHOULD CONSIDER, IN THE CASE OF ANY
SUCH CERTIFICATES PURCHASED AT A DISCOUNT, THE RISK THAT A LOWER 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, PARTICULARLY THE CLASS X CERTIFICATES, THE RISK THAT A
FASTER THAN ANTICIPATED RATE OF PRINCIPAL PAYMENTS COULD RESULT IN AN ACTUAL
YIELD THAT IS LOWER THAN THE ANTICIPATED YIELD. IN CERTAIN EXTREME PREPAYMENT
SCENARIOS, INVESTORS IN THE CLASS X CERTIFICATES MAY FAIL TO RECOVER THEIR
INITIAL INVESTMENTS. THE YIELD TO INVESTORS IN THE OFFERED CERTIFICATES ALSO
WILL BE ADVERSELY AFFECTED BY NET INTEREST SHORTFALLS AND BY REALIZED LOSSES.
There is currently no secondary market for the Offered Certificates and
there can be no assurance that such a market will develop or, if it does
develop, that it will continue.
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 , 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.
S-2
<PAGE> 52
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SUMMARY OF TERMS..................... S-4
RISK FACTORS......................... S-10
Yield and Prepayment
Considerations.................. S-10
Risks of Holding Subordinated
Certificates.................... S-10
Limited Source of
Payments -- Limited Recourse to
Seller and No Resource to Master
Servicer or Trustee............. S-11
Limited Liquidity.................. S-11
Geographic Concentration........... S-11
Consequences of Owning Book-Entry
Certificates.................... S-11
USE OF PROCEEDS...................... S-12
TRUST FUND ASSETS.................... S-12
General............................ S-12
The Mortgage Pool.................. S-12
The Index.......................... S-17
Assignment of the Mortgage Loans... S-17
Underwriting Standards............. S-18
DESCRIPTION OF THE CERTIFICATES...... S-18
General............................ S-19
Payments on Mortgage Loans;
Accounts........................ S-19
Priority of Distributions Among
Certificates.................... S-19
Distributions...................... S-19
Interest........................... S-20
Principal.......................... S-21
Allocation of Losses............... S-22
Termination; Optional
Termination..................... S-23
Last Scheduled Distribution Date... S-23
Controlling Class of
Certificates.................... S-23
Book-Entry Certificates............ S-24
The Trustee........................ S-25
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
DESCRIPTION OF THE UNDERLYING BOND... S-25
General............................ S-25
Redemption at the Option of the
Bond Issuer..................... S-26
PREPAYMENT AND YIELD
CONSIDERATIONS..................... S-26
General............................ S-26
Assumptions Relating to Tables..... S-28
Weighted Average Lives of the
Offered Certificates............ S-28
Yield on Class X Certificates...... S-29
CREDIT SUPPORT....................... S-30
Subordination of Subordinate
Certificates.................... S-30
SERVICING OF THE MORTGAGE LOANS...... S-31
The Master Servicer................ S-31
Servicing and Collection
Procedures...................... S-32
Foreclosure, Delinquency and Loss
Experience...................... S-32
Servicing Compensation and Payment
of Expenses..................... S-33
Adjustment to Master Servicing Fee
and Invested Amount in
Connection with Certain Prepaid
Mortgage Loans.................. S-34
Advances........................... S-34
CERTAIN FEDERAL INCOME TAX
CONSEQUENCES....................... S-34
ERISA CONSIDERATIONS................. S-35
METHOD OF DISTRIBUTION............... S-36
LEGAL MATTERS........................ S-36
CERTIFICATE RATING................... S-36
INDEX TO DEFINED TERMS............... S-38
</TABLE>
S-3
<PAGE> 53
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.
Title of Securities........ Mortgage-Backed Certificates, Series
1998- (the "Certificates").
Designations:
Offered Certificates..... Class A-1, Class X and Class M-1 Certificates.
Non-Offered
Certificates...............
<TABLE>
<CAPTION>
APPROXIMATE
INITIAL CLASS PASS-THROUGH
CLASS CERTIFICATE BALANCE RATE
----- ------------------- ------------
<S> <C> <C>
B-1............................... $ %
B-2............................... $ %
O................................. (1) (1)
</TABLE>
-------------------------------------------------------------------
(1) The Class O Certificates will not have a Class
Certificate Balance and will not bear
interest.
Senior Certificates...... Class A-1 and Class X Certificates
Mezzanine Certificates... Class M-1 Certificates
Subordinate
Certificates............... The Mezzanine Certificates and the Class B-1 and
B-2 Certificates.
Ownership Certificates... Class O Certificates.
[Fixed Rate
Certificates]..............
[Variable Rate
Certificates]..............
Book-Entry
Certificates...............
Certificate Issuer......... The trust formed by the Depositor for the purpose
of creating and issuing the Certificates.
Bond Issuer
American Residential Eagle
Trust One................ American Residential Eagle Trust One, a Delaware
statutory business trust (the "Bond Issuer").
Depositor.................. American Residential Eagle, Inc., a Delaware
corporation (the "Depositor" or the "Company")
Certificate Trustee........ [ ] (the "Certificate Trustee")
Bond Trustee............... [ ] (the "Bond Trustee").
Master Servicer............ [ ] (the "Master Servicer"). See "The
Master Servicer" herein.
Cut-Off Date............... , 1998.
Distribution Date.......... The day of each month, or, if such day is not
a Business Day, the next succeeding Business Day,
commencing in , 199 .
Record Date................ The Record Date for each Distribution Date will be
the last day of the preceding month.
S-4
<PAGE> 54
Trust Fund Assets.......... The Trust Fund Assets consist primarily of the
Underlying Bond. The Underlying Bond is secured by
the Mortgage Pool and represents the right to
receive all of the payments received on the
Mortgage Pool.
Underlying Bond............ The Underlying Bond will be issued by the Bond
Issuer pursuant to an Indenture dated as of
between the Bond Issuer and
as Bond Trustee. The payments of
principal due on the Underlying Bond and each month
generally will equal the aggregate principal amount
(i) due on the Mortgage Loans on the related Due
Date, (ii) received as prepayments during the
related Due Period, and (iii) determined to be a
Realized Loss upon liquidation. The payments of
interest due on the Underlying Bond each month
generally will equal the weighted average of the
Mortgage Rates on the Mortgage Loans during the
related Due Period less the Bond Expense Rate
(which includes the Master Servicing Fee, Servicing
Fees and Bond Trustee fees). The Underlying Bond is
payable solely from the limited assets of the
Seller.
Mortgage Pool.............. The Mortgage Pool will consist of fully-amortizing,
to month, [fixed
interest] [adjustable] rate, conventional first
mortgage loans (the "Mortgage Loans") having, as of
the Cut-off Date, an aggregate principal balance
equal to approximately $ (the "Cut-off
Date Pool Principal Balance"). See "TRUST FUND
ASSETS -- THE MORTGAGE POOL" herein.
Trust Agreement............ The Certificates will be issued pursuant to a Trust
Agreement to be dated as of (the
"Trust Agreement") among the Depositor and the
Certificate Trustee.
Priority of
Distributions.............. As more fully described herein, distributions will
be made on the Certificates on each Distribution
Date from Available Funds in the following order of
priority:
(i) to interest on each [interest bearing]
Class of Senior Certificates;
(ii) to principal on the Class A-1
Certificates, up to the maximum amount of principal
distributed on such Class on such Distribution Date
as described herein;
(iii) to interest on the M-1 Certificates;
(iv) to principal on the Class M-1
Certificates, up to the maximum amount of principal
to be distributed on each Class on such
Distribution Date as described herein; and
(v) to interest on and then principal of each
other Class of Subordinate Certificates in
increasing order of numerical Class designation, up
to the maximum amount of interest and principal to
be distributed on each such Class on such
Distribution Date [and subject to certain
limitations set forth herein under "DESCRIPTION OF
THE CERTIFICATES -- PRINCIPAL"].
Class X Notional Amount.... With respect to the first Distribution Date, the
initial Class X Notional Amount will be equal to
the aggregate principal balance of the Mortgage
Loans as of the Cut-Off Date. On any Distribution
Date thereafter, the Class X Notional Amount will
be equal to the aggregate of the Principal Balances
of the Mortgage Loans (the "Pool Principal
Balance") as of the first day of the month
preceding the month of such Distribution Date.
S-5
<PAGE> 55
Interest................... On each Distribution Date, each Class of interest
bearing Offered Certificates, to the extent
Available Funds are available for the distribution
of interest on such Class on such Distribution
Dates, as described above under "Priority of
Distributions," generally will be entitled to
receive an amount allocable to interest equal to
the sum of (i) one month's interest at the
applicable Pass-Through Rate set forth on the cover
page hereof (as to each Class, the "Pass-Through
Rate") on the related Class Certificate Balance or
the Class X Notional Amount, as applicable,
immediately prior to such Distribution Date and
(ii) the sum of the amounts, if any, by which the
amount described in clause (i) above on each prior
Distribution Date exceeded the amount actually
distributed as interest on such prior Distribution
Dates and not subsequently distributed ("Unpaid
Interest Shortfall").
Principal (including
prepayments)............. On each Distribution Date an amount allocable to
principal will be distributed on the Class A-1
Certificates generally equal to the lesser of (x)
Available Funds reduced by the amount of interest
distributed on the Senior Certificates on each
Distribution Date and (y) the sum of (i) the Class
A-1 Percentage of (a) all scheduled payments of
principal due on each Mortgage Loan on the Due Date
for such Mortgage Loan in the month in which such
Distribution Date occurs, (b) the Principal Balance
of each Mortgage Loan during the month preceding
the month of such Distribution Date, (c) the
Principal Balance of each Defective Mortgage Loan
that was repurchased by AmREIT or another person as
of such Distribution Date pursuant to the
Indenture, (d) certain amounts that may be required
to be paid in connection with any substitution of
Mortgage Loans on such distribution Date pursuant
to the Indenture and (e) any net insurance
liquidation proceeds received during the month
preceding the month of such Distribution Date
allocable to recoveries of principal of Mortgage
Loans that are not yet liquidated Mortgage Loans
and (ii) the Class A-1 Prepayment Percentage of all
partial principal prepayments and all principal
prepayments in full ("Principal Prepayments")
received during such preceding month.
On each Distribution Date an amount allocable to
principal will be distributed on Class M-1
Certificates equal to the lesser of (x) Available
Funds reduced by the amount of interest and
principal distributed on the Senior Certificates
and interest on the Class M-1 Certificates, in each
case on such Distribution Date and (y) the sum of
(i) the applicable Subordinate Percentage
Allocation of the sum of the amounts calculated
pursuant to clauses (a) through (e) in the
preceding paragraph for such Distribution Date and
(ii) the applicable Subordinate Prepayment
Percentage Allocation of all Principal Prepayments
received during the preceding month.
[Credit Support General]... See "DESCRIPTION OF THE CERTIFICATES -- PRINCIPAL"
herein.
A. Subordination......... The rights of holders of the Subordinate
Certificates to receive distributions with respect
to the Mortgage Loans in the Mortgage Pool will be
subordinated to such rights of holders of the
Senior Certificates, and the rights of holders of
the Senior Certificates, and the rights of holders
of the Class B-1 and Class B-2 Certificates to
receive such distributions will be further
subordinated to such rights of holders of the
Mezzanine
S-6
<PAGE> 56
Certificates, in each case only to the extent
described below. See "DESCRIPTION OF THE
CERTIFICATES -- PRIORITY OF DISTRIBUTIONS AMOUNT
CERTIFICATES," "-- ALLOCATION OF LOSSES" and
"CREDIT SUPPORT -- SUBORDINATION OF SUBORDINATE
CERTIFICATES" herein.
The subordination of the Subordinate Certificates
to the Senior Certificates, and the further
subordination of the Class B-1 and Class B-2
Certificates to the Mezzanine Certificates is
intended to increase the likelihood of receipt by
Senior Certificateholders and Mezzanine
Certificateholders, respectively, of the maximum
amount to which they are entitled on any
Distribution Date, to provide such holders
protection against losses on the Mortgage Loans to
the extent [described herein] and, to a lesser
extent, against losses on [Special Hazard Mortgage
Loans] [Fraud Loans] [and] [Bankruptcy Loans.]]
However, in certain circumstances the amount of
available subordination may be exhausted and
shortfalls in distributions on the Certificates may
be exhausted and shortfalls in distributions on the
Certificates may result. Holders of the Senior
Certificates will bear their proportionate share of
any losses realized on the Mortgage Loans in excess
of the subordination amount. See "CREDIT
SUPPORT -- SUBORDINATION OF SUBORDINATED
CERTIFICATES" and "DESCRIPTION OF THE
CERTIFICATES -- ALLOCATION OF LOSSES" herein]
[B. Description of other
types of credit support, if
any].....................
Weighted Average Lives (in
years)*..................
<TABLE>
<CAPTION>
PSA
------------------------------------------------------------
CLASS % % % %
----- ------ ------ ------ ------
<S> <C> <C> <C> <C>
A-1.........................
X...........................
M-1.........................
</TABLE>
---------------------------------------------
* Determined as described under "PREPAYMENT AND
YIELD CONSIDERATIONS -- WEIGHTED AVERAGE LIVES
OF THE OFFERED CERTIFICATES" herein. Prepayments
will not occur at any assumed rate shown or any
other constant rate, and the actual weighted
average lives of any or all of the Classes of
Offered Certificates are likely to differ from
those shown, perhaps significantly.
Last Scheduled Distribution
Date.....................
<TABLE>
<CAPTION>
CLASS LAST SCHEDULED DISTRIBUTION DATE
----- --------------------------------
<S> <C>
A-1................................
X..................................
M-1................................
</TABLE>
Servicing Fees and Other
Expenses................. As compensation for their services, the services
engaged by the Master Servicer to perform the
day-to-day servicing functions relating to the
Mortgage Loans and the Master Servicer will be
entitled to retain, from amounts received in
respect of the Mortgage Loans which are allocable
to interest, an amount equal to the Servicing Fee
and Master Servicing Fee, respectively.
S-7
<PAGE> 57
In addition to the Servicing Fee and the Master
Servicing Fee, 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 Bond Trustee's fee
and the Certificate Trustee's fee. As to each
Mortgage Loan, the sum of the Master Servicing Fee
Rate, the Servicing Fee Rate and the rate at which
the Bond Trustee's fee is 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 Rate."
See "SERVICING OF MORTGAGE LOANS -- SERVICING
COMPENSATION AND PAYMENT OF EXPENSES" herein.
[Advances.................. The Master Servicer, directly or through one or
more servicers, will be obligated to advance, four
business days prior to each Distribution Date an
amount equal to all delinquent amounts (net of the
related Servicing Fee and Master Servicing Fee and
Relief Act Reductions) on each Mortgage Loan in the
Mortgage Pool and not previously advanced to the
extent that such Advances are determined by the
Master Servicer to be recoverable.
[With respect to any Mortgage Loan requiring a
balloon payment on the maturity date of such
Mortgage Loan, in the event of default in any such
payment, the Master Servicer will continue to
advance, subject to the Master Servicer's
determination as to recoverability, an amount equal
to interest on the principal balance of such
Mortgage Loan deemed to be due thereon after such
default.]
Any Advance made by the Master Servicer or a
servicer with respect to a Mortgage Loan is
reimbursable to it as described herein under
"SERVICING OF MORTGAGE LOANS -- ADVANCES." Under
the limited circumstances described herein, the
Master Servicer will be entitled to reimburse
itself and any servicer from funds on deposit in
the Bond Account before distributions are made to
holders of Certificates.]
Optional Termination....... At its option, the Bond Issuer may redeem the
Underlying Bond at par and thereby effect early
retirement of the Certificates, on any Distribution
Date on which the Pool Principal Balance is less
than 10% of the Cut-off Date Pool Principal
Balance. In addition, the Depositor may exercise
its option to repurchase the Trust Fund Assets on
any Distribution Date on which the Pool Principal
Balance is less than 10% of the Cut-off Date Pool
Principal Balance. See "DESCRIPTION OF THE
CERTIFICATES -- TERMINATION; OPTIONAL TERMINATION"
herein.
