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As filed with the Securities and Exchange Commission on December 20, 1999
Registration No. 333-74467
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
Amendment No. 3 to
FORM S-3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
______________________
FIRST HORIZON ASSET SECURITIES INC.
(Exact name of registrant as specified in its charter)
Delaware 75-2808384
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4000 Horizon Way
Irving, Texas 75063
(214) 441-4000
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
______________________
James B. Witherow
4000 Horizon Way
Irving, Texas 75063
(214) 441-4000
(Name, address, including zip code, and telephone number
including area code, of agent for service)
______________________
The Commission is requested to send copies of all communication to:
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David Barbour Clyde A. Billings, Jr. John Arnholz
Andrews & Kurth L.L.P. Vice President and Counsel Brown & Wood LLP
1717 Main Street First Tennessee National Corporation 1666 K Street, N.W.
Suite 3700 165 Madison Avenue Washington, DC 20006
Dallas, Texas 75201 Memphis, Tennessee 38103 (202) 533-1300
(214) 659-4400 (901) 523-5679
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Approximate date of commencement of proposed sale to the public: From time
to time after the effective date of this Registration Statement, as determined
by market conditions.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or
reinvestment plans, please check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration for the same
offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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CALCULATION OF REGISTRATION FEE
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Proposed maximum Proposed maximum Amount of
Title of each class of securities to Amount to be offering price aggregate registration
be registered registered(1) per unit(2) offering price(2) fee(2)
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Mortgage Pass-Through Certificates $1,500,000,000 100% $1,500,000,000 $396,000.00
===================================================================================================================
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(1) This Registration Statement relates to the offering from time to time of up
to $1,500,000,000 aggregate principal amount of Mortgage Pass-Through
Certificates and to any resales of them in market making transactions by
First Tennessee Capital Markets, an affiliate of the Registrant, to the
extent required.
(2) Estimated for the purpose of calculating the registration fee pursuant to
Rule 457(o). The registrant has previously paid a registration fee of
$278.00 in connection with this filing.
------------------
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 or until the Registration Statement shall become
effective on such date as the Commission acting pursuant to said Section 8(a),
may determine.
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EXPLANATORY NOTE
This registration statement includes a basic prospectus and an
illustrative form of prospectus supplement for use in an offering of mortgage
pass-through certificates consisting of senior and subordinate certificate
classes.
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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 we are not soliciting offers to buy these
securities in any state where the offer or sale is not permitted.
Subject to Completion, dated December 20, 1999
PROSPECTUS
First Horizon Asset Securities Inc.
Depositor
Mortgage Pass-Through Certificates
(Issuable in Series)
You should carefully consider the risk factors beginning on page 6 of this
prospectus.
The Trusts
The depositor will periodically establish trusts to issue certificates
representing interests in the related trust fund. The assets in each trust fund
will be specified in the prospectus supplement for the particular trust and will
generally consist of
. first lien mortgage loans secured by one- to
four-family residential properties or
participations in that type of loan,
. mortgage pass-through securities issued or
guaranteed by Ginnie Mae, Fannie Mae, or Freddie
Mac, or
. private mortgage-backed securities backed by
first lien mortgage loans secured by one- to
four-family residential properties or
participations in that type of loan.
The Certificates
The depositor will sell the certificates pursuant to a prospectus supplement.
The certificates will be grouped into one or more series, each having its own
distinct designation. Each series will be issued in one or more classes and
each class will evidence beneficial ownership of a specified portion of future
payments on 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 each of the classes in the series.
Underwriting
The certificates may be offered to the public through several different
methods, including offerings through underwriters.
The SEC and state securities regulators have not approved or disapproved of
these securities or determined if this prospectus is truthful or complete.
Any representation to the contrary is a criminal offense.
