As filed with the Securities and Exchange Commission on December 7, 1999
Registration No. 333-88101
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No. 1
to
Form S-3
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
ACE SECURITIES CORP.
(Exact name of registrant as specified in its charter)
Delaware 56-2088493
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
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6525 Morrison Boulevard
Suite 318
Charlotte, North Carolina 28211
(704) 365-0569
(Address, including zip code, and telephone number, including area
code, of registrant's principal executive offices)
Elizabeth S. Eldridge
ACE Securities Corp.
6525 Morrison Boulevard
Suite 318
Charlotte, North Carolina 28211
(704) 365-0569
(Name, address, including zip code and telephone number,
including area code, of agent for service)
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Copy to:
Edward E. Gainor
Brown & Wood LLP
815 Connecticut Avenue, N.W.
Suite 701
Washington, D.C. 20006
(202) 973-0626
Approximate date of commencement of proposed sale to the public: From
time to time after the effective date of this Registration Statement.
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If any 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, check the following box. /X/
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
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Title of Securities Being Registered Amount Being Proposed Maximum Proposed Maximum Amount of
Registered Offering Price Per Aggregate Offering Registration
Unit(1) Price(1) Fee
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<S> <C> <C> <C> <C>
Asset-Backed Notes and Asset-Backed $3,000,000,000 100% $3,000,000,000 $792,000
Certificates
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(1) Estimated solely for the purpose of calculating the registration fee.
</TABLE>
Pursuant to Rule 429 under the Securities Act of 1933, the prospectus
which is part of this Registration Statement is a combined prospectus and
includes all the information currently required in a prospectus relating to
securities covered by Registration Statement No. 333-56213 previously filed by
the Registrant.
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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 of 1933, as amended, or until the
Registration Statement shall become effective on such date as the Commission,
acting pursuant to said Section 8(a), may determine.
The information in this prospectus is not complete and may be changed. We may
not sell these securiites until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an
offer to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
Subject to Completion, December [ ], 1999
PROSPECTUS
Asset Backed Certificates
Asset Backed Notes
(Issuable in Series)
ACE Securities Corp.,
Depositor
The Trust Funds:
Each trust fund will be established to hold assets transferred to
it by Ace Securities Corp. The assets in each trust fund will generally
consist of one or more of the following:
o mortgage loans secured by one- to four-family residential properties;
o mortgage loans secured by multi-family residential properties;
o unsecured home improvement loans;
o manufactured housing installment sale contracts;
o mortgage pass-through securities issued or guaranteed by Ginnie
Mae, Fannie Mae, or Freddie Mac; or
o previously issued asset-backed or mortgage-backed securities backed
by mortgage loans secured by residential properties or participations in those
types of loans.
The assets in your trust fund are specified in the prospectus
supplement for that particular trust fund, while the types of assets that may
be included in a trust fund, whether or not in your trust fund, are described
in greater detail in this prospectus.
The Securities:
Ace Securities Corp. will sell the securities pursuant to a
prospectus supplement. The securities will be grouped into one or more series,
each having is own distinct designation. Each series will be issued in one or
more classes and will evidence beneficial ownership of, or be secured by, the
assets in the trust fund that the series relates to. A prospectus supplement
for a series will specify all of the terms of the series and of each of the
classes in the series.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these securities or
passed upon the adequacy or accuracy of this prospectus. Any representation to
the contrary is a criminal offense.
The date of this prospectus is December , 1999.
Description of the Trust Funds
Assets
The primary assets of each trust fund (the "Assets") will include
some or all of the following types of assets:
o single family and/or multifamily mortgage loans, which may include
Home Equity Loans, Home Improvement Contracts and Land Sale Contracts (each as
defined herein);
o home improvement installment sales contracts or installment loans
that are unsecured ("Unsecured Home Improvement Loans");
o manufactured housing installment sale contracts or installment loan
agreements (the "Contracts");
o any combination of "fully modified pass-through" mortgage-backed
certificates guaranteed by the Government National Mortgage Association
("Ginnie Mae"), guaranteed mortgage pass-through securities issued by Fannie
Mae ("Fannie Mae") and mortgage participation certificates issued by the
Federal Home Loan Mortgage Corporation ("Freddie Mac") (collectively, "Agency
Securities");
o previously issued asset-backed certificates, collateralized
mortgage obligations or participation certificates (each, and collectively,
"Mortgage Securities") evidencing interests in, or collateralized by, mortgage
loans, Unsecured Home Improvement Loans, Contracts or Agency Securities; or
o a combination of mortgage loans, Unsecured Home Improvement Loans,
Contracts, Agency Securities and/or Mortgage Securities.
The mortgage loans will not be guaranteed or insured by ACE
Securities Corp. or any of its affiliates. The mortgage loans will be
guaranteed or insured by a governmental agency or instrumentality or other
person only if and to the extent expressly provided in the prospectus
supplement. The depositor will select each Asset to include in a trust fund
from among those it has purchased, either directly or indirectly, from a prior
holder (an "Asset Seller"), which may be an affiliate of the depositor and
which prior holder may or may not be the originator of that mortgage loan,
Unsecured Home Improvement Loan or Contract.
The Assets included in the trust fund for your series may be subject
to various types of payment provisions:
o "Level Payment Assets," which may provide for the payment of
interest, and full repayment of principal, in level monthly payments with a
fixed rate of interest computed on their declining principal balances;
o "Adjustable Rate Assets," which may provide for periodic
adjustments to their rates of interest to equal the sum of a fixed margin and
an index;
o "Buy Down Assets," which are Assets for which funds have been
provided by someone other than the related borrowers to reduce the borrowers'
monthly payments during the early period after origination of those Assets;
o "Increasing Payment Assets," as described below;
o "Interest Reduction Assets," which provide for the one-time
reduction of the interest rate payable thereon;
o "GEM Assets," which provide for (1) monthly payments during the
first year after origination that are at least sufficient to pay interest due
thereon, and (2) an increase in those monthly payments in later years at a
predetermined rate resulting in full repayment over a shorter term than the
initial amortization terms of those Assets;
o "GPM Assets," which allow for payments during a portion of their
terms which are or may be less than the amount of interest due on their unpaid
principal balances, and this unpaid interest will be added to the principal
balances of those Assets and will be paid, together with interest on the
unpaid interest, in later years;
o "Step-up Rate Assets" which provide for interest rates that
increase over time;
o "Balloon Payment Assets;"
o "Convertible Assets" which are Adjustable Rate Assets subject to
provisions pursuant to which, subject to certain limitations, the related
borrowers may exercise an option to convert the adjustable interest rate to a
fixed interest rate; and
o "Bi-weekly Assets," which provide for payments to be made by
borrowers on a bi-weekly basis.
An "Increasing Payment Asset" is an Asset that provides for monthly
payments that are fixed for an initial period to be specified in the
prospectus supplement and which increase thereafter (at a predetermined rate
expressed as a percentage of the monthly payment during the preceding payment
period, subject to any caps on the amount of any single monthly payment
increase) for a period to be specified in the prospectus supplement from the
date of origination, after which the monthly payment is fixed at a
level-payment amount so as to fully amortize the Asset over its remaining term
to maturity. The scheduled monthly payment for an Increasing Payment Asset is
the total amount required to be paid each month in accordance with its terms
and equals the sum of (1) the borrower's monthly payments referred to in the
preceding sentence and (2) payments made by the respective servicers pursuant
to buy-down or subsidy agreements. The borrower's initial monthly payments for
each Increasing Payment Asset are set at the level-payment amount that would
apply to an otherwise identical Level Payment Asset having an interest rate a
certain number of percentage points below the Asset Rate of that Increasing
Payment Asset. The borrower's monthly payments on each Increasing Payment
Asset, together with any payments made thereon by the related servicers
pursuant to buy-down or subsidy agreements, will in all cases be sufficient to
allow payment of accrued interest on the Increasing Payment Asset at the
related interest rate, without negative amortization. A borrower's monthly
payments on an Increasing Payment Asset may, however, not be sufficient to
result in any reduction of the principal balance of that Asset until after the
period when those payments may be increased.
The Securities (as defined herein) will be entitled to payment only
from the assets of the related trust fund and will not be entitled to payments
from the assets of any other trust fund established by the depositor. The
assets of a trust fund may consist of certificates representing beneficial
ownership interests in, or indebtedness of, another trust fund that contains
the Assets, if specified in the prospectus supplement.
Mortgage Loans
General
Each mortgage loan will generally be secured by a lien on (1) a one-
to four-family residential property (including a manufactured home) or a
security interest in shares issued by a cooperative housing corporation (a
"Single Family Property") or (2) a primarily residential property that
consists of five or more residential dwelling units (a "Multifamily
Property"), which may include limited retail, office or other commercial
space. Single Family Properties and Multifamily Properties are sometimes
referred to herein collectively as "Mortgaged Properties." The mortgage loans
will be secured by first and/or junior mortgages or deeds of trust or other
similar security instruments creating a first or junior lien on Mortgaged
Property.
The Mortgaged Properties may also include:
o Apartments owned by cooperative housing corporations
("Cooperatives"); and
o Leasehold interests in properties, the title to which is held by
third party lessors. The term of these leaseholds will exceed the term of the
related mortgage note by at least five years or some other time period
specified in the prospectus supplement.
The mortgage loans may include:
o Closed-end and/or revolving home equity loans or certain balances
thereof ("Home Equity Loans");
o Secured home improvement installment sales contracts and secured
installment loan agreements ("Home Improvement Contracts"); and
o Mortgage loans evidenced by contracts ("Land Sale Contracts") for
the sale of properties pursuant to which the borrower promises to pay the
amount due thereon to the holder thereof with fee title to the related
property held by that holder until the borrower has made all of the payments
required pursuant to that Land Sale Contract, at which time fee title is
conveyed to the borrower.
The originator of each mortgage loan will have been a person other
than the depositor. The prospectus supplement will indicate if any originator
is an affiliate of the depositor. The mortgage loans will be evidenced by
mortgage notes secured by mortgages, deeds of trust or other security
instruments (the "Mortgages") creating a lien on the Mortgaged Properties. The
Mortgaged Properties will be located in any one of the fifty states, the
District of Columbia, Guam, Puerto Rico or any other territory of the United
States. If provided in the prospectus supplement, the mortgage loans may
include loans insured by the Federal Housing Administration (the "FHA") or
partially guaranteed by the Veteran's Administration (the "VA"). See "--FHA
Loans and VA Loans" below.
Loan-to-Value Ratio
The "Loan-to-Value Ratio" of a mortgage loan at any particular time
is the ratio (expressed as a percentage) of the then outstanding principal
balance of the mortgage loan to the Value of the related Mortgaged Property.
The "Value" of a Mortgaged Property, other than for Refinance Loans, is
generally the lesser of (a) the appraised value determined in an appraisal
obtained by the originator at origination of that loan and (b) the sales price
for that property. "Refinance Loans" are loans made to refinance existing
loans. Unless otherwise specified in the prospectus supplement, the Value of
the Mortgaged Property securing a Refinance Loan is the appraised value
thereof determined in an appraisal obtained at the time of origination of the
Refinance Loan. The value of a Mortgaged Property as of the date of initial
issuance of the related series may be less than the Value at origination and
will fluctuate from time to time based upon changes in economic conditions and
the real estate market.
Mortgage Loan Information in the Prospectus Supplements
Your prospectus supplement will contain information, as of the dates
specified in that prospectus supplement and to the extent then applicable and
specifically known to the depositor, with respect to the mortgage loans,
including:
o the total outstanding principal balance and the largest, smallest
and average outstanding principal balance of the mortgage loans as of, unless
otherwise specified in that prospectus supplement, the close of business on
the first day of the month of formation of the related trust fund (the
"Cut-off Date");
o the type of property securing the mortgage loans;
o the weighted average (by principal balance) of the original and
remaining terms to maturity of the mortgage loans;
o the range of maturity dates of the mortgage loans;
o the range of the Loan-to-Value Ratios at origination of the
mortgage loans;
o the mortgage rates or range of mortgage rates and the weighted
average mortgage rate borne by the mortgage loans;
o the state or states in which most of the Mortgaged Properties are
located;
o information regarding the prepayment provisions, if any, of the
mortgage loans;
o for mortgage loans with adjustable mortgage rates ("ARM Loans"),
the index, the frequency of the adjustment dates, the range of margins added
to the index, and the maximum mortgage rate or monthly payment variation at
the time of any adjustment thereof and over the life of the ARM Loan;
o information regarding the payment characteristics of the mortgage
loans, including balloon payment and other amortization provisions;
o the number of mortgage loans that are delinquent and the number
of days or ranges of the number of days those mortgage loans are delinquent;
and
o the material underwriting standards used for the mortgage loans.
If specific information respecting the mortgage loans is unknown to
the depositor at the time the Securities are initially offered, more general
information of the nature described above will be provided in the prospectus
supplement, and specific information will be set forth in a report that will
be available to purchasers of the related Securities at or before the initial
issuance thereof and will be filed as part of a Current Report on Form 8-K
with the Securities and Exchange Commission (the "Commission") within fifteen
days after that initial issuance. The characteristics of the mortgage loans
included in a trust fund will not vary by more than five percent (by total
principal balance as of the Cut-off Date) from the characteristics thereof
that are described in the prospectus supplement.
The prospectus supplement will specify whether the mortgage loans
include (1) Home Equity Loans, which may be secured by Mortgages that are
junior to other liens on the related Mortgaged Property and/or (2) Home
Improvement Contracts originated by a home improvement contractor and secured
by a Mortgage on the related Mortgaged Property that is junior to other liens
on the Mortgaged Property. The home improvements purchased with the Home
Improvement Contracts typically include replacement windows, house siding,
roofs, swimming pools, satellite dishes, kitchen and bathroom remodeling
goods, solar heating panels, patios, decks, room additions and garages. The
prospectus supplement will specify whether the Home Improvement Contracts are
FHA loans and, if so, the limitations on any FHA insurance. In addition, the
prospectus supplement will specify whether the mortgage loans contain some
mortgage loans evidenced by Land Sale Contracts.
Payment Provisions of the Mortgage Loans
All of the mortgage loans will provide for payments of principal,
interest or both, on due dates that occur monthly, quarterly or semi-annually
or at some other interval as is specified in the prospectus supplement or for
payments in another manner described in the prospectus supplement. Each
mortgage loan may provide for no accrual of interest or for accrual of
interest thereon at a mortgage rate that is fixed over its term or that
adjusts from time to time, or that may be converted from an adjustable to a
fixed mortgage rate or a different adjustable mortgage rate, or from a fixed
to an adjustable mortgage rate, from time to time pursuant to an election or
as otherwise specified in the related mortgage note, in each case as described
in the prospectus supplement. Each mortgage loan may provide for scheduled
payments to maturity or payments that adjust from time to time to accommodate
changes in the mortgage rate or to reflect the occurrence of certain events or
that adjust on the basis of other methodologies, and may provide for negative
amortization or accelerated amortization, in each case as described in the
prospectus supplement. Each mortgage loan may be fully amortizing or require a
balloon payment due on its stated maturity date, in each case as described in
the prospectus supplement. Each mortgage loan may contain prohibitions on
prepayment (a "Lock-out Period" and, the date of expiration thereof, a
"Lock-out Date") or require payment of a premium or a yield maintenance
penalty (a "Prepayment Premium") in connection with a prepayment, in each case
as described in the prospectus supplement. If the holders of any class or
classes of Offered Securities are entitled to all or a portion of any
Prepayment Premiums collected from the mortgage loans, the prospectus
supplement will specify the method or methods by which any of these amounts
will be allocated. See "--Assets" above.
Revolving Credit Line Loans
As more fully described in the prospectus supplement, the mortgage
loans may consist, in whole or in part, of revolving Home Equity Loans or
certain balances thereof ("Revolving Credit Line Loans"). Interest on each
Revolving Credit Line Loan, excluding introductory rates offered from time to
time during promotional periods, may be computed and payable monthly on the
average daily outstanding principal balance of that loan. From time to time
before the expiration of the related draw period specified in a Revolving
Credit Line Loan, principal amounts on that Revolving Credit Line Loan may be
drawn down (up to a maximum amount as set forth in the prospectus supplement)
or repaid. If specified in the prospectus supplement, new draws by borrowers
under the Revolving Credit Line Loans will automatically become part of the
trust fund described in the prospectus supplement. As a result, the total
balance of the Revolving Credit Line Loans will fluctuate from day to day as
new draws by borrowers are added to the trust fund and principal payments are
applied to those balances and those amounts will usually differ each day, as
more specifically described in the prospectus supplement. Under some
circumstances, under a Revolving Credit Line Loan, a borrower may, during the
related draw period, choose an interest only payment option, during which the
borrower is obligated to pay only the amount of interest that accrues on the
loan during the billing cycle, and may also elect to pay all or a portion of
the principal. An interest only payment option may terminate at the end of the
related draw period, after which the borrower must begin paying at least a
minimum monthly portion of the average outstanding principal balance of the
loan.
Unsecured Home Improvement Loans
The Unsecured Home Improvement Loans may consist of conventional
unsecured home improvement loans, unsecured installment loans and unsecured
home improvement loans that are FHA loans. See "--FHA Loans and VA Loans"
below and "Description of the Agreements--Material Terms of the Pooling and
Servicing Agreements and Underlying Servicing Agreements--FHA Insurance and VA
Guarantees." Except as otherwise described in the prospectus supplement, the
Unsecured Home Improvement Loans will be fully amortizing and will bear
interest at a fixed or variable annual percentage rate.
Unsecured Home Improvement Loan Information in Prospectus Supplements
Each prospectus supplement will contain information, as of the dates
specified in the prospectus supplement and to the extent then applicable and
specifically known to the depositor, with respect to any Unsecured Home
Improvement Loans, including:
o the total outstanding principal balance and the largest, smallest
and average outstanding principal balance of the Unsecured Home Improvement
Loans as of the applicable Cut-Off Date;
o the weighted average (by principal balance) of the original and
remaining terms to maturity of the Unsecured Home Improvement Loans;
o the earliest and latest origination date and maturity date of the
Unsecured Home Improvements Loans;
o the interest rates or range of interest rates and the weighted
average interest rates borne by the Unsecured Home Improvement Loans;
o the state or states in which most of the Unsecured Home
Improvement Loans were originated;
o information regarding the prepayment provisions, if any, of the
Unsecured Home Improvement Loans;
o with respect to the Unsecured Home Improvement Loans with
adjustable interest rates ("ARM Unsecured Home Improvement Loans"), the index,
the frequency of the adjustment dates, the range of margins added to the
index, and the maximum interest rate or monthly payment variation at the time
of any adjustment thereof and over the life of the ARM Unsecured Home
Improvement Loan;
o information regarding the payment characteristics of the
Unsecured Home Improvement Loans;
o the number of Unsecured Home Improvement Loans that are
delinquent and the number of days or ranges of the number of days that
Unsecured Home Improvement Loans are delinquent; and
o the material underwriting standards used for the Unsecured Home
Improvement Loans.
If specific information respecting the Unsecured Home Improvement
Loans is unknown to the depositor at the time Securities are initially
offered, more general information of the nature described above will be
provided in the prospectus supplement, and specific information will be set
forth in a report that will be available to purchasers of the related
Securities at or before the initial issuance thereof and will be filed as part
of a Current Report on Form 8-K with the Commission within fifteen days after
the related initial issuance. The characteristics of the Unsecured Home
Improvement Loans included in a trust fund will not vary by more than five
percent (by total principal balance as of the Cut-off Date) from the
characteristics thereof that are described in the prospectus supplement.
Contracts
General
To the extent provided in the prospectus supplement, each Contract
will be secured by a security interest in a new or used manufactured home
(each, a "Manufactured Home"). The Contracts may include Contracts that are
FHA loans. See "--FHA Loans and VA Loans" below and "Description of the
Agreements--Material Terms of the Pooling and Servicing Agreements and
Underlying Servicing Agreements--FHA Insurance and VA Guarantees." The method
of computing the "Loan-to-Value Ratio" of a Contract will be described in the
prospectus supplement.
Contract Information in Prospectus Supplements
Each prospectus supplement relating to a trust fund whose Assets
include a substantial proportion of Contracts will contain certain
information, as of the dates specified in that prospectus supplement and to
the extent then applicable and specifically known to the depositor, with
respect to any Contracts, including:
o the total outstanding principal balance and the largest, smallest
and average outstanding principal balance of the Contracts as of the
applicable Cut-off Date;
o whether the Manufactured Homes were new or used as of the
origination of the related Contracts;
o the weighted average (by principal balance) of the original and
remaining terms to maturity of the Contracts;
o the range of maturity dates of the Contracts;
o the range of the Loan-to-Value Ratios at origination of the
Contracts;
o the annual percentage rate on each Contract (a "Contract Rate")
or range of Contract Rates and the weighted average Contract Rate borne by the
Contracts;
o the state or states in which most of the Manufactured Homes are
located at origination;
o information regarding the prepayment provisions, if any, of the
Contracts;
o for Contracts with adjustable Contract Rates ("ARM Contracts"),
the index, the frequency of the adjustment dates, and the maximum Contract
Rate or monthly payment variation at the time of any adjustment thereof and
over the life of the ARM Contract;
o the number of Contracts that are delinquent and the number of
days or ranges of the number of days those Contracts are delinquent;
o information regarding the payment characteristics of the
Contracts; and
o the material underwriting standards used for the Contracts.
If specific information respecting the Contracts is unknown to the
depositor at the time the Securities are initially offered, more general
information of the nature described above will be provided in the prospectus
supplement, and specific information will be set forth in a report that will
be available to purchasers of the related Securities at or before the initial
issuance thereof and will be filed as part of a Current Report on Form 8-K
with the Commission within fifteen days after the related initial issuance.
The characteristics of the Contracts included in a trust fund will not vary by
more than five percent (by total principal balance as of the Cut-off Date)
from the characteristics thereof that are described in the prospectus
supplement.
The information described above regarding the Contracts in a trust
fund may be presented in the prospectus supplement in combination with similar
information regarding the mortgage loans in the trust fund.
Payment Provisions of the Contracts
All of the Contracts will provide for payments of principal, interest
or both, on due dates that occur monthly or at some other interval as is
specified in the prospectus supplement or for payments in another manner
described in the prospectus supplement. Each Contract may provide for no
accrual of interest or for accrual of interest thereon at a Contract Rate that
is fixed over its term or that adjusts from time to time, or as otherwise
specified in the prospectus supplement. Each Contract may provide for
scheduled payments to maturity or payments that adjust from time to time to
accommodate changes in the Contract Rate as otherwise described in the
prospectus supplement. See "--Assets" above.
Agency Securities
The Agency Securities will consist of any combination of Ginnie Mae
certificates, Fannie Mae certificates and Freddie Mac certificates, which may
include Stripped Agency Securities, as described below.
Ginnie Mae
Ginnie Mae is a wholly-owned corporate instrumentality of the United
States within the Department of Housing and Urban Development. Section 306(g)
of Title III of the Housing Act authorizes Ginnie Mae to guarantee the timely
payment of the principal of and interest on certificates that are based on and
backed by a pool of FHA loans, VA loans or by pools of other eligible
residential 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 that may
be required to be paid under any guaranty under this subsection." To meet its
obligations under that guaranty, Ginnie Mae is authorized, under Section
306(d) of the National Housing Act of 1934 (the "Housing Act"), to borrow from
the United States Treasury with no limitations as to amount, to perform its
obligations under its guarantee.
Ginnie Mae Certificates
Each Ginnie Mae certificate will be a "fully modified pass-through"
mortgage-backed certificate issued and serviced by an issuer approved by
Ginnie Mae or Fannie Mae as a seller-servicer of FHA loans or VA loans, except
as described below regarding Stripped Agency Securities (as defined below).
The loans underlying Ginnie Mae certificates may consist of FHA loans, VA
loans and other loans eligible for inclusion in loan pools underlying Ginnie
Mae certificates. Ginnie Mae certificates may be issued under either or both
of the Ginnie Mae I program and the Ginnie Mae II program, as described in the
prospectus supplement. If the trust fund includes Ginnie Mae certificates,
your prospectus supplement will include any material additional information
regarding the Ginnie Mae guaranty program, the characteristics of the pool
underlying those Ginnie Mae certificates, the servicing of the related pool,
the payment of principal and interest on Ginnie Mae certificates and other
relevant matters regarding the Ginnie Mae certificates.
Except as otherwise specified in the prospectus supplement or as
described below with respect to Stripped Agency Securities, each Ginnie Mae
certificate will provide for the payment, by or on behalf of the issuer, to
the registered holder of that Ginnie Mae certificate of monthly payments of
principal and interest equal to the holder's proportionate interest in the
total amount of the monthly principal and interest payments on each related
FHA loan or VA loan, minus servicing and guaranty fees totaling the excess of
the interest on that FHA loan or VA loan over the Ginnie Mae certificates'
interest rate. In addition, each payment to a holder of a Ginnie Mae
certificate will include proportionate pass-through payments to that holder of
any prepayments of principal of the FHA loans or VA loans underlying the
Ginnie Mae certificate and the holder's proportionate interest in the
remaining principal balance in the event of a foreclosure or other disposition
of any related FHA loan or VA loan.
The Ginnie Mae certificates do not constitute a liability of, or
evidence any recourse against, the issuer of the Ginnie Mae certificates, the
depositor or any affiliates thereof, and the only recourse of a registered
holder (for example, the trustee) is to enforce the guaranty of Ginnie Mae.
Ginnie Mae will have approved the issuance of each of the Ginnie Mae
certificates included in a trust fund in accordance with a guaranty agreement
or contract between Ginnie Mae and the issuer of the Ginnie Mae certificates.
Pursuant to that agreement, that issuer, in its capacity as servicer, is
required to perform customary functions of a servicer of FHA loans and VA
loans, including collecting payments from borrowers and remitting those
collections to the registered holder, maintaining escrow and impoundment
accounts of borrowers for payments of taxes, insurance and other items
required to be paid by the borrower, maintaining primary hazard insurance, and
advancing from its own funds to make timely payments of all amounts due on the
Ginnie Mae certificate, even if the payments received by that issuer on the
loans backing the Ginnie Mae certificate are less than the amounts due
thereon. If the issuer is unable to make payments on a Ginnie Mae certificate
as they become due, it must promptly notify Ginnie Mae and request Ginnie Mae
to make that payment. Upon that notification and request, Ginnie Mae will make
those payments directly to the registered holder of the Ginnie Mae
certificate. In the event no payment is made by the issuer and the issuer
fails to notify and request Ginnie Mae to make that payment, the registered
holder of the Ginnie Mae certificate has recourse against only Ginnie Mae to
obtain that payment. The trustee or its nominee, as registered holder of the
Ginnie Mae certificates included in a trust fund, is entitled to proceed
directly against Ginnie Mae under the terms of the guaranty agreement or
contract relating to the Ginnie Mae certificates for any amounts that are
unpaid when due under each Ginnie Mae certificate.
The Ginnie Mae certificates included in a trust fund may have other
characteristics and terms, different from those described above so long as the
Ginnie Mae certificates and underlying residential loans meet the criteria of
the rating agency or agencies. The Ginnie Mae certificates and underlying
residential loans will be described in the prospectus supplement.
Fannie Mae
Fannie Mae is a federally chartered and stockholder-owned corporation
organized and existing under the Federal National Mortgage Association Charter
Act, as amended (the "Charter Act"). Fannie Mae was originally established in
1938 as a United States government agency to provide supplemental liquidity to
the mortgage market and was transformed into a stockholder-owned and privately
managed corporation by legislation enacted in 1968.
Fannie Mae provides funds to the mortgage market by purchasing
mortgage loans from lenders. Fannie Mae acquires funds to purchase loans from
many capital market investors, thereby expanding the total amount of funds
available for housing. Operating nationwide, Fannie Mae helps to redistribute
mortgage funds from capital-surplus to capital-short areas. In addition,
Fannie Mae issues mortgage-backed securities primarily in exchange for pools
of mortgage loans from lenders. Fannie Mae receives fees for its guaranty of
timely payment of principal and interest on its mortgage-backed securities.
Fannie Mae Certificates
Fannie Mae certificates are Guaranteed Mortgage Pass-Through
Certificates typically issued pursuant to a prospectus that is periodically
revised by Fannie Mae. Fannie Mae certificates represent fractional undivided
interests in a pool of mortgage loans formed by Fannie Mae. Each mortgage loan
must meet the applicable standards of the Fannie Mae purchase program.
Mortgage loans comprising a pool are either provided by Fannie Mae from its
own portfolio or purchased pursuant to the criteria of the Fannie Mae purchase
program. Mortgage loans underlying Fannie Mae certificates included in a trust
fund will consist of conventional mortgage loans, FHA loans or VA loans. If
the trust fund includes Fannie Mae certificates, your prospectus supplement
will include any material additional information regarding the Fannie Mae
program, the characteristics of the pool underlying the Fannie Mae
certificates, the servicing of the related pool, payment of principal and
interest on the Fannie Mae certificates and other relevant matters about the
Fannie Mae certificates.
Except as described below with respect to Stripped Agency Securities,
Fannie Mae guarantees to each registered holder of a Fannie Mae certificate
that it will distribute amounts representing that holder's proportionate share
of scheduled principal and interest at the applicable interest rate provided
for by that Fannie Mae certificate on the underlying mortgage loans, whether
or not received, and that holder's proportionate share of the full principal
amount of any prepayment or foreclosed or other finally liquidated mortgage
loan, whether or not the related principal amount is actually recovered.
The obligations of Fannie Mae under its guarantees are obligations
solely of Fannie Mae and are not backed by, nor entitled to, the full faith
and credit of the United States. If Fannie Mae were unable to satisfy those
obligations, distributions to the holders of Fannie Mae certificates would
consist solely of payments and other recoveries on the underlying loans and,
accordingly, monthly distributions to the holders of Fannie Mae certificates
would be affected by delinquent payments and defaults on those loans.
Fannie Mae certificates evidencing interests in pools of mortgage
loans formed on or after May 1, 1985 (other than Fannie Mae certificates
backed by pools containing graduated payment mortgage loans or multifamily
loans) are available in book-entry form only. For a Fannie Mae certificate
issued in book-entry form, distributions thereon will be made by wire, and for
a fully registered Fannie Mae certificate, distributions thereon will be made
by check.
The Fannie Mae certificates included in a trust fund may have other
characteristics and terms, different from those described above, as long as
the Fannie Mae certificates and underlying mortgage loans meet the criteria of
the rating agency or agencies rating the Certificates. The Fannie Mae
certificates and underlying mortgage loans will be described in the prospectus
supplement.
Freddie Mac
Freddie Mac is a corporate instrumentality of the United States
created pursuant to Title III of the Emergency Home Finance Act of 1970, as
amended (the "Freddie Mac Act"). Freddie Mac was established primarily for the
purpose of increasing the availability of mortgage credit for the financing of
needed housing. It seeks to provide an enhanced degree of liquidity for
residential mortgage investments primarily by assisting in the development of
secondary markets for conventional mortgages. The principal activity of
Freddie Mac currently consists of the purchase of first lien, conventional
residential mortgage loans or participation interests in those mortgage loans
and the resale of the mortgage loans so purchased in the form of mortgage
securities, primarily Freddie Mac certificates. Freddie Mac is confined to
purchasing, so far as practicable, mortgage loans and participation interests
therein which it deems to be of the quality, type and class as to meet
generally the purchase standards imposed by private institutional mortgage
investors.
Freddie Mac Certificates
Each Freddie Mac certificate represents an undivided interest in a
pool of residential loans that may consist of first lien conventional
residential loans, FHA loans or VA loans (the "Freddie Mac Certificate
Group"). Each of these mortgage loans must meet the applicable standards set
forth in the Freddie Mac Act. A Freddie Mac Certificate Group may include
whole loans, participation interests in whole loans and undivided interests in
whole loans and/or participations comprising another Freddie Mac Certificate
Group. If the trust fund includes Freddie Mac certificates, your prospectus
supplement will include any material additional information regarding the
Freddie Mac guaranty program, the characteristics of the pool underlying that
Freddie Mac certificate, the servicing of the related pool, payment of
principal and interest on the Freddie Mac certificate and any other relevant
matters about the Freddie Mac certificates.
Except as described below with respect to Stripped Agency Securities,
Freddie Mac guarantees to each registered holder of a Freddie Mac certificate
the timely payment of interest on the underlying mortgage loans to the extent
of the applicable interest rate on the registered holder's pro rata share of
the unpaid principal balance outstanding on the underlying mortgage loans in
the Freddie Mac Certificate Group represented by that Freddie Mac certificate,
whether or not received. Freddie Mac also guarantees to each registered holder
of a Freddie Mac certificate collection by that holder of all principal on the
underlying mortgage loans, without any offset or deduction, to the extent of
that holder's pro rata share thereof, but does not, except if and to the
extent specified in the prospectus supplement, guarantee the timely payment of
scheduled principal. Pursuant to its guarantees, Freddie Mac also guarantees
ultimate collection of scheduled principal payments, prepayments of principal
and the remaining principal balance in the event of a foreclosure or other
disposition of a mortgage loan. Freddie Mac may remit the amount due on
account of its guarantee of collection of principal at any time after default
on an underlying mortgage loan, but not later than 30 days following the
latest of
(1) foreclosure sale;
(2) payment of the claim by any mortgage insurer; and
(3) the expiration of any right of redemption, but in any
event no later than one year after demand has been made upon the
borrower for accelerated payment of principal.
In taking actions regarding the collection of principal after default on the
mortgage loans underlying Freddie Mac certificates, including the timing of
demand for acceleration, Freddie Mac reserves the right to exercise its
servicing judgment for the mortgage loans in the same manner as for mortgage
loans that it has purchased but not sold. The length of time necessary for
Freddie Mac to determine that a mortgage loan should be accelerated varies
with the particular circumstances of each borrower, and Freddie Mac has not
adopted servicing standards that require that the demand be made within any
specified period.
Freddie Mac certificates are not guaranteed by the United States or
by any Federal Home Loan Bank and do not constitute debts or obligations of
the United States or any Federal Home Loan Bank. The obligations of Freddie
Mac under its guarantee are obligations solely of Freddie Mac and are not
backed by, nor entitled to, the full faith and credit of the United States. If
Freddie Mac were unable to satisfy those obligations, distributions to holders
of Freddie Mac certificates would consist solely of payments and other
recoveries on the underlying mortgage loans and, accordingly, monthly
distributions to holders of Freddie Mac certificates would be affected by
delinquent payments and defaults on those mortgage loans.
The Freddie Mac certificates included in a trust fund may have other
characteristics and terms, different from those described above, so long as
the Freddie Mac certificates and underlying mortgage loans meet the criteria
of the rating agency or agencies rating the Securities. The Freddie Mac
certificates and underlying mortgage loans will be described in the prospectus
supplement.
Stripped Agency Securities
The Ginnie Mae certificates, Fannie Mae certificates or Freddie Mac
certificates may be issued in the form of certificates ("Stripped Agency
Securities") that represent an undivided interest in all or part of either the
principal distributions (but not the interest distributions) or the interest
distributions (but not the principal distributions), or in some specified
portion of the principal or interest distributions (but not all of those
distributions), on an underlying pool of mortgage loans or certain other
Ginnie Mae certificates, Fannie Mae certificates or Freddie Mac certificates.
Ginnie Mae, Fannie Mae or Freddie Mac, as applicable, will guarantee each
Stripped Agency Security to the same extent as that entity guarantees the
underlying securities backing the Stripped Agency Securities or to the extent
described above for a Stripped Agency Security backed by a pool of mortgage
loans, unless otherwise specified in the prospectus supplement. If the trust
fund includes Stripped Agency Securities, your prospectus supplement will
include any material additional information regarding the characteristics of
the assets underlying the Stripped Agency Securities, the payments of
principal and interest on the Stripped Agency Securities and other relevant
matters about the Stripped Agency Securities.
Mortgage Securities
The Mortgage Securities will represent beneficial interests in loans
of the type that would otherwise be eligible to be mortgage loans, Unsecured
Home Improvement Loans, Contract, or Agency Securities, or collateralized
obligations secured by mortgage loans, Unsecured Home Improvement Loans,
Contracts or Agency Securities. The Mortgage Securities will have been
(1) issued by an entity other than the depositor or its
affiliates;
(2) acquired in bona fide secondary market transactions from
persons other than the issuer thereof or its affiliates; and
(3) (a) offered and distributed to the public pursuant to an
effective registration statement or (b) purchased in a transaction
not involving any public offering from a person who is not an
affiliate of the issuer of those securities at the time of sale (nor
an affiliate thereof at any time during the preceding three months);
provided a period of two years elapsed since the later of the date
the securities were acquired from the issuer.
Although individual Underlying Loans may be insured or guaranteed by the
United States or an agency or instrumentality thereof, they need not be, and
Mortgage Securities themselves will not be so insured or guaranteed. Except as
otherwise set forth in the prospectus supplement, Mortgage Securities will
generally be similar to Securities offered hereunder.
The prospectus supplement for Securities of each series evidencing
interests in a trust fund including Mortgage Securities will include a
description of the Mortgage Securities and any related credit enhancement, and
the related mortgage loans, Unsecured Home Improvement Loans, Contracts or
Agency Securities will be described together with any other mortgage loans,
Unsecured Home Improvement Loans, Contracts or Agency Securities included in
the trust fund of that series. As used in this prospectus, the terms "mortgage
loans," "Unsecured Home Improvement Loans" and "Contracts" include the
mortgage loans, Unsecured Home Improvement Loans or Contracts, as applicable,
underlying the Mortgage Securities in your trust fund. References in this
prospectus to advances to be made and other actions to be taken by the master
servicer in connection with the Assets may include any advances made and other
actions taken pursuant to the terms of the applicable Mortgage Securities.
FHA Loans and VA Loans
FHA loans will be insured by the FHA as authorized under the Housing
Act, and the United States Housing Act of 1937, as amended. One- to
four-family FHA loans will be insured under various FHA programs including the
standard FHA 203-b programs to finance the acquisition of one- to four-family
housing units and the FHA 245 graduated payment mortgage program. The FHA
loans generally require a minimum down payment of approximately 5% of the
original principal amount of the FHA loan. No FHA loan may have an interest
rate or original principal balance exceeding the applicable FHA limits at the
time of origination of that FHA loan.
Mortgage loans, Unsecured Home Improvement Loans and Contracts that
are FHA loans are insured by the FHA (as described in the prospectus
supplement, up to an amount equal to 90% of the sum of the unpaid principal of
the FHA loan, a portion of the unpaid interest and certain other liquidation
costs) pursuant to Title I of the Housing Act.
There are two primary FHA insurance programs that are available for
multifamily loans. Sections 221(d)(3) and (d)(4) of the Housing Act allow HUD
to insure multifamily loans that are secured by newly constructed and
substantially rehabilitated multifamily rental projects. Section 244 of the
Housing Act provides for co-insurance of those loans made under Sections
221(d)(3) and (d)(4) by HUD/FHA and a HUD-approved co-insurer. Generally the
term of this type of multifamily loan may be up to 40 years and the ratio of
the loan amount to property replacement cost can be up to 90%.
Section 223(f) of the Housing Act allows HUD to insure multifamily
loans made for the purchase or refinancing of existing apartment projects that
are at least three years old. Section 244 also provides for co-insurance of
mortgage loans made under Section 223(f). Under Section 223(f), the loan
proceeds cannot be used for substantial rehabilitation work, but repairs may
be made for up to, in general, the greater of 15% of the value of the project
and a dollar amount per apartment unit established from time to time by HUD.
In general the loan term may not exceed 35 years and a loan-to-value ratio of
no more than 85% is required for the purchase of a project and 70% for the
refinancing of a project.
VA loans will be partially guaranteed by the VA under the
Servicemen's Readjustment Act of 1944, as amended (the "Servicemen's
Readjustment Act"). The Servicemen's Readjustment Act permits a veteran (or in
some instances the spouse of a veteran) to obtain a mortgage loan guarantee by
the VA covering mortgage financing of the purchase of a one- to four-family
dwelling unit at interest rates permitted by the VA. The program has no
mortgage loan limits, requires no down payment from the purchasers and permits
the guarantee of mortgage loans of up to 30 years' duration. However, no VA
loan will have an original principal amount greater than five times the
partial VA guarantee for that VA loan. The maximum guarantee that may be
issued by the VA under this program will be set forth in the prospectus
supplement.
Pre-Funding Accounts
To the extent provided in a prospectus supplement, a portion of the
proceeds of the issuance of Securities may be deposited into an account
maintained with the trustee (a "Pre-Funding Account"). In that case, the
depositor will be obligated to sell at a predetermined price - and the trust
fund for the related series of Securities will be obligated to purchase -
additional Assets (the "Subsequent Assets") from time to time, and as
frequently as daily, within the period (not to exceed three months) specified
in the prospectus supplement (the "Pre-Funding Period") after the issuance of
the Securities having a total principal balance approximately equal to the
amount on deposit in the Pre-Funding Account (the "Pre-Funded Amount") for
that series on the date of its issuance. The Pre-Funded Amount for a series
will be specified in the prospectus supplement, and will not in any case
exceed 50% of the total initial Security Balance of the related Securities.
Any Subsequent Assets will be required to satisfy certain eligibility criteria
more fully set forth in the prospectus supplement, which criteria will be
consistent with the eligibility criteria of the Assets initially included in
the trust fund, subject to those exceptions that are expressly stated in the
prospectus supplement. In addition, certain conditions must be satisfied
before the Subsequent Assets are transferred into the trust fund, for example,
the delivery to the rating agencies and to the trustee of any required
opinions of counsel. See "ERISA Considerations--Pre-Funding Accounts" for
additional information regarding Pre-Funding Accounts.
Except as set forth in the following sentence, the Pre-Funded Amount
will be used only to purchase Subsequent Assets. Any portion of the Pre-Funded
Amount remaining in the Pre-Funding Account at the end of the Pre-Funding
Period will be used to prepay one or more classes of Securities in the amounts
and in the manner specified in the prospectus supplement. In addition, if
specified in the prospectus supplement, the depositor may be required to
deposit cash into an account maintained by the trustee (the "Capitalized
Interest Account") for the purpose of assuring the availability of funds to
pay interest on the Securities during the Pre-Funding Period. Any amount
remaining in the Capitalized Interest Account at the end of the Pre-Funding
Period will be remitted as specified in the prospectus supplement.
Amounts deposited in the Pre-Funding and Capitalized Interest
Accounts will be permitted to be invested, pending application thereof, only
in eligible investments authorized by each applicable rating agency.
Accounts
Each trust fund will include one or more accounts, established and
maintained on behalf of the securityholders into which the person or persons
designated in the prospectus supplement will, to the extent described herein
and in the prospectus supplement deposit all payments and collections received
or advanced with respect to the Assets and other assets in the trust fund.
This type of account may be maintained as an interest bearing or a
non-interest bearing account, and funds held in that account may be held as
cash or invested in certain short-term, investment grade obligations, in each
case as described in the prospectus supplement. See "Description of the
Agreements--Material Terms of the Pooling and Servicing Agreements and
Underlying Servicing Agreements--Collection Account and Related Accounts."
Credit Support
If so provided in the prospectus supplement, partial or full
protection against certain defaults and losses on the Assets in the related
trust fund may be provided to one or more classes of Securities in the related
series in the form of subordination of one or more other classes of Securities
in that series or by one or more other types of credit support, for example, a
letter of credit, insurance policy, guarantee, reserve fund or another type of
credit support, or a combination thereof (any of these types of coverage for
the Securities of any series, is referred to generally as "credit support").
The amount and types of coverage, the identification of the entity providing
the coverage (if applicable) and related information for each type of credit
support, if any, will be described in the prospectus supplement for a series
of Securities. See "Description of Credit Support."
Cash Flow Agreements
If so provided in the prospectus supplement, the trust fund may
include guaranteed investment contracts pursuant to which moneys held in the
funds and accounts established for the related series will be invested at a
specified rate. The trust fund may also include certain other agreements, for
example, interest rate swap agreements, interest rate cap or floor agreements,
currency swap agreements or similar agreements provided to reduce the effects
of interest rate or currency exchange rate fluctuations on the Assets or on
one or more classes of Securities. (Currency swap agreements might be included
in the trust fund if some or all of the Assets were denominated in a
non-United States currency.) The principal terms of any related guaranteed
investment contract or other agreement (any of these types of agreement, a
"Cash Flow Agreement"), including provisions relating to the timing, manner
and amount of payments thereunder and provisions relating to the termination
thereof, will be described in the prospectus supplement for the related
series. In addition, the prospectus supplement will provide certain
information with respect to the borrower under any Cash Flow Agreement.
Use of Proceeds
The net proceeds to be received from the sale of the Securities will
be applied by the depositor to the purchase of Assets, or the repayment of the
financing incurred in that purchase, and to pay for certain expenses incurred
in connection with that purchase of Assets and sale of Securities. The
depositor expects to sell the Securities from time to time, but the timing and
amount of offerings of Securities will depend on a number of factors,
including the volume of Assets acquired by the depositor, prevailing interest
rates, availability of funds and general market conditions.
Yield Considerations
General
The yield on any Offered Security will depend on the price paid by
the securityholder, the Interest Rate of the Security, the receipt and timing
of receipt of distributions on the Security and the weighted average life of
the Assets in the related trust fund (which may be affected by prepayments,
defaults, liquidations or repurchases).
Interest Rate
Securities of any class within a series may have fixed, variable or
adjustable Interest Rates, which may or may not be based upon the interest
rates borne by the Assets in the related trust fund. The prospectus supplement
for any series will specify the Interest Rate for each class of Securities or,
in the case of a variable or adjustable Interest Rate, the method of
determining the Interest Rate; the effect, if any, of the prepayment of any
Asset on the Interest Rate of one or more classes of Securities; and whether
the distributions of interest on the Securities of any class will be
dependent, in whole or in part, on the performance of any borrower under a
Cash Flow Agreement.
If specified in the prospectus supplement, the effective yield to
maturity to each holder of Securities entitled to payments of interest will be
below that otherwise produced by the applicable Interest Rate and purchase
price of that Security because, while interest may accrue on each Asset during
a certain period (each, an "Accrual Period"), the distribution of that
interest will be made on a day that may be several days, weeks or months
following the period of accrual.
Timing of Payment of Interest
Each payment of interest on the Securities entitled to distributions
of interest (or addition to the Security Balance of a class of Accrual
Securities) will be made by or on behalf of the trustee each month on the date
specified in the related prospectus supplement (each date, a "Distribution
Date"), and will include interest accrued during the Accrual Period for that
Distribution Date. As indicated above under "--Interest Rate," if the Accrual
Period ends on a date other than the day before a Distribution Date for the
related series, the yield realized by the holders of those Securities may be
lower than the yield that would result if the Accrual Period ended on the day
before the Distribution Date.
Payments of Principal; Prepayments
The yield to maturity on the Securities will be affected by the rate
of principal payments on the Assets (or, in the case of Mortgage Securities
and Agency Securities, the underlying assets related thereto), including
principal prepayments resulting from both voluntary prepayments by the
borrowers and involuntary liquidations. The rate at which principal
prepayments occur will be affected by a variety of factors, including the
terms of the Assets (or, in the case of Mortgage Securities and Agency
Securities, the underlying assets related thereto), the level of prevailing
interest rates, the availability of mortgage credit and economic, demographic,
geographic, tax, legal and other factors.
In general, however, if prevailing interest rates fall significantly
below the interest rates on the Assets in a particular trust fund (or, in the
case of Mortgage Securities and Agency Securities, the underlying assets
related thereto), those assets are likely to be the subject of higher
principal prepayments than if prevailing rates remain at or above the rates
borne by those assets. However, you should note that some Assets (or, in the
case of Mortgage Securities and Agency Securities, the underlying assets
related thereto) may consist of loans with different interest rates. The rate
of principal payment on Mortgage Securities will also be affected by the
allocation of principal payments on the underlying assets among the Mortgage
Securities or Agency Securities and other Mortgage Securities or Agency
Securities of the same series. The rate of principal payments on the Assets in
the related trust fund (or, in the case of Mortgage Securities and Agency
Securities, the underlying assets related thereto) is likely to be affected by
the existence of any Lock-out Periods and Prepayment Premium provisions of the
mortgage loans underlying or comprising those Assets, and by the extent to
which the servicer of any of these mortgage loans is able to enforce these
provisions. Mortgage loans with a Lock-out Period or a Prepayment Premium
provision, to the extent enforceable, generally would be expected to
experience a lower rate of principal prepayments than otherwise identical
mortgage loans without those provisions, with shorter Lock-out Periods or with
lower Prepayment Premiums.
Because of the depreciating nature of manufactured housing, which
limits the possibilities for refinancing, and because the terms and principal
amounts of manufactured housing contracts are generally shorter and smaller
than the terms and principal amounts of mortgage loans secured by site-built
homes, changes in interest rates have a correspondingly smaller effect on the
amount of the monthly payments on manufactured housing contracts than on the
amount of the monthly payments on mortgage loans secured by site-built homes.
Consequently, changes in interest rates may play a smaller role in prepayment
behavior of manufactured housing contracts than they do in the prepayment
behavior of loans secured by mortgage on site-built homes. Conversely, local
economic conditions and some of the other factors mentioned above may play a
larger role in the prepayment behavior of manufactured housing contracts than
they do in the prepayment behavior of loans secured by mortgages on site-built
homes.
If the purchaser of a Security offered at a discount calculates its
anticipated yield to maturity based on an assumed rate of distributions of
principal that is faster than that actually experienced on the Assets (or, in
the case of Mortgage Securities and Agency Securities, the underlying assets
related thereto), the actual yield to maturity will be lower than that so
calculated. Conversely, if the purchaser of a Security offered at a premium
calculates its anticipated yield to maturity based on an assumed rate of
distributions of principal that is slower than that actually experienced on
the Assets (or, in the case of Mortgage Securities and Agency Securities, the
underlying assets related thereto), the actual yield to maturity will be lower
than that so calculated. In either case, if so provided in the prospectus
supplement for a series of Securities, the effect on yield on one or more
classes of the Securities of that series of prepayments of the Assets in the
related trust fund may be mitigated or exacerbated by any provisions for
sequential or selective distribution of principal to those classes.
When a full prepayment is made on a mortgage loan or a Contract, the
borrower is charged interest on the principal amount of the mortgage loan or
Contract so prepaid for the number of days in the month actually elapsed up to
the date of the prepayment or some other period specified in the prospectus
supplement. Generally, the effect of prepayments in full will be to reduce the
amount of interest paid in the following month to holders of Securities
entitled to payments of interest because interest on the principal amount of
any mortgage loan or Contract so prepaid will be paid only to the date of
prepayment rather than for a full month. A partial prepayment of principal is
applied so as to reduce the outstanding principal balance of the related
mortgage loan or Contract as of its due date in the month in which the partial
prepayment is received or some other date as is specified in the prospectus
supplement.
The timing of changes in the rate of principal payments on the Assets
(or, in the case of Mortgage Securities and Agency Securities, the underlying
assets related thereto) may significantly affect an investor's actual yield to
maturity, even if the average rate of distributions of principal is consistent
with an investor's expectation. In general, the earlier a principal payment is
received on the mortgage loans and distributed on a Security, the greater the
effect on that investor's yield to maturity. The effect on an investor's yield
of principal payments occurring at a rate higher (or lower) than the rate
anticipated by the investor during a particular period may not be offset by a
similar decrease (or increase) in the rate of principal payments at a later
time.
The securityholder will bear the risk of not being able to reinvest
principal received from a Security at a yield at least equal to the yield on
that Security.
Prepayments--Maturity and Weighted Average Life
The rates at which principal payments are received on the Assets
included in or comprising a trust fund and the rate at which payments are made
from any credit support or Cash Flow Agreement for the related series of
Securities may affect the ultimate maturity and the weighted average life of
each class of that series. Prepayments on the mortgage loans or Contracts
comprising or underlying the Assets in a particular trust fund will generally
accelerate the rate at which principal is paid on some or all of the classes
of the Securities of the related series.
If so provided in the prospectus supplement for a series of
Securities, one or more classes of Securities may have a final scheduled
Distribution Date, which is the date on or before which the Security Balance
thereof is scheduled to be reduced to zero, calculated on the basis of the
assumptions applicable to that series. Weighted average life refers to the
average amount of time that will elapse from the date of issue of a security
until each dollar of principal of that security will be repaid to the
investor. The weighted average life of a class of Securities of a series will
be influenced by the rate at which principal on the Assets is paid to that
class, which may be in the form of scheduled amortization or prepayments (for
this purpose, the term "prepayment" includes prepayments, in whole or in part,
and liquidations due to default).
In addition, the weighted average life of the Securities may be
affected by the varying maturities of the Assets in a trust fund. If any
Assets in a particular trust fund have actual terms to maturity less than
those assumed in calculating final scheduled Distribution Dates for the
classes of Securities of the related series, one or more classes of these
Securities may be fully paid before their respective final scheduled
Distribution Dates, even in the absence of prepayments. Accordingly, the
prepayment experience of the Assets will, to some extent, be a function of the
mix of mortgage rates or Contract Rates and maturities of the mortgage loans
or Contracts comprising or underlying those Assets. See "Description of the
Trust Funds."
Prepayments on loans are also commonly measured relative to a
prepayment standard or model, such as the Constant Prepayment Rate ("CPR")
prepayment model or the Standard Prepayment Assumption ("SPA") prepayment
model. CPR represents a constant assumed rate of prepayment each month
relative to the then outstanding principal balance of a pool of loans for the
life of those loans. SPA represents an assumed rate of prepayment each month
relative to the then outstanding principal balance of a pool of loans. A
prepayment assumption of 100% of SPA assumes prepayment rates of 0.2% per
annum of the then outstanding principal balance of those loans in the first
month of the life of the loans and an additional 0.2% per annum in each month
thereafter until the thirtieth month. Starting in the thirtieth month and in
each month thereafter during the life of the loans, 100% of SPA assumes a
constant prepayment rate of 6% per annum each month.
Neither CPR nor SPA nor any other prepayment model or assumption
purports to be a historical description of prepayment experience or a
prediction of the anticipated rate of prepayment of any pool of loans,
including the mortgage loans or Contracts underlying or comprising the Assets.
The prospectus supplement for each series of Securities may contain
tables, if applicable, setting forth the projected weighted average life of
each class of Offered Securities of that series and the percentage of the
initial Security Balance of each class that would be outstanding on specified
Distribution Dates based on the assumptions stated in the prospectus
supplement, including assumptions that prepayments on the mortgage loans
comprising or underlying the related Assets are made at rates corresponding to
various percentages of CPR, SPA or some other standard specified in the
prospectus supplement. These tables and assumptions are intended to illustrate
the sensitivity of the weighted average life of the Securities to various
prepayment rates and will not be intended to predict or to provide information
that will enable investors to predict the actual weighted average life of the
Securities. It is unlikely that prepayment of any mortgage loans or Contracts
comprising or underlying the Assets for any series will conform to any
particular level of CPR, SPA or any other rate specified in the prospectus
supplement.
Other Factors Affecting Weighted Average Life
Type of Asset
If specified in the prospectus supplement, a number of mortgage loans
may have balloon payments due at maturity (which, based on the amortization
schedule of those mortgage loans, may be a substantial amount), and because
the ability of a borrower to make a balloon payment typically will depend on
its ability either to refinance the loan or to sell the related Mortgaged
Property, there is a risk that a number of Balloon Payment Assets may default
at maturity. The ability to obtain refinancing will depend on a number of
factors prevailing at the time refinancing or sale is required, including real
estate values, the borrower's financial situation, prevailing mortgage loan
interest rates, the borrower's equity in the related Mortgaged Property, tax
laws and prevailing general economic conditions. Neither the depositor, the
servicer, the master servicer, nor any of their affiliates will be obligated
to refinance or repurchase any mortgage loan or to sell the Mortgaged Property
except to the extent provided in the prospectus supplement. In the case of
defaults, recovery of proceeds may be delayed by, among other things,
bankruptcy of the borrower or adverse conditions in the market where the
property is located. To minimize losses on defaulted mortgage loans, the
servicer may modify mortgage loans that are in default or as to which a
payment default is reasonably foreseeable. Any defaulted balloon payment or
modification that extends the maturity of a mortgage loan will tend to extend
the weighted average life of the Securities and may thereby lengthen the
period of time elapsed from the date of issuance of a Security until it is
retired.
For some mortgage loans, including ARM Loans, the mortgage rate at
origination may be below the rate that would result if the index and margin
relating thereto were applied at origination. For some Contracts, the Contract
Rate may be "stepped up" during its term or may otherwise vary or be adjusted.
Under the applicable underwriting standards, the borrower under each mortgage
loan or Contract generally will be qualified on the basis of the mortgage rate
or Contract Rate in effect at origination. The repayment of any of these
mortgage loans or Contracts may therefore be dependent on the ability of the
borrower to make larger level monthly payments following the adjustment of the
mortgage rate or Contract Rate. In addition, some mortgage loans may be
subject to temporary buydown plans ("Buydown Mortgage Loans") pursuant to
which the monthly payments made by the borrower during the early years of the
mortgage loan will be less than the scheduled monthly payments thereon (the
"Buydown Period"). The periodic increase in the amount paid by the borrower of
a Buydown Mortgage Loan during or at the end of the applicable Buydown Period
may create a greater financial burden for the borrower, who might not have
otherwise qualified for a mortgage, and may accordingly increase the risk of
default for the related mortgage loan.
The mortgage rates on some ARM Loans subject to negative amortization
generally adjust monthly and their amortization schedules adjust less
frequently. During a period of rising interest rates as well as immediately
after origination (initial mortgage rates are generally lower than the sum of
the applicable index at origination and the related margin over that index at
which interest accrues), the amount of interest accruing on the principal
balance of those mortgage loans may exceed the amount of the minimum scheduled
monthly payment thereon. As a result, a portion of the accrued interest on
negatively amortizing mortgage loans may be added to the principal balance
thereof and will bear interest at the applicable mortgage rate. The addition
of any deferred interest to the principal balance of any related class or
classes of Securities will lengthen the weighted average life thereof and may
adversely affect yield to holders thereof, depending on the price at which
those Securities were purchased. In addition, for some ARM Loans subject to
negative amortization, during a period of declining interest rates, it might
be expected that each minimum scheduled monthly payment on this type of
mortgage loan would exceed the amount of scheduled principal and accrued
interest on the principal balance thereof, and since that excess will be
applied to reduce the principal balance of the related class or classes of
Securities, the weighted average life of those Securities will be reduced and
may adversely affect yield to holders thereof, depending on the price at which
those Securities were purchased.
As may be described in the prospectus supplement, the related
Agreement may provide that all or a portion of the principal collected on or
with respect to the related mortgage loans may be applied by the related
trustee to the acquisition of additional mortgage loans during a specified
period (rather than used to fund payments of principal to securityholders
during that period) with the result that the related Securities possess an
interest-only period, also commonly referred to as a revolving period, which
will be followed by an amortization period. Any of these interest-only or
revolving periods may, upon the occurrence of certain events to be described
in the prospectus supplement, terminate before the end of the specified period
and result in the earlier than expected amortization of the related
Securities.
In addition, and as may be described in the prospectus supplement,
the related Agreement may provide that all or some of this collected principal
may be retained by the trustee (and held in certain temporary investments,
including mortgage loans) for a specified period before being used to fund
payments of principal to securityholders.
The result of the retention and temporary investment by the trustee
of this principal would be to slow the amortization rate of the related
Securities relative to the amortization rate of the related mortgage loans, or
to attempt to match the amortization rate of the related Securities to an
amortization schedule established at the time the Securities are issued. Any
similar feature applicable to any Securities may end on the occurrence of
events to be described in the prospectus supplement, resulting in the current
funding of principal payments to the related securityholders and an
acceleration of the amortization of these Securities.
Termination
If specified in the prospectus supplement, a series of Securities may
be subject to optional early termination through the repurchase of the Assets
in the related trust fund by the party specified therein, on any date on which
the total Security Balance of the Securities of that series declines to a
percentage specified in the prospectus supplement (generally not to exceed
10%) of the Initial Security Balance, under the circumstances and in the
manner set forth therein. In addition, if so provided in the prospectus
supplement, certain classes of Securities may be purchased or redeemed in the
manner set forth therein. See "Description of the Securities--Termination."
Defaults
The rate of defaults on the Assets will also affect the rate, timing
and amount of principal payments on the Assets and thus the yield on the
Securities. In general, defaults on mortgage loans or contracts are expected
to occur with greater frequency in their early years. The rate of default on
mortgage loans that are refinance or limited documentation mortgage loans, and
on mortgage loans with high Loan-to-Value Ratios, may be higher than for other
types of mortgage loans. Furthermore, the rate and timing of prepayments,
defaults and liquidations on the mortgage loans and Contracts will be affected
by the general economic condition of the region of the country in which the
related Mortgage Properties or Manufactured Homes are located. The risk of
delinquencies and loss is greater and prepayments are less likely in regions
where a weak or deteriorating economy exists, as may be evidenced by, among
other factors, increasing unemployment or falling property values.
Foreclosures
The number of foreclosures or repossessions and the principal amount
of the mortgage loans or Contracts comprising or underlying the Assets that
are foreclosed or repossessed in relation to the number and principal amount
of mortgage loans or Contracts that are repaid in accordance with their terms
will affect the weighted average life of the mortgage loans or Contracts
comprising or underlying the Assets and that of the related series of
Securities.
Refinancing
At the request of a borrower, the servicer may allow the refinancing
of a mortgage loan or Contract in any trust fund by accepting prepayments
thereon and permitting a new loan secured by a mortgage on the same property.
In the event of that refinancing, the new loan would not be included in the
related trust fund and, therefore, that refinancing would have the same effect
as a prepayment in full of the related mortgage loan or Contract. A servicer
may, from time to time, implement programs designed to encourage refinancing.
These programs may include modifications of existing loans, general or
targeted solicitations, the offering of pre-approved applications, reduced
origination fees or closing costs, or other financial incentives. In addition,
servicers may encourage the refinancing of mortgage loans or Contracts,
including defaulted mortgage loans or Contracts, that would permit
creditworthy borrowers to assume the outstanding indebtedness of those
mortgage loans or Contracts.
Due-on-Sale Clauses
Acceleration of mortgage payments as a result of certain transfers of
underlying Mortgaged Property is another factor affecting prepayment rates
that may not be reflected in the prepayment standards or models used in the
relevant prospectus supplement. A number of the mortgage loans comprising or
underlying the Assets, other than FHA loans and VA loans, may include
"due-on-sale clauses" that allow the holder of the mortgage loans to demand
payment in full of the remaining principal balance of the mortgage loans upon
sale, transfer or conveyance of the related Mortgaged Property.
For any mortgage loans, except as set forth in the prospectus
supplement, the servicer will generally enforce any due-on-sale clause to the
extent it has knowledge of the conveyance or proposed conveyance of the
underlying Mortgaged Property and it is entitled to do so under applicable
law; provided, however, that the servicer will not take any action in relation
to the enforcement of any due-on-sale provision that would adversely affect or
jeopardize coverage under any applicable insurance policy. See "Certain Legal
Aspects of Mortgage Loans--Due-on-Sale Clauses" and "Description of the
Agreements--Material Terms of the Pooling and Servicing Agreements and
Underlying Servicing Agreements--Due-on-Sale Provisions."
The Contracts, in general, prohibit the sale or transfer of the
related Manufactured Homes without the consent of the servicer and permit the
acceleration of the maturity of the Contracts by the servicer upon any sale or
transfer that is not consented to. It is expected that the servicer will
permit most transfers of Manufactured Homes and not accelerate the maturity of
the related Contracts. In some cases, the transfer may be made by a delinquent
borrower to avoid a repossession of the Manufactured Home. In the case of a
transfer of a Manufactured Home after which the servicer desires to accelerate
the maturity of the related Contract, the servicer's ability to do so will
depend on the enforceability under state law of the "due-on-sale clause." See
"Certain Legal Aspects of the Contracts--Transfers of Manufactured Homes;
Enforceability of Due-on-Sale Clauses."
The Depositor
ACE Securities Corp., the depositor, is a special purpose corporation
incorporated in the State of Delaware on June 3, 1998. The principal executive
offices of the depositor are located at 6525 Morrison Boulevard, Suite 318,
Charlotte, North Carolina 28211. Its telephone number is (704) 365-0569. The
depositor does not have, nor is it expected in the future to have, any
significant assets.
The limited purposes of the depositor are, in general, to acquire,
own and sell mortgage loans and financial assets; to issue, acquire, own, hold
and sell securities and notes secured by or representing ownership interests
in mortgage loans and other financial assets, collections thereon and related
assets; and to engage in any acts that are incidental to, or necessary,
suitable or convenient to accomplish, these purposes.
All of the shares of capital stock of the depositor are held by
Altamont Holdings Corp., a Delaware corporation.
Description of the Securities
General
The Asset-backed certificates (the "Certificates") of each series
(including any class of Certificates not offered hereby) will represent the
entire beneficial ownership interest in the trust fund created pursuant to the
related Agreement. If a series of Securities includes Asset-backed notes (the
"Notes," and together with the Certificates, the "Securities"), the Notes will
represent indebtedness of the related trust fund and will be issued and
secured pursuant to an indenture. Each series of Securities will consist of
one or more classes of Securities that may:
o provide for the accrual of interest thereon based on fixed,
variable or adjustable rates;
o be senior (collectively, "Senior Securities") or subordinate
(collectively, "Subordinate Securities") to one or more other classes of
Securities in respect of certain distributions on the Securities;
o be entitled either to (A) principal distributions, with
disproportionately low, nominal or no interest distributions or (B) interest
distributions, with disproportionately low, nominal or no principal
distributions (collectively, "Strip Securities");
o provide for distributions of accrued interest thereon which begin
only following the occurrence of certain events, that as the retirement of one
or more other classes of Securities of that series (collectively, "Accrual
Securities");
o provide for payments of principal as described in the prospectus
supplement, from all or only a portion of the Assets in that trust fund, to
the extent of available funds, in each case as described in the prospectus
supplement; and/or
o provide for distributions based on a combination of two or more
components thereof with one or more of the characteristics described in this
paragraph including a Strip Security component.
If specified in the prospectus supplement, distributions on one or
more classes of a series of Securities may be limited to collections from a
designated portion of the Assets in the related trust fund (each portion of
the Assets, an "Asset Group"). Any of these classes may include classes of
Offered Securities.
Each class of Securities offered by this prospectus and the related
prospectus supplement (the "Offered Securities") will be issued in minimum
denominations corresponding to the Security Balances or, in the case of
certain classes of Strip Securities, notional amounts or percentage interests
specified in the prospectus supplement. The transfer of any Offered Securities
may be registered and those Securities may be exchanged without the payment of
any service charge payable in connection with that registration of transfer or
exchange, but the depositor or the trustee or any agent thereof may require
payment of a sum sufficient to cover any tax or other governmental charge. One
or more classes of Securities of a series may be issued in fully registered,
certificated form ("Definitive Securities") or in book-entry form ("Book-Entry
Securities"), as provided in the prospectus supplement. See "Description of
the Securities--Book-Entry Registration and Definitive Securities." Definitive
Securities will be exchangeable for other Securities of the same class and
series of a similar total Security Balance, notional amount or percentage
interest but of different authorized denominations.
Distributions
Distributions on the Securities of each series will be made by or on
behalf of the trustee on each Distribution Date as specified in the prospectus
supplement from the Available Distribution Amount for that series and that
Distribution Date. Distributions (other than the final distribution) will be
made to the persons in whose names the Securities are registered at the close
of business on, unless a different date is specified in the prospectus
supplement, the last business day of the month preceding the month in which
the Distribution Date occurs (the "Record Date"), and the amount of each
distribution will be determined as of the close of business on the date
specified in the prospectus supplement (the "Determination Date"). All
distributions for each class of Securities on each Distribution Date will be
allocated pro rata among the outstanding securityholders in that class or by
random selection or as described in the prospectus supplement. Payments will
be made either by wire transfer in immediately available funds to the account
of a securityholder at a bank or other entity having appropriate facilities
therefor, if that securityholder has so notified the trustee or other person
required to make those payments no later than the date specified in the
prospectus supplement (and, if so provided in the prospectus supplement, holds
Securities in the requisite amount specified therein), or by check mailed to
the address of the person entitled thereto as it appears on the Security
Register; provided, however, that the final distribution in retirement of the
Securities will be made only upon presentation and surrender of the Securities
at the location specified in the notice to securityholders of that final
distribution.
Available Distribution Amount
All distributions on the Securities of each series on each
Distribution Date will be made from the Available Distribution Amount
described below, subject to the terms described in the prospectus supplement.
Generally, the "Available Distribution Amount" for each Distribution Date
equals the sum of the following amounts:
(1) the total amount of all cash on deposit in the related
Collection Account as of the corresponding Determination Date,
exclusive, unless otherwise specified in the prospectus supplement,
of:
(a) all scheduled payments of principal and
interest collected but due on a date after the related Due
Period (unless a different period is specified in the
prospectus supplement, a "Due Period" for any Distribution
Date will begin on the second day of the month in which the
immediately preceding Distribution Date occurs, or the
Cut-off Date in the case of the first Due Period, and will
end on the first day of the month of the related
Distribution Date),
(b) all prepayments, together with related payments
of the interest thereon and related Prepayment Premiums, all
proceeds of any FHA insurance, VA Guaranty Policy or
insurance policies to be maintained for each Asset (to the
extent that proceeds are not applied to the restoration of
the Asset or released in accordance with the normal
servicing procedures of a servicer, subject to the terms and
conditions applicable to the related Asset) (collectively,
"Insurance Proceeds"), all other amounts received and
retained in connection with the liquidation of Assets in
default in the trust fund ("Liquidation Proceeds"), and
other unscheduled recoveries received after the related Due
Period, or other period specified in the prospectus
supplement,
(c) all amounts in the Collection Account that are
due or reimbursable to the depositor, the trustee, an Asset
Seller, a servicer, the master servicer or any other entity
as specified in the prospectus supplement or that are
payable in respect of certain expenses of the related trust
fund, and
(d) all amounts received for a repurchase of an
Asset from the trust fund for defective documentation or a
breach of representation or warranty received after the
related Due Period, or other period specified in the
prospectus supplement;
(2) if the prospectus supplement so provides, interest or
investment income on amounts on deposit in the Collection Account,
including any net amounts paid under any Cash Flow Agreements;
(3) all advances made by a servicer or the master servicer
or any other entity as specified in the prospectus supplement for that
Distribution Date;
(4) if and to the extent the prospectus supplement so
provides, amounts paid by a servicer or any other entity as specified
in the prospectus supplement with respect to interest shortfalls
resulting from prepayments during the related Prepayment Period; and
(5) to the extent not on deposit in the related Collection
Account as of the corresponding Determination Date, any amounts
collected under, from or in respect of any credit support for that
Distribution Date.
As described below, unless otherwise specified in the prospectus
supplement, the entire Available Distribution Amount will be distributed among
the related Securities (including any Securities not offered hereby) on each
Distribution Date, and accordingly will be released from the trust fund and
will not be available for any future distributions.
The prospectus supplement for a series of Securities will describe
any variation in the calculation or distribution of the Available Distribution
Amount for that series.
Distributions of Interest on the Securities
Each class of Securities (other than classes of Strip Securities
which have no Interest Rate) may have a different Interest Rate, which will be
a fixed, variable or adjustable rate at which interest will accrue on that
class or a component thereof (the "Interest Rate" in the case of
Certificates). The prospectus supplement will specify the Interest Rate for
each class or component or, in the case of a variable or adjustable Interest
Rate, the method for determining the Interest Rate. Interest on the Securities
will be calculated on the basis of a 360-day year consisting of twelve 30-day
months unless the prospectus supplement specifies a different basis.
Distributions of interest on the Securities of any class will be made
on each Distribution Date (other than any class of Accrual Securities, which
will be entitled to distributions of accrued interest starting only on the
Distribution Date, or under the circumstances, specified in the prospectus
supplement, and any class of Strip Securities that are not entitled to any
distributions of interest) based on the Accrued Security Interest for that
class and that Distribution Date, subject to the sufficiency of the portion of
the Available Distribution Amount allocable to that class on that Distribution
Date. Before any interest is distributed on any class of Accrual Securities,
the amount of Accrued Security Interest otherwise distributable on that class
will instead be added to the Security Balance of that class on each
Distribution Date.
For each class of Securities and each Distribution Date (other than
certain classes of Strip Securities), "Accrued Security Interest" will be
equal to interest accrued during the related Accrual Period on the outstanding
Security Balance thereof immediately before the Distribution Date, at the
applicable Interest Rate, reduced as described below. Accrued Security
Interest on certain classes of Strip Securities will be equal to interest
accrued during the related Accrual Period on the outstanding notional amount
thereof immediately before each Distribution Date, at the applicable Interest
Rate, reduced as described below, or interest accrual in the manner described
in the prospectus supplement. The method of determining the notional amount
for a particular class of Strip Securities will be described in the prospectus
supplement. Reference to notional amount is solely for convenience in certain
calculations and does not represent the right to receive any distributions of
principal. Unless otherwise provided in the prospectus supplement, the Accrued
Security Interest on a series of Securities will be reduced in the event of
prepayment interest shortfalls, which are shortfalls in collections of
interest for a full accrual period resulting from prepayments before the due
date in that accrual period on the mortgage loans or Contracts comprising or
underlying the Assets in the trust fund for that series. The particular manner
in which these shortfalls are to be allocated among some or all of the classes
of Securities of that series will be specified in the prospectus supplement.
The prospectus supplement will also describe the extent to which the amount of
Accrued Security Interest that is otherwise distributable on (or, in the case
of Accrual Securities, that may otherwise be added to the Security Balance of)
a class of Offered Securities may be reduced as a result of any other
contingencies, including delinquencies, losses and deferred interest on the
mortgage loans or Contracts comprising or underlying the Assets in the related
trust fund. Unless otherwise provided in the prospectus supplement, any
reduction in the amount of Accrued Security Interest otherwise distributable
on a class of Securities by reason of the allocation to that class of a
portion of any deferred interest on the mortgage loans or Contracts comprising
or underlying the Assets in the related trust fund will result in a
corresponding increase in the Security Balance of that class. See "Yield
Considerations."
Distributions of Principal of the Securities
The Securities of each series, other than certain classes of Strip
Securities, will have a "Security Balance" which, at any time, will equal the
then maximum amount that the holder will be entitled to receive on principal
out of the future cash flow on the Assets and other assets included in the
related trust fund. The outstanding Security Balance of a Security will be
reduced:
o to the extent of distributions of principal on that Security from
time to time and
o if and to the extent provided in the prospectus supplement, by
the amount of losses incurred on the related Assets.
The outstanding Security Balance of a Security:
o may be increased in respect of deferred interest on the related
mortgage loans, to the extent provided in the prospectus supplement and
o in the case of Accrual Securities, will be increased by any
related Accrued Security Interest up until the Distribution Date on which
distributions of interest are required to begin.
If specified in the prospectus supplement, the initial total Security
Balance of all classes of Securities of a series will be greater than the
outstanding total principal balance of the related Assets as of the applicable
Cut-off Date. The initial total Security Balance of a series and each class
thereof will be specified in the prospectus supplement. Distributions of
principal will be made on each Distribution Date to the class or classes of
Securities in the amounts and in accordance with the priorities specified in
the prospectus supplement. Certain classes of Strip Securities with no
Security Balance are not entitled to any distributions of principal.
Components
To the extent specified in the prospectus supplement, distribution on
a class of Securities may be based on a combination of two or more different
components as described under "--General" above. To that extent, the
descriptions set forth under "--Distributions of Interest on the Securities"
and "--Distributions of Principal of the Securities" above also relate to
components of the component class of Securities. References in those sections
to Security Balance may refer to the principal balance, if any, of these
components and reference to the Interest Rate may refer to the Interest Rate,
if any, on these components.
Distributions on the Securities of Prepayment Premiums
If so provided in the prospectus supplement, Prepayment Premiums that
are collected on the mortgage loans in the related trust fund will be
distributed on each Distribution Date to the class or classes of Securities
entitled thereto as described in the prospectus supplement.
Allocation of Losses and Shortfalls
If so provided in the prospectus supplement for a series of
Securities consisting of one or more classes of Subordinate Securities, on any
Distribution Date in respect of which losses or shortfalls in collections on
the Assets have been incurred, the amount of those losses or shortfalls will
be borne first by a class of Subordinate Securities in the priority and manner
and subject to the limitations specified in the prospectus supplement. See
"Description of Credit Support" for a description of the types of protection
that may be included in a trust fund against losses and shortfalls on Assets
comprising that trust fund. The prospectus supplement for a series of
Securities will describe the entitlement, if any, of a class of Securities
whose Security Balance has been reduced to zero as a result of distributions
or the allocation of losses on the related Assets to recover any losses
previously allocated to that class from amounts received on the Assets.
However, if the Security Balance of a class of Securities has been reduced to
zero as the result of principal distributions, the allocation of losses on the
Assets, an optional termination or an optional purchase or redemption, that
class will no longer be entitled to receive principal distributions from
amounts received on the assets of the related trust fund, including
distributions in respect of principal losses previously allocated to that
class.
Advances in Respect of Delinquencies
If so provided in the prospectus supplement, the servicer or another
entity described therein will be required as part of its servicing
responsibilities to advance on or before each Distribution Date its own funds
or funds held in the related Collection Account that are not included in the
Available Distribution Amount for that Distribution Date, in an amount equal
to the total of payments of (1) principal (other than any balloon payments)
and (2) interest (net of related servicing fees and Retained Interest) that
were due on the Assets in that trust fund during the related Due Period and
were delinquent on the related Determination Date, subject to a good faith
determination that the advances will be reimbursable from Related Proceeds (as
defined below). In the case of a series of Securities that includes one or
more classes of Subordinate Securities and if so provided in the prospectus
supplement, the servicer's (or another entity's) advance obligation may be
limited only to the portion of those delinquencies necessary to make the
required distributions on one or more classes of Senior Securities and/or may
be subject to a good faith determination that advances will be reimbursable
not only from Related Proceeds but also from collections on other Assets
otherwise distributable on one or more classes of those Subordinate
Securities. See "Description of Credit Support."
Advances are intended to maintain a regular flow of scheduled
interest and principal payments to holders of the class or classes of
Securities entitled thereto, rather than to guarantee or insure against
losses. Advances of the servicer's (or another entity's) funds will be
reimbursable only out of related recoveries on the Assets (including amounts
received under any form of credit support) respecting which those advances
were made (as to any Assets, "Related Proceeds") and from any other amounts
specified in the prospectus supplement, including out of any amounts otherwise
distributable on one or more classes of Subordinate Securities of that series;
provided, however, that any advance will be reimbursable from any amounts in
the related Collection Account before any distributions being made on the
Securities to the extent that the servicer (or some other entity) determines
in good faith that that advance (a "Nonrecoverable Advance") is not ultimately
recoverable from Related Proceeds or, if applicable, from collections on other
Assets otherwise distributable on the Subordinate Securities. If advances have
been made by the servicer from excess funds in the related Collection Account,
the servicer is required to replace these funds in that Collection Account on
any future Distribution Date to the extent that funds in that Collection
Account on that Distribution Date are less than payments required to be made
to securityholders on that date. If specified in the prospectus supplement,
the obligations of the servicer (or another entity) to make advances may be
secured by a cash advance reserve fund, a surety bond, a letter of credit or
another form of limited guaranty. If applicable, information regarding the
characteristics of and the identity of any borrower on any surety bond will be
set forth in the prospectus supplement.
If and to the extent so provided in the prospectus supplement, the
servicer (or another entity) will be entitled to receive interest at the rate
specified therein on its outstanding advances and will be entitled to pay
itself this interest periodically from general collections on the Assets
before any payment to securityholders or as otherwise provided in the related
Agreement and described in the prospectus supplement.
If specified in the prospectus supplement, the master servicer or the
trustee will be required to make advances, subject to certain conditions
described in the prospectus supplement, in the event of a servicer default.
Reports to Securityholders
With each distribution to holders of any class of Securities of a
series, the servicer, the master servicer or the trustee, as provided in the
prospectus supplement, will forward or cause to be forwarded to each holder,
to the depositor and to any other parties as may be specified in the related
Agreement, a statement containing the information specified in the prospectus
supplement, or if no such information is specified in the prospectus
supplement, generally setting forth, in each case to the extent applicable and
available:
(1) the amount of that distribution to holders of Securities of
that class applied to reduce the Security Balance thereof;
(2) the amount of that distribution to holders of Securities of
that class allocable to Accrued Security Interest;
(3) the amount of that distribution allocable to Prepayment
Premiums;
(4) the amount of related servicing compensation and any other
customary information as is required to enable securityholders to prepare
their tax returns;
(5) the total amount of advances included in that distribution, and
the total amount of unreimbursed advances at the close of business on that
Distribution Date;
(6) the total principal balance of the Assets at the close of
business on that Distribution Date;
(7) the number and total principal balance of mortgage loans or
Contracts in respect of which (a) one scheduled payment is delinquent, (b) two
scheduled payments are delinquent, (c) three or more scheduled payments are
delinquent and (d) foreclosure proceedings have begun;
(8) for any mortgage loan or Contract liquidated during the related
Due Period, (a) the portion of the related liquidation proceeds payable or
reimbursable to a servicer (or any other entity) in respect of that mortgage
loan and (b) the amount of any loss to securityholders;
(9) with respect to collateral acquired by the trust fund through
foreclosure or otherwise (an "REO Property") relating to a mortgage loan or
Contract and included in the trust fund as of the end of the related Due
Period, the date of acquisition;
(10) for each REO Property relating to a mortgage loan or Contract
and included in the trust fund as of the end of the related Due Period, (a)
the book value, (b) the principal balance of the related mortgage loan or
Contract immediately following that Distribution Date (calculated as if that
mortgage loan or Contract were still outstanding taking into account certain
limited modifications to the terms thereof specified in the Agreement), (c)
the total amount of unreimbursed servicing expenses and unreimbursed advances
in respect thereof and (d) if applicable, the total amount of interest accrued
and payable on related servicing expenses and related advances;
(11) for any REO Property sold during the related Due Period (a)
the total amount of sale proceeds, (b) the portion of those sales proceeds
payable or reimbursable to the master servicer in respect of that REO Property
or the related mortgage loan or Contract and (c) the amount of any loss to
securityholders in respect of the related mortgage loan;
(12) the total Security Balance or notional amount, as the case may
be, of each class of Securities (including any class of Securities not offered
hereby) at the close of business on that Distribution Date, separately
identifying any reduction in that Security Balance due to the allocation of
any loss and increase in the Security Balance of a class of Accrual Securities
if any Accrued Security Interest has been added to that balance;
(13) the total amount of principal prepayments made during the
related Due Period;
(14) the amount deposited in the reserve fund, if any, on that
Distribution Date;
(15) the amount remaining in the reserve fund, if any, as of the
close of business on that Distribution Date;
(16) the total unpaid Accrued Security Interest, if any, on each
class of Securities at the close of business on that Distribution Date;
(17) in the case of Securities with a variable Interest Rate, the
Interest Rate applicable to that Distribution Date, and, if available, the
immediately succeeding Distribution Date, as calculated in accordance with the
method specified in the prospectus supplement;
(18) in the case of Securities with an adjustable Interest Rate,
for statements to be distributed in any month in which an adjustment date
occurs, the adjustable Interest Rate applicable to that Distribution Date, if
available, and the immediately succeeding Distribution Date as calculated in
accordance with the method specified in the prospectus supplement;
(19) as to any series that includes credit support, the amount of
coverage of each instrument of credit support included therein as of the close
of business on that Distribution Date;
(20) during the Pre-Funding Period, the remaining Pre-Funded Amount
and the portion of the Pre-Funding Amount used to acquire Subsequent Assets
since the preceding Distribution Date;
(21) during the Pre-Funding Period, the amount remaining in the
Capitalized Interest Account; and
(22) the total amount of payments by the borrowers of (a) default
interest, (b) late charges and (c) assumption and modification fees collected
during the related Due Period.
Within a reasonable period of time after the end of each calendar
year, the servicer, the master servicer or the trustee, as provided in the
prospectus supplement, will furnish to each securityholder of record at any
time during the calendar year the information required by the Code and
applicable regulations thereunder to enable securityholders to prepare their
tax returns. See "Description of the Securities--Book-Entry Registration and
Definitive Securities."
Termination
The obligations created by the related Agreement for each series of
Securities will terminate upon the payment to securityholders of that series
of all amounts held in the Collection Accounts or by a servicer, the master
servicer, if any, or the trustee and required to be paid to them pursuant to
that Agreement following the earlier of (1) the final payment or other
liquidation of the last Asset subject thereto or the disposition of all
property acquired upon foreclosure of any mortgage loan or Contract subject
thereto and (2) the purchase of all of the assets of the trust fund by the
party entitled to effect that termination, under the circumstances and in the
manner set forth in the prospectus supplement. In no event, however, will the
trust fund continue beyond the date specified in the prospectus supplement.
Written notice of termination of the Agreement will be given to each
securityholder, and the final distribution will be made only upon presentation
and surrender of the Securities at the location to be specified in the notice
of termination.
If specified in the prospectus supplement, a series of Securities may
be subject to optional early termination through the purchase of the Assets in
the related trust fund by the party specified therein, under the circumstances
and in the manner set forth therein. If so provided in the prospectus
supplement, upon the reduction of the Security Balance of a specified class or
classes of Securities by a specified percentage, the party specified therein
will solicit bids for the purchase of all assets of the trust fund, or of a
sufficient portion of those assets to retire that class or classes or purchase
that class or classes at a price set forth in the prospectus supplement, in
each case, under the circumstances and in the manner set forth therein. That
price will at least equal the outstanding Security Balances and any accrued
and unpaid interest thereon (including any unpaid interest shortfalls for
prior Distribution Dates). Any sale of the Assets of the trust fund will be
without recourse to the trust fund or the securityholders. Any purchase or
solicitation of bids may be made only when the total Security Balance of that
class or classes declines to a percentage of the Initial Security Balance of
those Securities (not to exceed 10%) specified in the prospectus supplement.
In addition, if so provided in the prospectus supplement, certain classes of
Securities may be purchased or redeemed in the manner set forth therein at a
price at least equal to the outstanding Security Balance of each class so
purchased or redeemed and any accrued and unpaid interest thereon (including
any unpaid interest shortfalls for prior Distribution Dates).
Optional Purchases
Subject to the provisions of the applicable Agreement, the depositor,
the servicer or any other party specified in the prospectus supplement may, at
that party's option, repurchase any mortgage loan that is in default or as to
which default is reasonably foreseeable if, in the depositor's, the servicer's
or any other party's judgment, the related default is not likely to be cured
by the borrower or default is not likely to be averted, at a price equal to
the unpaid principal balance thereof plus accrued interest thereon and under
the conditions set forth in the prospectus supplement.
Book-Entry Registration and Definitive Securities
General
If provided for in the prospectus supplement, one or more classes of
the Offered Securities of any series will be issued as Book-Entry Securities,
and each of these classes will be represented by one or more single Securities
registered in the name of a nominee for the depository, The Depository Trust
Company ("DTC") and, if provided in the prospectus supplement, additionally
through Cedelbank ("Cedel") or the Euroclear System ("Euroclear"). Each class
of Book-Entry Securities will be issued in one or more certificates or notes,
as the case may be, that equal the initial principal amount of the related
class of Offered Securities and will initially be registered in the name of
Cede & Co.
No person acquiring an interest in a Book-Entry Security (each, a
"Beneficial Owner") will be entitled to receive a Definitive Security, except
as set forth below under "--Definitive Securities." Unless and until
Definitive Securities are issued for the Book-Entry Securities under the
limited circumstances described in the applicable prospectus supplement or
this prospectus, all references to actions by securityholders with respect to
the Book-Entry Securities will refer to actions taken by DTC, Cedel or
Euroclear upon instructions from their Participants (as defined below), and
all references herein to distributions, notices, reports and statements to
securityholders with respect to the Book-Entry Securities will refer to
distributions, notices, reports and statements to DTC, Cedel or Euroclear, as
applicable, for distribution to Beneficial Owners by DTC in accordance with
the procedures of DTC and if applicable, Cedel and Euroclear.
Beneficial Owners will hold their Book-Entry Securities through DTC
in the United States, or, if the Offered Securities are offered for sale
globally, through Cedel or Euroclear in Europe if they are participating
organizations ("Participants") of those systems. Participants include
securities brokers and dealers, banks, trust companies and clearing
corporations and may include some other organizations. Indirect access to the
DTC, Cedel and Euroclear systems also is available to others, such as banks,
brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a Participant, either directly or indirectly
("Indirect Participants").
DTC
DTC is a limited-purpose trust company organized under the laws of
the State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the Uniform Commercial Code ("UCC") and a
"clearing agency" registered pursuant to the provisions of Section 17A of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). DTC was
created to hold securities for its Participants, some of which (and/or their
representatives) own DTC, and facilitate the clearance and settlement of
securities transactions between its Participants through electronic book-entry
changes in their accounts, thereby eliminating the need for physical movement
of securities. In accordance with its normal procedures, DTC is expected to
record the positions held by each of its Participants in the Book-Entry
Securities, whether held for its own account or as a nominee for another
person. In general, beneficial ownership of Book-Entry Securities will be
subject to the rules, regulations and procedures governing DTC and its
Participants as in effect from time to time.
Cedel
Cedel is incorporated under the laws of Luxembourg as a professional
depository. Cedel holds securities for its Participants and facilitates the
clearance and settlement of securities transactions between its Participants
through electronic book-entry changes in accounts of its Participants, thereby
eliminating the need for physical movement of securities. Transactions may be
settled in Cedel in any of 28 currencies, including United States dollars.
Cedel provides to its 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 Participant of Cedel, either directly or indirectly.
Euroclear
Euroclear was created in 1968 to hold securities for its Participants
and to clear and settle transactions between its Participants through
simultaneous electronic book-entry delivery against payment, thereby
eliminating the need for physical movement of securities and any risk from
lack of simultaneous transfers of securities and cash. Transactions may be
settled in any of 32 currencies, including United States dollars. Euroclear
includes various other services, including securities lending and borrowing,
and interfaces with domestic markets in several countries generally similar to
the arrangements for cross-market transfers with DTC described above.
Euroclear is operated by the Brussels, Belgium office of Morgan Guaranty Trust
Company of New York (the "Euroclear Operator"), under contract with Euroclear
Clearance Systems S.C., a Belgian cooperative corporation (the "Cooperative
Corporation"). All operations are conducted by the Euroclear Operator, and all
Euroclear securities clearance accounts and Euroclear cash accounts are
accounts with the Euroclear Operator, not the Cooperative Corporation. The
Cooperative Corporation establishes policy for Euroclear on behalf of its
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 Participant of
Euroclear, either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation that is a member bank of the Federal Reserve System, and is
regulated and examined by the Board of Governors of the Federal Reserve System
and the New York State Banking Department, as well as the Belgian Banking
Commission.
Securities clearance accounts and cash accounts with the Euroclear
Operator are governed by the Terms and Conditions Governing Use of Euroclear
and the related Operating Procedures of the Euroclear System and applicable
Belgian law (collectively, the "Terms and Conditions"). The Terms and
Conditions govern transfers of securities and cash within Euroclear,
withdrawals of securities and cash from Euroclear, and receipts of payments
with respect to securities in Euroclear. All securities in Euroclear are held
on a fungible basis without attribution of specific securities to specific
securities clearance accounts. The Euroclear Operator acts under the Terms and
Conditions only on behalf of its Participants, and has no record of or
relationship with persons holding through Participants of Euroclear.
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
positions in customers' securities accounts in the depositaries names on the
books of DTC. Citibank will act as depositary for Cedel and The Chase
Manhattan Bank will act as depositary for Euroclear (individually the
"Relevant Depositary" and collectively, the "European Depositaries").
Beneficial Ownership of Book-Entry Securities
Except as described below, no Beneficial Owner will be entitled to
receive a physical certificate representing a Certificate, or note
representing a Note. Unless and until Definitive Securities are issued, it is
anticipated that the only "securityholder" of the Offered Securities will be
Cede & Co., as nominee of DTC. Beneficial Owners will not be
"Certificateholders" as that term is used in any Agreement, nor "Noteholders"
as that term is used in any indenture. Beneficial Owners are only permitted to
exercise their rights indirectly through Participants, DTC, Cedel or
Euroclear, as applicable.
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 that purpose. In turn, the Financial
Intermediary's ownership of a Book-Entry Security will be recorded on the
records of DTC (or of a Participant that acts as agent for the Financial
Intermediary, whose interest will in turn be recorded on the records of DTC,
if the Beneficial Owner's Financial Intermediary is not a Participant of DTC
and on the records of Cedel or Euroclear, as appropriate).
Beneficial Owners will receive all distributions of principal of, and
interest on, the Offered Securities from the trustee through DTC and its
Participants. While the Offered 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 Offered Securities and is required to receive and transmit
distributions of principal of, and interest on, the Offered Securities.
Participants and Indirect Participants with whom Beneficial Owners have
accounts with respect to Offered Securities are similarly required to make
book-entry transfers and receive and transmit distributions on behalf of their
respective Beneficial Owners. Accordingly, although Beneficial Owners will not
possess certificates or notes, the Rules provide a mechanism by which
Beneficial Owners will receive distributions and will be able to transfer
their interest.
Beneficial Owners will not receive or be entitled to receive
certificates or notes representing their respective interests in the Offered
Securities, except under the limited circumstances described below. Unless and
until Definitive Securities are issued, Beneficial Owners who are not
Participants may transfer ownership of Offered Securities only through
Participants and Indirect Participants by instructing the Participants and
Indirect Participants to transfer Offered Securities, by book-entry transfer,
through DTC for the account of the purchasers of the Offered Securities, which
account is maintained with their respective Participants. Under the Rules and
in accordance with DTC's normal procedures, transfer of ownership of
Book-Entry Securities will be executed through DTC and the accounts of the
respective Participants at DTC will be debited and credited. Similarly, the
Participants and Indirect Participants will make debits or credits, as the
case may be, on their records on behalf of the selling and purchasing
Beneficial Owners.
Because of time zone differences, any 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. These credits or any transactions in
securities settled during this processing will be reported to the relevant
Participants of Cedel or Euroclear on that business day. Cash received in
Cedel or Euroclear as a result of sales of securities by or through a
Participant of Cedel or Euroclear to a Participant of DTC will be received
with value on the DTC settlement date but will be available in the relevant
Cedel or Euroclear cash account only as of the business day following
settlement in DTC. For information with respect to tax documentation
procedures relating to the Securities, see "Material Federal Income Tax
Considerations -- Tax Treatment of Foreign Investors" herein and, if the
Book-Entry Securities are globally offered and the prospectus supplement so
provides, see "Global Clearance, Settlement and Tax Documentation Procedures
- -- Certain U.S. Federal Income Tax Documentation Requirements" in Annex I to
the prospectus supplement.
Transfers between Participants of DTC will occur in accordance with
DTC Rules. Transfers between Participants of Cedel or Euroclear 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 Participants
of Cedel or Euroclear, on the other, will be effected in DTC in accordance
with the DTC Rules on behalf of the relevant European international clearing
system by the Relevant Depositary; however, cross-market transactions will
require delivery of instructions to the relevant European international
clearing system by the counterparty in that system in accordance with its
rules and procedures and within its established deadlines (European time). The
relevant European international clearing system will, if the transaction meets
its settlement requirements, deliver instructions to the Relevant Depositary
to take action to effect final settlement on its behalf by delivering or
receiving securities in DTC, and making or receiving payment in accordance
with normal procedures for same day funds settlement applicable to DTC.
Participants of Cedel or Euroclear may not deliver instructions directly to
the European Depositaries.
Distributions on the Book-Entry Securities will be made on each
Distribution Date by the Trustee to DTC. DTC will be responsible for crediting
the amount of each distribution to the accounts of the applicable Participants
of DTC in accordance with DTC's normal procedures. Each Participant of DTC
will be responsible for disbursing the distribution to the Beneficial Owners
of the Book-Entry Securities that it represents and to each Financial
Intermediary for which it acts as agent. Each Financial Intermediary will be
responsible for disbursing funds to the Beneficial Owners of the Book-Entry
Securities that it represents.