IF THE BOND ISSUER EXERCISES ITS RIGHT TO REDEEM
THE UNDERLYING BOND OR THE DEPOSITOR ELECTS TO
REPURCHASE THE TRUST FUND ASSETS, THE CERTIFICATES
OUTSTANDING AT THE TIME OF SUCH REPURCHASE WILL BE
RETIRED EARLIER THAN WOULD OTHERWISE BE THE CASE.
See "PREPAYMENT AND YIELD CONSIDERATIONS" herein.
Certain 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
S-8
<PAGE> 58
Trust Fund for federal income tax purposes with
payment terms equivalent to the terms of such
Certificates. The Class O Certificates will
constitute the sole class of "ownership interest"
in the FASIT and will be the Class of FASIT
Ownership Securities, as described herein under
"CERTAIN 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. The Class X Certificates will, and
the other 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 "CERTAIN 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"), and as
such, will be legal investments for certain
entities to the extent provided in SMMEA. See
"LEGAL INVESTMENT" in the Prospectus.
[It is anticipated that the Class M-1 Certificates
will not be rated in one of the two highest rating
categories by a nationally recognized statistical
rating organization and, therefore, will not
constitute "mortgage related securities" for
purposes of SMMEA.]
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. See "LEGAL INVESTMENT" in the
Prospectus.
ERISA Considerations....... A fiduciary of any employee benefit plan subject to
the Employee Retirement Income Security Act of
1974, as amended ("ERISA"), or the Internal Revenue
Code of 1986, as amended (the "Code"), should
carefully review with its legal advisors whether
the purchase or holding of an Offered Certificate
could give rise to a transaction prohibited or not
otherwise permissible under ERISA or the Code. The
Class M-1 Certificates may not be transferred
except upon satisfaction of certain conditions. See
"ERISA CONSIDERATIONS" herein and "ERISA MATTERS"
in the Prospectus.
Certificate Rating......... It is a condition to the issuance of the Offered
Certificates that the senior Certificates and the
Class M-1 Certificates be rated by
and at least as
follows:
<TABLE>
<CAPTION>
CLASS
----- -------- --------
<S> <C> <C>
A-1......................
X........................
M-1......................
</TABLE>
See "RATINGS" herein.
S-9
<PAGE> 59
RISK FACTORS
Investors should consider the following factors in connection with the
purchase of the Certificates.
YIELD AND PREPAYMENT CONSIDERATIONS
The rate of principal payments on the Certificates, the amount of principal
and interest payments on the Certificates and the yield to maturity of the
Certificates will be directly related to the rate of payments of principal 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 person of Defective Mortgage Loans as a result of
defective documentation or breaches of representations or warranties and
optional redemption of the Underlying Bond by the Bond Issuer or repurchase of
the Trust Fund Assets by the Depositor in connection with the termination of the
Certificate Issuer. [The Mortgagors may prepay any Mortgage Loan at any time
without penalty.]
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 timing of changes in the rate of prepayments may significantly affect
an investor's actual yield to maturity, even if the average rate of principal
prepayments is consistent with an investor's expectations. In general, the
earlier a prepayment of principal of the Mortgage Loans the greater the effect
on an investor's yield to maturity. The effect on an investor's yield as a
result of principal payments occurring at a rate higher (or lower) than the rate
anticipated by the investor during the period immediately following the issuance
of the Offered Certificates will not be offset by a subsequent like reduction
(or increase) in the rate of principal prepayments. The yield on the Class X
Certificates will be highly sensitive to the rate and timing of prepayments on
the Mortgage Loans. A rapid rate of principal prepayments on the Mortgage Loans
(as defined below) may have a material negative effect on the yield of the Class
X Certificates. Investors must make their own decisions as to the appropriate
prepayment assumptions to be used in deciding whether to purchase the Offered
Certificates. See "PREPAYMENT AND YIELD CONSIDERATIONS -- YIELD ON THE CLASS X
CERTIFICATES" herein.
RISKS OF HOLDING SUBORDINATED CERTIFICATES
The rights of the holders of the Class M-1 Certificates to receive
distributions with respect to the Mortgage Loans will be subordinated to such
rights of the Senior Certificates and the rights of the holders of the Class B-1
Certificates to receive distributions with respect to the Mortgage Loans will be
subordinated to such rights of the Senior Certificates and the Class M-1
Certificates. Delinquencies that are not advanced by or on behalf of the Master
Servicer (because the amounts, if advanced, would be nonrecoverable) and are not
reimbursed by the Bond Issuer out of its limited assets, will adversely affect
the yield on the Certificates. Because of the priority of distributions,
shortfalls resulting from delinquencies not so advanced or reimbursed will be
borne first by the Class B-2 Certificates, second by the Class B-1 Certificates,
third by the Class M-1 Certificates and finally 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, to the extent related
delinquencies and any losses are not reimbursed by the Bond Issuer from its
limited assets. If the actual rate and severity of
S-10
<PAGE> 60
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
assumption. 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 SELLER AND NO RECOURSE TO
MASTER SERVICER OR TRUSTEE
The Mortgage Loans will be the primary source of payments on the
Certificates. The Certificates do not represent an interest in or obligation of
the Depositor, AmREIT, the Certificate Trustee 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 nor the Mortgage
Loans will be guaranteed by or insured by any governmental agency or
instrumentality, the Depositor, AmREIT, the Certificate Trustee or any of their
affiliates. Consequently, in the event that payments on the Mortgage Loans are
insufficient or otherwise unavailable to make all payments required on the
Certificates, there will be no recourse to the Depositor, AmREIT, the
Certificate Trustee 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.
GEOGRAPHIC CONCENTRATION
[Approximately ( )% of the Mortgage Loans (by aggregate outstanding
principal balance as of the Cut-off Date) are secured by Mortgaged Properties
located in the State of California. Property values of residential real estate
in California have declined in recent years. If the California residential real
estate market should continue to experience an overall decline in property
values after the dates of origination of the Mortgage Loans, the rates of
delinquency, foreclosure, bankruptcy and loss on the Mortgage Loans may be
expected to increase, and may increase substantially, as compared to such rates
in a stable or improving real estate market.]
[describe other geographic concentrations presenting significant risks]
CONSEQUENCES OF OWNING BOOK-ENTRY CERTIFICATES
Since transactions in the Certificates (the "Book-Entry 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-11
<PAGE> 61
USE OF PROCEEDS
The Depositor will apply the net proceeds of the sale of the Offered
Certificates [(together with the net proceeds of the sale of the Class B-1 and
Class B-2 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 -year
conventional mortgage loans secured by first liens on one- to four-family
residential properties (each, a "Mortgaged Property"). 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 an agreement (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.
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
Company 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 purchase 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 under the Mortgage Loan
Purchase Agreement.
Certain information with respect to the Mortgage Loan 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. Unless
otherwise indicated, information presented below expressed as a percentage
(other than rates of interest) are approximate percentages based on the Stated
Principal Balances of the Mortgage Loans as of the Cut-off Date.
As of the Cut-off Date, the aggregate of the Stated Principal Balances of
the Mortgage Loans is expected to be approximately $ (the "Cut-off Date
Pool Principal Balance"). [The Mortgage Loans provide for the amortization of
the amount financed over a series of substantially equal monthly payments.] All
of the Mortgage Loans provide for payments due on the first day of each month
(the "Due Date"). At origination, substantially all of the Mortgage Loans had
stated terms to maturity of years. Scheduled monthly payments made by the
Mortgagors on the Mortgage Loans ("Scheduled Payments") either earlier or later
than the scheduled Due Dates thereof will not affect the amortization schedule
or the relative application of such payments to principal and interest.
[Mortgagors may prepay their Mortgage Loans at any time without penalty.]
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<PAGE> 62
Each Mortgage Loan will bear interest at a [fixed][adjustable] Mortgage
Rate. [Each Mortgage Loan will bear interest at a Mortgage Rate, subject to
annual adjustment on the first day of the month specified in the related
Mortgage Note (each such date, an "Adjustment Date"), equal to the sum, rounded
to the nearest of one percentage point ( %), of (i)
(the "Index") as made available by the
and most recently available as of days prior to the
Adjustment Date and (ii) a fixed percentage amount specified in the related
Mortgage Note (the "Margin") provided, however, that the Mortgage Rate will not
increase or decrease by more than percentage points ( %), except for
Mortgage Loans, representing approximately % of the Cut-off Date Pool
Principal Balance which will not increase or decrease by more than
percentage points ( %), on the first Adjustment Date or more than
percentage points ( %) on any Adjustment Date thereafter (the "Periodic Rate
Cap"). The Index with respect to any Bond Interest Rate and any Distribution
Date shall be the Index in effect as of the first day of the month preceding the
month in which such Distribution Date occurs.]
[All of the Mortgage Loans provide that over the life of the Mortgage Loan
the Mortgage Rate will in no event increase by more than the Mortgage Rate fixed
at origination plus a fixed number of percentage points specified in the related
Mortgage Note (such rate, the "Maximum Rate"). None of the Mortgage Loans are
subject to minimum Mortgage Rates. Effective with the first payment due on a
Mortgage Loan after each related Adjustment Date, the Scheduled Payment will be
adjusted to an amount which will pay interest at the adjusted rate and fully
amortize the then-outstanding principal balance of the Mortgage Loan over its
remaining term. If the Index ceases to be published or is otherwise unavailable,
the Master Servicer will select an alternative index based upon comparable
information.]
Each Mortgage Loan is, by its terms, assumable in connection with a
transfer of the related Mortgaged Property if the proposed transferee submits
certain information to the Master Servicer required to enable it to evaluate the
transferee's ability to repay the Mortgage Loan and if the Master Servicer
reasonably determines that the security for the Mortgage Loan would not be
impaired by the assumption. See "RISK FACTORS" herein and in the Prospectus.
Each Mortgage Loan was originated on or after , 19 .
The latest stated maturity date of any Mortgage Loan is , 20 . The
earliest stated maturity date of any Mortgage Loan is , 20 .
[As of the Cut-off Date, no Mortgage Loan was delinquent more than days.]
[None of the Mortgage Loans are subject to buydown agreements.] [No
Mortgage Loan provides for deferred interest or negative amortization.]
No Mortgage Loan had a Loan-to-Value Ratio at origination of more than %.
[Except for Mortgage Loans, representing approximately % of the
Cut-off Date Pool Principal Balance,] each Mortgage Loan with a Loan-to-Value
Ratio at origination of greater than 80% is covered by a primary mortgage
insurance policy (each a "Primary Mortgage Insurance Policy") issued by a
mortgage insurance company acceptable to the Federal National Mortgage
Association ("FNMA"), the Federal Home Loan Mortgage Corporation ("FHLMC") or
any nationally recognized statistical rating organization, which policy provides
coverage of a portion of the original principal balance of the related Mortgage
Loan equal to the product of the original principal balance thereof and a
fraction, the numerator of which is the excess of the original principal balance
of the related Mortgage Loan over 75% of the lesser of the appraised value and
selling price of the related Mortgage Property and the denominator of which is
the original principal balance of the related Mortgage Loan, plus accrued
interest thereon and related foreclosure expenses. No such Primary Mortgage
Insurance Policy will be required with respect to any such Mortgage Loan after
the date on which the related Loan-to-Value Ratio is 80% or less or, based on a
new appraisal, the principal balance of such Mortgage Loan represents 80% or
less of the new appraised value. See "-- UNDERWRITING STANDARDS" herein.
The "Loan-to-Value Ratio" of a Mortgage Loan at any given time is a
fraction, expressed as a percentage, the numerator of which is the principal
balance of the related Mortgage Loan at the date of determination and the
denominator of which is (a) in the case of a purchase, the lesser of the selling
price of the Mortgaged Property and its appraised value determined in an
appraisal obtained by the originator at
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<PAGE> 63
origination of such Mortgage Loan, or (b) in the case of a refinance, the
appraised value of the Mortgaged Property at the time of such refinance. No
assurance can be given that the value of any Mortgaged Property has remained or
will remain at the level that existed on the appraisal or sales date. If
residential real estate values generally or in a particular geographic area
decline, the Loan-to-Value Ratios might not be a reliable indicator of the rates
of delinquencies, foreclosures and losses that could occur with respect to such
Mortgage Loans.
The following information sets forth in tabular format certain information,
as of the Cut-off Date, as to the Mortgage Loans. Other than with respect to
rates of interest, percentages (approximate) are stated by Stated Principal
Balance of the Mortgage Loans as of the Cut-off Date and have been rounded in
order to total 100%.
ORIGINAL LOAN-TO-VALUE RATIOS(1)
<TABLE>
<CAPTION>
AGGREGATE
NUMBER OF PRINCIPAL PERCENT OF
ORIGINAL LOAN-TO-VALUE MORTGAGE BALANCE MORTGAGE
RATIOS(%) LOANS OUTSTANDING POOL
---------------------- --------- ----------- ----------
<S> <C> <C> <C>
$ %
----------- -----
Total............................................... $ %
=========== =====
</TABLE>
- ---------------
(1) The weighted average original Loan-to-Value Ratio of the Mortgage Loans is
expected to be approximately %.
ORIGINAL TERMS TO MATURITY(1)
<TABLE>
<CAPTION>
AGGREGATE
NUMBER OF PRINCIPAL PERCENT OF
ORIGINAL TERM TO MORTGAGE BALANCE MORTGAGE
MATURITY (MONTHS) LOANS OUTSTANDING POOL
----------------- --------- ----------- ----------
<S> <C> <C> <C>
$ %
----------- -----
Total............................................... $ %
=========== =====
</TABLE>
- ---------------
(1) As of the Cut-off Date, the weighted average remaining term to maturity of
the Mortgage Loans is expected to be approximately months.
CURRENT MORTGAGE LOAN PRINCIPAL BALANCES(1)
<TABLE>
<CAPTION>
AGGREGATE
RANGE OF CURRENT NUMBER OF PRINCIPAL PERCENT OF
MORTGAGE LOAN MORTGAGE BALANCE MORTGAGE
PRINCIPAL BALANCES LOANS OUTSTANDING POOL
------------------ --------- ----------- ----------
<S> <C> <C> <C>
$ %
----------- -----
Total............................................... $ %
=========== =====
</TABLE>
- ---------------
(1) As of the Cut-off Date, the average current Mortgage Loans principal balance
is expected to be approximately $ .
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<PAGE> 64
CURRENT MORTGAGE RATES(1)
<TABLE>
<CAPTION>
AGGREGATE
NUMBER OF PRINCIPAL PERCENT OF
MORTGAGE BALANCE MORTGAGE
CURRENT MORTGAGE RATES(%) LOANS OUTSTANDING POOL
------------------------- --------- ----------- ----------
<S> <C> <C> <C>
$ %
----------- -----
Total............................................... $ %
=========== =====
</TABLE>
- ---------------
(1) As of the Cut-off Date, the weighted average Mortgage Rate of the Mortgage
Loans is expected to be approximately % per annum.
PURPOSE OF MORTGAGE LOANS
<TABLE>
<CAPTION>
AGGREGATE
NUMBER OF PRINCIPAL PERCENT OF
MORTGAGE BALANCE MORTGAGE
LOAN PURPOSE LOANS OUTSTANDING POOL
------------ --------- ----------- ----------
<S> <C> <C> <C>
Purchase................................................. $ %
Refinance (Rate or Term).................................
Refinance (Cash-out).....................................
----------- -----
Total............................................... $ %
=========== =====
</TABLE>
STATE DISTRIBUTION OF MORTGAGED PROPERTIES(1)
<TABLE>
<CAPTION>
AGGREGATE
NUMBER OF PRINCIPAL PERCENT OF
MORTGAGE BALANCE MORTGAGE
STATE LOANS OUTSTANDING POOL
----- --------- ----------- ----------
<S> <C> <C> <C>
$ %
Other(1).................................................
----------- -----
Total............................................... $ %
=========== =====
</TABLE>
- ---------------
(1) Other includes other states, and the District of Columbia, with under
% concentrations individually. No more than approximately % of the
Mortgage Loans will be secured by Mortgaged Properties located in any one
postal zip code area.
DOCUMENTATION FOR MORTGAGE LOANS
<TABLE>
<CAPTION>
AGGREGATE
NUMBER OF PRINCIPAL PERCENT OF
MORTGAGE BALANCE MORTGAGE
TYPE OF PROGRAM LOANS OUTSTANDING POOL
--------------- --------- ----------- ----------
<S> <C> <C> <C>
Full..................................................... $ %
Alternative..............................................
Reduced..................................................
----------- -----
Total............................................... $ %
=========== =====
</TABLE>
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<PAGE> 65
OCCUPANCY TYPES(1)
<TABLE>
<CAPTION>
AGGREGATE
NUMBER OF PRINCIPAL PERCENT OF
MORTGAGE BALANCE MORTGAGE
OCCUPANCY TYPE LOANS OUTSTANDING POOL
-------------- --------- ----------- ----------
<S> <C> <C> <C>
Primary Home............................................. $ %
Investor.................................................
Second Home..............................................
----------- -----
Total............................................... $ %
=========== =====
</TABLE>
- ---------------
(1) Based upon representations of the related Mortgagors at the time of
origination.
PROPERTY TYPE
<TABLE>
<CAPTION>
AGGREGATE
NUMBER OF PRINCIPAL PERCENT OF
MORTGAGE BALANCE MORTGAGE
PROPERTY TYPE LOANS OUTSTANDING POOL
------------- --------- ----------- ----------
<S> <C> <C> <C>
Single Family............................................ $ %
Planned Unit Development Condominium.....................
2-4 Units................................................
----------- -----
Total............................................... $ %
=========== =====
</TABLE>
MAXIMUM MORTGAGE RATES(1)
<TABLE>
<CAPTION>
AGGREGATE
NUMBER OF PRINCIPAL PERCENT OF
MORTGAGE BALANCE MORTGAGE
LIFETIME CAPS(%) LOANS OUTSTANDING POOL
---------------- --------- ----------- ----------
<S> <C> <C> <C>
$ %
----------- -----
Total............................................... $ %
=========== =====
</TABLE>
- ---------------
(1) As of the Cut-off Date, the weighted average Lifetime Cap of the Mortgage
Loans is expected to be approximately % per annum.
MARGIN(1)
<TABLE>
<CAPTION>
AGGREGATE
NUMBER OF PRINCIPAL PERCENT OF
MORTGAGE BALANCE MORTGAGE
MARGIN LOANS OUTSTANDING POOL
------ --------- ----------- ----------
<S> <C> <C> <C>
$ %
----------- -----
Total............................................... $ %
=========== =====
</TABLE>
- ---------------
(1) As of the Cut-off Date, the weighted average margin of the Mortgage Loans is
expected to be approximately %.
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<PAGE> 66
NEXT NOTE RATE ADJUSTMENT DATES(1)
<TABLE>
<CAPTION>
AGGREGATE
NUMBER OF PRINCIPAL PERCENT OF
MORTGAGE BALANCE MORTGAGE
MONTHS LOANS OUTSTANDING POOL
------ --------- ----------- ----------
<S> <C> <C> <C>
$ %
----------- -----
Total............................................... $ %
=========== =====
</TABLE>
- ---------------
(1) As of the Cut-off Date, the weighted average months to the next Adjustment
Date of the Mortgage Loans was approximately months.
THE INDEX
[DESCRIPTION OF INDEX]
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 Bond Trustee will review each Mortgage File within days of the
Closing Date (or promptly after the Bond Trustee's 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 days of notice thereof from the
Bond Trustee (or within such longer period not to exceed 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 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 % less than, the Stated 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
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<PAGE> 67
Bondholders on the related Distribution Date (a "Substitution Adjustment
Amount")), (ii) have a Mortgage Rate not lower than, and not more than % 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 STANDARDS
All of the Mortgage Loans have been purchased by AmREIT in the ordinary
course of business directly from banks, savings and loan associations, mortgage
bankers and other mortgage loan originators (each, an "Originator"), 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 purchased the Mortgage Loans will
represent and warrant 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.
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 condition, the borrower
generally is required to provide a current list of assets and liabilities and a
statement of income and expense, 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 may also be required to authorize
verification of deposits at financial institutions where the borrower has demand
or savings accounts. See "MORTGAGE LOAN PROGRAM -- UNDERWRITING STANDARDS" in
the Prospectus.
DESCRIPTION OF THE CERTIFICATES
GENERAL
The Certificates will be issued pursuant to a Trust Agreement, dated as of
(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.
The Mortgage-Backed Certificates, Series 1998- (the "Certificates") will
consist of the Class A-1 Certificates and the Class X Certificates (the "Class
A-1 Certificates" and the "Class X Certificates," respectively, and
collectively, the "Senior Certificates"), three classes of subordinated
certificates (the "Class M-1 Certificates," the "Class B-1 Certificates" and the
"Class B-2 Certificates, "respectively and collectively, the "Subordinate
Certificates"), and the Class O Certificates (the "Ownership Certificates").
Only the Senior Certificates and the Class M-1 Certificates (the "Offered
Certificates") are offered hereby.
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<PAGE> 68
The Senior Certificates in the aggregate will evidence an initial
beneficial ownership interest of approximately % in the Trust Fund Assets, the
Class M-1 Certificates in the aggregate will evidence approximately % of the
undivided interest in the principal balance of the Trust Fund Assets and the
Class B-1 and Class B-2 Certificates evidence in the aggregate the remaining %
undivided interest in the principal balance of the Trust Fund Assets. The Class
X Certificates will have no principal balance, are entitled only to a portion of
the interest on the Mortgage Loans and are not entitled to any distributions of
principal. The Ownership Certificates will not have a Class Certificate Balance
and will not bear interest.
The Class A-1 Certificates will be issuable in (book-entry) (fully
registered) form only. [The Class A-1 Certificates will be issued in minimum
dollar denominations of $ and integral multiples of $ in excess
thereof.] The Class X [and Class M-1] Certificates will be issued in fully
registered certificated form in minimum dollar denomination of $ and
integral multiples of $ in excess thereof. A single certificate of each
Class may be issued in any amount in excess of the minimum denomination.
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
Certificateholders. 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 Indenture, 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 amount of Available
Funds and shall deposit such Available Funds in an account established and
maintained with the Certificate Trustee on behalf of Certificateholders (the
"Distribution Account").
PRIORITY OF DISTRIBUTIONS AMONG CERTIFICATES
As more fully described herein, distributions will be made on the
Certificates on each Distribution Date from Available Funds in the following
order of priority: (i) to interest on each Class of Senior Certificates, (ii) to
principal on the Class A-1 Certificates, up to the maximum amount of principal
to be distributed on the Class A-1 Certificates on such Distribution Date, (iii)
to interest on the Class M-1 Certificates, (iv) to principal on the Class M-1
Certificates, up the maximum amount of principal to be distributed on such Class
on such Distribution Date, and (v) to interest on and then principal of each
other Class of Subordinate Certificates, up to the maximum amount of interest
and principal to be distributed on such Class on such Distribution Date [and
subject to certain limitations set forth below under "Principal."]
DISTRIBUTIONS
Distributions of principal and interest to holders of the Offered
Certificates will be made on each Distribution Date to the extent of Available
Funds to holders of record of such Offered Certificates on (the last day of the
preceding month,) (the "Record Date") except that the final distribution in
respect of any Class of Offered Certificates will be made only upon presentation
and surrender of such Certificates at the office or agency appointed by the
Certificate Trustee for that purpose in .
Distributions of interest and principal to holders of Subordinate
Certificates will be subordinate to distributions of interest on and principal
of the Senior Certificates and distributions of interest and principal to
holders of the Class B-1 and Class B-2 Certificates will be subordinate to
distributions of interest on and principal of the Class M-1 Certificates. See
"-- ALLOCATION OF LOSSES" and "CREDIT SUPPORT."
The aggregate amount of funds available in the Distribution Account on a
Distribution Date for distribution on the Certificates is equal to "Available
Funds". Available Funds for any Distribution Date is the amount received with
respect to such Distribution Date from the Underlying Bond, which amount, prior
to a Bond Event of Default, will be equal to the sum of (i) all scheduled
installments of interest (net of related Expense Fees) and principal due on the
first day of the month in which such Distribution Date occurs and received prior
to the related Determination Date together with any Advances in respect thereof,
(ii) all insurance and liquidation proceeds (net of related expenses) received
during the month preceding such
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<PAGE> 69
Distribution Date, (iii) all partial or full prepayments received during the
month preceding such Distribution Date and (iv) the amount required to be paid
in respect of a Mortgage Loan that became required to be repurchased or
substituted during the month preceding such Distribution Date, reduced by
amounts in reimbursement for Advances previously made and other amounts as to
which the Master Servicer or a servicer is entitled to be reimbursed from the
Bond Account pursuant to the Master Servicing Agreement. See "TRUST FUND
ASSETS -- THE MORTGAGE POOL -- ASSIGNMENT, OF THE MORTGAGE LOANS" herein.
The Certificate Trustee will forward with each distribution on a
Distribution Date to each Offered Certificateholder a statement or statements
setting forth, among other things, (i) the amount of such distribution allocable
to principal and (ii) the amount of such distribution allocable to interest.
Such amounts will be expressed as a dollar amount per $1,000 of Class
Certificate Balance. See "DESCRIPTION OF THE SECURITIES -- REPORTS TO
SECURITYHOLDERS" in the Prospectus for a detailed description of the information
to be included in such statements.
INTEREST
On each Distribution Date, each Class of Offered Certificates, to the
extent of Available Funds on such Distribution Date applied in the order
described above under "-- PRIORITY OF DISTRIBUTIONS AMONG CERTIFICATES", will be
entitled to receive an amount allocable to interest equal to the sum of (i) one
month's interest at the applicable Pass-Through Rate on the Class Certificate
Balance or Class X Notional Amount, as the case may be, and (ii) the sum of the
amounts, if any, by which the amount described in clause (i) above on each prior
Distribution Date exceeded the amount actually distributed as interest on such
prior Distribution Dates and not subsequently distributed ("Unpaid Interest
Amounts"). [Interest will be calculated and payable on the basis of a 360-day
year divided into twelve 30-day months.]
The interest entitlement described above for each Class of Offered
Certificates will be reduced by (i) such Class of Certificates allocable share
of "Net Interest Shortfalls" with respect to such Distribution Date, which is
equal to the amount of interest any Class of Certificateholders would otherwise
have been entitled to receive with respect to any Mortgage Loan that was the
subject of (a) a Relief Act Reduction (or (b) after the coverage provided by the
Subordinate Certificates is exhausted for such type of loss, a Special Hazard
Loss, Fraud Loss or a Bankruptcy Loss,) and (ii) such Class' pro rata share of
Net Prepayment Interest Shortfalls. A "Relief Act Reduction" is a reduction in
the amount of monthly interest payment on a Mortgage Loan pursuant to the
Soldiers' and Sailors' Civil Relief Act of 1940. See "CERTAIN LEGAL ASPECTS OF
MORTGAGE LOANS -- SOLDIERS' AND SAILORS' CIVIL RELIEF ACT" in the Prospectus.
"Net Prepayment Interest Shortfall" is the amount by which the aggregate of
Prepayment Interest Shortfalls during the calendar month immediately preceding
the month in which the related Due Date occurs exceeds the aggregate amount of
the Master Servicing Fee for such period. A "Prepayment Interest Shortfall" is
the amount by which interest at the Net Mortgage Rate received in connection
with a prepayment of principal on a Mortgage Loan is less than one month's
interest at the Net Mortgage Rate on the Principal Balance of the related
Mortgage Loan that is prepaid. Each Class' pro rata share of such Net Prepayment
Interest Shortfalls will be based on the amount of interest such Class of
Certificates otherwise would have been entitled to receive.
In the event that, on a particular Distribution Date, Available Funds on
such Distribution Date applied in the order described above under "-- PRIORITY
OF DISTRIBUTIONS AMONG CERTIFICATES," are not sufficient to make a full
distribution of interest to holders of the Offered Certificates, interest will
be distributed on such Class or Classes of Offered Certificates of equal
priority in proportion to the amount of interest each such Class or Classes
would otherwise have been entitled to receive in the absence of such shortfall.
The amount of any resulting shortfall will be carried forward and added to the
amount holders of each such Class of Offered Certificates will be entitled to
receive on the next Distribution Date. Such a shortfall could occur, for
example, if losses realized on the Mortgage Loans were exceptionally high or
were concentrated in a particular month. Any such amount so carried forward will
not bear interest.
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<PAGE> 70
PRINCIPAL
On each Distribution Date, the Class A-1 Certificates will be entitled to
receive a amount allocable to principal equal to the lesser of (x) Available
Funds reduced by the amount of interest distributed on the Senior Certificates
on such Distribution Date and (y) the sum of (i) the Class A-1 Percentage of (a)
all scheduled payments of principal due on each Mortgage Loan on the Due Date
for such Mortgage Loan in the month in which such Distribution Date occurs, (b)
the Principal Balance of each Mortgage Loan that became a Liquidated Mortgage
Loan during the month preceding the month of such Distribution Date, (c) the
Pool Principal Balance of each Mortgage Loan that was repurchased by AmREIT or
another person as of such Distribution Date pursuant to the Mortgage Loan
Purchase Agreement, (d) certain amounts that may be required to be paid in
connection with any substitution of Mortgage Loans and (e) any net insurance or
liquidation proceeds received during the month preceding the month of such
Distribution Date allocable to recoveries of principal of Mortgage Loans that
are not yet Liquidated Mortgage Loans and (ii) the Class A-1 Prepayment
Percentage of all partial principal prepayments and of all principal prepayments
in full ("Principal Prepayments") received during such preceding month.
On each Distribution Date, the Class M-1 Certificates will be entitled to
receive an amount allocable to principal equal to the lesser of (x) Available
Funds reduced by the amount of interest and principal distributed on the Senior
Certificates and interest on the Class M-1 Certificates, in each case on such
Distribution Date and (y) the sum of (i) the applicable Subordinate Percentage
Allocation of the sum of the amounts calculated pursuant to clauses (a) through
(e) in the preceding paragraph for such Distribution Date and (ii) the
applicable Subordinate Prepayment Percentage Allocation of all Principal
Prepayments received during the preceding month.
"Principal Balance" of a Mortgage Loan as of any Due Date is the unpaid
principal balance of such Mortgage Loan as specified in the amortization
schedule at the time relating thereto (before any adjustment to such schedule by
reason of moratorium or similar waive or grace period) for such Due Date, after
giving effect to any previous partial payments and to the payment of principal
due on such Due Date and irrespective of any delinquency in payment by the
Mortgagor. The "Pool Principal Balance" will equal the aggregate of the
Principal Balances of all Mortgage Loans. The "Due Date" for a Mortgage Loan is
the first day of each calendar month on which the scheduled installment of
principal and interest with respect thereto is due.
The "Class A-1 Percentage" for any Distribution Date is the percentage
obtained by dividing the sum of the Class Certificate Balance of the Class A-1
Certificates immediately prior to such date by the aggregate of the Class
Certificate Balances of all Classes of Certificates immediately prior to such
date. The "Subordinate Percentage" for any Distribution Date is the percentage
calculated as the difference between 100% and the Class A-1 Percentage for such
date.
The "Subordinate Percentage Allocation" for any Distribution Date and Class
of Subordinate Certificates, is equal to a fraction, the numerator of which is
the related Class Certificate Balance immediately prior to such date and the
denominator of which is the aggregate of the Class Certificate Balances of all
Subordinate Certificates immediately prior to such date.