Under a book-entry format, Beneficial Owners of the Book-Entry
Securities may experience some delay in their receipt of payments, because the
distributions will be forwarded by the Trustee to Cede & Co. Any distributions
on Securities held through Cedel or Euroclear will be credited to the cash
accounts of Participants of Cedel or Euroclear in accordance with the relevant
system's rules and procedures, to the extent received by the Relevant
Depositary. These distributions will be subject to tax reporting in accordance
with relevant United States tax laws and regulations. See "Material Federal
Income Tax Considerations -- REMICs -- Taxation of Certain Foreign Investors"
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, or otherwise take
actions in respect of Book-Entry Securities, may be limited due to the lack of
physical securities for the Book-Entry Securities. In addition, issuance of
the Book-Entry Securities in book-entry form may reduce the liquidity of the
securities in the secondary market since certain potential investors may be
unwilling to purchase Securities for which they cannot obtain physical
securities.
Monthly and annual reports will be provided to Cede & Co., as nominee
of DTC, and may be made available by Cede & Co. to Beneficial Owners upon
request, in accordance with the rules, regulations and procedures creating and
affecting the depository, and to the Financial Intermediaries to whose DTC
accounts the Book-Entry Securities of Beneficial Owners are credited.
Generally, DTC will advise the applicable 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 Agreement or
indenture, as applicable, only at the direction of one or more Financial
Intermediaries to whose DTC accounts the Book-Entry Securities are credited,
to the extent that actions are taken on behalf of Financial Intermediaries
whose holdings include the Book-Entry Securities. If the Book-Entry Securities
are globally offered, Cedel or the Euroclear Operator, as the case may be,
will take any other action permitted to be taken by a securityholder under the
Agreement or indenture, as applicable, on behalf of a Participant of Cedel or
Euroclear only in accordance with its relevant rules and procedures and
subject to the ability of the Relevant Depositary to effect those actions on
its behalf through DTC. DTC may take actions, at the direction of the related
Participants, with respect to some Offered Securities that conflict with
actions taken with respect to other Offered Securities.
Although DTC, Cedel and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of Book-Entry Securities among
Participants of DTC, Cedel and Euroclear, they are under no obligation to
perform or continue to perform these procedures and the procedures may be
discontinued at any time.
None of the depositor, any master servicer, any servicer, the
trustee, any securities registrar or paying agent or any of their affiliates
will have any responsibility for any aspect of the records relating to or
payments made on account of beneficial ownership interests of the Book-Entry
Securities or for maintaining, supervising or reviewing any records relating
to those beneficial ownership interests.
Definitive Securities
Securities initially issued in book-entry form will be issued as
Definitive Securities to Beneficial Owners or their nominees, rather than to
DTC or its nominee only (1) if the depositor advises the trustee in writing
that DTC is no longer willing or able to properly discharge its
responsibilities as depository for the Securities and the depositor is unable
to locate a qualified successor, (2) if the depositor, at its option, elects
to end the book-entry system through DTC or (3) in accordance with any other
provisions described in the prospectus supplement.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, DTC is required to notify all Participants of the
availability through DTC of Definitive Securities for the Beneficial Owners.
Upon surrender by DTC of the security or securities representing the
Book-Entry Securities, together with instructions for registration, the
trustee will issue (or cause to be issued) to the Beneficial Owners identified
in those instructions the Definitive Securities to which they are entitled,
and thereafter the trustee will recognize the holders of those Definitive
Securities as securityholders under the Agreement.
Description of the Agreements
Agreements Applicable to a Series
REMIC Securities, FASIT Securities, Grantor Trust Securities
Securities representing interests in a trust fund, or a portion
thereof, that the trustee will elect to have treated as a real estate mortgage
investment conduit under Sections 860A through 860G of the Code ("REMIC
Securities"), FASIT Securities (as defined herein), or Grantor Trust
Securities (as defined herein) will be issued, and the related trust fund will
be created, pursuant to a pooling and servicing agreement or trust agreement
(in either case, generally referred to in this prospectus as the "pooling and
servicing agreement") among the depositor, the trustee and the sole servicer
or master servicer, as applicable. The Assets of that trust fund will be
transferred to the trust fund and thereafter serviced in accordance with the
terms of the pooling and servicing agreement. In the event there are multiple
servicers of the Assets of that trust fund, or in the event the Securities
consist of Notes, each servicer will perform its servicing functions pursuant
to a related underlying servicing agreement.
Securities That Are Partnership Interests for Tax Purposes and Notes
Securities that are partnership interests for tax purposes will be
issued, and the related trust fund will be created, pursuant to the pooling
and servicing agreement or trust agreement.
A series of Notes issued by a trust fund will be issued pursuant to
an indenture between the related trust fund and an indenture trustee named in
the prospectus supplement. The trust fund will be established either as a
statutory business trust under the law of the State of Delaware or as a common
law trust under the law of the State of New York pursuant to a trust agreement
between the depositor and an owner trustee specified in the prospectus
supplement relating to that series of Notes. The Assets securing payment on
the Notes will be serviced in accordance with a sale and servicing agreement
or servicing agreement.
Material Terms of the Pooling and Servicing Agreements and Underlying Servicing
Agreements
General
The following summaries describe the material provisions that may
appear in each pooling and servicing agreement, sale and servicing agreement
or servicing agreement (each, an "Agreement"). The prospectus supplement for a
series of Securities will describe any provision of the Agreement relating to
that series that materially differs from the description thereof contained in
this prospectus. The summaries do not purport to be complete and are subject
to, and are qualified by reference to, all of the provisions of the Agreement
for each trust fund and the description of those provisions in the prospectus
supplement. The provisions of each Agreement will vary depending on the nature
of the Securities to be issued thereunder and the nature of the related trust
fund. As used herein for any series, the term "Security" refers to all of the
Securities of that series, whether or not offered hereby and by the prospectus
supplement, unless the context otherwise requires. A form of a pooling and
servicing agreement has been filed as an exhibit to the Registration Statement
of which this prospectus is a part. The depositor will provide a copy of the
pooling and servicing agreement (without exhibits) relating to any series of
Securities without charge upon written request of a securityholder of that
series addressed to ACE Securities Corp., 6525 Morrison Boulevard, Suite 318,
Charlotte, North Carolina 28211, Attention: Elizabeth S. Eldridge.
The servicer or master servicer and the trustee for any series of
Securities will be named in the prospectus supplement. In the event there are
multiple servicers for the Assets in a trust fund, a master servicer will
perform certain administration, calculation and reporting functions for that
trust fund and will supervise the related servicers pursuant to a pooling and
servicing agreement. For a series involving a master servicer, references in
this prospectus to the servicer will apply to the master servicer where
non-servicing obligations are described. If specified in the prospectus
supplement, a manager or administrator may be appointed pursuant to the
pooling and servicing agreement for any trust fund to administer that trust
fund.
Assignment of Assets; Repurchases
At the time of issuance of any series of Securities, the depositor
will assign (or cause to be assigned) to the designated trustee the Assets to
be included in the related trust fund, together with all principal and
interest to be received on or with respect to those Assets after the Cut-off
Date, other than principal and interest due on or before the Cut-off Date and
other than any Retained Interest. The trustee will, concurrently with that
assignment, deliver the Securities to the depositor in exchange for the Assets
and the other assets comprising the trust fund for that series. Each Asset
will be identified in a schedule appearing as an exhibit to the related
Agreement. That schedule will include detailed information to the extent
available and relevant
(1) in respect of each mortgage loan included in the related trust
fund, including the city and state of the related Mortgaged Property and type
of that property, the mortgage rate and, if applicable, the applicable index,
margin, adjustment date and any rate cap information, the original and
remaining term to maturity, the original and outstanding principal balance and
balloon payment, if any, the Loan-to-Value Ratio as of the date indicated and
payment and prepayment provisions, if applicable;
(2) in respect of each Contract included in the related trust fund,
including the outstanding principal amount and the Contract Rate; and
(3) in respect of each Mortgage Security and Agency Security, the
original and outstanding principal amount, if any, and the interest rate
thereon.
For each mortgage loan, except as otherwise specified in the
prospectus supplement, the depositor will deliver or cause to be delivered to
the trustee (or to the custodian hereinafter referred to) certain loan
documents, which will generally include the original mortgage note endorsed,
without recourse, in blank or to the order of the trustee, the original
Mortgage (or a certified copy thereof) with evidence of recording indicated
thereon and an assignment of the Mortgage to the trustee in recordable form.
However, a trust fund may include mortgage loans where the original mortgage
note is not delivered to the trustee if the depositor delivers to the trustee
or the custodian a copy or a duplicate original of the mortgage note, together
with an affidavit certifying that the original thereof has been lost or
destroyed. For those mortgage loans, the trustee (or its nominee) may not be
able to enforce the mortgage note against the related borrower. The Asset
Seller or other entity specified in the prospectus supplement will be required
to agree to repurchase, or substitute for, each of these mortgage loans that
is subsequently in default if the enforcement thereof or of the related
Mortgage is materially adversely affected by the absence of the original
mortgage note. The related Agreement will generally require the depositor or
another party specified in the prospectus supplement to promptly cause each of
these assignments of Mortgage to be recorded in the appropriate public office
for real property records, except in the State of California or in other
states where, in the opinion of counsel acceptable to the trustee, recording
is not required to protect the trustee's interest in the related mortgage loan
against the claim of any subsequent transferee or any successor to or creditor
of the depositor, the servicer, the relevant Asset Seller or any other prior
holder of the mortgage loan.
The trustee (or a custodian) will review the mortgage loan documents
within a specified period of days after receipt thereof, and the trustee (or a
custodian) will hold those documents in trust for the benefit of the
securityholders. If any of these documents are found to be missing or
defective in any material respect, the trustee (or that custodian) will
immediately notify the servicer and the depositor, and the servicer will
immediately notify the relevant Asset Seller or other entity specified in the
prospectus supplement. If the Asset Seller cannot cure the omission or defect
within a specified number of days after receipt of that notice, then the Asset
Seller or other entity specified in the prospectus supplement will be
obligated, within a specified number of days of receipt of that notice, to
either (1) repurchase the related mortgage loan from the trustee at a price
equal to the sum of the unpaid principal balance thereof, plus unpaid accrued
interest at the interest rate for that Asset from the date as to which
interest was last paid to the due date in the Due Period in which the relevant
purchase is to occur, plus certain servicing expenses that are payable to the
servicer, or another price as specified in the prospectus supplement (the
"Purchase Price") or (2) substitute a new mortgage loan. There can be no
assurance that an Asset Seller or other named entity will fulfill this
repurchase or substitution obligation, and neither the servicer nor the
depositor will be obligated to repurchase or substitute for that mortgage loan
if the Asset Seller or other named entity defaults on its obligation.
This repurchase or substitution obligation constitutes the sole
remedy available to the securityholders or the trustee for omission of, or a
material defect in, a constituent document. To the extent specified in the
prospectus supplement, in lieu of curing any omission or defect in the Asset
or repurchasing or substituting for that Asset, the Asset Seller or other
named entity may agree to cover any losses suffered by the trust fund as a
result of that breach or defect.
Notwithstanding the preceding three paragraphs, the documents for
Home Equity Loans, Home Improvement Contracts and Unsecured Home Improvement
Loans will be delivered to the trustee (or a custodian) only to the extent
specified in the prospectus supplement. Generally these documents will be
retained by the servicer, which may also be the Asset Seller. In addition,
assignments of the related Mortgages to the trustee will be recorded only to
the extent specified in the prospectus supplement.
For each Contract, the servicer (which may also be the Asset Seller)
generally will maintain custody of the original Contract and copies of
documents and instruments related to each Contract and the security interest
in the Manufactured Home securing each Contract. To give notice of the right,
title and interest of the trustee in the Contracts, the depositor will cause
UCC-1 financing statements to be executed by the related Asset Seller
identifying the depositor as secured party and by the depositor identifying
the trustee as the secured party and, in each case, identifying all Contracts
as collateral. The Contracts will be stamped or otherwise marked to reflect
their assignment from the depositor to the trust fund only to the extent
specified in the prospectus supplement. Therefore, if, through negligence,
fraud or otherwise, a subsequent purchaser were able to take physical
possession of the Contracts without notice of that assignment, the interest of
the trustee in the Contracts could be defeated. See "Certain Legal Aspects of
the Contracts."
While the Contract documents will not be reviewed by the trustee or
the servicer, if the servicer finds that any document is missing or defective
in any material respect, the servicer will be required to immediately notify
the depositor and the relevant Asset Seller or other entity specified in the
prospectus supplement. If the Asset Seller or some other entity cannot cure
the omission or defect within a specified number of days after receipt of this
notice, then the Asset Seller or that other entity will be obligated, within a
specified number of days of receipt of this notice, to repurchase the related
Contract from the trustee at the Purchase Price or substitute for that
Contract. There can be no assurance that an Asset Seller or any other entity
will fulfill this repurchase or substitution obligation, and neither the
servicer nor the depositor will be obligated to repurchase or substitute for
that Contract if the Asset Seller or any other entity defaults on its
obligation. This repurchase or substitution obligation constitutes the sole
remedy available to the securityholders or the trustee for omission of, or a
material defect in, a constituent document. To the extent specified in the
prospectus supplement, in lieu of curing any omission or defect in the Asset
or repurchasing or substituting for that Asset, the Asset Seller may agree to
cover any losses suffered by the trust fund as a result of that breach or
defect.
Mortgage Securities and Agency Securities will be registered in the
name of the trustee or its nominee on the books of the issuer or guarantor or
its agent or, in the case of Mortgage Securities and Agency Securities issued
only in book-entry form, through the depository with respect thereto, in
accordance with the procedures established by the issuer or guarantor for
registration of those certificates, and distributions on those securities to
which the trust fund is entitled will be made directly to the trustee.
Representations and Warranties; Repurchases
To the extent provided in the prospectus supplement the depositor
will, for each Asset, assign certain representations and warranties, as of a
specified date (the person making those representations and warranties, the
"Warranting Party") covering, by way of example, the following types of
matters:
o the accuracy of the information set forth for that Asset on the
schedule of Assets appearing as an exhibit to the related Agreement;
o in the case of a mortgage loan, the existence of title insurance
insuring the lien priority of the mortgage loan and, in the case of a
Contract, that the Contract creates a valid first security interest in or lien
on the related Manufactured Home;
o the authority of the Warranting Party to sell the Asset;
o the payment status of the Asset;
o in the case of a mortgage loan, the existence of customary
provisions in the related mortgage note and Mortgage to permit realization
against the Mortgaged Property of the benefit of the security of the Mortgage;
and
o the existence of hazard and extended perils insurance coverage on
the Mortgaged Property or Manufactured Home.
Any Warranting Party shall be an Asset Seller or an affiliate thereof
or any other person acceptable to the depositor and will be identified in the
prospectus supplement.
Representations and warranties made in respect of an Asset may have
been made as of a date before the applicable Cut-off Date. A substantial
period of time may have elapsed between that date and the date of initial
issuance of the related series of Securities evidencing an interest in that
Asset. In the event of a breach of any of these representations or warranties,
the Warranting Party will be obligated to reimburse the trust fund for losses
caused by that breach or either cure that breach or repurchase or replace the
affected Asset as described below. Since the representations and warranties
may not address events that may occur following the date as of which they were
made, the Warranting Party will have a reimbursement, cure, repurchase or
substitution obligation in connection with a breach of that representation and
warranty only if the relevant event that causes that breach occurs before that
date. That party would have no obligations if the relevant event that causes
that breach occurs after that date.
Each Agreement will provide that the servicer and/or trustee or
another entity identified in the prospectus supplement will be required to
notify promptly the relevant Warranting Party of any breach of any
representation or warranty made by it in respect of an Asset that materially
and adversely affects the value of that Asset or the interests therein of the
securityholders. If the Warranting Party cannot cure that breach within a
specified period following the date on which that party was notified of that
breach, then the Warranting Party will be obligated to repurchase that Asset
from the trustee within a specified period from the date on which the
Warranting Party was notified of that breach, at the Purchase Price therefor.
If so provided in the prospectus supplement for a series, a Warranting Party,
rather than repurchase an Asset as to which a breach has occurred, will have
the option, within a specified period after initial issuance of that series of
Securities, to cause the removal of that Asset from the trust fund and
substitute in its place one or more other Assets, as applicable, in accordance
with the standards described in the prospectus supplement. If so provided in
the prospectus supplement for a series, a Warranting Party, rather than
repurchase or substitute an Asset as to which a breach has occurred, will have
the option to reimburse the trust fund or the securityholders for any losses
caused by that breach. This reimbursement, repurchase or substitution
obligation will constitute the sole remedy available to securityholders or the
trustee for a breach of representation by a Warranting Party.
Neither the depositor (except to the extent that it is the Warranting
Party) nor the servicer will be obligated to purchase or substitute for an
Asset if a Warranting Party defaults on its obligation to do so, and no
assurance can be given that the Warranting Parties will carry out those
obligations with respect to the Assets.
A servicer will make certain representations and warranties regarding
its authority to enter into, and its ability to perform its obligations under,
the related Agreement. A breach of any representation of the servicer that
materially and adversely affects the interests of the securityholders and
which continues unremedied for the number of days specified in the Agreement
after the discovery of the breach by the servicer or the receipt of written
notice of that breach by the servicer from the trustee, the depositor or the
holders of Securities evidencing not less than 25% of the voting rights or
other percentage specified in the related Agreement, will constitute an Event
of Default under that Agreement. See "Events of Default" and "Rights Upon
Event of Default."
Collection Account and Related Accounts
General. The servicer and/or the trustee will, as to each trust fund,
establish and maintain or cause to be established and maintained one or more
separate accounts for the collection of payments on the related Assets
(collectively, the "Collection Account"), which must be an account or accounts
that either:
o are insured by the Bank Insurance Fund or the Savings Association
Insurance Fund of the Federal Deposit Insurance Corporation ("FDIC") (to the
limits established by the FDIC) and the uninsured deposits in which are
otherwise secured so that the securityholders have a claim with respect to the
funds in the Collection Account or a perfected first priority security
interest against any collateral securing those funds that is superior to the
claims of any other depositors or general creditors of the institution with
which the Collection Account is maintained, or
o are maintained with a bank or trust company, and in a manner
satisfactory to the rating agency or agencies rating any class of Securities
of that series.
Investment of amounts in the Collection Account is limited to United
States government securities and other investment grade obligations specified
in the Agreement ("Permitted Investments"). A Collection Account may be
maintained as an interest bearing or a non-interest bearing account and the
funds held therein may be invested pending each succeeding Distribution Date
in certain short-term Permitted Investments. Any interest or other income
earned on funds in the Collection Account will, unless otherwise specified in
the prospectus supplement, be paid to the servicer or its designee as
additional servicing compensation. The Collection Account may be maintained
with an institution that is an affiliate of the servicer, if applicable,
provided that that institution meets the standards imposed by the rating
agency or agencies. If permitted by the rating agency or agencies, a
Collection Account may contain funds relating to more than one series of
mortgage pass-through certificates and may contain other funds respecting
payments on mortgage loans belonging to the servicer or serviced or master
serviced by it on behalf of others.
Deposits. A servicer or the trustee will deposit or cause to be
deposited in the Collection Account for one or more trust funds on a daily
basis, or any other period provided in the related Agreement, the following
payments and collections received, or advances made, by the servicer or the
trustee or on its behalf after the Cut-off Date (other than payments due on or
before the Cut-off Date, and exclusive of any amounts representing a Retained
Interest), except as otherwise provided in the Agreement:
(1) all payments on account of principal, including principal
prepayments, on the Assets;
(2) all payments on account of interest on the Assets, including
any default interest collected, in each case net of any portion thereof
retained by a servicer as its servicing compensation and net of any Retained
Interest;
(3) Liquidation Proceeds and Insurance Proceeds, together with the
net proceeds on a monthly basis with respect to any Assets acquired for the
benefit of securityholders;
(4) any amounts paid under any instrument or drawn from any fund
that constitutes credit support for the related series of Securities as
described under "Description of Credit Support;"
(5) any advances made as described under "Description of the
Securities--Advances in Respect of Delinquencies;"
(6) any amounts paid under any Cash Flow Agreement, as described
under "Description of the Trust Funds--Cash Flow Agreements;"
(7) all proceeds of any Asset or, with respect to a mortgage loan,
property acquired in respect thereof purchased by the depositor, any Asset
Seller or any other specified person as described above under "--Assignment of
Assets; Repurchases" and "--Representations and Warranties; Repurchases," all
proceeds of any defaulted mortgage loan purchased as described below under
"--Realization Upon Defaulted Assets," and all proceeds of any Asset purchased
as described under "Description of the Securities--Termination;"
(8) any amounts paid by a servicer to cover certain interest
shortfalls arising out of the prepayment of Assets in the trust fund as
described below under "--Retained Interest; Servicing Compensation and Payment
of Expenses;"
(9) to the extent that any of these items do not constitute
additional servicing compensation to a servicer, any payments on account of
modification or assumption fees, late payment charges or Prepayment Premiums
on the Assets;
(10) all payments required to be deposited in the Collection
Account with respect to any deductible clause in any blanket insurance policy
described below under "--Hazard Insurance Policies;"
(11) any amount required to be deposited by a servicer or the
trustee in connection with losses realized on investments for the benefit of
the servicer or the trustee, as the case may be, of funds held in the
Collection Account; and
(12) any other amounts required to be deposited in the Collection
Account as provided in the related Agreement and described in the prospectus
supplement.
Withdrawals. A servicer or the trustee may, from time to time as
provided in the related Agreement, make withdrawals from the Collection
Account for each trust fund for any of the following purposes, except as
otherwise provided in the Agreement:
(1) to make distributions to the securityholders on each
Distribution Date;
(2) to reimburse a servicer for unreimbursed amounts advanced as
described under "Description of the Securities--Advances in Respect of
Delinquencies," which reimbursement is to be made out of amounts received that
were identified and applied by the servicer as late collections of interest
(net of related servicing fees and Retained Interest) on and principal of the
particular Assets for which the advances were made or out of amounts drawn
under any form of credit support with respect to those Assets;
(3) to reimburse a servicer for unpaid servicing fees earned and
certain unreimbursed servicing expenses incurred with respect to Assets and
properties acquired in respect thereof, which reimbursement is to be made out
of amounts that represent Liquidation Proceeds and Insurance Proceeds
collected on the particular Assets and properties, and net income collected on
the particular properties, which fees were earned or expenses were incurred or
out of amounts drawn under any form of credit support for those Assets and
properties;
(4) to reimburse a servicer for any advances described in clause
(2) above and any servicing expenses described in clause (3) above which, in
the servicer's good faith judgment, will not be recoverable from the amounts
described in those clauses, which reimbursement is to be made from amounts
collected on other Assets or, if and to the extent so provided by the related
Agreement and described in the prospectus supplement, just from that portion
of amounts collected on other Assets that is otherwise distributable on one or
more classes of Subordinate Securities, if any, remain outstanding, and
otherwise any outstanding class of Securities, of the related series;
(5) if and to the extent described in the prospectus supplement, to
pay a servicer interest accrued on the advances described in clause (2) above
and the servicing expenses described in clause (3) above while those advances
and servicing expenses remain outstanding and unreimbursed;
(6) to reimburse a servicer, the depositor, or any of their
respective directors, officers, employees and agents, as the case may be, for
certain expenses, costs and liabilities incurred thereby, as and to the extent
described below under "--Certain Matters Regarding Servicers, the Master
Servicer and the Depositor;"
(7) if and to the extent described in the prospectus supplement, to
pay (or to transfer to a separate account for purposes of escrowing for the
payment of) the trustee's fees;
(8) to reimburse the trustee or any of its directors, officers,
employees and agents, as the case may be, for certain expenses, costs and
liabilities incurred thereby, as and to the extent described below under
"--Certain Matters Regarding the Trustee;"
(9) to pay a servicer, as additional servicing compensation,
interest and investment income earned in respect of amounts held in the
Collection Account;
(10) to pay the person entitled thereto any amounts deposited in
the Collection Account that were identified and applied by the servicer as
recoveries of Retained Interest;
(11) to pay for costs reasonably incurred in connection with the
proper management and maintenance of any Mortgaged Property acquired for the
benefit of securityholders by foreclosure or by deed in lieu of foreclosure or
otherwise, which payments are to be made out of income received on that
property;
(12) if one or more elections have been made to treat the trust
fund or designated portions thereof as a REMIC, to pay any federal, state or
local taxes imposed on the trust fund or its assets or transactions, as and to
the extent described under "Material Federal Income Tax
Considerations--REMICs--Taxes That May Be Imposed on the REMIC Pool" or in the
prospectus supplement, respectively;
(13) to pay for the cost of an independent appraiser or other
expert in real estate matters retained to determine a fair sale price for a
defaulted mortgage loan or a property acquired in respect thereof in
connection with the liquidation of that mortgage loan or property;
(14) to pay for the cost of various opinions of counsel obtained
pursuant to the related Agreement for the benefit of securityholders;
(15) to pay for the costs of recording the related Agreement if
that recordation materially and beneficially affects the interests of
securityholders, provided that the payment shall not constitute a waiver with
respect to the obligation of the Warranting Party to remedy any breach of
representation or warranty under the Agreement;
(16) to pay the person entitled thereto any amounts deposited in
the Collection Account in error, including amounts received on any Asset after
its removal from the trust fund whether by reason of purchase or substitution
as contemplated above under "--Assignment of Assets; Repurchase" and
"--Representations and Warranties; Repurchases" or otherwise;
(17) to make any other withdrawals permitted by the related
Agreement; and
(18) to clear and terminate the Collection Account at the
termination of the trust fund.
Other Collection Accounts. If specified in the prospectus supplement,
the Agreement for any series of Securities may provide for the establishment
and maintenance of a separate collection account into which the servicer will
deposit on a daily basis, or any other period as provided in the related
Agreement, the amounts described under "--Deposits" above for one or more
series of Securities. Any amounts on deposit in any of these collection
accounts will be withdrawn therefrom and deposited into the appropriate
Collection Account by a time specified in the prospectus supplement. To the
extent specified in the prospectus supplement, any amounts that could be
withdrawn from the Collection Account as described under "--Withdrawals" above
may also be withdrawn from any of these collection accounts. The prospectus
supplement will set forth any restrictions for any of these collection
accounts, including investment restrictions and any restrictions for financial
institutions with which any of these collection accounts may be maintained.
The servicer will establish and maintain with the indenture trustee
an account, in the name of the indenture trustee on behalf of the holders of
Notes, into which amounts released from the Collection Account for
distribution to the holders of Notes will be deposited and from which all
distributions to the holders of Notes will be made.
Collection and Other Servicing Procedures. The servicer is required
to make reasonable efforts to collect all scheduled payments under the Assets
and will follow or cause to be followed those collection procedures that it
would follow with respect to assets that are comparable to the Assets and held
for its own account, provided that those procedures are consistent with (1)
the terms of the related Agreement and any related hazard insurance policy or
instrument of credit support, if any, included in the related trust fund
described herein or under "Description of Credit Support," (2) applicable law
and (3) the general servicing standard specified in the prospectus supplement
or, if no standard is so specified, its normal servicing practices (in either
case, the "Servicing Standard"). In connection therewith, the servicer will be
permitted in its discretion to waive any late payment charge or penalty
interest in respect of a late payment on an Asset.
Each servicer will also be required to perform other customary
functions of a servicer of comparable assets, including maintaining hazard
insurance policies as described herein and in any prospectus supplement, and
filing and settling claims thereunder; maintaining, to the extent required by
the Agreement, escrow or impoundment accounts of borrowers for payment of
taxes, insurance and other items required to be paid by any borrower pursuant
to the terms of the Assets; processing assumptions or substitutions in those
cases where the servicer has determined not to enforce any applicable
due-on-sale clause; attempting to cure delinquencies; supervising foreclosures
or repossessions; inspecting and managing Mortgaged Properties or Manufactured
Homes under some circumstances; and maintaining accounting records relating to
the Assets. The servicer or any other entity specified in the prospectus
supplement will be responsible for filing and settling claims in respect of
particular Assets under any applicable instrument of credit support. See
"Description of Credit Support."
The servicer may agree to modify, waive or amend any term of any
Asset in a manner consistent with the Servicing Standard so long as the
modification, waiver or amendment will not (1) affect the amount or timing of
any scheduled payments of principal or interest on the Asset or (2) in its
judgment, materially impair the security for the Asset or reduce the
likelihood of timely payment of amounts due thereon. The servicer also may
agree to any modification, waiver or amendment that would so affect or impair
the payments on, or the security for, an Asset if (1) in its judgment, a
material default on the Asset has occurred or a payment default is reasonably
foreseeable and (2) in its judgment, that modification, waiver or amendment is
reasonably likely to produce a greater recovery with respect to the Asset on a
present value basis than would liquidation. In the event of any modification,
waiver or amendment of any Asset, the servicer will furnish a copy of that
modification, waiver or amendment to the trustee (or its custodian).
In the case of multifamily loans, a borrower's failure to make
required mortgage loan payments may mean that operating income is insufficient
to service the mortgage loan debt, or may reflect the diversion of that income
from the servicing of the mortgage loan debt. In addition, a borrower under a
multifamily loan that is unable to make mortgage loan payments may also be
unable to make timely payment of all required taxes and otherwise to maintain
and insure the related Mortgaged Property. In general, the servicer will be
required to monitor any multifamily loan that is in default, evaluate whether
the causes of the default can be corrected over a reasonable period without
significant impairment of the value of the related Mortgaged Property,
initiate corrective action in cooperation with the borrower if cure is likely,
inspect the related Multifamily Property and take those other actions as are
consistent with the related Agreement. A significant period of time may elapse
before the servicer is able to assess the success of any corrective action or
the need for additional initiatives. The time within which the servicer can
make the initial determination of appropriate action, evaluate the success of
corrective action, develop additional initiatives, institute foreclosure
proceedings and actually foreclose may vary considerably depending on the
particular multifamily loan, the Multifamily Property, the borrower, the
presence of an acceptable party to assume the multifamily loan and the laws of
the jurisdiction in which the Multifamily Property is located.
Realization Upon Defaulted Assets
Generally, the servicer is required to monitor any Asset that is in
default, initiate corrective action in cooperation with the borrower if cure
is likely, inspect the Asset and take any other actions as are consistent with
the Servicing Standard. A significant period of time may elapse before the
servicer is able to assess the success of that corrective action or the need
for additional initiatives.
Any Agreement relating to a trust fund that includes mortgage loans
or Contracts may grant to the servicer and/or the holder or holders of some
classes of Securities a right of first refusal to purchase from the trust fund
at a predetermined purchase price any mortgage loan or Contract as to which a
specified number of scheduled payments thereunder are delinquent. Any right of
first refusal granted to the holder of an Offered Security will be described
in the prospectus supplement. The prospectus supplement will also describe any
similar right granted to any person if the predetermined purchase price is
less than the Purchase Price described above under "--Representations and
Warranties; Repurchases."
If specified in the prospectus supplement, the servicer may offer to
sell any defaulted mortgage loan or Contract described in the preceding
paragraph and not otherwise purchased by any person having a right of first
refusal with respect to that defaulted mortgage loan or Contract, if and when
the servicer determines, consistent with the Servicing Standard, so that a
sale would produce a greater recovery on a present value basis than would
liquidation through foreclosure, repossession or similar proceedings. The
related Agreement will provide that any offering be made in a commercially
reasonable manner for a specified period and that the servicer accept the
highest cash bid received from any person (including itself, an affiliate of
the servicer or any securityholder) that constitutes a fair price for that
defaulted mortgage loan or Contract. If there is no bid that is determined to
be fair, the servicer will proceed with respect to that defaulted mortgage
loan or Contract as described below. Any bid in an amount at least equal to
the Purchase Price described above under "--Representations and Warranties;
Repurchases" will in all cases be deemed fair.
The servicer, on behalf of the trustee, may at any time institute
foreclosure proceedings, exercise any power of sale contained in any mortgage,
obtain a deed in lieu of foreclosure, or otherwise acquire title to a
Mortgaged Property securing a mortgage loan by operation of law or otherwise
and may at any time repossess and realize upon any Manufactured Home, if that
action is consistent with the Servicing Standard and a default on that
mortgage loan or Contract has occurred or, in the servicer's judgment, is
imminent.
If title to any Mortgaged Property is acquired by a trust fund as to
which a REMIC election has been made, the servicer, on behalf of the trust
fund, will be required to sell the Mortgaged Property within three years of
acquisition, unless (1) the Internal Revenue Service grants an extension of
time to sell that property or (2) the trustee receives an opinion of
independent counsel to the effect that the holding of the property by the
trust fund longer than three years after its acquisition will not result in
the imposition of a tax on the trust fund or cause the trust fund to fail to
qualify as a REMIC under the Code at any time that any Securities are
outstanding. Subject to the foregoing, the servicer will be required to (A)
solicit bids for any Mortgaged Property so acquired in that manner as will be
reasonably likely to realize a fair price for that property and (B) accept the
first (and, if multiple bids are contemporaneously received, the highest) cash
bid received from any person that constitutes a fair price.
The limitations imposed by the related Agreement and the REMIC
provisions of the Code (if a REMIC election has been made for the related
trust fund) on the ownership and management of any Mortgaged Property acquired
on behalf of the trust fund may result in the recovery of an amount less than
the amount that would otherwise be recovered.
See "Certain Legal Aspects of Mortgage Loans--Foreclosure."
If recovery on a defaulted Asset under any related instrument of
credit support is not available, the servicer nevertheless will be obligated
to follow or cause to be followed those normal practices and procedures as it
deems necessary or advisable to realize upon the defaulted Asset. If the
proceeds of any liquidation of the property securing the defaulted Asset are
less than the outstanding principal balance of the defaulted Asset plus
interest accrued thereon at the applicable interest rate, plus the total
amount of expenses incurred by the servicer in connection with those
proceedings and which are reimbursable under the Agreement, the trust fund
will realize a loss in the amount of that difference. The servicer will be
entitled to withdraw or cause to be withdrawn from the Collection Account out
of the Liquidation Proceeds recovered on any defaulted Asset, before the
distribution of those Liquidation Proceeds to securityholders, amounts
representing its normal servicing compensation on the Security, unreimbursed
servicing expenses incurred with respect to the Asset and any unreimbursed
advances of delinquent payments made with respect to the Asset.
If any property securing a defaulted Asset is damaged the servicer is
not required to expend its own funds to restore the damaged property unless it
determines (1) that restoration will increase the proceeds to securityholders
on liquidation of the Asset after reimbursement of the servicer for its
expenses and (2) that its expenses will be recoverable by it from related
Insurance Proceeds or Liquidation Proceeds.
The pooling and servicing agreement will require the trustee, if it
has not received a distribution for any Mortgage Security or Agency Security
by the fifth business day after the date on which that distribution was due
and payable pursuant to the terms of that Agency Security, to request the
issuer or guarantor, if any, of that Mortgage Security or Agency Security to
make that payment as promptly as possible and legally permitted to take legal
action against that issuer or guarantor as the trustee deems appropriate under
the circumstances, including the prosecution of any claims in connection
therewith. The reasonable legal fees and expenses incurred by the trustee in
connection with the prosecution of this legal action will be reimbursable to
the trustee out of the proceeds of that action and will be retained by the
trustee before the deposit of any remaining proceeds in the Collection Account
pending distribution thereof to securityholders of the related series. If the
proceeds of any legal action are insufficient to reimburse the trustee for its
legal fees and expenses, the trustee will be entitled to withdraw from the
Collection Account an amount equal to its expenses, and the trust fund may
realize a loss in that amount.
As servicer of the Assets, a servicer, on behalf of itself, the
trustee and the securityholders, will present claims to the borrower under
each instrument of credit support, and will take those reasonable steps as are
necessary to receive payment or to permit recovery thereunder for defaulted
Assets.
If a servicer or its designee recovers payments under any instrument
of credit support for any defaulted Assets, the servicer will be entitled to
withdraw or cause to be withdrawn from the Collection Account out of those
proceeds, before distribution thereof to securityholders, amounts representing
its normal servicing compensation on that Asset, unreimbursed servicing
expenses incurred for the Asset and any unreimbursed advances of delinquent
payments made with respect to the Asset. See "Hazard Insurance Policies" and
"Description of Credit Support."
Hazard Insurance Policies
Mortgage Loans. Generally, each Agreement for a trust fund composed
of mortgage loans will require the servicer to cause the borrower on each
mortgage loan to maintain a hazard insurance policy (including flood insurance
coverage, if obtainable, to the extent the property is located in a federally
designated flood area, in such amount as is required under applicable
guidelines) providing for the level of coverage that is required under the
related Mortgage or, if any Mortgage permits the holder thereof to dictate to
the borrower the insurance coverage to be maintained on the related Mortgaged
Property, then the level of coverage that is consistent with the Servicing
Standard. That coverage will be in general in an amount equal to the lesser of
the principal balance owing on that mortgage loan (but not less than the
amount necessary to avoid the application of any co-insurance clause contained
in the hazard insurance policy) and the amount necessary to fully compensate
for any damage or loss to the improvements on the Mortgaged Property on a
replacement cost basis or any other amount specified in the prospectus
supplement. The ability of the servicer to assure that hazard insurance
proceeds are appropriately applied may be dependent upon its being named as an
additional insured under any hazard insurance policy and under any other
insurance policy referred to below, or upon the extent to which information in
this regard is furnished by borrowers. All amounts collected by the servicer
under any of these policies (except for amounts to be applied to the
restoration or repair of the Mortgaged Property or released to the borrower in
accordance with the servicer's normal servicing procedures, subject to the
terms and conditions of the related Mortgage and mortgage note) will be
deposited in the Collection Account in accordance with the related Agreement.
The Agreement may provide that the servicer may satisfy its
obligation to cause each borrower to maintain a hazard insurance policy by the
servicer's maintaining a blanket policy insuring against hazard losses on the
mortgage loans. If the blanket policy contains a deductible clause, the
servicer will be required to deposit in the Collection Account from its own
funds all sums that would have been deposited therein but for that clause.
In general, the standard form of fire and extended coverage policy
covers physical damage to or destruction of the improvements of the property
by fire, lightning, explosion, smoke, windstorm and hail, and riot, strike and
civil commotion, subject to the conditions and exclusions specified in each
policy. Although the policies relating to the mortgage loans will be
underwritten by different insurers under different state laws in accordance
with different applicable state forms, and therefore will not contain
identical terms and conditions, the basic terms thereof are dictated by
respective state laws, and most of these policies typically do not cover any
physical damage resulting from war, revolution, governmental actions, floods
and other water-related causes, earth movement (including earthquakes,
landslides and mudflows), wet or dry rot, vermin, domestic animals and certain
other kinds of uninsured risks.
The hazard insurance policies covering the Mortgaged Properties
securing the mortgage loans will typically contain a coinsurance clause that
in effect requires the insured at all times to carry insurance of a specified
percentage (generally 80% to 90%) of the full replacement value of the
improvements on the property to recover the full amount of any partial loss.
If the insured's coverage falls below this specified percentage, the
coinsurance clause generally provides that the insurer's liability in the
event of partial loss does not exceed the lesser of (1) the replacement cost
of the improvements less physical depreciation and (2) that proportion of the
loss as the amount of insurance carried bears to the specified percentage of
the full replacement cost of those improvements.
Each Agreement for a trust fund composed of mortgage loans will
require the servicer to cause the borrower on each mortgage loan to maintain
all other insurance coverage for the related Mortgaged Property as is
consistent with the terms of the related Mortgage and the Servicing Standard,
which insurance may typically include flood insurance (if the related
Mortgaged Property was located at the time of origination in a federally
designated flood area).
Any cost incurred by the servicer in maintaining any insurance policy
will be added to the amount owing under the mortgage loan where the terms of
the mortgage loan so permit; provided, however, that the addition of that cost
will not be taken into account for purposes of calculating the distribution to
be made to securityholders. Those costs may be recovered by the servicer from
the Collection Account, with interest thereon, as provided by the Agreement.
Under the terms of the mortgage loans, borrowers will generally be
required to present claims to insurers under hazard insurance policies
maintained on the related Mortgaged Properties. The servicer, on behalf of the
trustee and securityholders, is obligated to present or cause to be presented
claims under any blanket insurance policy insuring against hazard losses on
Mortgaged Properties securing the mortgage loans. However, the ability of the
servicer to present or cause to be presented those claims is dependent upon
the extent to which information in this regard is furnished to the servicer by
borrowers.
Contracts. Generally, the terms of the Agreement for a trust fund
composed of Contracts will require the servicer to maintain for each Contract
one or more hazard insurance policies that provide, at a minimum, the same
coverage as a standard form fire and extended coverage insurance policy that
is customary for manufactured housing, issued by a company authorized to issue
those policies in the state in which the Manufactured Home is located, and in
an amount that is not less than the maximum insurable value of that
Manufactured Home or the principal balance due from the borrower on the
related Contract, whichever is less; provided, however, that the amount of
coverage provided by each hazard insurance policy must be sufficient to avoid
the application of any co-insurance clause contained therein. When a
Manufactured Home's location was, at the time of origination of the related
Contract, within a federally designated special flood hazard area, the
servicer must cause flood insurance to be maintained, which coverage must be
at least equal to the minimum amount specified in the preceding sentence or
any lesser amount as may be available under the federal flood insurance
program. Each hazard insurance policy caused to be maintained by the servicer
must contain a standard loss payee clause in favor of the servicer and its
successors and assigns. If any borrower is in default in the payment of
premiums on its hazard insurance policy or policies, the servicer must pay
those premiums out of its own funds, and may add separately the premiums to
the borrower's obligation as provided by the Contract, but may not add the
premiums to the remaining principal balance of the Contract.
The servicer may maintain, in lieu of causing individual hazard
insurance policies to be maintained for each Manufactured Home, and must
maintain, to the extent that the related Contract does not require the
borrower to maintain a hazard insurance policy for the related Manufactured
Home, one or more blanket insurance policies covering losses on the borrower's
interest in the Contracts resulting from the absence or insufficiency of
individual hazard insurance policies. The servicer must pay the premium for
that blanket policy on the basis described therein and must pay any deductible
amount for claims under that policy relating to the Contracts.
FHA Insurance and VA Guarantees
FHA loans will be insured by the FHA as authorized under the Housing
Act. Certain FHA loans will be insured under various FHA programs including
the standard FHA 203(b) program to finance the acquisition of one- to
four-family housing units, the FHA 245 graduated payment mortgage program and
the FHA Title I Program. These programs generally limit the principal amount
and interest rates of the mortgage loans insured. The prospectus supplement
for Securities of each series evidencing interests in a trust fund including
FHA loans will set forth additional information regarding the regulations
governing the applicable FHA insurance programs. Except as otherwise specified
in the prospectus supplement, the following describes FHA insurance programs
and regulations as generally in effect for FHA loans.
The insurance premiums for FHA loans are collected by lenders
approved by the Department of Housing and Urban Development ("HUD") or by the
servicer and are paid to the FHA. The regulations governing FHA single-family
mortgage insurance programs provide that insurance benefits are payable either
upon foreclosure (or other acquisition of possession) and conveyance of the
mortgaged premises to the United States of America or upon assignment of the
defaulted loan to the United States of America. For a defaulted FHA loan, the
servicer is limited in its ability to initiate foreclosure proceedings. When
it is determined, either by the servicer or HUD, that default was caused by
circumstances beyond the borrower's control, the servicer is expected to make
an effort to avoid foreclosure by entering, if feasible, into one of a number
of available forms of forbearance plans with the borrower. Those plans may
involve the reduction or suspension of regular mortgage payments for a
specified period, with those payments to be made on or before the maturity
date of the mortgage, or the recasting of payments due under the mortgage up
to or, other than FHA loans originated under the FHA Title I Program, beyond
the maturity date. In addition, when a default caused by those circumstances
is accompanied by certain other criteria, HUD may provide relief by making
payments to the servicer in partial or full satisfaction of amounts due under
the FHA loan (which payments are to be repaid by the borrower to HUD) or by
accepting assignment of the loan from the servicer. With some exceptions, at
least three full monthly installments must be due and unpaid under the FHA
loan, and HUD must have rejected any request for relief from the borrower
before the servicer may initiate foreclosure proceedings.
HUD has the option, in most cases, to pay insurance claims in cash or
in debentures issued by HUD. Currently, claims are being paid in cash, and
claims have not been paid in debentures since 1965. HUD debentures issued in
satisfaction of FHA insurance claims bear interest at the applicable HUD
debentures interest rate. To the extent specified in the prospectus
supplement, the servicer of each single family FHA loan will be obligated to
purchase any debenture issued in satisfaction of that FHA loan upon default
for an amount equal to the principal amount of that debenture.
Other than in relation to the FHA Title I Program, the amount of
insurance benefits generally paid by the FHA is equal to the entire unpaid
principal amount of the defaulted FHA loan adjusted to reimburse the servicer
for certain costs and expenses and to deduct certain amounts received or
retained by the servicer after default. When entitlement to insurance benefits
results from foreclosure (or other acquisition of possession) and conveyance
to HUD, the servicer is compensated for no more than two-thirds of its
foreclosure costs, and is compensated for interest accrued and unpaid before
that date but in general only to the extent it was allowed pursuant to a
forbearance plan approved by HUD. When entitlement to insurance benefits
results from assignment of the FHA loan to HUD, the insurance payment includes
full compensation for interest accrued and unpaid to the assignment date. The
insurance payment itself, upon foreclosure of an FHA loan, bears interest from
a date 30 days after the borrower's first uncorrected failure to perform any
obligation to make any payment due under the mortgage and, upon assignment,
from the date of assignment to the date of payment of the claim, in each case
at the same interest rate as the applicable HUD debenture interest rate as
described above.
VA loans will be partially guaranteed by the VA under the
Serviceman's Readjustment Act (a "VA Guaranty Policy"). For a defaulted VA
loan, the servicer is, absent exceptional circumstances, authorized to
announce its intention to foreclose only when the default has continued for
three months. Generally, a claim for the guarantee is submitted after
liquidation of the Mortgaged Property.
The amount payable under the guarantee will be the percentage of the
VA loan originally guaranteed applied to indebtedness outstanding as of the
applicable date of computation specified in the VA regulations. Payments under
the guarantee will be equal to the unpaid principal amount of that VA loan,
interest accrued on the unpaid balance of that VA loan to the appropriate date
of computation and limited expenses of the mortgagee, but in each case only to
the extent that those amounts have not been recovered through liquidation of
the Mortgaged Property. The amount payable under the guarantee may in no event
exceed the amount of the original guarantee.
Fidelity Bonds and Errors and Omissions Insurance
Each Agreement will require that the servicer obtain and maintain in
effect a fidelity bond or similar form of insurance coverage (which may
provide blanket coverage) or any combination thereof insuring against loss
occasioned by fraud, theft or other intentional misconduct of the officers,
employees and agents of the servicer. The related Agreement will allow the
servicer to self-insure against loss occasioned by the errors and omissions of
the officers, employees and agents of the servicer so long as certain criteria
set forth in the Agreement are met.
Due-on-Sale Clauses
The mortgage loans may contain clauses requiring the consent of the
mortgagee to any sale or other transfer of the related Mortgaged Property, or
due-on-sale clauses entitling the mortgagee to accelerate payment of the
mortgage loan upon any sale, transfer or conveyance of the related Mortgaged
Property. The servicer will generally enforce any due-on-sale clause to the
extent it has knowledge of the conveyance or proposed conveyance of the
underlying Mortgaged Property and it is entitled to do so under applicable
law; provided, however, that the servicer will not take any action in relation
to the enforcement of any due-on-sale clause that would:
o adversely affect or jeopardize coverage under any applicable
insurance policy or
o materially increase the risk of default or delinquency on, or
materially impair the security for, that mortgage loan.
Any fee collected by or on behalf of the servicer for entering into
an assumption agreement will be retained by or on behalf of the servicer as
additional servicing compensation. See "Certain Legal Aspects of Mortgage
Loans--Due-on-Sale Clauses."
The Contracts may also contain clauses requiring the consent of the
mortgagee to any sale or other transfer of the related Mortgaged Property, or
due-on-sale clauses. The servicer will generally permit that transfer so long
as the transferee satisfies the servicer's then applicable underwriting
standards. The purpose of those transfers is often to avoid a default by the
transferring borrower. See "Certain Legal Aspects of the Contracts--Transfers
of Manufactured Homes; Enforceability of "Due-on-Sale" Clauses."
Retained Interest; Servicing Compensation and Payment of Expenses
The prospectus supplement for a series of Securities will specify
whether there will be any Retained Interest in the Assets, and, if so, the
initial owner thereof. If so, the Retained Interest will be established on a
loan-by-loan basis and will be specified on an exhibit to the related
Agreement. A "Retained Interest" in an Asset represents a specified portion of
the interest payable thereon. The Retained Interest will be deducted from
borrower payments as received and will not be part of the related trust fund.
The servicer's primary servicing compensation for a series of
Securities will come from the periodic payment to it of a portion of the
interest payment on each Asset or any other amount specified in the prospectus
supplement. Since any Retained Interest and a servicer's primary compensation
are percentages of the principal balance of each Asset, those amounts will
decrease in accordance with the amortization of the Assets. The prospectus
supplement for a series of Securities evidencing interests in a trust fund
that includes mortgage loans or Contracts may provide that, as additional
compensation, the servicer may retain all or a portion of assumption fees,
modification fees, late payment charges or Prepayment Premiums collected from
borrowers and any interest or other income that may be earned on funds held in
the Collection Account or any account established by a servicer pursuant to
the Agreement.
The servicer may, to the extent provided in the prospectus
supplement, pay from its servicing compensation certain expenses incurred in
connection with its servicing and managing of the Assets, including payment of
the fees and disbursements of the trustee and independent accountants, payment
of expenses incurred in connection with distributions and reports to
securityholders, and payment of any other expenses described in the prospectus
supplement. Some other expenses, including certain expenses relating to
defaults and liquidations on the Assets and, to the extent so provided in the
prospectus supplement, interest thereon at the rate specified therein may be
borne by the trust fund.
If and to the extent provided in the prospectus supplement, the
servicer may be required to apply a portion of the servicing compensation
otherwise payable to it in respect of any Due Period to certain interest
shortfalls resulting from the voluntary prepayment of any Assets in the
related trust fund during that period before their due dates.
Evidence as to Compliance
Each Agreement relating to Assets that include mortgage loans or
Contracts, unless otherwise provided in the prospectus supplement, will
provide that on or before a specified date in each year, beginning with the
first of these dates at least six months after the related Cut-off Date, a
firm of independent public accountants will furnish a statement to the trustee
to the effect that, on the basis of the examination by that firm conducted
substantially in compliance with either the Uniform Single Attestation Program
for Mortgage Bankers, the Audit Program for Mortgages serviced for Freddie Mac
or any other program used by the servicer, the servicing by or on behalf of
the servicer of mortgage loans under agreements substantially similar to each
other (including the related Agreement) was conducted in compliance with the
terms of those agreements or that program except for any significant
exceptions or errors in records that, in the opinion of the firm, either the
Audit Program for Mortgages serviced for Freddie Mac, or paragraph 4 of the
Uniform Single Attestation Program for Mortgage Bankers, or any other program,
requires it to report.
Each Agreement will also provide for delivery to the trustee, on or
before a specified date in each year, of an officer's certificate of the
servicer to the effect that the servicer has fulfilled its obligations under
the Agreement throughout the preceding calendar year or other specified
twelve-month period.
Certain Matters Regarding Servicers, the Master Servicer and the
Depositor
The servicer or master servicer under each Agreement will be named in
the prospectus supplement. The entities serving as servicer or master servicer
may be affiliates of the depositor and may have other normal business
relationships with the depositor or the depositor's affiliates. If applicable,
reference in this prospectus to the servicer will also be deemed to be to the
master servicer. Each Agreement will provide, in general, that:
o The servicer may resign from its obligations and duties
thereunder only upon a determination that its duties under the Agreement are
no longer permissible under applicable law or are in material conflict by
reason of applicable law with any other activities carried on by it, the other
activities of the servicer so causing that conflict being of a type and nature
carried on by the servicer at the date of the Agreement. No resignation will
become effective until the trustee or a successor servicer has assumed the
servicer's obligations and duties under the Agreement.
o Neither any servicer, the depositor nor any director, officer,
employee, or agent of a servicer or the depositor will be under any liability
to the related trust fund or securityholders for any action taken, or for
refraining from the taking of any action, in good faith pursuant to the
Agreement; provided, however, that neither a servicer, the depositor nor any
other person will be protected against any breach of a representation,
warranty or covenant made in the related Agreement, or against any liability
specifically imposed thereby, or against any liability that would otherwise be
imposed by reason of willful misfeasance, bad faith or gross negligence in the
performance of obligations or duties thereunder or by reason of reckless
disregard of obligations and duties thereunder.
o Any servicer, the depositor and any director, officer, employee
or agent of a servicer or the depositor will be entitled to indemnification by
the related trust fund and will be held harmless against any loss, liability
or expense incurred in connection with any legal action relating to the
Agreement or the Securities; provided, however, that that indemnification will
not extend to any loss, liability or expense (1) specifically imposed by that
Agreement or otherwise incidental to the performance of obligations and duties
thereunder, including, in the case of a servicer, the prosecution of an
enforcement action in respect of any specific mortgage loan or mortgage loans
or Contract or Contracts (except as any loss, liability or expense will be
otherwise reimbursable pursuant to that Agreement); (2) incurred in connection
with any breach of a representation, warranty or covenant made in that
Agreement; (3) incurred by reason of misfeasance, bad faith or gross
negligence in the performance of obligations or duties thereunder, or by
reason of reckless disregard of those obligations or duties; (4) incurred in
connection with any violation of any state or federal securities law; or (5)
imposed by any taxing authority if that loss, liability or expense is not
specifically reimbursable pursuant to the terms of the related Agreement.
o Neither any servicer nor the depositor will be under any
obligation to appear in, prosecute or defend any legal action that is not
incidental to its respective responsibilities under the Agreement and which in
its opinion may involve it in any expense or liability. Any servicer or the
depositor may, however, in its discretion undertake any action which it may
deem necessary or desirable with respect to the Agreement and the rights and
duties of the parties thereto and the interests of the securityholders
thereunder. In that event, the legal expenses and costs of that action and any
liability resulting therefrom will be expenses, costs and liabilities of the
securityholders, and the servicer or the depositor, as the case may be, will
be entitled to be reimbursed therefor and to charge the Collection Account.
Any person into which the servicer or the depositor may be merged or
consolidated, or any person resulting from any merger or consolidation to
which the servicer or the depositor is a party, or any person succeeding to
the business of the servicer or the depositor, may be the successor of the
servicer or the depositor, as the case may be, under the terms of the related
Agreement.
Special Servicers
If and to the extent specified in the prospectus supplement, a
special servicer (a "Special servicer") may be a party to the related
Agreement or may be appointed by the servicer or another specified party to
perform certain specified duties in respect of servicing the related mortgage
loans that would otherwise be performed by the servicer (for example, the
workout and/or foreclosure of defaulted mortgage loans). The rights and
obligations of any Special servicer will be specified in the prospectus
supplement, and the servicer will be liable for the performance of a Special
servicer only if, and to the extent, set forth in the prospectus supplement.
Events of Default under the Agreement
Events of default under the related Agreement will generally include:
o any failure by the servicer to distribute or cause to be
distributed to securityholders, or to remit to the trustee for distribution to
securityholders, any required payment that continues after a grace period, if
any;
o any failure by the servicer duly to observe or perform in any
material respect any of its other covenants or obligations under the Agreement
that continues unremedied for 30 days after written notice of that failure has
been given to the servicer by the trustee or the depositor, or to the
servicer, the depositor and the trustee by securityholders evidencing not less
than 25% of the voting rights for that series;
o any breach of a representation or warranty made by the servicer
under the Agreement that materially and adversely affects the interests of
securityholders and which continues unremedied for 30 days after written
notice of that breach has been given to the servicer by the trustee or the
depositor, or to the servicer, the depositor and the trustee by the holders of
Securities evidencing not less than 25% of the voting rights for that series;
and
o certain events of insolvency, readjustment of debt, marshaling of
assets and liabilities or similar proceedings and certain actions by or on
behalf of the servicer indicating its insolvency or inability to pay its
obligations.
Material variations to the foregoing events of default (other than to
shorten cure periods or eliminate notice requirements) will be specified in
the prospectus supplement. The trustee will, not later than the later of 60
days or any other period specified in the prospectus supplement after the
occurrence of any event that constitutes or, with notice or lapse of time or
both, would constitute an event of default and five days after certain
officers of the trustee become aware of the occurrence of that event, transmit
by mail to the depositor and all securityholders of the applicable series
notice of that occurrence, unless that default has been cured or waived.
Rights Upon Event of Default under the Agreements
So long as an event of default under an Agreement remains unremedied,
the depositor or the trustee may, and at the direction of holders of
Securities evidencing not less than 51% (or any other percentage specified in
the Agreement) of the voting rights for that series, the trustee will
terminate all of the rights and obligations of the servicer under the
Agreement and in and to the mortgage loans (other than as a securityholder or
as the owner of any Retained Interest), whereupon the trustee will succeed to
all of the responsibilities, duties and liabilities of the servicer under the
Agreement (except that if the trustee is prohibited by law from obligating
itself to make advances regarding delinquent Assets, or if the prospectus
supplement so specifies, then the trustee will not be obligated to make those
advances) and will be entitled to similar compensation arrangements. If the
trustee is unwilling or unable so to act, it may or, at the written request of
the holders of Securities entitled to at least 51% (or any other percentage
specified in the Agreement) of the voting rights for that series, it must
appoint, or petition a court of competent jurisdiction for the appointment of,
a loan servicing institution acceptable to the rating agency with a net worth
at the time of that appointment of at least $15,000,000 (or any other amount
specified in the Agreement) to act as successor to the servicer under the
Agreement. Pending that appointment, the trustee is obligated to act in that
capacity. The trustee and any successor servicer may agree upon the servicing
compensation to be paid, which in no event may be greater than the
compensation payable to the servicer under the Agreement.
The holders of Securities representing at least 66 2/3% (or any other
percentage specified in the Agreement) of the voting rights allocated to the
respective classes of Securities affected by any event of default will be
entitled to waive that event of default; provided, however, that an Event of
Default involving a failure to distribute a required payment to
securityholders described in clause (1) under "Events of Default under the
Agreements" may be waived only by all of the securityholders. Upon any waiver
of an event of default, that event of default will cease to exist and will be
deemed to have been remedied for every purpose under the Agreement.
No securityholders will have the right under any Agreement to
institute any proceeding with respect thereto unless that holder previously
has given to the trustee written notice of default and unless the holders of
Securities evidencing not less than 25% (or any other percentage specified in
the Agreement) of the voting rights have made written request upon the trustee
to institute that proceeding in its own name as trustee thereunder and have
offered to the trustee reasonable indemnity, and the trustee for 60 days (or
any other number of days specified in the Agreement) has neglected or refused
to institute any proceeding. The trustee, however, is under no obligation to
exercise any of the trusts or powers vested in it by any Agreement or to make
any investigation of matters arising thereunder or to institute, conduct or
defend any litigation thereunder or in relation thereto at the request, order
or direction of any of the securityholders covered by that Agreement, unless
those securityholders have offered to the trustee reasonable security or
indemnity against the costs, expenses and liabilities that may be incurred
therein or thereby.
The manner of determining the voting rights of a Security or class or
classes of Securities will be specified in the Agreement.
Amendment
In general, each Agreement may be amended by the parties thereto,
without the consent of any securityholders covered by the Agreement, to
(1) cure any ambiguity or mistake;
(2) correct, modify or supplement any provision therein that may be
inconsistent with any other provision therein or with the prospectus
supplement;
(3) make any other provisions with respect to matters or questions
arising under the Agreement that are not materially inconsistent with the
provisions thereof; or
(4) comply with any requirements imposed by the Code; provided
that, in the case of clause (3), that amendment will not adversely affect in
any material respect the interests of any securityholders covered by the
Agreement as evidenced either by an opinion of counsel to that effect or the
delivery to the trustee of written notification from each rating agency that
provides, at the request of the depositor, a rating for the Offered Securities
of the related series to the effect that that amendment or supplement will not
cause that rating agency to lower or withdraw the then current rating assigned
to those Securities.
In general, each Agreement may also be amended by the depositor, the
servicer, if any, and the trustee, with the consent of the securityholders
affected thereby evidencing not less than 51% (or any other percentage
specified in the Agreement) of the voting rights, for any purpose; provided,
however, no amendment may (1) reduce in any manner the amount of, or delay the
timing of, payments received or advanced on Assets that are required to be
distributed on any Security without the consent of the securityholder or (2)
reduce the consent percentages described in this paragraph without the consent
of all the securityholders covered by the Agreement then outstanding. However,
for any series of Securities as to which a REMIC election is to be made, the
trustee will not consent to any amendment of the Agreement unless it has first
have received an opinion of counsel to the effect that that amendment will not
result in the imposition of a tax on the related trust fund or, if applicable,
cause the related trust fund to fail to qualify as a REMIC, at any time that
the related Securities are outstanding.
The Trustee
The trustee under each Agreement will be named in the prospectus
supplement. The commercial bank, national banking association, banking
corporation or trust company serving as trustee may have a banking
relationship with the depositor and its affiliates, with any servicer and its
affiliates and with any master servicer and its affiliates. To the extent
consistent with its fiduciary obligations as trustee, the trustee may delegate
its duties to one or more agents as provided in the Agreement.
Duties of the Trustee
The trustee will make no representations as to the validity or
sufficiency of any Agreement, the Securities or any Asset or related document
and is not accountable for the use or application by or on behalf of any
servicer of any funds paid to the master servicer or its designee in respect
of the Securities or the Assets, or deposited into or withdrawn from the
Collection Account or any other account by or on behalf of the servicer. If no
Event of Default has occurred and is continuing, the trustee is required to
perform only those duties specifically required under the related Agreement,
as applicable. However, upon receipt of the various certificates, reports or
other instruments required to be furnished to it, the trustee is required to
examine those documents and to determine whether they conform to the
requirements of the Agreement.
Certain Matters Regarding the Trustee
The trustee and any director, officer, employee or agent of the
trustee will be entitled to indemnification out of the Collection Account for
any loss, liability or expense (including costs and expenses of litigation,
and of investigation, counsel fees, damages, judgments and amounts paid in
settlement) incurred in connection with the trustee's (1) enforcing its rights
and remedies and protecting the interests of the securityholders during the
continuance of an Event of Default, (2) defending or prosecuting any legal
action in respect of the related Agreement or series of Securities, (3) being
the mortgagee of record for the mortgage loans in a trust fund and the owner
of record for any Mortgaged Property acquired in respect thereof for the
benefit of securityholders, or (4) acting or refraining from acting in good
faith at the direction of the holders of the related series of Securities
entitled to not less than 25% (or any other percentage as is specified in the
related Agreement for any particular matter) of the voting rights for that
series; provided, however, that this indemnification will not extend to any
loss, liability or expense that constitutes a specific liability of the
trustee pursuant to the related Agreement, or to any loss, liability or
expense incurred by reason of willful misfeasance, bad faith or negligence on
the part of the trustee in the performance of its obligations and duties
thereunder, or by reason of its reckless disregard of those obligations or
duties, or as may arise from a breach of any representation, warranty or
covenant of the trustee made therein.
Resignation and Removal of the Trustee
The trustee may at any time resign from its obligations and duties
under an Agreement by giving written notice thereof to the depositor, the
servicer, if any, each rating agency, and all securityholders. Upon receiving
that notice of resignation, the depositor is required promptly to appoint a
successor trustee acceptable to the servicer, if any. If no successor trustee
has been so appointed and has accepted appointment within 30 days after the
giving of that notice of resignation, the resigning trustee may petition any
court of competent jurisdiction for the appointment of a successor trustee.
If at any time the trustee ceases to be eligible to continue as a
trustee under the related Agreement, or if at any time the trustee becomes
incapable of acting, or is adjudged bankrupt or insolvent, or a receiver of
the trustee or of its property is appointed, or any public officer takes
charge or control of the trustee or of its property or affairs for the purpose
of rehabilitation, conservation or liquidation, or if a change in the
financial condition of the trustee has adversely affected or will adversely
affect the rating on any class of the Securities, then the depositor and/or a
party specified in the related Agreement may remove the trustee and appoint a
successor trustee acceptable to the master servicer, if any, according to the
terms of the related Agreement. Securityholders of any series entitled to at
least 51% (or any other percentage specified in the prospectus supplement) of
the voting rights for that series may at any time remove the trustee without
cause and appoint a successor trustee.
Any resignation or removal of the trustee and appointment of a
successor trustee will not become effective until acceptance of appointment by
the successor trustee.
Material Terms of the Indenture
General
The following summary describes the material provisions that may
appear in each indenture. The prospectus supplement for a series of Notes will
describe any provision of the indenture relating to that series that
materially differs from the description thereof contained in this prospectus.
The summaries do not purport to be complete and are subject to, and are
qualified by reference to, all of the provisions of the indenture for a series
of Notes. A form of an indenture has been filed as an exhibit to the
Registration Statement of which this prospectus is a part. The depositor will
provide a copy of the indenture (without exhibits) relating to any series of
Notes without charge upon written request of a securityholder of that series
addressed to ACE Securities Corp., 6525 Morrison Boulevard, Suite 318,
Charlotte, North Carolina 28211, Attention: Elizabeth S. Eldridge.
Events of Default
Events of default under the indenture for each series of Notes will
generally include:
o a default for thirty days (or any other number of days specified
in the prospectus supplement) or more in the payment of any principal of or
interest on a Note of that series, to the extent specified in the prospectus
supplement;
o failure to perform any other covenant of the depositor or the
trust fund in the indenture that continues for a period of sixty days (or any
other number of days specified in the prospectus supplement or the indenture)
after notice thereof is given in accordance with the procedures described in
the prospectus supplement;
o any representation or warranty made by the depositor or the trust
fund in the indenture or in any certificate or other writing delivered
pursuant thereto or in connection therewith with respect to or affecting that
series having been incorrect in a material respect as of the time made, and
that breach is not cured within sixty days (or any other number of days
specified in the prospectus supplement) after notice thereof is given in
accordance with the procedures described in the prospectus supplement;
o certain events of bankruptcy, insolvency, receivership or
liquidation of the trust fund; or
o any other event of default provided with respect to Notes of that
series.
If an event of default with respect to the Notes of any series at the
time outstanding occurs and is continuing, subject to and in accordance with
the terms of the indenture, either the indenture trustee or the holders of a
majority of the then total outstanding amount of the Notes of that series may
declare the principal amount (or, if the Notes of that series are Accrual
Securities, that portion of the principal amount as may be specified in the
terms of that series, as provided in the indenture) of all the Notes of that
series to be due and payable immediately. That declaration may, under certain
circumstances, be rescinded and annulled by the securityholders of a majority
in total outstanding amount of the Notes of that series.
If, following an event of default with respect to any series of
Notes, the Notes of that series have been declared to be due and payable, the
indenture trustee may, in its discretion, notwithstanding that acceleration,
elect to maintain possession of the collateral securing the Notes of that
series and to continue to apply distributions on that collateral as if there
had been no declaration of acceleration if that collateral continues to
provide sufficient funds for the payment of principal of and interest on the
Notes of that series as they would have become due if there had not been that
declaration. In addition, the indenture trustee may not sell or otherwise
liquidate the collateral securing the Notes of a series following an event of
default, other than a default in the payment of any principal or interest on
any Note of that series for thirty days or more, unless
(1) the holders of 100% (or any other percentage specified in the
indenture) of the then total outstanding amount of the Notes of that series
consent to that sale;
(2) the proceeds of that sale or liquidation are sufficient to pay
in full the principal of and accrued interest, due and unpaid, on the
outstanding Notes of that series at the date of that sale; or
(3) the indenture trustee determines that that collateral would not
be sufficient on an ongoing basis to make all payments on the Notes as those
payments would have become due if the Notes had not been declared due and
payable, and the indenture trustee obtains the consent of the holders of 66
2/3% (or any other percentage specified in the indenture) of the then total
outstanding amount of the Notes of that series.
If so specified in the prospectus supplement, only holders of certain
classes of Notes will have the right to declare the Notes of that series to be
immediately due and payable in the event of a payment default, as described
above, and to exercise the remedies described above.
If the indenture trustee liquidates the collateral in connection with
an event of default involving a default for thirty days (or any other number
of days specified in the indenture) or more in the payment of principal of or
interest on the Notes of a series, the indenture provides that the indenture
trustee will have a prior lien on the proceeds of any liquidation for unpaid
fees and expenses. As a result, upon the occurrence of that event of default,
the amount available for distribution to the securityholders would be less
than would otherwise be the case. However, the indenture trustee may not
institute a proceeding for the enforcement of its lien except in connection
with a proceeding for the enforcement of the lien of the indenture for the
benefit of the securityholders after the occurrence of that event of default.
To the extent provided in the prospectus supplement, in the event the
principal of the Notes of a series is declared due and payable, as described
above, the holders of any Notes issued at a discount from par may be entitled
to receive no more than an amount equal to the unpaid principal amount thereof
less the amount of the discount that is unamortized.
Subject to the provisions of the indenture relating to the duties of
the indenture trustee, in case an event of default occurs and continues for a
series of Notes, the indenture trustee will be under no obligation to exercise
any of the rights or powers under the indenture at the request or direction of
any of the securityholders of that series, unless those holders offer to the
indenture trustee security or indemnity satisfactory to it against the costs,
expenses and liabilities that might be incurred by it in complying with that
request or direction. Subject to those provisions for indemnification and
certain limitations contained in the indenture, the holders of a majority of
the then total outstanding amount of the Notes of that series will have the
right to direct the time, method and place of conducting any proceeding for
any remedy available to the indenture trustee or exercising any trust or power
conferred on the indenture trustee with respect to the Notes of that series,
and the holders of a majority of the then total outstanding amount of the
Notes of that series may, in some cases, waive any default with respect
thereto, except a default in the payment of principal or interest or a default
in respect of a covenant or provision of the indenture that cannot be modified
without the waiver or consent of all the holders of the outstanding Notes of
that series affected thereby.
Discharge of Indenture
The indenture will be discharged, subject to the provisions of the
indenture, for a series of Notes (except for certain continuing rights
specified in the indenture) upon the delivery to the indenture trustee for
cancellation of all the Notes of that series or, with certain limitations,
upon deposit with the indenture trustee of funds sufficient for the payment in
full of all of the Notes of that series.
With certain limitations, the indenture will provide that, if
specified for the Notes of any series, the related trust fund will be
discharged from any and all obligations in respect of the Notes of that series
(except for certain obligations specified in the indenture including
obligations relating to temporary Notes and exchange of Notes, to register the
transfer of or exchange Notes of that series, to replace stolen, lost or
mutilated Notes of that series, to maintain paying agencies and to hold monies
for payment in trust) upon the deposit with the indenture trustee, in trust,
of money and/or direct obligations of or obligations guaranteed by the United
States of America which through the payment of interest and principal in
respect thereof in accordance with their terms will provide money in an amount
sufficient to pay the principal of and each installment of interest on the
Notes of that series on the maturity date for those Notes and any installment
of interest on those Notes in accordance with the terms of the indenture and
the Notes of that series. In the event of any defeasance and discharge of
Notes of that series, holders of Notes of that series would be able to look
only to that money and/or those direct obligations for payment of principal
and interest, if any, on their Notes until maturity.
Indenture Trustee's Annual Report
The indenture trustee for each series of Notes will be required to
mail each year to all related securityholders a brief report, as provided in
the indenture, relating to its eligibility and qualification to continue as
indenture trustee under the related indenture, any amounts advanced by it
under the indenture, the amount, interest rate and maturity date of certain
indebtedness owing by that Trust to the applicable indenture trustee in its
individual capacity, the property and funds physically held by the indenture
trustee in its capacity as indenture trustee and any action taken by it that
materially affects the Notes and that has not been previously reported.
The Indenture Trustee
The indenture trustee for a series of Notes will be specified in the
prospectus supplement. The indenture trustee for any series may resign at any
time in accordance with the terms of the indenture, in which event the
depositor or the appropriate party designated in the indenture will be
obligated to appoint a successor trustee for that series. The depositor or the
appropriate party designated in the indenture may also remove any indenture
trustee if that indenture trustee ceases to be eligible to continue as the
indenture trustee under the related indenture, if that indenture trustee
becomes insolvent or for any other grounds specified in the indenture. In
those circumstances the depositor or the appropriate party designated in the
indenture will be obligated to appoint a successor trustee for the applicable
series of Notes. Any resignation or removal of the indenture trustee and
appointment of a successor trustee for any series of Notes does not become
effective until acceptance of the appointment by the successor trustee for
that series.
The bank or trust company serving as indenture trustee may have a
banking relationship with the depositor or any of its affiliates, a servicer
or any of its affiliates or the master servicer or any of its affiliates. To
the extent consistent with its fiduciary obligations as indenture trustee, the
indenture trustee may delegate its duties to one or more agents as provided in
the indenture and the Agreement.
Description of Credit Support
General
For any series of Securities, credit support may be provided for
one or more classes thereof or the related Assets. Credit support
may be in the form of:
o the subordination of one or more classes of Securities;
o letters of credit;
o insurance policies;
o guarantees;
o the establishment of one or more reserve funds; or
o any other method of credit support described in the prospectus
supplement, or any combination of the foregoing.
Any form of credit support may be structured so as to be drawn upon
by more than one series to the extent described in the prospectus supplement.
The coverage provided by any credit support will be described in the
prospectus supplement. Generally, that coverage will not provide protection
against all risks of loss and will not guarantee repayment of the entire
Security Balance of the Securities and interest thereon. If losses or
shortfalls occur that exceed the amount covered by credit support or that are
not covered by credit support, securityholders will bear their allocable share
of deficiencies. Moreover, if a form of credit support covers more than one
series of Securities (each, a "Covered Trust"), securityholders evidencing
interests in any of those Covered Trusts will be subject to the risk that the
credit support will be exhausted by the claims of other Covered Trusts before
that Covered Trust receiving any of its intended share of that coverage.
If credit support is provided for one or more classes of Securities
of a series, or the related Assets, the prospectus supplement will include a
description of (a) the nature and amount of coverage under that credit
support, (b) any conditions to payment thereunder not otherwise described
herein, (c) the conditions (if any) under which the amount of coverage under
that credit support may be reduced and under which that credit support may be
terminated or replaced and (d) the material provisions relating to that credit
support. Additionally, the prospectus supplement will set forth certain
information with respect to the obligor under any financial guaranty insurance
policy, letter of credit, guarantee or similar instrument of credit support,
including (1) a brief description of its principal business activities, (2)
its principal place of business, place of incorporation and the jurisdiction
under which it is chartered or licensed to do business, (3) if applicable, the
identity of regulatory agencies that exercise primary jurisdiction over the
conduct of its business and (4) its total assets, and its stockholders' or
policyholders' surplus, if applicable, as of the date specified in the
prospectus supplement.
Subordinate Securities
One or more classes of Securities of a series may be Subordinate
Securities if specified in the prospectus supplement. The rights of the
holders of Subordinate Securities to receive distributions of principal and
interest from the Collection Account on any Distribution Date will be
subordinated to those rights of the holders of Senior Securities. The
subordination of a class may apply only in the event of (or may be limited to)
certain types of losses or shortfalls. The prospectus supplement will set
forth information concerning the amount of subordination of a class or classes
of Subordinate Securities in a series, the circumstances in which that
subordination will be applicable and the manner, if any, in which the amount
of subordination will be effected.
Cross-Support Provisions
If the Assets for a series are divided into separate groups, each
supporting a separate class or classes of Securities of a series, credit
support may be provided by cross-support provisions requiring that
distributions be made on Senior Securities evidencing interests in one group
of mortgage loans before distributions on Subordinate Securities evidencing
interests in a different group of mortgage loans within the trust fund. The
prospectus supplement for a series that includes a cross-support provision
will describe the manner and conditions for applying those provisions.
Limited Guarantee
If specified in the prospectus supplement for a series of Securities,
credit enhancement may be provided in the form of a limited guarantee issued
by a guarantor named therein.
Financial Guaranty Insurance Policy or Surety Bond
Credit enhancement may be provided in the form of a financial
guaranty insurance policy or a surety bond issued by an insurer named therein,
if specified in the prospectus supplement.
Letter of Credit
Alternative credit support for a series of Securities may be provided
by the issuance of a letter of credit by the bank or financial institution
specified in the prospectus supplement. The coverage, amount and frequency of
any reduction in coverage provided by a letter of credit issued for a series
of Securities will be set forth in the prospectus supplement relating to that
series.
Pool Insurance Policies
If specified in the prospectus supplement relating to a series of
Securities, a pool insurance policy for the mortgage loans in the related
trust fund will be obtained. The pool insurance policy will cover any loss
(subject to the limitations described in the prospectus supplement) by reason
of default to the extent a related mortgage loan is not covered by any primary
mortgage insurance policy. The amount and principal terms of any pool
insurance coverage will be set forth in the prospectus supplement.
Special Hazard Insurance Policies
A special hazard insurance policy may also be obtained for the
related trust fund, if specified in the prospectus supplement, in the amount
set forth therein. The special hazard insurance policy will, subject to the
limitations described in the prospectus supplement, protect against loss by
reason of damage to Mortgaged Properties caused by certain hazards not insured
against under the standard form of hazard insurance policy for the respective
states, in which the Mortgaged Properties are located.
The amount and principal terms of any special hazard insurance coverage will
be set forth in the prospectus supplement.
Borrower Bankruptcy Bond
Losses resulting from a bankruptcy proceeding relating to a borrower
affecting the mortgage loans in a trust fund for a series of Securities will,
if specified in the prospectus supplement, be covered under a borrower
bankruptcy bond (or any other instrument that will not result in a downgrading
of the rating of the Securities of a series by the rating agency or agencies
that rate that series). Any borrower bankruptcy bond or any other instrument
will provide for coverage in an amount meeting the criteria of the rating
agency or agencies rating the Securities of the related series, which amount
will be set forth in the prospectus supplement. The amount and principal terms
of any borrower bankruptcy coverage will be set forth in the prospectus
supplement.
Reserve Funds
If so provided in the prospectus supplement for a series of
Securities, deficiencies in amounts otherwise payable on those Securities or
certain classes thereof will be covered by one or more reserve funds in which
cash, a letter of credit, Permitted Investments, a demand note or a
combination thereof will be deposited, in the amounts so specified in the
prospectus supplement. The reserve funds for a series may also be funded over
time by depositing therein a specified amount of the distributions received on
the related Assets as specified in the prospectus supplement.
Amounts on deposit in any reserve fund for a series, together with
the reinvestment income thereon, if any, will be applied for the purposes, in
the manner, and to the extent specified in the prospectus supplement. A
reserve fund may be provided to increase the likelihood of timely
distributions of principal of and interest on the Securities. If specified in
the prospectus supplement, reserve funds may be established to provide limited
protection against only certain types of losses and shortfalls. Following each
Distribution Date amounts in a reserve fund in excess of any amount required
to be maintained therein may be released from the reserve fund under the
conditions and to the extent specified in the prospectus supplement and will
not be available for further application to the Securities.
Money deposited in any reserve funds will be invested in Permitted
Investments, to the extent specified in the prospectus supplement. To the
extent specified in the prospectus supplement, any reinvestment income or
other gain from those investments will be credited to the related reserve fund
for that series, and any loss resulting from those investments will be charged
to the reserve fund. However, that income may be payable to any related
servicer or another service provider or other entity. To the extent specified
in the prospectus supplement, the reserve fund, if any, for a series will not
be a part of the trust fund.
Additional information concerning any reserve fund will be set forth
in the prospectus supplement, including the initial balance of the reserve
fund, the balance required to be maintained in the reserve fund, the manner in
which the required balance will decrease over time, the manner of funding the
reserve fund, the purposes for which funds in the reserve fund may be applied
to make distributions to securityholders and use of investment earnings from
the reserve fund, if any.
Overcollateralization
If specified in the prospectus supplement, subordination provisions
of a trust fund may be used to accelerate to a limited extent the amortization
of one or more classes of Securities relative to the amortization of the
related Assets. The accelerated amortization is achieved by the application of
certain excess interest to the payment of principal of one or more classes of
Securities. This acceleration feature creates, for the Assets or groups
thereof, overcollateralization, which is the excess of the total principal
balance of the related Assets, or a group thereof, over the principal balance
of the related class or classes of Securities. This acceleration may continue
for the life of the related Security, or may be limited. In the case of
limited acceleration, once the required level of overcollateralization is
reached, and subject to certain provisions specified in the prospectus
supplement, the limited acceleration feature may cease, unless necessary to
maintain the required level of overcollateralization.
Certain Legal Aspects of Mortgage Loans
The following discussion contains summaries, which are general in
nature, of certain legal aspects of loans secured by single-family or
multi-family residential properties. Because these legal aspects are governed
primarily by applicable state law (which laws may differ substantially), the
summaries do not purport to be complete nor to reflect the laws of any
particular state, nor to encompass the laws of all states in which the
security for the mortgage loans is situated. The summaries are qualified in
their entirety by reference to the applicable federal and state laws governing
the mortgage loans. In this regard, the following discussion does not fully
reflect federal regulations for FHA loans and VA loans. See "Description of
The Trust Funds--FHA Loans and VA Loans," "Description of the
Agreements--Material Terms of the Pooling and Servicing Agreements and
Underlying Servicing Agreements--FHA Insurance and VA Guarantees" and
"Description of the Trust Funds--Assets."
General
All of the mortgage loans are evidenced by a note or bond and secured
by instruments granting a security interest in real property which may be
mortgages, deeds of trust, security deeds or deeds to secure debt, depending
on the prevailing practice and law in the state in which the Mortgaged
Property is located. Mortgages, deeds of trust and deeds to secure debt are
herein collectively referred to as "mortgages." Any of the foregoing types of
mortgages will create a lien upon, or grant a title interest in, the subject
property, the priority of which will depend on the terms of the particular
security instrument, as well as separate, recorded, contractual arrangements
with others holding interests in the mortgaged property, the knowledge of the
parties to that instrument as well as the order of recordation of the
instrument in the appropriate public recording office. However, recording does
not generally establish priority over governmental claims for real estate
taxes and assessments and other charges imposed under governmental police
powers.
Types of Mortgage Instruments
A mortgage either creates a lien against or constitutes a conveyance
of real property between two parties--a borrower (usually the owner of the
subject property) and a mortgagee (the lender). In contrast, a deed of trust
is a three-party instrument, among a trustor (the equivalent of a borrower), a
trustee to whom the mortgaged property is conveyed, and a beneficiary (the
lender) for whose benefit the conveyance is made. As used in this prospectus,
unless the context otherwise requires, "borrower" includes the trustor under a
deed of trust and a grantor under a security deed or a deed to secure debt.
Under a deed of trust, the borrower grants the property, irrevocably
until the debt is paid, in trust, generally with a power of sale as security
for the indebtedness evidenced by the related note. A deed to secure debt
typically has two parties. By executing a deed to secure debt, the grantor
conveys title to, as opposed to merely creating a lien upon, the subject
property to the grantee until the underlying debt is repaid, generally with a
power of sale as security for the indebtedness evidenced by the related
mortgage note.
In case the borrower under a mortgage is a land trust, there would be
an additional party because legal title to the property is held by a land
trustee under a land trust agreement for the benefit of the borrower. At
origination of a mortgage loan involving a land trust, the borrower executes a
separate undertaking to make payments on the mortgage note. The mortgagee's
authority under a mortgage, the trustee's authority under a deed of trust and
the grantee's authority under a deed to secure debt are governed by the
express provisions of the mortgage, the law of the state in which the real
property is located, certain federal laws (including the Soldiers' and
Sailors' Civil Relief Act of 1940) and, in some cases, in deed of trust
transactions, the directions of the beneficiary.
The Mortgages that encumber Multifamily Properties may contain an
assignment of rents and leases, pursuant to which the borrower assigns to the
lender the borrower's right, title and interest as landlord under each lease
and the income derived therefrom, while retaining a revocable license to
collect the rents for so long as there is no default. If the borrower
defaults, the license terminates and the lender is entitled to collect the
rents. Local law may require that the lender take possession of the property
and/or obtain a court-appointed receiver before becoming entitled to collect
the rents.
Interest in Real Property
The real property covered by a mortgage, deed of trust, security deed
or deed to secure debt is most often the fee estate in land and improvements.
However, that instrument may encumber other interests in real property such as
a tenant's interest in a lease of land or improvements, or both, and the
leasehold estate created by that lease. An instrument covering an interest in
real property other than the fee estate requires special provisions in the
instrument creating that interest or in the mortgage, deed of trust, security
deed or deed to secure debt, to protect the mortgagee against termination of
that interest before the mortgage, deed of trust, security deed or deed to
secure debt is paid. The depositor, the Asset Seller or other entity specified
in the prospectus supplement will make certain representations and warranties
in the Agreement or certain representations and warranties will be assigned to
the trustee for any mortgage loans secured by an interest in a leasehold
estate. Those representation and warranties, if applicable, will be set forth
in the prospectus supplement.
Cooperative Loans
If specified in the prospectus supplement, the mortgage loans may
also consist of cooperative apartment loans ("Cooperative Loans") secured by
security interests in shares issued by a cooperative housing corporation (a
"Cooperative") and in the related proprietary leases or occupancy agreements
granting exclusive rights to occupy specific dwelling units in the
cooperatives' buildings. The security agreement will create a lien upon, or
grant a title interest in, the property that it covers, the priority of which
will depend on the terms of the particular security agreement as well as the
order of recordation of the agreement in the appropriate recording office.
That lien or title interest is not prior to the lien for real estate taxes and
assessments and other charges imposed under governmental police powers.
Each Cooperative owns in fee or has a leasehold interest in all the
real property and owns in fee or leases the building and all separate dwelling
units therein. The Cooperative is directly responsible for property management
and, in most cases, payment of real estate taxes, other governmental
impositions and hazard and liability insurance. If there is a blanket mortgage
or mortgages on the cooperative apartment building or underlying land, as is
generally the case, or an underlying lease of the land, as is the case in some
instances, the Cooperative, as property borrower, or lessee, as the case may
be, is also responsible for meeting these mortgage or rental obligations. A
blanket mortgage is ordinarily incurred by the cooperative in connection with
either the construction or purchase of the Cooperative's apartment building or
obtaining of capital by the Cooperative. The interest of the occupant under
proprietary leases or occupancy agreements as to which that Cooperative is the
landlord are generally subordinate to the interest of the holder of a blanket
mortgage and to the interest of the holder of a land lease.
If the Cooperative is unable to meet the payment obligations (1)
arising under a blanket mortgage, the mortgagee holding a blanket mortgage
could foreclose on that mortgage and terminate all subordinate proprietary
leases and occupancy agreements or (2) arising under its land lease, the
holder of the landlord's interest under the land lease could terminate it and
all subordinate proprietary leases and occupancy agreements. Also, a blanket
mortgage on a cooperative may provide financing in the form of a mortgage that
does not fully amortize, with a significant portion of principal being due in
one final payment at maturity. The inability of the Cooperative to refinance a
mortgage and its consequent inability to make that final payment could lead to
foreclosure by the mortgagee. Similarly, a land lease has an expiration date
and the inability of the Cooperative to extend its term or, in the
alternative, to purchase the land could lead to termination of the
Cooperative's interest in the property and termination of all proprietary
leases and occupancy agreement. In either event, a foreclosure by the holder
of a blanket mortgage or the termination of the underlying lease could
eliminate or significantly diminish the value of any collateral held by the
lender that financed the purchase by an individual tenant stockholder of
cooperative shares or, in the case of the mortgage loans, the collateral
securing the Cooperative Loans.
The Cooperative is owned by tenant-stockholders who, through
ownership of stock or shares in the corporation, receive proprietary lease or
occupancy agreements that confer exclusive rights to occupy specific units.
Generally, a tenant-stockholder of a Cooperative must make a monthly payment
to the Cooperative representing that 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 occupancy rights are financed
through a Cooperative Loan evidenced by a promissory note and secured by an
assignment of and a security interest in the occupancy agreement or
proprietary lease and a security interest in the related Cooperative shares.
The lender generally 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 is 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. See "--Foreclosure--Cooperative Loans" below.
Land Sale Contracts
Under an installment land sale contract for the sale of real estate
(a "land sale contract") the contract seller (hereinafter referred to as the
"contract lender") retains legal title to the property and enters into an
agreement with the contract purchaser (hereinafter referred to as the
"contract borrower") for the payment of the purchase price, plus interest,
over the term of the land sale contract. Only after full performance by the
borrower of the contract is the contract lender obligated to convey title to
the real estate to the purchaser. As with mortgage or deed of trust financing,
during the effective period of the land sale contract, the contract borrower
is responsible for maintaining the property in good condition and for paying
real estate taxes, assessments and hazard insurance premiums associated with
the property.
The method of enforcing the rights of the contract lender under an
installment contract varies on a state-by-state basis depending on the extent
to which state courts are willing, or able pursuant to state statute, to
enforce the contract strictly according to its terms. The terms of land sale
contracts generally provide that upon default by the contract borrower, the
borrower loses his or her right to occupy the property, the entire
indebtedness is accelerated, and the buyer's equitable interest in the
property is forfeited. The contract lender in that situation does not have to
foreclose to obtain title to the property, although in some cases a quiet
title action is in order if the contract borrower has filed the land sale
contract in local land records and an ejectment action may be necessary to
recover possession.
In a few states, particularly in cases of contract borrower default
during the early years of a land sale contract, the courts will permit
ejectment of the buyer and a forfeiture of his or her interest in the
property. However, most state legislatures have enacted provisions by analogy
to mortgage law protecting borrowers under land sale contracts from the harsh
consequences of forfeiture. Under those statues, a judicial contract may be
reinstated upon full payment of the default amount and the borrower may have a
post-foreclosure statutory redemption right. In other states, courts in equity
may permit a contract borrower with significant investment in the property
under a land sale contract for the sale of real estate to share the proceeds
of sale of the property after the indebtedness is repaid or may otherwise
refuse to enforce the forfeiture clause. Nevertheless, generally speaking, the
contract lender's procedures for obtaining possession and clear title under a
land sale contract for the sale of real estate in a particular state are
simpler and less time consuming and costly than are the procedures for
foreclosing and obtaining clear title to a mortgaged property.
Foreclosure
General
Foreclosure is a legal procedure that allows the mortgagee to recover
its mortgage debt by enforcing its rights and available legal remedies under
the mortgage. If the borrower defaults in payment or performance of its
obligations under the note or mortgage, the mortgagee has the right to
institute foreclosure proceedings to sell the mortgaged property at public
auction to satisfy the indebtedness.
Foreclosure procedures for the enforcement of a mortgage vary from
state to state. Two primary methods of foreclosing a mortgage are judicial
foreclosure and non-judicial foreclosure pursuant to a power of sale granted
in the mortgage instrument. There are several other foreclosure procedures
available in some states that are either infrequently used or available only
in some limited circumstances, such as strict foreclosure.
Judicial Foreclosure
A judicial foreclosure proceeding is conducted in a court having
jurisdiction over the mortgaged property. Generally, the action is initiated
by the service of legal pleadings upon all parties having an interest of
record in the real property. Delays in completion of the foreclosure may
occasionally result from difficulties in locating defendants. When the
lender's right to foreclose is contested, the legal proceedings can be
time-consuming. Upon successful completion of a judicial foreclosure
proceeding, the court generally issues a judgment of foreclosure and appoints
a referee or other officer to conduct a public sale of the mortgaged property,
the proceeds of which are used to satisfy the judgment. Those sales are made
in accordance with procedures that vary from state to state.
Equitable Limitations on Enforceability of Certain Provisions
United States courts have traditionally imposed general equitable
principles to limit the remedies available to a mortgagee in connection with
foreclosure. These equitable principles are generally designed to relieve the
borrower from the legal effect of mortgage defaults, to the extent that the
effect is perceived as harsh or unfair. Relying on those principles, a court
may alter the specific terms of a loan to the extent it considers necessary to
prevent or remedy an injustice, undue oppression or overreaching, or may
require the lender to undertake affirmative and expensive actions to determine
the cause of the borrower's default and the likelihood that the borrower will
be able to reinstate the loan.
In some cases, courts have substituted their judgment for the
lender's and have required that lenders reinstate loans or recast payment
schedules to accommodate borrowers who are suffering from a temporary
financial disability. In other cases, courts have limited the right of the
lender to foreclose if the default under the mortgage is not monetary, e.g.,
the borrower failed to maintain the mortgaged property adequately or the
borrower executed a junior mortgage on the mortgaged property. The exercise by
the court of its equity powers will depend on the individual circumstances of
each case presented to it. Finally, some courts have been faced with the issue
of whether federal or state constitutional provisions reflecting due process
concerns for adequate notice require that a borrower receive notice in
addition to statutorily-prescribed minimum notice. For the most part, these
cases have upheld the reasonableness of the notice provisions or have found
that a public sale under a mortgage providing for a power of sale does not
involve sufficient state action to afford constitutional protections to the
borrower.
Non-Judicial Foreclosure/Power of Sale
Foreclosure of a deed of trust is generally accomplished by a
non-judicial trustee's sale pursuant to the power of sale granted in the deed
of trust. A power of sale is typically granted in a deed of trust. It may also
be contained in any other type of mortgage instrument. A power of sale allows
a non-judicial public sale to be conducted generally following a request from
the beneficiary/lender to the trustee to sell the property upon any default by
the borrower under the terms of the mortgage note or the mortgage instrument
and after notice of sale is given in accordance with the terms of the mortgage
instrument, as well as applicable state law.
In some states, before the sale, the trustee under a deed of trust
must record a notice of default and notice of sale and send a copy to the
borrower and to any other party who has recorded a request for a copy of a
notice of default and notice of sale. In addition, in some states the trustee
must provide notice to any other party having an interest of record in the
real property, including junior lienholders. A notice of sale must be posted
in a public place and, in most states, published for a specified period of
time in one or more newspapers. The borrower or junior lienholder may then
have the right, during a reinstatement period required in some states, to cure
the default by paying the entire actual amount in arrears (without
acceleration) plus the expenses incurred in enforcing the obligation. In other
states, the borrower or the junior lienholder is not provided a period to
reinstate the loan, but has only the right to pay off the entire debt to
prevent the foreclosure sale. Generally, the procedure for public sale, the
parties entitled to notice, the method of giving notice and the applicable
time periods are governed by state law and vary among the states. Foreclosure
of a deed to secure debt is also generally accomplished by a non-judicial sale
similar to that required by a deed of trust, except that the lender or its
agent, rather than a trustee, is typically empowered to perform the sale in
accordance with the terms of the deed to secure debt and applicable law.
Public Sale
A third party may be unwilling to purchase a mortgaged property at a
public sale because of the difficulty in determining the value of that
property at the time of sale, due to, among other things, redemption rights
that may exist and the possibility of physical deterioration of the property
during the foreclosure proceedings. For these reasons, it is common for the
lender to purchase the mortgaged property for an amount equal to or less than
the underlying debt and accrued and unpaid interest plus the expenses of
foreclosure. Generally, state law controls the amount of foreclosure costs and
expenses that may be recovered by a lender. Thereafter, subject to the
borrower's right in some states to remain in possession during a redemption
period, if applicable, the lender will become the owner of the property and
have both the benefits and burdens of ownership of the mortgaged property. For
example, the lender will become obligated to pay taxes, obtain casualty
insurance and to make those 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 on market conditions, the ultimate
proceeds of the sale of the property may not equal the lender's investment in
the property. Moreover, a lender commonly incurs substantial legal fees and
court costs in acquiring a mortgaged property through contested foreclosure
and/or bankruptcy proceedings. Generally, state law controls the amount of
foreclosure expenses and costs, including attorneys' fees, that may be
recovered by a lender.
A junior mortgagee may not foreclose on the property securing the
junior mortgage unless it forecloses subject to senior mortgages and any other
prior liens, in which case it may be obliged to make payments on the senior
mortgages to avoid their foreclosure. In addition, if the foreclosure of a
junior mortgage triggers the enforcement of a "due-on-sale" clause contained
in a senior mortgage, the junior mortgagee may be required to pay the full
amount of the senior mortgage to avoid its foreclosure. Accordingly, for those
mortgage loans, if any, that are junior mortgage loans, if the lender
purchases the property the lender's title will be subject to all senior
mortgages, prior liens 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 under which the sale was
conducted. Any proceeds remaining after satisfaction of senior mortgage debt
are generally payable to the holders of junior mortgages and other liens and
claims in order of their priority, whether or not the borrower is in default.