The "Class A-1 Prepayment Percentage" for any Distribution Date occurring
during the five years beginning on the first Distribution Date will, except as
provided below, equal 100%. Thereafter, the Class A-1 Prepayment Percentage will
be subject to gradual reduction as described in the following paragraph. This
disproportionate allocation of certain unscheduled payments in respect of
principal will have the effect of accelerating the amortization of the Class A-1
Certificates while, in the absence of Realized Losses, increasing the interest
in the principal balance of the Mortgage Loans evidenced by the Subordinate
Certificates. Increasing the respective interest of the Subordinate Certificates
relative to that of the Senior Certificates is intended to preserve the
availability of the subordination provided by the Subordinate Certificates.
The "Class A-1 Prepayment Percentage" for any Distribution Date occurring
on or after the fifth anniversary of the first Distribution Date will be as
follows: for any Distribution Date in the first year thereafter, the Class A-1
Percentage for such Distribution Date plus 70% of the Subordinate Percentage for
such Distribution Date; for any distribution Date in the second year thereafter,
the Class A-1 Percentage for
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such Distribution Date plus 60% of the Subordinate Percentage for such
Distribution Date; for any Distribution Date in the third year thereafter, the
Class A-1 Percentage for such Distribution Date plus 40% of the Subordinate
Percentage for such Distribution Date; for any Distribution Date in the fourth
year thereafter, the Class A-1 Percentage for such Distribution Date plus 20% of
the Subordinate Percentage for such Distribution Date; and for any Distribution
Date thereafter, the Class A-1 Percentage for such Distribution Date (unless on
any of the foregoing Distribution Dates the Class A-1 Percentage exceeds the
initial Class A-1 Percentage, in which case the Class A-1 Prepayment Percentage
for such Distribution Date will once again equal 100%). Notwithstanding the
foregoing, no reduction to the Senior Prepayment Percentage will occur if [(i)
as of the first Distribution Date as to which any such reduction applies, the
dollar amount of all monthly payments on the Mortgage Loans due in each of the
preceding six months that are delinquent 60 days or more exceeds a monthly
average of % of all monthly payments due in such month (including for this
purpose any Mortgage Loans in foreclosure and Mortgage Loans with respect to
which the related Mortgaged Property has been acquired by the Mortgage Pool), or
(ii) cumulative Realized Losses with respect to the Mortgage Loans exceed (a)
with respect to the Distribution Date in , ( %) of the Class
Certificate Balance of the Subordinate Certificates as of the Cut-off Date (the
"Original Subordinate Principal Balance"), (b) with respect to the Distribution
Date in , ( %) of the Original Subordinate Principal Balance, (c)
with respect to the Distribution Date in , % of the Original
Subordinate Principal Balance, (d) with respect to the Distribution Date in
, % of the Original Subordinate Principal Balance, and (e) with
respect to the Distribution Date in , % of the Original Subordinate
Principal Balance.]
The "Subordinate Prepayment Percentage" for any Distribution Date is 100%
minus the Senior Prepayment Percentage for such Distribution Date. The
"Subordinate Prepayment Percentage Allocation" for any Distribution Date and
Class of Subordinate Certificates, is equal to the product of the Subordinate
Prepayment Percentage and a fraction, the numerator of which is the related
Class Certificate Balance immediately prior to such date and the denominator of
which is the aggregate of the Class Certificate Balances of all Subordinate
Certificates immediately prior to such date.
If on any Distribution Date the allocation to the Class of Certificates
then entitled to principal of full and partial principal prepayments and other
amounts in the percentages required above would reduce the outstanding Class
Certificate Balance of such Class below zero, the distribution to such Class of
Certificates will be limited to the amount necessary to reduce the related Class
Certificate Balance to zero and any remaining portion thereof will be
distributed to the Class of Certificates next entitled to distributions of
principal.
ALLOCATION OF LOSSES
On each Distribution Date, any Realized Loss on a Mortgage Loan, other than
any Excess Loss, that results in a reduction of the principal balance of the
Underlying Bond without a corresponding cash principal payment, will be
allocated first, sequentially, to the Class B-2, Class B-1 and Class M-1
Certificates, in that order, in each case until the respective Class Certificate
Balance thereof is reduced to zero, and thereafter to the Class A-1
Certificates.
On each Distribution Date, Excess Losses will be allocated pro rata among
the Class A-1 Certificates and the Subordinate Certificates based upon their
respective Class Certificate Balances.
In general, a "Realized Loss" means, with respect to a Liquidated Mortgage
Loan, the amount by which the remaining unpaid principal balance of the Mortgage
Loan exceeds the amount of liquidation proceeds applied to the principal balance
of the Mortgage Loan. "Excess Losses" are (i) Special Hazard Losses in excess of
the Special Hazard Loss Coverage Amount, (ii) Bankruptcy Losses in excess of the
Bankruptcy Loss Coverage Amount and (iii) Fraud Losses in excess of the Fraud
Loss Coverage Amount. "Bankruptcy Losses" are losses that are incurred as a
result of Debt Service Reductions and Deficient Valuations. "Special Hazard
Losses" are Realized Losses in respect of Special Hazard Mortgage Loans. "Fraud
Losses" are losses sustained on a Liquidated Mortgage Loan by reason of a
default arising from fraud, dishonesty or
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misrepresentation. See "CREDIT SUPPORT -- SUBORDINATION OF SUBORDINATE
CERTIFICATES" herein.
A "Liquidated Mortgage Loan" is a defaulted Mortgage Loan as to which the
Master Servicer has determined that all recoverable liquidation and insurance
proceeds have been received. A "Special Hazard Mortgage Loan" is a Liquidated
Mortgage Loan as to which the ability to recover the full amount due thereunder
was substantially impaired by a hazard not insured against under a standard
hazard insurance policy of the type described in the Prospectus under "CREDIT
SUPPORT -- SPECIAL HAZARD INSURANCE POLICIES." See "CREDIT
SUPPORT -- SUBORDINATION OF SUBORDINATE CERTIFICATES" herein.
The "Class Certificate Balance" of any Class of Certificates as of any
Distribution Date is the initial Class Certificate Balance thereof, reduced by
the sum of (i) all amounts previously distributed to holders of such Class as
payments of principal and (ii) the amount of Realized Losses and Excess Losses
allocated to such Class, as described above.
TERMINATION; OPTIONAL TERMINATION
The circumstances under which the obligations created by the Trust
Agreement will terminate in respect of the Certificates are described in
"DESCRIPTION OF THE SECURITIES -- EARLY TERMINATION" and "THE
AGREEMENTS -- TERMINATION OF TRUST AGREEMENT" in the Prospectus. At its option,
the Bond Issuer may redeem the Underlying Bond at par and thereby effect early
retirement of the Certificates, on any Distribution Date on which the Pool
Principal Balance is less than 10% of the Cut-off Date Pool Principal Balance.
In addition, the Depositor may exercise its option to repurchase the Trust Fund
Assets on any Distribution Date on which the Pool Principal Balance is less than
10% of the Cut-off Date Pool Principal Balance. Distributions in respect of any
such optional termination will be paid to Certificateholders in order of their
priority of distribution as described under "-- PRIORITY OF DISTRIBUTIONS AMONG
CERTIFICATES." The proceeds from such a distribution may not be sufficient to
distribute the full amount to which each Class is entitled if the purchase price
is based in part on the fair market value of the property acquired upon
foreclosure of a Mortgage Loan and such fair market value is less than the
Principal Balance of the related Mortgage Loan. 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)
. 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.]]
LAST SCHEDULED DISTRIBUTION DATE
The Last Scheduled Distribution Date for each Class of Offered Certificates
is the latest date on which the Class Certificate Balance is expected to be
reduced to zero, and has been calculated on the basis of the assumptions
described below under "PREPAYMENT AND YIELD CONSIDERATIONS -- ASSUMPTIONS
RELATING TO TABLES" except for the following additional assumptions: (describe).
Since the rate of distributions in reduction of the Class Certificate Balance on
each Class of Offered Certificates will depend on the rate of payment (including
prepayments) of the Mortgage Loans as well as the frequency and severity of
losses experienced by the Mortgage Pool, the Class Certificate Balance of any
such Class could reach zero significantly earlier or later than its Last
Scheduled Distribution Date. The rate of payments on the Mortgage Loans will
depend on their particular characteristics, as well as on prevailing interest
rates from time to time and other economic factors, and no assurance can be
given as to the actual payment experience of the Mortgage Loans.
[CONTROLLING CLASS OF CERTIFICATES
For the purposes described in the Prospectus under the headings "THE
AGREEMENTS -- MODIFICATION OF AGREEMENTS," "-- EVENTS OF DEFAULT" and "RIGHTS
UPON EVENT OF
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DEFAULT," the "Controlling Class" shall be the Class A-1 Bondholders or, if the
Class A-1 Bonds are no longer outstanding, the Class B-1 Bondholders.]
[BOOK-ENTRY CERTIFICATES
The Offered Certificates will be book-entry Certificates (the "Book-Entry
Certificates"). The Book-Entry Certificates will be issued in one or more
certificates which equal the aggregate principal balance of each such Class of
Offered Certificates which will be held by a nominee of The Depository Trust
Company (together with any successor depository selected by the Depositor, the
"Depository"). Beneficial interests in the Book-Entry Certificates will be
indirectly held by investors through the book-entry facilities of the
Depository, as described herein. Investors may hold such beneficial interests in
the Book-Entry Certificates in minimum denominations of $1,000 and in integral
multiples in excess thereof, except that one Book-Entry Certificate of each such
Class may be issued in an amount which is not an integral multiple of $1,000.
The Depositor has been informed by the Depository that its nominee will be CEDE
& Co. ("CEDE"). Accordingly, CEDE is expected to be the holder of record of the
Book-Entry Certificates. Except as described below, no person acquiring a
Book-Entry Certificate (each, a "beneficial owner") will be entitled to receive
a physical certificate representing such Certificate (a "Definitive
Certificate").
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 the Depository (or of a participating firm that acts as agent for the
Financial Intermediary, whose interests will in turn be recorded on the records
of the Depository, if the beneficial owner's Financial Intermediary is not a
Depository participant). Therefore, the beneficial owner must rely on the
foregoing procedures to evidence its beneficial ownership of a Book-Entry
Certificate. Beneficial ownership of a Book-Entry Certificate may only be
transferred by compliance with the procedures of such Financial Intermediaries
and Depository participants.
The Depository is a limited purpose trust company organized under the laws
of the State of New York, a member of the Federal Reserve System, a "Clearing
Corporation" within the meaning of the Uniform Commercial Code as in effect in
the State of New York and a "Clearing Agency" registered pursuant to Section 17A
of the Securities Exchange Act of 1934, as amended. The Depository performs
services for its participants, some of which (and/or their representatives) own
the Depository. In accordance with its normal procedures, the Depository is
expected to record the positions held by each Depository 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 the Depository and
Depository participants as in effect from time to time.
Distributions on the Book-Entry Certificates will be made on each
Distribution Date by the Trustee to the Depository. The Depository will be
responsible for crediting the amount of such payments to the accounts of the
applicable Depository participants in accordance with the Depository's normal
procedures. Each Depository participant will be responsible for disbursing such
payments 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 Trustee to CEDE. Because the Depository 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.
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None of the Depositor, AmREIT 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, as nominee for DTC, or for maintaining, supervising or reviewing any
records relating to such beneficial ownership interests. In the event of the
insolvency of the Depository, a Depository participant or an indirect Depository
participant in whose name Book-Entry Certificates are registered, the ability of
the Beneficial Owners of such Book-Entry Certificates to obtain timely payment
may be impaired.
Unless and until Definitive Certificates are issued, it is anticipated that
the only "Certificateholder" of the Book-Entry Certificates will be CEDE, as
nominee of the Depository. Beneficial owners of the Book-Entry Certificates will
not be Certificateholders, as that term is used in the Trust Agreement.
Beneficial owners are only permitted to exercise the rights of
Certificateholders indirectly through Financial Intermediaries and the
Depository. Monthly and annual reports on the Mortgage Pool provided by the
Master Servicer to CEDE, as nominee of the Depository, may be made available 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 Depository accounts the Book-Entry Certificates of such
beneficial owners are credited.
The Depository has advised the Depositor and the Certificate Trustee that,
unless and until Definitive Certificates are issued, the Depository 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 Depository 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.
Definitive Certificates will be issued to beneficial owners of the
Book-Entry Certificates, or their nominees, rather than to the Depository, only
if (a) the Depository or the Depositor advises the Certificate Trustee in
writing that the Depository 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 Depository; or (c) after the
occurrence of a Certificate of 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 the Depository through the Financial Intermediaries in writing that
the continuation of a book-entry system through the Depository (or a successor
thereto) is no longer in the best interests of beneficial owners.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Certificate Trustee will be required to notify all
beneficial owners of the occurrence of such event and the availability through
the Depository of Definitive Certificates. Upon surrender by the Depository of
the global certificate or certificates representing the Book-Entry Certificates
and instructions for re-registration, the Certificate Trustee will issue the
Definitive Certificates, and thereafter the Certificate Trustee will recognize
the holders of such Definitive Certificates as Certificateholders under the
Trust Agreement.]
THE TRUSTEE
will be the Trustee under the Trust Agreement. The
Depositor and may maintain other banking relationships
in the ordinary course of business with the Trustee. Offered Certificates may be
surrendered at the Corporate Trust Office of the Trustee located at
, Attention: or at
such other addresses as the Trustee may designate from time to time.
DESCRIPTION OF THE UNDERLYING BOND
GENERAL
The Underlying Bond will be issued pursuant to the Indenture. The
Underlying Bond will be issued by the Bond Issuer pursuant to an Indenture dated
as of between the Bond Issuer and as Bond Trustee. The
payments of principal due on the Underlying Bond each worth month generally will
equal
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the aggregate principal amount (i) due on the Mortgage Loans on the related Due
Date, (ii) received as prepayments during the related Due Period, and (iii)
determined to be a Realized Loss upon liquidation. The payments of interest due
on the Underlying Bond each month generally will equal the weighted average of
the Mortgage Rates on the Mortgage Loans during the related Due Period less the
Bond Expense Rate (which includes the Master Servicing Fee, Servicing Fees and
Bond Trustee fees). The Underlying Bond is payable solely from the limited
assets of the Bond Issuer.
[REDEMPTION AT THE OPTION OF THE BOND ISSUER
The Underlying Bond may be redeemed in whole, but not in part, at the Bond
Issuer's option, on any Distribution Date on or after the earlier of (a)
years after the initial issuance of the Bond and (b) [specify criteria], at a
redemption price equal to 100% of the unpaid principal amount of such Bond
(including, in the case of the Subordinated Bonds, any unpaid Subordinated
Principal Carryover Shortfall), plus accrued and unpaid interest at the
applicable Bond Interest Rate through the month preceding the month in which
such optional redemption date occurs. The Underlying Bond is not otherwise
subject to call or redemption at the option of the Bond Issuer nor is it subject
to special redemption. See "DESCRIPTION OF THE SECURITIES -- REDEMPTION OF
BONDS" in the Prospectus.]
[Notice of any redemption to be made at the option of the Bond Issuer must
be given by the Bond Issuer to the Bond Trustee and the Certificate Trustee not
less than 30 days prior to the redemption date and must be mailed by the Bond
Issuer or the Certificate Trustee to affected Certificateholders at least 10
days prior to the redemption date.]
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 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.
The timing of changes in the rate of prepayments may significantly affect
the actual yield to investors, even if the average rate of principal prepayments
is consistent with the expectations of investors. In general, the earlier the
payment of principal of the Mortgage Loans the greater the effect on an
investor's yield to maturity. As a result, the effect on an investor's yield of
principal prepayments occurring at a rate higher (or lower) than the rate
anticipated by the investor during the period immediately following the issuance
of the Certificates will not be offset by a subsequent like reduction (or
increase) in the rate of principal prepayments. The yield on the Class X
Certificates will be highly sensitive to the rate and timing of prepayments on
the Mortgage Loans. A rapid rate of principal prepayments on the Mortgage Loans
(as defined below) may have a material negative effect on the yield of the Class
X Certificates. Investors must make their own decisions as to the appropriate
prepayment assumptions to be used in deciding whether to purchase the Offered
Certificates. See "-- YIELD ON CLASS X CERTIFICATES" herein.