Any additional proceeds are generally payable to the borrower. The payment of
the proceeds to the holders of junior mortgages may occur in the foreclosure
action of the senior mortgage or a subsequent ancillary proceeding or may
require the institution of separate legal proceedings by those holders.
Rights of Redemption
The purposes of a foreclosure action are to enable the mortgagee to
realize upon its security and to bar the borrower, and all persons who have an
interest in the property that is subordinate to the mortgage being foreclosed,
from exercise of their "equity of redemption." The doctrine of equity of
redemption provides that, until the property covered by a mortgage has been
sold in accordance with a properly conducted foreclosure and foreclosure sale,
those having an interest that is subordinate to that of the foreclosing
mortgagee have an equity of redemption and may redeem the property by paying
the entire debt with interest. In addition, in some states, when a foreclosure
action has begun, the redeeming party must pay certain costs of that action.
Those having an equity of redemption must generally be made parties and joined
in the foreclosure proceeding in order for their equity of redemption to be
cut off and terminated.
The equity of redemption is a common-law (non-statutory) right that
exists before completion of the foreclosure, is not waivable by the borrower,
must be exercised before foreclosure sale and should be distinguished from the
post-sale statutory rights of redemption. In some states, after sale pursuant
to a deed of trust or foreclosure of a mortgage, the borrower and foreclosed
junior lienors are given a statutory period in which to redeem the property
from the foreclosure sale. In some states, statutory redemption may occur only
upon payment of the foreclosure sale price. In other states, redemption may be
authorized if the former borrower pays only a portion of the sums due. The
effect of a statutory right of redemption is to diminish the ability of the
lender to sell the foreclosed property. The exercise of a right of redemption
would defeat the title of any purchaser from a foreclosure sale or sale under
a deed of trust. Consequently, the practical effect of the redemption right is
to force the lender to maintain the property and pay the expenses of ownership
until the redemption period has expired. In some states, a post-sale statutory
right of redemption may exist following a judicial foreclosure, but not
following a trustee's sale under a deed of trust.
Under the REMIC Provisions currently in effect, property acquired by
foreclosure generally must not be held for more than three years. For a series
of Securities for which an election is made to qualify the trust fund or a
part thereof as a REMIC, the Agreement will permit foreclosed property to be
held for more than three years if the Internal Revenue Service grants an
extension of time within which to sell the property or independent counsel
renders an opinion to the effect that holding the property for that additional
period is permissible under the REMIC Provisions.
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 canceled by
the Cooperative for failure by the tenant-stockholder to pay rent or other
obligations or charges owed by that tenant-stockholder, including mechanics'
liens against the cooperative apartment building incurred by that
tenant-stockholder. The proprietary lease or occupancy agreement generally
permit the Cooperative to terminate the lease or agreement in the event a
borrower fails to make payments or defaults in the performance of covenants
required thereunder. Typically, the lender and the Cooperative enter into a
recognition agreement that establishes the rights and obligations of both
parties in the event of 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, if the
tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the Cooperative will take no action to terminate that 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 that
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 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 Cooperatives 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.
In the case of foreclosure on a building that 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 that apply to
certain tenants who elected to remain in a building so converted.
Year 2000 Legislation
In July 1999, a new federal law was passed to limit liability for
losses due to year 2000 computer-related errors. This law will, among other
things, protect borrowers from foreclosure if their residential mortgage loans
become delinquent because an actual year 2000 failure results in inability to
accurately or timely process their mortgage payments.
This law is not intended to extinguish or otherwise affect a
borrower's payment obligations but will instead delay the enforcement of
obligations on an otherwise defaulted mortgage loan. Borrowers seeking
foreclosure protection under this law must provide timely written notice and
documentation of that failure to the servicer. Absent an extension from the
lender, borrowers will then have four weeks to make up late payments on their
loans. This law will not apply to mortgage loans for which a default occurs
before December 15, 1999, or for which an imminent default is foreseeable
before that date. This law will also not protect borrowers who deliver notice
of a year 2000 failure after March 15, 2000. Mortgage loans that remain in
default after the applicable grace period will be subject to foreclosure or
other enforcement.
This law could delay the ability of a servicer to foreclose on some
mortgage loans during the first quarter of the year 2000. These delays could
affect the distributions on your Securities.
Junior Mortgages
Some of the mortgage loans may be secured by junior mortgages or
deeds of trust, that are subordinate to first or other senior mortgages or
deeds of trust held by other lenders. The rights of the trust fund as the
holder of a junior deed of trust or a junior mortgage are subordinate in lien
and in payment 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
borrower, 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" above.
Furthermore, because the terms of the junior mortgage or deed of
trust are subordinate to the terms of the first mortgage or deed of trust, in
the event of a conflict between the terms of the first mortgage or deed of
trust and the junior mortgage or deed of trust, the terms of the first
mortgage or deed of trust will generally govern. Upon a failure of the
borrower 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 right 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 first mortgagee
expends these sums, these sums will generally have priority over all sums due
under the junior mortgage.
Anti-Deficiency Legislation and Other Limitations on Lenders
Statutes in some states limit the right of a beneficiary under a deed
of trust or a mortgagee under a mortgage to obtain a deficiency judgment
against the borrower following foreclosure or sale under a deed of trust. A
deficiency judgment would be a personal judgment against the former borrower
equal to the difference between the net amount realized upon the public sale
of the real property and the amount due to the lender.
Some states require the lender to exhaust the security afforded under
a mortgage by foreclosure in an attempt to satisfy the full debt before
bringing a personal action against the borrower. In some other states, the
lender has the option of bringing a personal action against the borrower on
the debt without first exhausting that security; however, in some of these
states, the lender, following judgment on the personal action, may be deemed
to have elected a remedy and may be precluded from exercising remedies with
respect to the security. In some cases, a lender will be precluded from
exercising any additional rights under the note or mortgage if it has taken
any prior enforcement action. Consequently, the practical effect of the
election requirement, in those states permitting that election, is that
lenders will usually proceed against the security first rather than bringing a
personal action against the borrower. Finally, other statutory provisions
limit any deficiency judgment against the former borrower following a judicial
sale to the excess of the outstanding debt over the fair market value of the
property at the time of the public sale. The purpose of these statutes is
generally to prevent a lender from obtaining a large deficiency judgment
against the former borrower as a result of low or no bids at the judicial
sale.
In addition to anti-deficiency and related legislation, numerous
other federal and state statutory provisions, including the federal bankruptcy
laws and state laws affording relief to debtors, may interfere with or affect
the ability of a secured mortgage lender to realize upon its security. For
example, numerous statutory provisions under the United States Bankruptcy
Code, 11 U.S.C. Sections 101 et seq. (the "Bankruptcy Code"), may interfere
with or affect the ability of the secured mortgage lender to obtain payment of
a mortgage loan, to realize upon collateral and/or enforce a deficiency
judgment. Under federal bankruptcy law, virtually all actions (including
foreclosure actions and deficiency judgment proceedings) are automatically
stayed upon the filing of a bankruptcy petition, and often no interest or
principal payments are made during the course of the bankruptcy proceeding. In
a case under the Bankruptcy Code, the secured party is precluded from
foreclosing without authorization from the bankruptcy court. In addition, a
court with federal bankruptcy jurisdiction may permit a debtor through his or
her Chapter 11 or Chapter 13 plan to cure a monetary default in respect of a
mortgage loan by paying arrearages within a reasonable time period and
reinstating the original mortgage loan payment schedule even though the lender
accelerated the mortgage loan and final judgment of foreclosure had been
entered in state court (provided no foreclosure sale had yet occurred) before
the filing of the debtor's petition. Some courts with federal bankruptcy
jurisdiction have approved plans, based on the particular facts of the case,
that affected the curing of a mortgage loan default by paying arrearages over
a number of years.
If a mortgage loan is secured by property not consisting solely of
the debtor's principal residence, the Bankruptcy Code also permits that
mortgage loan to be modified. These modifications may include reducing the
amount of each monthly payment, changing the rate of interest, altering the
repayment schedule, and reducing the lender's security interest to the value
of the property, thus leaving the lender in the position of a general
unsecured creditor for the difference between the value of the property and
the outstanding balance of the mortgage loan. Some courts have permitted these
modifications when the mortgage loan is secured both by the debtor's principal
residence and by personal property.
In the case of income-producing Multifamily Properties, federal
bankruptcy law may also have the effect of interfering with or affecting the
ability of the secured lender to enforce the borrower's assignment of rents
and leases related to the mortgaged property. Under Section 362 of the
Bankruptcy Code, the lender will be stayed from enforcing the assignment, and
the legal proceedings necessary to resolve the issue could be time-consuming,
with resulting delays in the lender's receipt of the rents.
Certain tax liens arising under the Code may in some circumstances
provide priority over the lien of a mortgage or deed of trust. In addition,
substantive requirements are imposed upon mortgage lenders in connection with
the origination and the servicing of mortgage loans by numerous federal and
some state consumer protection laws. These laws include the federal
Truth-in-Lending Act, Real Estate Settlement Procedures Act, Equal Credit
Opportunity Act, Fair Credit Billing Act, Fair Credit Reporting Act and
related statutes. These federal laws impose specific statutory liabilities
upon lenders who originate mortgage loans and who fail to comply with the
provisions of the law. In some cases this liability may affect assignees of
the mortgage loans.
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.
Environmental Considerations
A lender may be subject to unforeseen environmental risks when taking
a security interest in real or personal property. Property subject to a
security interest may be subject to federal, state, and local laws and
regulations relating to environmental protection. These laws may regulate,
among other things: emissions of air pollutants; discharges of wastewater or
storm water; generation, transport, storage or disposal of hazardous waste or
hazardous substances; operation, closure and removal of underground storage
tanks; removal and disposal of asbestos-containing materials; and/or
management of electrical or other equipment containing polychlorinated
biphenyls ("PCBs"). Failure to comply with these laws and regulations may
result in significant penalties, including civil and criminal fines. Under the
laws of some states, environmental contamination on a property may give rise
to a lien on the property to ensure the availability and/or reimbursement of
cleanup costs. Generally all subsequent liens on that property are
subordinated to the environmentally-related lien and, in some states, even
prior recorded liens are subordinated to these liens ("Superliens"). In the
latter states, the security interest of the trustee in a property that is
subject to a Superlien could be adversely affected.
Under the federal Comprehensive Environmental Response, Compensation
and Liability Act, as amended ("CERCLA"), and under state law in some states,
a secured party that takes a deed in lieu of foreclosure, purchases a
mortgaged property at a foreclosure sale, operates a mortgaged property or
undertakes certain types of activities that may constitute management of the
mortgaged property may become liable in certain circumstances for the cleanup
costs of remedial action if hazardous wastes or hazardous substances have been
released or disposed of on the property. These cleanup costs may be
substantial. CERCLA imposes strict, as well as joint and several, liability
for environmental remediation and/or damage costs on several classes of
"potentially responsible parties," including current "owners and/or operators"
of property, irrespective of whether those owners or operators caused or
contributed to the contamination on the property. In addition, owners and
operators of properties that generate hazardous substances that are disposed
of at other "off-site" locations may be held strictly, jointly and severally
liable for environmental remediation and/or damages at those off-site
locations. Many states also have laws that are similar to CERCLA. Liability
under CERCLA or under similar state law could exceed the value of the property
itself as well as the total assets of the property owner.
Although certain provisions of the Asset Conservation Act (as defined
herein) apply to trusts and fiduciaries, the law is somewhat unclear as to
whether and under what precise circumstances cleanup costs, or the obligation
to take remedial actions, could be imposed on a secured lender, such as the
trust fund. Under the laws of some states and under CERCLA, a lender may be
liable as an "owner or operator" for costs of addressing releases or
threatened releases of hazardous substances on a mortgaged property if that
lender or its agents or employees have "participated in the management" of the
operations of the borrower, even though the environmental damage or threat was
caused by a prior owner or current owner or operator or other third party.
Excluded from CERCLA's definition of "owner or operator" is a person "who
without participating in the management of . . . [the] facility, holds indicia
of ownership primarily to protect his security interest" (the
"secured-creditor exemption"). This exemption for holders of a security
interest such as a secured lender applies only to the extent that a lender
seeks to protect its security interest in the contaminated facility or
property. Thus, if a lender's activities begin to encroach on the actual
management of that facility or property, the lender faces potential liability
as an "owner or operator" under CERCLA. Similarly, when a lender forecloses
and takes title to a contaminated facility or property, the lender may incur
potential CERCLA liability in various circumstances, including among others,
when it holds the facility or property as an investment (including leasing the
facility or property to a third party), fails to market the property in a
timely fashion or fails to properly address environmental conditions at the
property or facility.
The Resource Conservation and Recovery Act, as amended ("RCRA"),
contains a similar secured-creditor exemption for those lenders who hold a
security interest in a petroleum underground storage tank ("UST") or in real
estate containing a UST, or that acquire title to a petroleum UST or facility
or property on which a UST is located. As under CERCLA, a lender may lose its
secured-creditor exemption and be held liable under RCRA as a UST owner or
operator if that lender or its employees or agents participate in the
management of the UST. In addition, if the lender takes title to or possession
of the UST or the real estate containing the UST, under certain circumstances
the secured-creditor exemption may be deemed to be unavailable.
A decision in May 1990 of the United States Court of Appeals for the
Eleventh Circuit in United States v. Fleet Factors Corp. very narrowly
construed CERCLA's secured-creditor exemption. The court's opinion suggested
that a lender need not have involved itself in the day-to-day operations of
the facility or participated in decisions relating to hazardous waste to be
liable under CERCLA; rather, liability could attach to a lender if its
involvement with the management of the facility were broad enough to support
the inference that the lender had the capacity to influence the borrower's
treatment of hazardous waste. The court added that a lender's capacity to
influence these decisions could be inferred from the extent of its involvement
in the facility's financial management. A subsequent decision by the United
States Court of Appeals for the Ninth Circuit in re Bergsoe Metal Corp.,
apparently disagreeing with, but not expressly contradicting, the Fleet
Factors court, held that a secured lender had no liability absent "some actual
management of the facility" on the part of the lender.
Court decisions have taken varying views of the scope of the
secured-creditor exemption, leading to administrative and legislative efforts
to provide guidance to lenders on the scope of activities that would trigger
CERCLA and/or RCRA liability. Until recently, these efforts have failed to
provide substantial guidance.
On September 28, 1996, however, Congress enacted, and on September
30, 1996, the President signed into law the Asset Conservation Lender
Liability and Deposit Insurance Protection Act of 1996 (the "Asset
Conservation Act"). The Asset Conservation Act was intended to clarify the
scope of the secured creditor exemption under both CERCLA and RCRA. The Asset
Conservation Act more explicitly defined the kinds of "participation in
management" that would trigger liability under CERCLA and specified certain
activities that would not constitute "participation in management" or
otherwise result in a forfeiture of the secured-creditor exemption before
foreclosure or during a workout period. The Asset Conservation Act also
clarified the extent of protection against liability under CERCLA in the event
of foreclosure and authorized certain regulatory clarifications of the scope
of the secured-creditor exemption for purposes of RCRA, similar to the
statutory protections under CERCLA. However, since the courts have not yet had
the opportunity to interpret the new statutory provisions, the scope of the
additional protections offered by the Asset Conservation Act is not fully
defined. It also is important to note that the Asset Conservation Act does not
offer complete protection to lenders and that the risk of liability remains.
If a secured lender does become liable, it may be entitled to bring
an action for contribution against the owner or operator who created the
environmental contamination or against some other liable party, but that
person or entity may be bankrupt or otherwise judgment-proof. It is therefore
possible that cleanup or other environmental liability costs could become a
liability of the trust fund and occasion a loss to the trust fund and to
securityholders in certain circumstances. The new secured creditor amendments
to CERCLA, also, would not necessarily affect the potential for liability in
actions by either a state or a private party under other federal or state laws
that may impose liability on "owners or operators" but do not incorporate the
secured-creditor exemption.
Traditionally, residential mortgage lenders have not taken steps to
evaluate whether hazardous wastes or hazardous substances are present with
respect to any mortgaged property before the origination of the mortgage loan
or before foreclosure or accepting a deed-in-lieu of foreclosure. Neither the
depositor nor any servicer makes any representations or warranties or assumes
any liability with respect to: environmental conditions of the Mortgaged
Property; the absence, presence or effect of hazardous wastes or hazardous
substances on, near or emanating from the Mortgaged Property; the impact on
securityholders of any environmental condition or presence of any substance on
or near the Mortgaged Property; or the compliance of any Mortgaged Property
with any environmental laws. In addition, no agent, person or entity otherwise
affiliated with the depositor is authorized or able to make any
representation, warranty or assumption of liability relative to any Mortgaged
Property.
Due-on-Sale Clauses
The mortgage loans may contain due-on-sale clauses. These clauses
generally provide that the lender may accelerate the maturity of the loan if
the borrower sells, transfers or conveys the related Mortgaged Property. The
enforceability of due-on-sale clauses has been the subject of legislation or
litigation in many states and, in some cases, the enforceability of these
clauses was limited or denied. However, for certain loans the Garn-St. Germain
Depository Institutions Act of 1982 (the "Garn-St. Germain Act") preempts
state constitutional, statutory and case law that prohibits the enforcement of
due-on-sale clauses and permits lenders to enforce these clauses in accordance
with their terms, subject to certain limited exceptions. Due-on-sale clauses
contained in mortgage loans originated by federal savings and loan
associations of federal savings banks are fully enforceable pursuant to
regulations of the United States Federal Home Loan Bank Board, as succeeded by
the Office of Thrift Supervision, which preempt state law restrictions on the
enforcement of those clauses. Similarly, "due-on-sale" clauses in mortgage
loans made by national banks and federal credit unions are now fully
enforceable pursuant to preemptive regulations of the Comptroller of the
Currency and the National Credit Union Administration, respectively.
The Garn-St. Germain Act also sets forth nine specific instances in
which a mortgage lender covered by the act (including federal savings and loan
associations and federal savings banks) may not exercise a "due-on-sale"
clause, notwithstanding the fact that a transfer of the property may have
occurred. These include intra-family transfers, certain transfers by operation
of law, leases of fewer than three years and the creation of a junior
encumbrance. Regulations promulgated under the Garn-St. Germain Act also
prohibit the imposition of a prepayment penalty upon the acceleration of a
loan pursuant to a due-on-sale clause. The inability to enforce a
"due-on-sale" clause may result in a mortgage that bears an interest rate
below the current market rate being assumed by a new home buyer rather than
being paid off, which may affect the average life of the mortgage loans and
the number of mortgage loans which may extend to maturity.
Prepayment Charges
Under some state laws, prepayment charges may not be imposed after a
certain period of time following the origination of mortgage loans secured by
liens encumbering owner-occupied residential properties, if those loans are
paid before maturity. For Mortgaged Properties that are owner-occupied, it is
anticipated that prepayment charges may not be imposed for many of the
mortgage loans. The absence of a restraint on prepayment, particularly for
fixed rate mortgage loans having higher mortgage rates, may increase the
likelihood of refinancing or other early retirement of those loans.
Subordinate Financing
Where a borrower encumbers mortgaged property with one or more junior
liens, the senior lender is subjected to additional risks, such as:
o The borrower may have difficulty repaying multiple loans. In
addition, if the junior loan permits recourse to the borrower (as junior loans
often do) and the senior loan does not, a borrower may be more likely to repay
sums due on the junior loan than those on the senior loan.
o 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 borrower and the senior lender agree to
an increase in the principal amount of or the interest rate payable on the
senior loan, the senior lender may lose its priority to the extent any
existing junior lender is harmed or the borrower is additionally burdened.
o If the borrower defaults on the senior loan and/or any junior
loan or loans, the existence of junior loans and actions taken by junior
lenders can impair the security available to the senior lender and can
interfere with or delay the taking of action by the senior lender. Moreover,
the bankruptcy of a junior lender may operate to stay foreclosure or similar
proceedings by the senior lender.
Applicability of Usury Laws
Title V of the Depository Institutions Deregulation and Monetary
Control Act of 1980, enacted in March 1980 ("Title V"), provides that state
usury limitations will not apply to certain types of residential first
mortgage loans originated by certain lenders after March 31, 1980. A similar
federal statute was in effect for mortgage loans made during the first three
months of 1980. The Office of Thrift Supervision is authorized to issue rules
and regulations and to publish interpretations governing implementation of
Title V. The statute authorized any state to reimpose interest rate limits by
adopting, before April 1, 1983, a law or constitutional provision that
expressly rejects application of the federal law. In addition, even where
Title V is not so rejected, any state is authorized by the law to adopt a
provision limiting discount points or other charges on mortgage loans covered
by Title V. Some states have taken action to reimpose interest rate limits
and/or to limit discount points or other charges.
The depositor believes that a court interpreting Title V would hold
that residential first mortgage loans that are originated on or after January
1, 1980, are subject to federal preemption. Therefore, in a state that has not
taken the requisite action to reject application of Title V or to adopt a
provision limiting discount points or other charges before origination of
those mortgage loans, any limitation under that state's usury law would not
apply to those mortgage loans.
In any state in which application of Title V has been expressly
rejected or a provision limiting discount points or other charges is adopted,
no mortgage loan originated after the date of that state action will be
eligible for inclusion in a trust fund unless (1) the mortgage loan provides
for the interest rate, discount points and charges as are permitted in that
state or (2) the mortgage loan provides that the terms thereof will be
construed in accordance with the laws of another state under which the
interest rate, discount points and charges would not be usurious and the
borrower's counsel has rendered an opinion that the choice of law provision
would be given effect.
Statutes differ in their provisions as to the consequences of a
usurious loan. One group of statutes requires the lender to forfeit the
interest due above the applicable limit or impose a specified penalty. Under
this statutory scheme, the borrower may cancel the recorded mortgage or deed
of trust upon paying its debt with lawful interest, and the lender may
foreclose, but only for the debt plus lawful interest. A second group of
statutes is more severe. A violation of this type of usury law results in the
invalidation of the transaction, thereby permitting the borrower to cancel the
recorded mortgage or deed of trust without any payment or prohibiting the
lender from foreclosing.
Alternative Mortgage Instruments
Alternative mortgage instruments, including adjustable rate mortgage
loans and early ownership mortgage loans, originated by non-federally
chartered lenders have historically been subject to a variety of restrictions.
Those restrictions differed from state to state, resulting in difficulties in
determining whether a particular alternative mortgage instrument originated by
a state-chartered lender was in compliance with applicable law. These
difficulties were alleviated substantially as a result of the enactment of
Title VIII of the Garn-St. Germain Act ("Title VIII"). Title VIII provides
that, notwithstanding any state law to the contrary, state-chartered banks may
originate alternative mortgage instruments in accordance with regulations
promulgated by the Comptroller of the Currency with respect to origination of
alternative mortgage instruments by national banks; state-chartered credit
unions may originate alternative mortgage instruments in accordance with
regulations promulgated by the National Credit Union Administration with
respect to origination of alternative mortgage instruments by federal credit
unions; and all other non-federally chartered housing creditors, including
state-chartered savings and loan associations, state-chartered savings banks
and mutual savings banks and mortgage banking companies, may originate
alternative mortgage instruments in accordance with the regulations
promulgated by the Federal Home Loan Bank Board, predecessor to the Office of
Thrift Supervision, with respect to origination of alternative mortgage
instruments by federal savings and loan associations. Title VIII provides that
any state may reject applicability of the provisions of Title VIII by
adopting, before October 15, 1985, a law or constitutional provision expressly
rejecting the applicability of those provisions. Some states have taken that
action.
Soldiers' and Sailors' Civil Relief Act of 1940
Under the terms of the Soldiers' and Sailors' Civil Relief Act of
1940, as amended (the "Relief Act"), a borrower who enters military service
after the origination of the borrower's mortgage loan (including a borrower
who was in reserve status and is called to active duty after origination of
the mortgage loan) may not be charged interest (including fees and charges)
above an annual rate of 6% during the period of the borrower's active duty
status, unless a court orders otherwise upon application of the lender. The
Relief Act applies to borrowers who are members of the Army, Navy, Air Force,
Marines, National Guard, Reserves, Coast Guard and officers of the U.S. Public
Health Service assigned to duty with the military. Because the Relief Act
applies to borrowers who enter military service (including reservists who are
called to active duty) after origination of the related mortgage loan, no
information can be provided as to the number of loans that may be affected by
the Relief Act.
Application of the Relief Act would adversely affect, for an
indeterminate period of time, the ability of the servicer to collect full
amounts of interest on some of the mortgage loans. Any shortfalls in interest
collections resulting from the application of the Relief Act would result in a
reduction of the amounts distributable to the holders of the related series of
Securities, and would not be covered by advances. These shortfalls will be
covered by the credit support provided in connection with the Securities only
to the extent provided in the prospectus supplement. In addition, the Relief
Act imposes limitations that would impair the ability of the servicer to
foreclose on an affected mortgage loan during the borrower's period of active
duty status, and, under some circumstances, during an additional three month
period thereafter.
Thus, if an affected mortgage loan goes into default, there may be delays and
losses occasioned thereby.
Forfeitures in Drug and RICO Proceedings
Federal law provides that property owned by persons convicted of
drug-related crimes or of criminal violations of the Racketeer Influenced and
Corrupt Organizations ("RICO") statute can be seized by the government if the
property was used in, or purchased with the proceeds of, those crimes. Under
procedures contained in the Comprehensive Crime Control Act of 1984 (the
"Crime Control Act"), the government may seize the property even before
conviction. The government must publish notice of the forfeiture proceeding
and may give notice to all parties "known to have an alleged interest in the
property," including the holders of mortgage loans.
A lender may avoid forfeiture of its interest in the property if it
establishes that: (1) its mortgage was executed and recorded before commission
of the crime upon which the forfeiture is based, or (2) the lender was, at the
time of execution of the mortgage, "reasonably without cause to believe" that
the property was used in, or purchased with the proceeds of, illegal drug or
RICO activities.
Certain Legal Aspects of the Contracts
The following discussion contains summaries, which are general in
nature, of certain legal matters relating to the Contracts. Because these
legal aspects are governed primarily by applicable state law (which laws may
differ substantially), the summaries do not purport to be complete nor to
reflect the laws of any particular state, nor to encompass the laws of all
states in which the security for the Contracts is situated. The summaries are
qualified in their entirety by reference to the appropriate laws of the states
in which Contracts may be originated.
General
As a result of the assignment of the Contracts to the trustee, the
trustee will succeed collectively to all of the rights (including the right to
receive payment on the Contracts) of the obligee under the Contracts. Each
Contract evidences both (a) the obligation of the borrower to repay the loan
evidenced thereby, and (b) the grant of a security interest in the
Manufactured Home to secure repayment of the loan. Certain aspects of both
features of the Contracts are described more fully below.
The Contracts generally are "chattel paper" as defined in the UCC in
effect in the states in which the Manufactured Homes initially were
registered. Pursuant to the UCC, the sale of chattel paper is treated in a
manner similar to perfection of a security interest in chattel paper. Under
the Agreement, the servicer will transfer physical possession of the Contracts
to the trustee or its custodian or may retain possession of the Contracts as
custodian for the trustee. In addition, the servicer will make an appropriate
filing of a UCC-1 financing statement in the appropriate states to give notice
of the trustee's ownership of the Contracts. The Contracts will be stamped or
marked otherwise to reflect their assignment from the depositor to the trustee
only if provided in the prospectus supplement. Therefore, if, through
negligence, fraud or otherwise, a subsequent purchaser were able to take
physical possession of the Contracts without notice of the assignment, the
trustee's interest in Contracts could be defeated.
Security Interests in the Manufactured Homes
The Manufactured Homes securing the Contracts may be located in all
50 states. Security interests in manufactured homes may be perfected either by
notation of the secured party's lien on the certificate of title or by
delivery of the required documents and payment of a fee to the state motor
vehicle authority, depending on state law. In some nontitle states, perfection
pursuant to the provisions of the UCC is required. The Asset Seller may effect
that notation or delivery of the required documents and fees, and obtain
possession of the certificate of title, as appropriate under the laws of the
state in which any manufactured home securing a manufactured housing
conditional sales contract is registered. In the event the Asset Seller fails,
due to clerical error, to effect that notation or delivery, or files the
security interest under the wrong law (for example, under a motor vehicle
title statute rather than under the UCC, in a few states), the Asset Seller
may not have a first priority security interest in the Manufactured Home
securing a Contract. As manufactured homes have become larger and often have
been attached to their sites without any apparent intention to move them,
courts in many states have held that manufactured homes, under some
circumstances, may become subject to real estate title and recording laws. As
a result, a security interest in a manufactured home could be rendered
subordinate to the interests of other parties claiming an interest in the home
under applicable state real estate law.
To perfect a security interest in a manufactured home under real
estate laws, the holder of the security interest must file either a "fixture
filing" under the provisions of the UCC or a real estate mortgage under the
real estate laws of the state where the home is located. These filings must be
made in the real estate records office of the county where the home is
located. Substantially all of the Contracts contain provisions prohibiting the
borrower from permanently attaching the Manufactured Home to its site. So long
as the borrower does not violate this agreement, a security interest in the
Manufactured Home will be governed by the certificate of title laws or the
UCC, and the notation of the security interest on the certificate of title or
the filing of a UCC financing statement will be effective to maintain the
priority of the security interest in the Manufactured Home. If, however, a
Manufactured Home is permanently attached to its site, other parties could
obtain an interest in the Manufactured Home that is prior to the security
interest originally retained by the Asset Seller and transferred to the
depositor. For a series of Securities and if so described in the prospectus
supplement, the servicer may be required to perfect a security interest in the
Manufactured Home under applicable real estate laws. The Warranting Party will
represent that as of the date of the sale to the depositor it has obtained a
perfected first priority security interest by proper notation or delivery of
the required documents and fees for substantially all of the Manufactured
Homes securing the Contracts.
The depositor will cause the security interests in the Manufactured
Homes to be assigned to the trustee on behalf of the securityholders. The
depositor or the trustee will amend the certificates of title (or file UCC-3
statements) to identify the trustee as the new secured party, and will deliver
the certificates of title to the trustee or note thereon the interest of the
trustee only if specified in the prospectus supplement. Accordingly, the Asset
Seller (or other originator of the Contracts) will continue to be named as the
secured party on the certificates of title relating to the Manufactured Homes.
In some states, that assignment is an effective conveyance of the security
interest without amendment of any lien noted on the related certificate of
title and the new secured party succeeds to servicer's rights as the secured
party. However, in some states, in the absence of an amendment to the
certificate of title (or the filing of a UCC-3 statement), the assignment of
the security interest in the Manufactured Home may not be held effective or
the security interests may not be perfected and in the absence of that
notation or delivery to the trustee, the assignment of the security interest
in the Manufactured Home may not be effective against creditors of the Asset
Seller (or any other originator of the Contracts) or a trustee in bankruptcy
of the Asset Seller (or any other originator).
In the absence of fraud, forgery or permanent affixation of the
Manufactured Home to its site by the Manufactured Home owner, or
administrative error by state recording officials, the notation of the lien of
the Asset Seller (or other originator of the Contracts) on the certificate of
title or delivery of the required documents and fees will be sufficient to
protect the securityholders against the rights of subsequent purchasers of a
Manufactured Home or subsequent lenders who take a security interest in the
Manufactured Home. If there are any Manufactured Homes as to which the
security interest assigned to the trustee is not perfected, that security
interest would be subordinate to, among others, subsequent purchasers for
value of Manufactured Homes and holders of perfected security interests. There
also exists a risk in not identifying the trustee as the new secured party on
the certificate of title that, through fraud or negligence, the security
interest of the trustee could be released.
If the owner of a Manufactured Home moves it to a state other than
the state in which the Manufactured Home initially is registered, under the
laws of most states the perfected security interest in the Manufactured Home
would continue for four months after that relocation and thereafter only if
and after the owner re-registers the Manufactured Home in that state. If the
owner were to relocate a Manufactured Home to another state and not
re-register the Manufactured Home in that state, and if steps are not taken to
re-perfect the trustee's security interest in that state, the security
interest in the Manufactured Home would cease to be perfected. A majority of
states generally require surrender of a certificate of title to re-register a
Manufactured Home; accordingly, the servicer must surrender possession if it
holds the certificate of title to the Manufactured Home or, in the case of
Manufactured Homes registered in states that provide for notation of lien, the
Asset Seller (or other originator) would receive notice of surrender if the
security interest in the Manufactured Home is noted on the certificate of
title. Accordingly, the trustee would have the opportunity to re-perfect its
security interest in the Manufactured Home in the state of relocation. In
states that do not require a certificate of title for registration of a
manufactured home, re-registration could defeat perfection. In the ordinary
course of servicing the manufactured housing contracts, the servicer takes
steps to effect re-perfection upon receipt of notice of re-registration or
information from the borrower as to relocation.
Similarly, when a borrower under a manufactured housing contract
sells a manufactured home, the servicer must surrender possession of the
certificate of title or, if it is noted as lienholder on the certificate of
title, will receive notice as a result of its lien noted thereon and
accordingly will have an opportunity to require satisfaction of the related
manufactured housing conditional sales contract before release of the lien.
Under the Agreement, the servicer is obligated to take those steps, at the
servicer's expense, as are necessary to maintain perfection of security
interests in the Manufactured Homes.
Under the laws of most states, liens for repairs performed on a
Manufactured Home and liens for personal property taxes take priority even
over a perfected security interest. The Warranting Party will represent in the
Agreement that it has no knowledge of any of these liens for any Manufactured
Home securing payment on any Contract. However, these liens could arise at any
time during the term of a Contract. No notice will be given to the trustee or
securityholders if a lien arises.
Enforcement of Security Interests in Manufactured Homes
The servicer on behalf of the trustee, to the extent required by the
related Agreement, may take action to enforce the trustee's security interest
with respect to Contracts in default by repossession and resale of the
Manufactured Homes securing those defaulted Contracts. So long as the
Manufactured Home has not become subject to the real estate law, a creditor
can repossess a Manufactured Home securing a Contract by voluntary surrender,
by "self-help" repossession that is "peaceful" (i.e., without breach of the
peace) or, in the absence of voluntary surrender and the ability to repossess
without breach of the peace, by judicial process. The holder of a Contract
must give the debtor a number of days' notice, which varies from 10 to 30 days
depending on the state, before beginning any repossession. The UCC and
consumer protection laws in most states place restrictions on repossession
sales, including requiring prior notice to the debtor and commercial
reasonableness in effecting that sale. The law in most states also requires
that the debtor be given notice of any sale before resale of the unit so that
the debtor may redeem at or before that resale. In the event of repossession
and resale of a Manufactured Home, the trustee would be entitled to be paid
out of the sale proceeds before the proceeds could be applied to the payment
of the claims of unsecured creditors or the holders of subsequently perfected
security interests or, thereafter, to the debtor.
Under the laws applicable in most states, a creditor is entitled to
obtain a deficiency judgment from a debtor for any deficiency on repossession
and resale of the manufactured home securing the debtor's loan. However, some
states impose prohibitions or limitations on deficiency judgments, and in many
cases the defaulting borrower would have no assets with which to pay a
judgment.
Certain other statutory provisions, including federal and state
bankruptcy and insolvency laws and general equitable principles, may limit or
delay the ability of a lender to repossess and resell collateral or enforce a
deficiency judgment.
Soldiers' and Sailors' Civil Relief Act of 1940
The terms of the Relief Act apply to a borrower on a Contract as
described for a borrower on a mortgage loan under "Certain Legal Aspects of
Mortgage Loans--Soldiers' and Sailors' Civil Relief Act of 1940."
Consumer Protection Laws
The so-called "Holder-in-Due-Course" rule of the Federal Trade
Commission is intended to defeat the ability of the transferor of a consumer
credit contract that is the seller of goods which gave rise to the transaction
(and certain related lenders and assignees) to transfer the contract free of
notice of claims by the debtor thereunder. The effect of this rule is to
subject the assignee of the contract to all claims and defenses that the
debtor could assert against the seller of goods. Liability under this rule is
limited to amounts paid under a Contract; however, the borrower also may be
able to assert the rule to set off remaining amounts due as a defense against
a claim brought by the trustee against the borrower. Numerous other federal
and state consumer protection laws impose requirements applicable to the
origination and lending pursuant to the Contracts, including the Truth in
Lending Act, the Federal Trade Commission Act, the Fair Credit Billing Act,
the Fair Credit Reporting Act, the Equal Credit Opportunity Act, the Fair Debt
Collection Practices Act and the Uniform Consumer Credit Code. In the case of
some of these laws, the failure to comply with their provisions may affect the
enforceability of the related Contract.
Transfers of Manufactured Homes; Enforceability of "Due-on-Sale" Clauses
The Contracts, in general, prohibit the sale or transfer of the
related Manufactured Homes without the consent of the servicer and permit the
acceleration of the maturity of the Contracts by the servicer upon any sale or
transfer that is not consented to. Generally, it is expected that the servicer
will permit most transfers of Manufactured Homes and not accelerate the
maturity of the related Contracts. In some cases, the transfer may be made by
a delinquent borrower to avoid a repossession proceeding for a Manufactured
Home.
In the case of a transfer of a Manufactured Home after which the
servicer desires to accelerate the maturity of the related Contract, the
servicer's ability to do so will depend on the enforceability under state law
of the "due-on-sale" clause. The Garn-St. Germain Depositary Institutions Act
of 1982 preempts, subject to certain exceptions and conditions, state laws
prohibiting enforcement of "due-on-sale" clauses applicable to the
Manufactured Homes. Consequently, in some states the servicer may be
prohibited from enforcing a "due-on-sale" clause in respect of some
Manufactured Homes.
Applicability of Usury Laws
Title V of the Depository Institutions Deregulation and Monetary
Control Act of 1980, as amended ("Title V"), provides that, subject to the
following conditions, state usury limitations will not apply to any loan that
is secured by a first lien on certain kinds of manufactured housing. The
Contracts would be covered if they satisfy certain conditions, among other
things, governing the terms of any prepayments, late charges and deferral fees
and requiring a 30-day notice period before instituting any action leading to
repossession of or foreclosure on the related unit.
Title V authorized any state to re-impose limitations on interest
rates and finance charges by adopting before April 1, 1983, a law or
constitutional provision that expressly rejects application of the federal
law. Fifteen states adopted a similar law before the April 1, 1983, deadline.
In addition, even where Title V was not so rejected, any state is authorized
by the law to adopt a provision limiting discount points or other charges on
loans covered by Title V. The related Asset Seller will represent that all of
the Contracts comply with applicable usury law.
Material Federal Income Tax Considerations
General
The following discussion represents the opinion of Brown & Wood LLP
as to the material federal income tax consequences of the purchase, ownership
and disposition of the Securities offered hereunder. This opinion assumes
compliance with all provisions of the Agreements pursuant to which the
Securities are issued. This discussion is directed solely to securityholders
that hold the Securities as capital assets within the meaning of Section 1221
of the Internal Revenue Code of 1986, as amended (the "Code"), and does not
purport to discuss all federal income tax consequences that may be applicable
to particular categories of investors, some of which (such as banks, insurance
companies and foreign investors) may be subject to special rules. Further, the
authorities on which this discussion, and the opinion referred to below, are
based are subject to change or differing interpretations, which could apply
retroactively.
In addition to the federal income tax consequences described herein,
potential investors should consider the state and local tax consequences, if
any, of the purchase, ownership and disposition of the Securities. See "State
and Other Tax Considerations." The depositor recommends that securityholders
consult their own tax advisors concerning the federal, state, local or other
tax consequences to them of the purchase, ownership and disposition of the
Securities offered hereunder.
The following discussion addresses securities of five general types:
o REMIC Securities representing interests in a trust fund, or a
portion thereof, that the trustee will elect to have treated as a real estate
mortgage investment conduit ("REMIC") under Sections 860A through 860G (the
"REMIC Provisions") of the Code;
o securities ("FASIT Securities") representing interests in a trust
fund, or a portion thereof, that the trustee will elect to have treated as a
financial asset securitization investment trust ("FASIT") under Sections 860H
through 860L (the "FASIT Provisions") of the Code;
o securities ("Grantor Trust Securities") representing interests in
a trust fund (a "Grantor Trust Fund") as to which no election will be made;
o securities ("Partnership Securities") representing interests in a
trust fund (a "Partnership Trust Fund") which is treated as a partnership for
federal income tax purposes; and
o securities ("Debt Securities") representing indebtedness of a
Partnership Trust Fund for federal income tax purposes.
The prospectus supplement for each series of Securities will indicate
which of the foregoing treatments will apply to that series and, if a REMIC
election (or elections) will be made for the related trust fund, will identify
all "regular interests" and "residual interests" in the REMIC or, if a FASIT
election will be made for the related trust fund, will identify all "regular
interests" and "ownership interests" in the FASIT. For purposes of this tax
discussion, (1) references to a "securityholder" or a "holder" are to the
beneficial owner of a Security, (2) references to "REMIC Pool" are to an
entity or portion thereof as to which a REMIC election will be made and (3) to
the extent specified in the prospectus supplement, references to "mortgage
loans" include Contracts. Except to the extent specified in the prospectus
supplement, no REMIC election will be made for Unsecured Home Improvement
Loans.
The following discussion is based in part upon the rules governing
original issue discount that are set forth in Sections 1271 through 1273 and
1275 of the Code and in the Treasury regulations issued thereunder (the "OID
Regulations"), in part upon the REMIC Provisions and the Treasury regulations
issued thereunder (the "REMIC Regulations"), and in part upon the FASIT
Provisions. 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 the holders of FASIT Securities. In addition, the OID Regulations do not
adequately address certain issues relevant to, and in some instances provide
that they are not applicable to, securities such as the Securities.
Taxable Mortgage Pools
Corporate income tax can be imposed on the net income of certain
entities issuing non-REMIC debt obligations secured by real estate mortgages
("Taxable Mortgage Pools"). Any entity other than a REMIC or a FASIT (as
defined herein) will be considered a Taxable Mortgage Pool if (1)
substantially all of the assets of the entity consist of debt obligations and
more than 50% of those obligations consist of "real estate mortgages," (2)
that entity is the borrower under debt obligations with two or more
maturities, and (3) under the terms of the debt obligations on which the
entity is the borrower, payments on those obligations bear a relationship to
payments on the obligations held by the entity. Furthermore, a group of assets
held by an entity can be treated as a separate Taxable Mortgage Pool if the
assets are expected to produce significant cash flow that will support one or
more of the entity's issues of debt obligations. The depositor generally will
structure offerings of non-REMIC Securities to avoid the application of the
Taxable Mortgage Pool rules.
REMICs
Classification of REMICs
For each series of REMIC Securities, assuming compliance with all
provisions of the related pooling and servicing agreement, in the opinion of
Brown & Wood LLP, the related trust fund (or each applicable portion thereof)
will qualify as a REMIC and the REMIC Securities offered with respect thereto
will be considered to evidence ownership of "regular interests" ("Regular
Securities") or "residual interests" ("Residual Securities") in the REMIC
within the meaning of the REMIC Provisions.
In order for the REMIC Pool to qualify as a REMIC, there must be
ongoing compliance on the part of the REMIC Pool with the requirements set
forth in the Code. The REMIC Pool must fulfill an asset test, which requires
that no more than a de minimis portion of the assets of the REMIC Pool, as of
the close of the third calendar month beginning after the "Startup Day" (which
for purposes of this discussion is the date of issuance of the REMIC
Securities) and at all times thereafter, may consist of assets other than
"qualified mortgages" and "permitted investments." The REMIC Regulations
provide a safe harbor pursuant to which the de minimis requirement will be met
if at all times the total adjusted basis of the nonqualified assets is less
than 1% of the total adjusted basis of all the REMIC Pool's assets. An entity
that fails to meet the safe harbor may nevertheless demonstrate that it holds
no more than a de minimis amount of nonqualified assets. A REMIC Pool also
must provide "reasonable arrangements" to prevent its residual interests from
being held by "disqualified organizations" or agents thereof and must furnish
applicable tax information to transferors or agents that violate this
requirement. The pooling and servicing agreement for each series of REMIC
Securities will contain provisions meeting these requirements. See "--Taxation
of Owners of Residual Securities--Tax-Related Restrictions on Transfer of
Residual Securities--Disqualified Organizations" below.
A qualified mortgage is any obligation that is principally secured by
an interest in real property and that is either transferred to the REMIC Pool
on the Startup Day or is purchased by the REMIC Pool within a three-month
period thereafter pursuant to a fixed price contract in effect on the Startup
Day. Qualified mortgages include whole mortgage loans and, generally,
certificates of beneficial interest in a grantor trust that holds mortgage
loans and regular interests in another REMIC, such as lower-tier regular
interests in a tiered REMIC. The REMIC Regulations specify that loans secured
by timeshare interests, shares held by a tenant stockholder in a cooperative
housing corporation, and manufactured housing that qualifies as a "single
family residence" under Code Section 25(e)(10) can be qualified mortgages. A
qualified mortgage includes a qualified replacement mortgage, which is any
property that would have been treated as a qualified mortgage if it were
transferred to the REMIC Pool on the Startup Day and that is received either:
(1) in exchange for any qualified mortgage within a three-month
period thereafter; or
(2) in exchange for a "defective obligation" within a two-year
period thereafter.
A "defective obligation" includes:
(1) a mortgage in default or as to which default is reasonably
foreseeable;
(2) a mortgage as to which a customary representation or warranty
made at the time of transfer to the REMIC Pool has been breached;
(3) a mortgage that was fraudulently procured by the borrower; and
(4) a mortgage that was not in fact principally secured by real
property (but only if the mortgage is disposed of within 90 days of
discovery).
A mortgage loan that is "defective" as described in clause (4) above that is
not sold or, if within two years of the Startup Day, exchanged, within 90 days
of discovery, ceases to be a qualified mortgage after that 90-day period.
Permitted investments include cash flow investments, qualified
reserve assets, and foreclosure property. A cash flow investment is an
investment, earning a return in the nature of interest, of amounts received on
or with respect to qualified mortgages for a temporary period, not exceeding
13 months, until the next scheduled distribution to holders of interests in
the REMIC Pool. A qualified reserve asset is any intangible property held for
investment that is part of any reasonably required reserve maintained by the
REMIC Pool to provide for payments of expenses of the REMIC Pool or amounts
due on the regular or residual interests in the event of defaults (including
delinquencies) on the qualified mortgages, lower than expected reinvestment
returns, prepayment interest shortfalls and certain other contingencies. The
reserve fund will be disqualified if more than 30% of the gross income from
the assets in that fund for the year is derived from the sale or other
disposition of property held for less than three months, unless required to
prevent a default on the regular interests caused by a default on one or more
qualified mortgages. A reserve fund must be reduced "promptly and
appropriately" as payments on the mortgage loans are received. Foreclosure
property is real property acquired by the REMIC Pool in connection with the
default or imminent default of a qualified mortgage and generally may not be
held for more than three taxable years after the taxable year of acquisition
unless extensions are granted by the Secretary of the Treasury.
In addition to the foregoing requirements, the various interests in a
REMIC Pool also must meet certain requirements. All of the interests in a
REMIC Pool must be either of the following: (1) one or more classes of regular
interests or (2) a single class of residual interests on which distributions,
if any, are made pro rata.
o A regular interest is an interest in a REMIC Pool that is issued
on the Startup Day with fixed terms, is designated as a regular interest, and
unconditionally entitles the holder to receive a specified principal amount
(or other similar amount), and provides that interest payments (or other
similar amounts), if any, at or before maturity either are payable based on a
fixed rate or a qualified variable rate, or consist of a specified, nonvarying
portion of the interest payments on qualified mortgages. That specified
portion may consist of a fixed number of basis points, a fixed percentage of
the total interest, or a qualified variable rate, inverse variable rate or
difference between two fixed or qualified variable rates on some or all of the
qualified mortgages. The specified principal amount of a regular interest that
provides for interest payments consisting of a specified, nonvarying portion
of interest payments on qualified mortgages may be zero.
o A residual interest is an interest in a REMIC Pool other than a
regular interest that is issued on the Startup Day and that is designated as a
residual interest.
An interest in a REMIC Pool may be treated as a regular interest even
if payments of principal for that interest are subordinated to payments on
other regular interests or the residual interest in the REMIC Pool, and are
dependent on the absence of defaults or delinquencies on qualified mortgages
or permitted investments, lower than reasonably expected returns on permitted
investments, unanticipated expenses incurred by the REMIC Pool or prepayment
interest shortfalls. Accordingly, in the opinion of Brown & Wood LLP, the
Regular Securities of a series will constitute one or more classes of regular
interests, and the Residual Securities for that series will constitute a
single class of residual interests for each REMIC Pool.
If an entity electing to be treated as a REMIC fails to comply with
one or more of the ongoing requirements of the Code for that status during any
taxable year, the Code provides that the entity will not be treated as a REMIC
for that year and thereafter. In that event, that entity may be taxable as a
corporation under Treasury regulations, and the related REMIC Securities may
not be accorded the status or given the tax treatment described below.
Although the Code authorizes the Treasury Department to issue regulations
providing relief in the event of an inadvertent termination of REMIC status,
none of these regulations have been issued. Any relief provided, moreover, may
be accompanied by sanctions, such as the imposition of a corporate tax on all
or a portion of the trust fund's income for the period in which the
requirements for that status are not satisfied. The pooling and servicing
agreement for each REMIC Pool will include provisions designed to maintain the
trust fund's status as a REMIC under the REMIC Provisions. It is not
anticipated that the status of any trust fund as a REMIC will be terminated.
Characterization of Investments in REMIC Securities
In the opinion of Brown & Wood LLP, the REMIC Securities will be
treated as "real estate assets" within the meaning of Section 856(c)(4)(A) of
the Code and assets described in Section 7701(a)(19)(C) of the Code in the
same proportion that the assets of the REMIC Pool underlying these Securities
would be so treated. Moreover, if 95% or more of the assets of the REMIC Pool
qualify for either of the foregoing treatments at all times during a calendar
year, the REMIC Securities will qualify for the corresponding status in their
entirety for that calendar year.
If the assets of the REMIC Pool include Buydown Mortgage Loans, it is
possible that the percentage of those assets constituting "loans . . . secured
by an interest in real property which is . . . residential real property" for
purposes of Code Section 7701(a)(19)(C)(v) may be required to be reduced by
the amount of the related funds paid thereon (the "Buydown Funds"). No opinion
is expressed as to the treatment of those Buydown Funds because the law is
unclear as to whether the Buydown Funds represent an account held by the
lender that reduces the lender's investment in the mortgage loan. This
reduction of a holder's investment may reduce the assets qualifying for the
60% of assets test for meeting the definition of a "domestic building and loan
association." Interest (including original issue discount) on the Regular
Securities and income allocated to the class of Residual Securities will be
interest described in Section 856(c)(3)(B) of the Code to the extent that the
Securities are treated as "real estate assets" within the meaning of Section
856(c)(4)(A) of the Code. In addition, in the opinion of Brown & Wood LLP, the
Regular Securities generally will be "qualified mortgages" within the meaning
of Section 860G(a)(3) of the Code if transferred to another REMIC on its
Startup Day in exchange for regular or residual interests therein.
The determination as to the percentage of the REMIC Pool's assets
that constitute assets described in the foregoing sections of the Code will be
made for each calendar quarter based on the average adjusted basis of each
category of the assets held by the REMIC Pool during that calendar quarter.
The REMIC will report those determinations to securityholders in the manner
and at the times required by applicable Treasury regulations. The Small
Business Job Protection Act of 1996 (the "SBJPA of 1996") repealed the reserve
method of bad debts of domestic building and loan associations and mutual
savings banks, and thus has eliminated the asset category of "qualifying real
property loans" in former Code Section 593(d) for taxable years beginning
after December 31, 1995. The requirements in the SBJPA of 1996 that these
institutions must "recapture" a portion of their existing bad debt reserves is
suspended if a certain portion of their assets are maintained in "residential
loans" under Code Section 7701(a)(19)(C)(v), but only if those loans were made
to acquire, construct or improve the related real property and not for the
purpose of refinancing. However, no effort will be made to identify the
portion of the mortgage loans of any series meeting this requirement, and no
representation is made in this regard.
The assets of the REMIC Pool will include, in addition to mortgage
loans, payments on mortgage loans held pending distribution on the REMIC
Securities and property acquired by foreclosure held pending sale, and may
include amounts in reserve accounts. It is unclear whether property acquired
by foreclosure held pending sale and amounts in reserve accounts would be
considered to be part of the mortgage loans, or whether those assets (to the
extent not invested in assets described in the foregoing sections) otherwise
would receive the same treatment as the mortgage loans for purposes of all of
the foregoing sections. The REMIC Regulations do provide, however, that
payments on mortgage loans held pending distribution are considered part of
the mortgage loans for purposes of Section 856(c)(4)(A) of the Code.
Furthermore, foreclosure property generally will qualify as "real estate
assets" under Section 856(c)(4)(A) of the Code.
Tiered REMIC Structures
For some series of REMIC Securities, two or more separate elections
may be made to treat designated portions of the related trust fund as REMICs
("Tiered REMICs") for federal income tax purposes. Upon the issuance of any of
these series of REMIC Securities, Brown & Wood LLP will deliver its opinion
that, assuming compliance with all provisions of the related pooling and
servicing agreement, the Tiered REMICs will each qualify as a REMIC and the
respective REMIC Securities issued by each Tiered REMIC will be considered to
evidence ownership of Regular Securities or Residual Securities in the related
REMIC within the meaning of the REMIC Provisions.
Solely for purposes of determining whether the REMIC Securities will
be "real estate assets" within the meaning of Section 856(c)(4)(A) of the Code
and "loans secured by an interest in real property" under Section
7701(a)(19)(C) of the Code, and whether the income on those Securities is
interest described in Section 856(c)(3)(B) of the Code, the Tiered REMICs will
be treated as one REMIC.
Taxation of Owners of Regular Securities
(1) General
In general, interest, original issue discount, and market discount on
a Regular Security will be treated as ordinary income to a holder of the
Regular Security (the "Regular Securityholder"), and principal payments on a
Regular Security will be treated as a return of capital to the extent of the
Regular Securityholder's basis in the Regular Security allocable thereto.
Regular Securityholders must use the accrual method of accounting with regard
to Regular Securities, regardless of the method of accounting otherwise used
by that Regular Securityholder.
(2) Original Issue Discount
Accrual Securities will be, and other classes of Regular Securities
may be, issued with "original issue discount" within the meaning of Code
Section 1273(a). Holders of any Class or Subclass of Regular Securities having
original issue discount generally must include original issue discount in
ordinary income for federal income tax purposes as it accrues, in accordance
with a constant yield method that takes into account the compounding of
interest, in advance of the receipt of the cash attributable to that income.
The following discussion is based in part on the OID Regulations and in part
on the provisions of the Tax Reform Act of 1986 (the "1986 Act"). Regular
Securityholders should be aware, however, that the OID Regulations do not
adequately address certain issues relevant to prepayable securities, such as
the Regular Securities. To the extent that those issues are not addressed in
the regulations, the Seller intends to apply the methodology described in the
Conference Committee Report to the 1986 Act. No assurance can be provided that
the Internal Revenue Service will not take a different position as to those
matters not currently addressed by the OID Regulations. Moreover, the OID
Regulations include an anti-abuse rule allowing the Internal Revenue Service
to apply or depart from the OID Regulations where necessary or appropriate to
ensure a reasonable tax result because of the applicable statutory provisions.
A tax result will not be considered unreasonable under the anti-abuse rule in
the absence of a substantial effect on the present value of a taxpayer's tax
liability. Investors are advised to consult their own tax advisors as to the
discussion therein and the appropriate method for reporting interest and
original issue discount for the Regular Securities.
Each Regular Security (except to the extent described below for a
Regular Security on which principal is distributed in a single installment or
by lots of specified principal amounts upon the request of a securityholder or
by random lot (a "Non-Pro Rata Security")) will be treated as a single
installment obligation for purposes of determining the original issue discount
ineludible in a Regular Securityholder's income. The total amount of original
issue discount on a Regular Security is the excess of the "stated redemption
price at maturity" of the Regular Security over its "issue price." The issue
price of a Class of Regular Securities offered pursuant to this prospectus
generally is the first price at which a substantial amount of that Class is
sold to the public (excluding bond houses, brokers and underwriters). Although
unclear under the OID Regulations, it is anticipated that the trustee will
treat the issue price of a Class as to which there is no substantial sale as
of the issue date or that is retained by the depositor as the fair market
value of the Class as of the issue date. The issue price of a Regular Security
also includes any amount paid by an initial Regular Securityholder for accrued
interest that relates to a period before the issue date of the Regular
Security, unless the Regular Securityholder elects on its federal income tax
return to exclude that amount from the issue price and to recover it on the
first Distribution Date.
The stated redemption price at maturity of a Regular Security always
includes the original principal amount of the Regular Security, but generally
will not include distributions of interest if those distributions constitute
"qualified stated interest." Under the OID Regulations, qualified stated
interest generally means interest payable at a single fixed rate or a
qualified variable rate (as described below), provided that the interest
payments are unconditionally payable at intervals of one year or less during
the entire term of the Regular Security. Because there is no penalty or
default remedy in the case of nonpayment of interest for a Regular Security,
it is possible that no interest on any Class of Regular Securities will be
treated as qualified stated interest. However, except as provided in the
following three sentences or in the prospectus supplement, because the
underlying mortgage loans provide for remedies in the event of default, it is
anticipated that the trustee will treat interest for the Regular Securities as
qualified stated interest. Distributions of interest on an Accrual Security,
or on other Regular Securities for which deferred interest will accrue, will
not constitute qualified stated interest, in which case the stated redemption
price at maturity of those Regular Securities includes all distributions of
interest as well as principal thereon. Likewise, it is anticipated that the
trustee will treat an interest-only Class or a Class on which interest is
substantially disproportionate to its principal amount (a so-called
"super-premium" Class) as having no qualified stated interest. Where the
interval between the issue date and the first Distribution Date on a Regular
Security is shorter than the interval between subsequent Distribution Dates,
the interest attributable to the additional days will be included in the
stated redemption price at maturity.
Under a de minimis rule, original issue discount on a Regular
Security will be considered to be zero if the original issue discount is less
than 0.25% of the stated redemption price at maturity of the Regular Security
multiplied by the weighted average maturity of the Regular Security. For this
purpose, the weighted average maturity of the Regular Security is computed as
the sum of the amounts determined by multiplying the number of full years
(i.e., rounding down partial years) from the issue date until each
distribution in reduction of stated redemption price at maturity is scheduled
to be made by a fraction, the numerator of which is the amount of each
distribution included in the stated redemption price at maturity of the
Regular Security and the denominator of which is the stated redemption price
at maturity of the Regular Security. The Conference Committee Report to the
1986 Act provides that the schedule of those distributions should be
determined in accordance with the assumed rate of prepayment of the mortgage
loans (the "Prepayment Assumption") and the anticipated reinvestment rate, if
any, relating to the Regular Securities. The Prepayment Assumption for a
series of Regular Securities will be set forth in the prospectus supplement.
Holders generally must report de minimis original issue discount pro rata as
principal payments are received, and that income will be capital gain if the
Regular Security is held as a capital asset. Under the OID Regulations,
however, Regular Securityholders may elect to accrue all de minimis original
issue discount as well as market discount and market premium, under the
constant yield method. See "-Election to Treat All Interest Under the Constant
Yield Method" below.
A Regular Securityholder generally must include in gross income for
any taxable year the sum of the "daily portions," as defined below, of the
original issue discount on the Regular Security accrued during an accrual
period for each day on which it holds the Regular Security, including the date
of purchase but excluding the date of disposition. The trustee will treat the
monthly period ending on the day before each Distribution Date as the accrual
period. For each Regular Security, a calculation will be made of the original
issue discount that accrues during each successive full accrual period (or
shorter period from the date of original issue) that ends on the day before
the related Distribution Date on the Regular Security. The Conference
Committee Report to the 1986 Act states that the rate of accrual of original
issue discount is intended to be based on the Prepayment Assumption. The
original issue discount accruing in a full accrual period would be the excess,
if any, of:
(1) the sum of:
(a) the present value of all of the remaining distributions to be
made on the Regular Security as of the end of that accrual period and
(b) the distributions made on the Regular Security during the
accrual period that are included in the Regular Security's stated redemption
price at maturity, over
(2) the adjusted issue price of the Regular Security at the
beginning of the accrual period.
The present value of the remaining distributions referred to in the preceding
sentence is calculated based on:
(1) the yield to maturity of the Regular Security at the issue
date;
(2) events (including actual prepayments) that have occurred before
the end of the accrual period; and
(3) the Prepayment Assumption.
For these purposes, the adjusted issue price of a Regular Security at the
beginning of any accrual period equals the issue price of the Regular
Security, increased by the total amount of original issue discount for the
Regular Security that accrued in all prior accrual periods and reduced by the
amount of distributions included in the Regular Security's stated redemption
price at maturity that were made on the Regular Security in those prior
periods. The original issue discount accruing during any accrual period (as
determined in this paragraph) will then be divided by the number of days in
the period to determine the daily portion of original issue discount for each
day in the period. For an initial accrual period shorter than a full accrual
period, the daily portions of original issue discount must be determined
according to an appropriate allocation under any reasonable method.
Under the method described above, the daily portions of original
issue discount required to be included in income by a Regular Securityholder
generally will increase to take into account prepayments on the Regular
Securities as a result of prepayments on the mortgage loans that exceed the
Prepayment Assumption, and generally will decrease (but not below zero for any
period) if the prepayments are slower than the Prepayment Assumption. An
increase in prepayments on the mortgage loans for a series of Regular
Securities can result in both a change in the priority of principal payments
for certain Classes of Regular Securities and either an increase or decrease
in the daily portions of original issue discount for those Regular Securities.
In the case of a Non-Pro Rata Security, it is anticipated that the
trustee will determine the yield to maturity of that Security based upon the
anticipated payment characteristics of the Class as a whole under the
Prepayment Assumption. In general, the original issue discount accruing on
each Non-Pro Rata Security in a full accrual period would be its allocable
share of the original issue discount for the entire Class, as determined in
accordance with the preceding paragraph. However, in the case of a
distribution in retirement of the entire unpaid principal balance of any
Non-Pro Rata Security (or portion of the unpaid principal balance), (a) the
remaining unaccrued original issue discount allocable to the Security (or to
that portion) will accrue at the time of the distribution, and (b) the accrual
of original issue discount allocable to each remaining Security of that Class
will be adjusted by reducing the present value of the remaining payments on
that Class and the adjusted issue price of that Class to the extent
attributable to the portion of the unpaid principal balance thereof that was
distributed. The depositor believes that the foregoing treatment is consistent
with the "pro rata prepayment" rules of the OID Regulations, but with the rate
of accrual of original issue discount determined based on the Prepayment
Assumption for the Class as a whole. Investors are advised to consult their
tax advisors as to this treatment.
(3) Acquisition Premium
A purchaser of a Regular Security having original issue discount at a
price greater than its adjusted issue price but less than its stated
redemption price at maturity will be required to include in gross income the
daily portions of the original issue discount on the Regular Security reduced
pro rata by a fraction, the numerator of which is the excess of its purchase
price over the adjusted issue price and the denominator of which is the excess
of the remaining stated redemption price at maturity over the adjusted issue
price. Alternatively, a subsequent purchaser may elect to treat all that
acquisition premium under the constant yield method, as described below under
the heading "--Election to Treat All Interest Under the Constant Yield Method"
below.
(4) Variable Rate Regular Securities
Regular Securities may provide for interest based on a variable rate.
Under the OID Regulations, interest is treated as payable at a variable rate
if, generally, (1) the issue price does not exceed the original principal
balance by more than a specified amount and (2) the interest compounds or is
payable at least annually at current values of (a) one or more "qualified
floating rates," (b) a single fixed rate and one or more qualified floating
rates, (c) a single "objective rate," or (d) a single fixed rate and a single
objective rate that is a "qualified inverse floating rate." A floating rate is
a qualified floating rate if variations can reasonably be expected to measure
contemporaneous variations in the cost of newly borrowed funds. A multiple of
a qualified floating rate is considered a qualified floating rate only if the
rate is equal to either (a) the product of a qualified floating rate and a
fixed multiple that is greater than 0.65 but not more than 1.35 or (b) the
product of a qualified floating rate and a fixed multiple that is greater than
0.65 but not more than 1.35, increased or decreased by a fixed rate. That rate
may also be subject to a fixed cap or floor, or a cap or floor that is not
reasonably expected as of the issue date to affect the yield of the instrument
significantly. An objective rate is any rate (other than a qualified floating
rate) that is determined using a single fixed formula and that is based on
objective financial or economic information, provided that the information is
not (1) within the control of the issuer or a related party or (2) unique to
the circumstances of the issuer or a related party. A qualified inverse
floating rate is a rate equal to a fixed rate minus a qualified floating rate
that inversely reflects contemporaneous variations in the cost of newly
borrowed funds; an inverse floating rate that is not a qualified inverse
floating rate may nevertheless be an objective rate. A Class of Regular
Securities may be issued under this prospectus that does not have a variable
rate under the foregoing rules, for example, a Class that bears different
rates at different times during the period it is outstanding that it is
considered significantly "front-loaded" or "back-loaded" within the meaning of
the OID Regulations. It is possible that a Class may be considered to bear
"contingent interest" within the meaning of the OID Regulations. The OID
Regulations, as they relate to the treatment of contingent interest, are by
their terms not applicable to Regular Securities. However, if final
regulations dealing with contingent interest for Regular Securities apply the
same principles as the OID Regulations, those regulations may lead to
different timing of income inclusion that would be the case under the OID
Regulations. Furthermore, application of those principles could lead to the
characterization of gain on the sale of contingent interest Regular Securities
as ordinary income. Investors should consult their tax advisors regarding the
appropriate treatment of any Regular Security that does not pay interest at a
fixed rate or variable rate as described in this paragraph.
Under the REMIC Regulations, a Regular Security (1) bearing interest
at a rate that qualifies as a variable rate under the OID Regulations that is
tied to current values of a variable rate (or the highest, lowest or average
of two or more variable rates, including a rate based on the average cost of
funds of one or more financial institutions), or the product of that rate and
a positive or a negative multiple (plus or minus a specified number of basis
points), or that represents a weighted average of rates on some or all of the
mortgage loans, including a rate that is subject to one or more caps or
floors, or (2) bearing one or more variable rates for one or more periods, or
one or more fixed rates for one or more periods, and a different variable rate
or fixed rate for other periods, qualifies as a regular interest in a REMIC.
Accordingly, it is anticipated that the trustee will treat Regular Securities
that qualify as regular interests under this rule in the same manner as
obligations bearing a variable rate for original issue discount reporting
purposes.
The amount of original issue discount for a Regular Security bearing
a variable rate of interest will accrue in the manner described above under
"--Original Issue Discount," with the yield to maturity and future payments on
that Regular Security generally to be determined by assuming that interest
will be payable for the life of the Regular Security based on the initial rate
(or, if different, the value of the applicable variable rate as of the pricing
date) for the relevant Class. Unless required otherwise by applicable final
regulations, it is anticipated that the trustee will treat that variable
interest as qualified stated interest, other than variable interest on an
interest-only or super-premium Class or a Class bearing interest at a rate
equal to the weighted average of the net rates on the mortgage loans, which
will be treated as non-qualified stated interest includible in the stated
redemption price at maturity. Ordinary income reportable for any period will
be adjusted based on subsequent changes in the applicable interest rate index.
(5) Market Discount
A subsequent purchaser of a Regular Security also may be subject to
the market discount rules of Code Sections 1276 through 1278. Under these
sections and the principles applied by the OID Regulations in the context of
original issue discount, "market discount" is the amount by which the
purchaser's original basis in the Regular Security (1) is exceeded by the
remaining outstanding principal payments and interest payments other than
qualified stated interest payments due on a Regular Security, or (2) in the
case of a Regular Security having original issue discount, is exceeded by the
adjusted issue price of that Regular Security at the time of purchase. The
purchaser generally will be required to recognize ordinary income to the
extent of accrued market discount on that Regular Security as distributions
includible in the stated redemption price at maturity thereof are received, in
an amount not exceeding that distribution. The market discount would accrue in
a manner to be provided in Treasury regulations and should take into account
the Prepayment Assumption. The Conference Committee Report to the 1986 Act
provides that until these regulations are issued, the market discount would
accrue either (1) on the basis of a constant interest rate, or (2) in the
ratio of stated interest allocable to the relevant period to the sum of the
interest for that period plus the remaining interest as of the end of that
period, or in the case of a Regular Security issued with original issue
discount, in the ratio of original issue discount accrued for the relevant
period to the sum of the original issue discount accrued for that period plus
the remaining original issue discount as of the end of that period. The
purchaser also generally will be required to treat a portion of any gain on a
sale or exchange of the Regular Security as ordinary income to the extent of
the market discount accrued to the date of disposition under one of the
foregoing methods, less any accrued market discount previously reported as
ordinary income as partial distributions in reduction of the stated redemption
price at maturity were received. The purchaser will be required to defer
deduction of a portion of the excess of the interest paid or accrued on
indebtedness incurred to purchase or carry a Regular Security over the
interest distributable thereon. The deferred portion of the interest expense
in any taxable year generally will not exceed the accrued market discount on
the Regular Security for that year. Any deferred interest expense is, in
general, allowed as a deduction not later than the year in which the related
market discount income is recognized or the Regular Security is disposed of.
As an alternative to the inclusion of market discount in income on
the foregoing basis, the Regular Securityholder may elect to include market
discount in income currently as it accrues on all market discount instruments
acquired by the Regular Securityholder in that taxable year or thereafter, in
which case the interest deferral rule will not apply. See "--Election to Treat
All Interest Under the Constant Yield Method" below regarding an alternative
manner in which that election may be deemed to be made. A person who purchases
a Regular Security at a price lower than the remaining amounts includible in
the stated redemption price at maturity of the security, but higher than its
adjusted issue price, does not acquire the Regular Security with market
discount, but will be required to report original issue discount,
appropriately adjusted to reflect the excess of the price paid over the
adjusted issue price.
Market discount for a Regular Security will be considered to be zero
if the market discount is less than 0.25% of the remaining stated redemption
price at maturity of the Regular Security (or, in the case of a Regular
Security having original issue discount, the adjusted issue price of that
Regular Security) multiplied by the weighted average maturity of the Regular
Security (determined as described above in the third paragraph under
"--Original Issue Discount" above) remaining after the date of purchase. It
appears that de minimis market discount would be reported in a manner similar
to de minimis original issue discount. See "--Original Issue Discount" above.
Under provisions of the OID Regulations relating to contingent
payment obligations, a secondary purchaser of a Regular Security that has
"contingent interest" at a discount generally would continue to accrue
interest and determine adjustments on the Regular Security based on the
original projected payment schedule devised by the issuer of the Security. The
holder of the Regular Security would be required, however, to allocate the
difference between the adjusted issue price of the Regular Security and its
basis in the Regular Security as positive adjustments to the accruals or
projected payments on the Regular Security over the remaining term of the
Regular Security in a manner that is reasonable (e.g., based on a constant
yield to maturity).
Treasury regulations implementing the market discount rules have not
yet been issued, and uncertainty exists with respect to many aspects of those
rules. Due to the substantial lack of regulatory guidance with respect to the
market discount rules, it is unclear how those rules will affect any secondary
market that develops for a particular Class of Regular Securities. Prospective
investors in Regular Securities should consult their own tax advisors
regarding the application of the market discount rules to the Regular
Securities. Investors should also consult Revenue Procedure 92-67 concerning
the elections to include market discount in income currently and to accrue
market discount on the basis of the constant yield method.
(6) Amortizable Premium
A Regular Security purchased at a cost greater than its remaining
stated redemption price at maturity generally is considered to be purchased at
a premium. If the Regular Securityholder holds that Regular Security as a
"capital asset" within the meaning of Code Section 1221, the Regular
Securityholder may elect under Code Section 171 to amortize the premium under
a constant yield method that reflects compounding based on the interval
between payments on the Regular Security. The election will apply to all
taxable debt obligations (including REMIC regular interests) acquired by the
Regular Securityholder at a premium held in that taxable year or thereafter,
unless revoked with the permission of the Internal Revenue Service. The
Conference Committee Report to the 1986 Act indicates a Congressional intent
that the same rules that apply to the accrual of market discount on
installment obligations will also apply to amortizing bond premium under Code
Section 171 on installment obligations as the Regular Securities, although it
is unclear whether the alternatives to the constant interest method described
above under "Market Discount" are available. Amortizable bond premium
generally will be treated as an offset to interest income on a Regular
Security, rather than as a separate deductible item. See "--Election to Treat
All Interest Under the Constant Yield Method" below regarding an alternative
manner in which the Code Section 171 election may be deemed to be made.
(7) Election to Treat All Interest Under the Constant Yield Method
A holder of a debt instrument such as a Regular Security may elect to
treat all interest that accrues on the instrument using the constant yield
method, with none of the interest being treated as qualified stated interest.
For purposes of applying the constant yield method to a debt instrument
subject to this election, (1) "interest" includes stated interest, original
issue discount, de minimis original issue discount, market discount and de
minimis market discount, as adjusted by any amortizable bond premium or
acquisition premium and (2) the debt instrument is treated as if the
instrument were issued on the holder's acquisition date in the amount of the
holder's adjusted basis immediately after acquisition. It is unclear whether,
for this purpose, the initial Prepayment Assumption would continue to apply or
if a new prepayment assumption as of the date of the holder's acquisition
would apply. A holder generally may make this election on an instrument by
instrument basis or for a class or group of debt instruments. However, if the
holder makes this election for a debt instrument with amortizable bond
premium, the holder is deemed to have made elections to amortize bond premium
currently as it accrues under the constant yield method for all premium bonds
held by the holder in the same taxable year or thereafter. Alternatively, if
the holder makes this election for a debt instrument with market discount, the
holder is deemed to have made elections to report market discount income
currently as it accrues under the constant yield method for all market
discount bonds acquired by the holder in the same taxable year or thereafter.
The election is made on the holder's federal income tax return for the year in
which the debt instrument is acquired and is irrevocable except with the
approval of the Internal Revenue Service. Investors should consult their own
tax advisors regarding the advisability of making this election.
(8) Treatment of Losses
Regular Securityholders will be required to report income for Regular
Securities on the accrual method of accounting, without giving effect to
delays or reductions in distributions attributable to defaults or
delinquencies on the mortgage loans, except to the extent it can be
established that the losses are uncollectible. Accordingly, the holder of a
Regular Security, particularly a Subordinate Security, may have income, or may
incur a diminution in cash flow as a result of a default or delinquency, but
may not be able to take a deduction (subject to the discussion below) for the
corresponding loss until a subsequent taxable year. In this regard, investors
are cautioned that while they may generally cease to accrue interest income if
it reasonably appears that the interest will be uncollectible, the Internal
Revenue Service may take the position that original issue discount must
continue to be accrued in spite of its uncollectibility until the debt
instrument is disposed of in a taxable transaction or becomes worthless in
accordance with the rules of Code Section 166.
To the extent the rules of Code Section 166 regarding bad debts are
applicable, it appears that Regular Securityholders that are corporations or
that otherwise hold the Regular Securities in connection with a trade or
business should in general be allowed to deduct as an ordinary loss that loss
with respect to principal sustained during the taxable year on account of any
Regular Securities becoming wholly or partially worthless, and that, in
general, Regular Securityholders that are not corporations and do not hold the
Regular Securities in connection with a trade or business should be allowed to
deduct as a short-term capital loss any loss sustained during the taxable year
on account of a portion of any Regular Securities becoming wholly worthless.
Although the matter is not free from doubt, non-corporate Regular
Securityholders should be allowed a bad debt deduction at the time the
principal balance of the Regular Securities is reduced to reflect losses
resulting from any liquidated mortgage loans. The Internal Revenue Service,
however, could take the position that non-corporate holders will be allowed a
bad debt deduction to reflect those losses only after all the mortgage loans
remaining in the trust fund have been liquidated or the applicable Class of
Regular Securities has been otherwise retired. The Internal Revenue Service
could also assert that losses on the Regular Securities are deductible based
on some other method that may defer those deductions for all holders, such as
reducing future cashflow for purposes of computing original issue discount.
This may have the effect of creating "negative" original issue discount that
would be deductible only against future positive original issue discount or
otherwise upon termination of the Class.
Regular Securityholders are urged to consult their own tax advisors
regarding the appropriate timing, amount and character of any loss sustained
for their Regular Securities. While losses attributable to interest previously
reported as income should be deductible as ordinary losses by both corporate
and non-corporate holders, the Internal Revenue Service may take the position
that losses attributable to accrued original issue discount may only be
deducted as capital losses in the case of non-corporate holders who do not
hold the Regular Securities in connection with a trade or business. Special
loss rules are applicable to banks and thrift institutions, including rules
regarding reserves for bad debts. These taxpayers are advised to consult their
tax advisors regarding the treatment of losses on Regular Securities.
(9) Sale or Exchange of Regular Securities
If a Regular Securityholder sells or exchanges a Regular Security,
the Regular Securityholder will recognize gain or loss equal to the
difference, if any, between the amount received and its adjusted basis in the
Regular Security. The adjusted basis of a Regular Security generally will
equal the original cost of the Regular Security to the seller, increased by
any original issue discount or market discount previously included in the
seller's gross income for the Regular Security and reduced by amounts included
in the stated redemption price at maturity of the Regular Security that were
previously received by the seller, by any amortized premium, and by any
recognized losses.
Except as described above regarding market discount, and except as
provided in this paragraph, any gain or loss on the sale or exchange of a
Regular Security realized by an investor who holds the Regular Security as a
capital asset will be capital gain or loss and will be long-term or short-term
depending on whether the Regular Security has been held for the long-term
capital gain holding period (currently, more than one year). That gain will be
treated as ordinary income
(1) if a Regular Security is held as part of a "conversion
transaction" as defined in Code Section 1258(c), up to the amount of interest
that would have accrued on the Regular Securityholder's net investment in the
conversion transaction at 120% of the appropriate applicable federal rate in
effect at the time the taxpayer entered into the transaction minus any amount
previously treated as ordinary income for any prior disposition of property
that was held as part of that transaction;
(2) in the case of a non-corporate taxpayer, to the extent that the
taxpayer has made an election under Code Section 163(d)(4) to have net capital
gains taxed as investment income at ordinary income rates; or
(3) to the extent that the gain does not exceed the excess, if any,
of (a) the amount that would have been includible in the gross income of the
holder if its yield on that Regular Security were 110% of the applicable
federal rate as of the date of purchase, over (b) the amount of income
actually includible in the gross income of the holder for that Regular
Security.
In addition, gain or loss recognized from the sale of a Regular Security by
certain banks or thrift institutions will be treated as ordinary income or
loss pursuant to Code Section 582(c). Long-term capital gains of certain
noncorporate taxpayers generally are subject to a lower maximum tax rate (20%)
than ordinary income of those taxpayers (39.6%) for property held for more
than one year. Currently, the maximum tax rate for corporations is the same
for both ordinary income and capital gains.
Taxation of Owners of Residual Securities
(1) Taxation of REMIC Income
Generally, the "daily portions" of REMIC taxable income or net loss
will be includible as ordinary income or loss in determining the federal
taxable income of holders of Residual Securities ("Residual Holders"), and
will not be taxed separately to the REMIC Pool. The daily portions of REMIC
taxable income or net loss of a Residual Holder are determined by allocating
the REMIC Pool's taxable income or net loss for each calendar quarter ratably
to each day in that quarter and by allocating that daily portion among the
Residual Holders in proportion to their respective holdings of Residual
Securities in the REMIC Pool on that day. REMIC taxable income is generally
determined in the same manner as the taxable income of an individual using the
accrual method of accounting, except that
(1) the limitations on deductibility of investment interest expense
and expenses for the production of income do not apply;
(2) all bad loans will be deductible as business bad debts; and
(3) the limitation on the deductibility of interest and expenses
related to tax-exempt income will apply.
The REMIC Pool's gross income includes interest, original issue discount
income and market discount income, if any, on the mortgage loans, reduced by
amortization of any premium on the mortgage loans, plus income from
amortization of issue premium, if any, on the Regular Securities, plus income
on reinvestment of cash flows and reserve assets, plus any cancellation of
indebtedness income upon allocation of realized losses to the Regular
Securities. The REMIC Pool's deductions include interest and original issue
discount expense on the Regular Securities, servicing fees on the mortgage
loans, other administrative expenses of the REMIC Pool and realized losses on
the mortgage loans. The requirement that Residual Holders report their pro
rata share of taxable income or net loss of the REMIC Pool will continue until
there are no Securities of any class of the related series outstanding.
The taxable income recognized by a Residual Holder in any taxable
year will be affected by, among other factors, the relationship between the
timing of recognition of interest, original issue discount or market discount
income or amortization of premium for the mortgage loans, on the one hand, and
the timing of deductions for interest (including original issue discount) or
income from amortization of issue premium on the Regular Securities, on the
other hand. If an interest in the mortgage loans is acquired by the REMIC Pool
at a discount, and one or more of these mortgage loans is prepaid, the
prepayment may be used in whole or in part to make distributions in reduction
of principal on the Regular Securities, and (2) the discount on the mortgage
loans that is includible in income may exceed the deduction allowed upon those
distributions on those Regular Securities on account of any unaccrued original
issue discount relating to those Regular Securities. When there is more than
one Class of Regular Securities that distribute principal sequentially, this
mismatching of income and deductions is particularly likely to occur in the
early years following issuance of the Regular Securities when distributions in
reduction of principal are being made in respect of earlier Classes of Regular
Securities to the extent that those Classes are not issued with substantial
discount or are issued at a premium. If taxable income attributable to that
mismatching is realized, in general, losses would be allowed in later years as
distributions on the later maturing Classes of Regular Securities are made.
Taxable income may also be greater in earlier years than in later
years as a result of the fact that interest expense deductions, expressed as a
percentage of the outstanding principal amount of that series of Regular
Securities, may increase over time as distributions in reduction of principal
are made on the lower yielding Classes of Regular Securities, whereas, to the
extent the REMIC Pool consists of fixed rate mortgage loans, interest income
for any particular mortgage loan will remain constant over time as a
percentage of the outstanding principal amount of that loan. Consequently,
Residual Holders must have sufficient other sources of cash to pay any
federal, state, or local income taxes due as a result of that mismatching or
unrelated deductions against which to offset that income, subject to the
discussion of "excess inclusions" below under "--Limitations on Offset or
Exemption of REMIC Income." The timing of mismatching of income and deductions
described in this paragraph, if present for a series of Securities, may have a
significant adverse effect upon a Residual Holder's after-tax rate of return.
A portion of the income of a Residual Holder may be treated
unfavorably in three contexts:
(1) it may not be offset by current or net operating loss
deductions;
(2) it will be considered unrelated business taxable income to
tax-exempt entities; and
(3) it is ineligible for any statutory or treaty reduction in the
30% withholding tax otherwise available to a foreign Residual Holder.
See "--Limitations on Offset or Exemption of REMIC Income" below. In addition,
a Residual Holder's taxable income during certain periods may exceed the
income reflected by those Residual Holders for those periods in accordance
with generally accepted accounting principles. Investors should consult their
own accountants concerning the accounting treatment of their investment in
Residual Securities.
(2) Basis and Losses
The amount of any net loss of the REMIC Pool that may be taken into
account by the Residual Holder is limited to the adjusted basis of the
Residual Security as of the close of the quarter (or time of disposition of
the Residual Security if earlier), determined without taking into account the
net loss for the quarter. The initial adjusted basis of a purchaser of a
Residual Security is the amount paid for that Residual Security. The adjusted
basis will be increased by the amount of taxable income of the REMIC Pool
reportable by the Residual Holder and will be decreased (but not below zero),
first, by a cash distribution from the REMIC Pool and, second, by the amount
of loss of the REMIC Pool reportable by the Residual Holder. Any loss that is
disallowed on account of this limitation may be carried over indefinitely with
respect to the Residual Holder as to whom the loss was disallowed and may be
used by the Residual Holder only to offset any income generated by the same
REMIC Pool.
A Residual Holder will not be permitted to amortize directly the cost
of its Residual Security as an offset to its share of the taxable income of
the related REMIC Pool. However, the taxable income will not include cash
received by the REMIC Pool that represents a recovery of the REMIC Pool's
basis in its assets. Although the law is unclear in some respects, the
recovery of basis by the REMIC Pool will have the effect of amortization of
the issue price of the Residual Securities over their life. However, in view
of the possible acceleration of the income of Residual Holders described above
under "--Taxation of REMIC Income," the period of time over which the issue
price is effectively amortized may be longer than the economic life of the
Residual Securities.
A Residual Security may have a negative value if the net present
value of anticipated tax liabilities exceeds the present value of anticipated
cash flows. The REMIC Regulations appear to treat the issue price of the
residual interest as zero rather than the negative amount for purposes of
determining the REMIC Pool's basis in its assets. The preamble to the REMIC
Regulations states that the Internal Revenue Service may provide future
guidance on the proper tax treatment of payments made by a transferor of the
residual interest to induce the transferee to acquire the interest, and
Residual Holders should consult their own tax advisors in this regard.
Further, to the extent that the initial adjusted basis of a Residual
Holder (other than an original holder) in the Residual Security is greater
than the corresponding portion of the REMIC Pool's basis in the mortgage
loans, the Residual Holder will not recover a portion of the basis until
termination of the REMIC Pool unless future Treasury regulations provide for
periodic adjustments to the REMIC income otherwise reportable by the holder.
The REMIC Regulations currently in effect do not so provide. See "--Treatment
of Certain Items of REMIC Income and Expense--Market Discount" below regarding
the basis of mortgage loans to the REMIC Pool and "--Sale or Exchange of a
Residual Security" below regarding possible treatment of a loss upon
termination of the REMIC Pool as a capital loss.
(3) Treatment of Certain Items of REMIC Income and Expense
Although it is anticipated that the trustee will compute REMIC income
and expense in accordance with the Code and applicable regulations, the
authorities regarding the determination of specific items of income and
expense are subject to differing interpretations. The depositor makes no
representation as to the specific method that will be used for reporting
income with respect to the mortgage loans and expenses for the Regular
Securities, and different methods could result in different timing or
reporting of taxable income or net loss to Residual Holders or differences in
capital gain versus ordinary income.
Original Issue Discount and Premium. Generally, the REMIC Pool's
deductions for original issue discount and income from amortization of premium
will be determined in the same manner as original issue discount income on
Regular Securities as described above under "--Taxation of Owners of Regular
Securities--Original Issue Discount" and "--Variable Rate Regular Securities,"
without regard to the de minimis rule described therein, and "--Amortizable
Premium."
Market Discount. The REMIC Pool will have market discount income in
respect of mortgage loans if, in general, the basis of the REMIC Pool in those
mortgage loans is exceeded by their unpaid principal balances. The REMIC
Pool's basis in those mortgage loans is generally the fair market value of the
mortgage loans immediately after the transfer thereof to the REMIC Pool. The
REMIC Regulations provide that the basis is equal to the total of the issue
prices of all regular and residual interests in the REMIC Pool. The accrued
portion of the market discount would be recognized currently as an item of
ordinary income in a manner similar to original issue discount. Market
discount income generally should accrue in the manner described above under
"--Taxation of Owners of Regular Securities--Market Discount."
Premium. Generally, if the basis of the REMIC Pool in the mortgage
loans exceeds the unpaid principal balances thereof, the REMIC Pool will be
considered to have acquired those mortgage loans at a premium equal to the
amount of that excess. As stated above, the REMIC Pool's basis in mortgage
loans is the fair market value of the mortgage loans, based on the total of
the issue prices of the regular and residual interests in the REMIC Pool
immediately after the transfer thereof to the REMIC Pool. In a manner
analogous to the discussion above under "--Taxation of Owners of Regular
Securities--Amortizable Premium," a person that holds a mortgage loan as a
capital asset under Code Section 1221 may elect under Code Section 171 to
amortize premium on mortgage loans originated after September 27, 1985, under
the constant yield method. Amortizable bond premium will be treated as an
offset to interest income on the mortgage loans, rather than as a separate
deduction item. Because substantially all of the borrowers on the mortgage
loans are expected to be individuals, Code Section 171 will not be available
for premium on mortgage loans originated on or before September 27, 1985.
Premium for those mortgage loans may be deductible in accordance with a
reasonable method regularly employed by the holder thereof. The allocation of
that premium pro rata among principal payments should be considered a
reasonable method; however, the Internal Revenue Service may argue that the
premium should be allocated in a different manner, such as allocating the
premium entirely to the final payment of principal.
(4) Limitations on Offset or Exemption of REMIC Income
A portion (or all) of the REMIC taxable income includible in
determining the federal income tax liability of a Residual Holder will be
subject to special treatment. That portion, referred to as the "excess
inclusion," is equal to the excess of REMIC taxable income for the calendar
quarter allocable to a Residual Security over the daily accruals for that
quarterly period of (1) 120% of the long-term applicable federal rate that
would have applied to the Residual Security (if it were a debt instrument) on
the Startup Day under Code Section 1274(d), multiplied by (2) the adjusted
issue price of the Residual Security at the beginning of the quarterly period.
For this purpose, the adjusted issue price of a Residual Security at the
beginning of a quarter is the issue price of the Residual Security, plus the
amount of those daily accruals of REMIC income described in this paragraph for
all prior quarters, decreased by any distributions made with respect to the
Residual Security before the beginning of that quarterly period. Accordingly,
the portion of the REMIC Pool's taxable income that will be treated as excess
inclusions will be a larger portion of that income as the adjusted issue price
of the Residual Securities diminishes.
The portion of a Residual Holder's REMIC taxable income consisting of
the excess inclusions generally may not be offset by other deductions,
including net operating loss carryforwards, on the Residual Holder's return.
However, net operating loss carryovers are determined without regard to excess
inclusion income. Further, if the Residual Holder is an organization subject
to the tax on unrelated business income imposed by Code Section 511, the
Residual Holder's excess inclusions will be treated as unrelated business
taxable income of the Residual Holder for purposes of Code Section 511. In
addition, REMIC taxable income is subject to 30% withholding tax for certain
persons who are not U.S. Persons (as defined below under "--Tax-Related
Restrictions on Transfer of Residual Securities--Foreign Investors"), and the
portion thereof attributable to excess inclusions is not eligible for any
reduction in the rate of withholding tax (by treaty or otherwise). See
"--Taxation of Certain Foreign Investors--Residual Securities" below. Finally,
if a real estate investment trust or a regulated investment company owns a
Residual Security, a portion (allocated under Treasury regulations yet to be
issued) of dividends paid by the real estate investment trust or regulated
investment company could not be offset by net operating losses of its
shareholders, would constitute unrelated business taxable income for
tax-exempt shareholders, and would be ineligible for reduction of withholding
to certain persons who are not U.S. Persons. The SBJPA of 1996 has eliminated
the special rule permitting Section 593 institutions ("thrift institutions")
to use net operating losses and other allowable deductions to offset their
excess inclusion income from Residual Securities that have "significant value"
within the meaning of the REMIC Regulations, effective for taxable years
beginning after December 31, 1995, except for Residual Securities continuously
held by a thrift institution since November 1, 1995.
In addition, the SBJPA of 1996 provides three rules for determining
the effect of excess inclusions on the alternative minimum taxable income of a
Residual Holder. First, alternative minimum taxable income for a Residual
Holder is determined without regard to the special rule, discussed above, that
taxable income cannot be less than excess inclusions. Second, a Residual
Holder's alternative minimum taxable income for a taxable year cannot be less
than the excess inclusions for the year. Third, the amount of any alternative
minimum tax net operating loss deduction must be computed without regard to
any excess inclusions. These rules are effective for taxable years beginning
after December 31, 1986, unless a Residual Holder elects to have those rules
apply only to taxable years beginning after August 20, 1996.
(5) Tax-Related Restrictions on Transfer of Residual Securities
Disqualified Organizations. If any legal or beneficial interest in a
Residual Security is transferred to a Disqualified Organization (as defined
below), a tax would be imposed in an amount equal to the product of (1) the
present value of the total anticipated excess inclusions for that Residual
Security for periods after the transfer and (2) the highest marginal federal
income tax rate applicable to corporations. The REMIC Regulations provide that
the anticipated excess inclusions are based on actual prepayment experience to
the date of the transfer and projected payments based on the Prepayment
Assumption. The present value rate equals the applicable federal rate under
Code Section 1274(d) as of the date of the transfer for a term ending with the
last calendar quarter in which excess inclusions are expected to accrue. That
rate is applied to the anticipated excess inclusions from the end of the
remaining calendar quarters in which they arise to the date of the transfer.
That tax generally would be imposed on the transferor of the Residual
Security, except that where the transfer is through an agent (including a
broker, nominee, or other middleman) for a Disqualified Organization, the tax
would instead be imposed on the agent. However, a transferor of a Residual
Security would in no event be liable for the tax for a transfer if the
transferee furnished to the transferor an affidavit stating that the
transferee is not a Disqualified Organization and, as of the time of the
transfer, the transferor does not have actual knowledge that the affidavit is
false. The tax also may be waived by the Internal Revenue Service if the
Disqualified Organization promptly disposes of the Residual Security and the
transferor pays income tax at the highest corporate rate on the excess
inclusion for the period the Residual Security is actually held by the
Disqualified Organization.
In addition, if a "Pass-Through Entity" (as defined below) has excess
inclusion income for a Residual Security during a taxable year and a
Disqualified Organization is the record holder of an equity interest in that
entity, then a tax is imposed on the entity equal to the product of (1) the
amount of excess inclusions that are allocable to the interest in the
Pass-Through Entity during the period that interest is held by the
Disqualified Organization, and (2) the highest marginal federal corporate
income tax rate. That tax would be deductible from the ordinary gross income
of the Pass-Through Entity for the taxable year. The Pass-Through Entity would
not be liable for the tax if it has received an affidavit from the record
holder that it is not a Disqualified Organization or stating the holder's
taxpayer identification number and, during the period that person is the
record holder of the Residual Security, the Pass-Through Entity does not have
actual knowledge that the affidavit is false.
For taxable years beginning on or after January 1, 1998, if an
"electing large partnership" holds a Residual Security, all interests in the
electing large partnership are treated as held by Disqualified Organizations
for purposes of the tax imposed upon a Pass-Through Entity by Section 860E(c)
of the Code. An exception to this tax, otherwise available to a Pass-Through
Entity that is furnished certain affidavits by record holders of interests in
the entity and that does not know those affidavits are false, is not available
to an electing large partnership.
o "Disqualified Organization" means the United States, any state or
political subdivision thereof, any foreign government, any international
organization, any agency or instrumentality of any of the foregoing (provided,
that the term does not include an instrumentality if all of its activities are
subject to tax and a majority of its board of directors in not selected by any
governmental entity), any cooperative organization furnishing electric energy
or providing telephone service or persons in rural areas as described in Code
Section 1381(a)(2)(C), and any organization (other than a farmers' cooperative
described in Code Section 531) that is exempt from taxation under the Code
unless the organization is subject to the tax on unrelated business income
imposed by Code Section 511.
o "Pass-Through Entity" means any regulated investment company,
real estate investment trust, common trust fund, partnership, trust or estate
and certain corporations operating on a cooperative basis. Except as may be
provided in Treasury regulations, any person holding an interest in a
Pass-Through Entity as a nominee for another will, with respect to that
interest, be treated as a Pass-Through Entity.
The pooling and servicing agreement for a series will provide that no
legal or beneficial interest in a Residual Security may be transferred or
registered unless (1) the proposed transferee furnished to the transferor and
the trustee an affidavit providing its taxpayer identification number and
stating that the transferee is the beneficial owner of the Residual Security
and is not a Disqualified Organization and is not purchasing the Residual
Security on behalf of a Disqualified Organization (i.e., as a broker, nominee
or middleman thereof) and (2) the transferor provides a statement in writing
to the trustee that it has no actual knowledge that the affidavit is false.
Moreover, the pooling and servicing agreement will provide that any attempted
or purported transfer in violation of these transfer restrictions will be null
and void and will vest no rights in any purported transferee. Each Residual
Security for a series will bear a legend referring to those restrictions on
transfer, and each Residual Holder will be deemed to have agreed, as a
condition of ownership thereof, to any amendments to the related pooling and
servicing agreement required under the Code or applicable Treasury regulations
to effectuate the foregoing restrictions. Information necessary to compute an
applicable excise tax must be furnished to the Internal Revenue Service and to
the requesting party within 60 days of the request, and the Seller or the
trustee may charge a fee for computing and providing that information.
Noneconomic Residual Interests. The REMIC Regulations would disregard
certain transfers of Residual Securities, in which case the transferor would
continue to be treated as the owner of the Residual Securities and thus would
continue to be subject to tax on its allocable portion of the net income of
the REMIC Pool. Under the REMIC Regulations, a transfer of a "noneconomic
residual interest" (as defined below) to a Residual Holder (other than a
Residual Holder who is not a U.S. Person as defined below under "--Foreign
Investors") is disregarded to all federal income tax purposes if a significant
purpose of the transfer is to impede the assessment or collection of tax. A
residual interest in a REMIC (including a residual interest with a positive
value at issuance) is a "noneconomic residual interest" unless, at the time of
the transfer, (1) the present value of the expected future distributions on
the residual interest at least equals the product of the present value of the
anticipated excess inclusions and the highest corporate income tax rate in
effect for the year in which the transfer occurs, and (2) the transferor
reasonably expects that the transferee will receive distributions from the
REMIC at or after the time at which taxes accrue on the anticipated excess
inclusions in an amount sufficient to satisfy the accrued taxes on each excess
inclusion. The anticipated excess inclusions and the present value rate are
determined in the same manner as set forth above under "--Disqualified
Organizations." The REMIC Regulations explain that a significant purpose to
impede the assessment or collection of tax exists if the transferor, at the
time of the transfer, either knew or should have known that the transferee
would be unwilling or unable to pay taxes due on its share of the taxable
income of the REMIC. A safe harbor is provided if (1) the transferor
conducted, at the time of the transfer, a reasonable investigation of the
financial condition of the transferee and found that the transferee
historically had paid its debts as they came due and found no significant
evidence to indicate that the transferee would not continue to pay its debts
as they came due in the future, and (2) the transferee represents to the
transferor that it understands that, as the holder of the non-economic
residual interest, the transferee may incur liabilities in excess of any cash
flows generated by the interest and that the transferee intends to pay taxes
associated with holding the residual interest as they become due. The pooling
and servicing agreement for each series of Certificates will require the
transferee of a Residual Security to certify to the matters in the preceding
sentence as part of the affidavit described above under the heading
"--Disqualified Organizations."
Foreign Investors. The REMIC Regulations provide that the transfer of
a Residual Security that has "tax avoidance potential" to a "foreign person"
will be disregarded for all federal tax purposes. This rule appears intended
to apply to a transferee who is not a "U.S. Person" (as defined below), unless
the transferee's income is effectively connected with the conduct of a trade
or business within the United States. A Residual Security is deemed to have
tax avoidance potential unless, at the time of the transfer, (1) the future
value of expected distributions equals at least 30% of the anticipated excess
inclusions after the transfer, and (2) the transferor reasonably expects that
the transferee will receive sufficient distributions from the REMIC Pool at or
after the time at which the excess inclusions accrue and before the end of the
next succeeding taxable year for the accumulated withholding tax liability to
be paid. If the non-U.S. Person transfers the Residual Security back to a U.S.
Person, the transfer will be disregarded and the foreign transferor will
continue to be treated as the owner unless arrangements are made so that the
transfer does not have the effect of allowing the transferor to avoid tax on
accrued excess inclusions.
The prospectus supplement relating to the Certificates of a series
may provide that a Residual Security may not be purchased by or transferred to
any person that is not a U.S. Person or may describe the circumstances and
restrictions pursuant to which the transfer may be made. The term "U.S.
Person" means a citizen or resident of the United States, a corporation,
partnership (except as provided in applicable Treasury regulations) or other
entity treated as a partnership or as a corporation created or organized in or
under the laws of the United States or of any state (including, for this
purpose, the District of Columbia), an estate that is subject to U.S. federal
income tax regardless of the source of its income, or a trust if a court
within the United States is able to exercise primary supervision over the
administration of the trust and one or more U.S. Persons have the authority to
control all substantial decisions of the trust (or, to the extent provided in
applicable Treasury regulations, certain trusts in existence on August 20,
1996, which are eligible to elect to be treated as U.S. Persons).
(6) Sale or Exchange of a Residual Security
Upon the sale or exchange of a Residual Security, the Residual Holder
will recognize gain or loss equal to the excess, if any, of the amount
realized over the adjusted basis (as described above under "--Taxation of
Owners of Residual Securities--Basis and Losses") of the Residual Holder in
the Residual Security at the time of the sale or exchange. In addition to
reporting the taxable income of the REMIC Pool, a Residual Holder will have
taxable income to the extent that any cash distribution to it from the REMIC
Pool exceeds that adjusted basis on that Distribution Date. That income will
be treated as gain from the sale or exchange of the Residual Holder's Residual
Security, in which case, if the Residual Holder has an adjusted basis in its
Residual Security remaining when its interest in the REMIC Pool terminates,
and if it holds the Residual Security as a capital asset under Code Section
1221, then it will recognize a capital loss at that time in the amount of the
remaining adjusted basis.
Any gain on the sale of a Residual Security will be treated as
ordinary income (1) if a Residual Security is held as part of a "conversion
transaction" as defined in Code Section 1258(c), up to the amount of interest
that would have accrued on the Residual Holder's net investment in the
conversion transaction at 120% of the appropriate applicable federal rate in
effect at the time the taxpayer entered into the transaction minus any amount
previously treated as ordinary income for any prior disposition of property
that was held as a part of that transaction or (2) in the case of a
non-corporate taxpayer, to the extent that the taxpayer has made an election
under Code Section 163(d)(4) to have net capital gains taxed as investment
income at ordinary income rates. In addition, gain or loss recognized from the
sale of a Residual Security by certain banks or thrift institutions will be
treated as ordinary income or loss pursuant to Code Section 582(c).
Except as provided in Treasury regulations yet to be issued, the wash
sale rules of Code Section 1091 will apply to dispositions of Residual
Securities where the seller of the Residual Security, during the period
beginning six months before the sale or disposition of the Residual Security
and ending six months after the sale or disposition, acquires (or enters into
any other transaction that results in the application of Code Section 1091)
any residual interest in any REMIC or any interest in a "taxable mortgage
pool" (such as a non-REMIC owner trust) that is economically comparable to a
Residual Security.
(7) Mark to Market Regulations
On December 24, 1996, the Internal Revenue Service issued final
regulations (the "Mark to Market Regulations") under Code Section 475 relating
to the requirement that a securities dealer mark to market securities held for
sale to customers. This mark-to-market requirement applies to all securities
of a dealer, except to the extent that the dealer has specifically identified
a security as held for investment. The Mark to Market Regulations provide
that, for purposes of this mark to market requirement, a Residual Security is
not treated as a security and thus may not be marked to market. The Mark to
Market Regulations apply to all Residual Securities acquired on or after
January 4, 1995.
Taxes That May Be Imposed on the REMIC Pool
(1) Prohibited Transactions
Income from certain transactions by the REMIC Pool, called prohibited
transactions, will not be part of the calculation of income or loss includible
in the federal income tax returns of Residual Holders, but rather will be
taxed directly to the REMIC Pool at a 100% rate. Prohibited transactions
generally include:
(1) the disposition of a qualified mortgages other than for
(a) substitution within two years of the Startup Day for a
defective (including a defaulted) obligation (or repurchase in lieu of
substitution of a defective (including a defaulted) obligation at any time) or
for any qualified mortgage within three months of the Startup Day;
(b) foreclosure, default, or imminent default of a qualified
mortgage;
(c) bankruptcy or insolvency of the REMIC Pool; or
(d) a qualified (complete) liquidation;
(2) the receipt of income from assets that are not the type of
mortgages or investments that the REMIC Pool is permitted to hold;
(3) the receipt of compensation for services; or
(4) the receipt of gain from disposition of cash flow investments
other than pursuant to a qualified liquidation.
Notwithstanding (1) and (4) above, it is not a prohibited transaction to sell
a qualified mortgage or cash flow investment held by a REMIC Pool to prevent a
default on Regular Securities as a result of a default on qualified mortgages
or to facilitate a clean-up call (generally, an optional termination to save
administrative costs when no more than a small percentage of the Securities is
outstanding). The REMIC Regulations indicate that the modification of a
mortgage loan generally will not be treated as a disposition if it is
occasioned by a default or reasonably foreseeable default, an assumption of
the mortgage loan, the waiver of a due-on-sale or due-on-encumbrance clause,
or the conversion of an interest rate by a borrower pursuant to the terms of a
convertible adjustable rate mortgage loan.
(2) Contributions to the REMIC Pool After the Startup Day
In general, the REMIC Pool will be subject to a tax at a 100% rate on
the value of any property contributed to the REMIC Pool after the Startup Day.
Exceptions are provided for cash contributions to the REMIC Pool (1) during
the three months following the Startup Day, (2) made to a qualified reserve
fund by a Residual Holder, (3) in the nature of a guarantee, (4) made to
facilitate a qualified liquidation or clean-up call, and (5) as otherwise
permitted in Treasury regulations yet to be issued. It is not anticipated that
there will be any contributions to the REMIC Pool after the Startup Day.
(3) Net Income from Foreclosure Property
The REMIC Pool will be subject of federal income tax at the highest
corporate rate on "net income from foreclosure property," determined by
reference to the rules applicable to real estate investment trusts. Generally,
property acquired by deed in lieu of foreclosure would be treated as
"foreclosure property" until the close of the third calendar year after the
year in which the REMIC Pool acquired that property, with possible extensions.
Net income from foreclosure property generally means gain from the sale of a
foreclosure property that is inventory property and gross income from
foreclosure property other than qualifying rents and other qualifying income
for a real estate investment trust. It is not anticipated that the REMIC Pool
will have any taxable net income from foreclosure property.
(4) Liquidation of the REMIC Pool
If a REMIC Pool adopts a plan of complete liquidation, within the
meaning of Code Section 860F(a)(4)(A)(i), which may be accomplished by
designating in the REMIC Pool's final tax return a date on which that adoption
is deemed to occur, and sells all of its assets (other than cash) within a
90-day period beginning on that date, the REMIC Pool will not be subject to
the prohibited transaction rules on the sale of its assets, provided that the
REMIC Pool credits or distributes in liquidation all of the sale proceeds plus
its cash (other than amounts retained to meet claims) to holders of Regular
Securities and Residual Holders within the 90-day period.
(5) Administrative Matters
The REMIC Pool will be required to maintain its books on a calendar
year basis and to file federal income tax returns for federal income tax
purposes in a manner similar to a partnership. The form for the income tax
return is Form 1066, U.S. Real Estate Mortgage Investment Conduit Income Tax
Return. The trustee will be required to sign the REMIC Pool's returns.
Treasury regulations provide that, except where there is a single Residual
Holder for an entire taxable year, the REMIC Pool will be subject to the
procedural and administrative rules of the Code applicable to partnerships,
including the determination by the Internal Revenue Service of any adjustments
to, among other things, items of REMIC income, gain, loss, deduction, or
credit in a unified administrative proceeding. The master servicer will be
obligated to act as "tax matters person," as defined in applicable Treasury
regulations, for the REMIC Pool as agent of the Residual Holders holding the
largest percentage interest in the Residual Securities. If the Code or
applicable Treasury regulations do not permit the master servicer to act as
tax matters person in its capacity as agent of the Residual Holder, the
Residual Holder or any other person specified pursuant to Treasury regulations
will be required to act as tax matters person. The tax matters person
generally has responsibility for overseeing and providing notice to the other
Residual Holders of certain administrative and judicial proceedings regarding
the REMIC Pool's tax affairs, although other holders of the Residual
Securities of the same series would be able to participate in those
proceedings in appropriate circumstances.
(6) Limitations on Deduction of Certain Expenses
An investor who is an individual, estate, or trust will be subject to
limitation with respect to certain itemized deductions described in Code
Section 67, to the extent that those itemized deductions, in total, do not
exceed 2% of the investor's adjusted gross income. In addition, Code Section
68 provides that itemized deductions otherwise allowable for a taxable year of
an individual taxpayer will be reduced by the lesser or (1) 3% of the excess,
if any, of adjusted gross income over $100,000 ($50,000 in the case of a
married individual filing a separate return) (subject to adjustment for
inflation), or (2) 80% of the amount of itemized deductions otherwise
allowable for that year. In the case of a REMIC Pool, those deductions may
include deductions under Code Section 212 for the Servicing Fee and all
administrative and other expenses relating to the REMIC Pool, or any similar
expenses allocated to the REMIC Pool for a regular interest it holds in
another REMIC. Those investors who hold REMIC Securities either directly or
indirectly through certain pass-through entities may have their pro rata share
of those expenses allocated to them as additional gross income, but may be
subject to that limitation on deductions. In addition, those expenses are not
deductible at all for purposes of computing the alternative minimum tax, and
may cause those investors to be subject to significant additional tax
liability. Temporary Treasury regulations provide that the additional gross
income and corresponding amount of expenses generally are to be allocated
entirely to the holders of Residual Securities in the case of a REMIC Pool
that would not qualify as a fixed investment trust in the absence of a REMIC
election. For a REMIC Pool that would be classified as an investment trust in
the absence of a REMIC election or that is substantially similar to an
investment trust, any holder of a Regular Security that is an individual,
trust, estate, or pass-through entity also will be allocated its pro rata
share of those expenses and a corresponding amount of income and will be
subject to the limitations or deductions imposed by Code Sections 67 and 68,
as described above. The prospectus supplement will indicate if all those
expenses will not be allocable to the Residual Securities.
In general, the allocable portion will be determined based on the
ratio that a REMIC securityholder's income, determined on a daily basis, bears
to the income of all holders of Regular Securities and Residual Securities for
a REMIC Pool. As a result, individuals, estates or trusts holding REMIC
Securities (either directly or indirectly through a grantor trust,
partnership, S corporation, REMIC, or certain other pass-through entities
described in the foregoing temporary Treasury regulations) may have taxable
income in excess of the interest income at the Interest Rate on Regular
Securities that are issued in a single class or otherwise consistently with
fixed investment trust status or in excess of cash distributions for the
related period on Residual Securities.
Taxation of Certain Foreign Investors
(1) Regular Securities
Interest, including original issue discount, distributable to Regular
Securityholders who are non-resident aliens, foreign corporations, or other
Non-U.S. Persons (as defined below), generally will be considered "portfolio
interest" and, therefore, generally will not be subject to 30% United States
withholding tax, provided that (1) the interest is not effectively connected
with the conduct of a trade or business in the United States of the
securityholder, (2) the Non-U.S. Person is not a "10-percent shareholder"
within the meaning of Code Section 871(h)(3)(B) or a controlled foreign
corporation described in Code Section 881(c)(3)(C) and (3) that Non-U.S.
Person provides the trustee, or the person who would otherwise be required to
withhold tax from those distributions under Code Section 1441 or 1442, with an
appropriate statement, signed under penalties of perjury, identifying the
beneficial owner and stating, among other things, that the beneficial owner of
the Regular Security is a Non-U.S. Person. If that statement, or any other
required statement, is not provided, 30% withholding will apply unless reduced
or eliminated pursuant to an applicable tax treaty or unless the interest on
the Regular Security is effectively connected with the conduct of a trade or
business within the United States by that Non-U.S. Person. In the latter case,
the Non-U.S. Person will be subject to United States federal income tax at
regular rates. Investors who are Non-U.S. Persons should consult their own tax
advisors regarding the specific tax consequences to them of owning a Regular
Security. The term "Non-U.S. Person" means any person who is not a U.S.
Person.
The Internal Revenue Service recently issued final regulations (the
"New Regulations") that would provide alternative methods of satisfying the
beneficial ownership certification requirement described above. The New
Regulations are effective for payments made after December 31, 2000. The New
Regulations would require, in the case of Regular Certificates held by a
foreign partnership, that (x) the certification described above be provided by
the partners rather than by the foreign partnership and (y) the partnership
provide certain information, including a United States taxpayer identification
number. A look-through rule would apply in the case of tiered partnerships.
Non-U.S. Persons should consult their own tax advisors concerning the
application of the certification requirements in the New Regulations.
(2) Residual Securities
The Conference Committee Report to the 1986 Act indicates that
amounts paid to Residual Holders who are Non-U.S. Persons generally should be
treated as interest for purposes of the 30% (or lower treaty rate) United
States withholding tax. Treasury regulations provide that amount distributed
to Residual Holders may qualify as "portfolio interest," subject to the
conditions described in "Regular Securities" above, but only to the extent
that (1) the mortgage loans were issued after July 18, 1984, and (2) the trust
fund or segregated pool of assets therein (as to which a separate REMIC
election will be made), to which the Residual Security relates, consists of
obligations issued in "registered form" within the meaning of Code Section 163
(f) (1). Generally, mortgage loans will not be, but regular interests in
another REMIC Pool will be, considered obligations issued in registered form.
Furthermore, Residual Holders will not be entitled to any exemption from the
30% withholding tax (or lower treaty rate) to the extent of that portion of
REMIC taxable income that constitutes an "excess inclusion." See "--Taxation
of Owners of Residual Securities--Limitations on Offset or Exemption of REMIC
Income" above. If the amounts paid to Residual Holders who are Non-U.S.
Persons are effectively connected with the conduct of a trade or business
within the United States by those Non-U.S. Persons, 30% (or lower treaty rate)
withholding will not apply. Instead, the amounts paid to those Non-U.S.
Persons will be subject to United States federal income tax at regular rates.
If 30% (or lower treaty rate) withholding is applicable, those amounts
generally will be taken into account for purposes of withholding only when
paid or otherwise distributed (or when the Residual Security is disposed of)
under rules similar to withholding upon disposition of debt instruments that
have original issue discount. See "--Tax-Related Restrictions on Transfer of
Residual Securities--Foreign Investors" above concerning the disregard of
certain transfers having "tax avoidance potential." Investors who are Non-U.S.
Persons should consult their own tax advisors regarding the specific tax
consequences to them of owning Residual Securities.
(3) Backup Withholding
Distributions made on the Regular Securities, and proceeds from the
sale of the Regular Securities to or through certain brokers, may be subject
to a "backup" withholding tax under Code Section 3406 of 31% on "reportable
payments" (including interest distributions, original issue discount, and,
under some circumstances, principal distributions) unless the Regular Holder
complies with certain reporting and/or certification procedures, including the
provision of its taxpayer identification number to the trustee, its agent or
the broker who effected the sale of the Regular Security, or that Holder is
otherwise an exempt recipient under applicable provisions of the Code. Any
amounts to be withheld from distribution on the Regular Securities would be
refunded by the Internal Revenue Service or allowed as a credit against the
Regular Holder's federal income tax liability.
(4) Reporting Requirements
Reports of accrued interest, original issue discount and information
necessary to compute the accrual of market discount will be made annually to
the Internal Revenue Service and to individuals, estates, non-exempt and
non-charitable trusts, and partnerships who are either holders of record of
Regular Securities or beneficial owners who own Regular Securities through a
broker or middleman as nominee. All brokers, nominees and all other non-exempt
holders of record of Regular Securities (including corporations, non-calendar
year taxpayers, securities or commodities dealers, real estate investment
trusts, investment companies, common trust funds, thrift institutions and
charitable trusts) may request that information for any calendar quarter by
telephone or in writing by contacting the person designated in Internal
Revenue Service Publication 938 for a particular series of Regular Securities.
Holders through nominees must request the information from the nominee.
The Internal Revenue Service's Form 1066 has an accompanying Schedule
Q, Quarterly Notice to Residual Interest Holders of REMIC Taxable Income or
Net Loss Allocation. Treasury regulations require that Schedule Q be furnished
by the REMIC Pool to each Residual Holder by the end of the month following
the close of each calendar quarter (41 days after the end of a quarter under
proposed Treasury regulations) in which the REMIC Pool is in existence.
Treasury regulations require that, in addition to the foregoing requirements,
information must be furnished quarterly to Residual Holders, furnished
annually, if applicable, to holders of Regular Securities, and filed annually
with the Internal Revenue Service concerning Code Section 67 expenses (see
"Limitations on Deduction of Certain Expenses" above) allocable to those
holders. Furthermore, under these regulations, information must be furnished
quarterly to Residual Holders, furnished annually to holders of Regular
Securities, and filed annually with the Internal Revenue Service concerning
the percentage of the REMIC Pool's assets meeting the qualified asset tests
described above under "--Characterization of Investments in REMIC Securities."
Residual Holders should be aware that their responsibilities as
holders of the residual interest in a REMIC Pool, including the duty to
account for their shares of the REMIC Pool's income or loss on their returns,
continue for the life of the REMIC Pool, even after the principal and interest
on their Residual Securities have been paid in full.
Treasury regulations provide that a Residual Holder is not required
to treat items on its return consistently with their treatment on the REMIC
Pool's return if the Holder owns 100% of the Residual Securities for the
entire calendar year. Otherwise, each Residual Holder is required to treat
items on its returns consistently with their treatment on the REMIC Pool's
return, unless the Holder either files a statement identifying the
inconsistency or establishes that the inconsistency resulted from incorrect
information received from the REMIC Pool. The Internal Revenue Service may
assess a deficiency resulting from a failure to comply with the consistency
requirement without instituting an administrative proceeding at the REMIC Pool
level. A REMIC Pool typically will not register as a tax shelter pursuant to
Code Section 6111 because it generally will not have a net loss for any of the
first five taxable years of its existence. Any person that holds a Residual
Security as a nominee for another person may be required to furnish the
related REMIC Pool, in a manner to be provided in Treasury regulations, with
the name and address of that person and other specified information.
FASITs
Classification of FASITs
For each series of FASIT Securities, assuming compliance with all
provisions of the related pooling and servicing agreement, in the opinion of
Brown & Wood LLP, the related trust fund (or each applicable portion thereof)
will qualify as a FASIT. The trust fund will qualify under the Code as a FASIT
in which FASIT regular securities (the "FASIT Regular Securities") and the
ownership interest security (the "FASIT Ownership Security") will constitute
the "regular interests" and the "ownership interest," respectively, if
(1) a FASIT election is in effect;
(2) certain tests concerning
(a) the composition of the FASIT's assets and
(b) the nature of the securityholders' interests in the FASIT are
met on a continuing basis; and
(3) the trust fund is not a regulated investment company as defined
in Section 851(a) of the Code.
A segregated pool of assets may also qualify as a FASIT.
(1) Asset Composition
In order for the trust fund to be eligible for FASIT status,
substantially all of the assets of the trust fund must consist of "permitted
assets" as of the close of the third month beginning after the closing date
and at all times thereafter. Permitted assets include:
(1) cash or cash equivalents;
(2) debt instruments with fixed terms that would qualify as regular
interests if issued by a REMIC as defined in Section 860D of the Code
(generally, instruments that provide for interest at a fixed rate, a
qualifying variable rate, or a qualifying interest-only type rate);
(3) foreclosure property;
(4) 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;
(5) contract rights to acquire qualifying debt instruments or
qualifying hedging instruments;
(6) FASIT regular interests; and
(7) 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. A debt instrument is a permitted asset only if the instrument is
indebtedness for federal income tax purposes, including regular interests in a
REMIC or regular interests issued by another FASIT and it bears (1) fixed
interest or (2) variable interest of a type that relates to qualified variable
rate debt (as defined in Treasury regulations prescribed under section
860G(a)(1)(B)). Permitted debt instruments must bear interest, if any, at a
fixed or qualified variable rate. Permitted hedges include interest rate or
foreign currency notional principal contracts, letters of credit, insurance,
guarantees of payment default and similar instruments to be provided in
regulations, and which are reasonably required to guarantee or hedge against
the FASIT's risks associated with being the obligor on interests issued by the
FASIT. Foreclosure property is real property acquired by the FASIT in
connection with the default or imminent default of a qualified mortgage,
provided the depositor had no knowledge or reason to know as of the date such
asset was acquired by the FASIT that such a default had occurred or would
occur.
(2) 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:
(1) one or more classes of regular interests or
(2) a single class of ownership interest that is held by an
Eligible Corporation (as defined herein).
FASIT regular interests generally will be treated as debt for federal
income tax purposes. FASIT ownership interests generally will not treated as
debt for federal income tax 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 interests.
A FASIT interest generally qualifies as a regular interest if:
(1) it is designated as a regular interest;
(2) it has a stated maturity no greater than thirty years;
(3) it entitles its holder to a specified principal amount;
(4) the issue price of the interest does not exceed 125% of its
stated principal amount;
(5) the yield to maturity of the interest is less than the
applicable Treasury rate published by the IRS plus 5%; and
(6) if it pays interest, such interest is payable at either:
(a) a fixed rate with respect to the principal amount of the
regular interest or
(b) a permissible variable rate with respect to such principal
amount.
Permissible variable rates for FASIT regular interests are the same as those
for REMIC regular interests (i.e., certain qualified floating rates and
weighted average rates). Interest will be considered to be based on a
permissible variable rate if generally:
(1) such interest is unconditionally payable at least annually;
(2) the issue price of the debt instrument does not exceed the
total noncontingent principal payments; and
(3) interest is based on a "qualified floating rate," an "objective
rate," a combination of a single fixed rate and one or more "qualified
floating rates," 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 (3), (4), or (5) 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 (6), 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.
See "--Taxation of Owners of FASIT Regular Securities," "--Taxation
of Owners of High-Yield Interests" and "--Taxation of FASIT Ownership
Securities" below.
(3) Consequences of Disqualification
If the trust fund fails to comply with one or more of the Code's
ongoing requirements for FASIT status during any taxable year, the Code
provides that it's 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 U.S. 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 the requirements for FASIT status are not
satisfied.
Taxation of Owners of FASIT Regular Securities
(1) General
Payments received by holders of FASIT Regular Securities generally
will be accorded the same tax treatment under the Code as payments received on
other taxable debt instruments. Holders of FASIT Regular Securities must
report income from such Securities under an accrual method of accounting, even
if they otherwise would have used the cash receipts and disbursements method.
Except in the case of FASIT Regular Securities issued with original issue
discount, interest paid or accrued on a FASIT Regular Security generally will
be treated as ordinary income to the Holder and a principal payment on such
security will be treated as a return of capital to the extent that the
securityholder's basis is allocable to that payment.
(2) Original Issue Discount; Market Discount; Acquisition Premium
FASIT Regular Securities issued with original issue discount or
acquired with market discount or acquisition premium generally will treat
interest and principal payments on such Securities in the same manner
described for REMIC Regular Securities. See "--REMICs - Taxation of Owners of
Regular Securities" above.
(3) Sale or Exchange
If the FASIT Regular Securities are sold, the holder generally will
recognize gain or loss upon the sale in the manner described above for REMIC
Regular Securities. See "--REMICs--Taxation of Owners of Regular
Securities--Sale or Exchange of Regular Securities."
Taxation of Owners of High-Yield Interests
(1) General
The treatment of high-yield interests is intended to ensure that the
return on instruments issued by a FASIT yielding an equity-like return
continues to have a corporate level tax. High-yield interests are subject to
special rules regarding the eligibility of holders of such interest, and the
ability of such holders to offset income derived from their FASIT Security
with losses.
High-yield interests may only be held by Eligible Corporations, other
FASITs, and dealers in securities who acquire such interests as inventory.
o An "Eligible Corporation" is a taxable domestic C corporation
that does not qualify as a regulated investment company, a real estate
investment trust, a REMIC, or a cooperative.
o A "Disqualified Holder" is any holder other than (1) an Eligible
Corporation, or (2) a dealer who acquires FASIT debt for resale to customers
in the ordinary course of business.
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.
(2) Treatment of Losses
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 Security
(1) General
A FASIT Ownership Security represents the residual equity interest in
a FASIT. As such, the holder of a FASIT Ownership Security determines its
taxable income by taking into account all assets, liabilities, and items of
income, gain, deduction, loss, and credit of a FASIT. In general, the
character of the income to the holder of a FASIT Ownership Security 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 Security is treated as ordinary income. In determining that taxable
income, the holder of a FASIT Ownership Security must determine the amount of
interest, original issue discount, market discount, and premium recognized
with respect to the FASIT's assets and the FASIT Regular Securities issued by
the FASIT according to a constant yield methodology and under an accrual
method of accounting. In addition, a holder of a FASIT Ownership Security is
subject to the same limitations on their ability to use losses to offset
income from their FASIT Regular Securities as are holders of high-yield
interest. See "--Taxation of Owners of High-Yield Interests" above.
Rules similar to the wash sale rules applicable to REMIC Residual
Securities also will apply to FASIT Ownership Security. Accordingly, losses on
dispositions of a FASIT Ownership Security generally will be disallowed where
within six months before or after the disposition, the seller of such Security
acquires any other FASIT Ownership Security that is economically comparable to
a FASIT Ownership Security. In addition, if any security that is sold or
contributed to a FASIT by the holders of the related FASIT Ownership Security
was required to be marked-to-market under Section 475 of the Code by such
holder, then Section 475 of the Code will continue to apply to such
securities, except that the amount realized under the mark-to-market rules or
the securities' value after applying special valuation rules contained in the
FASIT Provisions. Those special valuation rules generally require that the
value of debt instruments that are not traded on an established securities
market be determined by calculating the present value of the reasonably
expected payments under the instrument using a discount rate of 120% of the
applicable federal rate, compounded semi-annually.
(2) Prohibited Transaction
The holder of a FASIT Ownership Security is required to pay a penalty
excise tax equal to 100 percent of net income derived from:
(1) an asset that is not a permitted asset;
(2) any disposition of an asset other than a permitted disposition;
(3) any income attributable to loans originated by the FASIT; and
(4) compensation for services (other than fees for a waiver,
amendment, or consent under permitted assets not acquired through
foreclosure).
A permitted disposition is any disposition of any permitted asset:
(1) arising from complete liquidation of a class of regular
interest (i.e., a qualified liquidation);
(2) incident to the foreclosure, default (or imminent default) on
an asset of the asset;
(3) incident to the bankruptcy or insolvency of the FASIT;
(4) necessary to avoid a default on any indebtedness of the a FASIT
attributable to a default (or imminent default) on an asset of the FASIT;
(5) to facilitate a clean-up call;
(6) to substitute a permitted debt instrument for another such
instrument; or
(7) in order to reduce over-collateralization where a principal
purposes of the disposition was not to avoid recognition of gain arising from
an increase in its market value after its acquisition by the FASIT.
Notwithstanding this rule, the holder of an Ownership Security may currently
deduct its losses incurred in prohibited transactions in computing its taxable
income for the year of the loss. A Series of Securities for which a FASIT
election is made generally will be structured in order to avoid application of
the prohibited transactions tax.
(3) Backup Withholding, Reporting and Tax Administration
Holders of FASIT Securities will be subject to backup withholding to
the same extent as holders of REMIC Securities. In addition, for purposes of
reporting and tax administration, holders of record of FASIT Securities
generally will be treated in the same manner as holders of REMIC Securities.
See "--REMICs" above.
Grantor Trust Funds
Classification of Grantor Trust Funds
For each series of Grantor Trust Securities, assuming compliance with
all provisions of the related Agreement, in the opinion of Brown & Wood LLP,
the related Grantor Trust Fund will be classified as a grantor trust under
subpart E, part I of subchapter J of the Code and not as a partnership, an
association taxable as a corporation, or a "taxable mortgage pool" within the
meaning of Code Section 7701(i). Accordingly, each holder of a Grantor Trust
Security generally will be treated as the beneficial owner of an undivided
interest in the mortgage loans included in the Grantor Trust Fund.
Standard Securities
General
Where there is no Retained Interest or "excess" servicing for the
mortgage loans underlying the Securities of a series, and where these
Securities are not designated as "Stripped Securities," the holder of each
Security of that series (referred to herein as "Standard Securities") will be
treated as the owner of a pro rata undivided interest in the ordinary income
and corpus portions of the Grantor Trust Fund represented by its Standard
Security and will be considered the beneficial owner of a pro rata undivided
interest in each of the mortgage loans, subject to the discussion below under
"--Recharacterization of Servicing Fees." Accordingly, the holder of a
Standard Security of a particular series will be required to report on its
federal income tax return its pro rata share of the entire income from the
mortgage loans represented by its Standard Security, including interest at the
coupon rate on those mortgage loans, original issue discount (if any),
prepayment fees, assumption fees, and late payment charges received by the
servicer, in accordance with that securityholder's method of accounting. A
securityholder generally will be able to deduct its share of the Servicing Fee
and all administrative and other expenses of the trust fund in accordance with
its method of accounting, provided that those amounts are reasonable
compensation for services rendered to the Grantor Trust Fund.
However, investors who are individuals, estates or trusts who own
Securities, either directly or indirectly through certain pass-through
entities, will be subject to limitations for certain itemized deductions
described in Code Section 67, including deductions under Code Section 212 for
the Servicing Fee and all administrative and other expenses of the Grantor
Trust Fund, to the extent that those deductions, in total, do not exceed two
percent of an investor's adjusted gross income. In addition, Code Section 68
provides that itemized deductions otherwise allowable for a taxable year of an
individual taxpayer will be reduced by the lesser of (1) 3% of the excess, if
any, of adjusted gross income over $100,000 ($50,000 in the case of a married
individual filing a separate return) (in each case, as adjusted for post-1991
inflation), or (2) 80% of the amount of itemized deductions otherwise
allowable for that year. As a result, those investors holding Standard
Securities, directly or indirectly through a pass-through entity, may have
total taxable income in excess of the total amount of cash received on the
Standard Securities with respect to interest at the Interest Rate or as
discount income on the Standard Securities. In addition, those expenses are
not deductible at all for purposes of computing the alternative minimum tax,
and may cause those investors to be subject to significant additional tax
liability. Moreover, where there is Retained Interest for the mortgage loans
underlying a series of Securities the transaction will be subject to the
application of the "stripped bond" rules of the Code as described below under
"--Stripped Securities." Where the servicing fees are in excess of reasonable
servicing compensation, the transaction will be subject to the application of
the "stripped coupon" rules of the Code, as described below under
"--Recharacterization of Servicing Fees."
Holders of Standard Securities, particularly any class of a series
that are Subordinate Securities, may incur losses of interest or principal
with respect to the mortgage loans. Those losses would be deductible generally
only as described above under "--REMICs--Taxation of Owners of Regular
Securities--Treatment of Losses," except that securityholders on the cash
method of accounting would not be required to report qualified stated interest
as income until actual receipt.
(1) Tax Status
For a series, in the opinion of Brown & Wood LLP, except for that
portion of a trust fund consisting of Unsecured Home Improvement Loans, a
Standard Security owned by a:
o "domestic building and loan association" within the meaning of
Code Section 7701(a)(19) will be considered to represent "loans . . . secured
by an interest in real property which is . . . residential real property"
within the meaning of Code Section 7701(a)(19)(C)(v), provided that the real
property securing the mortgage loans represented by that Standard Security is
of the type described in that section of the Code.
o real estate investment trust will be considered to represent
"real estate assets" within the meaning of Code Section 856(c)(4)(A) to the
extent that the assets of the related Grantor Trust Fund consist of qualified
assets, and interest income on those assets will be considered "interest on
obligations secured by mortgages on real property" to that extent within the
meaning of Code Section 856(c)(3)(B).
o REMIC will be considered to represent an "obligation (including
any participation or certificate of beneficial ownership therein) which is
principally secured by an interest in real property" within the meaning of
Code Section 860G(a)(3)(A) to the extent that the assets of the related
Grantor Trust Fund consist of "qualified mortgages" within the meaning of Code
Section 860G(a)(3).
An issue arises as to whether Buydown Mortgage Loans may be
characterized in their entirety under the Code provisions cited in clauses 1
and 2 of the immediately preceding paragraph or whether the amount qualifying
for that treatment must be reduced by the amount of the Buydown Mortgage
Funds. There is indirect authority supporting treatment of an investment in a
Buydown Mortgage Loan as entirely secured by real property if the fair market
value of the real property securing the loan exceeds the principal amount of
the loan at the time of issuance or acquisition, as the case may be. There is
no assurance that the treatment described above is proper. Accordingly,
securityholders are urged to consult their own tax advisors concerning the
effects of those arrangements on the characterization of the securityholder's
investment for federal income tax purposes.
(2) Premium and Discount
The depositor recommends that securityholders consult with their tax
advisors as to the federal income tax treatment of premium and discount
arising either upon initial acquisition of Standard Securities or thereafter.
Premium. The treatment of premium incurred upon the purchase of a
Standard Security will be determined generally as described above under
"--REMICs--Taxation of Owners of Residual Securities Premium."
Original Issue Discount. The original issue discount rules of Code
Section 1271 through 1275 will be applicable to a securityholder's interest in
those mortgage loans as to which the conditions for the application of those
sections are met. Rules regarding periodic inclusion of original issue
discount income generally are applicable to mortgages originated after March
2, 1984. The rules allowing for the amortization of premium are available for
mortgage loans originated after September 27, 1985. Under the OID Regulations,
original issue discount could arise by the charging of points by the
originator of the mortgages in an amount greater than the statutory de minimis
exception, including a payment of points that is currently deductible by the
borrower under applicable Code provisions or, under some circumstances, by the
presence of "teaser" rates on the mortgage loans. See "--Stripped Securities"
below regarding original issue discount on Stripped Securities.
Original issue discount generally must be reported as ordinary gross
income as it accrues under a constant interest method that takes into account
the compounding of interest, in advance of the cash attributable to that
income. No prepayment assumption will be assumed for purposes of that accrual
except as set forth in the prospectus supplement. However, Code Section 1272
provides for a reduction in the amount of original issue discount includible
in the income of a holder of an obligation that acquires the obligation after
its initial issuance at a price greater than the sum of the original issue
price and the previously accrued original issue discount, less prior payments
of principal. Accordingly, if those mortgage loans acquired by a
securityholder are purchased at a price equal to the then unpaid principal
amount of those mortgage loans, no original issue discount attributable to the
difference between the issue price and the original principal amount of those
mortgage loans (i.e., points) will be includible by that holder.
Market Discount. securityholders also will be subject to the market
discount rules to the extent that the conditions for application of those
sections are met. Market discount on the mortgage loans will be determined and
will be reported as ordinary income generally in the manner described above
under "--REMICs--Taxation of Owners of Regular Securities--Market Discount,"
except that the ratable accrual methods described therein will not apply.
Rather, the holder will accrue market discount pro rata over the life of the
mortgage loans, unless the constant yield method is elected. No prepayment
assumption will be assumed for purposes of that accrual except as set forth in
the prospectus supplement.
(3) Recharacterization of Servicing Fees
If the servicing fees paid to a servicer were deemed to exceed
reasonable servicing compensation, the amount of that excess would represent
neither income nor a deduction to securityholders. In this regard, there are
no authoritative guidelines for federal income tax purposes as to either the
maximum amount of servicing compensation that may be considered reasonable in
the context of this or similar transactions or whether, in the case of
Standard Securities, the reasonableness of servicing compensation should be
determined on a weighted average or loan-by-loan basis. If a loan-by-loan
basis is appropriate, the likelihood that the amount would exceed reasonable
servicing compensation as to some of the mortgage loans would be increased.
Internal Revenue Service guidance indicates that a servicing fee in excess of
reasonable compensation ("excess servicing") will cause the mortgage loans to
be treated under the "stripped bond" rules. That guidance provides safe
harbors for servicing deemed to be reasonable and requires taxpayers to
demonstrate that the value of servicing fees in excess of those amounts is not
greater than the value of the services provided.
Accordingly, if the Internal Revenue Service's approach is upheld, a
servicer who receives a servicing fee in excess of those amounts would be
viewed as retaining an ownership interest in a portion of the interest
payments on the mortgage loans. Under the rules of Code Section 1286, the
separation of ownership of the right to receive some or all of the interest
payments on an obligation from the right to receive some or all of the
principal payments on the obligation would result in treatment of those
mortgage loans as "stripped coupons" and "stripped bonds." Subject to the de
minimis rule discussed below under "--Stripped Securities," each stripped bond
or stripped coupon could be considered for this purpose as a non-interest
bearing obligation issued on the date of issue of the Standard Securities, and
the original issue discount rules of the Code would apply to the holder
thereof. While securityholders would still be treated as owners of beneficial
interests in a grantor trust for federal income tax purposes, the corpus of
the trust could be viewed as excluding the portion of the mortgage loans the
ownership of which is attributed to the servicer, or as including that portion
as a second class of equitable interest. Applicable Treasury regulations treat
that arrangement as a fixed investment trust, since the multiple classes of
trust interests should be treated as merely facilitating direct investments in
the trust assets and the existence of multiple classes of ownership interests
is incidental to that purpose. In general, that recharacterization should not
have any significant effect upon the timing or amount of income reported by a
securityholder, except that the income reported by a cash method holder may be
slightly accelerated. See "--Stripped Securities" below for a further
description of the federal income tax treatment of stripped bonds and stripped
coupons.
(4) Sale or Exchange of Standard Securities
Upon sale or exchange of a Standard Securities, a securityholder will
recognize gain or loss equal to the difference between the amount realized on
the sale and its total adjusted basis in the mortgage loans and other assets
represented by the Security. In general, the total adjusted basis will equal
the securityholder's cost for the Standard Security, exclusive of accrued
interest, increased by the amount of any income previously reported for the
Standard Security and decreased by the amount of any losses previously
reported for the Standard Security and the amount of any distributions (other
than accrued interest) received thereon. Except as provided above with respect
to market discount on any mortgage loans, and except for certain financial
institutions subject to the provisions of Code Section 582(c), the gain or
loss generally would be capital gain or loss if the Standard Security was held
as a capital asset. However, gain on the sale of a Standard Security will be
treated as ordinary income (1) if a Standard Security is held as part of a
"conversion transaction" as defined in Code Section 1258(c), up to the amount
of interest that would have accrued on the securityholder's net investment in
the conversion transaction at 120% of the appropriate applicable federal rate
in effect at the time the taxpayer entered into the transaction minus any
amount previously treated as ordinary income for any prior disposition of
property that was held as part of that transaction or (2) in the case of a
non-corporate taxpayer, to the extent that the taxpayer has made an election
under Code Section 163(d)(4) to have net capital gains taxed as investment
income at ordinary income rates. Long-term capital gains of certain
non-corporate taxpayers generally are subject to a lower maximum tax rate
(20%) than ordinary income or short-term capital gains of those taxpayers
(39.6%) for property held for more than one year. The maximum tax rate for
corporations currently is the same for both ordinary income and capital gains.
Stripped Securities
General
Pursuant to Code Section 1286, the separation of ownership of the
right to receive some or all of the principal payments on an obligation from
ownership of the right to receive some or all of the interest payments results
in the creation of "stripped bonds" for principal payments and "stripped
coupons" for interest payments. For purposes of this discussion, Securities
that are subject to those rules will be referred to as "Stripped Securities."
In the opinion of Brown & Wood LLP, the Securities will be subject to those
rules if:
o the depositor or any of its affiliates retains (for its own
account or for purposes of resale), in the form of Retained Interest or
otherwise, an ownership interest in a portion of the payments on the mortgage
loans;
o the depositor or any of its affiliates is treated as having an
ownership interest in the mortgage loans to the extent it is paid (or retains)
servicing compensation in an amount greater than reasonable consideration for
servicing the mortgage loans (see "--Standard Securities--Recharacterization
of Servicing Fees" above); and
o a Class of Securities are issued in two or more Classes or
Subclasses representing the right to non-pro-rata percentages of the interest
and principal payments on the mortgage loans.
In general, a holder of a Stripped Security will be considered to own
"stripped bonds" for its pro rata share of all or a portion of the principal
payments on each mortgage loan and/or "stripped coupons" for its pro rata
share of all or a portion of the interest payments on each mortgage loan,
including the Stripped Security's allocable share of the servicing fees paid
to a servicer, to the extent that those fees represent reasonable compensation
for services rendered. See the discussion above under "--Standard
Securities--Recharacterization of Servicing Fees." Although not free from
doubt, for purposes of reporting to securityholders of Stripped Securities,
the servicing fees will be allocated to the classes of Stripped Securities in
proportion to the distributions to those Classes for the related period or
periods. The holder of a Stripped Security generally will be entitled to a
deduction each year in respect of the servicing fees, as described above under
"--Standard Securities--General," subject to the limitation described therein.
Code Section 1286 treats a stripped bond or a stripped coupon
generally as an obligation issued at an original issue discount on the date
that the stripped interest is purchased. Although the treatment of Stripped
Securities for federal income tax purposes is not clear in some respects,
particularly where Stripped Securities are issued with respect to a Mortgage
Pool containing variable-rate mortgage loans, in the opinion of Brown & Wood
LLP, (1) the Grantor Trust Fund will be treated as a grantor trust under
subpart E, Part I of subchapter J of the Code and not as an association
taxable as a corporation or a "taxable mortgage pool" within the meaning of
Code Section 7701(i), and (2) each Stripped Security should be treated as a
single installment obligation for purposes of calculating original issue
discount and gain or loss on disposition. This treatment is based on the
interrelationship of Code Section 1286, Code Sections 1272 through 1275, and
the OID Regulations. Although it is possible that computations for Stripped
Securities could be made in one of the ways described below under "--Possible
Alternative Characterizations," the OID Regulations state, in general, that
two or more debt instruments issued by a single issuer to a single investor in
a single transaction should be treated as a single debt instrument.
Accordingly, for original issue discount purposes, all payments on any
Stripped Securities should be totaled and treated as though they were made on
a single debt instrument. The pooling and servicing agreement will require
that the trustee make and report all computations described below using the
approach described in this paragraph, unless substantial legal authority
requires otherwise.
Furthermore, Treasury regulations provide for treatment of a Stripped
Security as a single debt instrument issued on the date it is purchased for
purposes of calculating any original issue discount. In addition, under these
regulations, a Stripped Security that represents a right to payments of both
interest and principal may be viewed either as issued with original issue
discount or market discount (as described below), at a de minimis original
issue discount, or, presumably, at a premium. This treatment indicates that
the interest component of that Stripped Security would be treated as qualified
stated interest under the OID Regulations, assuming it is not an interest-only
or super-premium Stripped Security. Further, these regulations provide that
the purchaser of that Stripped Security will be required to account for any
discount as market discount rather than original issue discount if either (1)
the initial discount for the Stripped Security was treated as zero under the
de minimis rule, or (2) no more than 100 basis points in excess of reasonable
servicing is stripped off the related mortgage loans. That market discount
would be reportable as described above under "--REMICs--Taxation of Owners of
Regular Securities--Market Discount," without regard to the de minimis rule
therein, assuming that a prepayment assumption is employed in that
computation.
The holder of a Stripped Security will be treated as owning an
interest in each of the mortgage loans held by the Grantor Trust Fund and will
recognize an appropriate share of the income and expenses associated with the
mortgage loans. Accordingly, an individual, trust or estate that holds a
Stripped Security directly or through a pass-through entity will be subject to
the limitations on deductions imposed by Code Sections 67 and 68.
A holder of a Stripped Security, particularly any Stripped Security
that is a Subordinate Security, may deduct losses incurred for the Stripped
Security as described above under "--Standard Securities General."
Status of Stripped Securities
No specific legal authority exists as to whether the character of the
Stripped Securities, for federal income tax purposes, will be the same as that
of the mortgage loans. Although the issue is not free from doubt, in the
opinion of Brown & Wood LLP, except for a trust fund consisting of Unsecured
Home Improvement Loans, Stripped Securities owned by applicable holders should
be considered to represent "real estate assets" within the meaning of Code
Section 856(c)(4)(A), "obligation [ s ] . . . principally secured by an
interest in real property which is . . . . residential real estate" within the
meaning of Code Section 860G(a)(3)(A), and "loans . . . secured by an interest
in real property" within the meaning of Code Section 7701(a)(19)(C)(v), and
interest (including original issue discount) income attributable to Stripped
Securities should be considered to represent "interest on obligations secured
by mortgages on real property" within the meaning of Code Section
856(c)(3)(B), provided that in each case the mortgage loans and interest on
those mortgage loans qualify for that treatment. The application of those Code
provisions to Buydown Mortgage Loans is uncertain. See "--Standard
Securities--Tax Status" above.
Taxation of Stripped Securities
Original Issue Discount. Except as described above under "--General,"
each Stripped Security will be considered to have been issued at an original
issue discount for federal income tax purposes. Original issue discount for a
Stripped Security must be included in ordinary income as it accrues, in
accordance with a constant yield method that takes into account the
compounding of interest, which may be before the receipt of the cash
attributable to that income. Based in part on the issue discount required to
be included in the income of a holder of a Stripped Security in any taxable
year likely will be computed generally as described above under "--REMICs--
Taxation of Owners of Regular Securities--Original Issue Discount" and
"--Variable Rate Regular Securities." However, with the apparent exception of
a Stripped Security qualifying as a market discount obligation as described
above under "--General," the issue price of a Stripped Security will be the
purchase price paid by each holder thereof, and the stated redemption price at
maturity will include the total amount of the payments to be made on the
Stripped Security to that securityholder, presumably under the Prepayment
Assumption, other than qualified stated interest.
If the mortgage loans prepay at a rate either faster or slower than
that under the Prepayment Assumption, a securityholder's recognition of
original issue discount will be either accelerated or decelerated and the
amount of that original issue discount will be either increased or decreased
depending on the relative interests in principal and interest on each mortgage
loan represented by that securityholder's Stripped Security. While the matter
is not free from doubt, the holder of a Stripped Security should be entitled
in the year that it becomes certain (assuming no further prepayments) that the
holder will not recover a portion of its adjusted basis in the Stripped
Security to recognize a loss (which may be a capital loss) equal to that
portion of unrecoverable basis.
As an alternative to the method described above, the fact that some
or all of the interest payments with respect to the Stripped Securities will
not be made if the mortgage loans are prepaid could lead to the interpretation
that these interest payments are "contingent" within the meaning of the OID
Regulations. The OID Regulations, as they relate to the treatment of
contingent interest, are by their terms not applicable to prepayable
securities such as the Stripped Securities. However, if final regulations
dealing with contingent interest with respect to the Stripped Securities apply
the same principles as the OID Regulations, these regulations may lead to
different timing of income inclusion that would be the case under the OID
Regulations. Furthermore, application of these principles could lead to the
characterization of gain on the sale of contingent interest Stripped
Securities as ordinary income. Investors should consult their tax advisors
regarding the appropriate tax treatment of Stripped Securities.
Sale or Exchange of Stripped Securities. Sale or exchange of a
Stripped Security before its maturity will result in gain or loss equal to the
difference, if any, between the amount received and the securityholder's
adjusted basis in that Stripped Security, as described above under
"--REMICs--Taxation of Owners of Regular Securities--Sale or Exchange of
Regular Securities." Gain or loss from the sale or exchange of a Stripped
Security generally will be capital gain or loss to the securityholder if the
Stripped Security is held as a "capital asset" within the meaning of Code
Section 1221, and will be long-term or short-term depending on whether the
Stripped Security has been held for the long-term capital gain holding period
(currently, more than one year). To the extent that a subsequent purchaser's
purchase price is exceeded by the remaining payments on the Stripped
Securities, the subsequent purchaser will be required for federal income tax
purposes to accrue and report that excess as if it were original issue
discount in the manner described above. It is not clear for this purpose
whether the assumed prepayment rate that is to be used in the case of a
securityholder other than an original securityholder should be the Prepayment
Assumption or a new rate based on the circumstances at the date of subsequent
purchase.
Purchase of More Than One Class of Stripped Securities. When an
investor purchases more than one Class of Stripped Securities, it is currently
unclear whether for federal income tax purposes those Classes of Stripped
Securities should be treated separately or aggregated for purposes of the
rules described above.
Possible Alternative Characterization. The characterizations of the
Stripped Securities discussed above are not the only possible interpretations
of the applicable Code provisions. For example, the securityholder may be
treated as the owner of
(1) one installment obligation consisting of the Stripped
Security's pro rata share of the payments attributable to principal on each
mortgage loan and a second installment obligation consisting of the Stripped
Security's pro rata share of the payments attributable to interest on each
mortgage loan;
(2) as many stripped bonds or stripped coupons as there are
scheduled payments of principal and/or interest on each mortgage loan; or
(3) a separate installment obligation for each mortgage loan,
representing the Stripped Security's pro rata share of payments of principal
and/or interest to be made with respect thereto.
Alternatively, the holder of one or more Classes of Stripped Securities may be
treated as the owner of a pro rata fractional undivided interest in each
mortgage loan to the extent that a Stripped Security, or Classes of Stripped
Securities, represents the same pro rata portion of principal and interest on
each mortgage loan, and a stripped bond or stripped coupon (as the case may
be), treated as an installment obligation or contingent payment obligation, as
to the remainder. Treasury regulations regarding original issue discount on
stripped obligations make the foregoing interpretations less likely to be
applicable. The preamble to these regulations states that they are premised on
the assumption that an aggregation approach is appropriate for determining
whether original issue discount on a stripped bond or stripped coupon is de
minimis, and solicits comments on appropriate rules for aggregating stripped
bonds and stripped coupons under Code Section 1286.
Because of these possible varying characterizations of Stripped
Securities and the resultant differing treatment of income recognition,
securityholders are urged to consult their own tax advisors regarding the
proper treatment of Stripped Securities for federal income tax purposes.
Reporting Requirements and Backup Withholding
The trustee will furnish, within a reasonable time after the end of
each calendar year, to each securityholder at any time during that year,
information (prepared on the basis described above) necessary to enable the
securityholder to prepare its federal income tax returns. This information
will include the amount of original issue discount accrued on Securities held
by persons other than securityholders exempted from the reporting
requirements. However, the amount required to be reported by the trustee may
not be equal to the proper amount of original issue discount required to be
reported as taxable income by a securityholder, other than an original
securityholder who purchased at the issue price. In particular, in the case of
Stripped Securities, the reporting will be based upon a representative initial
offering price of each Class of Stripped Securities except as set forth in the
prospectus supplement. The trustee will also file the original issue discount
information with the Internal Revenue Service. If a securityholder fails to
supply an accurate taxpayer identification number or if the Secretary of the
Treasury determines that a securityholder has not reported all interest and
dividend income required to be shown on his federal income tax return, 31%
backup withholding may be required in respect of any reportable payments, as
described above under "--REMICs--Backup Withholding."
Taxation of Certain Foreign Investors
To the extent that a Security evidences ownership in mortgage loans
that are issued on or before July 18, 1984, interest or original issue
discount paid by the person required to withhold tax under Code Section 1441
or 1442 to nonresident aliens, foreign corporations, or other Non-U.S. persons
generally will be subject to 30% United States withholding tax, or any
applicable lower rate as may be provided for interest by an applicable tax
treaty. Accrued original issue discount recognized by the securityholder on
the sale or exchange of that Security also will be subject to federal income
tax at the same rate.
Treasury regulations provide that interest or original issue discount
paid by the trustee or other withholding agent to a Non-U.S. Person evidencing
ownership interest in mortgage loans issued after July 18, 1984 will be
"portfolio interest" and will be treated in the manner, and these persons will
be subject to the same certification requirements, described above under
"--REMICs--Taxation of Certain Foreign Investors--Regular Securities."
Partnership Trust Funds
Classification of Partnership Trust Funds
For each series of Partnership Securities or Debt Securities, Brown &
Wood LLP will deliver its opinion that the trust fund will not be a taxable
mortgage pool or an association (or publicly traded partnership) taxable as a
corporation for federal income tax purposes. This opinion will be based on the
assumption that the terms of the related Agreement and related documents will
be complied with, and on counsel's opinion that the nature of the income of
the trust fund will exempt it from the rule that certain publicly traded
partnerships are taxable as corporations.
Characterization of Investments in Partnership Securities and Debt
Securities
For federal income tax purposes, (1) Partnership Securities and Debt
Securities held by a thrift institution taxed as a domestic building and loan
association will not constitute "loans . . . secured by an interest in real
property which is . . . residual real property" within the meaning of Code
Section 7701(a)(19)(C)(v) and (2) interest on Debt Securities 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 Debt Securities held by a real
estate investment trust will not constitute "real estate assets" within the
meaning of Code Section 856(c)(4)(A), but Partnership Securities held by a
real estate investment trust will qualify under those sections based on the
real estate investments trust's proportionate interest in the assets of the
Partnership Trust Fund based on capital accounts.
Taxation of Debt Securityholders
The depositor will agree, and the securityholders will agree by their
purchase of Debt Securities, to treat the Debt Securities as debt for federal
income tax purposes. No regulations, published rulings, or judicial decisions
exist that discuss the characterization for federal income tax purposes of
securities with terms substantially the same as the Debt Securities. However,
for each series of Debt Securities, Brown & Wood LLP will deliver its opinion
that the Debt Securities will be classified as indebtedness for federal income
tax purposes. The discussion below assumes this characterization of the Debt
Securities is correct.
If, contrary to the opinion of counsel, the Internal Revenue Service
successfully asserted that the Debt Securities were not debt for federal
income tax purposes, the Debt Securities might be treated as equity interests
in the Partnership Trust, and the timing and amount of income allocable to
holders of those Debt Securities may be different than as described in the
following paragraph.
Debt Securities generally will be subject to the same rules of
taxation as Regular Securities issued by a REMIC, as described above, except
that (1) income reportable on Debt Securities is not required to be reported
under the accrual method unless the holder otherwise uses the accrual method
and (2) the special rule treating a portion of the gain on sale or exchange of
a Regular Security as ordinary income is inapplicable to Debt Securities. See
"--REMICs--Taxation of Owners of Regular Securities" and "--Sale or Exchange
of Regular Securities."
Taxation of Owners of Partnership Securities
(1) Treatment of the Partnership Trust Fund as a Partnership
If specified in the prospectus supplement, the depositor will agree,
and the securityholders will agree by their purchase of Securities, to treat
the Partnership Trust Fund as a partnership for purposes of federal and state
income tax, franchise tax and any other tax measured in whole or in part by
income, with the assets of the partnership being the assets held by the
Partnership Trust Fund, the partners of the partnership being the
securityholders (including the depositor), and the Debt Securities (if any)
being debt of the partnership. However, the proper characterization of the
arrangement involving the Partnership Trust Fund, the Partnership Securities,
the Debt Securities, and the depositor is not clear, because there is no
authority on transactions closely comparable to that contemplated herein.
A variety of alternative characterizations are possible. For example,
because one or more of the classes of Partnership Securities have some
features characteristic of debt, the Partnership Securities might be
considered debt of the depositor or the Partnership Trust Fund. This
characterization would not result in materially adverse tax consequences to
securityholders as compared to the consequences from treatment of the
Partnership Securities as equity in a partnership, described below. The
following discussion assumes that the Partnership Securities represent equity
interests in a partnership.
(2) Partnership Taxation
As a partnership, the Partnership Trust Fund will not be subject to
federal income tax. Rather, each securityholder will be required to separately
take into account that holder's allocated share of income, gains, losses,
deductions and credits of the Partnership Trust Fund. It is anticipated that
the Partnership Trust Fund's income will consist primarily of interest earned
on the mortgage loans (including appropriate adjustments for market discount,
original issue discount and bond premium) as described above under "--Grantor
Trust Funds--Standard Securities--General," and "--Premium and Discount" and
any gain upon collection or disposition of mortgage loans. The Partnership
Trust Fund's deductions will consist primarily of interest accruing with
respect to the Debt Securities, servicing and other fees, and losses or
deductions upon collection or disposition of Debt Securities.
The tax items of a partnership are allocable to the partners in
accordance with the Code, Treasury regulations and the partnership agreement
(here, the Agreement and related documents). The Agreement will provide, in
general, that the securityholders will be allocated taxable income of the
Partnership Trust Fund for each Due Period equal to the sum of:
(1) the interest that accrues on the Partnership Securities in
accordance with their terms for that Due Period, including interest accruing
at the applicable Interest Rate for that Due Period and interest on amounts
previously due on the Partnership Securities but not yet distributed;
(2) any Partnership Trust Fund income attributable to discount on
the mortgage loans that corresponds to any excess of the principal amount of
the Partnership Securities over their initial issue price; and
(3) any other amounts of income payable to the securityholders for
that Due Period.
This allocation will be reduced by any amortization by the
Partnership Trust Fund of premium on mortgage loans that corresponds to any
excess of the issue price of Partnership Securities over their principal
amount. All remaining taxable income of the Partnership Trust Fund will be
allocated to the depositor. Based on the economic arrangement of the parties,
this approach for allocating Partnership Trust Fund income should be
permissible under applicable Treasury regulations, although no assurance can
be given that the Internal Revenue Service would not require a greater amount
of income to be allocated to securityholders. Moreover, even under the
foregoing method of allocation, securityholders may be allocated income equal
to the entire Interest Rate plus the other items described above even though
the trust fund might not have sufficient cash to make current cash
distributions of that amount. Thus, cash basis holders will in effect be
required to report income from the Partnership Securities on the accrual basis
and securityholders may become liable for taxes on Partnership Trust Fund
income even if they have not received cash from the Partnership Trust Fund to
pay those taxes.
Part or all of the taxable income allocated to a securityholder that
is a pension, profit sharing or employee benefit plan or other tax-exempt
entity (including an individual retirement account) may constitute "unrelated
business taxable income" generally taxable to that holder under the Code.
A share of expenses of the Partnership Trust Fund (including fees of
the master servicer but not interest expense) allocable to an individual,
estate or trust securityholder would be miscellaneous itemized deductions
subject to the limitations described above under "--Grantor Trust
Funds--Standard Securities--General." Accordingly, those deductions might be
disallowed to the individual in whole or in part and might result in that
holder being taxed on an amount of income that exceeds the amount of cash
actually distributed to that holder over the life of the Partnership Trust
Fund.
Discount income or premium amortization for each mortgage loan would
be calculated in a manner similar to the description above under "--Grantor
Trust Funds--Standard Securities--General" and "--Premium and Discount."
Notwithstanding that description, it is intended that the Partnership Trust
Fund will make all tax calculations relating to income and allocations to
securityholders on a total basis for all mortgage loans held by the
Partnership Trust Fund rather than on a mortgage loan-by-mortgage loan basis.
If the Internal Revenue Service were to require that these calculations be
made separately for each mortgage loan, the Partnership Trust Fund might be
required to incur additional expense, but it is believed that there would not
be a material adverse effect on securityholders.
(3) Discount and Premium
It is not anticipated that the mortgage loans will have been issued
with original issue discount and, therefore, the Partnership Trust Fund should
not have original issue discount income. However, the purchase price paid by
the Partnership Trust Fund for the mortgage loans may be greater or less than
the remaining principal balance of the mortgage loans at the time of purchase.
If so, the mortgage loans will have been acquired at a premium or discount, as
the case may be. See "--Grantor Trust Funds--Standard Securities--Premium and
Discount." (As indicated above, the Partnership Trust Fund will make this
calculation on a total basis, but might be required to recompute it on a
mortgage loan-by-mortgage loan basis.)
If the Partnership Trust Fund acquires the mortgage loans at a market
discount or premium, the Partnership Trust Fund will elect to include that
discount in income currently as it accrues over the life of the mortgage loans
or to offset that premium against interest income on the mortgage loans. As
indicated above, a portion of that market discount income or premium deduction
may be allocated to securityholders.
(4) Section 708 Termination
Under Section 708 of the Code, the Partnership Trust Fund will be
deemed to terminate for federal income tax purposes if 50% or more of the
capital and profits interests in the Partnership Trust Fund are sold or
exchanged within a 12-month period. If that termination occurs, it would cause
a deemed contribution of the assets of a Partnership Trust Fund (the "old
partnership") to a new Partnership Trust Fund (the "new partnership") in
exchange for interests in the new partnership. Those interests would be deemed
distributed to the partners of the old partnership in liquidation thereof,
which would not constitute a sale or exchange. The Partnership Trust Fund will
not comply with certain technical requirements that might apply when the
constructive termination occurs. As a result, the Partnership Trust Fund may
be subject to certain tax penalties and may incur additional expenses if it is
required to comply with those requirements. Furthermore, the Partnership Trust
Fund might not be able to comply due to lack of data.
(5) Disposition of Securities
Generally, capital gain or loss will be recognized on a sale of
Partnership Securities in an amount equal to the difference between the amount
realized and the seller's tax basis in the Partnership Securities sold. A
securityholder's tax basis in an Partnership Security will generally equal the
holder's cost increased by the holder's share of Partnership Trust Fund income
(includible in income) and decreased by any distributions received with
respect to that Partnership Security. In addition, both the tax basis in the
Partnership Securities and the amount realized on a sale of an Partnership
Security would include the holder's share of the Debt Securities and other
liabilities of the Partnership Trust Fund. A holder acquiring Partnership
Securities at different prices may be required to maintain a single total
adjusted tax basis in those Partnership Securities, and, upon sale or other
disposition of some of the Partnership Securities, allocate a portion of that
total tax basis to the Partnership Securities sold (rather than maintaining a
separate tax basis in each Partnership Security for purposes of computing gain
or loss on a sale of that Partnership Security).
Any gain on the sale of an Partnership Security attributable to the
holder's share of unrecognized accrued market discount on the mortgage loans
would generally be treated as ordinary income to the holder and would give
rise to special tax reporting requirements. The Partnership Trust Fund does
not expect to have any other assets that would give rise to those special
reporting considerations. Thus, to avoid those special reporting requirements,
the Partnership Trust Fund will elect to include market discount in income as
it accrues.
If a securityholder is required to recognize a total amount of income
(not including income attributable to disallowed itemized deductions described
above) over the life of the Partnership Securities that exceeds the total cash
distributions with respect thereto, that excess will generally give rise to a
capital loss upon the retirement of the Partnership Securities.
(6) Allocations Between Transferors and Transferees
In general, the Partnership Trust Fund's taxable income and losses
will be determined each Due Period and the tax items for a particular Due
Period will be apportioned among the securityholders in proportion to the
principal amount of Partnership Securities owned by them as of the close of
the last day of that Due Period. As a result, a holder purchasing Partnership
Securities may be allocated tax items (which will affect its tax liability and
tax basis) attributable to periods before the actual transaction.
The use of a Due Period convention may not be permitted by existing
regulations. If a Due Period convention is not allowed (or only applies to
transfers of less than all of the partner's interest), taxable income or
losses of the Partnership Trust Fund might be reallocated among the
securityholders. The depositor will be authorized to revise the Partnership
Trust Fund's method of allocation between transferors and transferees to
conform to a method permitted by future regulations.
(7) Section 731 Distributions
In the case of any distribution to a securityholder, no gain will be
recognized to that securityholder to the extent that the amount of any money
distributed for that Security exceeds the adjusted basis of that
securityholder's interest in the Security. To the extent that the amount of
money distributed exceeds that securityholder's adjusted basis, gain will be
currently recognized. In the case of any distribution to a securityholder, no
loss will be recognized except upon a distribution in liquidation of a
securityholder's interest. Any gain or loss recognized by a securityholder
will be capital gain or loss.
(8) Section 754 Election
If a securityholder sells its Partnership Securities at a profit
(loss), the purchasing securityholder will have a higher (lower) basis in the
Partnership Securities than the selling securityholder had. The tax basis of
the Partnership Trust Fund's assets would not be adjusted to reflect that
higher (or lower) basis unless the Partnership Trust Fund were to file an
election under Section 754 of the Code. To avoid the administrative
complexities that would be involved in keeping accurate accounting records, as
well as potentially onerous information reporting requirements, the
Partnership Trust Fund will not make that election. As a result,
securityholder might be allocated a greater or lesser amount of Partnership
Trust Fund income than would be appropriate based on their own purchase price
for Partnership Securities.
(9) Administrative Matters
The trustee is required to keep or have kept complete and accurate
books of the Partnership Trust Fund. These books will be maintained for
financial reporting and tax purposes on an accrual basis and the fiscal year
of the Partnership Trust Fund will be the calendar year. The trustee will file
a partnership information return (Form 1065) with the Internal Revenue Service
for each taxable year of the Partnership Trust Fund and will report each
securityholder's allocable share of items of Partnership Trust Fund income and
expense to holders and the Internal Revenue Service on Schedule K-1. The
trustee will provide the Schedule K-1 information to nominees that fail to
provide the Partnership Trust Fund with the information statement described
below and these nominees will be required to forward that information to the
beneficial owners of the Partnership Securities. Generally, holders must file
tax returns that are consistent with the information return filed by the
Partnership Trust Fund or be subject to penalties unless the holder notifies
the Internal Revenue Service of all those inconsistencies.
Under Section 6031 of the Code, any person that holds Partnership
Securities as a nominee at any time during a calendar year is required to
furnish the Partnership Trust Fund with a statement containing certain
information on the nominee, the beneficial owners and the Partnership
Securities so held. This information includes (1) the name, address and
taxpayer identification number of the nominee and (2) as to each beneficial
owner (a) the name, address and identification number of that person, (b)
whether that person is a United States person, a tax-exempt entity or a
foreign government, an international organization, or any wholly-owned agency
or instrumentality of either of the foregoing, and (c) certain information on
Partnership Securities that were held, bought or sold on behalf of that person
throughout the year. In addition, brokers and financial institutions that hold
Partnership Securities through a nominee are required to furnish directly to
the trustee information as to themselves and their ownership of Partnership
Securities. A clearing agency registered under Section 17A of the Exchange Act
is not required to furnish that information statement to the Partnership Trust
Fund. The information referred to above for any calendar year must be
furnished to the Partnership Trust Fund on or before the following January 31.
Nominees, brokers and financial institutions that fail to provide the
Partnership Trust Fund with the information described above may be subject to
penalties.
Unless another designation is made, the depositor will be designated
as the tax matters partner in the pooling and servicing agreement and, as the
tax matters partner, will be responsible for representing the securityholders
in any dispute with the Internal Revenue Service. The Code provides for
administrative examination of a partnership as if the partnership were a
separate and distinct taxpayer. Generally, the statute of limitations for
partnership items does not expire until three years after the date on which
the partnership information return is filed. Any adverse determination
following an audit of the return of the Partnership Trust Fund by the
appropriate taxing authorities could result in an adjustment of the returns of
the securityholders, and, under certain circumstances, a securityholder may be
precluded from separately litigating a proposed adjustment to the items of the
Partnership Trust Fund. An adjustment could also result in an audit of a
securityholder's returns and adjustments of items not related to the income
and losses of the Partnership Trust Fund.
(10) Tax Consequences to Foreign Securityholders
It is not clear whether the Partnership Trust Fund would be
considered to be engaged in a trade or business in the United States for
purposes of federal withholding taxes with respect to Non-U.S. Persons,
because there is no clear authority dealing with that issue under facts
substantially similar to those described herein. Although it is not expected
that the Partnership Trust Fund would be engaged in a trade or business in the
United States for those purposes, the Partnership Trust Fund will withhold as
if it were so engaged to protect the Partnership Trust Fund from possible
adverse consequences of a failure to withhold. The Partnership Trust Fund
expects to withhold on the portion of its taxable income that is allocable to
securityholders who are Non-U.S. Persons pursuant to Section 1446 of the Code,
as if that income were effectively connected to a U.S. trade or business, at a
rate of 35% for Non-U.S. Persons that are taxable as corporations and 39.6%
for all other foreign holders. Amounts withheld will be deemed distributed to
the Non-U.S. Person securityholders. Subsequent adoption of Treasury
regulations or the issuance of other administrative pronouncements may require
the Partnership Trust Fund to change its withholding procedures. In
determining a holder's withholding status, the Partnership Trust Fund may rely
on Form W-8, Form W-9 or the holder's certification of nonforeign status
signed under penalties of perjury.
Each Non-U.S. Person holder might be required to file a U.S.
individual or corporate income tax return (including, in the case of a
corporation, the branch profits tax) on its share of the Partnership Trust
Fund's income. Each Non-U.S. Person holder must obtain a taxpayer
identification number from the Internal Revenue Service and submit that number
to the Partnership Trust Fund on Form W-8 to assure appropriate crediting of
the taxes withheld. A Non-U.S. Person holder generally would be entitled to
file with the Internal Revenue Service a claim for refund for taxes withheld
by the Partnership Trust Fund, taking the position that no taxes were due
because the Partnership Trust Fund was not engaged in a U.S. trade or
business. However, interest payments made (or accrued) to a securityholder who
is a Non-U.S. Person generally will be considered guaranteed payments to the
extent that those payments are determined without regard to the income of the
Partnership Trust Fund. If these interest payments are properly characterized
as guaranteed payments, then the interest may not be considered "portfolio
interest." As a result, securityholders who are Non-U.S. Persons may be
subject to United States federal income tax and withholding tax at a rate of
30%, unless reduced or eliminated pursuant to an applicable treaty. In that
case, a Non-U.S. Person holder would only be entitled to claim a refund for
that portion of the taxes in excess of the taxes that should be withheld for
the guaranteed payments.
(11) Backup Withholding
Distributions made on the Partnership Securities and proceeds from
the sale of the Partnership Securities will be subject to a "backup"
withholding tax of 31% if, in general, the securityholder fails to comply with
certain identification procedures, unless the holder is an exempt recipient
under applicable provisions of the Code.
Consequences for Particular Investors
The federal tax discussions above may not be applicable depending on
a securityholder's particular tax situation. The depositor recommends that
prospective purchasers consult their tax advisors for the tax consequences to
them of the purchase, ownership and disposition of REMIC Securities, FASIT
Securities, Grantor Trust Securities, Partnership Securities and Debt
Securities, including the tax consequences under state, local, foreign and
other tax laws and the possible effects of changes in federal or other tax
laws.
State and Other Tax Considerations
In addition to the federal income tax consequences described in
"Material Federal Income Tax Considerations," potential investors should
consider the state and local tax consequences of the acquisition, ownership,
and disposition of the Securities offered hereunder. State tax law may differ
substantially from the corresponding federal tax law, and the discussion above
does not purport to describe any aspect of the tax laws of any state or other
jurisdiction. Therefore, prospective investors should consult their own tax
advisors for the various tax consequences of investments in the Securities
offered hereunder.
ERISA Considerations
General
The Employee Retirement Income Security Act of 1974, as amended
("ERISA"), and the Code impose certain requirements on employee benefit plans
and on certain other retirement plans and arrangements, including individual
retirement accounts and annuities, Keogh plans and collective investment funds
and separate accounts in which these plans, accounts or arrangements are
invested, that are subject to Title I of ERISA and Section 4975 of the Code
("Plans") and on persons who are fiduciaries for those Plans in connection
with the investment of Plan assets. Some employee benefit plans, such as
governmental plans (as defined in ERISA Section 3(32)), and, if no election
has been made under Section 410(d) of the Code, church plans (as defined in
Section 3(33) of ERISA) are not subject to ERISA requirements. Therefore,
assets of these plans may be invested in Securities without regard to the
ERISA considerations described below, subject to the provisions of other
applicable federal, state and local law. Any of these plans that is qualified
and exempt from taxation under Sections 401(a) and 501(a) of the Code,
however, is subject to the prohibited transaction rules set forth in Section
503 of the Code.
ERISA generally imposes on Plan fiduciaries certain general fiduciary
requirements, including those of investment prudence and diversification and
the requirement that a Plan's investments be made in accordance with the
documents governing the Plan. In addition, ERISA and the Code prohibit a broad
range of transactions involving assets of a Plan and persons ("Parties in
Interest") who have certain specified relationships to the Plan unless a
statutory or administrative exemption is available. Certain Parties in
Interest that participate in a prohibited transaction may be subject to an
excise tax imposed pursuant to Section 4975 of the Code, unless a statutory or
administrative exemption is available. These prohibited transactions generally
are set forth in Sections 406 and 407 of ERISA and Section 4975 of the Code.
A Plan's investment in Securities may cause the mortgage loans,
Contracts, Unsecured Home Improvement Loans, Agency Securities, Mortgage
Securities and other assets included in a related trust fund to be deemed Plan
assets. Section 2510.3-101 of the regulations of the United States Department
of Labor ("DOL") provides that when a Plan acquires an equity interest in an
entity, the Plan's assets include both an equity interest and an undivided
interest in each of the underlying assets of the entity, unless certain
exceptions not applicable here apply, or unless the equity participation in
the entity by "benefit plan investors" (i.e., Plans and certain employee
benefit plans not subject to ERISA) is not "significant," both as defined
therein. For this purpose, in general, equity participation by benefit plan
investors will be "significant" on any date if 25% or more of the value of any
class of equity interests in the entity is held by benefit plan investors. To
the extent the Securities are treated as equity interests for purposes of DOL
regulations Section 2510.3-101, equity participation in a trust fund will be
significant on any date if immediately after the most recent acquisition of
any Security, 25% or more of any class of Securities is held by benefit plan
investors.
Any person who has discretionary authority or control respecting the
management or disposition of Plan assets, and any person who provides
investment advice for those assets for a fee, is a fiduciary of the investing
Plan. If the mortgage loans, Contracts, Unsecured Home Improvement Loans,
Agency Securities, Mortgage Securities and other assets included in a trust
fund constitute Plan assets, then any party exercising management or
discretionary control regarding those assets, such as the servicer or master
servicer, may be deemed to be a Plan "fiduciary" and thus subject to the
fiduciary responsibility provisions and prohibited transaction provisions of
ERISA and the Code for the investing Plan. In addition, if the mortgage loans,
Contracts, Unsecured Home Improvement Loans, Agency Securities, Mortgage
Securities and other assets included in a trust fund constitute Plan assets,
the purchase of Securities by a Plan, as well as the operation of the trust
fund, may constitute or involve a prohibited transaction under ERISA and the
Code.
The DOL issued an individual exemption (the "Exemption"), to DBSI
that generally exempts from the application of the prohibited transaction
provisions of Sections 406(a) and 407 of ERISA, and the excise taxes imposed
on those prohibited transactions pursuant to Section 4975(a) and (b) of the
Code, certain transactions, among others, relating to the servicing and
operation of mortgage pools and the purchase, sale and holding of Securities
underwritten by an underwriter, that (1) represent a beneficial ownership
interest in the assets of a trust fund and entitle the holder the pass-through
payments of principal, interest and/or other payments made with respect to the
assets of the trust fund or (2) are denominated as a debt instrument and
represent an interest in a REMIC, provided that certain conditions set forth
in the Exemption are satisfied.
For purposes of this Section "ERISA Considerations," the term
"underwriter" will include (a) DBSI, (b) any person directly or indirectly,
through one or more intermediaries, controlling, controlled by or under common
control with DBSI, and (c) any member of the underwriting syndicate or selling
group of which a person described in (a) or (b) is a manager or co-manager for
a class of Securities.
The Exemption sets forth six general conditions that must be
satisfied for a transaction involving the purchase, sale and holding of
Securities to be eligible for exemptive relief thereunder:
(1) The acquisition of Securities by a Plan must be on terms that
are at least as favorable to the Plan as they would be in an arm's-length
transaction with an unrelated party.
(2) The Exemption only applies to Securities evidencing rights and
interests not subordinated to the rights and interests evidenced by the other
Securities of the same series.
(3) The Securities at the time of acquisition by the Plan must be
rated in one of the three highest generic rating categories by Standard &
Poor's Ratings Services, a division of the McGraw-Hill Companies, Inc.
("S&P"), Moody's Investors Service ("Moody's"), Duff & Phelps Credit Rating
Co. ("DCR") or Fitch IBCA, Inc. ("Fitch").
(4) The trustee cannot be an affiliate of any member of the
"Restricted Group," which consists of the underwriter, the depositor, the
trustee, the master servicer, any servicer, any insurer and any obligor on
Assets constituting more than 5% of the total unamortized principal balance of
the Assets in the related trust fund as of the date of initial issuance of the
Securities.
(5) The sum of all payments made to and retained by the
underwriter(s) must represent not more than reasonable compensation for
underwriting the Securities; the sum of all payments made to and retained by
the depositor pursuant to the assignment of the Assets to the related trust
fund must represent not more than the fair market value of those obligations;
and the sum of all payments made to and retained by the servicer must
represent not more than reasonable compensation for that person's services
under the related Agreement and reimbursement of that person's reasonable
expenses in connection therewith.
(6) The investing Plan must be an accredited investor as defined in
Rule 501(a)(1) of Regulation D of the Commission under the Securities Act of
1933, as amended.
In addition, the trust fund must meet the following requirements: (1)
the assets of the trust fund must consist solely of assets of the type that
have been included in other investment pools; (2) securities evidencing
interests in those other investment pools must have been rated in one of the
three highest generic rating categories by S&P, Moody's, DCR, or Fitch for at
least one year before the Plan's acquisition of the securities; and (3)
securities evidencing interests in those other investment pools must have been
purchased by investors other than Plans for at least one year before any
Plan's acquisition of the Securities.
A fiduciary of a Plan contemplating purchasing a Security must make
its own determination that the general conditions set forth above will be
satisfied for that Security. However, to the extent Securities are
subordinate, the Exemption will not apply to an investment by a Plan. In
addition, any Securities representing a beneficial ownership interest in
Unsecured Home Improvement Loans or Revolving Credit Line Loans will not
satisfy the general conditions of the Exemption.
If the general conditions of the Exemption are satisfied, the
Exemption may provide an exemption from the restrictions imposed by Sections
406(a) and 407 of ERISA (as well as the excise taxes imposed by Sections
4975(a) and (b) of the Code by reason of Sections 4975(c) (1)(A) through (D)
of the Code) in connection with the direct or indirect sale, exchange,
transfer, holding or the direct or indirect acquisition or disposition in the
secondary market of Securities by Plans. However, no exemption is provided
from the restrictions of Sections 406(a)(1)(E), 406(a)(2) and 407 of ERISA for
the acquisition or holding of a Security on behalf of an "Excluded Plan" by
any person who has discretionary authority or renders investment advice with
respect to the assets of that Excluded Plan. For purposes of the Securities,
an Excluded Plan is a Plan sponsored by any member of the Restricted Group.
If certain specific conditions of the Exemption are also satisfied,
the Exemption may provide an exemption from the restrictions imposed by
Sections 406(b)(1) and (2) of ERISA and the taxes imposed by Sections 4975(a)
and (b) of the Code by reason of Section 4975(c)(1)(E) of the Code in
connection with
(1) the direct or indirect sale, exchange or transfer of Securities
in the initial issuance of Securities between the depositor or an underwriter
and a Plan when the person who has discretionary authority or renders
investment advice with respect to the investment of Plan assets in the
Securities is (a) an obligor with respect to 5% or less of the fair market
value of the Assets or (b) an affiliate of that person;
(2) the direct or indirect acquisition or disposition in the
secondary market of Securities by a Plan; and
(3) the holding of Securities by a Plan.
Further, if certain specific conditions of the Exemption are
satisfied, the Exemption may provide an exemption from the restrictions
imposed by Sections 406(a), 406(b) and 407 of ERISA, and the taxes imposed by
Sections 4975(a) and (b) of the Code by reason of Section 4975(c) of the Code
for transactions in connection with the servicing, management and operation of
the trust fund. The depositor expects that the specific conditions of the
Exemption required for this purpose will be satisfied for the Securities so
that the Exemption would provide an exemption from the restrictions imposed by
Sections 406(a) and (b) of ERISA (as well as the excise taxes imposed by
Sections 4975(a) and (b) of the Code by reason of Section 4975(c) of the Code)
for transactions in connection with the servicing, management and operation of
the Mortgage Pools, provided that the general conditions of the Exemption are
satisfied.
The Exemption also may provide an exemption from the restrictions
imposed by Sections 406(a) and 407(a) of ERISA, and the taxes imposed by
Section 4975(a) and (b) of the Code by reason of Sections 4975(c)(1)(A)
through (D) of the Code if those restrictions are deemed to otherwise apply
merely because a person is deemed to be a "party in interest" (within the
meaning of Section 3(14) of ERISA) or a "disqualified person" (within the
meaning of Section 4975(e)(2) of the Code) with respect to an investing Plan
by virtue of providing services to the Plan (or by virtue of having certain
specified relationships to that person) solely as a result of the Plan's
ownership of Securities.
To the extent the Securities are not treated as equity interests for
purposes of DOL regulations Section 2510.3-101, a Plan's investment in those
Securities ("Non-Equity Securities") would not cause the assets included in a
related trust fund to be deemed Plan assets. However, the depositor, the
servicer, the trustee, or underwriter may be the sponsor of or investment
advisor with respect to one or more Plans. Because these parties may receive
certain benefits in connection with the sale of Non-Equity Securities, the
purchase of Non-Equity Securities using Plan assets over which any of these
parties has investment authority might be deemed to be a violation of the
prohibited transaction rules of ERISA and the Code for which no exemption may
be available. Accordingly, Non-Equity Securities may not be purchased using
the assets of any Plan if any of the depositor, the servicer, the trustee or
underwriter has investment authority for those assets.
In addition, certain affiliates of the depositor might be considered
or might become Parties in Interest with respect to a Plan. Also, any holder
of Securities, because of its activities or the activities of its respective
affiliates, may be deemed to be a Party in Interest with respect to certain
Plans, including but not limited to Plans sponsored by that holder. In either
case, the acquisition or holding of Non-Equity Securities by or on behalf of
that Plan could be considered to give rise to an indirect prohibited
transaction within the meaning of ERISA and the Code, unless it is subject to
one or more statutory or administrative exemptions such as Prohibited
Transaction Class Exemption ("PTCE") 84-14, which exempts certain transactions
effected on behalf of a Plan by a "qualified professional asset manager," PTCE
90-1, which exempts certain transactions involving insurance company pooled
separate accounts, PTCE 91-38, which exempts certain transactions involving
bank collective investment funds, PTCE 95-60, which exempts certain
transactions involving insurance company general accounts, or PTCE 96-23,
which exempts certain transactions effected on behalf of a Plan by certain
"in-house" asset managers. It should be noted, however, that even if the
conditions specified in one or more of these exemptions are met, the scope of
relief provided by these exemptions may not necessarily cover all acts that
might be construed as prohibited transactions.
Any Plan fiduciary that proposes to cause a Plan to purchase
Securities should consult with its counsel with respect to the potential
applicability of ERISA and the Code to that investment, the availability of
the exemptive relief provided in the Exemption and the potential applicability
of any other prohibited transaction exemption in connection therewith. In
particular, a Plan fiduciary that proposes to cause a Plan to purchase
Securities representing a beneficial ownership interest in a pool of
single-family residential first mortgage loans, a Plan fiduciary should
consider the applicability of PTCE 83-1, which provides exemptive relief for
certain transactions involving mortgage pool investment trusts. The prospectus
supplement for a series of Securities may contain additional information
regarding the application of the Exemption, PTCE 83-1 or any other exemption,
with respect to the Securities offered thereby. In addition, any Plan
fiduciary that proposes to cause a Plan to purchase Strip Securities should
consider the federal income tax consequences of that investment.
Any Plan fiduciary considering whether to purchase a Security on
behalf of a Plan should consult with its counsel regarding the applicability
of the fiduciary responsibility and prohibited transaction provisions of ERISA
and the Code to that investment.
The sale of Securities to a Plan is in no respect a representation by
the depositor or the underwriter that this investment meets all relevant legal
requirements for investments by Plans generally or any particular Plan, or
that this investment is appropriate for Plans generally or any particular
Plan.
Pre-Funding Accounts
On July 21, 1997, the DOL published in the Federal Register an
amendment to the Exemption, which extends exemptive relief to certain
mortgage-backed and asset-backed securities transactions using pre-funding
accounts for trusts issuing pass-through certificates. The amendment generally
allows Assets supporting payments to securityholders, and having a value equal
to no more than 25% of the total initial Security Balance of the related
Securities, to be transferred to the trust fund within the Pre-Funding Period,
instead of requiring that all the Assets be either identified or transferred
on or before the Closing Date. The relief is available when the following
conditions are met:
(1) The ratio of the amount allocated to the Pre-Funding Account to
the total principal amount of the Securities being offered (the "Pre-Funding
Limit") must not exceed 25%.
(2) All Subsequent Assets must meet the same terms and conditions
for eligibility as the original Assets used to create the trust fund, which
terms and conditions have been approved by at least one rating agency.
(3) The transfer of the Subsequent Assets to the trust fund during
the Pre-Funding Period must not result in the Securities that are to be
covered by the Exemption receiving a lower credit rating from a rating agency
upon termination of the Pre-Funding Period than the rating that was obtained
at the time of the initial issuance of the Securities by the trust fund.
(4) Solely as a result of the use of pre-funding, the weighted
average annual percentage interest rate for all of the Assets in the trust
fund at the end of the Pre-Funding Period must not be more than 100 basis
points lower than the average interest rate for the Assets transferred to the
trust fund on the Closing Date.
(5) In order to ensure that the characteristics of the Subsequent
Assets are substantially similar to the original Assets that were transferred
to the trust fund,
o the characteristics of the Subsequent Assets must be monitored by
an insurer or other credit support provider that is independent of the
depositor; or
o an independent accountant retained by the depositor must provide
the depositor with a letter (with copies provided to each rating agency rating
the Securities, the underwriter and the trustee) stating whether or not the
characteristics of the Subsequent Assets conform to the characteristics
described in the related prospectus supplement and/or pooling and servicing
agreement. In preparing this letter, the independent accountant must use the
same type of procedures as were applicable to the Assets transferred to the
trust fund as of the Closing Date.
(6) The Pre-Funding Period must end no later than three months or
90 days after the Closing Date (or earlier in certain circumstances) if the
Pre-Funding Account falls below the minimum level specified in the pooling and
servicing agreement or an Event of Default occurs.
(7) Amounts transferred to the Pre-Funding Account and/or
Capitalized Interest Account used in connection with the pre-funding may be
invested only in certain permitted investments ("Permitted Investments").
(8) The prospectus or prospectus supplement must describe:
o the Pre-Funding Account and/or Capitalized Interest Account used
in connection with the Pre-Funding Account;
o the duration of the Pre-Funding Period;
o the percentage and/or dollar amount of the Pre-Funding Limit for
the trust fund; and
o that the amounts remaining in the Pre-Funding Account at the end
of the Pre-Funding Period will be remitted to securityholders as repayments of
principal.
(9) The Agreement must prescribe the Permitted Investments for the
Pre-Funding Account and/or Capitalized Interest Account and, if not disclosed
in the prospectus supplement, the terms and conditions for eligibility of
Subsequent Assets.
Legal Investment
The prospectus supplement will specify which classes of the
Securities, if any, will constitute "mortgage related securities" for purposes
of the Secondary Mortgage Market Enhancement Act of 1984, as amended
("SMMEA"). Generally, only classes of Offered Securities that (1) are rated in
one of the two highest rating categories by one or more rating agencies and
(2) are part of a series representing interests in, or secured by, a trust
fund consisting of loans secured by first liens on real property and
originated by certain types of originators specified in SMMEA, will be
"mortgage related securities" for purposes of SMMEA.
Those classes of Offered Securities qualifying as "mortgage related
securities" will constitute legal investments for persons, trusts,
corporations, partnerships, associations, business trusts and business
entities (including, but not limited to, state chartered savings banks,
commercial banks, savings and loan associations and insurance companies, as
well as trustees and state government employee retirement systems) created
pursuant to or existing under the laws of the United States or of any state
(including the District of Columbia and Puerto Rico) whose authorized
investments are subject to state regulation to the same extent that, under
applicable law, obligations issued by or guaranteed as to principal and
interest by the United States or any agency or instrumentality thereof
constitute legal investments for those entities. Pursuant to SMMEA, a number
of states enacted legislation, on or before the October 3, 1991 cut-off for
those enactments, limiting to varying extents the ability of certain entities
(in particular, insurance companies) to invest in mortgage related securities
secured by liens on residential, or mixed residential and commercial,
properties, in most cases by requiring the affected investors to rely solely
upon existing state law, and not SMMEA.
SMMEA also amended the legal investment authority of
federally-chartered depository institutions as follows: federal savings and
loan associations and federal savings banks may invest in, sell or otherwise
deal in "mortgage related securities" without limitation as to the percentage
of their assets represented thereby, federal credit unions may invest in these
securities, and national banks may purchase these securities for their own
account without regard to the limitations generally applicable to investment
securities set forth in 12 U.S.C. ss.24 (Seventh), subject in each case to
regulations that the applicable federal regulatory authority may prescribe. In
this connection, the Office of the Comptroller of the Currency (the "OCC") has
amended 12 C.F.R. Part 1 to authorize national banks to purchase and sell for
their own account, without limitation as to a percentage of the bank's capital
and surplus (but subject to compliance with certain general standards
concerning "safety and soundness" and retention of credit information in 12
C.F.R. ss.1.5), certain "Type IV securities," defined in 12 C.F.R. ss.1.2(l)
to include certain "residential mortgage related securities." As so defined,
"residential mortgage-related security" means, in relevant part, "mortgage
related security" within the meaning of SMMEA. The National Credit Union
Administration ("NCUA") has adopted rules, codified at 12 C.F.R. Part 703,
which permit federal credit unions to invest in "mortgage related securities"
under certain limited circumstances, other than stripped mortgage related
securities, residual interests in mortgage related securities, and commercial
mortgage related securities, unless the credit union has obtained written
approval from the NCUA to participate in the "investment pilot program"
described in 12 C.F.R. ss.703.140. Thrift institutions that are subject to the
jurisdiction of the Office of Thrift Supervision (the "OTS") should consider
the OTS' Thrift Bulletin 13a (December 1, 1998), "Management of Interest Rate
Risk, Investment Securities, and Derivatives Activities," before investing in
any of the Offered Securities.
All depository institutions considering an investment in the
Certificates should review the "Supervisory Policy Statement on Investment
Securities and End-User Derivatives Activities" (the "1998 Policy Statement")
of the Federal Financial Institutions Examination Council ("FFIEC"), which has
been adopted by the Board of Governors of the Federal Reserve System, the
Federal Deposit Insurance Corporation, the OCC and the OTS, effective May 26,
1998, and by the NCUA, effective October 1, 1998. The 1998 Policy Statement
sets forth general guidelines which depository institutions must follow in
managing risks (including market, credit, liquidity, operational
(transaction), and legal risks) applicable to all securities (including
mortgage pass-through securities and mortgage-derivative products) used for
investment purposes.
If specified in the prospectus supplement, other classes of Offered
Securities offered pursuant to this prospectus will not constitute "mortgage
related securities" under SMMEA. The appropriate characterization of those
classes under various legal investment restrictions, and thus the ability of
investors subject to these restrictions to purchase these Offered Securities,
may be subject to significant interpretive uncertainties.
Institutions whose investment activities are subject to regulation by
federal or state authorities should review rules, policies and guidelines
adopted from time to time by those authorities before purchasing any Offered
Securities, as certain classes or subclasses may be deemed unsuitable
investments, or may otherwise be restricted, under those rules, policies or
guidelines (in certain instances irrespective of SMMEA).
The foregoing does not take into consideration the applicability of
statutes, rules, regulations, orders, guidelines or agreements generally
governing investments made by a particular investor, including, but not
limited to, "prudent investor" provisions, percentage-of-assets limits
provisions that may restrict or prohibit investment in securities that are not
"interest bearing" or "income paying," and with regard to any Offered
Securities issued in book-entry form, provisions that may restrict or prohibit
investments in securities that are issued in book-entry form.
Except as to the status of certain classes of Offered Securities as
"mortgage related securities," no representation is made as to the proper
characterization of the Offered Securities for legal investment, financial
institution regulatory, or other purposes, or as to the ability of particular
investors to purchase any Offered Securities under applicable legal investment
restrictions. The uncertainties described above (and any unfavorable future
determinations concerning legal investment or financial institution regulatory
characteristics of the Offered Securities) may adversely affect the liquidity
of the Offered Securities.
Accordingly, all investors whose investment activities are subject to
legal investment laws and regulations, regulatory capital requirements or
review by regulatory authorities should consult with their own legal advisors
in determining whether and to what extent the Offered Securities of any class
constitute legal investments for them or are subject to investment, capital or
other restrictions, and, if applicable, whether SMMEA has been overridden in
any jurisdiction relevant to that investor.
Methods of Distribution
The Securities offered hereby and by the supplements to this
prospectus will be offered in series. The distribution of the Securities may
be effected from time to time in one or more transactions, including
negotiated transactions, at a fixed public offering price or at varying prices
to be determined at the time of sale or at the time of commitment therefor. If
specified in the prospectus supplement, the Securities will be distributed in
a firm commitment underwriting, subject to the terms and conditions of the
underwriting agreement, by Deutsche Bank Securities Inc. ("DBSI") acting as
underwriter with other underwriters, if any, named therein. In that event, the
prospectus supplement may also specify that the underwriters will not be
obligated to pay for any Securities agreed to be purchased by purchasers
pursuant to purchase agreements acceptable to the depositor. In connection
with the sale of the Securities, underwriters may receive compensation from
the depositor or from purchasers of the Securities in the form of discounts,
concessions or commissions. The prospectus supplement will describe any
compensation paid by the depositor.