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As described herein under "DESCRIPTION OF THE CERTIFICATES -- PRINCIPAL",
the Class A-1 Prepayment Percentage of Principal Prepayments and excluding for
this purpose, liquidations due to default, casualty, condemnation and the like
will be initially distributed to the Class A-1 Certificates. This may result in
all (or a disproportionate percentage) of such principal prepayments being
distributed to holders of the Class A-1 Certificates and none (or less than
their pro rata share) of such principal prepayments being distributed to holders
of Subordinate Certificates during the periods of time described in the
definition of "Class A-1 Prepayment Percentage."
[Mortgagors are permitted to prepay the Mortgage Loans, in whole or in
part, at any time without penalty.] The rate of payment of principal may also be
affected by any repurchase of the Mortgage Loans permitted or required by the
Master Servicing Agreement and the Mortgage Loan Purchase Agreement. See "TRUST
FUND ASSETS -- THE MORTGAGE POOL -- ASSIGNMENT OF THE MORTGAGE LOANS" and
"DESCRIPTION OF THE CERTIFICATES -- TERMINATION; OPTIONAL TERMINATION" herein.
Each monthly interest payment on a Mortgage Loan will be calculated as the
product of one-twelfth of the applicable Mortgage Rate at the time of such
calculation and the then unpaid principal balance on such Mortgage Loan. The Net
Mortgage Rate with respect to each Mortgage Loan will be similarly calculated on
a loan-by-loan basis, by subtracting from the applicable Mortgage Rate the
related Expense Rate.
The effective yield to holders of interest bearing Offered Certificates
will be reduced slightly below the yield otherwise produced by the applicable
Pass-Through Rate because, while interest will accrue from the first day of each
month, the distribution of such interest will not be made until the th day
of the month following the month of accrual.
[Substantially all] of the Mortgage Loans will include due-on-sale clauses
which allow the holder of the Mortgage Loan to demand payment in full of the
remaining principal balance upon sale or certain transfers of the property
securing such Mortgage Loan. The Master Servicer, or the applicable servicer,
will enforce "due-on-sale" clauses to the extent permitted by applicable law.
Each Mortgage Note which contains "due-on-sale" provisions permits the holder of
the Mortgage Note to accelerate the maturity of the Mortgage Loan upon
conveyance by the Mortgagor of the underlying Mortgaged Property. The Master
Servicer, or the applicable servicer, will enforce any "due-on-sale" clause to
the extent it has knowledge of the conveyance or proposed conveyance of the
underlying Mortgaged Property and reasonably believes that it is entitled to do
so under applicable law; provided, however, that the Master Servicer or any such
servicer will not take any action in relation to the enforcement of any
"due-on-sale" provisions which would impair or threaten to impair any recovery
under any related Primary Mortgage Insurance Policy. Acceleration of Mortgage
Loans as a result of enforcement of such "due-on-sale" provisions in connection
with transfers of the related Mortgaged Properties or the occurrence of certain
other events resulting in acceleration would affect the level of prepayments on
the Mortgage Loans, thereby affecting the weighted average lives of the Classes
of the Offered Certificates.
[See "DESCRIPTION OF THE CERTIFICATES -- TERMINATION; OPTIONAL TERMINATION"
herein for a description of the Bond Issuer's right to redeem the Underlying
Bond and the Master Servicer's option to repurchase the Mortgage Loans. 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 will shorten the weighted average lives of
the Classes of Offered Certificates.]
[Although each of the Mortgage Loans bears interest at an adjustable
Mortgage Rate, the [semi-annual] [annual] adjustments of the Mortgage Rate for
any Mortgage Loan will not exceed the Periodic Rate Cap and the Mortgage Rate
will in no event exceed the Maximum Rate for such Mortgage Loan, regardless of
the level of interest rates generally or the rate otherwise produced by the
Index and the Gross Margin.] [In addition, such adjustments will be subject to
rounding to the nearest one-eighth of 1%.]
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ASSUMPTIONS RELATING TO TABLES
The Decrement Tables have been prepared on the basis of the following
assumptions (the "Assumptions"): [describe assumptions]. Although the
characteristics of the mortgage loans for the Decrement Tables have been
prepared on the basis of the characteristics of the Mortgage Loans which are
expected to be in the Pool, there is no assurance that the Assumptions will
reflect the actual characteristics or performance of the Mortgage Loans or that
the performance of the Offered Certificates will conform to the results set
forth in the tables.
WEIGHTED AVERAGE LIVES OF THE OFFERED CERTIFICATES
Weighted average life refers to the average amount of time that will elapse
from the date of issuance of an Offered Certificate until each dollar in
reduction of the Class Certificate Balance thereof is distributed to the
investor. The weighted average lives of such Classes of Offered Certificates
will be influenced by, among other things, the rate at which principal of the
Mortgage Loans is paid, which may be in the form of scheduled amortization or
prepayments (for this purpose, the term "prepayments" includes prepayments and
liquidations due to default, casualty, condemnation and the like), the timing of
changes in such rate of payments and the priority sequence of distributions of
principal of such Offered Certificates. The interaction of the foregoing factors
may have different effects on each Class of Offered Certificates and the effects
on any such Class may vary at different times during the life of such Class.
Accordingly, no assurance can be given as to the weighted average life of any
such Class of Offered Certificates. For an example of how the weighted average
lives of the Offered Certificates are affected by the foregoing factors at
various constant percentages of PSA, see the Decrement Tables below.
Prepayments on mortgage loans are commonly measured relative to a
prepayment standard or model. The model used in this Prospectus Supplement is
the Prepayment Standard Assumption ("PSA"), which represents an assumed 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. A prepayment
assumption of 100% PSA assumes constant prepayment rates of 0.2% per annum of
the then outstanding principal balance of such mortgage loans in the first month
of the life of the mortgage loans and an additional 0.2% per annum in each month
thereafter until the thirtieth month. Beginning in the thirtieth month and in
each month thereafter during the life of the mortgage loans, 100% PSA assumes a
constant prepayment rate of 6% per annum each month. As used in the table below,
"0% PSA" assumes prepayment rates equal to 0% of PSA, i.e., no prepayments.
Correspondingly, "125% PSA" assumes prepayment rates equal to 125% of PSA, and
so forth. PSA does not purport to be a historical description of prepayment
experience or a prediction of the anticipated rate of prepayment of any pool of
mortgage loans, including the Mortgage Loans. The Depositor believes that no
existing statistics of which it is aware provide a reliable basis for holders of
Offered Certificates to predict the amount or the timing of receipt of
prepayments on the Mortgage Loans.
The Decrement Tables set forth below have been prepared on the basis of the
Assumptions described above under "-- ASSUMPTIONS RELATING TO TABLES." There
will likely be discrepancies between the characteristics of the actual Mortgage
Loans included in the Pool and the characteristics of the Mortgage Loans assumed
in preparing the Decrement Tables. Any such discrepancy may have an effect upon
the percentages of initial Class Certificate Balances outstanding set forth in
the Decrement Tables (and the weighted average lives of the Offered
Certificates). In addition, to the extent that the Mortgage Loans that actually
are included in the Mortgage Pool have characteristics that differ from those
assumed in preparing the following Decrement Tables, the Class Certificate
Balance of any such Class of Offered Certificates will be reduced to zero
earlier or later than indicated by such Decrement Tables.
Furthermore, the information contained in the Decrement Tables with respect
to the weighted average life of any Offered Certificate is not necessarily
indicative of the weighted average life of such Class of Offered Certificate
that might be calculated or projected under different or varying prepayment
assumptions.
It is not likely that (i) all of the Mortgage Loans will have the Mortgage
Rates or remaining terms to maturity assumed or (ii) the Mortgage Loans will
prepay at the indicated percentage of PSA until maturity. In addition, the
diverse remaining terms to maturity of the Mortgage Loans (which includes many
recently
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originated Mortgage Loans) could produce slower or faster distributions in
reduction of Class Certificate Balances than indicated in the Decrement Table at
the various percentages of PSA specified.
Based upon the foregoing assumptions, the following Decrement Tables
indicate the projected weighted average life of each Class of the Offered
Certificates and set forth the percentages of the initial Class Certificate
Balance of each such Class that would be outstanding after each of the dates
shown at various constant percentages of the PSA.
DECREMENT TABLES
PERCENTAGE OF INITIAL CLASS CERTIFICATE BALANCE OUTSTANDING FOR THE OFFERED
CERTIFICATES AT THE
RESPECTIVE PERCENTAGES OF PSA SET FORTH BELOW:
<TABLE>
<CAPTION>
CLASS A-1 CLASS M-1
------------------------------------- -------------------------------------
DISTRIBUTION DATE % % % % % % % % % %
- ----------------- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Class Certificate
Balance...................
Weighted Average Life (in
years)(1).................
Years to Maturity...........
</TABLE>
- ---------------
(1) The weighted average life of an Offered Certificate is determined by (i)
multiplying the amount of each distribution of the Class Certificate Balance
thereof by the number of years from the date of the issuance of the Offered
Certificate to the related Distribution Date, (ii) adding the results and
(iii) dividing the sum by the initial Class Certificate Balance of the
Offered Certificates of such Class.
YIELD ON CLASS X CERTIFICATES
The significance of the effects of prepayments on the Class X Certificates
is illustrated in the following table entitled "SENSITIVITY OF THE CLASS X
CERTIFICATES TO PREPAYMENTS," which shows the pre-tax yield (on a corporate bond
equivalent basis) to holders of such Certificates under different constant
percentages of the Prepayment Assumption. The yields of such Certificates set
forth in the following table were calculated using the assumptions specified
above for the Decrement Tables and assuming that the purchase price of the Class
X Certificates is approximately % for 100% of such Class of Certificates
and such Certificates are purchased on [date].
AS INDICATED IN THE FOLLOWING TABLE, THE YIELD TO INVESTORS IN THE CLASS X
CERTIFICATES WILL BE HIGHLY SENSITIVE TO THE RATE OF PRINCIPAL PAYMENTS
(INCLUDING PREPAYMENTS) OF THE MORTGAGE LOANS (ESPECIALLY THOSE WITH HIGH NET
MORTGAGE RATES), WHICH GENERALLY CAN BE PREPAID AT ANY TIME. ON THE BASIS OF THE
ASSUMPTIONS DESCRIBED ABOVE, THE YIELD TO MATURITY ON THE CLASS X CERTIFICATES
WOULD BE 0% IF PREPAYMENTS WERE TO OCCUR AT A CONSTANT RATE OF APPROXIMATELY
% OF THE PREPAYMENT ASSUMPTION. USING SUCH ASSUMPTIONS, IF THE ACTUAL
PREPAYMENT RATE OF THE MORTGAGE LOANS WERE TO EXCEED THE FOREGOING RATE FOR AS
LITTLE AS ONE MONTH (WHILE EQUALING SUCH RATE FOR ALL OTHER MONTHS), INVESTORS
IN THE CLASS X CERTIFICATES WOULD NOT RECOVER FULLY THEIR INITIAL INVESTMENTS.
It is not likely that the Mortgage Loans will prepay at a constant rate
until maturity or that all of the Mortgage Loans will prepay at the same rate or
that they will have the characteristics assumed. There can be no assurance that
the Mortgage Loans will prepay at any of the rates shown in the table or at any
other particular rate. The timing of changes in the rate of prepayments may
affect significantly the yield realized by
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<PAGE> 79
a holder of a Class X Certificate and there can be no assurance that the pre-tax
yield to an investor in the Class X Certificates will correspond to any of the
pre-tax yields shown herein. Each investor must make its own decision as to the
appropriate prepayment assumptions to be used in deciding whether or not to
purchase a Class X Certificate.
SENSITIVITY OF THE CLASS X
CERTIFICATES TO PREPAYMENTS
(PRE-TAX YIELDS TO MATURITY)
<TABLE>
<CAPTION>
% OF PREPAYMENT ASSUMPTION
-----------------------------------------
50% 75% 100% 125% 200%
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Pre-Tax Yields to Maturity......................... % % % % %
</TABLE>
The yields set forth in the preceding table were calculated by determining
the monthly discount rates which, when applied to the assumed stream of cash
flows to be paid on the Class X Certificates, would cause the discounted present
value of such assumed stream of cash flows to equal the assumed purchase price
of the Class X Certificates indicated above and converting such monthly rates to
corporate bond equivalent rates. Such calculation does not take into account
variations that may occur in the interest rates at which investors may be able
to reinvest funds received by them as payments of interest on the Class X
Certificates and consequently does not purport to reflect the return on any
investment in the Class X Certificates when such reinvestment rates are
considered.
CREDIT SUPPORT
SUBORDINATION OF SUBORDINATE CERTIFICATES
The rights of Subordinate Certificateholders to receive distributions with
respect to the Mortgage Loans will be subordinated to such rights of Senior
Certificateholders, and the rights of the holders of the Class B-1 and Class B-2
Certificates to receive such distributions will be further subordinated to such
rights of the Mezzanine Certificates, in each case only to the extent described
herein. The subordination of the Subordinate Certificates to the Senior
Certificates and the subordination of the Class B-1 and Class B-2 Certificates
to the Mezzanine Certificates is intended to increase the likelihood of receipt,
respectively, by Senior Certificateholders and Mezzanine Certificateholders,
respectively, of the maximum amount to which they are entitled on any
Distribution Date and to provide such holders protection against Realized
Losses, other than Excess Losses.
In addition, the Subordinate Certificates will provide limited protection
against Special Hazard Losses, Bankruptcy Losses and Fraud Losses up to the
Special Hazard Loss Coverage Amount, Bankruptcy Loss Coverage Amount and Fraud
Loss Coverage Amount, respectively, as described below. However, in certain
circumstances the amount of available subordination may be exhausted and
shortfalls in distributions on the Certificates may result. Holders of the
Senior Certificates will bear their proportionate share of any losses realized
on the Mortgage Loans in excess of the available subordination amount.
The Subordinated Certificates will provide protection to the Classes of
Certificates of higher relative priority against (i) Special Hazard Losses in an
initial amount expected to be up to approximately $ (the "Special
Hazard Loss Coverage Amount"), (ii) Bankruptcy Losses in an initial amount
expected to be up to approximately $ (the "Bankruptcy Loss Coverage
Amount") and (iii) Fraud Losses in an initial amount expected to be up to
approximately $ (the "Fraud Loss Coverage Amount").
The Special Hazard Loss Coverage Amount will be reduced, from time to time,
to be an amount equal on any Distribution Date to the lesser of [(a) the
greatest of (i) 1% of the aggregate of the principal balances of the Mortgage
Loans, (ii) twice the principal balance of the largest Mortgage Loan and (iii)
the aggregate principal balances of the Mortgage Loans secured by Mortgaged
Properties located in the single [California] postal zip code area having the
highest aggregate principal balance of any such zip code area and (b) the
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<PAGE> 80
Special Hazard Loss Coverage Amount as of the Closing Date less the amount, if
any, of losses attributable to Special Hazard Mortgage Loans incurred since the
Closing Date.] All principal balances for the purpose of this definition will be
calculated as of the first day of the month preceding such Distribution Date
after giving effect to scheduled installments of principal and interest on the
Mortgage Loans then due, whether or not paid.
The Fraud Loss Coverage Amount will be reduced, from time to time, by the
amount of Fraud Losses allocated to the Certificates. In addition, on each
anniversary of the Cut-off Date, the Fraud Loss Coverage Amount will be reduced
as follows: [(a) on the first and second anniversaries of the Cut-off Date, to
an amount equal to the excess of % of the Cut-off Date Pool Principal
Balance over the cumulative amount of Fraud Losses allocated to the
Certificates, (b) on the third and fourth anniversaries of the Cut-off Date, to
an amount equal to the excess of % of the Cut-off Date Pool Principal
Balance over the cumulative amount of Fraud Losses allocated to the Certificates
and (c) on the fifth anniversary of the Cut-off Date, to zero.]
The Bankruptcy Loss Coverage Amount will be reduced, from time to time, by
the amount of Bankruptcy Losses allocated to the Certificates.
The amount of coverage provided by the Subordinate Certificates for Special
Hazard Losses, Bankruptcy Losses and Fraud Losses may be cancelled or reduced
from time to time for each of the risks covered, provided that the then current
ratings of the Certificates assigned by the Rating Agencies are not adversely
affected thereby. [In addition, a reserve fund or other form of credit support
may be substituted for the protection provided by the Subordinated Certificates
for Special Hazard Losses, Bankruptcy Losses and Fraud Losses.]
As used herein, a "Deficient Valuation" is a bankruptcy proceeding whereby
the bankruptcy court may establish the value of the Mortgaged Property at an
amount less than the then outstanding principal balance of the Mortgage Loan
secured by such Mortgaged Property or may reduce the outstanding principal
balance of a Mortgage Loan. In the case of a reduction in the value of the
related Mortgaged Property, the amount of the secured debt could be reduced to
such value, and the holder of such Mortgage Loan thus would become an unsecured
creditor to the extent the outstanding principal balance of such Mortgage Loan
exceeds the value so assigned to the Mortgaged Property by the bankruptcy court.
In addition, certain other modifications of the terms of a Mortgage Loan can
result from a bankruptcy proceeding, including the reduction (a "Debt Service
Reduction") of the amount of the monthly payment on the related Mortgage Loan.
Notwithstanding the foregoing, no such occurrence shall be considered a Debt
Service Reduction or Deficient Valuation so long as the Master Servicer is
pursuing any other remedies that may be available with respect to the related
Mortgage Loan and (i) such Mortgage Loan is not in default with respect to
payment due thereunder or (ii) scheduled monthly payments of principal and
interest are being advanced by the Master Servicer without giving effect to any
Debt Service Reduction.
SERVICING OF THE MORTGAGE LOANS
THE MASTER SERVICER
will act as Master Servicer. The principal
executive offices of are located at
.
The Master Servicer will be responsible for servicing the Mortgage Loans in
accordance with the terms set forth in the Master Servicing Agreement. The
Master Servicer intends to perform its servicing obligations under the Master
Servicing Agreement directly or through one or more servicers (each, a
"Servicer"). On or prior to the Closing Date, the Master Servicer will enter
into or be assigned a mortgage servicing agreement (each, a "Servicing
Agreement") with each Servicer pursuant to which such Servicer will perform
certain servicing functions with respect to the Mortgage Loans. The Master
Servicer will administer and supervise the performance of each Servicer, who may
in turn be administering and supervising the performance of the subservicers of
the Mortgage Loans. Notwithstanding any such servicing arrangements, the Master
Servicer will remain liable for its servicing duties and obligations under the
Master Servicing Agreement.
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<PAGE> 81
SERVICING AND COLLECTION PROCEDURES
On or prior to the Closing Date, the Master Servicer will enter into a
separate Servicing Agreement with each Servicer to perform, as independent
contractor, servicing functions for the Master Servicer subject to its
supervision. Such servicing functions include 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 Servicers will not
thereby be released from their obligations under the Servicing Agreement. The
Master Servicer also may enter into subservicing agreements 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 Servicer directly or through an agent or independent
contractor and the Master Servicer will be responsible for administering and
servicing the Mortgage Loans pursuant to the Master Servicing Agreement.
On or before the Closing Date, the Master Servicer will establish one or
more accounts (the "Bond Account") into which each Servicer will remit
collections on the mortgage loans serviced by it (net of its related servicing
compensation). For purposes of the Master Servicing Agreement,
, as 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 has reserved the right to remove the Servicer
servicing any Mortgage Loan at any time and will exercise that right if it
considers such removal to be in the best interest of the Certificateholders. In
the event that the Master Servicer removes a Servicer, the Master Servicer will
continue to be responsible for servicing the related Mortgage Loans.
FORECLOSURE, DELINQUENCY AND LOSS EXPERIENCE
The following table summarizes the delinquency, foreclosure and loss
experience, respectively, as of December 31, 199 , December 31, 199 and December
31, 199 on approximately $ , $ and $ , respectively,
in outstanding principal balance of conventional mortgage loans master serviced
by commenced master servicing conventional mortgage
loans during . The delinquency and foreclosure percentages and the
loss experience may be affected by the size and relative lack of seasoning of
the servicing portfolio because many of such mortgage loans were not outstanding
long enough to give rise to some or all of the indicated periods of delinquency.
Accordingly, the information should not be considered as a basis for assessing
the likelihood, amount or severity of delinquency or losses on the Mortgage
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<PAGE> 82
Loans, and no assurances can be given that the foreclosure, delinquency and loss
experience presented in the table below will be indicative of such experience on
the Mortgage Loans in the future:
<TABLE>
<CAPTION>
AS OF AS OF AS OF
DECEMBER 31, DECEMBER 31, DECEMBER 31,
199 199 199
------------ ------------ ------------
<S> <C> <C> <C>
Total Number of Conventional Mortgage Loans in
Portfolio.......................................
Delinquent Mortgage Loans and Pending Foreclosures
at Period End(1):
30-59 days......................................
60-89 days......................................
90 days or more (excluding foreclosures)........
Total Delinquencies.............................
Foreclosures pending............................
Total delinquencies and foreclosures pending....
Net Loss(2).....................................
</TABLE>
- ---------------
(1) As a percentage of the total number of loans master serviced.
(2) There is no material difference between gross loss and net loss.
There can be no assurance that factors beyond the Master Servicer's
control, such as national or local economic conditions or downturns in the real
estate markets of its lending areas, will not result in increased rates of
delinquencies and foreclosure losses in the future. [For example, over the last
several years there has been a general deterioration of the real estate market
and weakening of the economy in many regions of the country, including
California. The general deterioration of the real estate market has been
reflected in increases in delinquencies of loans secured by real estate, slower
absorption rates of real estate into the market and lower sales prices for real
estate. The general weakening of the economy has been reflected in decreases in
the financial strength of borrowers and decreases in the value of collateral
serving as collateral for loans. If the real estate market and economy continue
to decline, the Master Servicer may experience an increase in delinquencies on
the loans it services and higher net losses on liquidated loans.]
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
The Expense Fees with respect to the Mortgage Loans are payable out of the
interest payments on each Mortgage Loan. The Expense Fees will vary from
Mortgage Loan to Mortgage Loan. The rate at which the Expense Fees accrue (the
"Expense Fee Rate") will range from % to % per annum, in each case of
the Stated Principal Balance of the related Mortgage Loan. As of the Cut-off
Date, the weighted average Expense Fee Rate equaled approximately %. The
Expense Fees consist of (a) master servicing compensation payable to the Master
Servicer in respect of its master servicing activities (the "Master Servicing
Fee"), (b) servicing compensation payable to the Servicers in respect of their
servicing activities (the "Servicing Fee") and (c) fees payable to the Bond
Trustee in respect of its activities as trustee under the Indenture and fees of
the Certificate Trustee under the Trust Agreement. The Master Servicing Fee will
be % per annum of the Stated Principal Balance of each Mortgage Loan. The
Servicing Fee payable to each Servicer will vary from Mortgage Loan to Mortgage
Loan and will range from % to % per annum, in each case of the Stated
Principal Balance of the related Mortgage Loan serviced by such Servicer. The
Master Servicer is obligated to pay certain ongoing expenses associated with the
Mortgage Loans and incurred by the Master Servicer in connection with its
responsibilities under the Master Servicing Agreement and such amounts will be
paid by the Master Servicer out of the Master Servicing Fee. The amount of the
Master Servicing Fee is subject to adjustment with respect to prepaid Mortgage
Loans, as described herein under "-- ADJUSTMENT TO MASTER SERVICING FEE AND
INVESTED AMOUNT IN CONNECTION WITH CERTAIN PREPAID MORTGAGE LOANS." The Master
Servicer or the related Servicer will also be entitled to receive late payment
fees, assumption fees and other similar charges. The Master Servicer will be
entitled to receive all reinvestment income earned on amounts on deposit in the
Bond Account
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<PAGE> 83
and the Distribution Account. The Net Mortgage Rate of a Mortgage Loan is the
Mortgage Rate thereof minus the related Expense Fee Rate.
ADJUSTMENT TO MASTER SERVICING FEE AND INVESTED AMOUNT IN CONNECTION WITH
CERTAIN PREPAID
MORTGAGE LOANS
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. Principal prepayments by borrowers received during a
calendar month will be distributed to Certificateholders (as beneficial holders
of the Underlying Bond) on the Distribution Date in the month following the
month of receipt. Pursuant to the Master Servicing Agreement, the Master
Servicing Fee for any month may be reduced by an amount with respect to each
such prepaid Mortgage Loan sufficient to pay to Certificateholders the full
amount of interest to which they would be entitled in respect of such Mortgage
Loan on the related Distribution Date. If shortfalls in interest as a result of
prepayments in any month exceed the sum of amount of the Master Servicing Fee
for such month, the amount of funds available to be paid to Bondholders in
respect of interest on such Distribution Date will be reduced by the amount of
such excess. See "DESCRIPTION OF THE CERTIFICATES -- INTEREST" herein.
ADVANCES
Subject to the following limitations, the Master Servicer will be required
to advance prior to each Distribution Date, from its own funds, funds advanced
by the related Servicer or amounts received with respect to the Mortgage Loans
that do not constitute Available Funds for such Distribution Date, an amount
equal to the aggregate of payments of principal of and interest on the Mortgage
Loans (net of the Master Servicing Fee and the applicable Servicing Fee with
respect to the related Mortgage Loans) which were due on the related Due Date
and which were delinquent on the related Determination Date, together with an
amount equivalent to interest on each Mortgage Loan as to which the related
Mortgaged Property has been acquired by the Bond Trustee through foreclosure or
deed-in-lieu of foreclosure ("REO Property") (any such advance, an "Advance").
Advances are intended to maintain a regular flow of scheduled interest and
principal payments on the Certificates rather than to guarantee or insure
against losses. The Master Servicer is obligated to make Advances with respect
to delinquent payments of principal of or interest on each Mortgage Loan to the
extent that such Advances are, in its reasonable judgment, recoverable from
future payments and collections or insurance payments or proceeds of liquidation
of the related Mortgage Loan. If the Master Servicer determines on any
Determination Date to make an Advance, such Advance will be included with the
payment to Certificateholders on the related Distribution Date. [Any failure by
a Servicer to advance funds as required under the related Servicing Agreement
will constitute a default thereunder, in which case the Master Servicer will be
obligated to make any such advance in accordance with the terms of the Master
Servicing Agreement.] Any failure by the Master Servicer to make an Advance as
required under the Master Servicing Agreement will constitute a Servicing
Default thereunder, in which case the Bond Trustee or the successor master
servicer will be obligated to make any such Advance, in accordance with the
terms of the Master Servicing Agreement. [Subject to the terms of the Bond
Insurance Policy, the Bond Insurance Policy will provide protection to the
Senior Bondholders against any shortfall resulting from delinquencies as to
which a required Advance is not made as described above or is determined to be
nonrecoverable, to the extent such shortfall is not otherwise covered by
Available Funds.]
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Upon issuance of the Offered Certificates, Jeffers, Wilson, Shaff & Falk,
LLP will deliver its opinion advising the Depositor that, in its opinion (a)
assuming compliance with the Indenture, 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) assuming compliance with the Trust
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<PAGE> 84
Agreement, 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 "CERTAIN 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 Class X Certificates will, and the other Classes of 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 "CERTAIN 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 % PSA.
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 LIFE OF THE OFFERED CERTIFICATES"
herein and "CERTAIN FEDERAL INCOME TAX CONSEQUENCES" in the Prospectus.
The Offered Certificates will be treated as regular interests in a FASIT
under section 860G 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 "CERTAIN FEDERAL INCOME TAX CONSEQUENCES" in the
Prospectus.
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 CONSIDERATIONS
A fiduciary of any employee benefit plan subject to the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"), or the Code, should carefully
review with its legal advisors whether the purchase or holding of an Offered
Certificate could give rise to a transaction prohibited or not otherwise
permissible under ERISA or the Code. No Class M-1 Certificate may be transferred
unless the transferor delivers to the Certificate Trustee (i) a certificate
satisfactory to the Certificate Trustee to the effect that such transferee
neither is nor is acting on behalf of a plan subject to ERISA (a "Plan") or (ii)
an opinion of counsel satisfactory to the Certificate Trustee to the effect that
such transfer will not result in the assets of the Certificate Issuer being
"plan assets." See "ERISA CONSIDERATIONS" in the Prospectus.
[The U.S. Department of Labor has granted to , an
administrative exemption (Prohibited Transaction Exemption ; Exemption
Application No. ) (the "Exemption") from certain of the prohibited
transaction rules of ERISA and the related excise tax provisions of Section 4975
of the Code with respect to the initial purchase, the holding and the subsequent
resale by Plans of certificates in pass-through trusts that consist of certain
receivables, loans and other obligations that meet the conditions and
requirements of the Exemption. The Exemption applies to mortgage loans such as
the Mortgage Loans in the Mortgage Pool.]
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<PAGE> 85
For a general description of the Exemption and the conditions that must be
satisfied for the Exemption to apply, see "ERISA CONSIDERATIONS" in the
Prospectus.
The Underwriter believes that the Exemption will apply to the acquisition
and holding of the Class A-1 Certificates and the Class X Certificates by Plans
and that all conditions of the Exemption other than those within the control of
the investors will be met. In addition, as of the date hereof, there is no
single Mortgagor that is the obligor on 5% of the Mortgage Loans included in the
Mortgage Pool by aggregate unamortized principal balance of the assets of the
Mortgage Pool.
Prospective Plan investors should consult with their legal advisors
concerning the impact of ERISA and the Code, the applicability of PTCE 83-1
described in the Prospectus and the Exemption, and the potential consequences in
their specific circumstances, prior to making an investment in the Class A-1
Certificates or the Class X Certificates. Moreover, each Plan fiduciary should
determine whether under the general fiduciary standards of investment prudence
and diversification, an investment in the Class A-1 Certificates or the Class X
Certificates is appropriate for the Plan, taking into account the overall
investment policy of the Plan and the composition of the Plan's investment
portfolio.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in the Underwriting Agreement
between the Depositor and , (the "Underwriter"), the
Depositor has agreed to sell to the Underwriter, and the Underwriter has agreed
to purchase from the Depositor, the Underwritten Certificates. Distribution of
the Underwritten Certificates will be made by the Underwriter from time to time
in negotiated transactions or otherwise at varying prices to be determined at
the time of sale. In connection with the sale of the Underwritten Certificates,
the Underwriter may be deemed to have received compensation from the Depositor
in the form of underwriting discounts.
The Depositor proposes to offer the Class A-1 Certificates with original
principal balance of $ for sale to AmREIT in a privately negotiated
transaction. AmREIT will initially pledge its Class A-1 Certificates to [name of
lender] to secure indebtedness. AmREIT or its pledgees, donees, transferees or
other successors in interest may, from time to time, offer such Class A-1
Certificates for sale to the public in negotiated transactions or otherwise at
varying prices to be determined at the time of sale.
The Depositor has been advised by the Underwriter that it intends to make a
market in the Offered Certificates but has no obligation to do so. There can be
no assurance that a secondary market for the Offered Certificates will develop
or, if it does develop, that it will continue.
The Depositor has agreed to indemnify the Underwriter against, or make
contributions to the Underwriter with respect to, certain liabilities, including
liabilities under the Securities Act of 1933, as amended.
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.
CERTIFICATE RATING
It is a condition to the issuance of the Offered Certificates that the
Offered Certificates be rated [Aaa] and [AAA] by and
.
Ratings on mortgage pass-through certificates address the likelihood of
receipt by Certificateholders of payments required under the Trust Agreement.