Alternatively, the prospectus supplement may specify that the
Securities will be distributed by DBSI acting as agent or in some cases as
principal with respect to Securities that it has previously purchased or
agreed to purchase. If DBSI acts as agent in the sale of Securities, DBSI will
receive a selling commission for each series of Securities, depending on
market conditions, expressed as a percentage of the total principal balance of
the related mortgage loans as of the Cut-off Date. The exact percentage for
each series of Securities will be disclosed in the prospectus supplement. To
the extent that DBSI elects to purchase Securities as principal, DBSI may
realize losses or profits based upon the difference between its purchase price
and the sales price. The prospectus supplement for any series offered other
than through underwriters will contain information regarding the nature of
that offering and any agreements to be entered into between the depositor and
purchasers of Securities of that series.
The depositor will indemnify DBSI and any underwriters against
certain civil liabilities, including liabilities under the Securities Act of
1933, or will contribute to payments DBSI and any underwriters may be required
to make in respect thereof.
In the ordinary course of business, DBSI and the depositor may engage
in various securities and financing transactions, including repurchase
agreements to provide interim financing of the depositor's mortgage loans
pending the sale of those mortgage loans or interests therein, including the
Securities. DBSI performs management services for the depositor.
The depositor anticipates that the Securities will be sold primarily
to institutional investors. Purchasers of Securities, including dealers, may,
depending on the facts and circumstances of those purchases, be deemed to be
"underwriters" within the meaning of the Securities Act of 1933 in connection
with reoffers and sales by them of Securities. securityholders should consult
with their legal advisors in this regard before any reoffer or sale of
Securities.
As to each series of Securities, only those classes rated in one of
the four highest rating categories by any rating agency will be offered
hereby. Any lower rated or unrated class may be initially retained by the
depositor, and may be sold by the depositor at any time to one or more
institutional investors.
Additional Information
The Depositor has filed with the Commission a registration statement
on Form S-3 under the Securities Act of 1933, as amended, with respect to the
Securities (the "Registration Statement"). This prospectus, which forms a part
of the Registration Statement, omits certain information contained in the
Registration Statement pursuant to the rules and regulations of the
Commission. The Registration Statement and the exhibits thereto can be
inspected and copied at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and at certain
of its Regional Offices in the following locations:
o Chicago Regional Office, Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661-2511; and
o New York Regional Office, 7 World Trade Center, Suite 1300, New
York, New York 10048.
Copies of these materials can also be obtained from the Public Reference
Section of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, at
prescribed rates.
The Commission also maintains a site on the world wide web at
"http://www.sec.gov" at which users can view and download copies of reports,
proxy and information statements and other information filed electronically
through the Electronic Data Gathering, Analysis and Retrieval ("EDGAR")
system. The Depositor has filed the Registration Statement, including all
exhibits thereto, through the EDGAR system and therefore such materials should
be available by logging onto the Commission's web site. The Commission
maintains computer terminals providing access to the EDGAR system at each of
the offices referred to above.
Copies of the most recent Fannie Mae prospectus for Fannie Mae
certificates and Fannie Mae's annual report and quarterly financial statements
as well as other financial information are available from the Director of
Investor Relations of Fannie Mae, 3900 Wisconsin Avenue, N.W., Washington,
D.C. 20016 (202-752-7115). The Depositor did not participate in the
preparation of Fannie Mae's prospectus or its annual or quarterly reports or
other financial information and, accordingly, makes no representation as to
the accuracy or completeness of the information in those documents.
Copies of the most recent Offering Circular for Freddie Mac
certificates as well as Freddie Mac's most recent Information Statement and
Information Statement supplement and any quarterly report made available by
Freddie Mac may be obtained by writing or calling the Investor Inquiry
Department of Freddie Mac at 8200 Jones Branch Drive, McLean, Virginia 22102
(outside Washington, D.C. metropolitan area, telephone 800-336-3672; within
Washington, D.C. metropolitan area, telephone 703-759-8160). The Depositor did
not participate in the preparation of Freddie Mac's Offering Circular,
Information Statement or any supplement thereto or any quarterly report
thereof and, accordingly, makes no representation as to the accuracy or
completeness of the information in those documents.
Incorporation of Certain Documents by Reference
All documents subsequently filed by or on behalf of the trust fund
referred to in the prospectus supplement with the Commission pursuant to
Section 13(a), 13(c), 14 or 15(d) of the Exchange Act, after the date of this
prospectus and prior to the termination of any offering of the Securities
issued by that trust fund will 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 those documents. Any statement contained in a document incorporated
or deemed to be incorporated by reference herein will be deemed to be modified
or superseded for all purposes of this prospectus to the extent that a
statement contained herein (or in the prospectus supplement) or in any other
subsequently filed document that also is or is deemed to be incorporated by
reference modifies or replaces that statement. Any statement so modified or
superseded will not be deemed, except as so modified or superseded, to
constitute a part of this prospectus.
The Trustee on behalf of any trust fund will provide without charge
to each person to whom this prospectus is delivered, upon request, 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 the exhibits are
specifically incorporated by reference into the information that this
prospectus incorporates). Requests for information should be directed to the
corporate trust office of the Trustee specified in the prospectus supplement.
Legal Matters
Certain legal matters, including the federal income tax consequences
to securityholders of an investment in the Securities of a series, will be
passed upon for the depositor by Brown & Wood LLP, Washington, D.C.
Financial Information
A new trust fund will be formed for each series of Securities and no
trust fund will engage in any business activities or have any assets or
obligations before the issuance of the related series of Securities.
Accordingly, financial statements for a trust fund will generally not be
included in this prospectus or in the prospectus supplement.
Rating
As a condition to the issuance of any class of Offered Securities,
they must not be rated lower than investment grade; that is, they must be
rated in one of the four highest rating categories, by a rating agency.
Ratings on mortgage pass-through certificates and mortgage-backed
notes address the likelihood of receipt by securityholders of all
distributions on the underlying mortgage loans. These ratings address the
structural, legal and issuer-related aspects associated with the securities,
the nature of the underlying assets and the credit quality of the guarantor,
if any. Ratings on mortgage pass-through certificates, mortgage-backed notes
and other asset backed securities do not represent any assessment of the
likelihood of principal prepayments by borrowers or of the degree by which
prepayments might differ from those originally anticipated. As a result,
securityholders might suffer a lower than anticipated yield, and, in addition,
holders of stripped interest certificates in extreme cases might fail to
recoup their initial investments.
A security rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating organization. Each security rating should be evaluated
independently of any other security rating.
INDEX OF DEFINED TERMS
1986 Act...........................................93
1998 Policy Statement.............................142
Accrual Period.....................................18
Accrual Securities.................................25
Accrued Security Interest..........................28
Adjustable Rate Assets..............................2
Agency Securities...................................2
Agreement..........................................39
ARM Contracts.......................................9
ARM Loans...........................................5
ARM Unsecured Home Improvement Loans................8
Asset Conservation Act.............................79
Asset Group........................................25
Asset Seller........................................2
Assets..............................................2
Available Distribution Amount......................26
Balloon Payment Assets..............................3
Bankruptcy Code....................................76
Beneficial Owner...................................34
Bi-weekly Assets....................................3
Book-Entry Securities..............................25
borrower...........................................68
Buy Down Assets.....................................3
Buydown Funds......................................91
Buydown Mortgage Loans.............................22
Buydown Period.....................................22
Capitalized Interest Account.......................16
Cash Flow Agreement................................17
Cedel..............................................33
CERCLA.............................................78
Certificates.......................................24
Charter Act........................................11
Code...............................................87
Collection Account.................................43
Commission..........................................6
contract borrower..................................70
contract lender....................................70
Contract Rate.......................................9
Contracts...........................................2
Convertible Assets..................................3
Cooperative........................................69
Cooperative Corporation............................35
Cooperative Loans..................................69
Cooperatives........................................4
Covered Trust......................................64
CPR................................................20
credit support.....................................17
Crime Control Act..................................83
Cut-off Date........................................5
DBSI..............................................143
DCR...............................................137
Debt Securities....................................88
Definitive Securities..............................25
Determination Date.................................26
Disqualified Organization.........................106
Distribution Date..................................18
DOL...............................................136
DTC................................................33
Due Period.........................................26
due-on-sale........................................73
due-on-sale clause.................................24
EDGAR.............................................144
equity of redemption...............................73
ERISA.............................................135
ERISA Considerations..............................136
Euroclear Operator.................................35
European Depositaries..............................35
excess servicing..................................123
Exchange Act.......................................34
Excluded Plan.....................................138
Exemption.........................................136
Fannie Mae..........................................2
FASIT..............................................88
FASIT Ownership Security..........................114
FASIT Provisions...................................88
FASIT Regular Securities..........................114
FASIT Securities...................................88
FDIC...............................................43
FFIEC.............................................142
FHA.................................................4
Financial Intermediary.............................36
Fitch.............................................137
Freddie Mac.........................................2
Freddie Mac Act....................................12
Freddie Mac Certificate Group......................13
Garn-St. Germain Act...............................80
GEM Assets..........................................3
Ginnie Mae..........................................2
GPM Assets..........................................3
Grantor Trust Fund.................................88
Grantor Trust Securities...........................88
Holder-in-Due-Course...............................86
Home Equity Loans...................................4
Home Improvement Contracts..........................4
Housing Act........................................10
HUD................................................52
Increasing Payment Asset............................3
Increasing Payment Assets...........................3
Indirect Participants..............................34
Insurance Proceeds.................................26
Interest Rate......................................27
Interest Reduction Assets...........................3
land sale contract.................................70
Land Sale Contracts.................................4
Level Payment Assets................................2
Liquidation Proceeds...............................26
Loan-to-Value Ratio.................................5
Lock-out Date.......................................6
Lock-out Period.....................................6
Manufactured Home...................................8
Mark to Market Regulations........................109
Moody's...........................................137
Mortgage Securities.................................2
Mortgaged Properties................................4
Mortgages...........................................4
Multifamily Property................................4
NCUA..............................................142
new partnership...................................131
New Regulations...................................112
Non-Equity Securities.............................138
Non-Pro Rata Security..............................93
Nonrecoverable Advance.............................30
Non-U.S. Person...................................112
Notes..............................................24
OCC...............................................141
Offered Securities.................................25
OID Regulations....................................88
old partnership...................................131
Participants.......................................34
Parties in Interest...............................135
Partnership Securities.............................88
Partnership Trust Fund.............................88
Pass-Through Entity...............................107
PCBs...............................................77
Permitted Investments..............................44
Plans.............................................135
pooling and servicing agreement....................38
Pre-Funded Amount..................................16
Pre-Funding Account................................16
Pre-Funding Limit.................................140
Pre-Funding Period.................................16
prepayment.........................................20
Prepayment Assumption..............................94
Prepayment Premium..................................6
PTCE..............................................139
Purchase Price.....................................41
RCRA...............................................78
Record Date........................................26
Refinance Loans.....................................5
Regular Securities.................................89
Regular Securityholder.............................93
Related Proceeds...................................30
Relevant Depositary................................35
Relief Act.........................................82
REMIC..............................................88
REMIC Pool.........................................88
REMIC Provisions...................................88
REMIC Regulations..................................88
REMIC Securities...................................38
REO Property.......................................31
Residual Holders..................................101
Residual Securities................................89
Restricted Group..................................137
Retained Interest..................................54
Revolving Credit Line Loans.........................7
RICO...............................................83
Rules..............................................36
S&P...............................................137
SBJPA of 1996......................................92
secured-creditor exemption.........................78
Securities.........................................24
Security...........................................39
Security Balance...................................28
Senior Securities..................................25
Servicemen's Readjustment Act......................15
Servicing Standard.................................47
Single Family Property..............................4
SMMEA.............................................141
SPA................................................20
Special servicer...................................57
Standard Securities...............................120
Startup Day........................................89
Step-up Rate Assets.................................3
Strip Securities...................................25
Stripped Agency Securities.........................14
Stripped Securities...............................120
Subordinate Securities.............................25
Subsequent Assets..................................16
Superliens.........................................77
Taxable Mortgage Pools.............................88
Terms and Conditions...............................35
thrift institutions...............................105
Tiered REMICs......................................92
Title V............................................81
Title VIII.........................................82
Type IV securities................................142
U.S. Person.......................................108
UCC................................................34
underwriter.......................................136
Unsecured Home Improvement Loans....................2
UST................................................78
VA................................................. 4
VA Guaranty Policy.................................53
Value...............................................5
Warranting Party...................................42
The information in this prospectus is not complete and may be changed. We
may not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an
offer to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
Subject to Completion, December [ ], 1999
PROSPECTUS
Asset Backed Certificates
Asset Backed Notes
(Issuable in Series)
ACE Securities Corp.,
Depositor
The Trust Funds:
Each trust fund will be established to hold assets transferred to it
by Ace Securities Corp. The assets in each trust fund will generally consist of
one or more of the following:
o mortgage loans secured by one- to four-family residential
properties;
o mortgage pass-through securities issued or guaranteed by Ginnie
Mae, Fannie Mae, or Freddie Mac; or
o previously issued asset-backed or mortgage-backed securities
backed by mortgage loans secured by residential properties or
participations in those types of loans.
The assets in your trust fund are specified in the prospectus
supplement for that particular trust fund, while the types of assets that may
be included in a trust fund, whether or not in your trust fund, are described
in greater detail in this prospectus.
The Securities:
Ace Securities Corp. will sell the securities pursuant to a prospectus
supplement. The securities will be grouped into one or more series, each having
is own distinct designation. Each series will be issued in one or more classes
and will evidence beneficial ownership of, or be secured by, the assets in the
trust fund that the series relates to. A prospectus supplement for a series
will specify all of the terms of the series and of each of the classes in the
series.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these securities or passed
upon the adequacy or accuracy of this prospectus. Any representation to the
contrary is a criminal offense.
The date of this prospectus is December , 1999.
Description of the Trust Funds
Assets
The primary assets of each trust fund (the "Assets") will include some
or all of the following types of assets:
o single family mortgage loans, which may include Home Equity Loans
and Land Sale Contracts (each as defined herein);
o any combination of "fully modified pass-through" mortgage-backed
certificates guaranteed by the Government National Mortgage
Association ("Ginnie Mae"), guaranteed mortgage pass-through
securities issued by Fannie Mae ("Fannie Mae") and mortgage
participation certificates issued by the Federal Home Loan
Mortgage Corporation ("Freddie Mac") (collectively, "Agency
Securities");
o previously issued asset-backed certificates, collateralized
mortgage obligations or participation certificates (each, and
collectively, "Mortgage Securities") evidencing interests in, or
collateralized by, mortgage loans or Agency Securities; or
o a combination of mortgage loans, Agency Securities and/or Mortgage
Securities.
The mortgage loans will not be guaranteed or insured by ACE Securities
Corp. or any of its affiliates. The mortgage loans will be guaranteed or
insured by a governmental agency or instrumentality or other person only if and
to the extent expressly provided in the prospectus supplement. The depositor
will select each Asset to include in a trust fund from among those it has
purchased, either directly or indirectly, from a prior holder (an "Asset
Seller"), which may be an affiliate of the depositor and which prior holder may
or may not be the originator of that mortgage loan.
The Assets included in the trust fund for your series may be subject
to various types of payment provisions:
o "Level Payment Assets," which may provide for the payment of
interest, and full repayment of principal, in level monthly
payments with a fixed rate of interest computed on their
declining principal balances;
o "Adjustable Rate Assets," which may provide for periodic
adjustments to their rates of interest to equal the sum of a
fixed margin and an index;
o "Buy Down Assets," which are Assets for which funds have been
provided by someone other than the related borrowers to reduce
the borrowers' monthly payments during the early period after
origination of those Assets;
o "Increasing Payment Assets," as described below;
o "Interest Reduction Assets," which provide for the one-time
reduction of the interest rate payable thereon;
o "GEM Assets," which provide for (1) monthly payments during the
first year after origination that are at least sufficient to pay
interest due thereon, and (2) an increase in those monthly
payments in later years at a predetermined rate resulting in full
repayment over a shorter term than the initial amortization terms
of those Assets;
o "GPM Assets," which allow for payments during a portion of their
terms which are or may be less than the amount of interest due on
their unpaid principal balances, and this unpaid interest will be
added to the principal balances of those Assets and will be paid,
together with interest on the unpaid interest, in later years;
o "Step-up Rate Assets" which provide for interest rates that
increase over time;
o "Balloon Payment Assets;"
o "Convertible Assets" which are Adjustable Rate Assets subject to
provisions pursuant to which, subject to certain limitations, the
related borrowers may exercise an option to convert the
adjustable interest rate to a fixed interest rate; and
o "Bi-weekly Assets," which provide for payments to be made by
borrowers on a bi-weekly basis.
An "Increasing Payment Asset" is an Asset that provides for monthly
payments that are fixed for an initial period to be specified in the prospectus
supplement and which increase thereafter (at a predetermined rate expressed as
a percentage of the monthly payment during the preceding payment period,
subject to any caps on the amount of any single monthly payment increase) for a
period to be specified in the prospectus supplement from the date of
origination, after which the monthly payment is fixed at a level-payment amount
so as to fully amortize the Asset over its remaining term to maturity. The
scheduled monthly payment for an Increasing Payment Asset is the total amount
required to be paid each month in accordance with its terms and equals the sum
of (1) the borrower's monthly payments referred to in the preceding sentence
and (2) payments made by the respective servicers pursuant to buy-down or
subsidy agreements. The borrower's initial monthly payments for each Increasing
Payment Asset are set at the level-payment amount that would apply to an
otherwise identical Level Payment Asset having an interest rate a certain
number of percentage points below the Asset Rate of that Increasing Payment
Asset. The borrower's monthly payments on each Increasing Payment Asset,
together with any payments made thereon by the related servicers pursuant to
buy-down or subsidy agreements, will in all cases be sufficient to allow
payment of accrued interest on the Increasing Payment Asset at the related
interest rate, without negative amortization. A borrower's monthly payments on
an Increasing Payment Asset may, however, not be sufficient to result in any
reduction of the principal balance of that Asset until after the period when
those payments may be increased.
The Securities (as defined herein) will be entitled to payment only
from the assets of the related trust fund and will not be entitled to payments
from the assets of any other trust fund established by the depositor. The
assets of a trust fund may consist of certificates representing beneficial
ownership interests in, or indebtedness of, another trust fund that contains
the Assets, if specified in the prospectus supplement.
Mortgage Loans
General
Each mortgage loan will generally be secured by a lien on a one- to
four-family residential property (including a manufactured home) or a security
interest in shares issued by a cooperative housing corporation (a "Single
Family Property"). Single Family Properties are sometimes referred to herein as
"Mortgaged Properties." The mortgage loans will be secured by first and/or
junior mortgages or deeds of trust or other similar security instruments
creating a first or junior lien on Mortgaged Property.
The Mortgaged Properties may also include:
o Apartments owned by cooperative housing corporations
("Cooperatives"); and
o Leasehold interests in properties, the title to which is held by
third party lessors. The term of these leaseholds will exceed the
term of the related mortgage note by at least five years or some
other time period specified in the prospectus supplement.
The mortgage loans may include:
o Closed-end and/or revolving home equity loans or certain balances
thereof ("Home Equity Loans"); and
o Mortgage loans evidenced by contracts ("Land Sale Contracts") for
the sale of properties pursuant to which the borrower promises to
pay the amount due thereon to the holder thereof with fee title
to the related property held by that holder until the borrower
has made all of the payments required pursuant to that Land Sale
Contract, at which time fee title is conveyed to the borrower.
The originator of each mortgage loan will have been a person other
than the depositor. The prospectus supplement will indicate if any originator
is an affiliate of the depositor. The mortgage loans will be evidenced by
mortgage notes secured by mortgages, deeds of trust or other security
instruments (the "Mortgages") creating a lien on the Mortgaged Properties. The
Mortgaged Properties will be located in any one of the fifty states, the
District of Columbia, Guam, Puerto Rico or any other territory of the United
States. If provided in the prospectus supplement, the mortgage loans may
include loans insured by the Federal Housing Administration (the "FHA") or
partially guaranteed by the Veteran's Administration (the "VA"). See "--FHA
Loans and VA Loans" below.
Loan-to-Value Ratio
The "Loan-to-Value Ratio" of a mortgage loan at any particular time is
the ratio (expressed as a percentage) of the then outstanding principal balance
of the mortgage loan to the Value of the related Mortgaged Property. The
"Value" of a Mortgaged Property, other than for Refinance Loans, is generally
the lesser of (a) the appraised value determined in an appraisal obtained by
the originator at origination of that loan and (b) the sales price for that
property. "Refinance Loans" are loans made to refinance existing loans. Unless
otherwise specified in the prospectus supplement, the Value of the Mortgaged
Property securing a Refinance Loan is the appraised value thereof determined in
an appraisal obtained at the time of origination of the Refinance Loan. The
value of a Mortgaged Property as of the date of initial issuance of the related
series may be less than the Value at origination and will fluctuate from time
to time based upon changes in economic conditions and the real estate market.
Mortgage Loan Information in the Prospectus Supplements
Your prospectus supplement will contain information, as of the dates
specified in that prospectus supplement and to the extent then applicable and
specifically known to the depositor, with respect to the mortgage loans,
including:
o the total outstanding principal balance and the largest, smallest
and average outstanding principal balance of the mortgage loans
as of, unless otherwise specified in that prospectus supplement,
the close of business on the first day of the month of formation
of the related trust fund (the "Cut-off Date");
o the type of property securing the mortgage loans;
o the weighted average (by principal balance) of the original and
remaining terms to maturity of the mortgage loans;
o the range of maturity dates of the mortgage loans;
o the range of the Loan-to-Value Ratios at origination of the
mortgage loans;
o the mortgage rates or range of mortgage rates and the weighted
average mortgage rate borne by the mortgage loans;
o the state or states in which most of the Mortgaged Properties are
located;
o information regarding the prepayment provisions, if any, of the
mortgage loans;
o for mortgage loans with adjustable mortgage rates ("ARM Loans"),
the index, the frequency of the adjustment dates, the range of
margins added to the index, and the maximum mortgage rate or
monthly payment variation at the time of any adjustment thereof
and over the life of the ARM Loan;
o information regarding the payment characteristics of the mortgage
loans, including balloon payment and other amortization
provisions;
o the number of mortgage loans that are delinquent and the number
of days or ranges of the number of days those mortgage loans are
delinquent; and
o the material underwriting standards used for the mortgage loans.
If specific information respecting the mortgage loans is unknown to
the depositor at the time the Securities are initially offered, more general
information of the nature described above will be provided in the prospectus
supplement, and specific information will be set forth in a report that will be
available to purchasers of the related Securities at or before the initial
issuance thereof and will be filed as part of a Current Report on Form 8-K with
the Securities and Exchange Commission (the "Commission") within fifteen days
after that initial issuance. The characteristics of the mortgage loans included
in a trust fund will not vary by more than five percent (by total principal
balance as of the Cut-off Date) from the characteristics thereof that are
described in the prospectus supplement.
The prospectus supplement will specify whether the mortgage loans
include Home Equity Loans, which may be secured by Mortgages that are junior to
other liens on the related Mortgaged Property. In addition, the prospectus
supplement will specify whether the mortgage loans contain some mortgage loans
evidenced by Land Sale Contracts.
Payment Provisions of the Mortgage Loans
All of the mortgage loans will provide for payments of principal,
interest or both, on due dates that occur monthly, quarterly or semi-annually
or at some other interval as is specified in the prospectus supplement or for
payments in another manner described in the prospectus supplement. Each
mortgage loan may provide for no accrual of interest or for accrual of interest
thereon at a mortgage rate that is fixed over its term or that adjusts from
time to time, or that may be converted from an adjustable to a fixed mortgage
rate or a different adjustable mortgage rate, or from a fixed to an adjustable
mortgage rate, from time to time pursuant to an election or as otherwise
specified in the related mortgage note, in each case as described in the
prospectus supplement. Each mortgage loan may provide for scheduled payments to
maturity or payments that adjust from time to time to accommodate changes in
the mortgage rate or to reflect the occurrence of certain events or that adjust
on the basis of other methodologies, and may provide for negative amortization
or accelerated amortization, in each case as described in the prospectus
supplement. Each mortgage loan may be fully amortizing or require a balloon
payment due on its stated maturity date, in each case as described in the
prospectus supplement. Each mortgage loan may contain prohibitions on
prepayment (a "Lock-out Period" and, the date of expiration thereof, a
"Lock-out Date") or require payment of a premium or a yield maintenance penalty
(a "Prepayment Premium") in connection with a prepayment, in each case as
described in the prospectus supplement. If the holders of any class or classes
of Offered Securities are entitled to all or a portion of any Prepayment
Premiums collected from the mortgage loans, the prospectus supplement will
specify the method or methods by which any of these amounts will be allocated.
See "--Assets" above.
Revolving Credit Line Loans
As more fully described in the prospectus supplement, the mortgage
loans may consist, in whole or in part, of revolving Home Equity Loans or
certain balances thereof ("Revolving Credit Line Loans"). Interest on each
Revolving Credit Line Loan, excluding introductory rates offered from time to
time during promotional periods, may be computed and payable monthly on the
average daily outstanding principal balance of that loan. From time to time
before the expiration of the related draw period specified in a Revolving
Credit Line Loan, principal amounts on that Revolving Credit Line Loan may be
drawn down (up to a maximum amount as set forth in the prospectus supplement)
or repaid. If specified in the prospectus supplement, new draws by borrowers
under the Revolving Credit Line Loans will automatically become part of the
trust fund described in the prospectus supplement. As a result, the total
balance of the Revolving Credit Line Loans will fluctuate from day to day as
new draws by borrowers are added to the trust fund and principal payments are
applied to those balances and those amounts will usually differ each day, as
more specifically described in the prospectus supplement. Under some
circumstances, under a Revolving Credit Line Loan, a borrower may, during the
related draw period, choose an interest only payment option, during which the
borrower is obligated to pay only the amount of interest that accrues on the
loan during the billing cycle, and may also elect to pay all or a portion of
the principal. An interest only payment option may terminate at the end of the
related draw period, after which the borrower must begin paying at least a
minimum monthly portion of the average outstanding principal balance of the
loan.
Agency Securities
The Agency Securities will consist of any combination of Ginnie Mae
certificates, Fannie Mae certificates and Freddie Mac certificates, which may
include Stripped Agency Securities, as described below.
Ginnie Mae
Ginnie Mae is a wholly-owned corporate instrumentality of the United
States within the Department of Housing and Urban Development. Section 306(g)
of Title III of the Housing Act authorizes Ginnie Mae to guarantee the timely
payment of the principal of and interest on certificates that are based on and
backed by a pool of FHA loans, VA loans or by pools of other eligible
residential 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 that may
be required to be paid under any guaranty under this subsection." To meet its
obligations under that guaranty, Ginnie Mae is authorized, under Section 306(d)
of the National Housing Act of 1934 (the "Housing Act"), to borrow from the
United States Treasury with no limitations as to amount, to perform its
obligations under its guarantee.
Ginnie Mae Certificates
Each Ginnie Mae certificate will be a "fully modified pass-through"
mortgage-backed certificate issued and serviced by an issuer approved by Ginnie
Mae or Fannie Mae as a seller-servicer of FHA loans or VA loans, except as
described below regarding Stripped Agency Securities (as defined below). The
loans underlying Ginnie Mae certificates may consist of FHA loans, VA loans and
other loans eligible for inclusion in loan pools underlying Ginnie Mae
certificates. Ginnie Mae certificates may be issued under either or both of the
Ginnie Mae I program and the Ginnie Mae II program, as described in the
prospectus supplement. If the trust fund includes Ginnie Mae certificates, your
prospectus supplement will include any material additional information
regarding the Ginnie Mae guaranty program, the characteristics of the pool
underlying those Ginnie Mae certificates, the servicing of the related pool,
the payment of principal and interest on Ginnie Mae certificates and other
relevant matters regarding the Ginnie Mae certificates.
Except as otherwise specified in the prospectus supplement or as
described below with respect to Stripped Agency Securities, each Ginnie Mae
certificate will provide for the payment, by or on behalf of the issuer, to the
registered holder of that Ginnie Mae certificate of monthly payments of
principal and interest equal to the holder's proportionate interest in the
total amount of the monthly principal and interest payments on each related FHA
loan or VA loan, minus servicing and guaranty fees totaling the excess of the
interest on that FHA loan or VA loan over the Ginnie Mae certificates' interest
rate. In addition, each payment to a holder of a Ginnie Mae certificate will
include proportionate pass-through payments to that holder of any prepayments
of principal of the FHA loans or VA loans underlying the Ginnie Mae certificate
and the holder's proportionate interest in the remaining principal balance in
the event of a foreclosure or other disposition of any related FHA loan or VA
loan.
The Ginnie Mae certificates do not constitute a liability of, or
evidence any recourse against, the issuer of the Ginnie Mae certificates, the
depositor or any affiliates thereof, and the only recourse of a registered
holder (for example, the trustee) is to enforce the guaranty of Ginnie Mae.
Ginnie Mae will have approved the issuance of each of the Ginnie Mae
certificates included in a trust fund in accordance with a guaranty agreement
or contract between Ginnie Mae and the issuer of the Ginnie Mae certificates.
Pursuant to that agreement, that issuer, in its capacity as servicer, is
required to perform customary functions of a servicer of FHA loans and VA
loans, including collecting payments from borrowers and remitting those
collections to the registered holder, maintaining escrow and impoundment
accounts of borrowers for payments of taxes, insurance and other items required
to be paid by the borrower, maintaining primary hazard insurance, and advancing
from its own funds to make timely payments of all amounts due on the Ginnie Mae
certificate, even if the payments received by that issuer on the loans backing
the Ginnie Mae certificate are less than the amounts due thereon. If the issuer
is unable to make payments on a Ginnie Mae certificate as they become due, it
must promptly notify Ginnie Mae and request Ginnie Mae to make that payment.
Upon that notification and request, Ginnie Mae will make those payments
directly to the registered holder of the Ginnie Mae certificate. In the event
no payment is made by the issuer and the issuer fails to notify and request
Ginnie Mae to make that payment, the registered holder of the Ginnie Mae
certificate has recourse against only Ginnie Mae to obtain that payment. The
trustee or its nominee, as registered holder of the Ginnie Mae certificates
included in a trust fund, is entitled to proceed directly against Ginnie Mae
under the terms of the guaranty agreement or contract relating to the Ginnie
Mae certificates for any amounts that are unpaid when due under each Ginnie Mae
certificate.
The Ginnie Mae certificates included in a trust fund may have other
characteristics and terms, different from those described above so long as the
Ginnie Mae certificates and underlying residential loans meet the criteria of
the rating agency or agencies. The Ginnie Mae certificates and underlying
residential loans will be described in the prospectus supplement.
Fannie Mae
Fannie Mae is a federally chartered and stockholder-owned corporation
organized and existing under the Federal National Mortgage Association Charter
Act, as amended (the "Charter Act"). Fannie Mae was originally established in
1938 as a United States government agency to provide supplemental liquidity to
the mortgage market and was transformed into a stockholder-owned and privately
managed corporation by legislation enacted in 1968.
Fannie Mae provides funds to the mortgage market by purchasing
mortgage loans from lenders. Fannie Mae acquires funds to purchase loans from
many capital market investors, thereby expanding the total amount of funds
available for housing. Operating nationwide, Fannie Mae helps to redistribute
mortgage funds from capital-surplus to capital-short areas. In addition, Fannie
Mae issues mortgage-backed securities primarily in exchange for pools of
mortgage loans from lenders. Fannie Mae receives fees for its guaranty of
timely payment of principal and interest on its mortgage-backed securities.
Fannie Mae Certificates
Fannie Mae certificates are Guaranteed Mortgage Pass-Through
Certificates typically issued pursuant to a prospectus that is periodically
revised by Fannie Mae. Fannie Mae certificates represent fractional undivided
interests in a pool of mortgage loans formed by Fannie Mae. Each mortgage loan
must meet the applicable standards of the Fannie Mae purchase program. Mortgage
loans comprising a pool are either provided by Fannie Mae from its own
portfolio or purchased pursuant to the criteria of the Fannie Mae purchase
program. Mortgage loans underlying Fannie Mae certificates included in a trust
fund will consist of conventional mortgage loans, FHA loans or VA loans. If the
trust fund includes Fannie Mae certificates, your prospectus supplement will
include any material additional information regarding the Fannie Mae program,
the characteristics of the pool underlying the Fannie Mae certificates, the
servicing of the related pool, payment of principal and interest on the Fannie
Mae certificates and other relevant matters about the Fannie Mae certificates.
Except as described below with respect to Stripped Agency Securities,
Fannie Mae guarantees to each registered holder of a Fannie Mae certificate
that it will distribute amounts representing that holder's proportionate share
of scheduled principal and interest at the applicable interest rate provided
for by that Fannie Mae certificate on the underlying mortgage loans, whether or
not received, and that holder's proportionate share of the full principal
amount of any prepayment or foreclosed or other finally liquidated mortgage
loan, whether or not the related principal amount is actually recovered.
The obligations of Fannie Mae under its guarantees are obligations
solely of Fannie Mae and are not backed by, nor entitled to, the full faith and
credit of the United States. If Fannie Mae were unable to satisfy those
obligations, distributions to the holders of Fannie Mae certificates would
consist solely of payments and other recoveries on the underlying loans and,
accordingly, monthly distributions to the holders of Fannie Mae certificates
would be affected by delinquent payments and defaults on those loans.
Fannie Mae certificates evidencing interests in pools of mortgage
loans formed on or after May 1, 1985 (other than Fannie Mae certificates backed
by pools containing graduated payment mortgage loans or multifamily loans) are
available in book-entry form only. For a Fannie Mae certificate issued in
book-entry form, distributions thereon will be made by wire, and for a fully
registered Fannie Mae certificate, distributions thereon will be made by check.
The Fannie Mae certificates included in a trust fund may have other
characteristics and terms, different from those described above, as long as the
Fannie Mae certificates and underlying mortgage loans meet the criteria of the
rating agency or agencies rating the Certificates. The Fannie Mae certificates
and underlying mortgage loans will be described in the prospectus supplement.
Freddie Mac
Freddie Mac is a corporate instrumentality of the United States
created pursuant to Title III of the Emergency Home Finance Act of 1970, as
amended (the "Freddie Mac Act"). Freddie Mac was established primarily for the
purpose of increasing the availability of mortgage credit for the financing of
needed housing. It seeks to provide an enhanced degree of liquidity for
residential mortgage investments primarily by assisting in the development of
secondary markets for conventional mortgages. The principal activity of Freddie
Mac currently consists of the purchase of first lien, conventional residential
mortgage loans or participation interests in those mortgage loans and the
resale of the mortgage loans so purchased in the form of mortgage securities,
primarily Freddie Mac certificates. Freddie Mac is confined to purchasing, so
far as practicable, mortgage loans and participation interests therein which it
deems to be of the quality, type and class as to meet generally the purchase
standards imposed by private institutional mortgage investors.
Freddie Mac Certificates
Each Freddie Mac certificate represents an undivided interest in a
pool of residential loans that may consist of first lien conventional
residential loans, FHA loans or VA loans (the "Freddie Mac Certificate Group").
Each of these mortgage loans must meet the applicable standards set forth in
the Freddie Mac Act. A Freddie Mac Certificate Group may include whole loans,
participation interests in whole loans and undivided interests in whole loans
and/or participations comprising another Freddie Mac Certificate Group. If the
trust fund includes Freddie Mac certificates, your prospectus supplement will
include any material additional information regarding the Freddie Mac guaranty
program, the characteristics of the pool underlying that Freddie Mac
certificate, the servicing of the related pool, payment of principal and
interest on the Freddie Mac certificate and any other relevant matters about
the Freddie Mac certificates.
Except as described below with respect to Stripped Agency Securities,
Freddie Mac guarantees to each registered holder of a Freddie Mac certificate
the timely payment of interest on the underlying mortgage loans to the extent
of the applicable interest rate on the registered holder's pro rata share of
the unpaid principal balance outstanding on the underlying mortgage loans in
the Freddie Mac Certificate Group represented by that Freddie Mac certificate,
whether or not received. Freddie Mac also guarantees to each registered holder
of a Freddie Mac certificate collection by that holder of all principal on the
underlying mortgage loans, without any offset or deduction, to the extent of
that holder's pro rata share thereof, but does not, except if and to the extent
specified in the prospectus supplement, guarantee the timely payment of
scheduled principal. Pursuant to its guarantees, Freddie Mac also guarantees
ultimate collection of scheduled principal payments, prepayments of principal
and the remaining principal balance in the event of a foreclosure or other
disposition of a mortgage loan. Freddie Mac may remit the amount due on account
of its guarantee of collection of principal at any time after default on an
underlying mortgage loan, but not later than 30 days following the latest of
(1) foreclosure sale;
(2) payment of the claim by any mortgage insurer; and
(3) the expiration of any right of redemption, but in any
event no later than one year after demand has been made upon the
borrower for accelerated payment of principal.
In taking actions regarding the collection of principal after default on the
mortgage loans underlying Freddie Mac certificates, including the timing of
demand for acceleration, Freddie Mac reserves the right to exercise its
servicing judgment for the mortgage loans in the same manner as for mortgage
loans that it has purchased but not sold. The length of time necessary for
Freddie Mac to determine that a mortgage loan should be accelerated varies with
the particular circumstances of each borrower, and Freddie Mac has not adopted
servicing standards that require that the demand be made within any specified
period.
Freddie Mac certificates are not guaranteed by the United States or by
any Federal Home Loan Bank and do not constitute debts or obligations of the
United States or any Federal Home Loan Bank. The obligations of Freddie Mac
under its guarantee are obligations solely of Freddie Mac and are not backed
by, nor entitled to, the full faith and credit of the United States. If Freddie
Mac were unable to satisfy those obligations, distributions to holders of
Freddie Mac certificates would consist solely of payments and other recoveries
on the underlying mortgage loans and, accordingly, monthly distributions to
holders of Freddie Mac certificates would be affected by delinquent payments
and defaults on those mortgage loans.
The Freddie Mac certificates included in a trust fund may have other
characteristics and terms, different from those described above, so long as the
Freddie Mac certificates and underlying mortgage loans meet the criteria of the
rating agency or agencies rating the Securities. The Freddie Mac certificates
and underlying mortgage loans will be described in the prospectus supplement.
Stripped Agency Securities
The Ginnie Mae certificates, Fannie Mae certificates or Freddie Mac
certificates may be issued in the form of certificates ("Stripped Agency
Securities") that represent an undivided interest in all or part of either the
principal distributions (but not the interest distributions) or the interest
distributions (but not the principal distributions), or in some specified
portion of the principal or interest distributions (but not all of those
distributions), on an underlying pool of mortgage loans or certain other Ginnie
Mae certificates, Fannie Mae certificates or Freddie Mac certificates. Ginnie
Mae, Fannie Mae or Freddie Mac, as applicable, will guarantee each Stripped
Agency Security to the same extent as that entity guarantees the underlying
securities backing the Stripped Agency Securities or to the extent described
above for a Stripped Agency Security backed by a pool of mortgage loans, unless
otherwise specified in the prospectus supplement. If the trust fund includes
Stripped Agency Securities, your prospectus supplement will include any
material additional information regarding the characteristics of the assets
underlying the Stripped Agency Securities, the payments of principal and
interest on the Stripped Agency Securities and other relevant matters about the
Stripped Agency Securities.
Mortgage Securities
The Mortgage Securities will represent beneficial interests in loans
of the type that would otherwise be eligible to be mortgage loans or Agency
Securities, or collateralized obligations secured by mortgage loans or Agency
Securities. The Mortgage Securities will have been
(1) issued by an entity other than the depositor or its
affiliates;
(2) acquired in bona fide secondary market transactions from
persons other than the issuer thereof or its affiliates; and
(3) (a) offered and distributed to the public pursuant to an
effective registration statement or (b) purchased in a transaction not
involving any public offering from a person who is not an affiliate of
the issuer of those securities at the time of sale (nor an affiliate
thereof at any time during the preceding three months); provided a
period of two years elapsed since the later of the date the securities
were acquired from the issuer.
Although individual Underlying Loans may be insured or guaranteed by
the United States or an agency or instrumentality thereof, they need not be,
and Mortgage Securities themselves will not be so insured or guaranteed. Except
as otherwise set forth in the prospectus supplement, Mortgage Securities will
generally be similar to Securities offered hereunder.
The prospectus supplement for Securities of each series evidencing
interests in a trust fund including Mortgage Securities will include a
description of the Mortgage Securities and any related credit enhancement, and
the related mortgage loans or Agency Securities will be described together with
any other mortgage loans or Agency Securities included in the trust fund of
that series. As used in this prospectus, the terms "mortgage loans" include the
mortgage loans underlying the Mortgage Securities in your trust fund.
References in this prospectus to advances to be made and other actions to be
taken by the master servicer in connection with the Assets may include any
advances made and other actions taken pursuant to the terms of the applicable
Mortgage Securities.
FHA Loans and VA Loans
FHA loans will be insured by the FHA as authorized under the Housing
Act, and the United States Housing Act of 1937, as amended. One- to four-family
FHA loans will be insured under various FHA programs including the standard FHA
203-b programs to finance the acquisition of one- to four-family housing units
and the FHA 245 graduated payment mortgage program. The FHA loans generally
require a minimum down payment of approximately 5% of the original principal
amount of the FHA loan. No FHA loan may have an interest rate or original
principal balance exceeding the applicable FHA limits at the time of
origination of that FHA loan.
Mortgage loans that are FHA loans are insured by the FHA (as described
in the prospectus supplement, up to an amount equal to 90% of the sum of the
unpaid principal of the FHA loan, a portion of the unpaid interest and certain
other liquidation costs) pursuant to Title I of the Housing Act.
VA loans will be partially guaranteed by the VA under the Servicemen's
Readjustment Act of 1944, as amended (the "Servicemen's Readjustment Act"). The
Servicemen's Readjustment Act permits a veteran (or in some instances the
spouse of a veteran) to obtain a mortgage loan guarantee by the VA covering
mortgage financing of the purchase of a one- to four-family dwelling unit at
interest rates permitted by the VA. The program has no mortgage loan limits,
requires no down payment from the purchasers and permits the guarantee of
mortgage loans of up to 30 years' duration. However, no VA loan will have an
original principal amount greater than five times the partial VA guarantee for
that VA loan. The maximum guarantee that may be issued by the VA under this
program will be set forth in the prospectus supplement.
Pre-Funding Accounts
To the extent provided in a prospectus supplement, a portion of the
proceeds of the issuance of Securities may be deposited into an account
maintained with the trustee (a "Pre-Funding Account"). In that case, the
depositor will be obligated to sell at a predetermined price - and the trust
fund for the related series of Securities will be obligated to purchase -
additional Assets (the "Subsequent Assets") from time to time, and as
frequently as daily, within the period (not to exceed three months) specified
in the prospectus supplement (the "Pre-Funding Period") after the issuance of
the Securities having a total principal balance approximately equal to the
amount on deposit in the Pre-Funding Account (the "Pre-Funded Amount") for that
series on the date of its issuance. The Pre-Funded Amount for a series will be
specified in the prospectus supplement, and will not in any case exceed 50% of
the total initial Security Balance of the related Securities. Any Subsequent
Assets will be required to satisfy certain eligibility criteria more fully set
forth in the prospectus supplement, which criteria will be consistent with the
eligibility criteria of the Assets initially included in the trust fund,
subject to those exceptions that are expressly stated in the prospectus
supplement. In addition, certain conditions must be satisfied before the
Subsequent Assets are transferred into the trust fund, for example, the
delivery to the rating agencies and to the trustee of any required opinions of
counsel. See "ERISA Considerations--Pre-Funding Accounts" for additional
information regarding Pre-Funding Accounts.
Except as set forth in the following sentence, the Pre-Funded Amount
will be used only to purchase Subsequent Assets. Any portion of the Pre-Funded
Amount remaining in the Pre-Funding Account at the end of the Pre-Funding
Period will be used to prepay one or more classes of Securities in the amounts
and in the manner specified in the prospectus supplement. In addition, if
specified in the prospectus supplement, the depositor may be required to
deposit cash into an account maintained by the trustee (the "Capitalized
Interest Account") for the purpose of assuring the availability of funds to pay
interest on the Securities during the Pre-Funding Period. Any amount remaining
in the Capitalized Interest Account at the end of the Pre-Funding Period will
be remitted as specified in the prospectus supplement.
Amounts deposited in the Pre-Funding and Capitalized Interest Accounts
will be permitted to be invested, pending application thereof, only in eligible
investments authorized by each applicable rating agency.
Accounts
Each trust fund will include one or more accounts, established and
maintained on behalf of the securityholders into which the person or persons
designated in the prospectus supplement will, to the extent described herein
and in the prospectus supplement deposit all payments and collections received
or advanced with respect to the Assets and other assets in the trust fund. This
type of account may be maintained as an interest bearing or a non-interest
bearing account, and funds held in that account may be held as cash or invested
in certain short-term, investment grade obligations, in each case as described
in the prospectus supplement. See "Description of the Agreements--Material
Terms of the Pooling and Servicing Agreements and Underlying Servicing
Agreements--Collection Account and Related Accounts."
Credit Support
If so provided in the prospectus supplement, partial or full
protection against certain defaults and losses on the Assets in the related
trust fund may be provided to one or more classes of Securities in the related
series in the form of subordination of one or more other classes of Securities
in that series or by one or more other types of credit support, for example, a
letter of credit, insurance policy, guarantee, reserve fund or another type of
credit support, or a combination thereof (any of these types of coverage for
the Securities of any series, is referred to generally as "credit support").
The amount and types of coverage, the identification of the entity providing
the coverage (if applicable) and related information for each type of credit
support, if any, will be described in the prospectus supplement for a series of
Securities. See "Description of Credit Support."
Cash Flow Agreements
If so provided in the prospectus supplement, the trust fund may
include guaranteed investment contracts pursuant to which moneys held in the
funds and accounts established for the related series will be invested at a
specified rate. The trust fund may also include certain other agreements, for
example, interest rate swap agreements, interest rate cap or floor agreements,
currency swap agreements or similar agreements provided to reduce the effects
of interest rate or currency exchange rate fluctuations on the Assets or on one
or more classes of Securities. (Currency swap agreements might be included in
the trust fund if some or all of the Assets were denominated in a non-United
States currency.) The principal terms of any related guaranteed investment
contract or other agreement (any of these types of agreement, a "Cash Flow
Agreement"), including provisions relating to the timing, manner and amount of
payments thereunder and provisions relating to the termination thereof, will be
described in the prospectus supplement for the related series. In addition, the
prospectus supplement will provide certain information with respect to the
borrower under any Cash Flow Agreement.
Use of Proceeds
The net proceeds to be received from the sale of the Securities will
be applied by the depositor to the purchase of Assets, or the repayment of the
financing incurred in that purchase, and to pay for certain expenses incurred
in connection with that purchase of Assets and sale of Securities. The
depositor expects to sell the Securities from time to time, but the timing and
amount of offerings of Securities will depend on a number of factors, including
the volume of Assets acquired by the depositor, prevailing interest rates,
availability of funds and general market conditions.
Yield Considerations
General
The yield on any Offered Security will depend on the price paid by the
securityholder, the Interest Rate of the Security, the receipt and timing of
receipt of distributions on the Security and the weighted average life of the
Assets in the related trust fund (which may be affected by prepayments,
defaults, liquidations or repurchases).
Interest Rate
Securities of any class within a series may have fixed, variable or
adjustable Interest Rates, which may or may not be based upon the interest
rates borne by the Assets in the related trust fund. The prospectus supplement
for any series will specify the Interest Rate for each class of Securities or,
in the case of a variable or adjustable Interest Rate, the method of
determining the Interest Rate; the effect, if any, of the prepayment of any
Asset on the Interest Rate of one or more classes of Securities; and whether
the distributions of interest on the Securities of any class will be dependent,
in whole or in part, on the performance of any borrower under a Cash Flow
Agreement.
If specified in the prospectus supplement, the effective yield to
maturity to each holder of Securities entitled to payments of interest will be
below that otherwise produced by the applicable Interest Rate and purchase
price of that Security because, while interest may accrue on each Asset during
a certain period (each, an "Accrual Period"), the distribution of that interest
will be made on a day that may be several days, weeks or months following the
period of accrual.
Timing of Payment of Interest
Each payment of interest on the Securities entitled to distributions
of interest (or addition to the Security Balance of a class of Accrual
Securities) will be made by or on behalf of the trustee each month on the date
specified in the related prospectus supplement (each date, a "Distribution
Date"), and will include interest accrued during the Accrual Period for that
Distribution Date. As indicated above under "--Interest Rate," if the Accrual
Period ends on a date other than the day before a Distribution Date for the
related series, the yield realized by the holders of those Securities may be
lower than the yield that would result if the Accrual Period ended on the day
before the Distribution Date.
Payments of Principal; Prepayments
The yield to maturity on the Securities will be affected by the rate
of principal payments on the Assets (or, in the case of Mortgage Securities and
Agency Securities, the underlying assets related thereto), including principal
prepayments resulting from both voluntary prepayments by the borrowers and
involuntary liquidations. The rate at which principal prepayments occur will be
affected by a variety of factors, including the terms of the Assets (or, in the
case of Mortgage Securities and Agency Securities, the underlying assets
related thereto), the level of prevailing interest rates, the availability of
mortgage credit and economic, demographic, geographic, tax, legal and other
factors.
In general, however, if prevailing interest rates fall significantly
below the interest rates on the Assets in a particular trust fund (or, in the
case of Mortgage Securities and Agency Securities, the underlying assets
related thereto), those assets are likely to be the subject of higher principal
prepayments than if prevailing rates remain at or above the rates borne by
those assets. However, you should note that some Assets (or, in the case of
Mortgage Securities and Agency Securities, the underlying assets related
thereto) may consist of loans with different interest rates. The rate of
principal payment on Mortgage Securities will also be affected by the
allocation of principal payments on the underlying assets among the Mortgage
Securities or Agency Securities and other Mortgage Securities or Agency
Securities of the same series. The rate of principal payments on the Assets in
the related trust fund (or, in the case of Mortgage Securities and Agency
Securities, the underlying assets related thereto) is likely to be affected by
the existence of any Lock-out Periods and Prepayment Premium provisions of the
mortgage loans underlying or comprising those Assets, and by the extent to
which the servicer of any of these mortgage loans is able to enforce these
provisions. Mortgage loans with a Lock-out Period or a Prepayment Premium
provision, to the extent enforceable, generally would be expected to experience
a lower rate of principal prepayments than otherwise identical mortgage loans
without those provisions, with shorter Lock-out Periods or with lower
Prepayment Premiums.
If the purchaser of a Security offered at a discount calculates its
anticipated yield to maturity based on an assumed rate of distributions of
principal that is faster than that actually experienced on the Assets (or, in
the case of Mortgage Securities and Agency Securities, the underlying assets
related thereto), the actual yield to maturity will be lower than that so
calculated. Conversely, if the purchaser of a Security offered at a premium
calculates its anticipated yield to maturity based on an assumed rate of
distributions of principal that is slower than that actually experienced on the
Assets (or, in the case of Mortgage Securities and Agency Securities, the
underlying assets related thereto), the actual yield to maturity will be lower
than that so calculated. In either case, if so provided in the prospectus
supplement for a series of Securities, the effect on yield on one or more
classes of the Securities of that series of prepayments of the Assets in the
related trust fund may be mitigated or exacerbated by any provisions for
sequential or selective distribution of principal to those classes.
When a full prepayment is made on a mortgage loan, the borrower is
charged interest on the principal amount of the mortgage loan so prepaid for
the number of days in the month actually elapsed up to the date of the
prepayment or some other period specified in the prospectus supplement.
Generally, the effect of prepayments in full will be to reduce the amount of
interest paid in the following month to holders of Securities entitled to
payments of interest because interest on the principal amount of any mortgage
loan so prepaid will be paid only to the date of prepayment rather than for a
full month. A partial prepayment of principal is applied so as to reduce the
outstanding principal balance of the related mortgage loan as of its due date
in the month in which the partial prepayment is received or some other date as
is specified in the prospectus supplement.
The timing of changes in the rate of principal payments on the Assets
(or, in the case of Mortgage Securities and Agency Securities, the underlying
assets related thereto) may significantly affect an investor's actual yield to
maturity, even if the average rate of distributions of principal is consistent
with an investor's expectation. In general, the earlier a principal payment is
received on the mortgage loans and distributed on a Security, the greater the
effect on that investor's yield to maturity. The effect on an investor's yield
of principal payments occurring at a rate higher (or lower) than the rate
anticipated by the investor during a particular period may not be offset by a
similar decrease (or increase) in the rate of principal payments at a later
time.
The securityholder will bear the risk of not being able to reinvest
principal received from a Security at a yield at least equal to the yield on
that Security.
Prepayments--Maturity and Weighted Average Life
The rates at which principal payments are received on the Assets
included in or comprising a trust fund and the rate at which payments are made
from any credit support or Cash Flow Agreement for the related series of
Securities may affect the ultimate maturity and the weighted average life of
each class of that series. Prepayments on the mortgage loans comprising or
underlying the Assets in a particular trust fund will generally accelerate the
rate at which principal is paid on some or all of the classes of the Securities
of the related series.
If so provided in the prospectus supplement for a series of
Securities, one or more classes of Securities may have a final scheduled
Distribution Date, which is the date on or before which the Security Balance
thereof is scheduled to be reduced to zero, calculated on the basis of the
assumptions applicable to that series. Weighted average life refers to the
average amount of time that will elapse from the date of issue of a security
until each dollar of principal of that security will be repaid to the investor.
The weighted average life of a class of Securities of a series will be
influenced by the rate at which principal on the Assets is paid to that class,
which may be in the form of scheduled amortization or prepayments (for this
purpose, the term "prepayment" includes prepayments, in whole or in part, and
liquidations due to default).
In addition, the weighted average life of the Securities may be
affected by the varying maturities of the Assets in a trust fund. If any Assets
in a particular trust fund have actual terms to maturity less than those
assumed in calculating final scheduled Distribution Dates for the classes of
Securities of the related series, one or more classes of these Securities may
be fully paid before their respective final scheduled Distribution Dates, even
in the absence of prepayments. Accordingly, the prepayment experience of the
Assets will, to some extent, be a function of the mix of mortgage rates or
Contract Rates and maturities of the mortgage loans comprising or underlying
those Assets. See "Description of the Trust Funds."
Prepayments on loans are also commonly measured relative to a
prepayment standard or model, such as the Constant Prepayment Rate ("CPR")
prepayment model or the Standard Prepayment Assumption ("SPA") prepayment
model. CPR represents a constant assumed rate of prepayment each month relative
to the then outstanding principal balance of a pool of loans for the life of
those loans. SPA represents an assumed rate of prepayment each month relative
to the then outstanding principal balance of a pool of loans. A prepayment
assumption of 100% of SPA assumes prepayment rates of 0.2% per annum of the
then outstanding principal balance of those loans in the first month of the
life of the loans and an additional 0.2% per annum in each month thereafter
until the thirtieth month. Starting in the thirtieth month and in each month
thereafter during the life of the loans, 100% of SPA assumes a constant
prepayment rate of 6% per annum each month.
Neither CPR nor SPA nor any other prepayment model or assumption
purports to be a historical description of prepayment experience or a
prediction of the anticipated rate of prepayment of any pool of loans,
including the mortgage loans underlying or comprising the Assets.
The prospectus supplement for each series of Securities may contain
tables, if applicable, setting forth the projected weighted average life of
each class of Offered Securities of that series and the percentage of the
initial Security Balance of each class that would be outstanding on specified
Distribution Dates based on the assumptions stated in the prospectus
supplement, including assumptions that prepayments on the mortgage loans
comprising or underlying the related Assets are made at rates corresponding to
various percentages of CPR, SPA or some other standard specified in the
prospectus supplement. These tables and assumptions are intended to illustrate
the sensitivity of the weighted average life of the Securities to various
prepayment rates and will not be intended to predict or to provide information
that will enable investors to predict the actual weighted average life of the
Securities. It is unlikely that prepayment of any mortgage loans comprising or
underlying the Assets for any series will conform to any particular level of
CPR, SPA or any other rate specified in the prospectus supplement.
Other Factors Affecting Weighted Average Life
Type of Asset
If specified in the prospectus supplement, a number of mortgage loans
may have balloon payments due at maturity (which, based on the amortization
schedule of those mortgage loans, may be a substantial amount), and because the
ability of a borrower to make a balloon payment typically will depend on its
ability either to refinance the loan or to sell the related Mortgaged Property,
there is a risk that a number of Balloon Payment Assets may default at
maturity. The ability to obtain refinancing will depend on a number of factors
prevailing at the time refinancing or sale is required, including real estate
values, the borrower's financial situation, prevailing mortgage loan interest
rates, the borrower's equity in the related Mortgaged Property, tax laws and
prevailing general economic conditions. Neither the depositor, the servicer,
the master servicer, nor any of their affiliates will be obligated to refinance
or repurchase any mortgage loan or to sell the Mortgaged Property except to the
extent provided in the prospectus supplement. In the case of defaults, recovery
of proceeds may be delayed by, among other things, bankruptcy of the borrower
or adverse conditions in the market where the property is located. To minimize
losses on defaulted mortgage loans, the servicer may modify mortgage loans that
are in default or as to which a payment default is reasonably foreseeable. Any
defaulted balloon payment or modification that extends the maturity of a
mortgage loan will tend to extend the weighted average life of the Securities
and may thereby lengthen the period of time elapsed from the date of issuance
of a Security until it is retired.
For some mortgage loans, including ARM Loans, the mortgage rate at
origination may be below the rate that would result if the index and margin
relating thereto were applied at origination. Under the applicable underwriting
standards, the borrower under each mortgage loan generally will be qualified on
the basis of the mortgage rate in effect at origination. The repayment of any
of these mortgage loans may therefore be dependent on the ability of the
borrower to make larger level monthly payments following the adjustment of the
mortgage rate. In addition, some mortgage loans may be subject to temporary
buydown plans ("Buydown Mortgage Loans") pursuant to which the monthly payments
made by the borrower during the early years of the mortgage loan will be less
than the scheduled monthly payments thereon (the "Buydown Period"). The
periodic increase in the amount paid by the borrower of a Buydown Mortgage Loan
during or at the end of the applicable Buydown Period may create a greater
financial burden for the borrower, who might not have otherwise qualified for a
mortgage, and may accordingly increase the risk of default for the related
mortgage loan.
The mortgage rates on some ARM Loans subject to negative amortization
generally adjust monthly and their amortization schedules adjust less
frequently. During a period of rising interest rates as well as immediately
after origination (initial mortgage rates are generally lower than the sum of
the applicable index at origination and the related margin over that index at
which interest accrues), the amount of interest accruing on the principal
balance of those mortgage loans may exceed the amount of the minimum scheduled
monthly payment thereon. As a result, a portion of the accrued interest on
negatively amortizing mortgage loans may be added to the principal balance
thereof and will bear interest at the applicable mortgage rate. The addition of
any deferred interest to the principal balance of any related class or classes
of Securities will lengthen the weighted average life thereof and may adversely
affect yield to holders thereof, depending on the price at which those
Securities were purchased. In addition, for some ARM Loans subject to negative
amortization, during a period of declining interest rates, it might be expected
that each minimum scheduled monthly payment on this type of mortgage loan would
exceed the amount of scheduled principal and accrued interest on the principal
balance thereof, and since that excess will be applied to reduce the principal
balance of the related class or classes of Securities, the weighted average
life of those Securities will be reduced and may adversely affect yield to
holders thereof, depending on the price at which those Securities were
purchased.
As may be described in the prospectus supplement, the related
Agreement may provide that all or a portion of the principal collected on or
with respect to the related mortgage loans may be applied by the related
trustee to the acquisition of additional mortgage loans during a specified
period (rather than used to fund payments of principal to securityholders
during that period) with the result that the related Securities possess an
interest-only period, also commonly referred to as a revolving period, which
will be followed by an amortization period. Any of these interest-only or
revolving periods may, upon the occurrence of certain events to be described in
the prospectus supplement, terminate before the end of the specified period and
result in the earlier than expected amortization of the related Securities.
In addition, and as may be described in the prospectus supplement, the
related Agreement may provide that all or some of this collected principal may
be retained by the trustee (and held in certain temporary investments,
including mortgage loans) for a specified period before being used to fund
payments of principal to securityholders.
The result of the retention and temporary investment by the trustee of
this principal would be to slow the amortization rate of the related Securities
relative to the amortization rate of the related mortgage loans, or to attempt
to match the amortization rate of the related Securities to an amortization
schedule established at the time the Securities are issued. Any similar feature
applicable to any Securities may end on the occurrence of events to be
described in the prospectus supplement, resulting in the current funding of
principal payments to the related securityholders and an acceleration of the
amortization of these Securities.
Termination
If specified in the prospectus supplement, a series of Securities may
be subject to optional early termination through the repurchase of the Assets
in the related trust fund by the party specified therein, on any date on which
the total Security Balance of the Securities of that series declines to a
percentage specified in the prospectus supplement (generally not to exceed 10%)
of the Initial Security Balance, under the circumstances and in the manner set
forth therein. In addition, if so provided in the prospectus supplement,
certain classes of Securities may be purchased or redeemed in the manner set
forth therein. See "Description of the Securities--Termination."
Defaults
The rate of defaults on the Assets will also affect the rate, timing
and amount of principal payments on the Assets and thus the yield on the
Securities. In general, defaults on mortgage loans are expected to occur with
greater frequency in their early years. The rate of default on mortgage loans
that are refinance or limited documentation mortgage loans, and on mortgage
loans with high Loan-to-Value Ratios, may be higher than for other types of
mortgage loans. Furthermore, the rate and timing of prepayments, defaults and
liquidations on the mortgage loans will be affected by the general economic
condition of the region of the country in which the related Mortgage Properties
are located. The risk of delinquencies and loss is greater and prepayments are
less likely in regions where a weak or deteriorating economy exists, as may be
evidenced by, among other factors, increasing unemployment or falling property
values.
Foreclosures
The number of foreclosures or repossessions and the principal amount
of the mortgage loans comprising or underlying the Assets that are foreclosed
or repossessed in relation to the number and principal amount of mortgage loans
that are repaid in accordance with their terms will affect the weighted average
life of the mortgage loans comprising or underlying the Assets and that of the
related series of Securities.
Refinancing
At the request of a borrower, the servicer may allow the refinancing
of a mortgage loan in any trust fund by accepting prepayments thereon and
permitting a new loan secured by a mortgage on the same property. In the event
of that refinancing, the new loan would not be included in the related trust
fund and, therefore, that refinancing would have the same effect as a
prepayment in full of the related mortgage loan. A servicer may, from time to
time, implement programs designed to encourage refinancing. These programs may
include modifications of existing loans, general or targeted solicitations, the
offering of pre-approved applications, reduced origination fees or closing
costs, or other financial incentives. In addition, servicers may encourage the
refinancing of mortgage loans, including defaulted mortgage loans, that would
permit creditworthy borrowers to assume the outstanding indebtedness of those
mortgage loans.
Due-on-Sale Clauses
Acceleration of mortgage payments as a result of certain transfers of
underlying Mortgaged Property is another factor affecting prepayment rates that
may not be reflected in the prepayment standards or models used in the relevant
prospectus supplement. A number of the mortgage loans comprising or underlying
the Assets, other than FHA loans and VA loans, may include "due-on-sale
clauses" that allow the holder of the mortgage loans to demand payment in full
of the remaining principal balance of the mortgage loans upon sale, transfer or
conveyance of the related Mortgaged Property.
For any mortgage loans, except as set forth in the prospectus
supplement, the servicer will generally enforce any due-on-sale clause to the
extent it has knowledge of the conveyance or proposed conveyance of the
underlying Mortgaged Property and it is entitled to do so under applicable law;
provided, however, that the servicer will not take any action in relation to
the enforcement of any due-on-sale provision that would adversely affect or
jeopardize coverage under any applicable insurance policy. See "Certain Legal
Aspects of Mortgage Loans--Due-on-Sale Clauses" and "Description of the
Agreements--Material Terms of the Pooling and Servicing Agreements and
Underlying Servicing Agreements--Due-on-Sale Provisions."
The Depositor
ACE Securities Corp., the depositor, is a special purpose corporation
incorporated in the State of Delaware on June 3, 1998. The principal executive
offices of the depositor are located at 6525 Morrison Boulevard, Suite 318,
Charlotte, North Carolina 28211. Its telephone number is (704) 365-0569. The
depositor does not have, nor is it expected in the future to have, any
significant assets.
The limited purposes of the depositor are, in general, to acquire, own
and sell mortgage loans and financial assets; to issue, acquire, own, hold and
sell securities and notes secured by or representing ownership interests in
mortgage loans and other financial assets, collections thereon and related
assets; and to engage in any acts that are incidental to, or necessary,
suitable or convenient to accomplish, these purposes.
All of the shares of capital stock of the depositor are held by
Altamont Holdings Corp., a Delaware corporation.
Description of the Securities
General
The Asset-backed certificates (the "Certificates") of each series
(including any class of Certificates not offered hereby) will represent the
entire beneficial ownership interest in the trust fund created pursuant to the
related Agreement. If a series of Securities includes Asset-backed notes (the
"Notes," and together with the Certificates, the "Securities"), the Notes will
represent indebtedness of the related trust fund and will be issued and secured
pursuant to an indenture. Each series of Securities will consist of one or more
classes of Securities that may:
o provide for the accrual of interest thereon based on fixed,
variable or adjustable rates;
o be senior (collectively, "Senior Securities") or subordinate
(collectively, "Subordinate Securities") to one or more other
classes of Securities in respect of certain distributions on the
Securities;
o be entitled either to (A) principal distributions, with
disproportionately low, nominal or no interest distributions or
(B) interest distributions, with disproportionately low, nominal
or no principal distributions (collectively, "Strip Securities");
o provide for distributions of accrued interest thereon which begin
only following the occurrence of certain events, that as the
retirement of one or more other classes of Securities of that
series (collectively, "Accrual Securities");
o provide for payments of principal as described in the prospectus
supplement, from all or only a portion of the Assets in that
trust fund, to the extent of available funds, in each case as
described in the prospectus supplement; and/or
o provide for distributions based on a combination of two or more
components thereof with one or more of the characteristics
described in this paragraph including a Strip Security component.
If specified in the prospectus supplement, distributions on one or
more classes of a series of Securities may be limited to collections from a
designated portion of the Assets in the related trust fund (each portion of the
Assets, an "Asset Group"). Any of these classes may include classes of Offered
Securities.
Each class of Securities offered by this prospectus and the related
prospectus supplement (the "Offered Securities") will be issued in minimum
denominations corresponding to the Security Balances or, in the case of certain
classes of Strip Securities, notional amounts or percentage interests specified
in the prospectus supplement. The transfer of any Offered Securities may be
registered and those Securities may be exchanged without the payment of any
service charge payable in connection with that registration of transfer or
exchange, but the depositor or the trustee or any agent thereof may require
payment of a sum sufficient to cover any tax or other governmental charge. One
or more classes of Securities of a series may be issued in fully registered,
certificated form ("Definitive Securities") or in book-entry form ("Book-Entry
Securities"), as provided in the prospectus supplement. See "Description of the
Securities--Book-Entry Registration and Definitive Securities." Definitive
Securities will be exchangeable for other Securities of the same class and
series of a similar total Security Balance, notional amount or percentage
interest but of different authorized denominations.
Distributions
Distributions on the Securities of each series will be made by or on
behalf of the trustee on each Distribution Date as specified in the prospectus
supplement from the Available Distribution Amount for that series and that
Distribution Date. Distributions (other than the final distribution) will be
made to the persons in whose names the Securities are registered at the close
of business on, unless a different date is specified in the prospectus
supplement, the last business day of the month preceding the month in which the
Distribution Date occurs (the "Record Date"), and the amount of each
distribution will be determined as of the close of business on the date
specified in the prospectus supplement (the "Determination Date"). All
distributions for each class of Securities on each Distribution Date will be
allocated pro rata among the outstanding securityholders in that class or by
random selection or as described in the prospectus supplement. Payments will be
made either by wire transfer in immediately available funds to the account of a
securityholder at a bank or other entity having appropriate facilities
therefor, if that securityholder has so notified the trustee or other person
required to make those payments no later than the date specified in the
prospectus supplement (and, if so provided in the prospectus supplement, holds
Securities in the requisite amount specified therein), or by check mailed to
the address of the person entitled thereto as it appears on the Security
Register; provided, however, that the final distribution in retirement of the
Securities will be made only upon presentation and surrender of the Securities
at the location specified in the notice to securityholders of that final
distribution.
Available Distribution Amount
All distributions on the Securities of each series on each
Distribution Date will be made from the Available Distribution Amount described
below, subject to the terms described in the prospectus supplement. Generally,
the "Available Distribution Amount" for each Distribution Date equals the sum
of the following amounts:
(1) the total amount of all cash on deposit in the related
Collection Account as of the corresponding Determination Date,
exclusive, unless otherwise specified in the prospectus supplement,
of:
(a) all scheduled payments of principal and interest
collected but due on a date after the related Due Period
(unless a different period is specified in the prospectus
supplement, a "Due Period " for any Distribution Date will
begin on the second day of the month in which the immediately
preceding Distribution Date occurs, or the Cut-off Date in
the case of the first Due Period, and will end on the first
day of the month of the related Distribution Date),
(b) all prepayments, together with related payments
of the interest thereon and related Prepayment Premiums, all
proceeds of any FHA insurance, VA Guaranty Policy or
insurance policies to be maintained for each Asset (to the
extent that proceeds are not applied to the restoration of
the Asset or released in accordance with the normal servicing
procedures of a servicer, subject to the terms and conditions
applicable to the related Asset) (collectively, "Insurance
Proceeds"), all other amounts received and retained in
connection with the liquidation of Assets in default in the
trust fund ("Liquidation Proceeds"), and other unscheduled
recoveries received after the related Due Period, or other
period specified in the prospectus supplement,
(c) all amounts in the Collection Account that are
due or reimbursable to the depositor, the trustee, an Asset
Seller, a servicer, the master servicer or any other entity
as specified in the prospectus supplement or that are payable
in respect of certain expenses of the related trust fund, and
(d) all amounts received for a repurchase of an
Asset from the trust fund for defective documentation or a
breach of representation or warranty received after the
related Due Period, or other period specified in the
prospectus supplement;
(2) if the prospectus supplement so provides, interest or
investment income on amounts on deposit in the Collection Account,
including any net amounts paid under any Cash Flow Agreements;
(3) all advances made by a servicer or the master servicer or
any other entity as specified in the prospectus supplement for that
Distribution Date;
(4) if and to the extent the prospectus supplement so
provides, amounts paid by a servicer or any other entity as specified
in the prospectus supplement with respect to interest shortfalls
resulting from prepayments during the related Prepayment Period; and
(5) to the extent not on deposit in the related Collection
Account as of the corresponding Determination Date, any amounts
collected under, from or in respect of any credit support for that
Distribution Date.
As described below, unless otherwise specified in the prospectus
supplement, the entire Available Distribution Amount will be distributed among
the related Securities (including any Securities not offered hereby) on each
Distribution Date, and accordingly will be released from the trust fund and
will not be available for any future distributions.
The prospectus supplement for a series of Securities will describe any
variation in the calculation or distribution of the Available Distribution
Amount for that series.
Distributions of Interest on the Securities
Each class of Securities (other than classes of Strip Securities which
have no Interest Rate) may have a different Interest Rate, which will be a
fixed, variable or adjustable rate at which interest will accrue on that class
or a component thereof (the "Interest Rate" in the case of Certificates). The
prospectus supplement will specify the Interest Rate for each class or
component or, in the case of a variable or adjustable Interest Rate, the method
for determining the Interest Rate. Interest on the Securities will be
calculated on the basis of a 360-day year consisting of twelve 30-day months
unless the prospectus supplement specifies a different basis.
Distributions of interest on the Securities of any class will be made
on each Distribution Date (other than any class of Accrual Securities, which
will be entitled to distributions of accrued interest starting only on the
Distribution Date, or under the circumstances, specified in the prospectus
supplement, and any class of Strip Securities that are not entitled to any
distributions of interest) based on the Accrued Security Interest for that
class and that Distribution Date, subject to the sufficiency of the portion of
the Available Distribution Amount allocable to that class on that Distribution
Date. Before any interest is distributed on any class of Accrual Securities,
the amount of Accrued Security Interest otherwise distributable on that class
will instead be added to the Security Balance of that class on each
Distribution Date.
For each class of Securities and each Distribution Date (other than
certain classes of Strip Securities), "Accrued Security Interest" will be equal
to interest accrued during the related Accrual Period on the outstanding
Security Balance thereof immediately before the Distribution Date, at the
applicable Interest Rate, reduced as described below. Accrued Security Interest
on certain classes of Strip Securities will be equal to interest accrued during
the related Accrual Period on the outstanding notional amount thereof
immediately before each Distribution Date, at the applicable Interest Rate,
reduced as described below, or interest accrual in the manner described in the
prospectus supplement. The method of determining the notional amount for a
particular class of Strip Securities will be described in the prospectus
supplement. Reference to notional amount is solely for convenience in certain
calculations and does not represent the right to receive any distributions of
principal. Unless otherwise provided in the prospectus supplement, the Accrued
Security Interest on a series of Securities will be reduced in the event of
prepayment interest shortfalls, which are shortfalls in collections of interest
for a full accrual period resulting from prepayments before the due date in
that accrual period on the mortgage loans comprising or underlying the Assets
in the trust fund for that series. The particular manner in which these
shortfalls are to be allocated among some or all of the classes of Securities
of that series will be specified in the prospectus supplement. The prospectus
supplement will also describe the extent to which the amount of Accrued
Security Interest that is otherwise distributable on (or, in the case of
Accrual Securities, that may otherwise be added to the Security Balance of) a
class of Offered Securities may be reduced as a result of any other
contingencies, including delinquencies, losses and deferred interest on the
mortgage loans comprising or underlying the Assets in the related trust fund.
Unless otherwise provided in the prospectus supplement, any reduction in the
amount of Accrued Security Interest otherwise distributable on a class of
Securities by reason of the allocation to that class of a portion of any
deferred interest on the mortgage loans comprising or underlying the Assets in
the related trust fund will result in a corresponding increase in the Security
Balance of that class. See "Yield Considerations."
Distributions of Principal of the Securities
The Securities of each series, other than certain classes of Strip
Securities, will have a "Security Balance" which, at any time, will equal the
then maximum amount that the holder will be entitled to receive on principal
out of the future cash flow on the Assets and other assets included in the
related trust fund. The outstanding Security Balance of a Security will be
reduced:
o to the extent of distributions of principal on that Security from
time to time and
o if and to the extent provided in the prospectus supplement, by
the amount of losses incurred on the related Assets.
The outstanding Security Balance of a Security:
o may be increased in respect of deferred interest on the related
mortgage loans, to the extent provided in the prospectus
supplement and
o in the case of Accrual Securities, will be increased by any
related Accrued Security Interest up until the Distribution Date
on which distributions of interest are required to begin.
If specified in the prospectus supplement, the initial total Security
Balance of all classes of Securities of a series will be greater than the
outstanding total principal balance of the related Assets as of the applicable
Cut-off Date. The initial total Security Balance of a series and each class
thereof will be specified in the prospectus supplement. Distributions of
principal will be made on each Distribution Date to the class or classes of
Securities in the amounts and in accordance with the priorities specified in
the prospectus supplement. Certain classes of Strip Securities with no Security
Balance are not entitled to any distributions of principal.
Components
To the extent specified in the prospectus supplement, distribution on
a class of Securities may be based on a combination of two or more different
components as described under "--General" above. To that extent, the
descriptions set forth under "--Distributions of Interest on the Securities"
and "--Distributions of Principal of the Securities" above also relate to
components of the component class of Securities. References in those sections
to Security Balance may refer to the principal balance, if any, of these
components and reference to the Interest Rate may refer to the Interest Rate,
if any, on these components.
Distributions on the Securities of Prepayment Premiums
If so provided in the prospectus supplement, Prepayment Premiums that
are collected on the mortgage loans in the related trust fund will be
distributed on each Distribution Date to the class or classes of Securities
entitled thereto as described in the prospectus supplement.
Allocation of Losses and Shortfalls
If so provided in the prospectus supplement for a series of Securities
consisting of one or more classes of Subordinate Securities, on any
Distribution Date in respect of which losses or shortfalls in collections on
the Assets have been incurred, the amount of those losses or shortfalls will be
borne first by a class of Subordinate Securities in the priority and manner and
subject to the limitations specified in the prospectus supplement. See
"Description of Credit Support" for a description of the types of protection
that may be included in a trust fund against losses and shortfalls on Assets
comprising that trust fund. The prospectus supplement for a series of
Securities will describe the entitlement, if any, of a class of Securities
whose Security Balance has been reduced to zero as a result of distributions or
the allocation of losses on the related Assets to recover any losses previously
allocated to that class from amounts received on the Assets. However, if the
Security Balance of a class of Securities has been reduced to zero as the
result of principal distributions, the allocation of losses on the Assets, an
optional termination or an optional purchase or redemption, that class will no
longer be entitled to receive principal distributions from amounts received on
the assets of the related trust fund, including distributions in respect of
principal losses previously allocated to that class.
Advances in Respect of Delinquencies
If so provided in the prospectus supplement, the servicer or another
entity described therein will be required as part of its servicing
responsibilities to advance on or before each Distribution Date its own funds
or funds held in the related Collection Account that are not included in the
Available Distribution Amount for that Distribution Date, in an amount equal to
the total of payments of (1) principal (other than any balloon payments) and
(2) interest (net of related servicing fees and Retained Interest) that were
due on the Assets in that trust fund during the related Due Period and were
delinquent on the related Determination Date, subject to a good faith
determination that the advances will be reimbursable from Related Proceeds (as
defined below). In the case of a series of Securities that includes one or more
classes of Subordinate Securities and if so provided in the prospectus
supplement, the servicer's (or another entity's) advance obligation may be
limited only to the portion of those delinquencies necessary to make the
required distributions on one or more classes of Senior Securities and/or may
be subject to a good faith determination that advances will be reimbursable not
only from Related Proceeds but also from collections on other Assets otherwise
distributable on one or more classes of those Subordinate Securities. See
"Description of Credit Support."
Advances are intended to maintain a regular flow of scheduled interest
and principal payments to holders of the class or classes of Securities
entitled thereto, rather than to guarantee or insure against losses. Advances
of the servicer's (or another entity's) funds will be reimbursable only out of
related recoveries on the Assets (including amounts received under any form of
credit support) respecting which those advances were made (as to any Assets,
"Related Proceeds") and from any other amounts specified in the prospectus
supplement, including out of any amounts otherwise distributable on one or more
classes of Subordinate Securities of that series; provided, however, that any
advance will be reimbursable from any amounts in the related Collection Account
before any distributions being made on the Securities to the extent that the
servicer (or some other entity) determines in good faith that that advance (a
"Nonrecoverable Advance") is not ultimately recoverable from Related Proceeds
or, if applicable, from collections on other Assets otherwise distributable on
the Subordinate Securities. If advances have been made by the servicer from
excess funds in the related Collection Account, the servicer is required to
replace these funds in that Collection Account on any future Distribution Date
to the extent that funds in that Collection Account on that Distribution Date
are less than payments required to be made to securityholders on that date. If
specified in the prospectus supplement, the obligations of the servicer (or
another entity) to make advances may be secured by a cash advance reserve fund,
a surety bond, a letter of credit or another form of limited guaranty. If
applicable, information regarding the characteristics of and the identity of
any borrower on any surety bond will be set forth in the prospectus supplement.
If and to the extent so provided in the prospectus supplement, the
servicer (or another entity) will be entitled to receive interest at the rate
specified therein on its outstanding advances and will be entitled to pay
itself this interest periodically from general collections on the Assets before
any payment to securityholders or as otherwise provided in the related
Agreement and described in the prospectus supplement.
If specified in the prospectus supplement, the master servicer or the
trustee will be required to make advances, subject to certain conditions
described in the prospectus supplement, in the event of a servicer default.
Reports to Securityholders
With each distribution to holders of any class of Securities of a
series, the servicer, the master servicer or the trustee, as provided in the
prospectus supplement, will forward or cause to be forwarded to each holder, to
the depositor and to any other parties as may be specified in the related
Agreement, a statement containing the information specified in the prospectus
supplement, or if no such information is specified in the prospectus
supplement, generally setting forth, in each case to the extent applicable and
available:
(1) the amount of that distribution to holders of Securities
of that class applied to reduce the Security Balance thereof;
(2) the amount of that distribution to holders of Securities
of that class allocable to Accrued Security Interest;
(3) the amount of that distribution allocable to Prepayment
Premiums;
(4) the amount of related servicing compensation and any
other customary information as is required to enable securityholders
to prepare their tax returns;
(5) the total amount of advances included in that
distribution, and the total amount of unreimbursed advances at the
close of business on that Distribution Date;
(6) the total principal balance of the Assets at the close of
business on that Distribution Date;
(7) the number and total principal balance of mortgage loans
in respect of which (a) one scheduled payment is delinquent, (b) two
scheduled payments are delinquent, (c) three or more scheduled
payments are delinquent and (d) foreclosure proceedings have begun;
(8) for any mortgage loan liquidated during the related Due
Period, (a) the portion of the related liquidation proceeds payable or
reimbursable to a servicer (or any other entity) in respect of that
mortgage loan and (b) the amount of any loss to securityholders;
(9) with respect to collateral acquired by the trust fund
through foreclosure or otherwise (an "REO Property") relating to a
mortgage loan and included in the trust fund as of the end of the
related Due Period, the date of acquisition;
(10) for each REO Property relating to a mortgage loan and
included in the trust fund as of the end of the related Due Period,
(a) the book value, (b) the principal balance of the related mortgage
loan immediately following that Distribution Date (calculated as if
that mortgage loan were still outstanding taking into account certain
limited modifications to the terms thereof specified in the
Agreement), (c) the total amount of unreimbursed servicing expenses
and unreimbursed advances in respect thereof and (d) if applicable,
the total amount of interest accrued and payable on related servicing
expenses and related advances;
(11) for any REO Property sold during the related Due Period
(a) the total amount of sale proceeds, (b) the portion of those sales
proceeds payable or reimbursable to the master servicer in respect of
that REO Property or the related mortgage loan and (c) the amount of
any loss to securityholders in respect of the related mortgage loan;
(12) the total Security Balance or notional amount, as the
case may be, of each class of Securities (including any class of
Securities not offered hereby) at the close of business on that
Distribution Date, separately identifying any reduction in that
Security Balance due to the allocation of any loss and increase in the
Security Balance of a class of Accrual Securities if any Accrued
Security Interest has been added to that balance;
(13) the total amount of principal prepayments made during
the related Due Period;
(14) the amount deposited in the reserve fund, if any, on
that Distribution Date;
(15) the amount remaining in the reserve fund, if any, as of
the close of business on that Distribution Date;
(16) the total unpaid Accrued Security Interest, if any, on
each class of Securities at the close of business on that Distribution
Date;
(17) in the case of Securities with a variable Interest Rate,
the Interest Rate applicable to that Distribution Date, and, if
available, the immediately succeeding Distribution Date, as calculated
in accordance with the method specified in the prospectus supplement;
(18) in the case of Securities with an adjustable Interest
Rate, for statements to be distributed in any month in which an
adjustment date occurs, the adjustable Interest Rate applicable to
that Distribution Date, if available, and the immediately succeeding
Distribution Date as calculated in accordance with the method
specified in the prospectus supplement;
(19) as to any series that includes credit support, the
amount of coverage of each instrument of credit support included
therein as of the close of business on that Distribution Date;
(20) during the Pre-Funding Period, the remaining Pre-Funded
Amount and the portion of the Pre-Funding Amount used to acquire
Subsequent Assets since the preceding Distribution Date;
(21) during the Pre-Funding Period, the amount remaining in
the Capitalized Interest Account; and
(22) the total amount of payments by the borrowers of (a)
default interest, (b) late charges and (c) assumption and modification
fees collected during the related Due Period.
Within a reasonable period of time after the end of each calendar
year, the servicer, the master servicer or the trustee, as provided in the
prospectus supplement, will furnish to each securityholder of record at any
time during the calendar year the information required by the Code and
applicable regulations thereunder to enable securityholders to prepare their
tax returns. See "Description of the Securities--Book-Entry Registration and
Definitive Securities."
Termination
The obligations created by the related Agreement for each series of
Securities will terminate upon the payment to securityholders of that series of
all amounts held in the Collection Accounts or by a servicer, the master
servicer, if any, or the trustee and required to be paid to them pursuant to
that Agreement following the earlier of (1) the final payment or other
liquidation of the last Asset subject thereto or the disposition of all
property acquired upon foreclosure of any mortgage loan subject thereto and (2)
the purchase of all of the assets of the trust fund by the party entitled to
effect that termination, under the circumstances and in the manner set forth in
the prospectus supplement. In no event, however, will the trust fund continue
beyond the date specified in the prospectus supplement. Written notice of
termination of the Agreement will be given to each securityholder, and the
final distribution will be made only upon presentation and surrender of the
Securities at the location to be specified in the notice of termination.
If specified in the prospectus supplement, a series of Securities may
be subject to optional early termination through the purchase of the Assets in
the related trust fund by the party specified therein, under the circumstances
and in the manner set forth therein. If so provided in the prospectus
supplement, upon the reduction of the Security Balance of a specified class or
classes of Securities by a specified percentage, the party specified therein
will solicit bids for the purchase of all assets of the trust fund, or of a
sufficient portion of those assets to retire that class or classes or purchase
that class or classes at a price set forth in the prospectus supplement, in
each case, under the circumstances and in the manner set forth therein. That
price will at least equal the outstanding Security Balances and any accrued and
unpaid interest thereon (including any unpaid interest shortfalls for prior
Distribution Dates). Any sale of the Assets of the trust fund will be without
recourse to the trust fund or the securityholders. Any purchase or solicitation
of bids may be made only when the total Security Balance of that class or
classes declines to a percentage of the Initial Security Balance of those
Securities (not to exceed 10%) specified in the prospectus supplement. In
addition, if so provided in the prospectus supplement, certain classes of
Securities may be purchased or redeemed in the manner set forth therein at a
price at least equal to the outstanding Security Balance of each class so
purchased or redeemed and any accrued and unpaid interest thereon (including
any unpaid interest shortfalls for prior Distribution Dates).
Optional Purchases
Subject to the provisions of the applicable Agreement, the depositor,
the servicer or any other party specified in the prospectus supplement may, at
that party's option, repurchase any mortgage loan that is in default or as to
which default is reasonably foreseeable if, in the depositor's, the servicer's
or any other party's judgment, the related default is not likely to be cured by
the borrower or default is not likely to be averted, at a price equal to the
unpaid principal balance thereof plus accrued interest thereon and under the
conditions set forth in the prospectus supplement.
Book-Entry Registration and Definitive Securities
General
If provided for in the prospectus supplement, one or more classes of
the Offered Securities of any series will be issued as Book-Entry Securities,
and each of these classes will be represented by one or more single Securities
registered in the name of a nominee for the depository, The Depository Trust
Company ("DTC") and, if provided in the prospectus supplement, additionally
through Cedelbank ("Cedel") or the Euroclear System ("Euroclear"). Each class
of Book-Entry Securities will be issued in one or more certificates or notes,
as the case may be, that equal the initial principal amount of the related
class of Offered Securities and will initially be registered in the name of
Cede & Co.
No person acquiring an interest in a Book-Entry Security (each, a
"Beneficial Owner") will be entitled to receive a Definitive Security, except
as set forth below under "--Definitive Securities." Unless and until Definitive
Securities are issued for the Book-Entry Securities under the limited
circumstances described in the applicable prospectus supplement or this
prospectus, all references to actions by securityholders with respect to the
Book-Entry Securities will refer to actions taken by DTC, Cedel or Euroclear
upon instructions from their Participants (as defined below), and all
references herein to distributions, notices, reports and statements to
securityholders with respect to the Book-Entry Securities will refer to
distributions, notices, reports and statements to DTC, Cedel or Euroclear, as
applicable, for distribution to Beneficial Owners by DTC in accordance with the
procedures of DTC and if applicable, Cedel and Euroclear.
Beneficial Owners will hold their Book-Entry Securities through DTC in
the United States, or, if the Offered Securities are offered for sale globally,
through Cedel or Euroclear in Europe if they are participating organizations
("Participants") of those systems. Participants include securities brokers and
dealers, banks, trust companies and clearing corporations and may include some
other organizations. Indirect access to the DTC, Cedel and Euroclear systems
also is available to others, such as banks, brokers, dealers and trust
companies that clear through or maintain a custodial relationship with a
Participant, either directly or indirectly ("Indirect Participants").
DTC
DTC is a limited-purpose trust company organized under the laws of the
State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the Uniform Commercial Code ("UCC") and a
"clearing agency" registered pursuant to the provisions of Section 17A of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). DTC was
created to hold securities for its Participants, some of which (and/or their
representatives) own DTC, and facilitate the clearance and settlement of
securities transactions between its Participants through electronic book-entry
changes in their accounts, thereby eliminating the need for physical movement
of securities. In accordance with its normal procedures, DTC is expected to
record the positions held by each of its Participants in the Book-Entry
Securities, whether held for its own account or as a nominee for another
person. In general, beneficial ownership of Book-Entry Securities will be
subject to the rules, regulations and procedures governing DTC and its
Participants as in effect from time to time.
Cedel
Cedel is incorporated under the laws of Luxembourg as a professional
depository. Cedel holds securities for its Participants and facilitates the
clearance and settlement of securities transactions between its Participants
through electronic book-entry changes in accounts of its Participants, thereby
eliminating the need for physical movement of securities. Transactions may be
settled in Cedel in any of 28 currencies, including United States dollars.
Cedel provides to its 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 Participant of Cedel, either
directly or indirectly.
Euroclear
Euroclear was created in 1968 to hold securities for its Participants
and to clear and settle transactions between its Participants through
simultaneous electronic book-entry delivery against payment, thereby
eliminating the need for physical movement of securities and any risk from lack
of simultaneous transfers of securities and cash. Transactions may be settled
in any of 32 currencies, including United States dollars. Euroclear includes
various other services, including securities lending and borrowing, and
interfaces with domestic markets in several countries generally similar to the
arrangements for cross-market transfers with DTC described above. Euroclear is
operated by the Brussels, Belgium office of Morgan Guaranty Trust Company of
New York (the "Euroclear Operator"), under contract with Euroclear Clearance
Systems S.C., a Belgian cooperative corporation (the "Cooperative
Corporation"). All operations are conducted by the Euroclear Operator, and all
Euroclear securities clearance accounts and Euroclear cash accounts are
accounts with the Euroclear Operator, not the Cooperative Corporation. The
Cooperative Corporation establishes policy for Euroclear on behalf of its
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 Participant of Euroclear,
either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation that is a member bank of the Federal Reserve System, and is
regulated and examined by the Board of Governors of the Federal Reserve System
and the New York State Banking Department, as well as the Belgian Banking
Commission.
Securities clearance accounts and cash accounts with the Euroclear
Operator are governed by the Terms and Conditions Governing Use of Euroclear
and the related Operating Procedures of the Euroclear System and applicable
Belgian law (collectively, the "Terms and Conditions"). The Terms and
Conditions govern transfers of securities and cash within Euroclear,
withdrawals of securities and cash from Euroclear, and receipts of payments
with respect to securities in Euroclear. All securities in Euroclear are held
on a fungible basis without attribution of specific securities to specific
securities clearance accounts. The Euroclear Operator acts under the Terms and
Conditions only on behalf of its Participants, and has no record of or
relationship with persons holding through Participants of Euroclear.
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
positions in customers' securities accounts in the depositaries names on the
books of DTC. Citibank will act as depositary for Cedel and The Chase Manhattan
Bank will act as depositary for Euroclear (individually the "Relevant
Depositary" and collectively, the "European Depositaries").
Beneficial Ownership of Book-Entry Securities
Except as described below, no Beneficial Owner will be entitled to
receive a physical certificate representing a Certificate, or note representing
a Note. Unless and until Definitive Securities are issued, it is anticipated
that the only "securityholder" of the Offered Securities will be Cede & Co., as
nominee of DTC. Beneficial Owners will not be "Certificateholders" as that term
is used in any Agreement, nor "Noteholders" as that term is used in any
indenture. Beneficial Owners are only permitted to exercise their rights
indirectly through Participants, DTC, Cedel or Euroclear, as applicable.
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 that purpose. In turn, the Financial
Intermediary's ownership of a Book-Entry Security will be recorded on the
records of DTC (or of a Participant that acts as agent for the Financial
Intermediary, whose interest will in turn be recorded on the records of DTC, if
the Beneficial Owner's Financial Intermediary is not a Participant of DTC and
on the records of Cedel or Euroclear, as appropriate).
Beneficial Owners will receive all distributions of principal of, and
interest on, the Offered Securities from the trustee through DTC and its
Participants. While the Offered 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 Offered Securities and is required to receive and transmit
distributions of principal of, and interest on, the Offered Securities.
Participants and Indirect Participants with whom Beneficial Owners have
accounts with respect to Offered Securities are similarly required to make
book-entry transfers and receive and transmit distributions on behalf of their
respective Beneficial Owners. Accordingly, although Beneficial Owners will not
possess certificates or notes, the Rules provide a mechanism by which
Beneficial Owners will receive distributions and will be able to transfer their
interest.
Beneficial Owners will not receive or be entitled to receive
certificates or notes representing their respective interests in the Offered
Securities, except under the limited circumstances described below. Unless and
until Definitive Securities are issued, Beneficial Owners who are not
Participants may transfer ownership of Offered Securities only through
Participants and Indirect Participants by instructing the Participants and
Indirect Participants to transfer Offered Securities, by book-entry transfer,
through DTC for the account of the purchasers of the Offered Securities, which
account is maintained with their respective Participants. Under the Rules and
in accordance with DTC's normal procedures, transfer of ownership of Book-Entry
Securities will be executed through DTC and the accounts of the respective
Participants at DTC will be debited and credited. Similarly, the Participants
and Indirect Participants will make debits or credits, as the case may be, on
their records on behalf of the selling and purchasing Beneficial Owners.
Because of time zone differences, any 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. These credits or any transactions in
securities settled during this processing will be reported to the relevant
Participants of Cedel or Euroclear on that business day. Cash received in Cedel
or Euroclear as a result of sales of securities by or through a Participant of
Cedel or Euroclear to a Participant of DTC will be received with value on the
DTC settlement date but will be available in the relevant Cedel or Euroclear
cash account only as of the business day following settlement in DTC. For
information with respect to tax documentation procedures relating to the
Securities, see "Material Federal Income Tax Considerations -- Tax Treatment of
Foreign Investors" herein and, if the Book-Entry Securities are globally
offered and the prospectus supplement so provides, see "Global Clearance,
Settlement and Tax Documentation Procedures -- Certain U.S. Federal Income Tax
Documentation Requirements" in Annex I to the prospectus supplement.
Transfers between Participants of DTC will occur in accordance with
DTC Rules. Transfers between Participants of Cedel or Euroclear 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 Participants
of Cedel or Euroclear, on the other, will be effected in DTC in accordance with
the DTC Rules on behalf of the relevant European international clearing system
by the Relevant Depositary; however, cross-market transactions will require
delivery of instructions to the relevant European international clearing system
by the counterparty in that system in accordance with its rules and procedures
and within its established deadlines (European time). The relevant European
international clearing system will, if the transaction meets its settlement
requirements, deliver instructions to the Relevant Depositary to take action to
effect final settlement on its behalf by delivering or receiving securities in
DTC, and making or receiving payment in accordance with normal procedures for
same day funds settlement applicable to DTC. Participants of Cedel or Euroclear
may not deliver instructions directly to the European Depositaries.