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<PAGE> 86
's and 's ratings take
into consideration the credit quality of the Mortgage Pool including any credit
support providers, structural and legal aspects associated with the Offered
Certificates, and the extent to which the payment stream of the Mortgage Pool is
adequate to make payments required under the Offered Certificates.
's and 's ratings on the
Offered Certificates do not, however, constitute a statement regarding frequency
of prepayments on the Mortgage Loans or address the remote possibility that, in
the event of the insolvency of AmREIT or the Depositor, the sale of the Offered
Certificates may be recharacterized as a financing and that, as a result of such
recharacterization, the Senior Certificates may be accelerated. The ratings also
do not address the possibility that, as a result of principal prepayments,
holders of the Certificates may receive a lower than anticipated yield and that
in extreme cases, holders of stripped pass-through certificates, such as the
Class X Certificates, may fail to recoup their initial investments.
The Depositor has not requested a rating of any Class of Offered
Certificates by any rating agency other than and
. However, there can be no assurance as to whether any
other rating agency will rate the Offered Certificates, or if it does, what
rating would be assigned by such other rating agency. The rating assigned by any
such other rating agency to a Class of Offered Certificates may be lower than
the ratings assigned by and .
The rating of 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 assigning rating agency.
S-37
<PAGE> 87
INDEX TO DEFINED TERMS
<TABLE>
<CAPTION>
PAGE
----------------
<S> <C>
Adjustment Date............................................. S-13
Advance..................................................... S-34
AmREIT...................................................... Cover
Assumptions................................................. S-28
Available Funds............................................. S-19
Bankruptcy Loss Coverage Amount............................. S-30
Bankruptcy Losses........................................... S-22
Beneficial Owner............................................ S-24
Bond Account................................................ S-19, 5-32
Bond Expense Rate........................................... S-8
Bond Issuer................................................. Cover, S-4
Bond Trustee................................................ S-4
Book-Entry Certificates..................................... S-11, 5-24
CEDE........................................................ Cover, S-24
Certificate Issuer.......................................... Cover
Certificate Trustee......................................... Cover, S-4
Certificateholder........................................... S-25
Certificates................................................ Cover, S-4, 5-18
Class A-1 Certificates...................................... S-18
Class A-1 Percentage........................................ S-21
Class A-1 Prepayment Percentage............................. S-21
Class B-1 Certificates...................................... S-18
Class B-2 Certificates...................................... S-18
Class Certificate Balance................................... S-18, S-23
Class M-1 Certificates...................................... S-18
Class X Certificates........................................ S-18
Clearing Agency............................................. S-24
Clearing Corporation........................................ S-24
Code........................................................ S-9
Company..................................................... S-4
Controlling Class........................................... S-24
Cut-off Date Pool Principal Balance......................... S-5, S-12
Debt Service Reduction...................................... S-31
Deficient Valuation......................................... S-31
Definitive Certificate...................................... S-24
Deleted Mortgage Loan....................................... S-17
Depositor................................................... Cover, S-4
Depository.................................................. S-24
Distribution Account........................................ S-19
Distribution Date........................................... Cover
Due Date.................................................... S-12, S-21
ERISA....................................................... S-9, S-35
Excess Losses............................................... S-22
Exemption................................................... S-35
Expense Fee Rate............................................ S-33
Expense Rate................................................ S-8
</TABLE>
S-38
<PAGE> 88
<TABLE>
<CAPTION>
PAGE
----------------
<S> <C>
FASIT....................................................... S-2, S-8
FHLMC....................................................... S-13
FICO........................................................ S-24
Financial Intermediary...................................... S-24
FNMA........................................................ S-13
Fraud Loss Coverage Amount.................................. S-30
Fraud Losses................................................ S-22
Index....................................................... S-13
Liquidated Mortgage Loan.................................... S-23
Loan-to-Value Ratio......................................... S-13
Margin...................................................... S-13
Master Servicer............................................. S-4
Master Servicing Fee........................................ S-33
Maximum Rate................................................ S-13
Mortgage.................................................... S-17
Mortgage File............................................... S-17
Mortgage Loan Purchase Agreement............................ S-12
Mortgage Loans.............................................. Cover, S-5
Mortgage Note............................................... S-17
Mortgage Pool............................................... Cover, S-12
Mortgaged Property.......................................... S-12
Net Interest Shortfalls..................................... S-20
Net Prepayment Interest Shortfall........................... S-20
Offered Certificates........................................ Cover, S-18
Originator.................................................. S-18
Ownership Certificates...................................... S-18
Pass-Through Rate........................................... S-6
Periodic Rate Cap........................................... S-13
Plan........................................................ S-35
Pool Principal Balance...................................... S-5, S-21
Prepayment Interest Shortfall............................... S-20
Primary Mortgage Insurance Policy........................... S-13
Prepayments................................................. S-28
Principal Balance........................................... S-21
Principal Prepayments....................................... S-6, S-21, S-26
Prospectus.................................................. S-2
PSA......................................................... S-28
Realized Loss............................................... S-22
Record Date................................................. S-19
Relief Act Reduction........................................ S-20
REO Property................................................ S-34
Replacement Mortgage Loan................................... S-17
Scheduled Payments.......................................... S-12
Senior Certificates......................................... S-18
Servicer.................................................... S-31
Servicing Agreement......................................... S-31
Servicing Fee............................................... S-33
SMMEA....................................................... 9
</TABLE>
S-39
<PAGE> 89
<TABLE>
<CAPTION>
PAGE
----------------
<S> <C>
Special Losses.............................................. S-22
Special Hazard Losses....................................... S-22
Special Hazard Loss Coverage Amount......................... S-30
Special Hazard Mortgage Loan................................ S-23
Subordinate Certificates.................................... S-18
Subordinate Percentage...................................... S-21
Subordinate Prepayment Percentage........................... S-22
Subordinate Percentage Allocation........................... S-21, S-22
Substitution Adjustment Amount.............................. S-18
Trust Agreement............................................. Cover, S-5, S-18
Trust Fund Assets........................................... Cover
Underlying Bond............................................. Cover
Underwriter................................................. Cover, S-36
Underwritten Certificates................................... Cover
Unpaid Interest Amounts..................................... S-20
Unpaid Interest Shortfall................................... S-6
</TABLE>
S-40
<PAGE> 90
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED MARCH 4, 1998
PROSPECTUS
AMERICAN RESIDENTIAL EAGLE, INC.
DEPOSITOR
$1,000,000
(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"). 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 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.
FOR A DISCUSSION OF CERTAIN 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
"CERTAIN 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.
March , 1998.
<PAGE> 91
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.
2
<PAGE> 92
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents subsequently filed by or on behalf of the 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 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.
3
<PAGE> 93
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 85 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 or in
4
<PAGE> 94
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.
5
<PAGE> 95
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.
Unless otherwise specified in the related
Prospectus Supplement, 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.
If specified in the related Prospectus Supplement,
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
6
<PAGE> 96
equal to the interest rate borne by the underlying
Loans (the "Mortgage Rate") net of the aggregate
servicing fees and 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........ The Bonds of each Series will be redeemable under
the following circumstances:
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. 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 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 in respect of
Trust Fund Assets evidenced by a Series of
Securities by the Master Servicer or such
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<PAGE> 97
other person will be at a price specified in the
related Prospectus Supplement. 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 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. In any such event,
the related Issuer of such Series of Certificates
will 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.
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.
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<PAGE> 98
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.
(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
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<PAGE> 99
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, any other territory of the
United States or such other location as may be
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 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
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<PAGE> 100
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 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 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 in
the related Prospectus Supplement. The protection
against losses afforded by any such credit
enhancement may be limited. The type,
characteristics and
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<PAGE> 101
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,
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.
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<PAGE> 102
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.
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
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<PAGE> 103
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 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.
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<PAGE> 104
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. See "SERVICING OF MORTGAGE
LOANS -- ADVANCES AND OTHER AMOUNTS PAYABLE BY
MASTER SERVICER" herein.
Tax Status of the
Securities................. The federal income tax consequences to
Securityholders will depend on whether the
Securities they hold are Bonds or Certificates.
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 "CERTAIN 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.
With respect to each Series of Certificates, one or
more elections will be made to treat the Trust Fund
Assets (or specified portions thereof) evidenced by
such Series as a "financial asset securitization
investment trust" ("FASIT") within the meaning of
Section 860L of the Code.
If a FASIT election is made with respect to a
Series of Certificates, then the arrangement by
which such Certificates are issued will be treated
as a FASIT as long as all of the provisions of the
applicable Agreements are
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<PAGE> 105
complied with and the statutory and regulatory
requirements are satisfied. Certificates will be
designated as "regular interests" or "ownership
interests" in a FASIT. A FASIT will not be subject
to entity-level tax. Rather, the taxable income or
net loss of a FASIT will be taken into account by
the holders of ownership interests. Such holders
will report their proportionate share of the
taxable income of the FASIT whether or not they
receive cash distributions from the FASIT
attributable to such income. The portion of the
FASIT taxable income consisting of "excess
inclusions" may not be offset against other
deductions or losses of the holder, including the
net operating losses.
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 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 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.
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<PAGE> 106
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. Institutions whose
investment activities are subject to review by
federal or state authorities should consult with
their counsel or the applicable authorities to
determine whether an investment in a particular
Class of Securities of a Series (whether or not
such Class constitutes a "mortgage-related
security") complies with applicable guidelines,
policy statements or restrictions. See "LEGAL
INVESTMENT" herein.
ERISA Matters.............. A fiduciary of any employee benefit plan or other
retirement plan or arrangement subject to the
Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), or the Code should carefully
review with its legal advisors whether the purchase
or holding of Securities could give rise to a
transaction prohibited or not otherwise permissible
under ERISA or the Code. See "ERISA MATTERS."
Certain Classes of Securities may not be
transferred unless the Company is furnished with a
letter of representation or an opinion of counsel
to the effect that such transfer will not result in
a violation of the prohibited transaction
provisions of ERISA and the Code and will subject
the Company, the Master Servicer, the Bond Trustee
or the Certificate Trustee to additional
obligations. See "ERISA MATTERS."
Risk Factors............... For a discussion of certain 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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<PAGE> 108
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.
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
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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.
The "yield to maturity" of a security refers to the investment rate of return on
such security if held to maturity. A Series of Securities may include one or
more Classes of Deferred Interest Securities with respect to which certain
accrued interest will not be paid but rather will be added to the principal
balance thereof and, as a result, yields on such Securities will be sensitive to
(a) the provisions of such Deferred Interest Securities relating to the timing
of payments of interest thereon and (b) if such Deferred Interest Securities
accrue interest at a variable or adjustable rate, changes in such rate.
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 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.
The extent to which the yields to maturity of the Securities of a Series
may vary from the anticipated yields will depend upon the degree to which such
Securities are purchased at a discount or premium, and 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. 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. 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 on the yield, weighted average lives and maturities of such
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.
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LIMITED LIQUIDITY OF INVESTMENT
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 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 their 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.
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, unless
otherwise provided in the related Prospectus Supplement, 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 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.
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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 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
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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 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
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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, 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.
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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 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 "CERTAIN 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. Unless otherwise specified in the related Prospectus Supplement, 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 persons who have originated or otherwise acquired
such loans.
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
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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 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,
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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, the
earnings thereon at the Assumed Reinvestment Rate for such Series specified in
the related Prospectus Supplement and, if 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." 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, any other territory of the United States or such
other location as may be specified in the related Prospectus Supplement.
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
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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.
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
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"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 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,
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the term of the leasehold will exceed the scheduled maturity of the Mortgage
Loans by at least five years, or such other period specified in the related
Prospectus Supplement.
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.
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 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.
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- 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, 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.
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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 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. Except as otherwise
specified in the related Prospectus Supplement, 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, AmREIT, 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 substitute mortgage loan (an
"Eligible Substitute 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 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.
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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.
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.
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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 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
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to 40 years. The original maturities of substantially all of the fixed rate,
level payment FHA Loans or VA Loans are expected to be 30 years.
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 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.
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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
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
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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 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
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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 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
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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. 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
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are subject to, and are qualified in their entirety by reference to, all of the
provisions of the Agreement for each Series of Securities and the applicable
Prospectus Supplement. 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 issue 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 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.
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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 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
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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."
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
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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.
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. 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 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. In any such event, the related Issuer
of such Series of Certificates will be terminated and Certificateholders will
receive final distributions as described in the related Prospectus Supplement.
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.
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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 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
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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. 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 no principal balance and bearing interest
on the related notional amount. The notional amount is
used for purposes of the determination of interest
distributions.
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. 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.
Scheduled Principal Class................. A Class that is designed to receive principal payments
using a predetermined principal balance schedule but is
not designated as a Planned Principal Class or Targeted
Principal Class. In many cases, the schedule is derived
by assuming two constant prepayment rates for the
underlying Trust Fund Assets. These two rates are the
endpoints for the "structuring range" for the Scheduled
Principal Class.
</TABLE>
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<TABLE>
<CAPTION>
CATEGORIES OF CLASSES DEFINITION
--------------------- ----------
<S> <C>
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, Targeted
Principal Classes and/or Scheduled Principal Classes.
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.
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 various 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 various 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
either a nominal principal balance or a notional amount.
A nominal principal balance represents actual principal
that will be paid on the Class. It is referred to as
nominal since it is extremely small compared to other
Classes. A notional amount is the amount used as a
reference to calculate the amount of interest due on an
Interest Only Class that is not entitled to any
distributions in respect of principal.
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 "CERTAIN 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."
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 under its 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 may also be required to authorize
verification of deposits at financial institutions where the borrower has demand
or savings accounts.
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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.
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
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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 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
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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 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
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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.
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
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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 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.
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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 the percentage per annum described in the related Prospectus Supplement
(which may vary under certain circumstances) of the outstanding principal
balance of each Mortgage Loan supporting such Series of Securities and such
compensation will be retained by it from collections of interest on such
Mortgage Loan (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
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
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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 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
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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 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 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
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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.
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
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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 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.
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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 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
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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.
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 "CERTAIN FEDERAL INCOME TAX CONSEQUENCES" below), of all
of the remaining Trust Fund Assets and all property acquired in respect of such
Trust Fund Assets.
Unless otherwise specified by the related Prospectus Supplement, 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. The exercise of such right will effect early
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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 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
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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.
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-
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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 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.
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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 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.
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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 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.
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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 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.
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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 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
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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
(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 environmen-
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tal 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
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
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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.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of the anticipated 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 Prospectus Supplement. 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.
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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 "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, then
the arrangement by which the Securities of that Series are issued will be
treated as a FASIT so long as all of the provisions of the relevant Agreement
are complied with and the statutory and regulatory requirements are satisfied.
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
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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
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, (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
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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 INTEREST
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 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
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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. 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
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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.
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
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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 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 Internal Revenue Service. 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.
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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 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
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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.
WITHHOLDING WITH RESPECT TO CERTAIN FOREIGN INVESTORS
Pursuant to Code Sections 871(h), 881(c), 1441(c)(9) and 1442(a), 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 is 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
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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.
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
"CERTAIN 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
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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 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
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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, 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. 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 "inhouse 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
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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.
RATINGS
It is a condition to the issuance of the Securities of each Series offered
hereby and by the Prospectus Supplement that they shall have been rated in one
of the four highest rating categories by the nationally recognized statistical
rating 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 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.
92
<PAGE> 182
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.
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.
93
<PAGE> 183
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.......................................... 46
Accrual Period.............................................. 85
Advance..................................................... 15
Agency Securities........................................... 1, 4
Agreements.................................................. 4
AmREIT...................................................... 1, 5
Applicable Trustee.......................................... 3
Available Funds............................................. 42
Balloon payments............................................ 9, 29
Bankruptcy Bond............................................. 13
Belgian Cooperative......................................... 50
Beneficial owner............................................ 49
Bond Account................................................ 10
Bond Trustee................................................ 4
Bondholders................................................. 4
Bonds....................................................... 4
Book-Entry Securities....................................... 49
Buydown Fund................................................ 30
Buydown Loans............................................... 29
Capitalized Interest Account................................ 40
CEDEL Participants.......................................... 50
CERCLA...................................................... 78
Certificate Trustee......................................... 4
Certificateholders.......................................... 4
Certificates................................................ 4
Class Security Balance...................................... 42
Closing Date................................................ 11
Code........................................................ 5
Collateral.................................................. 27
Commission.................................................. 2
Companion Classes........................................... 47
Company..................................................... 1, 5
Component Securities........................................ 46
Controlling Class........................................... 68
Conventional Loans.......................................... 45
Cooperative Loans........................................... 8
Cooperatives................................................ 8
Correspondents.............................................. 31
Cut-off Date................................................ 13
Cut-off Date Principal Balance.............................. 41
Deferred Interest Securities................................ 42
Definitive Security......................................... 49
Depositor................................................... 1, 5
Detailed Description........................................ 28
</TABLE>
94
<PAGE> 184
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Distribution Account........................................ 10
Distribution Account Deposit Date........................... 10
Distribution Date........................................... 6
DTC......................................................... 22
Eligible Account............................................ 62
Eligible Corporations....................................... 82
Eligible Substitute Mortgage Loan........................... 33
EPA......................................................... 78
ERISA....................................................... 90
Euroclear Operator.......................................... 50
Euroclear Participants...................................... 50
European Depositaries....................................... 49
Event of Default............................................ 69
Excess Spread............................................... 57
Exchange Act................................................ 2
FASIT....................................................... 81
FASIT Provisions............................................ 81
FASIT Qualification Test.................................... 82
FHA Loans................................................... 34
FHLMC....................................................... 4
FHLMC Act................................................... 36
FHLMC Certificates.......................................... 33
FICO........................................................ 59
Financial Intermediary...................................... 49
Fixed Rate Mortgage Loans................................... 4
Floating Rate Mortgage Loans................................ 4
FNMA........................................................ 4
FNMA Certificates........................................... 33
Funding Period.............................................. 11
Garn-St Germain Act......................................... 79
GNMA........................................................ 4
GNMA Certificates........................................... 33
GNMA I Certificate.......................................... 34
GNMA II Certificate......................................... 34
GNMA Issuer................................................. 34
Guaranteed Mortgage Pass-Through Certificates............... 33
Guaranty Agreement.......................................... 34
Housing Act................................................. 34
Indenture................................................... 60
Insurance Proceeds.......................................... 27
Interest Only............................................... 47
IO.......................................................... 82
IRS......................................................... 84
Issuer...................................................... 26
L/C Bank.................................................... 56
L/C Percentage.............................................. 56
Labor....................................................... 91
Liquidated Mortgage......................................... 64
</TABLE>
95
<PAGE> 185
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Liquidation Proceeds........................................ 27
Lockout periods............................................. 29
Master Servicer............................................. 5
Master Servicing Agreement.................................. 5
Master Servicing Fee........................................ 64
Moody's..................................................... 39
Morgan...................................................... 50
Mortgage Collateral......................................... 4
Mortgage Loans.............................................. 4
Mortgage Note............................................... 9
Mortgage Pool Insurance Policy.............................. 53
Mortgage Rate............................................... 7
Mortgaged Property.......................................... 10
Mortgagor................................................... 60
NCUA........................................................ 90
Offered Securities.......................................... 2
OID......................................................... 84
OID Regulations............................................. 80
PACs........................................................ 46
Parties in interest......................................... 90
Permitted Investments....................................... 38
Plan Asset Regulation....................................... 91
Plans....................................................... 90
Policy Statement............................................ 90
Pool Insurer................................................ 53
Pre-Funded Amount........................................... 25
Pre-Funding Account......................................... 11
Primary Mortgage Insurance Policy........................... 28
Principal Prepayments....................................... 43
PTCE........................................................ 91
Purchase Price.............................................. 60
Qualified REIT subsidiary................................... 81
Rating Agency............................................... 92
RCRA........................................................ 78
Record Date................................................. 41
REIT........................................................ 15
Relevant Depositary......................................... 49
Relief Act.................................................. 80
REMIC....................................................... 81
Remittance Date............................................. 29
Reserve Account............................................. 42
Reserve Fund................................................ 53
Retained Interest........................................... 41
Rules....................................................... 49
Secured Creditor Exclusion.................................. 79
Security Distribution Amount................................ 11
Security Insurance Policy................................... 13
Security Owners............................................. 49
</TABLE>
96
<PAGE> 186
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Security Register........................................... 41
Securities.................................................. Cover
Securities Act.............................................. 2
Seller...................................................... 26
Senior Securities........................................... 4
Senior Securityholders...................................... 52
Senior Liens................................................ 30
Servicer.................................................... 61
Servicers................................................... 33
Servicing Agreement......................................... 61
Servicing Default........................................... 67
SMMEA....................................................... 17
Special Hazard Insurance Policy............................. 13
Special Hazard Insurer...................................... 54
Special Servicer............................................ 5
Special Servicing Agreement................................. 66
Stand-by Master Servicer.................................... 66
Subordinated Securities..................................... 4
Subordinated Securityholders................................ 52
Subsequent Mortgage Collateral.............................. 25
Substitute Collateral....................................... 38
Successor Master Servicer................................... 66
TACs........................................................ 47
Tax Prepayment Assumption................................... 85
Terms and Conditions........................................ 51
TIN......................................................... 89
Title V..................................................... 79
TMP......................................................... 81
Trust Agreement............................................. 40
Trust Fund.................................................. 81
Trust Fund Assets........................................... Cover
UCC......................................................... 74
VA Loans.................................................... 34
</TABLE>
97
<PAGE> 187
======================================================
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS SUPPLEMENT OR THE
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS 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 OF THE SECURITIES
OFFERED HEREBY, NOR AN OFFER OF BONDS IN ANY STATE OR JURISDICTION IN WHICH, OR
TO ANY PERSON TO WHOM, SUCH OFFER WOULD BE UNLAWFUL. THE DELIVERY OF THIS
PROSPECTUS SUPPLEMENT OR THE PROSPECTUS AT ANY TIME DOES NOT IMPLY THAT THE
INFORMATION CONTAINED HEREIN OR THEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO
ITS DATE; HOWEVER, IF ANY MATERIAL CHANGE OCCURS WHILE THIS PROSPECTUS
SUPPLEMENT OR THE PROSPECTUS IS REQUIRED BY LAW TO BE DELIVERED, THIS PROSPECTUS
SUPPLEMENT OR THE PROSPECTUS WILL BE AMENDED OR SUPPLEMENTED ACCORDINGLY.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUPPLEMENT
Incorporation of Certain Documents by
Reference................................
Summary....................................
Risk Factors...............................
The Issuer.................................
Description of the Bonds...................
Credit Enhancement.........................
Security for the Bonds.....................
Servicing of the Mortgage Loans............
Use of Proceeds............................
Federal Income Tax Consequences............
ERISA Matters..............................
Method of Distribution.....................
Legal Matters..............................
Ratings....................................
Index of Defined Terms.....................
PROSPECTUS
Prospectus Supplement......................
Available Information......................
Incorporation of Certain Documents by
Reference................................
Summary....................................
Risk Factors...............................
Introduction...............................
Use of Proceeds............................
Trust Fund Assets..........................
Description of the Securities..............
Credit Enhancement.........................
Mortgage Loan Program......................
Servicing of the Mortgage Loans............
The Agreements.............................
Federal Income Tax Consequences............
State Tax Considerations...................
Legal Investment...........................
ERISA Matters..............................
Rating.....................................
Plan of Distribution.......................
Legal Matters..............................
Index of Certain Definitions...............
</TABLE>
======================================================
======================================================
AMERICAN RESIDENTIAL EAGLE TRUST ONE
19 --
COLLATERALIZED
MORTGAGE
BONDS
------------------------
PROSPECTUS SUPPLEMENT
------------------------
[UNDERWRITER]
, 199
======================================================
<PAGE> 188
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14 (S-3) AND ITEM 31(S-11). OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.*
<TABLE>
<S> <C>
SEC Registration Fee........................................ $295
Printing and Engraving Expenses.............................
Accounting Fees and Expenses................................
Legal Fees and Expenses.....................................
Trustee Fees and Expenses...................................
Blue Sky Fees and Expenses..................................
Rating Agency Fees..........................................
Miscellaneous...............................................
Total..................................................
</TABLE>
- ---------------
* All amounts except the SEC Registration Fee are estimates of expenses incurred
in connection with the issuance and distribution of Securities in an aggregate
principal amount assumed for these purposes to be equal to $1,000,000 of
Securities registered hereby.
ITEM 15 (S-3) AND ITEM 34 (S-11). INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the General Corporation Law of Delaware empowers a
corporation to indemnify any person who was or is a party or is threatened to be
made a party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative (other than an action
by or in the right of the corporation) by reason of the fact that he is or was a
director, officer, employee or agent of the corporation, or is or was serving at
the request of the corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise.
Depending on the character of the proceeding, a corporation may indemnify
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred in connection with such action,
suit or proceeding if the person indemnified acted in good faith and in a manner
he reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his or her conduct was unlawful. In the case of an
action by or in the right of the corporation, no indemnification may be made in
respect of any claim, issue or matter as to which such person shall have been
adjudged to be liable to the corporation unless and only to the extent that the
Court of Chancery or the court in which such action or suit was brought shall
determine upon application that, despite the adjudication of liability but in
view of all the circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses which the Court of Chancery or other
such court shall deem proper. Section 145 further provides that to the extent a
director, officer, employee or agent of a corporation has been successful on the
merits or otherwise in the defense of any action, suit or proceeding referred to
above or in the defense of any claim, issue or matter therein, he or she shall
be indemnified against expenses (including attorneys' fees) actually and
reasonably incurred by him in connection therewith.
The Certificate of Incorporation and Bylaws of the Company provide, in
effect, that, to the extent and under the circumstances permitted by Section 145
of the General Corporation Law of Delaware, the Company shall indemnify any
person who was or is a party or is threatened to be made a party to any action,
suit or proceeding of the type described above by reason of the fact that he or
she is or was a director, officer, employee or agent of the Company.
The Underwriting Agreement for any Series of Securities may provide that
the Company and AmREIT will indemnify the related Underwriter or Underwriters
against, or make contributions to such Underwriter or Underwriters with respect
to, certain liabilities, including liabilities under the Securities Act of 1933.
ITEM 32 (S-11). SALES TO SPECIAL PARTIES.
None.
II-1
<PAGE> 189
ITEM 33 (S-11). RECENT SALES OF UNREGISTERED SECURITIES.
None.
ITEM 35 (S-11). TREATMENT OF PROCEEDS FROM STOCK BEING REGISTERED.
Not applicable.
ITEM 16 (S-3) AND ITEM 36 (S-11). FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements.
None. The Registrant is registering mortgage-backed securities as to
which no financial statements of the Registrant is required.
(b) Exhibits.
<TABLE>
<S> <C>
1.1* Form of Underwriting Agreement.
4.1* Form of Indenture to be entered into between each Bond
Issuer and the Bond Trustee.
4.2* Form of Deposit Trust Agreement to be entered into between
the Registrant and the Owner Trustee creating each Bond
Issuer.
4.3* Form of Master Servicing Agreement to be entered into among
each Issuer, the Bond Trustee and each Master Servicer.
4.4* Form of Trust Agreement to be entered into between the
Registrant and the Certificate Trustee creating each
Certificate Issuer.
5.1* Opinion of Tobin & Tobin regarding legality.
8.1* Opinion of Jeffers, Wilson, Shaff & Falk, LLP regarding
certain tax matters.
23.1* Consent of Tobin & Tobin (included in Exhibit 5.1).
23.2* Consent of Jeffers, Wilson, Shaff & Falk, LLP (included in
Exhibit 8.1).
24.1 Power of Attorney (included on page II-4).
25.1* Statement of Eligibility and Qualification of Trustee under
the Trust Indenture Act of 1939 for
[ ].
</TABLE>
- ---------------
* To be filed by amendment.
ITEM 17 (S-3) AND ITEM 37 (S-11). UNDERTAKINGS.
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of this Registration Statement (or the most recent
post-effective amendment hereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in this Registration Statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high and of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20 percent change in
the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective Registration Statement.
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in this Registration Statement
or any material change to such information in this Registration
Statement;
II-2
<PAGE> 190
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b) The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 that is incorporated by reference in this Registration
Statement shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(c) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act of 1933 and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act of 1933 and will be governed by the final adjudication of such
issue.
(d) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this Registration Statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the Registrant pursuant to Rule 424(b)(l) or
(4) or 497(h) under the Securities Act of 1933 shall be deemed to be part
of this Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new Registration Statement relating to
the securities offered therein, and the offering of such Securities at that
time shall be deemed to be the initial bona fide offering thereof.
(e) The undersigned Registrant hereby undertakes to file an application for
the purpose of determining the eligibility of the trustee to act under
subsection (a) of Section 310 of the Trust Indenture Act in accordance with the
rules and regulations prescribed by the Securities and Exchange Commission under
Section 305(b)(2) of the Trust Indenture Act.
(f) The undersigned Registrant hereby undertakes to provide to the
underwriter at the closing specified in the underwriting agreements,
certificates in such denominations and registered in such names as required by
the underwriter to permit prompt delivery to each purchaser.
II-3
<PAGE> 191
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3/S-11 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Del Mar, State of California, on February 27, 1998.
AMERICAN RESIDENTIAL EAGLE, INC.*
By /s/ JAY M. FULLER
------------------------------------
Name: Jay M. Fuller
Title: President and Chief
Operating Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Jay M. Fuller, Mark A. Conger, John Dahl
and Rollie O. Lynn, and each of them, his or her true and lawful
attorneys-in-fact and agents, with full power of substitution and
resubstitution, for and in his or her name, place and stead, in any and all
capacities, to sign any and all amendments (including post-effective amendments)
to this Registration Statement, and to file the same, with all exhibits thereto,
and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as might or could be done in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or any of them, or their
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities as officers and directors of the Company and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<C> <S> <C>
/s/ JOHN M. ROBBINS Chief Executive Officer and February 28, 1998
- --------------------------------------------------- Chairman of the Board of
John M. Robbins Directors (Principal Executive
Officer)
/s/ JAY M. FULLER President, Chief Operating February 27, 1998
- --------------------------------------------------- Officer and Director
Jay M. Fuller
/s/ MARK A. CONGER Executive Vice President, Chief February 27, 1998
- --------------------------------------------------- Financial Officer and Director
Mark A. Conger (Principal Financial and
Accounting Officer)
/s/ D. BARRY ENGELMAN Director February 25, 1998
- ---------------------------------------------------
D. Barry Engelman
/s/ EARL GERVAIS Director February 25, 1998
- ---------------------------------------------------
Earl Gervais
</TABLE>
- ---------------
* For itself and on behalf of each trust acting as an Issuer hereunder.
II-4
<PAGE> 192
EXHIBIT INDEX
<TABLE>
<C> <S>
1.1* Form of Underwriting Agreement.
4.1* Form of Indenture to be entered into between each Bond
Issuer and the Bond Trustee.
4.2* Form of Deposit Trust Agreement to be entered into between
the Registrant and the Owner Trustee creating each Bond
Issuer.
4.3* Form of Master Servicing Agreement to be entered into among
each Issuer, the Bond Trustee and each Master Servicer.
4.4* Form of Trust Agreement to be entered into between the
Registrant and the Certificate Trustee creating each
Certificate Issuer.
5.1* Opinion of Tobin & Tobin regarding legality.
8.1* Opinion of Jeffers, Wilson, Shaff & Falk, LLP regarding
certain tax matters.
23.1* Consent of Tobin & Tobin (included in Exhibit 5.1).
23.2* Consent of Jeffers, Wilson, Shaff & Falk, LLP (included in
Exhibit 8.1).
24.1 Power of Attorney (included on page II-4).
25.1* Statement of Eligibility and Qualification of Trustee under
the Trust Indenture Act of 1939 for
[ ].
</TABLE>
- ---------------
* To be filed by amendment.