Distributions on the Book-Entry Securities will be made on each
Distribution Date by the Trustee to DTC. DTC will be responsible for crediting
the amount of each distribution to the accounts of the applicable Participants
of DTC in accordance with DTC's normal procedures. Each Participant of DTC will
be responsible for disbursing the distribution to the Beneficial Owners of the
Book-Entry Securities that it represents and to each Financial Intermediary for
which it acts as agent. Each Financial Intermediary will be responsible for
disbursing funds to the Beneficial Owners of the Book-Entry Securities that it
represents.
Under a book-entry format, Beneficial Owners of the Book-Entry
Securities may experience some delay in their receipt of payments, because the
distributions will be forwarded by the Trustee to Cede & Co. Any distributions
on Securities held through Cedel or Euroclear will be credited to the cash
accounts of Participants of Cedel or Euroclear in accordance with the relevant
system's rules and procedures, to the extent received by the Relevant
Depositary. These distributions will be subject to tax reporting in accordance
with relevant United States tax laws and regulations. See "Material Federal
Income Tax Considerations -- REMICs -- Taxation of Certain Foreign Investors"
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, or otherwise take
actions in respect of Book-Entry Securities, may be limited due to the lack of
physical securities for the Book-Entry Securities. In addition, issuance of the
Book-Entry Securities in book-entry form may reduce the liquidity of the
securities in the secondary market since certain potential investors may be
unwilling to purchase Securities for which they cannot obtain physical
securities.
Monthly and annual reports will be provided to Cede & Co., as nominee
of DTC, and may be made available by Cede & Co. to Beneficial Owners upon
request, in accordance with the rules, regulations and procedures creating and
affecting the depository, and to the Financial Intermediaries to whose DTC
accounts the Book-Entry Securities of Beneficial Owners are credited.
Generally, DTC will advise the applicable 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 Agreement or
indenture, as applicable, only at the direction of one or more Financial
Intermediaries to whose DTC accounts the Book-Entry Securities are credited, to
the extent that actions are taken on behalf of Financial Intermediaries whose
holdings include the Book-Entry Securities. If the Book-Entry Securities are
globally offered, Cedel or the Euroclear Operator, as the case may be, will
take any other action permitted to be taken by a securityholder under the
Agreement or indenture, as applicable, on behalf of a Participant of Cedel or
Euroclear only in accordance with its relevant rules and procedures and subject
to the ability of the Relevant Depositary to effect those actions on its behalf
through DTC. DTC may take actions, at the direction of the related
Participants, with respect to some Offered Securities that conflict with
actions taken with respect to other Offered Securities.
Although DTC, Cedel and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of Book-Entry Securities among
Participants of DTC, Cedel and Euroclear, they are under no obligation to
perform or continue to perform these procedures and the procedures may be
discontinued at any time.
None of the depositor, any master servicer, any servicer, the trustee,
any securities registrar or paying agent or any of their affiliates will have
any responsibility for any aspect of the records relating to or payments made
on account of beneficial ownership interests of the Book-Entry Securities or
for maintaining, supervising or reviewing any records relating to those
beneficial ownership interests.
Definitive Securities
Securities initially issued in book-entry form will be issued as
Definitive Securities to Beneficial Owners or their nominees, rather than to
DTC or its nominee only (1) if the depositor advises the trustee in writing
that DTC is no longer willing or able to properly discharge its
responsibilities as depository for the Securities and the depositor is unable
to locate a qualified successor, (2) if the depositor, at its option, elects to
end the book-entry system through DTC or (3) in accordance with any other
provisions described in the prospectus supplement.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, DTC is required to notify all Participants of the
availability through DTC of Definitive Securities for the Beneficial Owners.
Upon surrender by DTC of the security or securities representing the Book-Entry
Securities, together with instructions for registration, the trustee will issue
(or cause to be issued) to the Beneficial Owners identified in those
instructions the Definitive Securities to which they are entitled, and
thereafter the trustee will recognize the holders of those Definitive
Securities as securityholders under the Agreement.
Description of the Agreements
Agreements Applicable to a Series
REMIC Securities, FASIT Securities, Grantor Trust Securities
Securities representing interests in a trust fund, or a portion
thereof, that the trustee will elect to have treated as a real estate mortgage
investment conduit under Sections 860A through 860G of the Code ("REMIC
Securities"), FASIT Securities (as defined herein), or Grantor Trust Securities
(as defined herein) will be issued, and the related trust fund will be created,
pursuant to a pooling and servicing agreement or trust agreement (in either
case, generally referred to in this prospectus as the "pooling and servicing
agreement") among the depositor, the trustee and the sole servicer or master
servicer, as applicable. The Assets of that trust fund will be transferred to
the trust fund and thereafter serviced in accordance with the terms of the
pooling and servicing agreement. In the event there are multiple servicers of
the Assets of that trust fund, or in the event the Securities consist of Notes,
each servicer will perform its servicing functions pursuant to a related
underlying servicing agreement.
Securities That Are Partnership Interests for Tax Purposes and Notes
Securities that are partnership interests for tax purposes will be
issued, and the related trust fund will be created, pursuant to the pooling and
servicing agreement or trust agreement.
A series of Notes issued by a trust fund will be issued pursuant to an
indenture between the related trust fund and an indenture trustee named in the
prospectus supplement. The trust fund will be established either as a statutory
business trust under the law of the State of Delaware or as a common law trust
under the law of the State of New York pursuant to a trust agreement between
the depositor and an owner trustee specified in the prospectus supplement
relating to that series of Notes. The Assets securing payment on the Notes will
be serviced in accordance with a sale and servicing agreement or servicing
agreement.
Material Terms of the Pooling and Servicing Agreements and Underlying Servicing
Agreements
General
The following summaries describe the material provisions that may
appear in each pooling and servicing agreement, sale and servicing agreement or
servicing agreement (each an "Agreement"). The prospectus supplement for a
series of Securities will describe any provision of the Agreement relating to
that series that materially differs from the description thereof contained in
this prospectus. The summaries do not purport to be complete and are subject
to, and are qualified by reference to, all of the provisions of the Agreement
for each trust fund and the description of those provisions in the prospectus
supplement. The provisions of each Agreement will vary depending on the nature
of the Securities to be issued thereunder and the nature of the related trust
fund. As used herein for any series, the term "Security" refers to all of the
Securities of that series, whether or not offered hereby and by the prospectus
supplement, unless the context otherwise requires. A form of a pooling and
servicing agreement has been filed as an exhibit to the Registration Statement
of which this prospectus is a part. The depositor will provide a copy of the
pooling and servicing agreement (without exhibits) relating to any series of
Securities without charge upon written request of a securityholder of that
series addressed to ACE Securities Corp., 6525 Morrison Boulevard, Suite 318,
Charlotte, North Carolina 28211, Attention: Elizabeth S.
Eldridge.
The servicer or master servicer and the trustee for any series of
Securities will be named in the prospectus supplement. In the event there are
multiple servicers for the Assets in a trust fund, a master servicer will
perform certain administration, calculation and reporting functions for that
trust fund and will supervise the related servicers pursuant to a pooling and
servicing agreement. For a series involving a master servicer, references in
this prospectus to the servicer will apply to the master servicer where
non-servicing obligations are described. If specified in the prospectus
supplement, a manager or administrator may be appointed pursuant to the pooling
and servicing agreement for any trust fund to administer that trust fund.
Assignment of Assets; Repurchases
At the time of issuance of any series of Securities, the depositor
will assign (or cause to be assigned) to the designated trustee the Assets to
be included in the related trust fund, together with all principal and interest
to be received on or with respect to those Assets after the Cut-off Date, other
than principal and interest due on or before the Cut-off Date and other than
any Retained Interest. The trustee will, concurrently with that assignment,
deliver the Securities to the depositor in exchange for the Assets and the
other assets comprising the trust fund for that series. Each Asset will be
identified in a schedule appearing as an exhibit to the related Agreement. That
schedule will include detailed information to the extent available and relevant
(1) in respect of each mortgage loan included in the related
trust fund, including the city and state of the related Mortgaged
Property and type of that property, the mortgage rate and, if
applicable, the applicable index, margin, adjustment date and any rate
cap information, the original and remaining term to maturity, the
original and outstanding principal balance and balloon payment, if
any, the Loan-to-Value Ratio as of the date indicated and payment and
prepayment provisions, if applicable, and
(2) in respect of each Mortgage Security and Agency Security,
the original and outstanding principal amount, if any, and the
interest rate thereon.
For each mortgage loan, except as otherwise specified in the
prospectus supplement, the depositor will deliver or cause to be delivered to
the trustee (or to the custodian hereinafter referred to) certain loan
documents, which will generally include the original mortgage note endorsed,
without recourse, in blank or to the order of the trustee, the original
Mortgage (or a certified copy thereof) with evidence of recording indicated
thereon and an assignment of the Mortgage to the trustee in recordable form.
However, a trust fund may include mortgage loans where the original mortgage
note is not delivered to the trustee if the depositor delivers to the trustee
or the custodian a copy or a duplicate original of the mortgage note, together
with an affidavit certifying that the original thereof has been lost or
destroyed. For those mortgage loans, the trustee (or its nominee) may not be
able to enforce the mortgage note against the related borrower. The Asset
Seller or other entity specified in the prospectus supplement will be required
to agree to repurchase, or substitute for, each of these mortgage loans that is
subsequently in default if the enforcement thereof or of the related Mortgage
is materially adversely affected by the absence of the original mortgage note.
The related Agreement will generally require the depositor or another party
specified in the prospectus supplement to promptly cause each of these
assignments of Mortgage to be recorded in the appropriate public office for
real property records, except in the State of California or in other states
where, in the opinion of counsel acceptable to the trustee, recording is not
required to protect the trustee's interest in the related mortgage loan against
the claim of any subsequent transferee or any successor to or creditor of the
depositor, the servicer, the relevant Asset Seller or any other prior holder of
the mortgage loan.
The trustee (or a custodian) will review the mortgage loan documents
within a specified period of days after receipt thereof, and the trustee (or a
custodian) will hold those documents in trust for the benefit of the
securityholders. If any of these documents are found to be missing or defective
in any material respect, the trustee (or that custodian) will immediately
notify the servicer and the depositor, and the servicer will immediately notify
the relevant Asset Seller or other entity specified in the prospectus
supplement. If the Asset Seller cannot cure the omission or defect within a
specified number of days after receipt of that notice, then the Asset Seller or
other entity specified in the prospectus supplement will be obligated, within a
specified number of days of receipt of that notice, to either (1) repurchase
the related mortgage loan from the trustee at a price equal to the sum of the
unpaid principal balance thereof, plus unpaid accrued interest at the interest
rate for that Asset from the date as to which interest was last paid to the due
date in the Due Period in which the relevant purchase is to occur, plus certain
servicing expenses that are payable to the servicer, or another price as
specified in the prospectus supplement (the "Purchase Price") or (2) substitute
a new mortgage loan. There can be no assurance that an Asset Seller or other
named entity will fulfill this repurchase or substitution obligation, and
neither the servicer nor the depositor will be obligated to repurchase or
substitute for that mortgage loan if the Asset Seller or other named entity
defaults on its obligation.
This repurchase or substitution obligation constitutes the sole remedy
available to the securityholders or the trustee for omission of, or a material
defect in, a constituent document. To the extent specified in the prospectus
supplement, in lieu of curing any omission or defect in the Asset or
repurchasing or substituting for that Asset, the Asset Seller or other named
entity may agree to cover any losses suffered by the trust fund as a result of
that breach or defect.
Notwithstanding the preceding three paragraphs, the documents for Home
Equity Loans will be delivered to the trustee (or a custodian) only to the
extent specified in the prospectus supplement. Generally these documents will
be retained by the servicer, which may also be the Asset Seller. In addition,
assignments of the related Mortgages to the trustee will be recorded only to
the extent specified in the prospectus supplement.
Mortgage Securities and Agency Securities will be registered in the
name of the trustee or its nominee on the books of the issuer or guarantor or
its agent or, in the case of Mortgage Securities and Agency Securities issued
only in book-entry form, through the depository with respect thereto, in
accordance with the procedures established by the issuer or guarantor for
registration of those certificates, and distributions on those securities to
which the trust fund is entitled will be made directly to the trustee.
Representations and Warranties; Repurchases
To the extent provided in the prospectus supplement the depositor
will, for each Asset, assign certain representations and warranties, as of a
specified date (the person making those representations and warranties, the
"Warranting Party") covering, by way of example, the following types of
matters:
o the accuracy of the information set forth for that Asset on the
schedule of Assets appearing as an exhibit to the related
Agreement;
o in the case of a mortgage loan, the existence of title insurance
insuring the lien priority of the mortgage loan;
o the authority of the Warranting Party to sell the Asset;
o the payment status of the Asset;
o in the case of a mortgage loan, the existence of customary
provisions in the related mortgage note and Mortgage to permit
realization against the Mortgaged Property of the benefit of the
security of the Mortgage; and
o the existence of hazard and extended perils insurance coverage on
the Mortgaged Property.
Any Warranting Party shall be an Asset Seller or an affiliate thereof
or any other person acceptable to the depositor and will be identified in the
prospectus supplement.
Representations and warranties made in respect of an Asset may have
been made as of a date before the applicable Cut-off Date. A substantial period
of time may have elapsed between that date and the date of initial issuance of
the related series of Securities evidencing an interest in that Asset. In the
event of a breach of any of these representations or warranties, the Warranting
Party will be obligated to reimburse the trust fund for losses caused by that
breach or either cure that breach or repurchase or replace the affected Asset
as described below. Since the representations and warranties may not address
events that may occur following the date as of which they were made, the
Warranting Party will have a reimbursement, cure, repurchase or substitution
obligation in connection with a breach of that representation and warranty only
if the relevant event that causes that breach occurs before that date. That
party would have no obligations if the relevant event that causes that breach
occurs after that date.
Each Agreement will provide that the servicer and/or trustee or
another entity identified in the prospectus supplement will be required to
notify promptly the relevant Warranting Party of any breach of any
representation or warranty made by it in respect of an Asset that materially
and adversely affects the value of that Asset or the interests therein of the
securityholders. If the Warranting Party cannot cure that breach within a
specified period following the date on which that party was notified of that
breach, then the Warranting Party will be obligated to repurchase that Asset
from the trustee within a specified period from the date on which the
Warranting Party was notified of that breach, at the Purchase Price therefor.
If so provided in the prospectus supplement for a series, a Warranting Party,
rather than repurchase an Asset as to which a breach has occurred, will have
the option, within a specified period after initial issuance of that series of
Securities, to cause the removal of that Asset from the trust fund and
substitute in its place one or more other Assets, as applicable, in accordance
with the standards described in the prospectus supplement. If so provided in
the prospectus supplement for a series, a Warranting Party, rather than
repurchase or substitute an Asset as to which a breach has occurred, will have
the option to reimburse the trust fund or the securityholders for any losses
caused by that breach. This reimbursement, repurchase or substitution
obligation will constitute the sole remedy available to securityholders or the
trustee for a breach of representation by a Warranting Party.
Neither the depositor (except to the extent that it is the Warranting
Party) nor the servicer will be obligated to purchase or substitute for an
Asset if a Warranting Party defaults on its obligation to do so, and no
assurance can be given that the Warranting Parties will carry out those
obligations with respect to the Assets.
A servicer will make certain representations and warranties regarding
its authority to enter into, and its ability to perform its obligations under,
the related Agreement. A breach of any representation of the servicer that
materially and adversely affects the interests of the securityholders and which
continues unremedied for the number of days specified in the Agreement after
the discovery of the breach by the servicer or the receipt of written notice of
that breach by the servicer from the trustee, the depositor or the holders of
Securities evidencing not less than 25% of the voting rights or other
percentage specified in the related Agreement, will constitute an Event of
Default under that Agreement. See "Events of Default" and "Rights Upon Event of
Default."
Collection Account and Related Accounts
General. The servicer and/or the trustee will, as to each trust fund,
establish and maintain or cause to be established and maintained one or more
separate accounts for the collection of payments on the related Assets
(collectively, the "Collection Account"), which must be an account or accounts
that either:
o are insured by the Bank Insurance Fund or the Savings Association
Insurance Fund of the Federal Deposit Insurance Corporation
("FDIC") (to the limits established by the FDIC) and the
uninsured deposits in which are otherwise secured so that the
securityholders have a claim with respect to the funds in the
Collection Account or a perfected first priority security
interest against any collateral securing those funds that is
superior to the claims of any other depositors or general
creditors of the institution with which the Collection Account is
maintained, or
o are maintained with a bank or trust company, and in a manner
satisfactory to the rating agency or agencies rating any class of
Securities of that series.
Investment of amounts in the Collection Account is limited to United
States government securities and other investment grade obligations specified
in the Agreement ("Permitted Investments"). A Collection Account may be
maintained as an interest bearing or a non-interest bearing account and the
funds held therein may be invested pending each succeeding Distribution Date in
certain short-term Permitted Investments. Any interest or other income earned
on funds in the Collection Account will, unless otherwise specified in the
prospectus supplement, be paid to the servicer or its designee as additional
servicing compensation. The Collection Account may be maintained with an
institution that is an affiliate of the servicer, if applicable, provided that
that institution meets the standards imposed by the rating agency or agencies.
If permitted by the rating agency or agencies, a Collection Account may contain
funds relating to more than one series of mortgage pass-through certificates
and may contain other funds respecting payments on mortgage loans belonging to
the servicer or serviced or master serviced by it on behalf of others.
Deposits. A servicer or the trustee will deposit or cause to be
deposited in the Collection Account for one or more trust funds on a daily
basis, or any other period provided in the related Agreement, the following
payments and collections received, or advances made, by the servicer or the
trustee or on its behalf after the Cut-off Date (other than payments due on or
before the Cut-off Date, and exclusive of any amounts representing a Retained
Interest), except as otherwise provided in the Agreement:
(1) all payments on account of principal, including principal
prepayments, on the Assets;
(2) all payments on account of interest on the Assets,
including any default interest collected, in each case net of any
portion thereof retained by a servicer as its servicing compensation
and net of any Retained Interest;
(3) Liquidation Proceeds and Insurance Proceeds, together
with the net proceeds on a monthly basis with respect to any Assets
acquired for the benefit of securityholders;
(4) any amounts paid under any instrument or drawn from any
fund that constitutes credit support for the related series of
Securities as described under "Description of Credit Support;"
(5) any advances made as described under "Description of the
Securities--Advances in Respect of Delinquencies;"
(6) any amounts paid under any Cash Flow Agreement, as
described under "Description of the Trust Funds--Cash Flow
Agreements;"
(7) all proceeds of any Asset or, with respect to a mortgage
loan, property acquired in respect thereof purchased by the depositor,
any Asset Seller or any other specified person as described above
under "--Assignment of Assets; Repurchases" and "--Representations and
Warranties; Repurchases," all proceeds of any defaulted mortgage loan
purchased as described below under "--Realization Upon Defaulted
Assets," and all proceeds of any Asset purchased as described under
"Description of the Securities--Termination;"
(8) any amounts paid by a servicer to cover certain interest
shortfalls arising out of the prepayment of Assets in the trust fund
as described below under "--Retained Interest; Servicing Compensation
and Payment of Expenses;"
(9) to the extent that any of these items do not constitute
additional servicing compensation to a servicer, any payments on
account of modification or assumption fees, late payment charges or
Prepayment Premiums on the Assets;
(10) all payments required to be deposited in the Collection
Account with respect to any deductible clause in any blanket insurance
policy described below under "--Hazard Insurance Policies;"
(11) any amount required to be deposited by a servicer or the
trustee in connection with losses realized on investments for the
benefit of the servicer or the trustee, as the case may be, of funds
held in the Collection Account; and
(12) any other amounts required to be deposited in the
Collection Account as provided in the related Agreement and described
in the prospectus supplement.
Withdrawals. A servicer or the trustee may, from time to time as
provided in the related Agreement, make withdrawals from the Collection Account
for each trust fund for any of the following purposes, except as otherwise
provided in the Agreement:
(1) to make distributions to the securityholders on each
Distribution Date;
(2) to reimburse a servicer for unreimbursed amounts advanced
as described under "Description of the Securities--Advances in Respect
of Delinquencies," which reimbursement is to be made out of amounts
received that were identified and applied by the servicer as late
collections of interest (net of related servicing fees and Retained
Interest) on and principal of the particular Assets for which the
advances were made or out of amounts drawn under any form of credit
support with respect to those Assets;
(3) to reimburse a servicer for unpaid servicing fees earned
and certain unreimbursed servicing expenses incurred with respect to
Assets and properties acquired in respect thereof, which reimbursement
is to be made out of amounts that represent Liquidation Proceeds and
Insurance Proceeds collected on the particular Assets and properties,
and net income collected on the particular properties, which fees were
earned or expenses were incurred or out of amounts drawn under any
form of credit support for those Assets and properties;
(4) to reimburse a servicer for any advances described in
clause (2) above and any servicing expenses described in clause (3)
above which, in the servicer's good faith judgment, will not be
recoverable from the amounts described in those clauses, which
reimbursement is to be made from amounts collected on other Assets or,
if and to the extent so provided by the related Agreement and
described in the prospectus supplement, just from that portion of
amounts collected on other Assets that is otherwise distributable on
one or more classes of Subordinate Securities, if any, remain
outstanding, and otherwise any outstanding class of Securities, of the
related series;
(5) if and to the extent described in the prospectus
supplement, to pay a servicer interest accrued on the advances
described in clause (2) above and the servicing expenses described in
clause (3) above while those advances and servicing expenses remain
outstanding and unreimbursed;
(6) to reimburse a servicer, the depositor, or any of their
respective directors, officers, employees and agents, as the case may
be, for certain expenses, costs and liabilities incurred thereby, as
and to the extent described below under "--Certain Matters Regarding
Servicers, the Master Servicer and the Depositor;"
(7) if and to the extent described in the prospectus
supplement, to pay (or to transfer to a separate account for purposes
of escrowing for the payment of) the trustee's fees;
(8) to reimburse the trustee or any of its directors,
officers, employees and agents, as the case may be, for certain
expenses, costs and liabilities incurred thereby, as and to the extent
described below under "--Certain Matters Regarding the Trustee;"
(9) to pay a servicer, as additional servicing compensation,
interest and investment income earned in respect of amounts held in
the Collection Account;
(10) to pay the person entitled thereto any amounts deposited
in the Collection Account that were identified and applied by the
servicer as recoveries of Retained Interest;
(11) to pay for costs reasonably incurred in connection with
the proper management and maintenance of any Mortgaged Property
acquired for the benefit of securityholders by foreclosure or by deed
in lieu of foreclosure or otherwise, which payments are to be made out
of income received on that property;
(12) if one or more elections have been made to treat the
trust fund or designated portions thereof as a REMIC, to pay any
federal, state or local taxes imposed on the trust fund or its assets
or transactions, as and to the extent described under "Material
Federal Income Tax Considerations--REMICs--Taxes That May Be Imposed
on the REMIC Pool" or in the prospectus supplement, respectively;
(13) to pay for the cost of an independent appraiser or other
expert in real estate matters retained to determine a fair sale price
for a defaulted mortgage loan or a property acquired in respect
thereof in connection with the liquidation of that mortgage loan or
property;
(14) to pay for the cost of various opinions of counsel
obtained pursuant to the related Agreement for the benefit of
securityholders;
(15) to pay for the costs of recording the related Agreement
if that recordation materially and beneficially affects the interests
of securityholders, provided that the payment shall not constitute a
waiver with respect to the obligation of the Warranting Party to
remedy any breach of representation or warranty under the Agreement;
(16) to pay the person entitled thereto any amounts deposited
in the Collection Account in error, including amounts received on any
Asset after its removal from the trust fund whether by reason of
purchase or substitution as contemplated above under "--Assignment of
Assets; Repurchase" and "--Representations and Warranties;
Repurchases" or otherwise;
(17) to make any other withdrawals permitted by the related
Agreement; and
(18) to clear and terminate the Collection Account at the
termination of the trust fund.
Other Collection Accounts. If specified in the prospectus supplement,
the Agreement for any series of Securities may provide for the establishment
and maintenance of a separate collection account into which the servicer will
deposit on a daily basis, or any other period as provided in the related
Agreement, the amounts described under "--Deposits" above for one or more
series of Securities. Any amounts on deposit in any of these collection
accounts will be withdrawn therefrom and deposited into the appropriate
Collection Account by a time specified in the prospectus supplement. To the
extent specified in the prospectus supplement, any amounts that could be
withdrawn from the Collection Account as described under "--Withdrawals" above
may also be withdrawn from any of these collection accounts. The prospectus
supplement will set forth any restrictions for any of these collection
accounts, including investment restrictions and any restrictions for financial
institutions with which any of these collection accounts may be maintained.
The servicer will establish and maintain with the indenture trustee an
account, in the name of the indenture trustee on behalf of the holders of
Notes, into which amounts released from the Collection Account for distribution
to the holders of Notes will be deposited and from which all distributions to
the holders of Notes will be made.
Collection and Other Servicing Procedures. The servicer is required to
make reasonable efforts to collect all scheduled payments under the Assets and
will follow or cause to be followed those collection procedures that it would
follow with respect to assets that are comparable to the Assets and held for
its own account, provided that those procedures are consistent with (1) the
terms of the related Agreement and any related hazard insurance policy or
instrument of credit support, if any, included in the related trust fund
described herein or under "Description of Credit Support," (2) applicable law
and (3) the general servicing standard specified in the prospectus supplement
or, if no standard is so specified, its normal servicing practices (in either
case, the "Servicing Standard"). In connection therewith, the servicer will be
permitted in its discretion to waive any late payment charge or penalty
interest in respect of a late payment on an Asset.
Each servicer will also be required to perform other customary
functions of a servicer of comparable assets, including maintaining hazard
insurance policies as described herein and in any prospectus supplement, and
filing and settling claims thereunder; maintaining, to the extent required by
the Agreement, escrow or impoundment accounts of borrowers for payment of
taxes, insurance and other items required to be paid by any borrower pursuant
to the terms of the Assets; processing assumptions or substitutions in those
cases where the servicer has determined not to enforce any applicable
due-on-sale clause; attempting to cure delinquencies; supervising foreclosures
or repossessions; inspecting and managing Mortgaged Properties under some
circumstances; and maintaining accounting records relating to the Assets. The
servicer or any other entity specified in the prospectus supplement will be
responsible for filing and settling claims in respect of particular Assets
under any applicable instrument of credit support. See "Description of Credit
Support."
The servicer may agree to modify, waive or amend any term of any Asset
in a manner consistent with the Servicing Standard so long as the modification,
waiver or amendment will not (1) affect the amount or timing of any scheduled
payments of principal or interest on the Asset or (2) in its judgment,
materially impair the security for the Asset or reduce the likelihood of timely
payment of amounts due thereon. The servicer also may agree to any
modification, waiver or amendment that would so affect or impair the payments
on, or the security for, an Asset if (1) in its judgment, a material default on
the Asset has occurred or a payment default is reasonably foreseeable and (2)
in its judgment, that modification, waiver or amendment is reasonably likely to
produce a greater recovery with respect to the Asset on a present value basis
than would liquidation. In the event of any modification, waiver or amendment
of any Asset, the servicer will furnish a copy of that modification, waiver or
amendment to the trustee (or its custodian).
Realization Upon Defaulted Assets
Generally, the servicer is required to monitor any Asset that is in
default, initiate corrective action in cooperation with the borrower if cure is
likely, inspect the Asset and take any other actions as are consistent with the
Servicing Standard. A significant period of time may elapse before the servicer
is able to assess the success of that corrective action or the need for
additional initiatives.
Any Agreement relating to a trust fund that includes mortgage loans
may grant to the servicer and/or the holder or holders of some classes of
Securities a right of first refusal to purchase from the trust fund at a
predetermined purchase price any mortgage loan as to which a specified number
of scheduled payments thereunder are delinquent. Any right of first refusal
granted to the holder of an Offered Security will be described in the
prospectus supplement. The prospectus supplement will also describe any similar
right granted to any person if the predetermined purchase price is less than
the Purchase Price described above under "--Representations and Warranties;
Repurchases."
If specified in the prospectus supplement, the servicer may offer to
sell any defaulted mortgage loan described in the preceding paragraph and not
otherwise purchased by any person having a right of first refusal with respect
to that defaulted mortgage loan, if and when the servicer determines,
consistent with the Servicing Standard, so that a sale would produce a greater
recovery on a present value basis than would liquidation through foreclosure,
repossession or similar proceedings. The related Agreement will provide that
any offering be made in a commercially reasonable manner for a specified period
and that the servicer accept the highest cash bid received from any person
(including itself, an affiliate of the servicer or any securityholder) that
constitutes a fair price for that defaulted mortgage loan. If there is no bid
that is determined to be fair, the servicer will proceed with respect to that
defaulted mortgage loan as described below. Any bid in an amount at least equal
to the Purchase Price described above under "--Representations and Warranties;
Repurchases" will in all cases be deemed fair.
The servicer, on behalf of the trustee, may at any time institute
foreclosure proceedings, exercise any power of sale contained in any mortgage,
obtain a deed in lieu of foreclosure, or otherwise acquire title to a Mortgaged
Property securing a mortgage loan by operation of law or otherwise, if that
action is consistent with the Servicing Standard and a default on that mortgage
loan has occurred or, in the servicer's judgment, is imminent.
If title to any Mortgaged Property is acquired by a trust fund as to
which a REMIC election has been made, the servicer, on behalf of the trust
fund, will be required to sell the Mortgaged Property within three years of
acquisition, unless (1) the Internal Revenue Service grants an extension of
time to sell that property or (2) the trustee receives an opinion of
independent counsel to the effect that the holding of the property by the trust
fund longer than three years after its acquisition will not result in the
imposition of a tax on the trust fund or cause the trust fund to fail to
qualify as a REMIC under the Code at any time that any Securities are
outstanding. Subject to the foregoing, the servicer will be required to (A)
solicit bids for any Mortgaged Property so acquired in that manner as will be
reasonably likely to realize a fair price for that property and (B) accept the
first (and, if multiple bids are contemporaneously received, the highest) cash
bid received from any person that constitutes a fair price.
The limitations imposed by the related Agreement and the REMIC
provisions of the Code (if a REMIC election has been made for the related trust
fund) on the ownership and management of any Mortgaged Property acquired on
behalf of the trust fund may result in the recovery of an amount less than the
amount that would otherwise be recovered. See "Certain Legal Aspects of
Mortgage Loans--Foreclosure."
If recovery on a defaulted Asset under any related instrument of
credit support is not available, the servicer nevertheless will be obligated to
follow or cause to be followed those normal practices and procedures as it
deems necessary or advisable to realize upon the defaulted Asset. If the
proceeds of any liquidation of the property securing the defaulted Asset are
less than the outstanding principal balance of the defaulted Asset plus
interest accrued thereon at the applicable interest rate, plus the total amount
of expenses incurred by the servicer in connection with those proceedings and
which are reimbursable under the Agreement, the trust fund will realize a loss
in the amount of that difference. The servicer will be entitled to withdraw or
cause to be withdrawn from the Collection Account out of the Liquidation
Proceeds recovered on any defaulted Asset, before the distribution of those
Liquidation Proceeds to securityholders, amounts representing its normal
servicing compensation on the Security, unreimbursed servicing expenses
incurred with respect to the Asset and any unreimbursed advances of delinquent
payments made with respect to the Asset.
If any property securing a defaulted Asset is damaged the servicer is
not required to expend its own funds to restore the damaged property unless it
determines (1) that restoration will increase the proceeds to securityholders
on liquidation of the Asset after reimbursement of the servicer for its
expenses and (2) that its expenses will be recoverable by it from related
Insurance Proceeds or Liquidation Proceeds.
The pooling and servicing agreement will require the trustee, if it
has not received a distribution for any Mortgage Security or Agency Security by
the fifth business day after the date on which that distribution was due and
payable pursuant to the terms of that Agency Security, to request the issuer or
guarantor, if any, of that Mortgage Security or Agency Security to make that
payment as promptly as possible and legally permitted to take legal action
against that issuer or guarantor as the trustee deems appropriate under the
circumstances, including the prosecution of any claims in connection therewith.
The reasonable legal fees and expenses incurred by the trustee in connection
with the prosecution of this legal action will be reimbursable to the trustee
out of the proceeds of that action and will be retained by the trustee before
the deposit of any remaining proceeds in the Collection Account pending
distribution thereof to securityholders of the related series. If the proceeds
of any legal action are insufficient to reimburse the trustee for its legal
fees and expenses, the trustee will be entitled to withdraw from the Collection
Account an amount equal to its expenses, and the trust fund may realize a loss
in that amount.
As servicer of the Assets, a servicer, on behalf of itself, the
trustee and the securityholders, will present claims to the borrower under each
instrument of credit support, and will take those reasonable steps as are
necessary to receive payment or to permit recovery thereunder for defaulted
Assets.
If a servicer or its designee recovers payments under any instrument
of credit support for any defaulted Assets, the servicer will be entitled to
withdraw or cause to be withdrawn from the Collection Account out of those
proceeds, before distribution thereof to securityholders, amounts representing
its normal servicing compensation on that Asset, unreimbursed servicing
expenses incurred for the Asset and any unreimbursed advances of delinquent
payments made with respect to the Asset. See "Hazard Insurance Policies" and
"Description of Credit Support."
Hazard Insurance Policies
Mortgage Loans. Generally, each Agreement for a trust fund composed of
mortgage loans will require the servicer to cause the borrower on each mortgage
loan to maintain a hazard insurance policy (including flood insurance coverage,
if obtainable, to the extent the property is located in a federally designated
flood area, in such amount as is required under applicable guidelines)
providing for the level of coverage that is required under the related Mortgage
or, if any Mortgage permits the holder thereof to dictate to the borrower the
insurance coverage to be maintained on the related Mortgaged Property, then the
level of coverage that is consistent with the Servicing Standard. That coverage
will be in general in an amount equal to the lesser of the principal balance
owing on that mortgage loan (but not less than the amount necessary to avoid
the application of any co-insurance clause contained in the hazard insurance
policy) and the amount necessary to fully compensate for any damage or loss to
the improvements on the Mortgaged Property on a replacement cost basis or any
other amount specified in the prospectus supplement. The ability of the
servicer to assure that hazard insurance proceeds are appropriately applied may
be dependent upon its being named as an additional insured under any hazard
insurance policy and under any other insurance policy referred to below, or
upon the extent to which information in this regard is furnished by borrowers.
All amounts collected by the servicer under any of these policies (except for
amounts to be applied to the restoration or repair of the Mortgaged Property or
released to the borrower in accordance with the servicer's normal servicing
procedures, subject to the terms and conditions of the related Mortgage and
mortgage note) will be deposited in the Collection Account in accordance with
the related Agreement.
The Agreement may provide that the servicer may satisfy its obligation
to cause each borrower to maintain a hazard insurance policy by the servicer's
maintaining a blanket policy insuring against hazard losses on the mortgage
loans. If the blanket policy contains a deductible clause, the servicer will be
required to deposit in the Collection Account from its own funds all sums that
would have been deposited therein but for that clause.
In general, the standard form of fire and extended coverage policy
covers physical damage to or destruction of the improvements of the property by
fire, lightning, explosion, smoke, windstorm and hail, and riot, strike and
civil commotion, subject to the conditions and exclusions specified in each
policy. Although the policies relating to the mortgage loans will be
underwritten by different insurers under different state laws in accordance
with different applicable state forms, and therefore will not contain identical
terms and conditions, the basic terms thereof are dictated by respective state
laws, and most of these policies typically do not cover any physical damage
resulting from war, revolution, governmental actions, floods and other
water-related causes, earth movement (including earthquakes, landslides and
mudflows), wet or dry rot, vermin, domestic animals and certain other kinds of
uninsured risks.
The hazard insurance policies covering the Mortgaged Properties
securing the mortgage loans will typically contain a coinsurance clause that in
effect requires the insured at all times to carry insurance of a specified
percentage (generally 80% to 90%) of the full replacement value of the
improvements on the property to recover the full amount of any partial loss. If
the insured's coverage falls below this specified percentage, the coinsurance
clause generally provides that the insurer's liability in the event of partial
loss does not exceed the lesser of (1) the replacement cost of the improvements
less physical depreciation and (2) that proportion of the loss as the amount of
insurance carried bears to the specified percentage of the full replacement
cost of those improvements.
Each Agreement for a trust fund composed of mortgage loans will
require the servicer to cause the borrower on each mortgage loan to maintain
all other insurance coverage for the related Mortgaged Property as is
consistent with the terms of the related Mortgage and the Servicing Standard,
which insurance may typically include flood insurance (if the related Mortgaged
Property was located at the time of origination in a federally designated flood
area).
Any cost incurred by the servicer in maintaining any insurance policy
will be added to the amount owing under the mortgage loan where the terms of
the mortgage loan so permit; provided, however, that the addition of that cost
will not be taken into account for purposes of calculating the distribution to
be made to securityholders. Those costs may be recovered by the servicer from
the Collection Account, with interest thereon, as provided by the Agreement.
Under the terms of the mortgage loans, borrowers will generally be
required to present claims to insurers under hazard insurance policies
maintained on the related Mortgaged Properties. The servicer, on behalf of the
trustee and securityholders, is obligated to present or cause to be presented
claims under any blanket insurance policy insuring against hazard losses on
Mortgaged Properties securing the mortgage loans. However, the ability of the
servicer to present or cause to be presented those claims is dependent upon the
extent to which information in this regard is furnished to the servicer by
borrowers.
FHA Insurance and VA Guarantees
FHA loans will be insured by the FHA as authorized under the Housing
Act. Certain FHA loans will be insured under various FHA programs including the
standard FHA 203(b) program to finance the acquisition of one- to four-family
housing units, the FHA 245 graduated payment mortgage program and the FHA Title
I Program. These programs generally limit the principal amount and interest
rates of the mortgage loans insured. The prospectus supplement for Securities
of each series evidencing interests in a trust fund including FHA loans will
set forth additional information regarding the regulations governing the
applicable FHA insurance programs. Except as otherwise specified in the
prospectus supplement, the following describes FHA insurance programs and
regulations as generally in effect for FHA loans.
The insurance premiums for FHA loans are collected by lenders approved
by the Department of Housing and Urban Development ("HUD") or by the servicer
and are paid to the FHA. The regulations governing FHA single-family mortgage
insurance programs provide that insurance benefits are payable either upon
foreclosure (or other acquisition of possession) and conveyance of the
mortgaged premises to the United States of America or upon assignment of the
defaulted loan to the United States of America. For a defaulted FHA loan, the
servicer is limited in its ability to initiate foreclosure proceedings. When it
is determined, either by the servicer or HUD, that default was caused by
circumstances beyond the borrower's control, the servicer is expected to make
an effort to avoid foreclosure by entering, if feasible, into one of a number
of available forms of forbearance plans with the borrower. Those plans may
involve the reduction or suspension of regular mortgage payments for a
specified period, with those payments to be made on or before the maturity date
of the mortgage, or the recasting of payments due under the mortgage up to or,
other than FHA loans originated under the FHA Title I Program, beyond the
maturity date. In addition, when a default caused by those circumstances is
accompanied by certain other criteria, HUD may provide relief by making
payments to the servicer in partial or full satisfaction of amounts due under
the FHA loan (which payments are to be repaid by the borrower to HUD) or by
accepting assignment of the loan from the servicer. With some exceptions, at
least three full monthly installments must be due and unpaid under the FHA
loan, and HUD must have rejected any request for relief from the borrower
before the servicer may initiate foreclosure proceedings.
HUD has the option, in most cases, to pay insurance claims in cash or
in debentures issued by HUD. Currently, claims are being paid in cash, and
claims have not been paid in debentures since 1965. HUD debentures issued in
satisfaction of FHA insurance claims bear interest at the applicable HUD
debentures interest rate. To the extent specified in the prospectus supplement,
the servicer of each single family FHA loan will be obligated to purchase any
debenture issued in satisfaction of that FHA loan upon default for an amount
equal to the principal amount of that debenture.
Other than in relation to the FHA Title I Program, the amount of
insurance benefits generally paid by the FHA is equal to the entire unpaid
principal amount of the defaulted FHA loan adjusted to reimburse the servicer
for certain costs and expenses and to deduct certain amounts received or
retained by the servicer after default. When entitlement to insurance benefits
results from foreclosure (or other acquisition of possession) and conveyance to
HUD, the servicer is compensated for no more than two-thirds of its foreclosure
costs, and is compensated for interest accrued and unpaid before that date but
in general only to the extent it was allowed pursuant to a forbearance plan
approved by HUD. When entitlement to insurance benefits results from assignment
of the FHA loan to HUD, the insurance payment includes full compensation for
interest accrued and unpaid to the assignment date. The insurance payment
itself, upon foreclosure of an FHA loan, bears interest from a date 30 days
after the borrower's first uncorrected failure to perform any obligation to
make any payment due under the mortgage and, upon assignment, from the date of
assignment to the date of payment of the claim, in each case at the same
interest rate as the applicable HUD debenture interest rate as described above.
VA loans will be partially guaranteed by the VA under the Serviceman's
Readjustment Act (a "VA Guaranty Policy"). For a defaulted VA loan, the
servicer is, absent exceptional circumstances, authorized to announce its
intention to foreclose only when the default has continued for three months.
Generally, a claim for the guarantee is submitted after liquidation of the
Mortgaged Property.
The amount payable under the guarantee will be the percentage of the
VA loan originally guaranteed applied to indebtedness outstanding as of the
applicable date of computation specified in the VA regulations. Payments under
the guarantee will be equal to the unpaid principal amount of that VA loan,
interest accrued on the unpaid balance of that VA loan to the appropriate date
of computation and limited expenses of the mortgagee, but in each case only to
the extent that those amounts have not been recovered through liquidation of
the Mortgaged Property. The amount payable under the guarantee may in no event
exceed the amount of the original guarantee.
Fidelity Bonds and Errors and Omissions Insurance
Each Agreement will require that the servicer obtain and maintain in
effect a fidelity bond or similar form of insurance coverage (which may provide
blanket coverage) or any combination thereof insuring against loss occasioned
by fraud, theft or other intentional misconduct of the officers, employees and
agents of the servicer. The related Agreement will allow the servicer to
self-insure against loss occasioned by the errors and omissions of the
officers, employees and agents of the servicer so long as certain criteria set
forth in the Agreement are met.
Due-on-Sale Clauses
The mortgage loans may contain clauses requiring the consent of the
mortgagee to any sale or other transfer of the related Mortgaged Property, or
due-on-sale clauses entitling the mortgagee to accelerate payment of the
mortgage loan upon any sale, transfer or conveyance of the related Mortgaged
Property. The servicer will generally enforce any due-on-sale clause to the
extent it has knowledge of the conveyance or proposed conveyance of the
underlying Mortgaged Property and it is entitled to do so under applicable law;
provided, however, that the servicer will not take any action in relation to
the enforcement of any due-on-sale clause that would:
o adversely affect or jeopardize coverage under any applicable
insurance policy or
o materially increase the risk of default or delinquency on, or
materially impair the security for, that mortgage loan.
Any fee collected by or on behalf of the servicer for entering into an
assumption agreement will be retained by or on behalf of the servicer as
additional servicing compensation. See "Certain Legal Aspects of Mortgage
Loans--Due-on-Sale Clauses."
The servicer will generally permit that transfer so long as the
transferee satisfies the servicer's then applicable underwriting standards. The
purpose of those transfers is often to avoid a default by the transferring
borrower.
Retained Interest; Servicing Compensation and Payment of Expenses
The prospectus supplement for a series of Securities will specify
whether there will be any Retained Interest in the Assets, and, if so, the
initial owner thereof. If so, the Retained Interest will be established on a
loan-by-loan basis and will be specified on an exhibit to the related
Agreement. A "Retained Interest" in an Asset represents a specified portion of
the interest payable thereon. The Retained Interest will be deducted from
borrower payments as received and will not be part of the related trust fund.
The servicer's primary servicing compensation for a series of
Securities will come from the periodic payment to it of a portion of the
interest payment on each Asset or any other amount specified in the prospectus
supplement. Since any Retained Interest and a servicer's primary compensation
are percentages of the principal balance of each Asset, those amounts will
decrease in accordance with the amortization of the Assets. The prospectus
supplement for a series of Securities evidencing interests in a trust fund that
includes mortgage loans may provide that, as additional compensation, the
servicer may retain all or a portion of assumption fees, modification fees,
late payment charges or Prepayment Premiums collected from borrowers and any
interest or other income that may be earned on funds held in the Collection
Account or any account established by a servicer pursuant to the Agreement.
The servicer may, to the extent provided in the prospectus supplement,
pay from its servicing compensation certain expenses incurred in connection
with its servicing and managing of the Assets, including payment of the fees
and disbursements of the trustee and independent accountants, payment of
expenses incurred in connection with distributions and reports to
securityholders, and payment of any other expenses described in the prospectus
supplement. Some other expenses, including certain expenses relating to
defaults and liquidations on the Assets and, to the extent so provided in the
prospectus supplement, interest thereon at the rate specified therein may be
borne by the trust fund.
If and to the extent provided in the prospectus supplement, the
servicer may be required to apply a portion of the servicing compensation
otherwise payable to it in respect of any Due Period to certain interest
shortfalls resulting from the voluntary prepayment of any Assets in the related
trust fund during that period before their due dates.
Evidence as to Compliance
Each Agreement relating to Assets that include mortgage loans, unless
otherwise provided in the prospectus supplement, will provide that on or before
a specified date in each year, beginning with the first of these dates at least
six months after the related Cut-off Date, a firm of independent public
accountants will furnish a statement to the trustee to the effect that, on the
basis of the examination by that firm conducted substantially in compliance
with either the Uniform Single Attestation Program for Mortgage Bankers, the
Audit Program for Mortgages serviced for Freddie Mac or any other program used
by the servicer, the servicing by or on behalf of the servicer of mortgage
loans under agreements substantially similar to each other (including the
related Agreement) was conducted in compliance with the terms of those
agreements or that program except for any significant exceptions or errors in
records that, in the opinion of the firm, either the Audit Program for
Mortgages serviced for Freddie Mac, or paragraph 4 of the Uniform Single
Attestation Program for Mortgage Bankers, or any other program, requires it to
report.
Each Agreement will also provide for delivery to the trustee, on or
before a specified date in each year, of an officer's certificate of the
servicer to the effect that the servicer has fulfilled its obligations under
the Agreement throughout the preceding calendar year or other specified
twelve-month period.
Certain Matters Regarding Servicers, the Master Servicer and the Depositor
The servicer or master servicer under each Agreement will be named in
the prospectus supplement. The entities serving as servicer or master servicer
may be affiliates of the depositor and may have other normal business
relationships with the depositor or the depositor's affiliates. If applicable,
reference in this prospectus to the servicer will also be deemed to be to the
master servicer. Each Agreement will provide, in general, that:
o The servicer may resign from its obligations and duties
thereunder only upon a determination that its duties under the
Agreement are no longer permissible under applicable law or are
in material conflict by reason of applicable law with any other
activities carried on by it, the other activities of the servicer
so causing that conflict being of a type and nature carried on by
the servicer at the date of the Agreement. No resignation will
become effective until the trustee or a successor servicer has
assumed the servicer's obligations and duties under the
Agreement.
o Neither any servicer, the depositor nor any director, officer,
employee, or agent of a servicer or the depositor will be under
any liability to the related trust fund or securityholders for
any action taken, or for refraining from the taking of any
action, in good faith pursuant to the Agreement; provided,
however, that neither a servicer, the depositor nor any other
person will be protected against any breach of a representation,
warranty or covenant made in the related Agreement, or against
any liability specifically imposed thereby, or against any
liability that would otherwise be imposed by reason of willful
misfeasance, bad faith or gross negligence in the performance of
obligations or duties thereunder or by reason of reckless
disregard of obligations and duties thereunder.
o Any servicer, the depositor and any director, officer, employee
or agent of a servicer or the depositor will be entitled to
indemnification by the related trust fund and will be held
harmless against any loss, liability or expense incurred in
connection with any legal action relating to the Agreement or the
Securities; provided, however, that that indemnification will not
extend to any loss, liability or expense (1) specifically imposed
by that Agreement or otherwise incidental to the performance of
obligations and duties thereunder, including, in the case of a
servicer, the prosecution of an enforcement action in respect of
any specific mortgage loan or mortgage loans (except as any loss,
liability or expense will be otherwise reimbursable pursuant to
that Agreement); (2) incurred in connection with any breach of a
representation, warranty or covenant made in that Agreement; (3)
incurred by reason of misfeasance, bad faith or gross negligence
in the performance of obligations or duties thereunder, or by
reason of reckless disregard of those obligations or duties; (4)
incurred in connection with any violation of any state or federal
securities law; or (5) imposed by any taxing authority if that
loss, liability or expense is not specifically reimbursable
pursuant to the terms of the related Agreement.
o Neither any servicer nor the depositor will be under any
obligation to appear in, prosecute or defend any legal action
that is not incidental to its respective responsibilities under
the Agreement and which in its opinion may involve it in any
expense or liability. Any servicer or the depositor may, however,
in its discretion undertake any action which it may deem
necessary or desirable with respect to the Agreement and the
rights and duties of the parties thereto and the interests of the
securityholders thereunder. In that event, the legal expenses and
costs of that action and any liability resulting therefrom will
be expenses, costs and liabilities of the securityholders, and
the servicer or the depositor, as the case may be, will be
entitled to be reimbursed therefor and to charge the Collection
Account.
Any person into which the servicer or the depositor may be merged or
consolidated, or any person resulting from any merger or consolidation to which
the servicer or the depositor is a party, or any person succeeding to the
business of the servicer or the depositor, may be the successor of the servicer
or the depositor, as the case may be, under the terms of the related Agreement.
Special Servicers
If and to the extent specified in the prospectus supplement, a special
servicer (a "Special servicer") may be a party to the related Agreement or may
be appointed by the servicer or another specified party to perform certain
specified duties in respect of servicing the related mortgage loans that would
otherwise be performed by the servicer (for example, the workout and/or
foreclosure of defaulted mortgage loans). The rights and obligations of any
Special servicer will be specified in the prospectus supplement, and the
servicer will be liable for the performance of a Special servicer only if, and
to the extent, set forth in the prospectus supplement.
Events of Default under the Agreement
Events of default under the related Agreement will generally include:
o any failure by the servicer to distribute or cause to be
distributed to securityholders, or to remit to the trustee for
distribution to securityholders, any required payment that
continues after a grace period, if any;
o any failure by the servicer duly to observe or perform in any
material respect any of its other covenants or obligations under
the Agreement that continues unremedied for 30 days after written
notice of that failure has been given to the servicer by the
trustee or the depositor, or to the servicer, the depositor and
the trustee by securityholders evidencing not less than 25% of
the voting rights for that series;
o any breach of a representation or warranty made by the servicer
under the Agreement that materially and adversely affects the
interests of securityholders and which continues unremedied for
30 days after written notice of that breach has been given to the
servicer by the trustee or the depositor, or to the servicer, the
depositor and the trustee by the holders of Securities evidencing
not less than 25% of the voting rights for that series; and
o certain events of insolvency, readjustment of debt, marshaling of
assets and liabilities or similar proceedings and certain actions
by or on behalf of the servicer indicating its insolvency or
inability to pay its obligations.
Material variations to the foregoing events of default (other than to
shorten cure periods or eliminate notice requirements) will be specified in the
prospectus supplement. The trustee will, not later than the later of 60 days or
any other period specified in the prospectus supplement after the occurrence of
any event that constitutes or, with notice or lapse of time or both, would
constitute an event of default and five days after certain officers of the
trustee become aware of the occurrence of that event, transmit by mail to the
depositor and all securityholders of the applicable series notice of that
occurrence, unless that default has been cured or waived.
Rights Upon Event of Default under the Agreements
So long as an event of default under an Agreement remains unremedied,
the depositor or the trustee may, and at the direction of holders of Securities
evidencing not less than 51% (or any other percentage specified in the
Agreement) of the voting rights for that series, the trustee will terminate all
of the rights and obligations of the servicer under the Agreement and in and to
the mortgage loans (other than as a securityholder or as the owner of any
Retained Interest), whereupon the trustee will succeed to all of the
responsibilities, duties and liabilities of the servicer under the Agreement
(except that if the trustee is prohibited by law from obligating itself to make
advances regarding delinquent Assets, or if the prospectus supplement so
specifies, then the trustee will not be obligated to make those advances) and
will be entitled to similar compensation arrangements. If the trustee is
unwilling or unable so to act, it may or, at the written request of the holders
of Securities entitled to at least 51% (or any other percentage specified in
the Agreement) of the voting rights for that series, it must appoint, or
petition a court of competent jurisdiction for the appointment of, a loan
servicing institution acceptable to the rating agency with a net worth at the
time of that appointment of at least $15,000,000 (or any other amount specified
in the Agreement) to act as successor to the servicer under the Agreement.
Pending that appointment, the trustee is obligated to act in that capacity. The
trustee and any successor servicer may agree upon the servicing compensation to
be paid, which in no event may be greater than the compensation payable to the
servicer under the Agreement.
The holders of Securities representing at least 66 2/3% (or any other
percentage specified in the Agreement) of the voting rights allocated to the
respective classes of Securities affected by any event of default will be
entitled to waive that event of default; provided, however, that an Event of
Default involving a failure to distribute a required payment to securityholders
described in clause (1) under "Events of Default under the Agreements" may be
waived only by all of the securityholders. Upon any waiver of an event of
default, that event of default will cease to exist and will be deemed to have
been remedied for every purpose under the Agreement.
No securityholders will have the right under any Agreement to
institute any proceeding with respect thereto unless that holder previously has
given to the trustee written notice of default and unless the holders of
Securities evidencing not less than 25% (or any other percentage specified in
the Agreement) of the voting rights have made written request upon the trustee
to institute that proceeding in its own name as trustee thereunder and have
offered to the trustee reasonable indemnity, and the trustee for 60 days (or
any other number of days specified in the Agreement) has neglected or refused
to institute any proceeding. The trustee, however, is under no obligation to
exercise any of the trusts or powers vested in it by any Agreement or to make
any investigation of matters arising thereunder or to institute, conduct or
defend any litigation thereunder or in relation thereto at the request, order
or direction of any of the securityholders covered by that Agreement, unless
those securityholders have offered to the trustee reasonable security or
indemnity against the costs, expenses and liabilities that may be incurred
therein or thereby.
The manner of determining the voting rights of a Security or class or
classes of Securities will be specified in the Agreement.
Amendment
In general, each Agreement may be amended by the parties thereto,
without the consent of any securityholders covered by the Agreement, to
(1) cure any ambiguity or mistake;
(2) correct, modify or supplement any provision therein that
may be inconsistent with any other provision therein or with the
prospectus supplement;
(3) make any other provisions with respect to matters or
questions arising under the Agreement that are not materially
inconsistent with the provisions thereof; or
(4) comply with any requirements imposed by the Code;
provided that, in the case of clause (3), that amendment will not
adversely affect in any material respect the interests of any
securityholders covered by the Agreement as evidenced either by an
opinion of counsel to that effect or the delivery to the trustee of
written notification from each rating agency that provides, at the
request of the depositor, a rating for the Offered Securities of the
related series to the effect that that amendment or supplement will
not cause that rating agency to lower or withdraw the then current
rating assigned to those Securities.
In general, each Agreement may also be amended by the depositor, the
servicer, if any, and the trustee, with the consent of the securityholders
affected thereby evidencing not less than 51% (or any other percentage
specified in the Agreement) of the voting rights, for any purpose; provided,
however, no amendment may (1) reduce in any manner the amount of, or delay the
timing of, payments received or advanced on Assets that are required to be
distributed on any Security without the consent of the securityholder or (2)
reduce the consent percentages described in this paragraph without the consent
of all the securityholders covered by the Agreement then outstanding. However,
for any series of Securities as to which a REMIC election is to be made, the
trustee will not consent to any amendment of the Agreement unless it has first
have received an opinion of counsel to the effect that that amendment will not
result in the imposition of a tax on the related trust fund or, if applicable,
cause the related trust fund to fail to qualify as a REMIC, at any time that
the related Securities are outstanding.
The Trustee
The trustee under each Agreement will be named in the prospectus
supplement. The commercial bank, national banking association, banking
corporation or trust company serving as trustee may have a banking relationship
with the depositor and its affiliates, with any servicer and its affiliates and
with any master servicer and its affiliates. To the extent consistent with its
fiduciary obligations as trustee, the trustee may delegate its duties to one or
more agents as provided in the Agreement.
Duties of the Trustee
The trustee will make no representations as to the validity or
sufficiency of any Agreement, the Securities or any Asset or related document
and is not accountable for the use or application by or on behalf of any
servicer of any funds paid to the master servicer or its designee in respect of
the Securities or the Assets, or deposited into or withdrawn from the
Collection Account or any other account by or on behalf of the servicer. If no
Event of Default has occurred and is continuing, the trustee is required to
perform only those duties specifically required under the related Agreement, as
applicable. However, upon receipt of the various certificates, reports or other
instruments required to be furnished to it, the trustee is required to examine
those documents and to determine whether they conform to the requirements of
the Agreement.
Certain Matters Regarding the Trustee
The trustee and any director, officer, employee or agent of the
trustee will be entitled to indemnification out of the Collection Account for
any loss, liability or expense (including costs and expenses of litigation, and
of investigation, counsel fees, damages, judgments and amounts paid in
settlement) incurred in connection with the trustee's (1) enforcing its rights
and remedies and protecting the interests of the securityholders during the
continuance of an Event of Default, (2) defending or prosecuting any legal
action in respect of the related Agreement or series of Securities, (3) being
the mortgagee of record for the mortgage loans in a trust fund and the owner of
record for any Mortgaged Property acquired in respect thereof for the benefit
of securityholders, or (4) acting or refraining from acting in good faith at
the direction of the holders of the related series of Securities entitled to
not less than 25% (or any other percentage as is specified in the related
Agreement for any particular matter) of the voting rights for that series;
provided, however, that this indemnification will not extend to any loss,
liability or expense that constitutes a specific liability of the trustee
pursuant to the related Agreement, or to any loss, liability or expense
incurred by reason of willful misfeasance, bad faith or negligence on the part
of the trustee in the performance of its obligations and duties thereunder, or
by reason of its reckless disregard of those obligations or duties, or as may
arise from a breach of any representation, warranty or covenant of the trustee
made therein.
Resignation and Removal of the Trustee
The trustee may at any time resign from its obligations and duties
under an Agreement by giving written notice thereof to the depositor, the
servicer, if any, each rating agency, and all securityholders. Upon receiving
that notice of resignation, the depositor is required promptly to appoint a
successor trustee acceptable to the servicer, if any. If no successor trustee
has been so appointed and has accepted appointment within 30 days after the
giving of that notice of resignation, the resigning trustee may petition any
court of competent jurisdiction for the appointment of a successor trustee.
If at any time the trustee ceases to be eligible to continue as a
trustee under the related Agreement, or if at any time the trustee becomes
incapable of acting, or is adjudged bankrupt or insolvent, or a receiver of the
trustee or of its property is appointed, or any public officer takes charge or
control of the trustee or of its property or affairs for the purpose of
rehabilitation, conservation or liquidation, or if a change in the financial
condition of the trustee has adversely affected or will adversely affect the
rating on any class of the Securities, then the depositor and/or a party
specified in the related Agreement may remove the trustee and appoint a
successor trustee acceptable to the master servicer, if any, according to the
terms of the related Agreement. Securityholders of any series entitled to at
least 51% (or any other percentage specified in the prospectus supplement) of
the voting rights for that series may at any time remove the trustee without
cause and appoint a successor trustee.
Any resignation or removal of the trustee and appointment of a
successor trustee will not become effective until acceptance of appointment by
the successor trustee.
Material Terms of the Indenture
General
The following summary describes the material provisions that may
appear in each indenture. The prospectus supplement for a series of Notes will
describe any provision of the indenture relating to that series that materially
differs from the description thereof contained in this prospectus. The
summaries do not purport to be complete and are subject to, and are qualified
by reference to, all of the provisions of the indenture for a series of Notes.
A form of an indenture has been filed as an exhibit to the Registration
Statement of which this prospectus is a part. The depositor will provide a copy
of the indenture (without exhibits) relating to any series of Notes without
charge upon written request of a securityholder of that series addressed to ACE
Securities Corp., 6525 Morrison Boulevard, Suite 318, Charlotte, North Carolina
28211, Attention: Elizabeth S.
Eldridge.
Events of Default
Events of default under the indenture for each series of Notes will
generally include:
o a default for thirty days (or any other number of days specified
in the prospectus supplement) or more in the payment of any
principal of or interest on a Note of that series, to the extent
specified in the prospectus supplement;
o failure to perform any other covenant of the depositor or the
trust fund in the indenture that continues for a period of sixty
days (or any other number of days specified in the prospectus
supplement or the indenture) after notice thereof is given in
accordance with the procedures described in the prospectus
supplement;
o any representation or warranty made by the depositor or the trust
fund in the indenture or in any certificate or other writing
delivered pursuant thereto or in connection therewith with
respect to or affecting that series having been incorrect in a
material respect as of the time made, and that breach is not
cured within sixty days (or any other number of days specified in
the prospectus supplement) after notice thereof is given in
accordance with the procedures described in the prospectus
supplement;
o certain events of bankruptcy, insolvency, receivership or
liquidation of the trust fund; or
o any other event of default provided with respect to Notes of that
series.
If an event of default with respect to the Notes of any series at the
time outstanding occurs and is continuing, subject to and in accordance with
the terms of the indenture, either the indenture trustee or the holders of a
majority of the then total outstanding amount of the Notes of that series may
declare the principal amount (or, if the Notes of that series are Accrual
Securities, that portion of the principal amount as may be specified in the
terms of that series, as provided in the indenture) of all the Notes of that
series to be due and payable immediately. That declaration may, under certain
circumstances, be rescinded and annulled by the securityholders of a majority
in total outstanding amount of the Notes of that series.
If, following an event of default with respect to any series of Notes,
the Notes of that series have been declared to be due and payable, the
indenture trustee may, in its discretion, notwithstanding that acceleration,
elect to maintain possession of the collateral securing the Notes of that
series and to continue to apply distributions on that collateral as if there
had been no declaration of acceleration if that collateral continues to provide
sufficient funds for the payment of principal of and interest on the Notes of
that series as they would have become due if there had not been that
declaration. In addition, the indenture trustee may not sell or otherwise
liquidate the collateral securing the Notes of a series following an event of
default, other than a default in the payment of any principal or interest on
any Note of that series for thirty days or more, unless
(1) the holders of 100% (or any other percentage specified in
the indenture) of the then total outstanding amount of the Notes of
that series consent to that sale;
(2) the proceeds of that sale or liquidation are sufficient
to pay in full the principal of and accrued interest, due and unpaid,
on the outstanding Notes of that series at the date of that sale; or
(3) the indenture trustee determines that that collateral
would not be sufficient on an ongoing basis to make all payments on
the Notes as those payments would have become due if the Notes had not
been declared due and payable, and the indenture trustee obtains the
consent of the holders of 66 2/3% (or any other percentage specified
in the indenture) of the then total outstanding amount of the Notes of
that series.
If so specified in the prospectus supplement, only holders of certain
classes of Notes will have the right to declare the Notes of that series to be
immediately due and payable in the event of a payment default, as described
above, and to exercise the remedies described above.
If the indenture trustee liquidates the collateral in connection with
an event of default involving a default for thirty days (or any other number of
days specified in the indenture) or more in the payment of principal of or
interest on the Notes of a series, the indenture provides that the indenture
trustee will have a prior lien on the proceeds of any liquidation for unpaid
fees and expenses. As a result, upon the occurrence of that event of default,
the amount available for distribution to the securityholders would be less than
would otherwise be the case. However, the indenture trustee may not institute a
proceeding for the enforcement of its lien except in connection with a
proceeding for the enforcement of the lien of the indenture for the benefit of
the securityholders after the occurrence of that event of default.
To the extent provided in the prospectus supplement, in the event the
principal of the Notes of a series is declared due and payable, as described
above, the holders of any Notes issued at a discount from par may be entitled
to receive no more than an amount equal to the unpaid principal amount thereof
less the amount of the discount that is unamortized.
Subject to the provisions of the indenture relating to the duties of
the indenture trustee, in case an event of default occurs and continues for a
series of Notes, the indenture trustee will be under no obligation to exercise
any of the rights or powers under the indenture at the request or direction of
any of the securityholders of that series, unless those holders offer to the
indenture trustee security or indemnity satisfactory to it against the costs,
expenses and liabilities that might be incurred by it in complying with that
request or direction. Subject to those provisions for indemnification and
certain limitations contained in the indenture, the holders of a majority of
the then total outstanding amount of the Notes of that series will have the
right to direct the time, method and place of conducting any proceeding for any
remedy available to the indenture trustee or exercising any trust or power
conferred on the indenture trustee with respect to the Notes of that series,
and the holders of a majority of the then total outstanding amount of the Notes
of that series may, in some cases, waive any default with respect thereto,
except a default in the payment of principal or interest or a default in
respect of a covenant or provision of the indenture that cannot be modified
without the waiver or consent of all the holders of the outstanding Notes of
that series affected thereby.
Discharge of Indenture
The indenture will be discharged, subject to the provisions of the
indenture, for a series of Notes (except for certain continuing rights
specified in the indenture) upon the delivery to the indenture trustee for
cancellation of all the Notes of that series or, with certain limitations, upon
deposit with the indenture trustee of funds sufficient for the payment in full
of all of the Notes of that series.
With certain limitations, the indenture will provide that, if
specified for the Notes of any series, the related trust fund will be
discharged from any and all obligations in respect of the Notes of that series
(except for certain obligations specified in the indenture including
obligations relating to temporary Notes and exchange of Notes, to register the
transfer of or exchange Notes of that series, to replace stolen, lost or
mutilated Notes of that series, to maintain paying agencies and to hold monies
for payment in trust) upon the deposit with the indenture trustee, in trust, of
money and/or direct obligations of or obligations guaranteed by the United
States of America which through the payment of interest and principal in
respect thereof in accordance with their terms will provide money in an amount
sufficient to pay the principal of and each installment of interest on the
Notes of that series on the maturity date for those Notes and any installment
of interest on those Notes in accordance with the terms of the indenture and
the Notes of that series. In the event of any defeasance and discharge of Notes
of that series, holders of Notes of that series would be able to look only to
that money and/or those direct obligations for payment of principal and
interest, if any, on their Notes until maturity.
Indenture Trustee's Annual Report
The indenture trustee for each series of Notes will be required to
mail each year to all related securityholders a brief report, as provided in
the indenture, relating to its eligibility and qualification to continue as
indenture trustee under the related indenture, any amounts advanced by it under
the indenture, the amount, interest rate and maturity date of certain
indebtedness owing by that Trust to the applicable indenture trustee in its
individual capacity, the property and funds physically held by the indenture
trustee in its capacity as indenture trustee and any action taken by it that
materially affects the Notes and that has not been previously reported.
The Indenture Trustee
The indenture trustee for a series of Notes will be specified in the
prospectus supplement. The indenture trustee for any series may resign at any
time in accordance with the terms of the indenture, in which event the
depositor or the appropriate party designated in the indenture will be
obligated to appoint a successor trustee for that series. The depositor or the
appropriate party designated in the indenture may also remove any indenture
trustee if that indenture trustee ceases to be eligible to continue as the
indenture trustee under the related indenture, if that indenture trustee
becomes insolvent or for any other grounds specified in the indenture. In those
circumstances the depositor or the appropriate party designated in the
indenture will be obligated to appoint a successor trustee for the applicable
series of Notes. Any resignation or removal of the indenture trustee and
appointment of a successor trustee for any series of Notes does not become
effective until acceptance of the appointment by the successor trustee for that
series.
The bank or trust company serving as indenture trustee may have a
banking relationship with the depositor or any of its affiliates, a servicer or
any of its affiliates or the master servicer or any of its affiliates. To the
extent consistent with its fiduciary obligations as indenture trustee, the
indenture trustee may delegate its duties to one or more agents as provided in
the indenture and the Agreement.
Description of Credit Support
General
For any series of Securities, credit support may be provided for one
or more classes thereof or the related Assets. Credit support may be in the
form of:
o the subordination of one or more classes of Securities;
o letters of credit;
o insurance policies;
o guarantees;
o the establishment of one or more reserve funds; or
o any other method of credit support described in the prospectus
supplement, or any combination of the foregoing.
Any form of credit support may be structured so as to be drawn upon by
more than one series to the extent described in the prospectus supplement.
The coverage provided by any credit support will be described in the
prospectus supplement. Generally, that coverage will not provide protection
against all risks of loss and will not guarantee repayment of the entire
Security Balance of the Securities and interest thereon. If losses or
shortfalls occur that exceed the amount covered by credit support or that are
not covered by credit support, securityholders will bear their allocable share
of deficiencies. Moreover, if a form of credit support covers more than one
series of Securities (each, a "Covered Trust"), securityholders evidencing
interests in any of those Covered Trusts will be subject to the risk that the
credit support will be exhausted by the claims of other Covered Trusts before
that Covered Trust receiving any of its intended share of that coverage.
If credit support is provided for one or more classes of Securities of
a series, or the related Assets, the prospectus supplement will include a
description of (a) the nature and amount of coverage under that credit support,
(b) any conditions to payment thereunder not otherwise described herein, (c)
the conditions (if any) under which the amount of coverage under that credit
support may be reduced and under which that credit support may be terminated or
replaced and (d) the material provisions relating to that credit support.
Additionally, the prospectus supplement will set forth certain information with
respect to the obligor under any financial guaranty insurance policy, letter of
credit, guarantee or similar instrument of credit support, including (1) a
brief description of its principal business activities, (2) its principal place
of business, place of incorporation and the jurisdiction under which it is
chartered or licensed to do business, (3) if applicable, the identity of
regulatory agencies that exercise primary jurisdiction over the conduct of its
business and (4) its total assets, and its stockholders' or policyholders'
surplus, if applicable, as of the date specified in the prospectus supplement.
Subordinate Securities
One or more classes of Securities of a series may be Subordinate
Securities if specified in the prospectus supplement. The rights of the holders
of Subordinate Securities to receive distributions of principal and interest
from the Collection Account on any Distribution Date will be subordinated to
those rights of the holders of Senior Securities. The subordination of a class
may apply only in the event of (or may be limited to) certain types of losses
or shortfalls. The prospectus supplement will set forth information concerning
the amount of subordination of a class or classes of Subordinate Securities in
a series, the circumstances in which that subordination will be applicable and
the manner, if any, in which the amount of subordination will be effected.
Cross-Support Provisions
If the Assets for a series are divided into separate groups, each
supporting a separate class or classes of Securities of a series, credit
support may be provided by cross-support provisions requiring that
distributions be made on Senior Securities evidencing interests in one group of
mortgage loans before distributions on Subordinate Securities evidencing
interests in a different group of mortgage loans within the trust fund. The
prospectus supplement for a series that includes a cross-support provision will
describe the manner and conditions for applying those provisions.
Limited Guarantee
If specified in the prospectus supplement for a series of Securities,
credit enhancement may be provided in the form of a limited guarantee issued by
a guarantor named therein.
Financial Guaranty Insurance Policy or Surety Bond
Credit enhancement may be provided in the form of a financial guaranty
insurance policy or a surety bond issued by an insurer named therein, if
specified in the prospectus supplement.
Letter of Credit
Alternative credit support for a series of Securities may be provided
by the issuance of a letter of credit by the bank or financial institution
specified in the prospectus supplement. The coverage, amount and frequency of
any reduction in coverage provided by a letter of credit issued for a series of
Securities will be set forth in the prospectus supplement relating to that
series.
Pool Insurance Policies
If specified in the prospectus supplement relating to a series of
Securities, a pool insurance policy for the mortgage loans in the related trust
fund will be obtained. The pool insurance policy will cover any loss (subject
to the limitations described in the prospectus supplement) by reason of default
to the extent a related mortgage loan is not covered by any primary mortgage
insurance policy. The amount and principal terms of any pool insurance coverage
will be set forth in the prospectus supplement.
Special Hazard Insurance Policies
A special hazard insurance policy may also be obtained for the related
trust fund, if specified in the prospectus supplement, in the amount set forth
therein. The special hazard insurance policy will, subject to the limitations
described in the prospectus supplement, protect against loss by reason of
damage to Mortgaged Properties caused by certain hazards not insured against
under the standard form of hazard insurance policy for the respective states,
in which the Mortgaged Properties are located. The amount and principal terms
of any special hazard insurance coverage will be set forth in the prospectus
supplement.
Borrower Bankruptcy Bond
Losses resulting from a bankruptcy proceeding relating to a borrower
affecting the mortgage loans in a trust fund for a series of Securities will,
if specified in the prospectus supplement, be covered under a borrower
bankruptcy bond (or any other instrument that will not result in a downgrading
of the rating of the Securities of a series by the rating agency or agencies
that rate that series). Any borrower bankruptcy bond or any other instrument
will provide for coverage in an amount meeting the criteria of the rating
agency or agencies rating the Securities of the related series, which amount
will be set forth in the prospectus supplement. The amount and principal terms
of any borrower bankruptcy coverage will be set forth in the prospectus
supplement.
Reserve Funds
If so provided in the prospectus supplement for a series of
Securities, deficiencies in amounts otherwise payable on those Securities or
certain classes thereof will be covered by one or more reserve funds in which
cash, a letter of credit, Permitted Investments, a demand note or a combination
thereof will be deposited, in the amounts so specified in the prospectus
supplement. The reserve funds for a series may also be funded over time by
depositing therein a specified amount of the distributions received on the
related Assets as specified in the prospectus supplement.
Amounts on deposit in any reserve fund for a series, together with the
reinvestment income thereon, if any, will be applied for the purposes, in the
manner, and to the extent specified in the prospectus supplement. A reserve
fund may be provided to increase the likelihood of timely distributions of
principal of and interest on the Securities. If specified in the prospectus
supplement, reserve funds may be established to provide limited protection
against only certain types of losses and shortfalls. Following each
Distribution Date amounts in a reserve fund in excess of any amount required to
be maintained therein may be released from the reserve fund under the
conditions and to the extent specified in the prospectus supplement and will
not be available for further application to the Securities.
Money deposited in any reserve funds will be invested in Permitted
Investments, to the extent specified in the prospectus supplement. To the
extent specified in the prospectus supplement, any reinvestment income or other
gain from those investments will be credited to the related reserve fund for
that series, and any loss resulting from those investments will be charged to
the reserve fund. However, that income may be payable to any related servicer
or another service provider or other entity. To the extent specified in the
prospectus supplement, the reserve fund, if any, for a series will not be a
part of the trust fund.
Additional information concerning any reserve fund will be set forth
in the prospectus supplement, including the initial balance of the reserve
fund, the balance required to be maintained in the reserve fund, the manner in
which the required balance will decrease over time, the manner of funding the
reserve fund, the purposes for which funds in the reserve fund may be applied
to make distributions to securityholders and use of investment earnings from
the reserve fund, if any.
Overcollateralization
If specified in the prospectus supplement, subordination provisions of
a trust fund may be used to accelerate to a limited extent the amortization of
one or more classes of Securities relative to the amortization of the related
Assets. The accelerated amortization is achieved by the application of certain
excess interest to the payment of principal of one or more classes of
Securities. This acceleration feature creates, for the Assets or groups
thereof, overcollateralization, which is the excess of the total principal
balance of the related Assets, or a group thereof, over the principal balance
of the related class or classes of Securities. This acceleration may continue
for the life of the related Security, or may be limited. In the case of limited
acceleration, once the required level of overcollateralization is reached, and
subject to certain provisions specified in the prospectus supplement, the
limited acceleration feature may cease, unless necessary to maintain the
required level of overcollateralization.
Certain Legal Aspects of Mortgage Loans
The following discussion contains summaries, which are general in
nature, of certain legal aspects of loans secured by single-family residential
properties. Because these legal aspects are governed primarily by applicable
state law (which laws may differ substantially), the summaries do not purport
to be complete nor to reflect the laws of any particular state, nor to
encompass the laws of all states in which the security for the mortgage loans
is situated. The summaries are qualified in their entirety by reference to the
applicable federal and state laws governing the mortgage loans. In this regard,
the following discussion does not fully reflect federal regulations for FHA
loans and VA loans. See "Description of The Trust Funds--FHA Loans and VA
Loans," "Description of the Agreements--Material Terms of the Pooling and
Servicing Agreements and Underlying Servicing Agreements--FHA Insurance and VA
Guarantees" and "Description of the Trust Funds--Assets."
General
All of the mortgage loans are evidenced by a note or bond and secured
by instruments granting a security interest in real property which may be
mortgages, deeds of trust, security deeds or deeds to secure debt, depending on
the prevailing practice and law in the state in which the Mortgaged Property is
located. Mortgages, deeds of trust and deeds to secure debt are herein
collectively referred to as "mortgages." Any of the foregoing types of
mortgages will create a lien upon, or grant a title interest in, the subject
property, the priority of which will depend on the terms of the particular
security instrument, as well as separate, recorded, contractual arrangements
with others holding interests in the mortgaged property, the knowledge of the
parties to that instrument as well as the order of recordation of the
instrument in the appropriate public recording office. However, recording does
not generally establish priority over governmental claims for real estate taxes
and assessments and other charges imposed under governmental police powers.
Types of Mortgage Instruments
A mortgage either creates a lien against or constitutes a conveyance
of real property between two parties--a borrower (usually the owner of the
subject property) and a mortgagee (the lender). In contrast, a deed of trust is
a three-party instrument, among a trustor (the equivalent of a borrower), a
trustee to whom the mortgaged property is conveyed, and a beneficiary (the
lender) for whose benefit the conveyance is made. As used in this prospectus,
unless the context otherwise requires, "borrower" includes the trustor under a
deed of trust and a grantor under a security deed or a deed to secure debt.
Under a deed of trust, the borrower grants the property, irrevocably
until the debt is paid, in trust, generally with a power of sale as security
for the indebtedness evidenced by the related note. A deed to secure debt
typically has two parties. By executing a deed to secure debt, the grantor
conveys title to, as opposed to merely creating a lien upon, the subject
property to the grantee until the underlying debt is repaid, generally with a
power of sale as security for the indebtedness evidenced by the related
mortgage note.
In case the borrower under a mortgage is a land trust, there would be
an additional party because legal title to the property is held by a land
trustee under a land trust agreement for the benefit of the borrower. At
origination of a mortgage loan involving a land trust, the borrower executes a
separate undertaking to make payments on the mortgage note. The mortgagee's
authority under a mortgage, the trustee's authority under a deed of trust and
the grantee's authority under a deed to secure debt are governed by the express
provisions of the mortgage, the law of the state in which the real property is
located, certain federal laws (including the Soldiers' and Sailors' Civil
Relief Act of 1940) and, in some cases, in deed of trust transactions, the
directions of the beneficiary.
Interest in Real Property
The real property covered by a mortgage, deed of trust, security deed
or deed to secure debt is most often the fee estate in land and improvements.
However, that instrument may encumber other interests in real property such as
a tenant's interest in a lease of land or improvements, or both, and the
leasehold estate created by that lease. An instrument covering an interest in
real property other than the fee estate requires special provisions in the
instrument creating that interest or in the mortgage, deed of trust, security
deed or deed to secure debt, to protect the mortgagee against termination of
that interest before the mortgage, deed of trust, security deed or deed to
secure debt is paid. The depositor, the Asset Seller or other entity specified
in the prospectus supplement will make certain representations and warranties
in the Agreement or certain representations and warranties will be assigned to
the trustee for any mortgage loans secured by an interest in a leasehold
estate. Those representation and warranties, if applicable, will be set forth
in the prospectus supplement.
Cooperative Loans
If specified in the prospectus supplement, the mortgage loans may also
consist of cooperative apartment loans ("Cooperative Loans") secured by
security interests in shares issued by a cooperative housing corporation (a
"Cooperative") and in the related proprietary leases or occupancy agreements
granting exclusive rights to occupy specific dwelling units in the
cooperatives' buildings. The security agreement will create a lien upon, or
grant a title interest in, the property that it covers, the priority of which
will depend on the terms of the particular security agreement as well as the
order of recordation of the agreement in the appropriate recording office. That
lien or title interest is not prior to the lien for real estate taxes and
assessments and other charges imposed under governmental police powers.
Each Cooperative owns in fee or has a leasehold interest in all the
real property and owns in fee or leases the building and all separate dwelling
units therein. The Cooperative is directly responsible for property management
and, in most cases, payment of real estate taxes, other governmental
impositions and hazard and liability insurance. If there is a blanket mortgage
or mortgages on the cooperative apartment building or underlying land, as is
generally the case, or an underlying lease of the land, as is the case in some
instances, the Cooperative, as property borrower, or lessee, as the case may
be, is also responsible for meeting these mortgage or rental obligations. A
blanket mortgage is ordinarily incurred by the cooperative in connection with
either the construction or purchase of the Cooperative's apartment building or
obtaining of capital by the Cooperative. The interest of the occupant under
proprietary leases or occupancy agreements as to which that Cooperative is the
landlord are generally subordinate to the interest of the holder of a blanket
mortgage and to the interest of the holder of a land lease.
If the Cooperative is unable to meet the payment obligations (1)
arising under a blanket mortgage, the mortgagee holding a blanket mortgage
could foreclose on that mortgage and terminate all subordinate proprietary
leases and occupancy agreements or (2) arising under its land lease, the holder
of the landlord's interest under the land lease could terminate it and all
subordinate proprietary leases and occupancy agreements. Also, a blanket
mortgage on a cooperative may provide financing in the form of a mortgage that
does not fully amortize, with a significant portion of principal being due in
one final payment at maturity. The inability of the Cooperative to refinance a
mortgage and its consequent inability to make that final payment could lead to
foreclosure by the mortgagee. Similarly, a land lease has an expiration date
and the inability of the Cooperative to extend its term or, in the alternative,
to purchase the land could lead to termination of the Cooperative's interest in
the property and termination of all proprietary leases and occupancy agreement.
In either event, a foreclosure by the holder of a blanket mortgage or the
termination of the underlying lease could eliminate or significantly diminish
the value of any collateral held by the lender that financed the purchase by an
individual tenant stockholder of cooperative shares or, in the case of the
mortgage loans, the collateral securing the Cooperative Loans.
The Cooperative is owned by tenant-stockholders who, through ownership
of stock or shares in the corporation, receive proprietary lease or occupancy
agreements that confer exclusive rights to occupy specific units. Generally, a
tenant-stockholder of a Cooperative must make a monthly payment to the
Cooperative representing that 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 occupancy rights are financed
through a Cooperative Loan evidenced by a promissory note and secured by an
assignment of and a security interest in the occupancy agreement or proprietary
lease and a security interest in the related Cooperative shares. The lender
generally 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 is 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. See
"--Foreclosure--Cooperative Loans" below.
Land Sale Contracts
Under an installment land sale contract for the sale of real estate (a
"land sale contract") the contract seller (hereinafter referred to as the
"contract lender") retains legal title to the property and enters into an
agreement with the contract purchaser (hereinafter referred to as the "contract
borrower") for the payment of the purchase price, plus interest, over the term
of the land sale contract. Only after full performance by the borrower of the
contract is the contract lender obligated to convey title to the real estate to
the purchaser. As with mortgage or deed of trust financing, during the
effective period of the land sale contract, the contract borrower is
responsible for maintaining the property in good condition and for paying real
estate taxes, assessments and hazard insurance premiums associated with the
property.
The method of enforcing the rights of the contract lender under an
installment contract varies on a state-by-state basis depending on the extent
to which state courts are willing, or able pursuant to state statute, to
enforce the contract strictly according to its terms. The terms of land sale
contracts generally provide that upon default by the contract borrower, the
borrower loses his or her right to occupy the property, the entire indebtedness
is accelerated, and the buyer's equitable interest in the property is
forfeited. The contract lender in that situation does not have to foreclose to
obtain title to the property, although in some cases a quiet title action is in
order if the contract borrower has filed the land sale contract in local land
records and an ejectment action may be necessary to recover possession.
In a few states, particularly in cases of contract borrower default
during the early years of a land sale contract, the courts will permit
ejectment of the buyer and a forfeiture of his or her interest in the property.
However, most state legislatures have enacted provisions by analogy to mortgage
law protecting borrowers under land sale contracts from the harsh consequences
of forfeiture. Under those statues, a judicial contract may be reinstated upon
full payment of the default amount and the borrower may have a post-foreclosure
statutory redemption right. In other states, courts in equity may permit a
contract borrower with significant investment in the property under a land sale
contract for the sale of real estate to share the proceeds of sale of the
property after the indebtedness is repaid or may otherwise refuse to enforce
the forfeiture clause. Nevertheless, generally speaking, the contract lender's
procedures for obtaining possession and clear title under a land sale contract
for the sale of real estate in a particular state are simpler and less time
consuming and costly than are the procedures for foreclosing and obtaining
clear title to a mortgaged property.
Foreclosure
General
Foreclosure is a legal procedure that allows the mortgagee to recover
its mortgage debt by enforcing its rights and available legal remedies under
the mortgage. If the mortgagor defaults in payment or performance of its
obligations under the note or mortgage, the mortgagee has the right to
institute foreclosure proceedings to sell the mortgaged property at public
auction to satisfy the indebtedness.
Foreclosure procedures for the enforcement of a mortgage vary from
state to state. Two primary methods of foreclosing a mortgage are judicial
foreclosure and non-judicial foreclosure pursuant to a power of sale granted in
the mortgage instrument. There are several other foreclosure procedures
available in some states that are either infrequently used or available only in
some limited circumstances, such as strict foreclosure.
Judicial Foreclosure
A judicial foreclosure proceeding is conducted in a court having
jurisdiction over the mortgaged property. Generally, the action is initiated by
the service of legal pleadings upon all parties having an interest of record in
the real property. Delays in completion of the foreclosure may occasionally
result from difficulties in locating defendants. When the lender's right to
foreclose is contested, the legal proceedings can be time-consuming. Upon
successful completion of a judicial foreclosure proceeding, the court generally
issues a judgment of foreclosure and appoints a referee or other officer to
conduct a public sale of the mortgaged property, the proceeds of which are used
to satisfy the judgment. Those sales are made in accordance with procedures
that vary from state to state.
Equitable Limitations on Enforceability of Certain Provisions
United States courts have traditionally imposed general equitable
principles to limit the remedies available to a mortgagee in connection with
foreclosure. These equitable principles are generally designed to relieve the
borrower from the legal effect of mortgage defaults, to the extent that the
effect is perceived as harsh or unfair. Relying on those principles, a court
may alter the specific terms of a loan to the extent it considers necessary to
prevent or remedy an injustice, undue oppression or overreaching, or may
require the lender to undertake affirmative and expensive actions to determine
the cause of the borrower's default and the likelihood that the borrower will
be able to reinstate the loan.
In some cases, courts have substituted their judgment for the lender's
and have required that lenders reinstate loans or recast payment schedules to
accommodate borrowers who are suffering from a temporary financial disability.
In other cases, courts have limited the right of the lender to foreclose if the
default under the mortgage is not monetary, e.g., the borrower failed to
maintain the mortgaged property adequately or the borrower executed a junior
mortgage on the mortgaged property. The exercise by the court of its equity
powers will depend on the individual circumstances of each case presented to
it. Finally, some courts have been faced with the issue of whether federal or
state constitutional provisions reflecting due process concerns for adequate
notice require that a borrower receive notice in addition to
statutorily-prescribed minimum notice. For the most part, these cases have
upheld the reasonableness of the notice provisions or have found that a public
sale under a mortgage providing for a power of sale does not involve sufficient
state action to afford constitutional protections to the borrower.
Non-Judicial Foreclosure/Power of Sale
Foreclosure of a deed of trust is generally accomplished by a
non-judicial trustee's sale pursuant to the power of sale granted in the deed
of trust. A power of sale is typically granted in a deed of trust. It may also
be contained in any other type of mortgage instrument. A power of sale allows a
non-judicial public sale to be conducted generally following a request from the
beneficiary/lender to the trustee to sell the property upon any default by the
borrower under the terms of the mortgage note or the mortgage instrument and
after notice of sale is given in accordance with the terms of the mortgage
instrument, as well as applicable state law.
In some states, before the sale, the trustee under a deed of trust
must record a notice of default and notice of sale and send a copy to the
borrower and to any other party who has recorded a request for a copy of a
notice of default and notice of sale. In addition, in some states the trustee
must provide notice to any other party having an interest of record in the real
property, including junior lienholders. A notice of sale must be posted in a
public place and, in most states, published for a specified period of time in
one or more newspapers. The borrower or junior lienholder may then have the
right, during a reinstatement period required in some states, to cure the
default by paying the entire actual amount in arrears (without acceleration)
plus the expenses incurred in enforcing the obligation. In other states, the
borrower or the junior lienholder is not provided a period to reinstate the
loan, but has only the right to pay off the entire debt to prevent the
foreclosure sale. Generally, the procedure for public sale, the parties
entitled to notice, the method of giving notice and the applicable time periods
are governed by state law and vary among the states. Foreclosure of a deed to
secure debt is also generally accomplished by a non-judicial sale similar to
that required by a deed of trust, except that the lender or its agent, rather
than a trustee, is typically empowered to perform the sale in accordance with
the terms of the deed to secure debt and applicable law.
Public Sale
A third party may be unwilling to purchase a mortgaged property at a
public sale because of the difficulty in determining the value of that property
at the time of sale, due to, among other things, redemption rights that may
exist and the possibility of physical deterioration of the property during the
foreclosure proceedings. For these reasons, it is common for the lender to
purchase the mortgaged property for an amount equal to or less than the
underlying debt and accrued and unpaid interest plus the expenses of
foreclosure. Generally, state law controls the amount of foreclosure costs and
expenses that may be recovered by a lender. Thereafter, subject to the
borrower's right in some states to remain in possession during a redemption
period, if applicable, the lender will become the owner of the property and
have both the benefits and burdens of ownership of the mortgaged property. For
example, the lender will become obligated to pay taxes, obtain casualty
insurance and to make those 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 on market conditions, the ultimate
proceeds of the sale of the property may not equal the lender's investment in
the property. Moreover, a lender commonly incurs substantial legal fees and
court costs in acquiring a mortgaged property through contested foreclosure
and/or bankruptcy proceedings. Generally, state law controls the amount of
foreclosure expenses and costs, including attorneys' fees, that may be
recovered by a lender.
A junior mortgagee may not foreclose on the property securing the
junior mortgage unless it forecloses subject to senior mortgages and any other
prior liens, in which case it may be obliged to make payments on the senior
mortgages to avoid their foreclosure. In addition, if the foreclosure of a
junior mortgage triggers the enforcement of a "due-on-sale" clause contained in
a senior mortgage, the junior mortgagee may be required to pay the full amount
of the senior mortgage to avoid its foreclosure. Accordingly, for those
mortgage loans, if any, that are junior mortgage loans, if the lender purchases
the property the lender's title will be subject to all senior mortgages, prior
liens 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 under which the sale was conducted.
Any proceeds remaining after satisfaction of senior mortgage debt are generally
payable to the holders of junior mortgages and other liens and claims in order
of their priority, whether or not the borrower is in default. Any additional
proceeds are generally payable to the borrower. The payment of the proceeds to
the holders of junior mortgages may occur in the foreclosure action of the
senior mortgage or a subsequent ancillary proceeding or may require the
institution of separate legal proceedings by those holders.
Rights of Redemption
The purposes of a foreclosure action are to enable the mortgagee to
realize upon its security and to bar the borrower, and all persons who have an
interest in the property that is subordinate to the mortgage being foreclosed,
from exercise of their "equity of redemption." The doctrine of equity of
redemption provides that, until the property covered by a mortgage has been
sold in accordance with a properly conducted foreclosure and foreclosure sale,
those having an interest that is subordinate to that of the foreclosing
mortgagee have an equity of redemption and may redeem the property by paying
the entire debt with interest. In addition, in some states, when a foreclosure
action has begun, the redeeming party must pay certain costs of that action.
Those having an equity of redemption must generally be made parties and joined
in the foreclosure proceeding in order for their equity of redemption to be cut
off and terminated.
The equity of redemption is a common-law (non-statutory) right that
exists before completion of the foreclosure, is not waivable by the borrower,
must be exercised before foreclosure sale and should be distinguished from the
post-sale statutory rights of redemption. In some states, after sale pursuant
to a deed of trust or foreclosure of a mortgage, the borrower and foreclosed
junior lienors are given a statutory period in which to redeem the property
from the foreclosure sale. In some states, statutory redemption may occur only
upon payment of the foreclosure sale price. In other states, redemption may be
authorized if the former borrower pays only a portion of the sums due. The
effect of a statutory right of redemption is to diminish the ability of the
lender to sell the foreclosed property. The exercise of a right of redemption
would defeat the title of any purchaser from a foreclosure sale or sale under a
deed of trust. Consequently, the practical effect of the redemption right is to
force the lender to maintain the property and pay the expenses of ownership
until the redemption period has expired. In some states, a post-sale statutory
right of redemption may exist following a judicial foreclosure, but not
following a trustee's sale under a deed of trust.
Under the REMIC Provisions currently in effect, property acquired by
foreclosure generally must not be held for more than three years. For a series
of Securities for which an election is made to qualify the trust fund or a part
thereof as a REMIC, the Agreement will permit foreclosed property to be held
for more than three years if the Internal Revenue Service grants an extension
of time within which to sell the property or independent counsel renders an
opinion to the effect that holding the property for that additional period is
permissible under the REMIC Provisions.
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 canceled by the
Cooperative for failure by the tenant-stockholder to pay rent or other
obligations or charges owed by that tenant-stockholder, including mechanics'
liens against the cooperative apartment building incurred by that
tenant-stockholder. The proprietary lease or occupancy agreement generally
permit the Cooperative to terminate the lease or agreement in the event a
borrower fails to make payments or defaults in the performance of covenants
required thereunder. Typically, the lender and the Cooperative enter into a
recognition agreement that establishes the rights and obligations of both
parties in the event of 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, if the
tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the Cooperative will take no action to terminate that 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 that 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 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 Cooperatives 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.
In the case of foreclosure on a building that 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 that apply to certain
tenants who elected to remain in a building so converted.
Year 2000 Legislation
In July 1999, a new federal law was passed to limit liability for
losses due to year 2000 computer-related errors. This law will, among other
things, protect borrowers from foreclosure if their residential mortgage loans
become delinquent because an actual year 2000 failure results in inability to
accurately or timely process their mortgage payments.
This law is not intended to extinguish or otherwise affect a
borrower's payment obligations but will instead delay the enforcement of
obligations on an otherwise defaulted mortgage loan. Borrowers seeking
foreclosure protection under this law must provide timely written notice and
documentation of that failure to the servicer. Absent an extension from the
lender, borrowers will then have four weeks to make up late payments on their
loans. This law will not apply to mortgage loans for which a default occurs
before December 15, 1999, or for which an imminent default is foreseeable
before that date. This law will also not protect borrowers who deliver notice
of a year 2000 failure after March 15, 2000. Mortgage loans that remain in
default after the applicable grace period will be subject to foreclosure or
other enforcement.
This law could delay the ability of a servicer to foreclose on some
mortgage loans during the first quarter of the year 2000. These delays could
affect the distributions on your Securities.
Junior Mortgages
Some of the mortgage loans may be secured by junior mortgages or deeds
of trust, that are subordinate to first or other senior mortgages or deeds of
trust held by other lenders. The rights of the trust fund as the holder of a
junior deed of trust or a junior mortgage are subordinate in lien and in
payment 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
borrower, 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" above.
Furthermore, because the terms of the junior mortgage or deed of trust
are subordinate to the terms of the first mortgage or deed of trust, in the
event of a conflict between the terms of the first mortgage or deed of trust
and the junior mortgage or deed of trust, the terms of the first mortgage or
deed of trust will generally govern. Upon a failure of the borrower 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 right 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 first mortgagee expends these sums, these sums will
generally have priority over all sums due under the junior mortgage.
Anti-Deficiency Legislation and Other Limitations on Lenders
Statutes in some states limit the right of a beneficiary under a deed
of trust or a mortgagee under a mortgage to obtain a deficiency judgment
against the borrower following foreclosure or sale under a deed of trust. A
deficiency judgment would be a personal judgment against the former borrower
equal to the difference between the net amount realized upon the public sale of
the real property and the amount due to the lender.
Some states require the lender to exhaust the security afforded under
a mortgage by foreclosure in an attempt to satisfy the full debt before
bringing a personal action against the borrower. In some other states, the
lender has the option of bringing a personal action against the borrower on the
debt without first exhausting that security; however, in some of these states,
the lender, following judgment on the personal action, may be deemed to have
elected a remedy and may be precluded from exercising remedies with respect to
the security. In some cases, a lender will be precluded from exercising any
additional rights under the note or mortgage if it has taken any prior
enforcement action. Consequently, the practical effect of the election
requirement, in those states permitting that election, is that lenders will
usually proceed against the security first rather than bringing a personal
action against the borrower. Finally, other statutory provisions limit any
deficiency judgment against the former borrower following a judicial sale to
the excess of the outstanding debt over the fair market value of the property
at the time of the public sale. The purpose of these statutes is generally to
prevent a lender from obtaining a large deficiency judgment against the former
borrower as a result of low or no bids at the judicial sale.
In addition to anti-deficiency and related legislation, numerous other
federal and state statutory provisions, including the federal bankruptcy laws
and state laws affording relief to debtors, may interfere with or affect the
ability of a secured mortgage lender to realize upon its security. For example,
numerous statutory provisions under the United States Bankruptcy Code, 11
U.S.C. Sections 101 et seq. (the "Bankruptcy Code"), may interfere with or
affect the ability of the secured mortgage lender to obtain payment of a
mortgage loan, to realize upon collateral and/or enforce a deficiency judgment.
Under federal bankruptcy law, virtually all actions (including foreclosure
actions and deficiency judgment proceedings) are automatically stayed upon the
filing of a bankruptcy petition, and often no interest or principal payments
are made during the course of the bankruptcy proceeding. In a case under the
Bankruptcy Code, the secured party is precluded from foreclosing without
authorization from the bankruptcy court. In addition, a court with federal
bankruptcy jurisdiction may permit a debtor through his or her Chapter 11 or
Chapter 13 plan to cure a monetary default in respect of a mortgage loan by
paying arrearages within a reasonable time period and reinstating the original
mortgage loan payment schedule even though the lender accelerated the mortgage
loan and final judgment of foreclosure had been entered in state court
(provided no foreclosure sale had yet occurred) before the filing of the
debtor's petition. Some courts with federal bankruptcy jurisdiction have
approved plans, based on the particular facts of the case, that affected the
curing of a mortgage loan default by paying arrearages over a number of years.
If a mortgage loan is secured by property not consisting solely of the
debtor's principal residence, the Bankruptcy Code also permits that mortgage
loan to be modified. These modifications may include reducing the amount of
each monthly payment, changing the rate of interest, altering the repayment
schedule, and reducing the lender's security interest to the value of the
property, thus leaving the lender in the position of a general unsecured
creditor for the difference between the value of the property and the
outstanding balance of the mortgage loan. Some courts have permitted these
modifications when the mortgage loan is secured both by the debtor's principal
residence and by personal property.
Certain tax liens arising under the Code may in some circumstances
provide priority over the lien of a mortgage or deed of trust. In addition,
substantive requirements are imposed upon mortgage lenders in connection with
the origination and the servicing of mortgage loans by numerous federal and
some state consumer protection laws. These laws include the federal
Truth-in-Lending Act, Real Estate Settlement Procedures Act, Equal Credit
Opportunity Act, Fair Credit Billing Act, Fair Credit Reporting Act and related
statutes. These federal laws impose specific statutory liabilities upon lenders
who originate mortgage loans and who fail to comply with the provisions of the
law. In some cases this liability may affect assignees of the mortgage loans.
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.
Environmental Considerations
A lender may be subject to unforeseen environmental risks when taking
a security interest in real or personal property. Property subject to a
security interest may be subject to federal, state, and local laws and
regulations relating to environmental protection. These laws may regulate,
among other things: emissions of air pollutants; discharges of wastewater or
storm water; generation, transport, storage or disposal of hazardous waste or
hazardous substances; operation, closure and removal of underground storage
tanks; removal and disposal of asbestos-containing materials; and/or management
of electrical or other equipment containing polychlorinated biphenyls ("PCBs").
Failure to comply with these laws and regulations may result in significant
penalties, including civil and criminal fines. Under the laws of some states,
environmental contamination on a property may give rise to a lien on the
property to ensure the availability and/or reimbursement of cleanup costs.
Generally all subsequent liens on that property are subordinated to the
environmentally-related lien and, in some states, even prior recorded liens are
subordinated to these liens ("Superliens"). In the latter states, the security
interest of the trustee in a property that is subject to a Superlien could be
adversely affected.
Under the federal Comprehensive Environmental Response, Compensation
and Liability Act, as amended ("CERCLA"), and under state law in some states, a
secured party that takes a deed in lieu of foreclosure, purchases a mortgaged
property at a foreclosure sale, operates a mortgaged property or undertakes
certain types of activities that may constitute management of the mortgaged
property may become liable in certain circumstances for the cleanup costs of
remedial action if hazardous wastes or hazardous substances have been released
or disposed of on the property. These cleanup costs may be substantial. CERCLA
imposes strict, as well as joint and several, liability for environmental
remediation and/or damage costs on several classes of "potentially responsible
parties," including current "owners and/or operators" of property, irrespective
of whether those owners or operators caused or contributed to the contamination
on the property. In addition, owners and operators of properties that generate
hazardous substances that are disposed of at other "off-site" locations may be
held strictly, jointly and severally liable for environmental remediation
and/or damages at those off-site locations. Many states also have laws that are
similar to CERCLA. Liability under CERCLA or under similar state law could
exceed the value of the property itself as well as the total assets of the
property owner.
Although certain provisions of the Asset Conservation Act (as defined
herein) apply to trusts and fiduciaries, the law is somewhat unclear as to
whether and under what precise circumstances cleanup costs, or the obligation
to take remedial actions, could be imposed on a secured lender, such as the
trust fund. Under the laws of some states and under CERCLA, a lender may be
liable as an "owner or operator" for costs of addressing releases or threatened
releases of hazardous substances on a mortgaged property if that lender or its
agents or employees have "participated in the management" of the operations of
the borrower, even though the environmental damage or threat was caused by a
prior owner or current owner or operator or other third party. Excluded from
CERCLA's definition of "owner or operator" is a person "who without
participating in the management of . . . [the] facility, holds indicia of
ownership primarily to protect his security interest" (the "secured-creditor
exemption"). This exemption for holders of a security interest such as a
secured lender applies only to the extent that a lender seeks to protect its
security interest in the contaminated facility or property. Thus, if a lender's
activities begin to encroach on the actual management of that facility or
property, the lender faces potential liability as an "owner or operator" under
CERCLA. Similarly, when a lender forecloses and takes title to a contaminated
facility or property, the lender may incur potential CERCLA liability in
various circumstances, including among others, when it holds the facility or
property as an investment (including leasing the facility or property to a
third party), fails to market the property in a timely fashion or fails to
properly address environmental conditions at the property or facility.
The Resource Conservation and Recovery Act, as amended ("RCRA"),
contains a similar secured-creditor exemption for those lenders who hold a
security interest in a petroleum underground storage tank ("UST") or in real
estate containing a UST, or that acquire title to a petroleum UST or facility
or property on which a UST is located. As under CERCLA, a lender may lose its
secured-creditor exemption and be held liable under RCRA as a UST owner or
operator if that lender or its employees or agents participate in the
management of the UST. In addition, if the lender takes title to or possession
of the UST or the real estate containing the UST, under certain circumstances
the secured-creditor exemption may be deemed to be unavailable.
A decision in May 1990 of the United States Court of Appeals for the
Eleventh Circuit in United States v. Fleet Factors Corp. very narrowly
construed CERCLA's secured-creditor exemption. The court's opinion suggested
that a lender need not have involved itself in the day-to-day operations of the
facility or participated in decisions relating to hazardous waste to be liable
under CERCLA; rather, liability could attach to a lender if its involvement
with the management of the facility were broad enough to support the inference
that the lender had the capacity to influence the borrower's treatment of
hazardous waste. The court added that a lender's capacity to influence these
decisions could be inferred from the extent of its involvement in the
facility's financial management. A subsequent decision by the United States
Court of Appeals for the Ninth Circuit in re Bergsoe Metal Corp., apparently
disagreeing with, but not expressly contradicting, the Fleet Factors court,
held that a secured lender had no liability absent "some actual management of
the facility" on the part of the lender.
Court decisions have taken varying views of the scope of the
secured-creditor exemption, leading to administrative and legislative efforts
to provide guidance to lenders on the scope of activities that would trigger
CERCLA and/or RCRA liability. Until recently, these efforts have failed to
provide substantial guidance.
On September 28, 1996, however, Congress enacted, and on September 30,
1996, the President signed into law the Asset Conservation Lender Liability and
Deposit Insurance Protection Act of 1996 (the "Asset Conservation Act"). The
Asset Conservation Act was intended to clarify the scope of the secured
creditor exemption under both CERCLA and RCRA. The Asset Conservation Act more
explicitly defined the kinds of "participation in management" that would
trigger liability under CERCLA and specified certain activities that would not
constitute "participation in management" or otherwise result in a forfeiture of
the secured-creditor exemption before foreclosure or during a workout period.
The Asset Conservation Act also clarified the extent of protection against
liability under CERCLA in the event of foreclosure and authorized certain
regulatory clarifications of the scope of the secured-creditor exemption for
purposes of RCRA, similar to the statutory protections under CERCLA. However,
since the courts have not yet had the opportunity to interpret the new
statutory provisions, the scope of the additional protections offered by the
Asset Conservation Act is not fully defined. It also is important to note that
the Asset Conservation Act does not offer complete protection to lenders and
that the risk of liability remains.
If a secured lender does become liable, it may be entitled to bring an
action for contribution against the owner or operator who created the
environmental contamination or against some other liable party, but that person
or entity may be bankrupt or otherwise judgment-proof. It is therefore possible
that cleanup or other environmental liability costs could become a liability of
the trust fund and occasion a loss to the trust fund and to securityholders in
certain circumstances. The new secured creditor amendments to CERCLA, also,
would not necessarily affect the potential for liability in actions by either a
state or a private party under other federal or state laws that may impose
liability on "owners or operators" but do not incorporate the secured-creditor
exemption.
Traditionally, residential mortgage lenders have not taken steps to
evaluate whether hazardous wastes or hazardous substances are present with
respect to any mortgaged property before the origination of the mortgage loan
or before foreclosure or accepting a deed-in-lieu of foreclosure. Neither the
depositor nor any servicer makes any representations or warranties or assumes
any liability with respect to: environmental conditions of the Mortgaged
Property; the absence, presence or effect of hazardous wastes or hazardous
substances on, near or emanating from the Mortgaged Property; the impact on
securityholders of any environmental condition or presence of any substance on
or near the Mortgaged Property; or the compliance of any Mortgaged Property
with any environmental laws. In addition, no agent, person or entity otherwise
affiliated with the depositor is authorized or able to make any representation,
warranty or assumption of liability relative to any Mortgaged Property.
Due-on-Sale Clauses
The mortgage loans may contain due-on-sale clauses. These clauses
generally provide that the lender may accelerate the maturity of the loan if
the borrower sells, transfers or conveys the related Mortgaged Property. The
enforceability of due-on-sale clauses has been the subject of legislation or
litigation in many states and, in some cases, the enforceability of these
clauses was limited or denied. However, for certain loans the Garn-St. Germain
Depository Institutions Act of 1982 (the "Garn-St. Germain Act") preempts state
constitutional, statutory and case law that prohibits the enforcement of
due-on-sale clauses and permits lenders to enforce these clauses in accordance
with their terms, subject to certain limited exceptions. Due-on-sale clauses
contained in mortgage loans originated by federal savings and loan associations
of federal savings banks are fully enforceable pursuant to regulations of the
United States Federal Home Loan Bank Board, as succeeded by the Office of
Thrift Supervision, which preempt state law restrictions on the enforcement of
those clauses. Similarly, "due-on-sale" clauses in mortgage loans made by
national banks and federal credit unions are now fully enforceable pursuant to
preemptive regulations of the Comptroller of the Currency and the National
Credit Union Administration, respectively.
The Garn-St. Germain Act also sets forth nine specific instances in
which a mortgage lender covered by the act (including federal savings and loan
associations and federal savings banks) may not exercise a "due-on-sale"
clause, notwithstanding the fact that a transfer of the property may have
occurred. These include intra-family transfers, certain transfers by operation
of law, leases of fewer than three years and the creation of a junior
encumbrance. Regulations promulgated under the Garn-St. Germain Act also
prohibit the imposition of a prepayment penalty upon the acceleration of a loan
pursuant to a due-on-sale clause. The inability to enforce a "due-on-sale"
clause may result in a mortgage that bears an interest rate below the current
market rate being assumed by a new home buyer rather than being paid off, which
may affect the average life of the mortgage loans and the number of mortgage
loans which may extend to maturity.
Prepayment Charges
Under some state laws, prepayment charges may not be imposed after a
certain period of time following the origination of mortgage loans secured by
liens encumbering owner-occupied residential properties, if those loans are
paid before maturity. For Mortgaged Properties that are owner-occupied, it is
anticipated that prepayment charges may not be imposed for many of the mortgage
loans. The absence of a restraint on prepayment, particularly for fixed rate
mortgage loans having higher mortgage rates, may increase the likelihood of
refinancing or other early retirement of those loans.
Subordinate Financing
Where a borrower encumbers mortgaged property with one or more junior
liens, the senior lender is subjected to additional risks, such as:
o The borrower may have difficulty repaying multiple loans. In
addition, if the junior loan permits recourse to the borrower (as
junior loans often do) and the senior loan does not, a borrower
may be more likely to repay sums due on the junior loan than
those on the senior loan.
o 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 borrower and
the senior lender agree to an increase in the principal amount of
or the interest rate payable on the senior loan, the senior
lender may lose its priority to the extent any existing junior
lender is harmed or the borrower is additionally burdened.
o If the borrower defaults on the senior loan and/or any junior
loan or loans, the existence of junior loans and actions taken by
junior lenders can impair the security available to the senior
lender and can interfere with or delay the taking of action by
the senior lender. Moreover, the bankruptcy of a junior lender
may operate to stay foreclosure or similar proceedings by the
senior lender.
Applicability of Usury Laws
Title V of the Depository Institutions Deregulation and Monetary
Control Act of 1980, enacted in March 1980 ("Title V"), provides that state
usury limitations will not apply to certain types of residential first mortgage
loans originated by certain lenders after March 31, 1980. A similar federal
statute was in effect for mortgage loans made during the first three months of
1980. The Office of Thrift Supervision is authorized to issue rules and
regulations and to publish interpretations governing implementation of Title V.
The statute authorized any state to reimpose interest rate limits by adopting,
before April 1, 1983, a law or constitutional provision that expressly rejects
application of the federal law. In addition, even where Title V is not so
rejected, any state is authorized by the law to adopt a provision limiting
discount points or other charges on mortgage loans covered by Title V. Some
states have taken action to reimpose interest rate limits and/or to limit
discount points or other charges.
The depositor believes that a court interpreting Title V would hold
that residential first mortgage loans that are originated on or after January
1, 1980, are subject to federal preemption. Therefore, in a state that has not
taken the requisite action to reject application of Title V or to adopt a
provision limiting discount points or other charges before origination of those
mortgage loans, any limitation under that state's usury law would not apply to
those mortgage loans.
In any state in which application of Title V has been expressly
rejected or a provision limiting discount points or other charges is adopted,
no mortgage loan originated after the date of that state action will be
eligible for inclusion in a trust fund unless (1) the mortgage loan provides
for the interest rate, discount points and charges as are permitted in that
state or (2) the mortgage loan provides that the terms thereof will be
construed in accordance with the laws of another state under which the interest
rate, discount points and charges would not be usurious and the borrower's
counsel has rendered an opinion that the choice of law provision would be given
effect.
Statutes differ in their provisions as to the consequences of a
usurious loan. One group of statutes requires the lender to forfeit the
interest due above the applicable limit or impose a specified penalty. Under
this statutory scheme, the borrower may cancel the recorded mortgage or deed of
trust upon paying its debt with lawful interest, and the lender may foreclose,
but only for the debt plus lawful interest. A second group of statutes is more
severe. A violation of this type of usury law results in the invalidation of
the transaction, thereby permitting the borrower to cancel the recorded
mortgage or deed of trust without any payment or prohibiting the lender from
foreclosing.
Alternative Mortgage Instruments
Alternative mortgage instruments, including adjustable rate mortgage
loans and early ownership mortgage loans, originated by non-federally chartered
lenders have historically been subject to a variety of restrictions. Those
restrictions differed from state to state, resulting in difficulties in
determining whether a particular alternative mortgage instrument originated by
a state-chartered lender was in compliance with applicable law. These
difficulties were alleviated substantially as a result of the enactment of
Title VIII of the Garn-St. Germain Act ("Title VIII"). Title VIII provides
that, notwithstanding any state law to the contrary, state-chartered banks may
originate alternative mortgage instruments in accordance with regulations
promulgated by the Comptroller of the Currency with respect to origination of
alternative mortgage instruments by national banks; state-chartered credit
unions may originate alternative mortgage instruments in accordance with
regulations promulgated by the National Credit Union Administration with
respect to origination of alternative mortgage instruments by federal credit
unions; and all other non-federally chartered housing creditors, including
state-chartered savings and loan associations, state-chartered savings banks
and mutual savings banks and mortgage banking companies, may originate
alternative mortgage instruments in accordance with the regulations promulgated
by the Federal Home Loan Bank Board, predecessor to the Office of Thrift
Supervision, with respect to origination of alternative mortgage instruments by
federal savings and loan associations. Title VIII provides that any state may
reject applicability of the provisions of Title VIII by adopting, before
October 15, 1985, a law or constitutional provision expressly rejecting the
applicability of those provisions. Some states have taken that action.
Soldiers' and Sailors' Civil Relief Act of 1940
Under the terms of the Soldiers' and Sailors' Civil Relief Act of
1940, as amended (the "Relief Act"), a borrower who enters military service
after the origination of the borrower's mortgage loan (including a borrower who
was in reserve status and is called to active duty after origination of the
mortgage loan) may not be charged interest (including fees and charges) above
an annual rate of 6% during the period of the borrower's active duty status,
unless a court orders otherwise upon application of the lender. The Relief Act
applies to borrowers who are members of the Army, Navy, Air Force, Marines,
National Guard, Reserves, Coast Guard and officers of the U.S. Public Health
Service assigned to duty with the military. Because the Relief Act applies to
borrowers who enter military service (including reservists who are called to
active duty) after origination of the related mortgage loan, no information can
be provided as to the number of loans that may be affected by the Relief Act.
Application of the Relief Act would adversely affect, for an
indeterminate period of time, the ability of the servicer to collect full
amounts of interest on some of the mortgage loans. Any shortfalls in interest
collections resulting from the application of the Relief Act would result in a
reduction of the amounts distributable to the holders of the related series of
Securities, and would not be covered by advances. These shortfalls will be
covered by the credit support provided in connection with the Securities only
to the extent provided in the prospectus supplement. In addition, the Relief
Act imposes limitations that would impair the ability of the servicer to
foreclose on an affected mortgage loan during the borrower's period of active
duty status, and, under some circumstances, during an additional three month
period thereafter. Thus, if an affected mortgage loan goes into default, there
may be delays and losses occasioned thereby.
Forfeitures in Drug and RICO Proceedings
Federal law provides that property owned by persons convicted of
drug-related crimes or of criminal violations of the Racketeer Influenced and
Corrupt Organizations ("RICO") statute can be seized by the government if the
property was used in, or purchased with the proceeds of, those crimes. Under
procedures contained in the Comprehensive Crime Control Act of 1984 (the "Crime
Control Act"), the government may seize the property even before conviction.
The government must publish notice of the forfeiture proceeding and may give
notice to all parties "known to have an alleged interest in the property,"
including the holders of mortgage loans.
A lender may avoid forfeiture of its interest in the property if it
establishes that: (1) its mortgage was executed and recorded before commission
of the crime upon which the forfeiture is based, or (2) the lender was, at the
time of execution of the mortgage, "reasonably without cause to believe" that
the property was used in, or purchased with the proceeds of, illegal drug or
RICO activities.
Material Federal Income Tax Considerations
General
The following discussion represents the opinion of Brown & Wood LLP as
to the material federal income tax consequences of the purchase, ownership and
disposition of the Securities offered hereunder. This opinion assumes
compliance with all provisions of the Agreements pursuant to which the
Securities are issued. This discussion is directed solely to securityholders
that hold the Securities as capital assets within the meaning of Section 1221
of the Internal Revenue Code of 1986, as amended (the "Code"), and does not
purport to discuss all federal income tax consequences that may be applicable
to particular categories of investors, some of which (such as banks, insurance
companies and foreign investors) may be subject to special rules. Further, the
authorities on which this discussion, and the opinion referred to below, are
based are subject to change or differing interpretations, which could apply
retroactively.
In addition to the federal income tax consequences described herein,
potential investors should consider the state and local tax consequences, if
any, of the purchase, ownership and disposition of the Securities. See "State
and Other Tax Considerations." The depositor recommends that securityholders
consult their own tax advisors concerning the federal, state, local or other
tax consequences to them of the purchase, ownership and disposition of the
Securities offered hereunder.
The following discussion addresses securities of five general types:
o REMIC Securities representing interests in a trust fund, or a
portion thereof, that the trustee will elect to have treated as a
real estate mortgage investment conduit ("REMIC") under Sections
860A through 860G (the "REMIC Provisions") of the Code;
o securities ("FASIT Securities") representing interests in a trust
fund, or a portion thereof, that the trustee will elect to have
treated as a financial asset securitization investment trust
("FASIT") under Sections 860H through 860L (the "FASIT
Provisions") of the Code;
o securities ("Grantor Trust Securities") representing interests in
a trust fund (a "Grantor Trust Fund") as to which no election
will be made;
o securities ("Partnership Securities") representing interests in a
trust fund (a "Partnership Trust Fund") which is treated as a
partnership for federal income tax purposes; and
o securities ("Debt Securities") representing indebtedness of a
Partnership Trust Fund for federal income tax purposes.
The prospectus supplement for each series of Securities will indicate
which of the foregoing treatments will apply to that series and, if a REMIC
election (or elections) will be made for the related trust fund, will identify
all "regular interests" and "residual interests" in the REMIC or, if a FASIT
election will be made for the related trust fund, will identify all "regular
interests" and "ownership interests" in the FASIT. For purposes of this tax
discussion, (1) references to a "securityholder" or a "holder" are to the
beneficial owner of a Security, (2) references to "REMIC Pool" are to an entity
or portion thereof as to which a REMIC election will be made and (3) to the
extent specified in the prospectus supplement, references to "mortgage loans"
include Contracts. Except to the extent specified in the prospectus supplement,
no REMIC election will be made for Unsecured Home Improvement Loans.
The following discussion is based in part upon the rules governing
original issue discount that are set forth in Sections 1271 through 1273 and
1275 of the Code and in the Treasury regulations issued thereunder (the "OID
Regulations"), in part upon the REMIC Provisions and the Treasury regulations
issued thereunder (the "REMIC Regulations"), and in part upon the FASIT
Provisions. 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 the holders of FASIT Securities. In addition, the OID Regulations do not
adequately address certain issues relevant to, and in some instances provide
that they are not applicable to, securities such as the Securities.
Taxable Mortgage Pools
Corporate income tax can be imposed on the net income of certain
entities issuing non-REMIC debt obligations secured by real estate mortgages
("Taxable Mortgage Pools"). Any entity other than a REMIC or a FASIT (as
defined herein) will be considered a Taxable Mortgage Pool if (1) substantially
all of the assets of the entity consist of debt obligations and more than 50%
of those obligations consist of "real estate mortgages," (2) that entity is the
borrower under debt obligations with two or more maturities, and (3) under the
terms of the debt obligations on which the entity is the borrower, payments on
those obligations bear a relationship to payments on the obligations held by
the entity. Furthermore, a group of assets held by an entity can be treated as
a separate Taxable Mortgage Pool if the assets are expected to produce
significant cash flow that will support one or more of the entity's issues of
debt obligations. The depositor generally will structure offerings of non-REMIC
Securities to avoid the application of the Taxable Mortgage Pool rules.
REMICs
Classification of REMICs
For each series of REMIC Securities, assuming compliance with all
provisions of the related pooling and servicing agreement, in the opinion of
Brown & Wood LLP, the related trust fund (or each applicable portion thereof)
will qualify as a REMIC and the REMIC Securities offered with respect thereto
will be considered to evidence ownership of "regular interests" ("Regular
Securities") or "residual interests" ("Residual Securities") in the REMIC
within the meaning of the REMIC Provisions.
In order for the REMIC Pool to qualify as a REMIC, there must be
ongoing compliance on the part of the REMIC Pool with the requirements set
forth in the Code. The REMIC Pool must fulfill an asset test, which requires
that no more than a de minimis portion of the assets of the REMIC Pool, as of
the close of the third calendar month beginning after the "Startup Day" (which
for purposes of this discussion is the date of issuance of the REMIC
Securities) and at all times thereafter, may consist of assets other than
"qualified mortgages" and "permitted investments." The REMIC Regulations
provide a safe harbor pursuant to which the de minimis requirement will be met
if at all times the total adjusted basis of the nonqualified assets is less
than 1% of the total adjusted basis of all the REMIC Pool's assets. An entity
that fails to meet the safe harbor may nevertheless demonstrate that it holds
no more than a de minimis amount of nonqualified assets. A REMIC Pool also must
provide "reasonable arrangements" to prevent its residual interests from being
held by "disqualified organizations" or agents thereof and must furnish
applicable tax information to transferors or agents that violate this
requirement. The pooling and servicing agreement for each series of REMIC
Securities will contain provisions meeting these requirements. See "--Taxation
of Owners of Residual Securities--Tax-Related Restrictions on Transfer of
Residual Securities--Disqualified Organizations" below.
A qualified mortgage is any obligation that is principally secured by
an interest in real property and that is either transferred to the REMIC Pool
on the Startup Day or is purchased by the REMIC Pool within a three-month
period thereafter pursuant to a fixed price contract in effect on the Startup
Day. Qualified mortgages include whole mortgage loans and, generally,
certificates of beneficial interest in a grantor trust that holds mortgage
loans and regular interests in another REMIC, such as lower-tier regular
interests in a tiered REMIC. The REMIC Regulations specify that loans secured
by timeshare interests, shares held by a tenant stockholder in a cooperative
housing corporation, and manufactured housing that qualifies as a "single
family residence" under Code Section 25(e)(10) can be qualified mortgages. A
qualified mortgage includes a qualified replacement mortgage, which is any
property that would have been treated as a qualified mortgage if it were
transferred to the REMIC Pool on the Startup Day and that is received either:
(1) in exchange for any qualified mortgage within a
three-month period thereafter; or
(2) in exchange for a "defective obligation" within a
two-year period thereafter.
A "defective obligation" includes:
(1) a mortgage in default or as to which default is
reasonably foreseeable;
(2) a mortgage as to which a customary representation or
warranty made at the time of transfer to the REMIC Pool has been
breached;
(3) a mortgage that was fraudulently procured by the
borrower; and
(4) a mortgage that was not in fact principally secured by
real property (but only if the mortgage is disposed of within 90 days
of discovery).
A mortgage loan that is "defective" as described in clause (4) above that is
not sold or, if within two years of the Startup Day, exchanged, within 90 days
of discovery, ceases to be a qualified mortgage after that 90-day period.
Permitted investments include cash flow investments, qualified reserve
assets, and foreclosure property. A cash flow investment is an investment,
earning a return in the nature of interest, of amounts received on or with
respect to qualified mortgages for a temporary period, not exceeding 13 months,
until the next scheduled distribution to holders of interests in the REMIC
Pool. A qualified reserve asset is any intangible property held for investment
that is part of any reasonably required reserve maintained by the REMIC Pool to
provide for payments of expenses of the REMIC Pool or amounts due on the
regular or residual interests in the event of defaults (including
delinquencies) on the qualified mortgages, lower than expected reinvestment
returns, prepayment interest shortfalls and certain other contingencies. The
reserve fund will be disqualified if more than 30% of the gross income from the
assets in that fund for the year is derived from the sale or other disposition
of property held for less than three months, unless required to prevent a
default on the regular interests caused by a default on one or more qualified
mortgages. A reserve fund must be reduced "promptly and appropriately" as
payments on the mortgage loans are received. Foreclosure property is real
property acquired by the REMIC Pool in connection with the default or imminent
default of a qualified mortgage and generally may not be held for more than
three taxable years after the taxable year of acquisition unless extensions are
granted by the Secretary of the Treasury.
In addition to the foregoing requirements, the various interests in a
REMIC Pool also must meet certain requirements. All of the interests in a REMIC
Pool must be either of the following: (1) one or more classes of regular
interests or (2) a single class of residual interests on which distributions,
if any, are made pro rata.
o A regular interest is an interest in a REMIC Pool that is issued
on the Startup Day with fixed terms, is designated as a regular
interest, and unconditionally entitles the holder to receive a
specified principal amount (or other similar amount), and
provides that interest payments (or other similar amounts), if
any, at or before maturity either are payable based on a fixed
rate or a qualified variable rate, or consist of a specified,
nonvarying portion of the interest payments on qualified
mortgages. That specified portion may consist of a fixed number
of basis points, a fixed percentage of the total interest, or a
qualified variable rate, inverse variable rate or difference
between two fixed or qualified variable rates on some or all of
the qualified mortgages. The specified principal amount of a
regular interest that provides for interest payments consisting
of a specified, nonvarying portion of interest payments on
qualified mortgages may be zero.
o A residual interest is an interest in a REMIC Pool other than a
regular interest that is issued on the Startup Day and that is
designated as a residual interest.
An interest in a REMIC Pool may be treated as a regular interest even
if payments of principal for that interest are subordinated to payments on
other regular interests or the residual interest in the REMIC Pool, and are
dependent on the absence of defaults or delinquencies on qualified mortgages or
permitted investments, lower than reasonably expected returns on permitted
investments, unanticipated expenses incurred by the REMIC Pool or prepayment
interest shortfalls. Accordingly, in the opinion of Brown & Wood LLP, the
Regular Securities of a series will constitute one or more classes of regular
interests, and the Residual Securities for that series will constitute a single
class of residual interests for each REMIC Pool.
If an entity electing to be treated as a REMIC fails to comply with
one or more of the ongoing requirements of the Code for that status during any
taxable year, the Code provides that the entity will not be treated as a REMIC
for that year and thereafter. In that event, that entity may be taxable as a
corporation under Treasury regulations, and the related REMIC Securities may
not be accorded the status or given the tax treatment described below. Although
the Code authorizes the Treasury Department to issue regulations providing
relief in the event of an inadvertent termination of REMIC status, none of
these regulations have been issued. Any relief provided, moreover, may be
accompanied by sanctions, such as the imposition of a corporate tax on all or a
portion of the trust fund's income for the period in which the requirements for
that status are not satisfied. The pooling and servicing agreement for each
REMIC Pool will include provisions designed to maintain the trust fund's status
as a REMIC under the REMIC Provisions. It is not anticipated that the status of
any trust fund as a REMIC will be terminated.
Characterization of Investments in REMIC Securities
In the opinion of Brown & Wood LLP, the REMIC Securities will be
treated as "real estate assets" within the meaning of Section 856(c)(4)(A) of
the Code and assets described in Section 7701(a)(19)(C) of the Code in the same
proportion that the assets of the REMIC Pool underlying these Securities would
be so treated. Moreover, if 95% or more of the assets of the REMIC Pool qualify
for either of the foregoing treatments at all times during a calendar year, the
REMIC Securities will qualify for the corresponding status in their entirety
for that calendar year.
If the assets of the REMIC Pool include Buydown Mortgage Loans, it is
possible that the percentage of those assets constituting "loans . . . secured
by an interest in real property which is . . . residential real property" for
purposes of Code Section 7701(a)(19)(C)(v) may be required to be reduced by the
amount of the related funds paid thereon (the "Buydown Funds"). No opinion is
expressed as to the treatment of those Buydown Funds because the law is unclear
as to whether the Buydown Funds represent an account held by the lender that
reduces the lender's investment in the mortgage loan. This reduction of a
holder's investment may reduce the assets qualifying for the 60% of assets test
for meeting the definition of a "domestic building and loan association."
Interest (including original issue discount) on the Regular Securities and
income allocated to the class of Residual Securities will be interest described
in Section 856(c)(3)(B) of the Code to the extent that the Securities are
treated as "real estate assets" within the meaning of Section 856(c)(4)(A) of
the Code. In addition, in the opinion of Brown & Wood LLP, the Regular
Securities generally will be "qualified mortgages" within the meaning of
Section 860G(a)(3) of the Code if transferred to another REMIC on its Startup
Day in exchange for regular or residual interests therein.
The determination as to the percentage of the REMIC Pool's assets that
constitute assets described in the foregoing sections of the Code will be made
for each calendar quarter based on the average adjusted basis of each category
of the assets held by the REMIC Pool during that calendar quarter. The REMIC
will report those determinations to securityholders in the manner and at the
times required by applicable Treasury regulations. The Small Business Job
Protection Act of 1996 (the "SBJPA of 1996") repealed the reserve method of bad
debts of domestic building and loan associations and mutual savings banks, and
thus has eliminated the asset category of "qualifying real property loans" in
former Code Section 593(d) for taxable years beginning after December 31, 1995.
The requirements in the SBJPA of 1996 that these institutions must "recapture"
a portion of their existing bad debt reserves is suspended if a certain portion
of their assets are maintained in "residential loans" under Code Section
7701(a)(19)(C)(v), but only if those loans were made to acquire, construct or
improve the related real property and not for the purpose of refinancing.
However, no effort will be made to identify the portion of the mortgage loans
of any series meeting this requirement, and no representation is made in this
regard.
The assets of the REMIC Pool will include, in addition to mortgage
loans, payments on mortgage loans held pending distribution on the REMIC
Securities and property acquired by foreclosure held pending sale, and may
include amounts in reserve accounts. It is unclear whether property acquired by
foreclosure held pending sale and amounts in reserve accounts would be
considered to be part of the mortgage loans, or whether those assets (to the
extent not invested in assets described in the foregoing sections) otherwise
would receive the same treatment as the mortgage loans for purposes of all of
the foregoing sections. The REMIC Regulations do provide, however, that
payments on mortgage loans held pending distribution are considered part of the
mortgage loans for purposes of Section 856(c)(4)(A) of the Code. Furthermore,
foreclosure property generally will qualify as "real estate assets" under
Section 856(c)(4)(A) of the Code.
Tiered REMIC Structures
For some series of REMIC Securities, two or more separate elections
may be made to treat designated portions of the related trust fund as REMICs
("Tiered REMICs") for federal income tax purposes. Upon the issuance of any of
these series of REMIC Securities, Brown & Wood LLP will deliver its opinion
that, assuming compliance with all provisions of the related pooling and
servicing agreement, the Tiered REMICs will each qualify as a REMIC and the
respective REMIC Securities issued by each Tiered REMIC will be considered to
evidence ownership of Regular Securities or Residual Securities in the related
REMIC within the meaning of the REMIC Provisions.
Solely for purposes of determining whether the REMIC Securities will
be "real estate assets" within the meaning of Section 856(c)(4)(A) of the Code
and "loans secured by an interest in real property" under Section
7701(a)(19)(C) of the Code, and whether the income on those Securities is
interest described in Section 856(c)(3)(B) of the Code, the Tiered REMICs will
be treated as one REMIC.
Taxation of Owners of Regular Securities
(1) General
In general, interest, original issue discount, and market discount on
a Regular Security will be treated as ordinary income to a holder of the
Regular Security (the "Regular Securityholder"), and principal payments on a
Regular Security will be treated as a return of capital to the extent of the
Regular Securityholder's basis in the Regular Security allocable thereto.
Regular Securityholders must use the accrual method of accounting with regard
to Regular Securities, regardless of the method of accounting otherwise used by
that Regular Securityholder.
(2) Original Issue Discount
Accrual Securities will be, and other classes of Regular Securities
may be, issued with "original issue discount" within the meaning of Code
Section 1273(a). Holders of any Class or Subclass of Regular Securities having
original issue discount generally must include original issue discount in
ordinary income for federal income tax purposes as it accrues, in accordance
with a constant yield method that takes into account the compounding of
interest, in advance of the receipt of the cash attributable to that income.
The following discussion is based in part on temporary and final Treasury
regulations issued on February 2, 1994, as amended on June 14, 1996, (the "OID
Regulations") under Code Section 1271 through 1273 and 1275 and in part on the
provisions of the Tax Reform Act of 1986 (the "1986 Act"). Regular
Securityholders should be aware, however, that the OID Regulations do not
adequately address certain issues relevant to prepayable securities, such as
the Regular Securities. To the extent that those issues are not addressed in
the regulations, the Seller intends to apply the methodology described in the
Conference Committee Report to the 1986 Act. No assurance can be provided that
the Internal Revenue Service will not take a different position as to those
matters not currently addressed by the OID Regulations. Moreover, the OID
Regulations include an anti-abuse rule allowing the Internal Revenue Service to
apply or depart from the OID Regulations where necessary or appropriate to
ensure a reasonable tax result because of the applicable statutory provisions.
A tax result will not be considered unreasonable under the anti-abuse rule in
the absence of a substantial effect on the present value of a taxpayer's tax
liability. Investors are advised to consult their own tax advisors as to the
discussion therein and the appropriate method for reporting interest and
original issue discount for the Regular Securities.
Each Regular Security (except to the extent described below for a
Regular Security on which principal is distributed in a single installment or
by lots of specified principal amounts upon the request of a securityholder or
by random lot (a "Non-Pro Rata Security")) will be treated as a single
installment obligation for purposes of determining the original issue discount
includible in a Regular Securityholder's income. The total amount of original
issue discount on a Regular Security is the excess of the "stated redemption
price at maturity" of the Regular Security over its "issue price." The issue
price of a Class of Regular Securities offered pursuant to this prospectus
generally is the first price at which a substantial amount of that Class is
sold to the public (excluding bond houses, brokers and underwriters). Although
unclear under the OID Regulations, it is anticipated that the trustee will
treat the issue price of a Class as to which there is no substantial sale as of
the issue date or that is retained by the depositor as the fair market value of
the Class as of the issue date. The issue price of a Regular Security also
includes any amount paid by an initial Regular Securityholder for accrued
interest that relates to a period before the issue date of the Regular
Security, unless the Regular Securityholder elects on its federal income tax
return to exclude that amount from the issue price and to recover it on the
first Distribution Date.
The stated redemption price at maturity of a Regular Security always
includes the original principal amount of the Regular Security, but generally
will not include distributions of interest if those distributions constitute
"qualified stated interest." Under the OID Regulations, qualified stated
interest generally means interest payable at a single fixed rate or a qualified
variable rate (as described below), provided that the interest payments are
unconditionally payable at intervals of one year or less during the entire term
of the Regular Security. Because there is no penalty or default remedy in the
case of nonpayment of interest for a Regular Security, it is possible that no
interest on any Class of Regular Securities will be treated as qualified stated
interest. However, except as provided in the following three sentences or in
the prospectus supplement, because the underlying mortgage loans provide for
remedies in the event of default, it is anticipated that the trustee will treat
interest for the Regular Securities as qualified stated interest. Distributions
of interest on an Accrual Security, or on other Regular Securities for which
deferred interest will accrue, will not constitute qualified stated interest,
in which case the stated redemption price at maturity of those Regular
Securities includes all distributions of interest as well as principal thereon.
Likewise, it is anticipated that the trustee will treat an interest-only Class
or a Class on which interest is substantially disproportionate to its principal
amount (a so-called "super-premium" Class) as having no qualified stated
interest. Where the interval between the issue date and the first Distribution
Date on a Regular Security is shorter than the interval between subsequent
Distribution Dates, the interest attributable to the additional days will be
included in the stated redemption price at maturity.
Under a de minimis rule, original issue discount on a Regular Security
will be considered to be zero if the original issue discount is less than 0.25%
of the stated redemption price at maturity of the Regular Security multiplied
by the weighted average maturity of the Regular Security. For this purpose, the
weighted average maturity of the Regular Security is computed as the sum of the
amounts determined by multiplying the number of full years (i.e., rounding down
partial years) from the issue date until each distribution in reduction of
stated redemption price at maturity is scheduled to be made by a fraction, the
numerator of which is the amount of each distribution included in the stated
redemption price at maturity of the Regular Security and the denominator of
which is the stated redemption price at maturity of the Regular Security. The
Conference Committee Report to the 1986 Act provides that the schedule of those
distributions should be determined in accordance with the assumed rate of
prepayment of the mortgage loans (the "Prepayment Assumption") and the
anticipated reinvestment rate, if any, relating to the Regular Securities. The
Prepayment Assumption for a series of Regular Securities will be set forth in
the prospectus supplement. Holders generally must report de minimis original
issue discount pro rata as principal payments are received, and that income
will be capital gain if the Regular Security is held as a capital asset. Under
the OID Regulations, however, Regular Securityholders may elect to accrue all
de minimis original issue discount as well as market discount and market
premium, under the constant yield method. See "-Election to Treat All Interest
Under the Constant Yield Method" below.
A Regular Securityholder generally must include in gross income for
any taxable year the sum of the "daily portions," as defined below, of the
original issue discount on the Regular Security accrued during an accrual
period for each day on which it holds the Regular Security, including the date
of purchase but excluding the date of disposition. The trustee will treat the
monthly period ending on the day before each Distribution Date as the accrual
period. For each Regular Security, a calculation will be made of the original
issue discount that accrues during each successive full accrual period (or
shorter period from the date of original issue) that ends on the day before the
related Distribution Date on the Regular Security. The Conference Committee
Report to the 1986 Act states that the rate of accrual of original issue
discount is intended to be based on the Prepayment Assumption. The original
issue discount accruing in a full accrual period would be the excess, if any,
of:
(1) the sum of:
(a) the present value of all of the remaining
distributions to be made on the Regular Security as of the
end of that accrual period and
(b) the distributions made on the Regular Security
during the accrual period that are included in the Regular
Security's stated redemption price at maturity, over
(2) the adjusted issue price of the Regular Security at
the beginning of the accrual period.
The present value of the remaining distributions referred to in the preceding
sentence is calculated based on:
(1) the yield to maturity of the Regular Security at the
issue date;
(2) events (including actual prepayments) that have
occurred before the end of the accrual period; and
(3) the Prepayment Assumption.
For these purposes, the adjusted issue price of a Regular Security at the
beginning of any accrual period equals the issue price of the Regular Security,
increased by the total amount of original issue discount for the Regular
Security that accrued in all prior accrual periods and reduced by the amount of
distributions included in the Regular Security's stated redemption price at
maturity that were made on the Regular Security in those prior periods. The
original issue discount accruing during any accrual period (as determined in
this paragraph) will then be divided by the number of days in the period to
determine the daily portion of original issue discount for each day in the
period. For an initial accrual period shorter than a full accrual period, the
daily portions of original issue discount must be determined according to an
appropriate allocation under any reasonable method.
Under the method described above, the daily portions of original issue
discount required to be included in income by a Regular Securityholder
generally will increase to take into account prepayments on the Regular
Securities as a result of prepayments on the mortgage loans that exceed the
Prepayment Assumption, and generally will decrease (but not below zero for any
period) if the prepayments are slower than the Prepayment Assumption. An
increase in prepayments on the mortgage loans for a series of Regular
Securities can result in both a change in the priority of principal payments
for certain Classes of Regular Securities and either an increase or decrease in
the daily portions of original issue discount for those Regular Securities.
In the case of a Non-Pro Rata Security, it is anticipated that the
trustee will determine the yield to maturity of that Security based upon the
anticipated payment characteristics of the Class as a whole under the
Prepayment Assumption. In general, the original issue discount accruing on each
Non-Pro Rata Security in a full accrual period would be its allocable share of
the original issue discount for the entire Class, as determined in accordance
with the preceding paragraph. However, in the case of a distribution in
retirement of the entire unpaid principal balance of any Non-Pro Rata Security
(or portion of the unpaid principal balance), (a) the remaining unaccrued
original issue discount allocable to the Security (or to that portion) will
accrue at the time of the distribution, and (b) the accrual of original issue
discount allocable to each remaining Security of that Class will be adjusted by
reducing the present value of the remaining payments on that Class and the
adjusted issue price of that Class to the extent attributable to the portion of
the unpaid principal balance thereof that was distributed. The depositor
believes that the foregoing treatment is consistent with the "pro rata
prepayment" rules of the OID Regulations, but with the rate of accrual of
original issue discount determined based on the Prepayment Assumption for the
Class as a whole. Investors are advised to consult their tax advisors as to
this treatment.
(3) Acquisition Premium
A purchaser of a Regular Security having original issue discount at a
price greater than its adjusted issue price but less than its stated redemption
price at maturity will be required to include in gross income the daily
portions of the original issue discount on the Regular Security reduced pro
rata by a fraction, the numerator of which is the excess of its purchase price
over the adjusted issue price and the denominator of which is the excess of the
remaining stated redemption price at maturity over the adjusted issue price.
Alternatively, a subsequent purchaser may elect to treat all that acquisition
premium under the constant yield method, as described below under the heading
"--Election to Treat All Interest Under the Constant Yield Method" below.
(4) Variable Rate Regular Securities
Regular Securities may provide for interest based on a variable rate.
Under the OID Regulations, interest is treated as payable at a variable rate
if, generally, (1) the issue price does not exceed the original principal
balance by more than a specified amount and (2) the interest compounds or is
payable at least annually at current values of (a) one or more "qualified
floating rates," (b) a single fixed rate and one or more qualified floating
rates, (c) a single "objective rate," or (d) a single fixed rate and a single
objective rate that is a "qualified inverse floating rate." A floating rate is
a qualified floating rate if variations can reasonably be expected to measure
contemporaneous variations in the cost of newly borrowed funds. A multiple of a
qualified floating rate is considered a qualified floating rate only if the
rate is equal to either (a) the product of a qualified floating rate and a
fixed multiple that is greater than 0.65 but not more than 1.35 or (b) the
product of a qualified floating rate and a fixed multiple that is greater than
0.65 but not more than 1.35, increased or decreased by a fixed rate. That rate
may also be subject to a fixed cap or floor, or a cap or floor that is not
reasonably expected as of the issue date to affect the yield of the instrument
significantly. An objective rate is any rate (other than a qualified floating
rate) that is determined using a single fixed formula and that is based on
objective financial or economic information, provided that the information is
not (1) within the control of the issuer or a related party or (2) unique to
the circumstances of the issuer or a related party. A qualified inverse
floating rate is a rate equal to a fixed rate minus a qualified floating rate
that inversely reflects contemporaneous variations in the cost of newly
borrowed funds; an inverse floating rate that is not a qualified inverse
floating rate may nevertheless be an objective rate. A Class of Regular
Securities may be issued under this prospectus that does not have a variable
rate under the foregoing rules, for example, a Class that bears different rates
at different times during the period it is outstanding that it is considered
significantly "front-loaded" or "back-loaded" within the meaning of the OID
Regulations. It is possible that a Class may be considered to bear "contingent
interest" within the meaning of the OID Regulations. The OID Regulations, as
they relate to the treatment of contingent interest, are by their terms not
applicable to Regular Securities. However, if final regulations dealing with
contingent interest for Regular Securities apply the same principles as the OID
Regulations, those regulations may lead to different timing of income inclusion
that would be the case under the OID Regulations. Furthermore, application of
those principles could lead to the characterization of gain on the sale of
contingent interest Regular Securities as ordinary income. Investors should
consult their tax advisors regarding the appropriate treatment of any Regular
Security that does not pay interest at a fixed rate or variable rate as
described in this paragraph.
Under the REMIC Regulations, a Regular Security (1) bearing interest
at a rate that qualifies as a variable rate under the OID Regulations that is
tied to current values of a variable rate (or the highest, lowest or average of
two or more variable rates, including a rate based on the average cost of funds
of one or more financial institutions), or the product of that rate and a
positive or a negative multiple (plus or minus a specified number of basis
points), or that represents a weighted average of rates on some or all of the
mortgage loans, including a rate that is subject to one or more caps or floors,
or (2) bearing one or more variable rates for one or more periods, or one or
more fixed rates for one or more periods, and a different variable rate or
fixed rate for other periods, qualifies as a regular interest in a REMIC.
Accordingly, it is anticipated that the trustee will treat Regular Securities
that qualify as regular interests under this rule in the same manner as
obligations bearing a variable rate for original issue discount reporting
purposes.
The amount of original issue discount for a Regular Security bearing a
variable rate of interest will accrue in the manner described above under
"--Original Issue Discount," with the yield to maturity and future payments on
that Regular Security generally to be determined by assuming that interest will
be payable for the life of the Regular Security based on the initial rate (or,
if different, the value of the applicable variable rate as of the pricing date)
for the relevant Class. Unless required otherwise by applicable final
regulations, it is anticipated that the trustee will treat that variable
interest as qualified stated interest, other than variable interest on an
interest-only or super-premium Class or a Class bearing interest at a rate
equal to the weighted average of the net rates on the mortgage loans, which
will be treated as non-qualified stated interest includible in the stated
redemption price at maturity. Ordinary income reportable for any period will be
adjusted based on subsequent changes in the applicable interest rate index.
(5) Market Discount
A subsequent purchaser of a Regular Security also may be subject to
the market discount rules of Code Sections 1276 through 1278. Under these
sections and the principles applied by the OID Regulations in the context of
original issue discount, "market discount" is the amount by which the
purchaser's original basis in the Regular Security (1) is exceeded by the
remaining outstanding principal payments and interest payments other than
qualified stated interest payments due on a Regular Security, or (2) in the
case of a Regular Security having original issue discount, is exceeded by the
adjusted issue price of that Regular Security at the time of purchase. The
purchaser generally will be required to recognize ordinary income to the extent
of accrued market discount on that Regular Security as distributions includible
in the stated redemption price at maturity thereof are received, in an amount
not exceeding that distribution. The market discount would accrue in a manner
to be provided in Treasury regulations and should take into account the
Prepayment Assumption. The Conference Committee Report to the 1986 Act provides
that until these regulations are issued, the market discount would accrue
either (1) on the basis of a constant interest rate, or (2) in the ratio of
stated interest allocable to the relevant period to the sum of the interest for
that period plus the remaining interest as of the end of that period, or in the
case of a Regular Security issued with original issue discount, in the ratio of
original issue discount accrued for the relevant period to the sum of the
original issue discount accrued for that period plus the remaining original
issue discount as of the end of that period. The purchaser also generally will
be required to treat a portion of any gain on a sale or exchange of the Regular
Security as ordinary income to the extent of the market discount accrued to the
date of disposition under one of the foregoing methods, less any accrued market
discount previously reported as ordinary income as partial distributions in
reduction of the stated redemption price at maturity were received. The
purchaser will be required to defer deduction of a portion of the excess of the
interest paid or accrued on indebtedness incurred to purchase or carry a
Regular Security over the interest distributable thereon. The deferred portion
of the interest expense in any taxable year generally will not exceed the
accrued market discount on the Regular Security for that year. Any deferred
interest expense is, in general, allowed as a deduction not later than the year
in which the related market discount income is recognized or the Regular
Security is disposed of.
As an alternative to the inclusion of market discount in income on the
foregoing basis, the Regular Securityholder may elect to include market
discount in income currently as it accrues on all market discount instruments
acquired by the Regular Securityholder in that taxable year or thereafter, in
which case the interest deferral rule will not apply. See "--Election to Treat
All Interest Under the Constant Yield Method" below regarding an alternative
manner in which that election may be deemed to be made. A person who purchases
a Regular Security at a price lower than the remaining amounts includible in
the stated redemption price at maturity of the security, but higher than its
adjusted issue price, does not acquire the Regular Security with market
discount, but will be required to report original issue discount, appropriately
adjusted to reflect the excess of the price paid over the adjusted issue price.
Market discount for a Regular Security will be considered to be zero
if the market discount is less than 0.25% of the remaining stated redemption
price at maturity of the Regular Security (or, in the case of a Regular
Security having original issue discount, the adjusted issue price of that
Regular Security) multiplied by the weighted average maturity of the Regular
Security (determined as described above in the third paragraph under
"--Original Issue Discount" above) remaining after the date of purchase. It
appears that de minimis market discount would be reported in a manner similar
to de minimis original issue discount. See "--Original Issue Discount" above.
Under provisions of the OID Regulations relating to contingent payment
obligations, a secondary purchaser of a Regular Security that has "contingent
interest" at a discount generally would continue to accrue interest and
determine adjustments on the Regular Security based on the original projected
payment schedule devised by the issuer of the Security. The holder of the
Regular Security would be required, however, to allocate the difference between
the adjusted issue price of the Regular Security and its basis in the Regular
Security as positive adjustments to the accruals or projected payments on the
Regular Security over the remaining term of the Regular Security in a manner
that is reasonable (e.g., based on a constant yield to maturity).
Treasury regulations implementing the market discount rules have not
yet been issued, and uncertainty exists with respect to many aspects of those
rules. Due to the substantial lack of regulatory guidance with respect to the
market discount rules, it is unclear how those rules will affect any secondary
market that develops for a particular Class of Regular Securities. Prospective
investors in Regular Securities should consult their own tax advisors regarding
the application of the market discount rules to the Regular Securities.
Investors should also consult Revenue Procedure 92-67 concerning the elections
to include market discount in income currently and to accrue market discount on
the basis of the constant yield method.
(6) Amortizable Premium
A Regular Security purchased at a cost greater than its remaining
stated redemption price at maturity generally is considered to be purchased at
a premium. If the Regular Securityholder holds that Regular Security as a
"capital asset" within the meaning of Code Section 1221, the Regular
Securityholder may elect under Code Section 171 to amortize the premium under a
constant yield method that reflects compounding based on the interval between
payments on the Regular Security. The election will apply to all taxable debt
obligations (including REMIC regular interests) acquired by the Regular
Securityholder at a premium held in that taxable year or thereafter, unless
revoked with the permission of the Internal Revenue Service. The Conference
Committee Report to the 1986 Act indicates a Congressional intent that the same
rules that apply to the accrual of market discount on installment obligations
will also apply to amortizing bond premium under Code Section 171 on
installment obligations as the Regular Securities, although it is unclear
whether the alternatives to the constant interest method described above under
"Market Discount" are available. Amortizable bond premium generally will be
treated as an offset to interest income on a Regular Security, rather than as a
separate deductible item. See "--Election to Treat All Interest Under the
Constant Yield Method" below regarding an alternative manner in which the Code
Section 171 election may be deemed to be made.
(7) Election to Treat All Interest Under the Constant Yield Method
A holder of a debt instrument such as a Regular Security may elect to
treat all interest that accrues on the instrument using the constant yield
method, with none of the interest being treated as qualified stated interest.
For purposes of applying the constant yield method to a debt instrument subject
to this election, (1) "interest" includes stated interest, original issue
discount, de minimis original issue discount, market discount and de minimis
market discount, as adjusted by any amortizable bond premium or acquisition
premium and (2) the debt instrument is treated as if the instrument were issued
on the holder's acquisition date in the amount of the holder's adjusted basis
immediately after acquisition. It is unclear whether, for this purpose, the
initial Prepayment Assumption would continue to apply or if a new prepayment
assumption as of the date of the holder's acquisition would apply. A holder
generally may make this election on an instrument by instrument basis or for a
class or group of debt instruments. However, if the holder makes this election
for a debt instrument with amortizable bond premium, the holder is deemed to
have made elections to amortize bond premium currently as it accrues under the
constant yield method for all premium bonds held by the holder in the same
taxable year or thereafter. Alternatively, if the holder makes this election
for a debt instrument with market discount, the holder is deemed to have made
elections to report market discount income currently as it accrues under the
constant yield method for all market discount bonds acquired by the holder in
the same taxable year or thereafter. The election is made on the holder's
federal income tax return for the year in which the debt instrument is acquired
and is irrevocable except with the approval of the Internal Revenue Service.
Investors should consult their own tax advisors regarding the advisability of
making this election.
(8) Treatment of Losses
Regular Securityholders will be required to report income for Regular
Securities on the accrual method of accounting, without giving effect to delays
or reductions in distributions attributable to defaults or delinquencies on the
mortgage loans, except to the extent it can be established that the losses are
uncollectible. Accordingly, the holder of a Regular Security, particularly a
Subordinate Security, may have income, or may incur a diminution in cash flow
as a result of a default or delinquency, but may not be able to take a
deduction (subject to the discussion below) for the corresponding loss until a
subsequent taxable year. In this regard, investors are cautioned that while
they may generally cease to accrue interest income if it reasonably appears
that the interest will be uncollectible, the Internal Revenue Service may take
the position that original issue discount must continue to be accrued in spite
of its uncollectibility until the debt instrument is disposed of in a taxable
transaction or becomes worthless in accordance with the rules of Code Section
166.
To the extent the rules of Code Section 166 regarding bad debts are
applicable, it appears that Regular Securityholders that are corporations or
that otherwise hold the Regular Securities in connection with a trade or
business should in general be allowed to deduct as an ordinary loss that loss
with respect to principal sustained during the taxable year on account of any
Regular Securities becoming wholly or partially worthless, and that, in
general, Regular Securityholders that are not corporations and do not hold the
Regular Securities in connection with a trade or business should be allowed to
deduct as a short-term capital loss any loss sustained during the taxable year
on account of a portion of any Regular Securities becoming wholly worthless.
Although the matter is not free from doubt, non-corporate Regular
Securityholders should be allowed a bad debt deduction at the time the
principal balance of the Regular Securities is reduced to reflect losses
resulting from any liquidated mortgage loans. The Internal Revenue Service,
however, could take the position that non-corporate holders will be allowed a
bad debt deduction to reflect those losses only after all the mortgage loans
remaining in the trust fund have been liquidated or the applicable Class of
Regular Securities has been otherwise retired. The Internal Revenue Service
could also assert that losses on the Regular Securities are deductible based on
some other method that may defer those deductions for all holders, such as
reducing future cashflow for purposes of computing original issue discount.
This may have the effect of creating "negative" original issue discount that
would be deductible only against future positive original issue discount or
otherwise upon termination of the Class.
Regular Securityholders are urged to consult their own tax advisors
regarding the appropriate timing, amount and character of any loss sustained
for their Regular Securities. While losses attributable to interest previously
reported as income should be deductible as ordinary losses by both corporate
and non-corporate holders, the Internal Revenue Service may take the position
that losses attributable to accrued original issue discount may only be
deducted as capital losses in the case of non-corporate holders who do not hold
the Regular Securities in connection with a trade or business. Special loss
rules are applicable to banks and thrift institutions, including rules
regarding reserves for bad debts. These taxpayers are advised to consult their
tax advisors regarding the treatment of losses on Regular Securities.
(9) Sale or Exchange of Regular Securities
If a Regular Securityholder sells or exchanges a Regular Security, the
Regular Securityholder will recognize gain or loss equal to the difference, if
any, between the amount received and its adjusted basis in the Regular
Security. The adjusted basis of a Regular Security generally will equal the
original cost of the Regular Security to the seller, increased by any original
issue discount or market discount previously included in the seller's gross
income for the Regular Security and reduced by amounts included in the stated
redemption price at maturity of the Regular Security that were previously
received by the seller, by any amortized premium, and by any recognized losses.
Except as described above regarding market discount, and except as
provided in this paragraph, any gain or loss on the sale or exchange of a
Regular Security realized by an investor who holds the Regular Security as a
capital asset will be capital gain or loss and will be long-term or short-term
depending on whether the Regular Security has been held for the long-term
capital gain holding period (currently, more than one year). That gain will be
treated as ordinary income
(1) if a Regular Security is held as part of a "conversion
transaction" as defined in Code Section 1258(c), up to the amount of
interest that would have accrued on the Regular Securityholder's net
investment in the conversion transaction at 120% of the appropriate
applicable federal rate in effect at the time the taxpayer entered
into the transaction minus any amount previously treated as ordinary
income for any prior disposition of property that was held as part of
that transaction;
(2) in the case of a non-corporate taxpayer, to the extent
that the taxpayer has made an election under Code Section 163(d)(4) to
have net capital gains taxed as investment income at ordinary income
rates; or
(3) to the extent that the gain does not exceed the excess,
if any, of (a) the amount that would have been includible in the gross
income of the holder if its yield on that Regular Security were 110%
of the applicable federal rate as of the date of purchase, over (b)
the amount of income actually includible in the gross income of the
holder for that Regular Security.
In addition, gain or loss recognized from the sale of a Regular Security by
certain banks or thrift institutions will be treated as ordinary income or loss
pursuant to Code Section 582(c). Long-term capital gains of certain
noncorporate taxpayers generally are subject to a lower maximum tax rate (20%)
than ordinary income of those taxpayers (39.6%) for property held for more than
one year. Currently, the maximum tax rate for corporations is the same for both
ordinary income and capital gains.
Taxation of Owners of Residual Securities
(1) Taxation of REMIC Income
Generally, the "daily portions" of REMIC taxable income or net loss
will be includible as ordinary income or loss in determining the federal
taxable income of holders of Residual Securities ("Residual Holders"), and will
not be taxed separately to the REMIC Pool. The daily portions of REMIC taxable
income or net loss of a Residual Holder are determined by allocating the REMIC
Pool's taxable income or net loss for each calendar quarter ratably to each day
in that quarter and by allocating that daily portion among the Residual Holders
in proportion to their respective holdings of Residual Securities in the REMIC
Pool on that day. REMIC taxable income is generally determined in the same
manner as the taxable income of an individual using the accrual method of
accounting, except that
(1) the limitations on deductibility of investment interest
expense and expenses for the production of income do not apply;
(2) all bad loans will be deductible as business bad debts;
and
(3) the limitation on the deductibility of interest and
expenses related to tax-exempt income will apply.
The REMIC Pool's gross income includes interest, original issue discount income
and market discount income, if any, on the mortgage loans, reduced by
amortization of any premium on the mortgage loans, plus income from
amortization of issue premium, if any, on the Regular Securities, plus income
on reinvestment of cash flows and reserve assets, plus any cancellation of
indebtedness income upon allocation of realized losses to the Regular
Securities. The REMIC Pool's deductions include interest and original issue
discount expense on the Regular Securities, servicing fees on the mortgage
loans, other administrative expenses of the REMIC Pool and realized losses on
the mortgage loans. The requirement that Residual Holders report their pro rata
share of taxable income or net loss of the REMIC Pool will continue until there
are no Securities of any class of the related series outstanding.
The taxable income recognized by a Residual Holder in any taxable year
will be affected by, among other factors, the relationship between the timing
of recognition of interest, original issue discount or market discount income
or amortization of premium for the mortgage loans, on the one hand, and the
timing of deductions for interest (including original issue discount) or income
from amortization of issue premium on the Regular Securities, on the other
hand. If an interest in the mortgage loans is acquired by the REMIC Pool at a
discount, and one or more of these mortgage loans is prepaid, the prepayment
may be used in whole or in part to make distributions in reduction of principal
on the Regular Securities, and (2) the discount on the mortgage loans that is
includible in income may exceed the deduction allowed upon those distributions
on those Regular Securities on account of any unaccrued original issue discount
relating to those Regular Securities. When there is more than one Class of
Regular Securities that distribute principal sequentially, this mismatching of
income and deductions is particularly likely to occur in the early years
following issuance of the Regular Securities when distributions in reduction of
principal are being made in respect of earlier Classes of Regular Securities to
the extent that those Classes are not issued with substantial discount or are
issued at a premium. If taxable income attributable to that mismatching is
realized, in general, losses would be allowed in later years as distributions
on the later maturing Classes of Regular Securities are made.
Taxable income may also be greater in earlier years than in later
years as a result of the fact that interest expense deductions, expressed as a
percentage of the outstanding principal amount of that series of Regular
Securities, may increase over time as distributions in reduction of principal
are made on the lower yielding Classes of Regular Securities, whereas, to the
extent the REMIC Pool consists of fixed rate mortgage loans, interest income
for any particular mortgage loan will remain constant over time as a percentage
of the outstanding principal amount of that loan. Consequently, Residual
Holders must have sufficient other sources of cash to pay any federal, state,
or local income taxes due as a result of that mismatching or unrelated
deductions against which to offset that income, subject to the discussion of
"excess inclusions" below under "--Limitations on Offset or Exemption of REMIC
Income." The timing of mismatching of income and deductions described in this
paragraph, if present for a series of Securities, may have a significant
adverse effect upon a Residual Holder's after-tax rate of return.
A portion of the income of a Residual Holder may be treated
unfavorably in three contexts:
(1) it may not be offset by current or net operating loss
deductions;
(2) it will be considered unrelated business taxable income
to tax-exempt entities; and
(3) it is ineligible for any statutory or treaty reduction in
the 30% withholding tax otherwise available to a foreign Residual
Holder.
See "--Limitations on Offset or Exemption of REMIC Income" below. In addition,
a Residual Holder's taxable income during certain periods may exceed the income
reflected by those Residual Holders for those periods in accordance with
generally accepted accounting principles. Investors should consult their own
accountants concerning the accounting treatment of their investment in Residual
Securities.
(2) Basis and Losses
The amount of any net loss of the REMIC Pool that may be taken into
account by the Residual Holder is limited to the adjusted basis of the Residual
Security as of the close of the quarter (or time of disposition of the Residual
Security if earlier), determined without taking into account the net loss for
the quarter. The initial adjusted basis of a purchaser of a Residual Security
is the amount paid for that Residual Security. The adjusted basis will be
increased by the amount of taxable income of the REMIC Pool reportable by the
Residual Holder and will be decreased (but not below zero), first, by a cash
distribution from the REMIC Pool and, second, by the amount of loss of the
REMIC Pool reportable by the Residual Holder. Any loss that is disallowed on
account of this limitation may be carried over indefinitely with respect to the
Residual Holder as to whom the loss was disallowed and may be used by the
Residual Holder only to offset any income generated by the same REMIC Pool.
A Residual Holder will not be permitted to amortize directly the cost
of its Residual Security as an offset to its share of the taxable income of the
related REMIC Pool. However, the taxable income will not include cash received
by the REMIC Pool that represents a recovery of the REMIC Pool's basis in its
assets. Although the law is unclear in some respects, the recovery of basis by
the REMIC Pool will have the effect of amortization of the issue price of the
Residual Securities over their life. However, in view of the possible
acceleration of the income of Residual Holders described above under
"--Taxation of REMIC Income," the period of time over which the issue price is
effectively amortized may be longer than the economic life of the Residual
Securities.
A Residual Security may have a negative value if the net present value
of anticipated tax liabilities exceeds the present value of anticipated cash
flows. The REMIC Regulations appear to treat the issue price of the residual
interest as zero rather than the negative amount for purposes of determining
the REMIC Pool's basis in its assets. The preamble to the REMIC Regulations
states that the Internal Revenue Service may provide future guidance on the
proper tax treatment of payments made by a transferor of the residual interest
to induce the transferee to acquire the interest, and Residual Holders should
consult their own tax advisors in this regard.
Further, to the extent that the initial adjusted basis of a Residual
Holder (other than an original holder) in the Residual Security is greater than
the corresponding portion of the REMIC Pool's basis in the mortgage loans, the
Residual Holder will not recover a portion of the basis until termination of
the REMIC Pool unless future Treasury regulations provide for periodic
adjustments to the REMIC income otherwise reportable by the holder. The REMIC
Regulations currently in effect do not so provide. See "--Treatment of Certain
Items of REMIC Income and Expense--Market Discount" below regarding the basis
of mortgage loans to the REMIC Pool and "--Sale or Exchange of a Residual
Security" below regarding possible treatment of a loss upon termination of the
REMIC Pool as a capital loss.
(3) Treatment of Certain Items of REMIC Income and Expense
Although it is anticipated that the trustee will compute REMIC income
and expense in accordance with the Code and applicable regulations, the
authorities regarding the determination of specific items of income and expense
are subject to differing interpretations. The depositor makes no representation
as to the specific method that will be used for reporting income with respect
to the mortgage loans and expenses for the Regular Securities, and different
methods could result in different timing or reporting of taxable income or net
loss to Residual Holders or differences in capital gain versus ordinary income.
Original Issue Discount and Premium. Generally, the REMIC Pool's
deductions for original issue discount and income from amortization of premium
will be determined in the same manner as original issue discount income on
Regular Securities as described above under "--Taxation of Owners of Regular
Securities--Original Issue Discount" and "--Variable Rate Regular Securities,"
without regard to the de minimis rule described therein, and "--Amortizable
Premium."
Market Discount. The REMIC Pool will have market discount income in
respect of mortgage loans if, in general, the basis of the REMIC Pool in those
mortgage loans is exceeded by their unpaid principal balances. The REMIC Pool's
basis in those mortgage loans is generally the fair market value of the
mortgage loans immediately after the transfer thereof to the REMIC Pool. The
REMIC Regulations provide that the basis is equal to the total of the issue
prices of all regular and residual interests in the REMIC Pool. The accrued
portion of the market discount would be recognized currently as an item of
ordinary income in a manner similar to original issue discount. Market discount
income generally should accrue in the manner described above under "--Taxation
of Owners of Regular Securities--Market Discount."
Premium. Generally, if the basis of the REMIC Pool in the mortgage
loans exceeds the unpaid principal balances thereof, the REMIC Pool will be
considered to have acquired those mortgage loans at a premium equal to the
amount of that excess. As stated above, the REMIC Pool's basis in mortgage
loans is the fair market value of the mortgage loans, based on the total of the
issue prices of the regular and residual interests in the REMIC Pool
immediately after the transfer thereof to the REMIC Pool. In a manner analogous
to the discussion above under "--Taxation of Owners of Regular
Securities--Amortizable Premium," a person that holds a mortgage loan as a
capital asset under Code Section 1221 may elect under Code Section 171 to
amortize premium on mortgage loans originated after September 27, 1985, under
the constant yield method. Amortizable bond premium will be treated as an
offset to interest income on the mortgage loans, rather than as a separate
deduction item. Because substantially all of the borrowers on the mortgage
loans are expected to be individuals, Code Section 171 will not be available
for premium on mortgage loans originated on or before September 27, 1985.
Premium for those mortgage loans may be deductible in accordance with a
reasonable method regularly employed by the holder thereof. The allocation of
that premium pro rata among principal payments should be considered a
reasonable method; however, the Internal Revenue Service may argue that the
premium should be allocated in a different manner, such as allocating the
premium entirely to the final payment of principal.
(4) Limitations on Offset or Exemption of REMIC Income
A portion (or all) of the REMIC taxable income includible in
determining the federal income tax liability of a Residual Holder will be
subject to special treatment. That portion, referred to as the "excess
inclusion," is equal to the excess of REMIC taxable income for the calendar
quarter allocable to a Residual Security over the daily accruals for that
quarterly period of (1) 120% of the long-term applicable federal rate that
would have applied to the Residual Security (if it were a debt instrument) on
the Startup Day under Code Section 1274(d), multiplied by (2) the adjusted
issue price of the Residual Security at the beginning of the quarterly period.
For this purpose, the adjusted issue price of a Residual Security at the
beginning of a quarter is the issue price of the Residual Security, plus the
amount of those daily accruals of REMIC income described in this paragraph for
all prior quarters, decreased by any distributions made with respect to the
Residual Security before the beginning of that quarterly period. Accordingly,
the portion of the REMIC Pool's taxable income that will be treated as excess
inclusions will be a larger portion of that income as the adjusted issue price
of the Residual Securities diminishes.
The portion of a Residual Holder's REMIC taxable income consisting of
the excess inclusions generally may not be offset by other deductions,
including net operating loss carryforwards, on the Residual Holder's return.
However, net operating loss carryovers are determined without regard to excess
inclusion income. Further, if the Residual Holder is an organization subject to
the tax on unrelated business income imposed by Code Section 511, the Residual
Holder's excess inclusions will be treated as unrelated business taxable income
of the Residual Holder for purposes of Code Section 511. In addition, REMIC
taxable income is subject to 30% withholding tax for certain persons who are
not U.S. Persons (as defined below under "--Tax-Related Restrictions on
Transfer of Residual Securities--Foreign Investors"), and the portion thereof
attributable to excess inclusions is not eligible for any reduction in the rate
of withholding tax (by treaty or otherwise). See "--Taxation of Certain Foreign
Investors--Residual Securities" below. Finally, if a real estate investment
trust or a regulated investment company owns a Residual Security, a portion
(allocated under Treasury regulations yet to be issued) of dividends paid by
the real estate investment trust or regulated investment company could not be
offset by net operating losses of its shareholders, would constitute unrelated
business taxable income for tax-exempt shareholders, and would be ineligible
for reduction of withholding to certain persons who are not U.S. Persons. The
SBJPA of 1996 has eliminated the special rule permitting Section 593
institutions ("thrift institutions") to use net operating losses and other
allowable deductions to offset their excess inclusion income from Residual
Securities that have "significant value" within the meaning of the REMIC
Regulations, effective for taxable years beginning after December 31, 1995,
except for Residual Securities continuously held by a thrift institution since
November 1, 1995.
In addition, the SBJPA of 1996 provides three rules for determining
the effect of excess inclusions on the alternative minimum taxable income of a
Residual Holder. First, alternative minimum taxable income for a Residual
Holder is determined without regard to the special rule, discussed above, that
taxable income cannot be less than excess inclusions. Second, a Residual
Holder's alternative minimum taxable income for a taxable year cannot be less
than the excess inclusions for the year. Third, the amount of any alternative
minimum tax net operating loss deduction must be computed without regard to any
excess inclusions. These rules are effective for taxable years beginning after
December 31, 1986, unless a Residual Holder elects to have those rules apply
only to taxable years beginning after August 20, 1996.
(5) Tax-Related Restrictions on Transfer of Residual Securities
Disqualified Organizations. If any legal or beneficial interest in a
Residual Security is transferred to a Disqualified Organization (as defined
below), a tax would be imposed in an amount equal to the product of (1) the
present value of the total anticipated excess inclusions for that Residual
Security for periods after the transfer and (2) the highest marginal federal
income tax rate applicable to corporations. The REMIC Regulations provide that
the anticipated excess inclusions are based on actual prepayment experience to
the date of the transfer and projected payments based on the Prepayment
Assumption. The present value rate equals the applicable federal rate under
Code Section 1274(d) as of the date of the transfer for a term ending with the
last calendar quarter in which excess inclusions are expected to accrue. That
rate is applied to the anticipated excess inclusions from the end of the
remaining calendar quarters in which they arise to the date of the transfer.
That tax generally would be imposed on the transferor of the Residual Security,
except that where the transfer is through an agent (including a broker,
nominee, or other middleman) for a Disqualified Organization, the tax would
instead be imposed on the agent. However, a transferor of a Residual Security
would in no event be liable for the tax for a transfer if the transferee
furnished to the transferor an affidavit stating that the transferee is not a
Disqualified Organization and, as of the time of the transfer, the transferor
does not have actual knowledge that the affidavit is false. The tax also may be
waived by the Internal Revenue Service if the Disqualified Organization
promptly disposes of the Residual Security and the transferor pays income tax
at the highest corporate rate on the excess inclusion for the period the
Residual Security is actually held by the Disqualified Organization.
In addition, if a "Pass-Through Entity" (as defined below) has excess
inclusion income for a Residual Security during a taxable year and a
Disqualified Organization is the record holder of an equity interest in that
entity, then a tax is imposed on the entity equal to the product of (1) the
amount of excess inclusions that are allocable to the interest in the
Pass-Through Entity during the period that interest is held by the Disqualified
Organization, and (2) the highest marginal federal corporate income tax rate.
That tax would be deductible from the ordinary gross income of the Pass-Through
Entity for the taxable year. The Pass-Through Entity would not be liable for
the tax if it has received an affidavit from the record holder that it is not a
Disqualified Organization or stating the holder's taxpayer identification
number and, during the period that person is the record holder of the Residual
Security, the Pass-Through Entity does not have actual knowledge that the
affidavit is false.
For taxable years beginning on or after January 1, 1998, if an
"electing large partnership" holds a Residual Security, all interests in the
electing large partnership are treated as held by Disqualified Organizations
for purposes of the tax imposed upon a Pass-Through Entity by Section 860E(c)
of the Code. An exception to this tax, otherwise available to a Pass-Through
Entity that is furnished certain affidavits by record holders of interests in
the entity and that does not know those affidavits are false, is not available
to an electing large partnership.
o "Disqualified Organization" means the United States, any state or
political subdivision thereof, any foreign government, any
international organization, any agency or instrumentality of any
of the foregoing (provided, that the term does not include an
instrumentality if all of its activities are subject to tax and a
majority of its board of directors in not selected by any
governmental entity), any cooperative organization furnishing
electric energy or providing telephone service or persons in
rural areas as described in Code Section 1381(a)(2)(C), and any
organization (other than a farmers' cooperative described in Code
Section 531) that is exempt from taxation under the Code unless
the organization is subject to the tax on unrelated business
income imposed by Code Section 511.
o "Pass-Through Entity" means any regulated investment company,
real estate investment trust, common trust fund, partnership,
trust or estate and certain corporations operating on a
cooperative basis. Except as may be provided in Treasury
regulations, any person holding an interest in a Pass-Through
Entity as a nominee for another will, with respect to that
interest, be treated as a Pass-Through Entity.
The pooling and servicing agreement for a series will provide that no
legal or beneficial interest in a Residual Security may be transferred or
registered unless (1) the proposed transferee furnished to the transferor and
the trustee an affidavit providing its taxpayer identification number and
stating that the transferee is the beneficial owner of the Residual Security
and is not a Disqualified Organization and is not purchasing the Residual
Security on behalf of a Disqualified Organization (i.e., as a broker, nominee
or middleman thereof) and (2) the transferor provides a statement in writing to
the trustee that it has no actual knowledge that the affidavit is false.
Moreover, the pooling and servicing agreement will provide that any attempted
or purported transfer in violation of these transfer restrictions will be null
and void and will vest no rights in any purported transferee. Each Residual
Security for a series will bear a legend referring to those restrictions on
transfer, and each Residual Holder will be deemed to have agreed, as a
condition of ownership thereof, to any amendments to the related pooling and
servicing agreement required under the Code or applicable Treasury regulations
to effectuate the foregoing restrictions. Information necessary to compute an
applicable excise tax must be furnished to the Internal Revenue Service and to
the requesting party within 60 days of the request, and the Seller or the
trustee may charge a fee for computing and providing that information.
Noneconomic Residual Interests. The REMIC Regulations would disregard
certain transfers of Residual Securities, in which case the transferor would
continue to be treated as the owner of the Residual Securities and thus would
continue to be subject to tax on its allocable portion of the net income of the
REMIC Pool. Under the REMIC Regulations, a transfer of a "noneconomic residual
interest" (as defined below) to a Residual Holder (other than a Residual Holder
who is not a U.S. Person as defined below under "--Foreign Investors") is
disregarded to all federal income tax purposes if a significant purpose of the
transfer is to impede the assessment or collection of tax. A residual interest
in a REMIC (including a residual interest with a positive value at issuance) is
a "noneconomic residual interest" unless, at the time of the transfer, (1) the
present value of the expected future distributions on the residual interest at
least equals the product of the present value of the anticipated excess
inclusions and the highest corporate income tax rate in effect for the year in
which the transfer occurs, and (2) the transferor reasonably expects that the
transferee will receive distributions from the REMIC at or after the time at
which taxes accrue on the anticipated excess inclusions in an amount sufficient
to satisfy the accrued taxes on each excess inclusion. The anticipated excess
inclusions and the present value rate are determined in the same manner as set
forth above under "--Disqualified Organizations." The REMIC Regulations explain
that a significant purpose to impede the assessment or collection of tax exists
if the transferor, at the time of the transfer, either knew or should have
known that the transferee would be unwilling or unable to pay taxes due on its
share of the taxable income of the REMIC. A safe harbor is provided if (1) the
transferor conducted, at the time of the transfer, a reasonable investigation
of the financial condition of the transferee and found that the transferee
historically had paid its debts as they came due and found no significant
evidence to indicate that the transferee would not continue to pay its debts as
they came due in the future, and (2) the transferee represents to the
transferor that it understands that, as the holder of the non-economic residual
interest, the transferee may incur liabilities in excess of any cash flows
generated by the interest and that the transferee intends to pay taxes
associated with holding the residual interest as they become due. The pooling
and servicing agreement for each series of Certificates will require the
transferee of a Residual Security to certify to the matters in the preceding
sentence as part of the affidavit described above under the heading
"--Disqualified Organizations."
Foreign Investors. The REMIC Regulations provide that the transfer of
a Residual Security that has "tax avoidance potential" to a "foreign person"
will be disregarded for all federal tax purposes. This rule appears intended to
apply to a transferee who is not a "U.S. Person" (as defined below), unless the
transferee's income is effectively connected with the conduct of a trade or
business within the United States. A Residual Security is deemed to have tax
avoidance potential unless, at the time of the transfer, (1) the future value
of expected distributions equals at least 30% of the anticipated excess
inclusions after the transfer, and (2) the transferor reasonably expects that
the transferee will receive sufficient distributions from the REMIC Pool at or
after the time at which the excess inclusions accrue and before the end of the
next succeeding taxable year for the accumulated withholding tax liability to
be paid. If the non-U.S. Person transfers the Residual Security back to a U.S.
Person, the transfer will be disregarded and the foreign transferor will
continue to be treated as the owner unless arrangements are made so that the
transfer does not have the effect of allowing the transferor to avoid tax on
accrued excess inclusions.
The prospectus supplement relating to the Certificates of a series may
provide that a Residual Security may not be purchased by or transferred to any
person that is not a U.S. Person or may describe the circumstances and
restrictions pursuant to which the transfer may be made. The term "U.S. Person"
means a citizen or resident of the United States, a corporation, partnership
(except as provided in applicable Treasury regulations) or other entity treated
as a partnership or as a corporation created or organized in or under the laws
of the United States or of any state (including, for this purpose, the District
of Columbia), an estate that is subject to U.S. federal income tax regardless
of the source of its income, or a trust if a court within the United States is
able to exercise primary supervision over the administration of the trust and
one or more U.S. Persons have the authority to control all substantial
decisions of the trust (or, to the extent provided in applicable Treasury
regulations, certain trusts in existence on August 20, 1996, which are eligible
to elect to be treated as U.S.
Persons).
(6) Sale or Exchange of a Residual Security
Upon the sale or exchange of a Residual Security, the Residual Holder
will recognize gain or loss equal to the excess, if any, of the amount realized
over the adjusted basis (as described above under "--Taxation of Owners of
Residual Securities--Basis and Losses") of the Residual Holder in the Residual
Security at the time of the sale or exchange. In addition to reporting the
taxable income of the REMIC Pool, a Residual Holder will have taxable income to
the extent that any cash distribution to it from the REMIC Pool exceeds that
adjusted basis on that Distribution Date. That income will be treated as gain
from the sale or exchange of the Residual Holder's Residual Security, in which
case, if the Residual Holder has an adjusted basis in its Residual Security
remaining when its interest in the REMIC Pool terminates, and if it holds the
Residual Security as a capital asset under Code Section 1221, then it will
recognize a capital loss at that time in the amount of the remaining adjusted
basis.
Any gain on the sale of a Residual Security will be treated as
ordinary income (1) if a Residual Security is held as part of a "conversion
transaction" as defined in Code Section 1258(c), up to the amount of interest
that would have accrued on the Residual Holder's net investment in the
conversion transaction at 120% of the appropriate applicable federal rate in
effect at the time the taxpayer entered into the transaction minus any amount
previously treated as ordinary income for any prior disposition of property
that was held as a part of that transaction or (2) in the case of a
non-corporate taxpayer, to the extent that the taxpayer has made an election
under Code Section 163(d)(4) to have net capital gains taxed as investment
income at ordinary income rates. In addition, gain or loss recognized from the
sale of a Residual Security by certain banks or thrift institutions will be
treated as ordinary income or loss pursuant to Code Section 582(c).
Except as provided in Treasury regulations yet to be issued, the wash
sale rules of Code Section 1091 will apply to dispositions of Residual
Securities where the seller of the Residual Security, during the period
beginning six months before the sale or disposition of the Residual Security
and ending six months after the sale or disposition, acquires (or enters into
any other transaction that results in the application of Code Section 1091) any
residual interest in any REMIC or any interest in a "taxable mortgage pool"
(such as a non-REMIC owner trust) that is economically comparable to a Residual
Security.
(7) Mark to Market Regulations
On December 24, 1996, the Internal Revenue Service issued final
regulations (the "Mark to Market Regulations") under Code Section 475 relating
to the requirement that a securities dealer mark to market securities held for
sale to customers. This mark-to-market requirement applies to all securities of
a dealer, except to the extent that the dealer has specifically identified a
security as held for investment. The Mark to Market Regulations provide that,
for purposes of this mark to market requirement, a Residual Security is not
treated as a security and thus may not be marked to market. The Mark to Market
Regulations apply to all Residual Securities acquired on or after January 4,
1995.
Taxes That May Be Imposed on the REMIC Pool
(1) Prohibited Transactions
Income from certain transactions by the REMIC Pool, called prohibited
transactions, will not be part of the calculation of income or loss includible
in the federal income tax returns of Residual Holders, but rather will be taxed
directly to the REMIC Pool at a 100% rate. Prohibited transactions generally
include:
(1) the disposition of a qualified mortgages other than
for
(a) substitution within two years of the Startup Day
for a defective (including a defaulted) obligation (or
repurchase in lieu of substitution of a defective (including
a defaulted) obligation at any time) or for any qualified
mortgage within three months of the Startup Day;
(b) foreclosure, default, or imminent default
of a qualified mortgage;
(c) bankruptcy or insolvency of the REMIC Pool;
or
(d) a qualified (complete) liquidation;
(2) the receipt of income from assets that are not the type
of mortgages or investments that the REMIC Pool is permitted to hold;
(3) the receipt of compensation for services; or
(4) the receipt of gain from disposition of cash flow
investments other than pursuant to a qualified liquidation.
Notwithstanding (1) and (4) above, it is not a prohibited transaction to sell a
qualified mortgage or cash flow investment held by a REMIC Pool to prevent a
default on Regular Securities as a result of a default on qualified mortgages
or to facilitate a clean-up call (generally, an optional termination to save
administrative costs when no more than a small percentage of the Securities is
outstanding). The REMIC Regulations indicate that the modification of a
mortgage loan generally will not be treated as a disposition if it is
occasioned by a default or reasonably foreseeable default, an assumption of the
mortgage loan, the waiver of a due-on-sale or due-on-encumbrance clause, or the
conversion of an interest rate by a borrower pursuant to the terms of a
convertible adjustable rate mortgage loan.
(2) Contributions to the REMIC Pool After the Startup Day
In general, the REMIC Pool will be subject to a tax at a 100% rate on
the value of any property contributed to the REMIC Pool after the Startup Day.
Exceptions are provided for cash contributions to the REMIC Pool (1) during the
three months following the Startup Day, (2) made to a qualified reserve fund by
a Residual Holder, (3) in the nature of a guarantee, (4) made to facilitate a
qualified liquidation or clean-up call, and (5) as otherwise permitted in
Treasury regulations yet to be issued. It is not anticipated that there will be
any contributions to the REMIC Pool after the Startup Day.
(3) Net Income from Foreclosure Property
The REMIC Pool will be subject of federal income tax at the highest
corporate rate on "net income from foreclosure property," determined by
reference to the rules applicable to real estate investment trusts. Generally,
property acquired by deed in lieu of foreclosure would be treated as
"foreclosure property" until the close of the third calendar year after the
year in which the REMIC Pool acquired that property, with possible extensions.
Net income from foreclosure property generally means gain from the sale of a
foreclosure property that is inventory property and gross income from
foreclosure property other than qualifying rents and other qualifying income
for a real estate investment trust. It is not anticipated that the REMIC Pool
will have any taxable net income from foreclosure property.
(4) Liquidation of the REMIC Pool
If a REMIC Pool adopts a plan of complete liquidation, within the
meaning of Code Section 860F(a)(4)(A)(i), which may be accomplished by
designating in the REMIC Pool's final tax return a date on which that adoption
is deemed to occur, and sells all of its assets (other than cash) within a
90-day period beginning on that date, the REMIC Pool will not be subject to the
prohibited transaction rules on the sale of its assets, provided that the REMIC
Pool credits or distributes in liquidation all of the sale proceeds plus its
cash (other than amounts retained to meet claims) to holders of Regular
Securities and Residual Holders within the 90-day period.
(5) Administrative Matters
The REMIC Pool will be required to maintain its books on a calendar
year basis and to file federal income tax returns for federal income tax
purposes in a manner similar to a partnership. The form for the income tax
return is Form 1066, U.S. Real Estate Mortgage Investment Conduit Income Tax
Return. The trustee will be required to sign the REMIC Pool's returns. Treasury
regulations provide that, except where there is a single Residual Holder for an
entire taxable year, the REMIC Pool will be subject to the procedural and
administrative rules of the Code applicable to partnerships, including the
determination by the Internal Revenue Service of any adjustments to, among
other things, items of REMIC income, gain, loss, deduction, or credit in a
unified administrative proceeding. The master servicer will be obligated to act
as "tax matters person," as defined in applicable Treasury regulations, for the
REMIC Pool as agent of the Residual Holders holding the largest percentage
interest in the Residual Securities. If the Code or applicable Treasury
regulations do not permit the master servicer to act as tax matters person in
its capacity as agent of the Residual Holder, the Residual Holder or any other
person specified pursuant to Treasury regulations will be required to act as
tax matters person. The tax matters person generally has responsibility for
overseeing and providing notice to the other Residual Holders of certain
administrative and judicial proceedings regarding the REMIC Pool's tax affairs,
although other holders of the Residual Securities of the same series would be
able to participate in those proceedings in appropriate circumstances.
(6) Limitations on Deduction of Certain Expenses
An investor who is an individual, estate, or trust will be subject to
limitation with respect to certain itemized deductions described in Code
Section 67, to the extent that those itemized deductions, in total, do not
exceed 2% of the investor's adjusted gross income. In addition, Code Section 68
provides that itemized deductions otherwise allowable for a taxable year of an
individual taxpayer will be reduced by the lesser or (1) 3% of the excess, if
any, of adjusted gross income over $100,000 ($50,000 in the case of a married
individual filing a separate return) (subject to adjustment for inflation), or
(2) 80% of the amount of itemized deductions otherwise allowable for that year.
In the case of a REMIC Pool, those deductions may include deductions under Code
Section 212 for the Servicing Fee and all administrative and other expenses
relating to the REMIC Pool, or any similar expenses allocated to the REMIC Pool
for a regular interest it holds in another REMIC. Those investors who hold
REMIC Securities either directly or indirectly through certain pass-through
entities may have their pro rata share of those expenses allocated to them as
additional gross income, but may be subject to that limitation on deductions.
In addition, those expenses are not deductible at all for purposes of computing
the alternative minimum tax, and may cause those investors to be subject to
significant additional tax liability. Temporary Treasury regulations provide
that the additional gross income and corresponding amount of expenses generally
are to be allocated entirely to the holders of Residual Securities in the case
of a REMIC Pool that would not qualify as a fixed investment trust in the
absence of a REMIC election. For a REMIC Pool that would be classified as an
investment trust in the absence of a REMIC election or that is substantially
similar to an investment trust, any holder of a Regular Security that is an
individual, trust, estate, or pass-through entity also will be allocated its
pro rata share of those expenses and a corresponding amount of income and will
be subject to the limitations or deductions imposed by Code Sections 67 and 68,
as described above. The prospectus supplement will indicate if all those
expenses will not be allocable to the Residual Securities.
In general, the allocable portion will be determined based on the
ratio that a REMIC securityholder's income, determined on a daily basis, bears
to the income of all holders of Regular Securities and Residual Securities for
a REMIC Pool. As a result, individuals, estates or trusts holding REMIC
Securities (either directly or indirectly through a grantor trust, partnership,
S corporation, REMIC, or certain other pass-through entities described in the
foregoing temporary Treasury regulations) may have taxable income in excess of
the interest income at the Interest Rate on Regular Securities that are issued
in a single class or otherwise consistently with fixed investment trust status
or in excess of cash distributions for the related period on Residual
Securities.
Taxation of Certain Foreign Investors
(1) Regular Securities
Interest, including original issue discount, distributable to Regular
Securityholders who are non-resident aliens, foreign corporations, or other
Non-U.S. Persons (as defined below), generally will be considered "portfolio
interest" and, therefore, generally will not be subject to 30% United States
withholding tax, provided that (1) the interest is not effectively connected
with the conduct of a trade or business in the United States of the
securityholder, (2) the Non-U.S. Person is not a "10-percent shareholder"
within the meaning of Code Section 871(h)(3)(B) or a controlled foreign
corporation described in Code Section 881(c)(3)(C) and (3) that Non-U.S. Person
provides the trustee, or the person who would otherwise be required to withhold
tax from those distributions under Code Section 1441 or 1442, with an
appropriate statement, signed under penalties of perjury, identifying the
beneficial owner and stating, among other things, that the beneficial owner of
the Regular Security is a Non-U.S. Person. If that statement, or any other
required statement, is not provided, 30% withholding will apply unless reduced
or eliminated pursuant to an applicable tax treaty or unless the interest on
the Regular Security is effectively connected with the conduct of a trade or
business within the United States by that Non-U.S. Person. In the latter case,
the Non-U.S. Person will be subject to United States federal income tax at
regular rates. Investors who are Non-U.S. Persons should consult their own tax
advisors regarding the specific tax consequences to them of owning a Regular
Security. The term "Non-U.S. Person" means any person who is not a U.S. Person.
The Internal Revenue Service recently issued final regulations (the
"New Regulations") that would provide alternative methods of satisfying the
beneficial ownership certification requirement described above. The New
Regulations are effective for payments made after December 31, 2000. The New
Regulations would require, in the case of Regular Certificates held by a
foreign partnership, that (x) the certification described above be provided by
the partners rather than by the foreign partnership and (y) the partnership
provide certain information, including a United States taxpayer identification
number. A look-through rule would apply in the case of tiered partnerships.
Non-U.S. Persons should consult their own tax advisors concerning the
application of the certification requirements in the New Regulations.
(2) Residual Securities
The Conference Committee Report to the 1986 Act indicates that amounts
paid to Residual Holders who are Non-U.S. Persons generally should be treated
as interest for purposes of the 30% (or lower treaty rate) United States
withholding tax. Treasury regulations provide that amount distributed to
Residual Holders may qualify as "portfolio interest," subject to the conditions
described in "Regular Securities" above, but only to the extent that (1) the
mortgage loans were issued after July 18, 1984, and (2) the trust fund or
segregated pool of assets therein (as to which a separate REMIC election will
be made), to which the Residual Security relates, consists of obligations
issued in "registered form" within the meaning of Code Section 163 (f) (1).
Generally, mortgage loans will not be, but regular interests in another REMIC
Pool will be, considered obligations issued in registered form. Furthermore,
Residual Holders will not be entitled to any exemption from the 30% withholding
tax (or lower treaty rate) to the extent of that portion of REMIC taxable
income that constitutes an "excess inclusion." See "--Taxation of Owners of
Residual Securities--Limitations on Offset or Exemption of REMIC Income" above.
If the amounts paid to Residual Holders who are Non-U.S. Persons are
effectively connected with the conduct of a trade or business within the United
States by those Non-U.S. Persons, 30% (or lower treaty rate) withholding will
not apply. Instead, the amounts paid to those Non-U.S. Persons will be subject
to United States federal income tax at regular rates. If 30% (or lower treaty
rate) withholding is applicable, those amounts generally will be taken into
account for purposes of withholding only when paid or otherwise distributed (or
when the Residual Security is disposed of) under rules similar to withholding
upon disposition of debt instruments that have original issue discount. See
"--Tax-Related Restrictions on Transfer of Residual Securities--Foreign
Investors" above concerning the disregard of certain transfers having "tax
avoidance potential." Investors who are Non-U.S. Persons should consult their
own tax advisors regarding the specific tax consequences to them of owning
Residual Securities.
(3) Backup Withholding
Distributions made on the Regular Securities, and proceeds from the
sale of the Regular Securities to or through certain brokers, may be subject to
a "backup" withholding tax under Code Section 3406 of 31% on "reportable
payments" (including interest distributions, original issue discount, and,
under some circumstances, principal distributions) unless the Regular Holder
complies with certain reporting and/or certification procedures, including the
provision of its taxpayer identification number to the trustee, its agent or
the broker who effected the sale of the Regular Security, or that Holder is
otherwise an exempt recipient under applicable provisions of the Code. Any
amounts to be withheld from distribution on the Regular Securities would be
refunded by the Internal Revenue Service or allowed as a credit against the
Regular Holder's federal income tax liability.
(4) Reporting Requirements
Reports of accrued interest, original issue discount and information
necessary to compute the accrual of market discount will be made annually to
the Internal Revenue Service and to individuals, estates, non-exempt and
non-charitable trusts, and partnerships who are either holders of record of
Regular Securities or beneficial owners who own Regular Securities through a
broker or middleman as nominee. All brokers, nominees and all other non-exempt
holders of record of Regular Securities (including corporations, non-calendar
year taxpayers, securities or commodities dealers, real estate investment
trusts, investment companies, common trust funds, thrift institutions and
charitable trusts) may request that information for any calendar quarter by
telephone or in writing by contacting the person designated in Internal Revenue
Service Publication 938 for a particular series of Regular Securities. Holders
through nominees must request the information from the nominee.
The Internal Revenue Service's Form 1066 has an accompanying Schedule
Q, Quarterly Notice to Residual Interest Holders of REMIC Taxable Income or Net
Loss Allocation. Treasury regulations require that Schedule Q be furnished by
the REMIC Pool to each Residual Holder by the end of the month following the
close of each calendar quarter (41 days after the end of a quarter under
proposed Treasury regulations) in which the REMIC Pool is in existence.
Treasury regulations require that, in addition to the foregoing requirements,
information must be furnished quarterly to Residual Holders, furnished
annually, if applicable, to holders of Regular Securities, and filed annually
with the Internal Revenue Service concerning Code Section 67 expenses (see
"Limitations on Deduction of Certain Expenses" above) allocable to those
holders. Furthermore, under these regulations, information must be furnished
quarterly to Residual Holders, furnished annually to holders of Regular
Securities, and filed annually with the Internal Revenue Service concerning the
percentage of the REMIC Pool's assets meeting the qualified asset tests
described above under "--Characterization of Investments in REMIC Securities."
Residual Holders should be aware that their responsibilities as
holders of the residual interest in a REMIC Pool, including the duty to account
for their shares of the REMIC Pool's income or loss on their returns, continue
for the life of the REMIC Pool, even after the principal and interest on their
Residual Securities have been paid in full.
Treasury regulations provide that a Residual Holder is not required to
treat items on its return consistently with their treatment on the REMIC Pool's
return if the Holder owns 100% of the Residual Securities for the entire
calendar year. Otherwise, each Residual Holder is required to treat items on
its returns consistently with their treatment on the REMIC Pool's return,
unless the Holder either files a statement identifying the inconsistency or
establishes that the inconsistency resulted from incorrect information received
from the REMIC Pool. The Internal Revenue Service may assess a deficiency
resulting from a failure to comply with the consistency requirement without
instituting an administrative proceeding at the REMIC Pool level. A REMIC Pool
typically will not register as a tax shelter pursuant to Code Section 6111
because it generally will not have a net loss for any of the first five taxable
years of its existence. Any person that holds a Residual Security as a nominee
for another person may be required to furnish the related REMIC Pool, in a
manner to be provided in Treasury regulations, with the name and address of
that person and other specified information.
FASITs
Classification of FASITs
For each series of FASIT Securities, assuming compliance with all
provisions of the related pooling and servicing agreement, in the opinion of
Brown & Wood LLP, the related trust fund (or each applicable portion thereof)
will qualify as a FASIT. The trust fund will qualify under the Code as a FASIT
in which FASIT regular securities (the "FASIT Regular Securities") and the
ownership interest security (the "FASIT Ownership Security") will constitute
the "regular interests" and the "ownership interest," respectively, if
(1) a FASIT election is in effect;
(2) certain tests concerning
(a) the composition of the FASIT's assets and
(b) the nature of the securityholders' interests
in the FASIT are met on a continuing basis; and
(3) the trust fund is not a regulated investment company
as defined in Section 851(a) of the Code.
A segregated pool of assets may also qualify as a FASIT.
(1) Asset Composition
In order for the trust fund to be eligible for FASIT status,
substantially all of the assets of the trust fund must consist of "permitted
assets" as of the close of the third month beginning after the closing date and
at all times thereafter. Permitted assets include:
(1) cash or cash equivalents;
(2) debt instruments with fixed terms that would qualify
as regular interests if issued by a REMIC as defined in Section 860D of
the Code (generally, instruments that provide for interest at a fixed
rate, a qualifying variable rate, or a qualifying interest-only type
rate);
(3) foreclosure property;
(4) 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;
(5) contract rights to acquire qualifying debt instruments or
qualifying hedging instruments;
(6) FASIT regular interests; and
(7) 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. A debt instrument is a permitted asset only if the instrument is
indebtedness for federal income tax purposes, including regular interests in a
REMIC or regular interests issued by another FASIT and it bears (1) fixed
interest or (2) variable interest of a type that relates to qualified variable
rate debt (as defined in Treasury regulations prescribed under section
860G(a)(1)(B)). Permitted debt instruments must bear interest, if any, at a
fixed or qualified variable rate. Permitted hedges include interest rate or
foreign currency notional principal contracts, letters of credit, insurance,
guarantees of payment default and similar instruments to be provided in
regulations, and which are reasonably required to guarantee or hedge against
the FASIT's risks associated with being the obligor on interests issued by the
FASIT. Foreclosure property is real property acquired by the FASIT in
connection with the default or imminent default of a qualified mortgage,
provided the depositor had no knowledge or reason to know as of the date such
asset was acquired by the FASIT that such a default had occurred or would
occur.
(2) 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:
(1) one or more classes of regular interests or
(2) a single class of ownership interest that is held by an
Eligible Corporation (as defined herein).
FASIT regular interests generally will be treated as debt for federal
income tax purposes. FASIT ownership interests generally will not treated as
debt for federal income tax 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 interests.
A FASIT interest generally qualifies as a regular interest if:
(1) it is designated as a regular interest;
(2) it has a stated maturity no greater than thirty
years;
(3) it entitles its holder to a specified principal
amount;
(4) the issue price of the interest does not exceed 125%
of its stated principal amount;
(5) the yield to maturity of the interest is less than the
applicable Treasury rate published by the IRS plus 5%; and
(6) if it pays interest, such interest is payable at either:
(a) a fixed rate with respect to the principal
amount of the regular interest or
(b) a permissible variable rate with respect to such
principal amount.
Permissible variable rates for FASIT regular interests are the same as those
for REMIC regular interests (i.e., certain qualified floating rates and
weighted average rates). Interest will be considered to be based on a
permissible variable rate if generally:
(1) such interest is unconditionally payable at least
annually;
(2) the issue price of the debt instrument does not exceed
the total noncontingent principal payments; and
(3) interest is based on a "qualified floating rate," an
"objective rate," a combination of a single fixed rate and one or more
"qualified floating rates," 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 (3), (4), or (5) 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 (6), 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.
See "--Taxation of Owners of FASIT Regular Securities," "--Taxation of
Owners of High-Yield Interests" and "--Taxation of FASIT Ownership Securities"
below.
(3) Consequences of Disqualification
If the trust fund fails to comply with one or more of the Code's
ongoing requirements for FASIT status during any taxable year, the Code
provides that it's 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 U.S. 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
the requirements for FASIT status are not satisfied.
Taxation of Owners of FASIT Regular Securities
(1) General
Payments received by holders of FASIT Regular Securities generally
will be accorded the same tax treatment under the Code as payments received on
other taxable debt instruments. Holders of FASIT Regular Securities must report
income from such Securities under an accrual method of accounting, even if they
otherwise would have used the cash receipts and disbursements method. Except in
the case of FASIT Regular Securities issued with original issue discount,
interest paid or accrued on a FASIT Regular Security generally will be treated
as ordinary income to the Holder and a principal payment on such security will
be treated as a return of capital to the extent that the securityholder's basis
is allocable to that payment.
(2) Original Issue Discount; Market Discount; Acquisition Premium
FASIT Regular Securities issued with original issue discount or
acquired with market discount or acquisition premium generally will treat
interest and principal payments on such Securities in the same manner described
for REMIC Regular Securities. See "--REMICs - Taxation of Owners of Regular
Securities" above.
(3) Sale or Exchange
If the FASIT Regular Securities are sold, the holder generally will
recognize gain or loss upon the sale in the manner described above for REMIC
Regular Securities. See "--REMICs--Taxation of Owners of Regular
Securities--Sale or Exchange of Regular Securities."
Taxation of Owners of High-Yield Interests
(1) General
The treatment of high-yield interests is intended to ensure that the
return on instruments issued by a FASIT yielding an equity-like return
continues to have a corporate level tax. High-yield interests are subject to
special rules regarding the eligibility of holders of such interest, and the
ability of such holders to offset income derived from their FASIT Security with
losses.
High-yield interests may only be held by Eligible Corporations, other
FASITs, and dealers in securities who acquire such interests as inventory.
o An "Eligible Corporation" is a taxable domestic C corporation
that does not qualify as a regulated investment company, a real
estate investment trust, a REMIC, or a cooperative.
o A "Disqualified Holder" is any holder other than (1) an Eligible
Corporation, or (2) a dealer who acquires FASIT debt for resale
to customers in the ordinary course of business.
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.
(2) Treatment of Losses
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 Security
(1) General
A FASIT Ownership Security represents the residual equity interest in
a FASIT. As such, the holder of a FASIT Ownership Security determines its
taxable income by taking into account all assets, liabilities, and items of
income, gain, deduction, loss, and credit of a FASIT. In general, the character
of the income to the holder of a FASIT Ownership Security 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 Security is
treated as ordinary income. In determining that taxable income, the holder of a
FASIT Ownership Security must determine the amount of interest, original issue
discount, market discount, and premium recognized with respect to the FASIT's
assets and the FASIT Regular Securities issued by the FASIT according to a
constant yield methodology and under an accrual method of accounting. In
addition, a holder of a FASIT Ownership Security is subject to the same
limitations on their ability to use losses to offset income from their FASIT
Regular Securities as are holders of high-yield interest. See "--Taxation of
Owners of High-Yield Interests" above.
Rules similar to the wash sale rules applicable to REMIC Residual
Securities also will apply to FASIT Ownership Security. Accordingly, losses on
dispositions of a FASIT Ownership Security generally will be disallowed where
within six months before or after the disposition, the seller of such Security
acquires any other FASIT Ownership Security that is economically comparable to
a FASIT Ownership Security. In addition, if any security that is sold or
contributed to a FASIT by the holders of the related FASIT Ownership Security
was required to be marked-to-market under Section 475 of the Code by such
holder, then Section 475 of the Code will continue to apply to such securities,
except that the amount realized under the mark-to-market rules or the
securities' value after applying special valuation rules contained in the FASIT
Provisions. Those special valuation rules generally require that the value of
debt instruments that are not traded on an established securities market be
determined by calculating the present value of the reasonably expected payments
under the instrument using a discount rate of 120% of the applicable federal
rate, compounded semi-annually.
(2) Prohibited Transaction
The holder of a FASIT Ownership Security is required to pay a penalty
excise tax equal to 100 percent of net income derived from:
(1) an asset that is not a permitted asset;
(2) any disposition of an asset other than a permitted
disposition;
(3) any income attributable to loans originated by the
FASIT; and
(4) compensation for services (other than fees for a waiver,
amendment, or consent under permitted assets not acquired through
foreclosure).
A permitted disposition is any disposition of any permitted asset:
(1) arising from complete liquidation of a class of
regular interest (i.e., a qualified liquidation);
(2) incident to the foreclosure, default (or imminent
default) on an asset of the asset;
(3) incident to the bankruptcy or insolvency of the
FASIT;
(4) necessary to avoid a default on any indebtedness of the a
FASIT attributable to a default (or imminent default) on an asset of
the FASIT;
(5) to facilitate a clean-up call;
(6) to substitute a permitted debt instrument for
another such instrument; or
(7) in order to reduce over-collateralization where a
principal purposes of the disposition was not to avoid recognition of
gain arising from an increase in its market value after its
acquisition by the FASIT.
Notwithstanding this rule, the holder of an Ownership Security may currently
deduct its losses incurred in prohibited transactions in computing its taxable
income for the year of the loss. A Series of Securities for which a FASIT
election is made generally will be structured in order to avoid application of
the prohibited transactions tax.
(3) Backup Withholding, Reporting and Tax Administration
Holders of FASIT Securities will be subject to backup withholding to
the same extent as holders of REMIC Securities. In addition, for purposes of
reporting and tax administration, holders of record of FASIT Securities
generally will be treated in the same manner as holders of REMIC Securities.
See "--REMICs" above.
Grantor Trust Funds
Classification of Grantor Trust Funds
For each series of Grantor Trust Securities, assuming compliance with
all provisions of the related Agreement, in the opinion of Brown & Wood LLP,
the related Grantor Trust Fund will be classified as a grantor trust under
subpart E, part I of subchapter J of the Code and not as a partnership, an
association taxable as a corporation, or a "taxable mortgage pool" within the
meaning of Code Section 7701(i). Accordingly, each holder of a Grantor Trust
Security generally will be treated as the beneficial owner of an undivided
interest in the mortgage loans included in the Grantor Trust Fund.
Standard Securities
General
Where there is no Retained Interest or "excess" servicing for the
mortgage loans underlying the Securities of a series, and where these
Securities are not designated as "Stripped Securities," the holder of each
Security of that series (referred to herein as "Standard Securities") will be
treated as the owner of a pro rata undivided interest in the ordinary income
and corpus portions of the Grantor Trust Fund represented by its Standard
Security and will be considered the beneficial owner of a pro rata undivided
interest in each of the mortgage loans, subject to the discussion below under
"--Recharacterization of Servicing Fees." Accordingly, the holder of a Standard
Security of a particular series will be required to report on its federal
income tax return its pro rata share of the entire income from the mortgage
loans represented by its Standard Security, including interest at the coupon
rate on those mortgage loans, original issue discount (if any), prepayment
fees, assumption fees, and late payment charges received by the servicer, in
accordance with that securityholder's method of accounting. A securityholder
generally will be able to deduct its share of the Servicing Fee and all
administrative and other expenses of the trust fund in accordance with its
method of accounting, provided that those amounts are reasonable compensation
for services rendered to the Grantor Trust Fund.
However, investors who are individuals, estates or trusts who own
Securities, either directly or indirectly through certain pass-through
entities, will be subject to limitations for certain itemized deductions
described in Code Section 67, including deductions under Code Section 212 for
the Servicing Fee and all administrative and other expenses of the Grantor
Trust Fund, to the extent that those deductions, in total, do not exceed two
percent of an investor's adjusted gross income. In addition, Code Section 68
provides that itemized deductions otherwise allowable for a taxable year of an
individual taxpayer will be reduced by the lesser of (1) 3% of the excess, if
any, of adjusted gross income over $100,000 ($50,000 in the case of a married
individual filing a separate return) (in each case, as adjusted for post-1991
inflation), or (2) 80% of the amount of itemized deductions otherwise allowable
for that year. As a result, those investors holding Standard Securities,
directly or indirectly through a pass-through entity, may have total taxable
income in excess of the total amount of cash received on the Standard
Securities with respect to interest at the Interest Rate or as discount income
on the Standard Securities. In addition, those expenses are not deductible at
all for purposes of computing the alternative minimum tax, and may cause those
investors to be subject to significant additional tax liability. Moreover,
where there is Retained Interest for the mortgage loans underlying a series of
Securities the transaction will be subject to the application of the "stripped
bond" rules of the Code as described below under "--Stripped Securities." Where
the servicing fees are in excess of reasonable servicing compensation, the
transaction will be subject to the application of the "stripped coupon" rules
of the Code, as described below under "--Recharacterization of Servicing Fees."
Holders of Standard Securities, particularly any class of a series
that are Subordinate Securities, may incur losses of interest or principal with
respect to the mortgage loans. Those losses would be deductible generally only
as described above under "--REMICs--Taxation of Owners of Regular
Securities--Treatment of Losses," except that securityholders on the cash
method of accounting would not be required to report qualified stated interest
as income until actual receipt.
(1) Tax Status
For a series, in the opinion of Brown & Wood LLP, a Standard Security
owned by a:
o "domestic building and loan association" within the meaning of
Code Section 7701(a)(19) will be considered to represent "loans .
. . secured by an interest in real property which is . . .
residential real property" within the meaning of Code Section
7701(a)(19)(C)(v), provided that the real property securing the
mortgage loans represented by that Standard Security is of the
type described in that section of the Code.
o real estate investment trust will be considered to represent
"real estate assets" within the meaning of Code Section
856(c)(4)(A) to the extent that the assets of the related Grantor
Trust Fund consist of qualified assets, and interest income on
those assets will be considered "interest on obligations secured
by mortgages on real property" to that extent within the meaning
of Code Section 856(c)(3)(B).
o REMIC will be considered to represent an "obligation (including
any participation or certificate of beneficial ownership therein)
which is principally secured by an interest in real property"
within the meaning of Code Section 860G(a)(3)(A) to the extent
that the assets of the related Grantor Trust Fund consist of
"qualified mortgages" within the meaning of Code Section
860G(a)(3).
An issue arises as to whether Buydown Mortgage Loans may be
characterized in their entirety under the Code provisions cited in clauses 1
and 2 of the immediately preceding paragraph or whether the amount qualifying
for that treatment must be reduced by the amount of the Buydown Mortgage Funds.
There is indirect authority supporting treatment of an investment in a Buydown
Mortgage Loan as entirely secured by real property if the fair market value of
the real property securing the loan exceeds the principal amount of the loan at
the time of issuance or acquisition, as the case may be. There is no assurance
that the treatment described above is proper. Accordingly, securityholders are
urged to consult their own tax advisors concerning the effects of those
arrangements on the characterization of the securityholder's investment for
federal income tax purposes.
(2) Premium and Discount
The depositor recommends that securityholders consult with their tax
advisors as to the federal income tax treatment of premium and discount arising
either upon initial acquisition of Standard Securities or thereafter.
Premium. The treatment of premium incurred upon the purchase of a
Standard Security will be determined generally as described above under
"--REMICs--Taxation of Owners of Residual Securities Premium."
Original Issue Discount. The original issue discount rules of Code
Section 1271 through 1275 will be applicable to a securityholder's interest in
those mortgage loans as to which the conditions for the application of those
sections are met. Rules regarding periodic inclusion of original issue discount
income generally are applicable to mortgages originated after March 2, 1984.
The rules allowing for the amortization of premium are available for mortgage
loans originated after September 27, 1985. Under the OID Regulations, original
issue discount could arise by the charging of points by the originator of the
mortgages in an amount greater than the statutory de minimis exception,
including a payment of points that is currently deductible by the borrower
under applicable Code provisions or, under some circumstances, by the presence
of "teaser" rates on the mortgage loans. See "--Stripped Securities" below
regarding original issue discount on Stripped Securities.
Original issue discount generally must be reported as ordinary gross
income as it accrues under a constant interest method that takes into account
the compounding of interest, in advance of the cash attributable to that
income. No prepayment assumption will be assumed for purposes of that accrual
except as set forth in the prospectus supplement. However, Code Section 1272
provides for a reduction in the amount of original issue discount includible in
the income of a holder of an obligation that acquires the obligation after its
initial issuance at a price greater than the sum of the original issue price
and the previously accrued original issue discount, less prior payments of
principal. Accordingly, if those mortgage loans acquired by a securityholder
are purchased at a price equal to the then unpaid principal amount of those
mortgage loans, no original issue discount attributable to the difference
between the issue price and the original principal amount of those mortgage
loans (i.e., points) will be includible by that holder.
Market Discount. securityholders also will be subject to the market
discount rules to the extent that the conditions for application of those
sections are met. Market discount on the mortgage loans will be determined and
will be reported as ordinary income generally in the manner described above
under "--REMICs--Taxation of Owners of Regular Securities--Market Discount,"
except that the ratable accrual methods described therein will not apply.
Rather, the holder will accrue market discount pro rata over the life of the
mortgage loans, unless the constant yield method is elected. No prepayment
assumption will be assumed for purposes of that accrual except as set forth in
the prospectus supplement.
(3) Recharacterization of Servicing Fees
If the servicing fees paid to a servicer were deemed to exceed
reasonable servicing compensation, the amount of that excess would represent
neither income nor a deduction to securityholders. In this regard, there are no
authoritative guidelines for federal income tax purposes as to either the
maximum amount of servicing compensation that may be considered reasonable in
the context of this or similar transactions or whether, in the case of Standard
Securities, the reasonableness of servicing compensation should be determined
on a weighted average or loan-by-loan basis. If a loan-by-loan basis is
appropriate, the likelihood that the amount would exceed reasonable servicing
compensation as to some of the mortgage loans would be increased. Internal
Revenue Service guidance indicates that a servicing fee in excess of reasonable
compensation ("excess servicing") will cause the mortgage loans to be treated
under the "stripped bond" rules. That guidance provides safe harbors for
servicing deemed to be reasonable and requires taxpayers to demonstrate that
the value of servicing fees in excess of those amounts is not greater than the
value of the services provided.
Accordingly, if the Internal Revenue Service's approach is upheld, a
servicer who receives a servicing fee in excess of those amounts would be
viewed as retaining an ownership interest in a portion of the interest payments
on the mortgage loans. Under the rules of Code Section 1286, the separation of
ownership of the right to receive some or all of the interest payments on an
obligation from the right to receive some or all of the principal payments on
the obligation would result in treatment of those mortgage loans as "stripped
coupons" and "stripped bonds." Subject to the de minimis rule discussed below
under "--Stripped Securities," each stripped bond or stripped coupon could be
considered for this purpose as a non-interest bearing obligation issued on the
date of issue of the Standard Securities, and the original issue discount rules
of the Code would apply to the holder thereof. While securityholders would
still be treated as owners of beneficial interests in a grantor trust for
federal income tax purposes, the corpus of the trust could be viewed as
excluding the portion of the mortgage loans the ownership of which is
attributed to the servicer, or as including that portion as a second class of
equitable interest. Applicable Treasury regulations treat that arrangement as a
fixed investment trust, since the multiple classes of trust interests should be
treated as merely facilitating direct investments in the trust assets and the
existence of multiple classes of ownership interests is incidental to that
purpose. In general, that recharacterization should not have any significant
effect upon the timing or amount of income reported by a securityholder, except
that the income reported by a cash method holder may be slightly accelerated.
See "--Stripped Securities" below for a further description of the federal
income tax treatment of stripped bonds and stripped coupons.
(4) Sale or Exchange of Standard Securities
Upon sale or exchange of a Standard Securities, a securityholder will
recognize gain or loss equal to the difference between the amount realized on
the sale and its total adjusted basis in the mortgage loans and other assets
represented by the Security. In general, the total adjusted basis will equal
the securityholder's cost for the Standard Security, exclusive of accrued
interest, increased by the amount of any income previously reported for the
Standard Security and decreased by the amount of any losses previously reported
for the Standard Security and the amount of any distributions (other than
accrued interest) received thereon. Except as provided above with respect to
market discount on any mortgage loans, and except for certain financial
institutions subject to the provisions of Code Section 582(c), the gain or loss
generally would be capital gain or loss if the Standard Security was held as a
capital asset. However, gain on the sale of a Standard Security will be treated
as ordinary income (1) if a Standard Security is held as part of a "conversion
transaction" as defined in Code Section 1258(c), up to the amount of interest
that would have accrued on the securityholder's net investment in the
conversion transaction at 120% of the appropriate applicable federal rate in
effect at the time the taxpayer entered into the transaction minus any amount
previously treated as ordinary income for any prior disposition of property
that was held as part of that transaction or (2) in the case of a non-corporate
taxpayer, to the extent that the taxpayer has made an election under Code
Section 163(d)(4) to have net capital gains taxed as investment income at
ordinary income rates. Long-term capital gains of certain non-corporate
taxpayers generally are subject to a lower maximum tax rate (20%) than ordinary
income or short-term capital gains of those taxpayers (39.6%) for property held
for more than one year. The maximum tax rate for corporations currently is the
same for both ordinary income and capital gains.
Stripped Securities
General
Pursuant to Code Section 1286, the separation of ownership of the
right to receive some or all of the principal payments on an obligation from
ownership of the right to receive some or all of the interest payments results
in the creation of "stripped bonds" for principal payments and "stripped
coupons" for interest payments. For purposes of this discussion, Securities
that are subject to those rules will be referred to as "Stripped Securities."
In the opinion of Brown & Wood LLP, the Securities will be subject to those
rules if:
o the depositor or any of its affiliates retains (for its own
account or for purposes of resale), in the form of Retained
Interest or otherwise, an ownership interest in a portion of the
payments on the mortgage loans;
o the depositor or any of its affiliates is treated as having an
ownership interest in the mortgage loans to the extent it is paid
(or retains) servicing compensation in an amount greater than
reasonable consideration for servicing the mortgage loans (see
"--Standard Securities--Recharacterization of Servicing Fees"
above); and
o a Class of Securities are issued in two or more Classes or
Subclasses representing the right to non-pro-rata percentages of
the interest and principal payments on the mortgage loans.
In general, a holder of a Stripped Security will be considered to own
"stripped bonds" for its pro rata share of all or a portion of the principal
payments on each mortgage loan and/or "stripped coupons" for its pro rata share
of all or a portion of the interest payments on each mortgage loan, including
the Stripped Security's allocable share of the servicing fees paid to a
servicer, to the extent that those fees represent reasonable compensation for
services rendered. See the discussion above under "--Standard
Securities--Recharacterization of Servicing Fees." Although not free from
doubt, for purposes of reporting to securityholders of Stripped Securities, the
servicing fees will be allocated to the classes of Stripped Securities in
proportion to the distributions to those Classes for the related period or
periods. The holder of a Stripped Security generally will be entitled to a
deduction each year in respect of the servicing fees, as described above under
"--Standard Securities--General," subject to the limitation described therein.
Code Section 1286 treats a stripped bond or a stripped coupon
generally as an obligation issued at an original issue discount on the date
that the stripped interest is purchased. Although the treatment of Stripped
Securities for federal income tax purposes is not clear in some respects,
particularly where Stripped Securities are issued with respect to a Mortgage
Pool containing variable-rate mortgage loans, in the opinion of Brown & Wood
LLP, (1) the Grantor Trust Fund will be treated as a grantor trust under
subpart E, Part I of subchapter J of the Code and not as an association taxable
as a corporation or a "taxable mortgage pool" within the meaning of Code
Section 7701(i), and (2) each Stripped Security should be treated as a single
installment obligation for purposes of calculating original issue discount and
gain or loss on disposition. This treatment is based on the interrelationship
of Code Section 1286, Code Sections 1272 through 1275, and the OID Regulations.
Although it is possible that computations for Stripped Securities could be made
in one of the ways described below under "--Possible Alternative
Characterizations," the OID Regulations state, in general, that two or more
debt instruments issued by a single issuer to a single investor in a single
transaction should be treated as a single debt instrument. Accordingly, for
original issue discount purposes, all payments on any Stripped Securities
should be totaled and treated as though they were made on a single debt
instrument. The pooling and servicing agreement will require that the trustee
make and report all computations described below using the approach described
in this paragraph, unless substantial legal authority requires otherwise.
Furthermore, Treasury regulations provide for treatment of a Stripped
Security as a single debt instrument issued on the date it is purchased for
purposes of calculating any original issue discount. In addition, under these
regulations, a Stripped Security that represents a right to payments of both
interest and principal may be viewed either as issued with original issue
discount or market discount (as described below), at a de minimis original
issue discount, or, presumably, at a premium. This treatment indicates that the
interest component of that Stripped Security would be treated as qualified
stated interest under the OID Regulations, assuming it is not an interest-only
or super-premium Stripped Security. Further, these regulations provide that the
purchaser of that Stripped Security will be required to account for any
discount as market discount rather than original issue discount if either (1)
the initial discount for the Stripped Security was treated as zero under the de
minimis rule, or (2) no more than 100 basis points in excess of reasonable
servicing is stripped off the related mortgage loans. That market discount
would be reportable as described above under "--REMICs--Taxation of Owners of
Regular Securities--Market Discount," without regard to the de minimis rule
therein, assuming that a prepayment assumption is employed in that computation.
The holder of a Stripped Security will be treated as owning an
interest in each of the mortgage loans held by the Grantor Trust Fund and will
recognize an appropriate share of the income and expenses associated with the
mortgage loans. Accordingly, an individual, trust or estate that holds a
Stripped Security directly or through a pass-through entity will be subject to
the limitations on deductions imposed by Code Sections 67 and 68.
A holder of a Stripped Security, particularly any Stripped Security
that is a Subordinate Security, may deduct losses incurred for the Stripped
Security as described above under "--Standard Securities General."
Status of Stripped Securities
No specific legal authority exists as to whether the character of the
Stripped Securities, for federal income tax purposes, will be the same as that
of the mortgage loans. Although the issue is not free from doubt, in the
opinion of Brown & Wood LLP, except for a trust fund consisting of Unsecured
Home Improvement Loans, Stripped Securities owned by applicable holders should
be considered to represent "real estate assets" within the meaning of Code
Section 856(c)(4)(A), "obligation [ s ] . . . principally secured by an
interest in real property which is . . . . residential real estate" within the
meaning of Code Section 860G(a)(3)(A), and "loans . . . secured by an interest
in real property" within the meaning of Code Section 7701(a)(19)(C)(v), and
interest (including original issue discount) income attributable to Stripped
Securities should be considered to represent "interest on obligations secured
by mortgages on real property" within the meaning of Code Section 856(c)(3)(B),
provided that in each case the mortgage loans and interest on those mortgage
loans qualify for that treatment. The application of those Code provisions to
Buydown Mortgage Loans is uncertain. See "--Standard Securities--Tax Status"
above.
Taxation of Stripped Securities
Original Issue Discount. Except as described above under "--General,"
each Stripped Security will be considered to have been issued at an original
issue discount for federal income tax purposes. Original issue discount for a
Stripped Security must be included in ordinary income as it accrues, in
accordance with a constant yield method that takes into account the compounding
of interest, which may be before the receipt of the cash attributable to that
income. Based in part on the issue discount required to be included in the
income of a holder of a Stripped Security in any taxable year likely will be
computed generally as described above under "--REMICs-- Taxation of Owners of
Regular Securities--Original Issue Discount" and "--Variable Rate Regular
Securities." However, with the apparent exception of a Stripped Security
qualifying as a market discount obligation as described above under
"--General," the issue price of a Stripped Security will be the purchase price
paid by each holder thereof, and the stated redemption price at maturity will
include the total amount of the payments to be made on the Stripped Security to
that securityholder, presumably under the Prepayment Assumption, other than
qualified stated interest.
If the mortgage loans prepay at a rate either faster or slower than
that under the Prepayment Assumption, a securityholder's recognition of
original issue discount will be either accelerated or decelerated and the
amount of that original issue discount will be either increased or decreased
depending on the relative interests in principal and interest on each mortgage
loan represented by that securityholder's Stripped Security. While the matter
is not free from doubt, the holder of a Stripped Security should be entitled in
the year that it becomes certain (assuming no further prepayments) that the
holder will not recover a portion of its adjusted basis in the Stripped
Security to recognize a loss (which may be a capital loss) equal to that
portion of unrecoverable basis.
As an alternative to the method described above, the fact that some or
all of the interest payments with respect to the Stripped Securities will not
be made if the mortgage loans are prepaid could lead to the interpretation that
these interest payments are "contingent" within the meaning of the OID
Regulations. The OID Regulations, as they relate to the treatment of contingent
interest, are by their terms not applicable to prepayable securities such as
the Stripped Securities. However, if final regulations dealing with contingent
interest with respect to the Stripped Securities apply the same principles as
the OID Regulations, these regulations may lead to different timing of income
inclusion that would be the case under the OID Regulations. Furthermore,
application of these principles could lead to the characterization of gain on
the sale of contingent interest Stripped Securities as ordinary income.
Investors should consult their tax advisors regarding the appropriate tax
treatment of Stripped Securities.
Sale or Exchange of Stripped Securities. Sale or exchange of a
Stripped Security before its maturity will result in gain or loss equal to the
difference, if any, between the amount received and the securityholder's
adjusted basis in that Stripped Security, as described above under
"--REMICs--Taxation of Owners of Regular Securities--Sale or Exchange of
Regular Securities." Gain or loss from the sale or exchange of a Stripped
Security generally will be capital gain or loss to the securityholder if the
Stripped Security is held as a "capital asset" within the meaning of Code
Section 1221, and will be long-term or short-term depending on whether the
Stripped Security has been held for the long-term capital gain holding period
(currently, more than one year). To the extent that a subsequent purchaser's
purchase price is exceeded by the remaining payments on the Stripped
Securities, the subsequent purchaser will be required for federal income tax
purposes to accrue and report that excess as if it were original issue discount
in the manner described above. It is not clear for this purpose whether the
assumed prepayment rate that is to be used in the case of a securityholder
other than an original securityholder should be the Prepayment Assumption or a
new rate based on the circumstances at the date of subsequent purchase.
Purchase of More Than One Class of Stripped Securities. When an
investor purchases more than one Class of Stripped Securities, it is currently
unclear whether for federal income tax purposes those Classes of Stripped
Securities should be treated separately or aggregated for purposes of the rules
described above.
Possible Alternative Characterization. The characterizations of the
Stripped Securities discussed above are not the only possible interpretations
of the applicable Code provisions. For example, the securityholder may be
treated as the owner of
(1) one installment obligation consisting of the Stripped
Security's pro rata share of the payments attributable to principal on
each mortgage loan and a second installment obligation consisting of
the Stripped Security's pro rata share of the payments attributable to
interest on each mortgage loan;
(2) as many stripped bonds or stripped coupons as there are
scheduled payments of principal and/or interest on each mortgage loan;
or
(3) a separate installment obligation for each mortgage loan,
representing the Stripped Security's pro rata share of payments of
principal and/or interest to be made with respect thereto.
Alternatively, the holder of one or more Classes of Stripped Securities may be
treated as the owner of a pro rata fractional undivided interest in each
mortgage loan to the extent that a Stripped Security, or Classes of Stripped
Securities, represents the same pro rata portion of principal and interest on
each mortgage loan, and a stripped bond or stripped coupon (as the case may
be), treated as an installment obligation or contingent payment obligation, as
to the remainder. Treasury regulations regarding original issue discount on
stripped obligations make the foregoing interpretations less likely to be
applicable. The preamble to these regulations states that they are premised on
the assumption that an aggregation approach is appropriate for determining
whether original issue discount on a stripped bond or stripped coupon is de
minimis, and solicits comments on appropriate rules for aggregating stripped
bonds and stripped coupons under Code Section 1286.
Because of these possible varying characterizations of Stripped
Securities and the resultant differing treatment of income recognition,
securityholders are urged to consult their own tax advisors regarding the
proper treatment of Stripped Securities for federal income tax purposes.
Reporting Requirements and Backup Withholding
The trustee will furnish, within a reasonable time after the end of
each calendar year, to each securityholder at any time during that year,
information (prepared on the basis described above) necessary to enable the
securityholder to prepare its federal income tax returns. This information will
include the amount of original issue discount accrued on Securities held by
persons other than securityholders exempted from the reporting requirements.
However, the amount required to be reported by the trustee may not be equal to
the proper amount of original issue discount required to be reported as taxable
income by a securityholder, other than an original securityholder who purchased
at the issue price. In particular, in the case of Stripped Securities, the
reporting will be based upon a representative initial offering price of each
Class of Stripped Securities except as set forth in the prospectus supplement.
The trustee will also file the original issue discount information with the
Internal Revenue Service. If a securityholder fails to supply an accurate
taxpayer identification number or if the Secretary of the Treasury determines
that a securityholder has not reported all interest and dividend income
required to be shown on his federal income tax return, 31% backup withholding
may be required in respect of any reportable payments, as described above under
"--REMICs--Backup Withholding."
Taxation of Certain Foreign Investors
To the extent that a Security evidences ownership in mortgage loans
that are issued on or before July 18, 1984, interest or original issue discount
paid by the person required to withhold tax under Code Section 1441 or 1442 to
nonresident aliens, foreign corporations, or other Non-U.S. persons generally
will be subject to 30% United States withholding tax, or any applicable lower
rate as may be provided for interest by an applicable tax treaty. Accrued
original issue discount recognized by the securityholder on the sale or
exchange of that Security also will be subject to federal income tax at the
same rate.
Treasury regulations provide that interest or original issue discount
paid by the trustee or other withholding agent to a Non-U.S. Person evidencing
ownership interest in mortgage loans issued after July 18, 1984 will be
"portfolio interest" and will be treated in the manner, and these persons will
be subject to the same certification requirements, described above under
"--REMICs--Taxation of Certain Foreign Investors--Regular Securities."
Partnership Trust Funds
Classification of Partnership Trust Funds
For each series of Partnership Securities or Debt Securities, Brown &
Wood LLP will deliver its opinion that the trust fund will not be a taxable
mortgage pool or an association (or publicly traded partnership) taxable as a
corporation for federal income tax purposes. This opinion will be based on the
assumption that the terms of the related Agreement and related documents will
be complied with, and on counsel's opinion that the nature of the income of the
trust fund will exempt it from the rule that certain publicly traded
partnerships are taxable as corporations.
Characterization of Investments in Partnership Securities and Debt Securities
For federal income tax purposes, (1) Partnership Securities and Debt
Securities held by a thrift institution taxed as a domestic building and loan
association will not constitute "loans . . . secured by an interest in real
property which is . . . residual real property" within the meaning of Code
Section 7701(a)(19)(C)(v) and (2) interest on Debt Securities 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 Debt Securities held by a real estate
investment trust will not constitute "real estate assets" within the meaning of
Code Section 856(c)(4)(A), but Partnership Securities held by a real estate
investment trust will qualify under those sections based on the real estate
investments trust's proportionate interest in the assets of the Partnership
Trust Fund based on capital accounts.
Taxation of Debt Securityholders
The depositor will agree, and the securityholders will agree by their
purchase of Debt Securities, to treat the Debt Securities as debt for federal
income tax purposes. No regulations, published rulings, or judicial decisions
exist that discuss the characterization for federal income tax purposes of
securities with terms substantially the same as the Debt Securities. However,
for each series of Debt Securities, Brown & Wood LLP will deliver its opinion
that the Debt Securities will be classified as indebtedness for federal income
tax purposes. The discussion below assumes this characterization of the Debt
Securities is correct.
If, contrary to the opinion of counsel, the Internal Revenue Service
successfully asserted that the Debt Securities were not debt for federal income
tax purposes, the Debt Securities might be treated as equity interests in the
Partnership Trust, and the timing and amount of income allocable to holders of
those Debt Securities may be different than as described in the following
paragraph.
Debt Securities generally will be subject to the same rules of
taxation as Regular Securities issued by a REMIC, as described above, except
that (1) income reportable on Debt Securities is not required to be reported
under the accrual method unless the holder otherwise uses the accrual method
and (2) the special rule treating a portion of the gain on sale or exchange of
a Regular Security as ordinary income is inapplicable to Debt Securities. See
"--REMICs--Taxation of Owners of Regular Securities" and "--Sale or Exchange of
Regular Securities."
Taxation of Owners of Partnership Securities
(1) Treatment of the Partnership Trust Fund as a Partnership
If specified in the prospectus supplement, the depositor will agree,
and the securityholders will agree by their purchase of Securities, to treat
the Partnership Trust Fund as a partnership for purposes of federal and state
income tax, franchise tax and any other tax measured in whole or in part by
income, with the assets of the partnership being the assets held by the
Partnership Trust Fund, the partners of the partnership being the
securityholders (including the depositor), and the Debt Securities (if any)
being debt of the partnership. However, the proper characterization of the
arrangement involving the Partnership Trust Fund, the Partnership Securities,
the Debt Securities, and the depositor is not clear, because there is no
authority on transactions closely comparable to that contemplated herein.
A variety of alternative characterizations are possible. For example,
because one or more of the classes of Partnership Securities have some features
characteristic of debt, the Partnership Securities might be considered debt of
the depositor or the Partnership Trust Fund. This characterization would not
result in materially adverse tax consequences to securityholders as compared to
the consequences from treatment of the Partnership Securities as equity in a
partnership, described below. The following discussion assumes that the
Partnership Securities represent equity interests in a partnership.
(2) Partnership Taxation
As a partnership, the Partnership Trust Fund will not be subject to
federal income tax. Rather, each securityholder will be required to separately
take into account that holder's allocated share of income, gains, losses,
deductions and credits of the Partnership Trust Fund. It is anticipated that
the Partnership Trust Fund's income will consist primarily of interest earned
on the mortgage loans (including appropriate adjustments for market discount,
original issue discount and bond premium) as described above under "--Grantor
Trust Funds--Standard Securities--General," and "--Premium and Discount" and
any gain upon collection or disposition of mortgage loans. The Partnership
Trust Fund's deductions will consist primarily of interest accruing with
respect to the Debt Securities, servicing and other fees, and losses or
deductions upon collection or disposition of Debt Securities.
The tax items of a partnership are allocable to the partners in
accordance with the Code, Treasury regulations and the partnership agreement
(here, the Agreement and related documents). The Agreement will provide, in
general, that the securityholders will be allocated taxable income of the
Partnership Trust Fund for each Due Period equal to the sum of:
(1) the interest that accrues on the Partnership Securities
in accordance with their terms for that Due Period, including interest
accruing at the applicable Interest Rate for that Due Period and
interest on amounts previously due on the Partnership Securities but
not yet distributed;
(2) any Partnership Trust Fund income attributable to
discount on the mortgage loans that corresponds to any excess of the
principal amount of the Partnership Securities over their initial
issue price; and
(3) any other amounts of income payable to the
securityholders for that Due Period.
This allocation will be reduced by any amortization by the Partnership
Trust Fund of premium on mortgage loans that corresponds to any excess of the
issue price of Partnership Securities over their principal amount. All
remaining taxable income of the Partnership Trust Fund will be allocated to the
depositor. Based on the economic arrangement of the parties, this approach for
allocating Partnership Trust Fund income should be permissible under applicable
Treasury regulations, although no assurance can be given that the Internal
Revenue Service would not require a greater amount of income to be allocated to
securityholders. Moreover, even under the foregoing method of allocation,
securityholders may be allocated income equal to the entire Interest Rate plus
the other items described above even though the trust fund might not have
sufficient cash to make current cash distributions of that amount. Thus, cash
basis holders will in effect be required to report income from the Partnership
Securities on the accrual basis and securityholders may become liable for taxes
on Partnership Trust Fund income even if they have not received cash from the
Partnership Trust Fund to pay those taxes.
Part or all of the taxable income allocated to a securityholder that
is a pension, profit sharing or employee benefit plan or other tax-exempt
entity (including an individual retirement account) may constitute "unrelated
business taxable income" generally taxable to that holder under the Code.
A share of expenses of the Partnership Trust Fund (including fees of
the master servicer but not interest expense) allocable to an individual,
estate or trust securityholder would be miscellaneous itemized deductions
subject to the limitations described above under "--Grantor Trust
Funds--Standard Securities--General." Accordingly, those deductions might be
disallowed to the individual in whole or in part and might result in that
holder being taxed on an amount of income that exceeds the amount of cash
actually distributed to that holder over the life of the Partnership Trust
Fund.
Discount income or premium amortization for each mortgage loan would
be calculated in a manner similar to the description above under "--Grantor
Trust Funds--Standard Securities--General" and "--Premium and Discount."
Notwithstanding that description, it is intended that the Partnership Trust
Fund will make all tax calculations relating to income and allocations to
securityholders on a total basis for all mortgage loans held by the Partnership
Trust Fund rather than on a mortgage loan-by-mortgage loan basis. If the
Internal Revenue Service were to require that these calculations be made
separately for each mortgage loan, the Partnership Trust Fund might be required
to incur additional expense, but it is believed that there would not be a
material adverse effect on securityholders.
(3) Discount and Premium
It is not anticipated that the mortgage loans will have been issued
with original issue discount and, therefore, the Partnership Trust Fund should
not have original issue discount income. However, the purchase price paid by
the Partnership Trust Fund for the mortgage loans may be greater or less than
the remaining principal balance of the mortgage loans at the time of purchase.
If so, the mortgage loans will have been acquired at a premium or discount, as
the case may be. See "--Grantor Trust Funds--Standard Securities--Premium and
Discount." (As indicated above, the Partnership Trust Fund will make this
calculation on a total basis, but might be required to recompute it on a
mortgage loan-by-mortgage loan basis.)
If the Partnership Trust Fund acquires the mortgage loans at a market
discount or premium, the Partnership Trust Fund will elect to include that
discount in income currently as it accrues over the life of the mortgage loans
or to offset that premium against interest income on the mortgage loans. As
indicated above, a portion of that market discount income or premium deduction
may be allocated to securityholders.
(4) Section 708 Termination
Under Section 708 of the Code, the Partnership Trust Fund will be
deemed to terminate for federal income tax purposes if 50% or more of the
capital and profits interests in the Partnership Trust Fund are sold or
exchanged within a 12-month period. If that termination occurs, it would cause
a deemed contribution of the assets of a Partnership Trust Fund (the "old
partnership") to a new Partnership Trust Fund (the "new partnership") in
exchange for interests in the new partnership. Those interests would be deemed
distributed to the partners of the old partnership in liquidation thereof,
which would not constitute a sale or exchange. The Partnership Trust Fund will
not comply with certain technical requirements that might apply when the
constructive termination occurs. As a result, the Partnership Trust Fund may be
subject to certain tax penalties and may incur additional expenses if it is
required to comply with those requirements. Furthermore, the Partnership Trust
Fund might not be able to comply due to lack of data.
(5) Disposition of Securities
Generally, capital gain or loss will be recognized on a sale of
Partnership Securities in an amount equal to the difference between the amount
realized and the seller's tax basis in the Partnership Securities sold. A
securityholder's tax basis in an Partnership Security will generally equal the
holder's cost increased by the holder's share of Partnership Trust Fund income
(includible in income) and decreased by any distributions received with respect
to that Partnership Security. In addition, both the tax basis in the
Partnership Securities and the amount realized on a sale of an Partnership
Security would include the holder's share of the Debt Securities and other
liabilities of the Partnership Trust Fund. A holder acquiring Partnership
Securities at different prices may be required to maintain a single total
adjusted tax basis in those Partnership Securities, and, upon sale or other
disposition of some of the Partnership Securities, allocate a portion of that
total tax basis to the Partnership Securities sold (rather than maintaining a
separate tax basis in each Partnership Security for purposes of computing gain
or loss on a sale of that Partnership Security).
Any gain on the sale of an Partnership Security attributable to the
holder's share of unrecognized accrued market discount on the mortgage loans
would generally be treated as ordinary income to the holder and would give rise
to special tax reporting requirements. The Partnership Trust Fund does not
expect to have any other assets that would give rise to those special reporting
considerations. Thus, to avoid those special reporting requirements, the
Partnership Trust Fund will elect to include market discount in income as it
accrues.
If a securityholder is required to recognize a total amount of income
(not including income attributable to disallowed itemized deductions described
above) over the life of the Partnership Securities that exceeds the total cash
distributions with respect thereto, that excess will generally give rise to a
capital loss upon the retirement of the Partnership Securities.
(6) Allocations Between Transferors and Transferees
In general, the Partnership Trust Fund's taxable income and losses
will be determined each Due Period and the tax items for a particular Due
Period will be apportioned among the securityholders in proportion to the
principal amount of Partnership Securities owned by them as of the close of the
last day of that Due Period. As a result, a holder purchasing Partnership
Securities may be allocated tax items (which will affect its tax liability and
tax basis) attributable to periods before the actual transaction.
The use of a Due Period convention may not be permitted by existing
regulations. If a Due Period convention is not allowed (or only applies to
transfers of less than all of the partner's interest), taxable income or losses
of the Partnership Trust Fund might be reallocated among the securityholders.
The depositor will be authorized to revise the Partnership Trust Fund's method
of allocation between transferors and transferees to conform to a method
permitted by future regulations.
(7) Section 731 Distributions
In the case of any distribution to a securityholder, no gain will be
recognized to that securityholder to the extent that the amount of any money
distributed for that Security exceeds the adjusted basis of that
securityholder's interest in the Security. To the extent that the amount of
money distributed exceeds that securityholder's adjusted basis, gain will be
currently recognized. In the case of any distribution to a securityholder, no
loss will be recognized except upon a distribution in liquidation of a
securityholder's interest. Any gain or loss recognized by a securityholder will
be capital gain or loss.
(8) Section 754 Election
If a securityholder sells its Partnership Securities at a profit
(loss), the purchasing securityholder will have a higher (lower) basis in the
Partnership Securities than the selling securityholder had. The tax basis of
the Partnership Trust Fund's assets would not be adjusted to reflect that
higher (or lower) basis unless the Partnership Trust Fund were to file an
election under Section 754 of the Code. To avoid the administrative
complexities that would be involved in keeping accurate accounting records, as
well as potentially onerous information reporting requirements, the Partnership
Trust Fund will not make that election. As a result, securityholder might be
allocated a greater or lesser amount of Partnership Trust Fund income than
would be appropriate based on their own purchase price for Partnership
Securities.
(9) Administrative Matters
The trustee is required to keep or have kept complete and accurate
books of the Partnership Trust Fund. These books will be maintained for
financial reporting and tax purposes on an accrual basis and the fiscal year of
the Partnership Trust Fund will be the calendar year. The trustee will file a
partnership information return (Form 1065) with the Internal Revenue Service
for each taxable year of the Partnership Trust Fund and will report each
securityholder's allocable share of items of Partnership Trust Fund income and
expense to holders and the Internal Revenue Service on Schedule K-1. The
trustee will provide the Schedule K-1 information to nominees that fail to
provide the Partnership Trust Fund with the information statement described
below and these nominees will be required to forward that information to the
beneficial owners of the Partnership Securities. Generally, holders must file
tax returns that are consistent with the information return filed by the
Partnership Trust Fund or be subject to penalties unless the holder notifies
the Internal Revenue Service of all those inconsistencies.
Under Section 6031 of the Code, any person that holds Partnership
Securities as a nominee at any time during a calendar year is required to
furnish the Partnership Trust Fund with a statement containing certain
information on the nominee, the beneficial owners and the Partnership
Securities so held. This information includes (1) the name, address and
taxpayer identification number of the nominee and (2) as to each beneficial
owner (a) the name, address and identification number of that person, (b)
whether that person is a United States person, a tax-exempt entity or a foreign
government, an international organization, or any wholly-owned agency or
instrumentality of either of the foregoing, and (c) certain information on
Partnership Securities that were held, bought or sold on behalf of that person
throughout the year. In addition, brokers and financial institutions that hold
Partnership Securities through a nominee are required to furnish directly to
the trustee information as to themselves and their ownership of Partnership
Securities. A clearing agency registered under Section 17A of the Exchange Act
is not required to furnish that information statement to the Partnership Trust
Fund. The information referred to above for any calendar year must be furnished
to the Partnership Trust Fund on or before the following January 31. Nominees,
brokers and financial institutions that fail to provide the Partnership Trust
Fund with the information described above may be subject to penalties.
Unless another designation is made, the depositor will be designated
as the tax matters partner in the pooling and servicing agreement and, as the
tax matters partner, will be responsible for representing the securityholders
in any dispute with the Internal Revenue Service. The Code provides for
administrative examination of a partnership as if the partnership were a
separate and distinct taxpayer. Generally, the statute of limitations for
partnership items does not expire until three years after the date on which the
partnership information return is filed. Any adverse determination following an
audit of the return of the Partnership Trust Fund by the appropriate taxing
authorities could result in an adjustment of the returns of the
securityholders, and, under certain circumstances, a securityholder may be
precluded from separately litigating a proposed adjustment to the items of the
Partnership Trust Fund. An adjustment could also result in an audit of a
securityholder's returns and adjustments of items not related to the income and
losses of the Partnership Trust Fund.
(10) Tax Consequences to Foreign Securityholders
It is not clear whether the Partnership Trust Fund would be considered
to be engaged in a trade or business in the United States for purposes of
federal withholding taxes with respect to Non-U.S. Persons, because there is no
clear authority dealing with that issue under facts substantially similar to
those described herein. Although it is not expected that the Partnership Trust
Fund would be engaged in a trade or business in the United States for those
purposes, the Partnership Trust Fund will withhold as if it were so engaged to
protect the Partnership Trust Fund from possible adverse consequences of a
failure to withhold. The Partnership Trust Fund expects to withhold on the
portion of its taxable income that is allocable to securityholders who are
Non-U.S. Persons pursuant to Section 1446 of the Code, as if that income were
effectively connected to a U.S. trade or business, at a rate of 35% for
Non-U.S. Persons that are taxable as corporations and 39.6% for all other
foreign holders. Amounts withheld will be deemed distributed to the Non-U.S.
Person securityholders. Subsequent adoption of Treasury regulations or the
issuance of other administrative pronouncements may require the Partnership
Trust Fund to change its withholding procedures. In determining a holder's
withholding status, the Partnership Trust Fund may rely on Form W-8, Form W-9
or the holder's certification of nonforeign status signed under penalties of
perjury.
Each Non-U.S. Person holder might be required to file a U.S.
individual or corporate income tax return (including, in the case of a
corporation, the branch profits tax) on its share of the Partnership Trust
Fund's income. Each Non-U.S. Person holder must obtain a taxpayer
identification number from the Internal Revenue Service and submit that number
to the Partnership Trust Fund on Form W-8 to assure appropriate crediting of
the taxes withheld. A Non-U.S. Person holder generally would be entitled to
file with the Internal Revenue Service a claim for refund for taxes withheld by
the Partnership Trust Fund, taking the position that no taxes were due because
the Partnership Trust Fund was not engaged in a U.S. trade or business.
However, interest payments made (or accrued) to a securityholder who is a
Non-U.S. Person generally will be considered guaranteed payments to the extent
that those payments are determined without regard to the income of the
Partnership Trust Fund. If these interest payments are properly characterized
as guaranteed payments, then the interest may not be considered "portfolio
interest." As a result, securityholders who are Non-U.S. Persons may be subject
to United States federal income tax and withholding tax at a rate of 30%,
unless reduced or eliminated pursuant to an applicable treaty. In that case, a
Non-U.S. Person holder would only be entitled to claim a refund for that
portion of the taxes in excess of the taxes that should be withheld for the
guaranteed payments.
(11) Backup Withholding
Distributions made on the Partnership Securities and proceeds from the
sale of the Partnership Securities will be subject to a "backup" withholding
tax of 31% if, in general, the securityholder fails to comply with certain
identification procedures, unless the holder is an exempt recipient under
applicable provisions of the Code.
Consequences for Particular Investors
The federal tax discussions above may not be applicable depending on a
securityholder's particular tax situation. The depositor recommends that
prospective purchasers consult their tax advisors for the tax consequences to
them of the purchase, ownership and disposition of REMIC Securities, FASIT
Securities, Grantor Trust Securities, Partnership Securities and Debt
Securities, including the tax consequences under state, local, foreign and
other tax laws and the possible effects of changes in federal or other tax
laws.
State and Other Tax Considerations
In addition to the federal income tax consequences described in
"Material Federal Income Tax Considerations," potential investors should
consider the state and local tax consequences of the acquisition, ownership,
and disposition of the Securities offered hereunder. State tax law may differ
substantially from the corresponding federal tax law, and the discussion above
does not purport to describe any aspect of the tax laws of any state or other
jurisdiction. Therefore, prospective investors should consult their own tax
advisors for the various tax consequences of investments in the Securities
offered hereunder.
ERISA Considerations
General
The Employee Retirement Income Security Act of 1974, as amended
("ERISA"), and the Code impose certain requirements on employee benefit plans
and on certain other retirement plans and arrangements, including individual
retirement accounts and annuities, Keogh plans and collective investment funds
and separate accounts in which these plans, accounts or arrangements are
invested, that are subject to Title I of ERISA and Section 4975 of the Code
("Plans") and on persons who are fiduciaries for those Plans in connection with
the investment of Plan assets. Some employee benefit plans, such as
governmental plans (as defined in ERISA Section 3(32)), and, if no election has
been made under Section 410(d) of the Code, church plans (as defined in Section
3(33) of ERISA) are not subject to ERISA requirements. Therefore, assets of
these plans may be invested in Securities without regard to the ERISA
considerations described below, subject to the provisions of other applicable
federal, state and local law. Any of these plans that is qualified and exempt
from taxation under Sections 401(a) and 501(a) of the Code, however, is subject
to the prohibited transaction rules set forth in Section 503 of the Code.
ERISA generally imposes on Plan fiduciaries certain general fiduciary
requirements, including those of investment prudence and diversification and
the requirement that a Plan's investments be made in accordance with the
documents governing the Plan. In addition, ERISA and the Code prohibit a broad
range of transactions involving assets of a Plan and persons ("Parties in
Interest") who have certain specified relationships to the Plan unless a
statutory or administrative exemption is available. Certain Parties in Interest
that participate in a prohibited transaction may be subject to an excise tax
imposed pursuant to Section 4975 of the Code, unless a statutory or
administrative exemption is available. These prohibited transactions generally
are set forth in Sections 406 and 407 of ERISA and Section 4975 of the Code.
A Plan's investment in Securities may cause the mortgage loans, Agency
Securities, Mortgage Securities and other assets included in a related trust
fund to be deemed Plan assets. Section 2510.3-101 of the regulations of the
United States Department of Labor ("DOL") provides that when a Plan acquires an
equity interest in an entity, the Plan's assets include both an equity interest
and an undivided interest in each of the underlying assets of the entity,
unless certain exceptions not applicable here apply, or unless the equity
participation in the entity by "benefit plan investors" (i.e., Plans and
certain employee benefit plans not subject to ERISA) is not "significant," both
as defined therein. For this purpose, in general, equity participation by
benefit plan investors will be "significant" on any date if 25% or more of the
value of any class of equity interests in the entity is held by benefit plan
investors. To the extent the Securities are treated as equity interests for
purposes of DOL regulations Section 2510.3-101, equity participation in a trust
fund will be significant on any date if immediately after the most recent
acquisition of any Security, 25% or more of any class of Securities is held by
benefit plan investors.
Any person who has discretionary authority or control respecting the
management or disposition of Plan assets, and any person who provides
investment advice for those assets for a fee, is a fiduciary of the investing
Plan. If the mortgage loans, Agency Securities, Mortgage Securities and other
assets included in a trust fund constitute Plan assets, then any party
exercising management or discretionary control regarding those assets, such as
the servicer or master servicer, may be deemed to be a Plan "fiduciary" and
thus subject to the fiduciary responsibility provisions and prohibited
transaction provisions of ERISA and the Code for the investing Plan. In
addition, if the mortgage loans, Agency Securities, Mortgage Securities and
other assets included in a trust fund constitute Plan assets, the purchase of
Securities by a Plan, as well as the operation of the trust fund, may
constitute or involve a prohibited transaction under ERISA and the Code.
The DOL issued an individual exemption (the "Exemption"), to DBSI that
generally exempts from the application of the prohibited transaction provisions
of Sections 406(a) and 407 of ERISA, and the excise taxes imposed on those
prohibited transactions pursuant to Section 4975(a) and (b) of the Code,
certain transactions, among others, relating to the servicing and operation of
mortgage pools and the purchase, sale and holding of Securities underwritten by
an underwriter, that (1) represent a beneficial ownership interest in the
assets of a trust fund and entitle the holder the pass-through payments of
principal, interest and/or other payments made with respect to the assets of
the trust fund or (2) are denominated as a debt instrument and represent an
interest in a REMIC, provided that certain conditions set forth in the
Exemption are satisfied.
For purposes of this Section "ERISA Considerations," the term
"underwriter" will include (a) DBSI, (b) any person directly or indirectly,
through one or more intermediaries, controlling, controlled by or under common
control with DBSI, and (c) any member of the underwriting syndicate or selling
group of which a person described in (a) or (b) is a manager or co-manager for
a class of Securities.
The Exemption sets forth six general conditions that must be satisfied
for a transaction involving the purchase, sale and holding of Securities to be
eligible for exemptive relief thereunder:
(1) The acquisition of Securities by a Plan must be on terms
that are at least as favorable to the Plan as they would be in an
arm's-length transaction with an unrelated party.
(2) The Exemption only applies to Securities evidencing
rights and interests not subordinated to the rights and interests
evidenced by the other Securities of the same series.
(3) The Securities at the time of acquisition by the Plan
must be rated in one of the three highest generic rating categories by
Standard & Poor's Ratings Services, a division of the McGraw-Hill
Companies, Inc. ("S&P"), Moody's Investors Service ("Moody's"), Duff &
Phelps Credit Rating Co. ("DCR") or Fitch IBCA, Inc. ("Fitch").
(4) The trustee cannot be an affiliate of any member of the
"Restricted Group," which consists of the underwriter, the depositor,
the trustee, the master servicer, any servicer, any insurer and any
obligor on Assets constituting more than 5% of the total unamortized
principal balance of the Assets in the related trust fund as of the
date of initial issuance of the Securities.
(5) The sum of all payments made to and retained by the
underwriter(s) must represent not more than reasonable compensation
for underwriting the Securities; the sum of all payments made to and
retained by the depositor pursuant to the assignment of the Assets to
the related trust fund must represent not more than the fair market
value of those obligations; and the sum of all payments made to and
retained by the servicer must represent not more than reasonable
compensation for that person's services under the related Agreement
and reimbursement of that person's reasonable expenses in connection
therewith.
(6) The investing Plan must be an accredited investor as
defined in Rule 501(a)(1) of Regulation D of the Commission under the
Securities Act of 1933, as amended.
In addition, the trust fund must meet the following requirements: (1)
the assets of the trust fund must consist solely of assets of the type that
have been included in other investment pools; (2) securities evidencing
interests in those other investment pools must have been rated in one of the
three highest generic rating categories by S&P, Moody's, DCR, or Fitch for at
least one year before the Plan's acquisition of the securities; and (3)
securities evidencing interests in those other investment pools must have been
purchased by investors other than Plans for at least one year before any Plan's
acquisition of the Securities.
A fiduciary of a Plan contemplating purchasing a Security must make
its own determination that the general conditions set forth above will be
satisfied for that Security. However, to the extent Securities are subordinate,
the Exemption will not apply to an investment by a Plan. In addition, any
Securities representing a beneficial ownership interest in Revolving Credit
Line Loans will not satisfy the general conditions of the Exemption.
If the general conditions of the Exemption are satisfied, the
Exemption may provide an exemption from the restrictions imposed by Sections
406(a) and 407 of ERISA (as well as the excise taxes imposed by Sections
4975(a) and (b) of the Code by reason of Sections 4975(c) (1)(A) through (D) of
the Code) in connection with the direct or indirect sale, exchange, transfer,
holding or the direct or indirect acquisition or disposition in the secondary
market of Securities by Plans. However, no exemption is provided from the
restrictions of Sections 406(a)(1)(E), 406(a)(2) and 407 of ERISA for the
acquisition or holding of a Security on behalf of an "Excluded Plan" by any
person who has discretionary authority or renders investment advice with
respect to the assets of that Excluded Plan. For purposes of the Securities, an
Excluded Plan is a Plan sponsored by any member of the Restricted Group.
If certain specific conditions of the Exemption are also satisfied,
the Exemption may provide an exemption from the restrictions imposed by
Sections 406(b)(1) and (2) of ERISA and the taxes imposed by Sections 4975(a)
and (b) of the Code by reason of Section 4975(c)(1)(E) of the Code in
connection with
(1) the direct or indirect sale, exchange or transfer of
Securities in the initial issuance of Securities between the depositor
or an underwriter and a Plan when the person who has discretionary
authority or renders investment advice with respect to the investment
of Plan assets in the Securities is (a) an obligor with respect to 5%
or less of the fair market value of the Assets or (b) an affiliate of
that person;
(2) the direct or indirect acquisition or disposition in the
secondary market of Securities by a Plan; and
(3) the holding of Securities by a Plan.
Further, if certain specific conditions of the Exemption are
satisfied, the Exemption may provide an exemption from the restrictions imposed
by Sections 406(a), 406(b) and 407 of ERISA, and the taxes imposed by Sections
4975(a) and (b) of the Code by reason of Section 4975(c) of the Code for
transactions in connection with the servicing, management and operation of the
trust fund. The depositor expects that the specific conditions of the Exemption
required for this purpose will be satisfied for the Securities so that the
Exemption would provide an exemption from the restrictions imposed by Sections
406(a) and (b) of ERISA (as well as the excise taxes imposed by Sections
4975(a) and (b) of the Code by reason of Section 4975(c) of the Code) for
transactions in connection with the servicing, management and operation of the
Mortgage Pools, provided that the general conditions of the Exemption are
satisfied.
The Exemption also may provide an exemption from the restrictions
imposed by Sections 406(a) and 407(a) of ERISA, and the taxes imposed by
Section 4975(a) and (b) of the Code by reason of Sections 4975(c)(1)(A) through
(D) of the Code if those restrictions are deemed to otherwise apply merely
because a person is deemed to be a "party in interest" (within the meaning of
Section 3(14) of ERISA) or a "disqualified person" (within the meaning of
Section 4975(e)(2) of the Code) with respect to an investing Plan by virtue of
providing services to the Plan (or by virtue of having certain specified
relationships to that person) solely as a result of the Plan's ownership of
Securities.
To the extent the Securities are not treated as equity interests for
purposes of DOL regulations Section 2510.3-101, a Plan's investment in those
Securities ("Non-Equity Securities") would not cause the assets included in a
related trust fund to be deemed Plan assets. However, the depositor, the
servicer, the trustee, or underwriter may be the sponsor of or investment
advisor with respect to one or more Plans. Because these parties may receive
certain benefits in connection with the sale of Non-Equity Securities, the
purchase of Non-Equity Securities using Plan assets over which any of these
parties has investment authority might be deemed to be a violation of the
prohibited transaction rules of ERISA and the Code for which no exemption may
be available. Accordingly, Non-Equity Securities may not be purchased using the
assets of any Plan if any of the depositor, the servicer, the trustee or
underwriter has investment authority for those assets.
In addition, certain affiliates of the depositor might be considered
or might become Parties in Interest with respect to a Plan. Also, any holder of
Securities, because of its activities or the activities of its respective
affiliates, may be deemed to be a Party in Interest with respect to certain
Plans, including but not limited to Plans sponsored by that holder. In either
case, the acquisition or holding of Non-Equity Securities by or on behalf of
that Plan could be considered to give rise to an indirect prohibited
transaction within the meaning of ERISA and the Code, unless it is subject to
one or more statutory or administrative exemptions such as Prohibited
Transaction Class Exemption ("PTCE") 84-14, which exempts certain transactions
effected on behalf of a Plan by a "qualified professional asset manager," PTCE
90-1, which exempts certain transactions involving insurance company pooled
separate accounts, PTCE 91-38, which exempts certain transactions involving
bank collective investment funds, PTCE 95-60, which exempts certain
transactions involving insurance company general accounts, or PTCE 96-23, which
exempts certain transactions effected on behalf of a Plan by certain "in-house"
asset managers. It should be noted, however, that even if the conditions
specified in one or more of these exemptions are met, the scope of relief
provided by these exemptions may not necessarily cover all acts that might be
construed as prohibited transactions.
Any Plan fiduciary that proposes to cause a Plan to purchase
Securities should consult with its counsel with respect to the potential
applicability of ERISA and the Code to that investment, the availability of the
exemptive relief provided in the Exemption and the potential applicability of
any other prohibited transaction exemption in connection therewith. In
particular, a Plan fiduciary that proposes to cause a Plan to purchase
Securities representing a beneficial ownership interest in a pool of
single-family residential first mortgage loans, a Plan fiduciary should
consider the applicability of PTCE 83-1, which provides exemptive relief for
certain transactions involving mortgage pool investment trusts. The prospectus
supplement for a series of Securities may contain additional information
regarding the application of the Exemption, PTCE 83-1 or any other exemption,
with respect to the Securities offered thereby. In addition, any Plan fiduciary
that proposes to cause a Plan to purchase Strip Securities should consider the
federal income tax consequences of that investment.
Any Plan fiduciary considering whether to purchase a Security on
behalf of a Plan should consult with its counsel regarding the applicability of
the fiduciary responsibility and prohibited transaction provisions of ERISA and
the Code to that investment.
The sale of Securities to a Plan is in no respect a representation by
the depositor or the underwriter that this investment meets all relevant legal
requirements for investments by Plans generally or any particular Plan, or that
this investment is appropriate for Plans generally or any particular Plan.
Pre-Funding Accounts
On July 21, 1997, the DOL published in the Federal Register an
amendment to the Exemption, which extends exemptive relief to certain
mortgage-backed and asset-backed securities transactions using pre-funding
accounts for trusts issuing pass-through certificates. The amendment generally
allows Assets supporting payments to securityholders, and having a value equal
to no more than 25% of the total initial Security Balance of the related
Securities, to be transferred to the trust fund within the Pre-Funding Period,
instead of requiring that all the Assets be either identified or transferred on
or before the Closing Date. The relief is available when the following
conditions are met:
(1) The ratio of the amount allocated to the Pre-Funding
Account to the total principal amount of the Securities being offered
(the "Pre-Funding Limit") must not exceed 25%.
(2) All Subsequent Assets must meet the same terms and
conditions for eligibility as the original Assets used to create the
trust fund, which terms and conditions have been approved by at least
one rating agency.
(3) The transfer of the Subsequent Assets to the trust fund
during the Pre-Funding Period must not result in the Securities that
are to be covered by the Exemption receiving a lower credit rating
from a rating agency upon termination of the Pre-Funding Period than
the rating that was obtained at the time of the initial issuance of
the Securities by the trust fund.
(4) Solely as a result of the use of pre-funding, the
weighted average annual percentage interest rate for all of the Assets
in the trust fund at the end of the Pre-Funding Period must not be
more than 100 basis points lower than the average interest rate for
the Assets transferred to the trust fund on the Closing Date.
(5) In order to ensure that the characteristics of the
Subsequent Assets are substantially similar to the original Assets
that were transferred to the trust fund,
o the characteristics of the Subsequent Assets must be
monitored by an insurer or other credit support provider
that is independent of the depositor; or
o an independent accountant retained by the depositor must
provide the depositor with a letter (with copies provided
to each rating agency rating the Securities, the
underwriter and the trustee) stating whether or not the
characteristics of the Subsequent Assets conform to the
characteristics described in the related prospectus
supplement and/or pooling and servicing agreement. In
preparing this letter, the independent accountant must
use the same type of procedures as were applicable to the
Assets transferred to the trust fund as of the Closing
Date.
(6) The Pre-Funding Period must end no later than three
months or 90 days after the Closing Date (or earlier in certain
circumstances) if the Pre-Funding Account falls below the minimum
level specified in the pooling and servicing agreement or an Event of
Default occurs.
(7) Amounts transferred to the Pre-Funding Account and/or
Capitalized Interest Account used in connection with the pre-funding
may be invested only in certain permitted investments Permitted
Investments.
(8) The prospectus or prospectus supplement must describe:
o the Pre-Funding Account and/or Capitalized Interest
Account used in connection with the Pre-Funding Account;
o the duration of the Pre-Funding Period;
o the percentage and/or dollar amount of the Pre-Funding
Limit for the trust fund; and
o that the amounts remaining in the Pre-Funding Account at
the end of the Pre-Funding Period will be remitted to
securityholders as repayments of principal.
(9) The Agreement must prescribe the permitted investments
for the Pre-Funding Account and/or Capitalized Interest Account and,
if not disclosed in the prospectus supplement, the terms and
conditions for eligibility of Subsequent Assets.
Legal Investment
The prospectus supplement will specify which classes of the
Securities, if any, will constitute "mortgage related securities" for purposes
of the Secondary Mortgage Market Enhancement Act of 1984, as amended ("SMMEA").
Generally, only classes of Offered Securities that (1) are rated in one of the
two highest rating categories by one or more rating agencies and (2) are part
of a series representing interests in, or secured by, a trust fund consisting
of loans secured by first liens on real property and originated by certain
types of originators specified in SMMEA, will be "mortgage related securities"
for purposes of SMMEA.
Those classes of Offered Securities qualifying as "mortgage related
securities" will constitute legal investments for persons, trusts,
corporations, partnerships, associations, business trusts and business entities
(including, but not limited to, state chartered savings banks, commercial
banks, savings and loan associations and insurance companies, as well as
trustees and state government employee retirement systems) created pursuant to
or existing under the laws of the United States or of any state (including the
District of Columbia and Puerto Rico) whose authorized investments are subject
to state regulation to the same extent that, under applicable law, obligations
issued by or guaranteed as to principal and interest by the United States or
any agency or instrumentality thereof constitute legal investments for those
entities. Pursuant to SMMEA, a number of states enacted legislation, on or
before the October 3, 1991 cut-off for those enactments, limiting to varying
extents the ability of certain entities (in particular, insurance companies) to
invest in mortgage related securities secured by liens on residential, or mixed
residential and commercial, properties, in most cases by requiring the affected
investors to rely solely upon existing state law, and not SMMEA.
SMMEA also amended the legal investment authority of
federally-chartered depository institutions as follows: federal savings and
loan associations and federal savings banks may invest in, sell or otherwise
deal in "mortgage related securities" without limitation as to the percentage
of their assets represented thereby, federal credit unions may invest in these
securities, and national banks may purchase these securities for their own
account without regard to the limitations generally applicable to investment
securities set forth in 12 U.S.C. ss.24 (Seventh), subject in each case to
regulations that the applicable federal regulatory authority may prescribe. In
this connection, the Office of the Comptroller of the Currency (the "OCC") has
amended 12 C.F.R. Part 1 to authorize national banks to purchase and sell for
their own account, without limitation as to a percentage of the bank's capital
and surplus (but subject to compliance with certain general standards
concerning "safety and soundness" and retention of credit information in 12
C.F.R. ss.1.5), certain "Type IV securities," defined in 12 C.F.R. ss.1.2(l) to
include certain "residential mortgage related securities." As so defined,
"residential mortgage-related security" means, in relevant part, "mortgage
related security" within the meaning of SMMEA. The National Credit Union
Administration ("NCUA") has adopted rules, codified at 12 C.F.R. Part 703,
which permit federal credit unions to invest in "mortgage related securities"
under certain limited circumstances, other than stripped mortgage related
securities, residual interests in mortgage related securities, and commercial
mortgage related securities, unless the credit union has obtained written
approval from the NCUA to participate in the "investment pilot program"
described in 12 C.F.R. ss.703.140. Thrift institutions that are subject to the
jurisdiction of the Office of Thrift Supervision (the "OTS") should consider
the OTS' Thrift Bulletin 13a (December 1, 1998), "Management of Interest Rate
Risk, Investment Securities, and Derivatives Activities," before investing in
any of the Offered Securities.
All depository institutions considering an investment in the
Certificates should review the "Supervisory Policy Statement on Investment
Securities and End-User Derivatives Activities" (the "1998 Policy Statement")
of the Federal Financial Institutions Examination Council ("FFIEC"), which has
been adopted by the Board of Governors of the Federal Reserve System, the
Federal Deposit Insurance Corporation, the OCC and the OTS, effective May 26,
1998, and by the NCUA, effective October 1, 1998. The 1998 Policy Statement
sets forth general guidelines which depository institutions must follow in
managing risks (including market, credit, liquidity, operational (transaction),
and legal risks) applicable to all securities (including mortgage pass-through
securities and mortgage-derivative products) used for investment purposes.
If specified in the prospectus supplement, other classes of Offered
Securities offered pursuant to this prospectus will not constitute "mortgage
related securities" under SMMEA. The appropriate characterization of those
classes under various legal investment restrictions, and thus the ability of
investors subject to these restrictions to purchase these Offered Securities,
may be subject to significant interpretive uncertainties.
Institutions whose investment activities are subject to regulation by
federal or state authorities should review rules, policies and guidelines
adopted from time to time by those authorities before purchasing any Offered
Securities, as certain classes or subclasses may be deemed unsuitable
investments, or may otherwise be restricted, under those rules, policies or
guidelines (in certain instances irrespective of SMMEA).
The foregoing does not take into consideration the applicability of
statutes, rules, regulations, orders, guidelines or agreements generally
governing investments made by a particular investor, including, but not limited
to, "prudent investor" provisions, percentage-of-assets limits provisions that
may restrict or prohibit investment in securities that are not "interest
bearing" or "income paying," and with regard to any Offered Securities issued
in book-entry form, provisions that may restrict or prohibit investments in
securities that are issued in book-entry form.
Except as to the status of certain classes of Offered Securities as
"mortgage related securities," no representation is made as to the proper
characterization of the Offered Securities for legal investment, financial
institution regulatory, or other purposes, or as to the ability of particular
investors to purchase any Offered Securities under applicable legal investment
restrictions. The uncertainties described above (and any unfavorable future
determinations concerning legal investment or financial institution regulatory
characteristics of the Offered Securities) may adversely affect the liquidity
of the Offered Securities.
Accordingly, all investors whose investment activities are subject to
legal investment laws and regulations, regulatory capital requirements or
review by regulatory authorities should consult with their own legal advisors
in determining whether and to what extent the Offered Securities of any class
constitute legal investments for them or are subject to investment, capital or
other restrictions, and, if applicable, whether SMMEA has been overridden in
any jurisdiction relevant to that investor.
Methods of Distribution
The Securities offered hereby and by the supplements to this
prospectus will be offered in series. The distribution of the Securities may be
effected from time to time in one or more transactions, including negotiated
transactions, at a fixed public offering price or at varying prices to be
determined at the time of sale or at the time of commitment therefor. If
specified in the prospectus supplement, the Securities will be distributed in a
firm commitment underwriting, subject to the terms and conditions of the
underwriting agreement, by Deutsche Bank Securities Inc. ("DBSI") acting as
underwriter with other underwriters, if any, named therein. In that event, the
prospectus supplement may also specify that the underwriters will not be
obligated to pay for any Securities agreed to be purchased by purchasers
pursuant to purchase agreements acceptable to the depositor. In connection with
the sale of the Securities, underwriters may receive compensation from the
depositor or from purchasers of the Securities in the form of discounts,
concessions or commissions. The prospectus supplement will describe any
compensation paid by the depositor.
Alternatively, the prospectus supplement may specify that the
Securities will be distributed by DBSI acting as agent or in some cases as
principal with respect to Securities that it has previously purchased or agreed
to purchase. If DBSI acts as agent in the sale of Securities, DBSI will receive
a selling commission for each series of Securities, depending on market
conditions, expressed as a percentage of the total principal balance of the
related mortgage loans as of the Cut-off Date. The exact percentage for each
series of Securities will be disclosed in the prospectus supplement. To the
extent that DBSI elects to purchase Securities as principal, DBSI may realize
losses or profits based upon the difference between its purchase price and the
sales price. The prospectus supplement for any series offered other than
through underwriters will contain information regarding the nature of that
offering and any agreements to be entered into between the depositor and
purchasers of Securities of that series.
The depositor will indemnify DBSI and any underwriters against certain
civil liabilities, including liabilities under the Securities Act of 1933, or
will contribute to payments DBSI and any underwriters may be required to make
in respect thereof.
In the ordinary course of business, DBSI and the depositor may engage
in various securities and financing transactions, including repurchase
agreements to provide interim financing of the depositor's mortgage loans
pending the sale of those mortgage loans or interests therein, including the
Securities. DBSI performs management services for the depositor.
The depositor anticipates that the Securities will be sold primarily
to institutional investors. Purchasers of Securities, including dealers, may,
depending on the facts and circumstances of those purchases, be deemed to be
"underwriters" within the meaning of the Securities Act of 1933 in connection
with reoffers and sales by them of Securities. securityholders should consult
with their legal advisors in this regard before any reoffer or sale of
Securities.
As to each series of Securities, only those classes rated in one of
the four highest rating categories by any rating agency will be offered hereby.
Any lower rated or unrated class may be initially retained by the depositor,
and may be sold by the depositor at any time to one or more institutional
investors.
Additional Information
The Depositor has filed with the Commission a registration statement
on Form S-3 under the Securities Act of 1933, as amended, with respect to the
Securities (the "Registration Statement"). This prospectus, which forms a part
of the Registration Statement, omits certain information contained in the
Registration Statement pursuant to the rules and regulations of the Commission.
The Registration Statement and the exhibits thereto can be inspected and copied
at the public reference facilities maintained by the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549, and at certain of its Regional Offices in
the following locations:
o Chicago Regional Office, Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661-2511; and
o New York Regional Office, 7 World Trade Center, Suite 1300, New
York, New York 10048.
Copies of these materials can also be obtained from the Public Reference
Section of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, at
prescribed rates.
The Commission also maintains a site on the world wide web at
"http://www.sec.gov" at which users can view and download copies of reports,
proxy and information statements and other information filed electronically
through the Electronic Data Gathering, Analysis and Retrieval ("EDGAR") system.
The Depositor has filed the Registration Statement, including all exhibits
thereto, through the EDGAR system and therefore such materials should be
available by logging onto the Commission's web site. The Commission maintains
computer terminals providing access to the EDGAR system at each of the offices
referred to above.
Copies of the most recent Fannie Mae prospectus for Fannie Mae
certificates and Fannie Mae's annual report and quarterly financial statements
as well as other financial information are available from the Director of
Investor Relations of Fannie Mae, 3900 Wisconsin Avenue, N.W., Washington, D.C.
20016 (202-752-7115). The Depositor did not participate in the preparation of
Fannie Mae's prospectus or its annual or quarterly reports or other financial
information and, accordingly, makes no representation as to the accuracy or
completeness of the information in those documents.
Copies of the most recent Offering Circular for Freddie Mac
certificates as well as Freddie Mac's most recent Information Statement and
Information Statement supplement and any quarterly report made available by
Freddie Mac may be obtained by writing or calling the Investor Inquiry
Department of Freddie Mac at 8200 Jones Branch Drive, McLean, Virginia 22102
(outside Washington, D.C. metropolitan area, telephone 800-336-3672; within
Washington, D.C. metropolitan area, telephone 703-759-8160). The Depositor did
not participate in the preparation of Freddie Mac's Offering Circular,
Information Statement or any supplement thereto or any quarterly report thereof
and, accordingly, makes no representation as to the accuracy or completeness of
the information in those documents.
Incorporation of Certain Documents by Reference
All documents subsequently filed by or on behalf of the trust fund
referred to in the prospectus supplement with the Commission pursuant to
Section 13(a), 13(c), 14 or 15(d) of the Exchange Act, after the date of this
prospectus and prior to the termination of any offering of the Securities
issued by that trust fund will 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 those documents. Any statement contained in a document incorporated or
deemed to be incorporated by reference herein will be deemed to be modified or
superseded for all purposes of this prospectus to the extent that a statement
contained herein (or in the prospectus supplement) or in any other subsequently
filed document that also is or is deemed to be incorporated by reference
modifies or replaces that statement. Any statement so modified or superseded
will not be deemed, except as so modified or superseded, to constitute a part
of this prospectus.
The Trustee on behalf of any trust fund will provide without charge to
each person to whom this prospectus is delivered, upon request, 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 the exhibits are specifically incorporated
by reference into the information that this prospectus incorporates). Requests
for information should be directed to the corporate trust office of the Trustee
specified in the prospectus supplement.
Legal Matters
Certain legal matters, including the federal income tax consequences
to securityholders of an investment in the Securities of a series, will be
passed upon for the depositor by Brown & Wood LLP, Washington, D.C.
Financial Information
A new trust fund will be formed for each series of Securities and no
trust fund will engage in any business activities or have any assets or
obligations before the issuance of the related series of Securities.
Accordingly, financial statements for a trust fund will generally not be
included in this prospectus or in the prospectus supplement.
Rating
As a condition to the issuance of any class of Offered Securities,
they must not be rated lower than investment grade; that is, they must be rated
in one of the four highest rating categories, by a rating agency.
Ratings on mortgage pass-through certificates and mortgage-backed
notes address the likelihood of receipt by securityholders of all distributions
on the underlying mortgage loans. These ratings address the structural, legal
and issuer-related aspects associated with the Securities, the nature of the
underlying assets and the credit quality of the guarantor, if any. Ratings on
mortgage pass-through certificates, mortgage-backed notes and other asset
backed securities do not represent any assessment of the likelihood of
principal prepayments by borrowers or of the degree by which prepayments might
differ from those originally anticipated. As a result, securityholders might
suffer a lower than anticipated yield, and, in addition, holders of stripped
interest certificates in extreme cases might fail to recoup their initial
investments.
A security rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating organization. Each security rating should be evaluated
independently of any other security rating.
INDEX OF DEFINED TERMS
1986 Act...........................................83
1998 Policy Statement.............................132
Accrual Period.....................................14
Accrual Securities.................................21
Accrued Security Interest..........................24
Adjustable Rate Assets..............................2
Agency Securities...................................2
Agreement..........................................35
ARM Loans...........................................5
Asset Conservation Act.............................73
Asset Group........................................21
Asset Seller........................................2
Assets..............................................2
Available Distribution Amount......................22
Balloon Payment Assets..............................3
Bankruptcy Code....................................70
Beneficial Owner...................................30
Bi-weekly Assets....................................3
Book-Entry Securities..............................21
borrower...........................................62
Buy Down Assets.....................................2
Buydown Funds......................................81
Buydown Mortgage Loans.............................18
Buydown Period.....................................18
Capitalized Interest Account.......................13
Cash Flow Agreement................................14
Cedel..............................................30
CERCLA.............................................71
Certificates.......................................21
Charter Act.........................................8
Code...............................................77
Collection Account.................................39
Commission..........................................5
contract borrower..................................64
contract lender....................................64
Convertible Assets..................................3
Cooperative........................................63
Cooperative Corporation............................31
Cooperative Loans..................................63
Cooperatives........................................4
Covered Trust......................................59
CPR................................................17
credit support.....................................13
Crime Control Act..................................77
Cut-off Date........................................5
DBSI..............................................133
DCR...............................................127
Debt Securities....................................78
defective obligation...............................79
Definitive Securities..............................21
Determination Date.................................22
Disqualified Holder...............................108
Disqualified Organization..........................96
Distribution Date..................................15
DOL...............................................125
DTC................................................30
Due Period.........................................22
EDGAR.............................................134
Eligible Corporation..............................107
ERISA.............................................125
Euroclear..........................................30
Euroclear Operator.................................31
European Depositaries..............................32
excess servicing..................................112
Exchange Act.......................................30
Excluded Plan.....................................127
Exemption.........................................126
Fannie Mae..........................................2
FASIT..............................................77
FASIT Ownership Security..........................104
FASIT Provisions...................................77
FASIT Regular Securities..........................104
FASIT Securities...................................77
FDIC...............................................39
FFIEC.............................................132
FHA.................................................4
Financial Intermediary.............................32
Fitch.............................................127
Freddie Mac.........................................2
Freddie Mac Act.....................................9
Freddie Mac Certificate Group......................10
Garn-St. Germain Act...............................74
GEM Assets..........................................2
Ginnie Mae..........................................2
GPM Assets..........................................3
Grantor Trust Fund.................................78
Grantor Trust Securities...........................78
Home Equity Loans...................................4
Housing Act.........................................7
HUD................................................47
Increasing Payment Asset............................3
Indirect Participants..............................30
Insurance Proceeds.................................22
Interest Rate......................................23
Interest Reduction Assets...........................2
land sale contract.................................64
Land Sale Contracts.................................4
Level Payment Assets................................2
Liquidation Proceeds...............................22
Loan-to-Value Ratio.................................4
Lock-out Date.......................................6
Lock-out Period.....................................6
Mark to Market Regulations.........................99
Mortgage Securities.................................2
Mortgaged Properties................................4
Mortgages...........................................4
NCUA..............................................131
new partnership...................................121
New Regulations...................................102
Non-Equity Securities.............................128
Non-Pro Rata Security..............................83
Nonrecoverable Advance.............................26
Non-U.S. Person...................................102
Notes..............................................21
OCC...............................................131
Offered Securities.................................21
OID Regulations................................78, 83
old partnership...................................121
Participants.......................................30
Parties in Interest...............................125
Partnership Securities.............................78
Partnership Trust Fund.............................78
Pass-Through Entity................................96
PCBs...............................................71
Permitted Investments..............................39
Plans.............................................125
pooling and servicing agreement....................35
Pre-Funded Amount..................................12
Pre-Funding Account................................12
Pre-Funding Limit.................................129
Pre-Funding Period.................................12
prepayment.........................................16
Prepayment Assumption..............................84
PTCE..............................................128
Purchase Price.....................................37
RCRA...............................................72
Record Date........................................22
Refinance Loans.....................................4
Registration Statement............................134
Regular Securities.................................79
Regular Securityholder.............................82
Related Proceeds...................................26
Relevant Depositary................................32
Relief Act.........................................76
REMIC..............................................77
REMIC Pool.........................................78
REMIC Provisions...................................77
REMIC Regulations..................................78
REMIC Securities...................................35
REO Property.......................................27
Residual Holders...................................91
Residual Securities................................79
Restricted Group..................................127
Retained Interest..................................49
Revolving Credit Line Loans.........................6
RICO...............................................77
Rules..............................................32
S&P...............................................127
SBJPA of 1996......................................82
secured-creditor exemption.........................72
Securities.........................................21
Security Balance...................................24
Senior Securities..................................21
Servicemen's Readjustment Act......................12
Servicing Standard.................................43
Single Family Property..............................4
SMMEA.............................................131
SPA................................................17
Special servicer...................................51
Standard Securities...............................110
Startup Day........................................79
Step-up Rate Assets.................................3
Strip Securities...................................21
Stripped Agency Securities.........................11
Stripped Securities...............................110
Subordinate Securities.............................21
Subsequent Assets..................................12
Superliens.........................................71
super-premium......................................84
Taxable Mortgage Pools.............................78
Terms and Conditions...............................31
thrift institutions................................95
Tiered REMICs......................................82
Title V............................................75
Title VIII.........................................76
U.S. Person........................................98
UCC................................................30
UST................................................72
VA 4
VA Guaranty Policy.................................48
Value...............................................4
Warranting Party...................................37
Yield Considerations...............................24
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution.
The estimated expenses expected to be incurred by the Registrant in
connection with the issuance and distribution of the securities being
registered, other than underwriting compensation, are as follows:
SEC Registration Fee........................................ $792,000
Trustee's Fees and Expenses (including counsel fees)........ 250,000
Printing and Engraving Costs................................ 450,000
Rating Agency Fees.......................................... 2,000,000
Legal Fees and Expenses..................................... 1,000,000
Blue Sky Fees and Expenses.................................. 100,000
Accounting Fees and Expenses................................ 350,000
Miscellaneous............................................... 500,000
-------
Total.................................................... $5,442,000
Item 15. Indemnification of Directors and Officers.
Section 145 of the Delaware General Corporation Law provides that a
Delaware corporation may indemnify any persons, including officers and
directors, who are made, or are threatened to be made, parties to any
threatened, pending or completed legal action, suit or proceeding, whether
civil, criminal, administrative or investigative (other than an action by or
in the right of such corporation), by reason of the fact that such person is
or was an officer or director of such corporation, or is or was serving at the
request of such corporation as a director, officer, employee or agent of
another corporation or enterprise. The indemnity may include expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by such person in connection with such
action, suit or proceeding, provided such officer or director acted in good
faith and in a manner he reasonably believed to be in or not opposed to the
corporation's best interests and, for criminal proceedings, had no reasonable
cause to believe that his conduct was illegal. A Delaware corporation may
indemnify officers and directors in an action by or in the right of the
corporation under the same conditions, except that no indemnification is
permitted without judicial approval if the officer or director is adjudged to
be liable to the corporation. Where an officer or director is successful on
the merits or otherwise in the defense of any action referred to above, the
corporation must indemnify him against the expenses which such officer or
director actually and reasonably incurred.
The By-laws of the Registrant provide for indemnification of officers and
directors to the full extent permitted by the Delaware General Corporation
Law.
The Pooling and Servicing Agreement or Indenture for each series of
Securities will provide either that the Registrant and the partners,
directors, officers, employees and agents of the Registrant, or that the
Servicer or Master Servicer and the partners, directors, officers, employees
and agents of the Servicer or Master Servicer, will be entitled to
indemnification by the Trust Fund and will be held harmless against any loss,
liability or expense incurred in connection with any legal action relating to
the Pooling and Servicing Agreement, Indenture or the Securities, other than
any loss, liability or expense incurred by reason of willful misfeasance, bad
faith or gross negligence in the performance of his or its duties thereunder
or by reason of reckless disregard of his or its obligations and duties
thereunder.
The Underwriting Agreement for each series of Securities will generally
provide that each underwriter will indemnify the Registrant, each of its
directors, each of its officers who signs the Registration Statement, and each
person who controls the Registrant within the meaning of either the Securities
Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended,
against claims, damages, or liability, to which the Registrant may become
subject, under the Securities Act or the Exchange Act, or otherwise, insofar
as such losses, claims, damages or liabilities (or actions in respect thereof)
arise out of or are based upon any untrue statement or alleged untrue
statement of material fact furnished by the underwriter for the preparation of
a prospectus, or included in any computational materials, term sheets or
similar documents delivered to prospective investors by the underwriter (other
than any such untrue statement that is based on materials previously provided
to the underwriter by the Registrant).
Item 16. Exhibits.
1.1(1) Form of Underwriting Agreement
4.1** Form of Trust Agreement
4.2(1) Form of Pooling and Servicing Agreement
4.3(1) Form of Indenture
5.1** Opinion of Brown & Wood LLP as to legality (including consent
of such firm)
8.1** Opinion of Brown & Wood LLP as to certain tax matters
(including consent of such firm) (included in Exhibit
5.1)
23.1** Consent of Brown & Wood LLP (included in Exhibit 5.1)
24.1** Power of Attorney (included on page II-4)
- -----------------
(1) Incorporated herein by reference to the Registrant's Registration
Statement on Form S-3 (Reg. No. 333-56213), filed with the
Commission on June 5, 1999.
** Previously filed.
Item 17. Undertakings
A. Undertaking in respect of Rule 415 offering.
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, as
amended; (ii) to reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
Registration Statement; and (iii) to include any material information with
respect to the plan of distribution not previously disclosed in the
Registration Statement or any material change of such information in the
Registration Statement;
provided, however, that paragraphs (i) and (iii) do not apply if the
information required to be included in the post-effective amendment is
contained in periodic reports filed by the Registrant pursuant to Section 13
or Section 15(d) of the Securities Exchange Act of 1934, as amended, that are
incorporated by reference in the Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, as amended, 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. Undertaking in respect of filings incorporating subsequent Exchange Act
documents by reference.
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
C. Undertaking in respect of indemnification.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended, 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, as amended, 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, as
amended, and will be governed by the final adjudication of such issue.
D. Undertakings for registration statement permitted by Rule 430A.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, as amended, the information omitted from the form of prospectus filed as
part of this Registration Statement in reliance upon Rule 430A and contained
in the form of prospectus filed by the Registrant pursuant to Rule 424(b)(1)
or (4) or 497(h) under the Securities Act of 1933, as amended, shall be deemed
to be part of this Registration Statement as of the time it was declared
effective; and
(2) For the purpose of determining any liability under the Securities Act
of 1933, as amended, 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. Undertaking in respect of qualification of Indentures under the Trust
Indenture Act of 1939.
The 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 of 1939 in accordance with the rules
and regulations prescribed by the Commission under Section 305(b)(2) of the
Trust Indenture Act of 1939.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the Registrant certifies that it has reasonable grounds to believe that it
meets all of the requirements for filing on Form S-3 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in Charlotte, North Carolina on the 7th day of
December, 1999.
ACE SECURITIES CORP.
By: /s/ Douglas K. Johnson
------------------------------------
Douglas K. Johnson
President
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement on Form S-3 has been signed below by the following
persons in the capacities and on the dates indicated.
<TABLE>
Signature Title Date
<S> <C> <C>
/s/ Douglas K. Johnson President and Director December 7, 1999
- --------------------------- (Principal Executive Officer)
Douglas K. Johnson
/s/ Elizabeth S. Eldridge Director December 7, 1999
- ---------------------------
Elizabeth S. Eldridge
/s/ Juliana C. Johnson Treasurer and Director December 7, 1999
- --------------------------- (Principal Financial and
Juliana C. Johnson Accounting Officer)
</TABLE>