December 20, 1999
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TABLE OF CONTENTS
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Important notice about information in this prospectus and each accompanying prospectus
supplement..................................................................................................5
RISK FACTORS......................................................................................................6
THE TRUST FUND...................................................................................................16
The Mortgage Loans -- General..............................................................................18
Agency Securities..........................................................................................22
Private Mortgage-Backed Securities.........................................................................24
Substitution of Mortgage Assets............................................................................26
Pre-Funding Arrangements...................................................................................27
Available Information......................................................................................28
Incorporation of Certain Documents by Reference............................................................28
USE OF PROCEEDS..................................................................................................29
THE DEPOSITOR....................................................................................................29
THE MASTER SERVICER..............................................................................................29
MORTGAGE LOAN PROGRAM............................................................................................30
Underwriting Standards.....................................................................................30
Qualifications of Sellers..................................................................................34
Representations by Sellers; Repurchases....................................................................34
DESCRIPTION OF THE CERTIFICATES..................................................................................37
General....................................................................................................38
Distributions on Certificates..............................................................................40
Advances...................................................................................................43
Reports to Certificateholders..............................................................................44
Categories of Classes of Certificates......................................................................45
Indices Applicable to Floating Rate and Inverse Floating Rate Classes .....................................48
Book-Entry Certificates....................................................................................53
CREDIT ENHANCEMENT...............................................................................................55
General....................................................................................................55
Subordination..............................................................................................56
Mortgage Pool Insurance Policies...........................................................................57
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Special Hazard Insurance Policies..........................................................................59
Bankruptcy Bonds...........................................................................................60
Reserve Fund...............................................................................................60
Cross Support..............................................................................................61
Insurance Policies, Surety Bonds and Guaranties............................................................62
Over-Collateralization.....................................................................................62
YIELD AND PREPAYMENT CONSIDERATIONS..............................................................................62
THE POOLING AND SERVICING AGREEMENT..............................................................................64
Assignment of Mortgage Assets..............................................................................64
Payments on Mortgage Assets; Deposits to Certificate Account ..............................................67
Collection Procedures......................................................................................71
Hazard Insurance...........................................................................................72
Realization Upon Defaulted Mortgage Loans..................................................................74
Servicing and Other Compensation and Payment of Expenses...................................................79
Evidence as to Compliance..................................................................................80
List of Certificateholders.................................................................................80
Matters Regarding the Master Servicer and the Depositor ...................................................81
Events of Default..........................................................................................82
Rights Upon Event of Default...............................................................................82
Amendment..................................................................................................83
Termination; Optional Termination..........................................................................85
The Trustee................................................................................................85
LEGAL ASPECTS OF THE MORTGAGE LOANS .............................................................................85
General....................................................................................................86
Foreclosure/Repossession...................................................................................87
Rights of Redemption.......................................................................................90
Anti-Deficiency Legislation and Other Limitations on Lenders ..............................................90
Environmental Risks........................................................................................92
Due-on-Sale Clauses........................................................................................93
Prepayment Charges.........................................................................................94
Applicability of Usury Laws................................................................................94
Soldiers' and Sailors' Civil Relief Act....................................................................94
MATERIAL FEDERAL INCOME TAX CONSEQUENCES ........................................................................95
General....................................................................................................95
Non-REMIC Certificates.....................................................................................95
REMIC Certificates........................................................................................105
Prohibited Transactions and Other Taxes...................................................................121
Liquidation and Termination...............................................................................122
Administrative Matters....................................................................................122
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Tax-Exempt Investors......................................................................................123
Non-U.S. Persons..........................................................................................123
Tax-Related Restrictions on Transfers of Residual Certificates ...........................................123
STATE TAX CONSIDERATIONS........................................................................................126
ERISA CONSIDERATIONS............................................................................................126
PTE 83-1..................................................................................................127
Underwriter Exemptions....................................................................................129
Insurance Company General Accounts........................................................................132
Other Exemptions..........................................................................................132
Consultation with Counsel.................................................................................132
LEGAL INVESTMENT................................................................................................133
METHOD OF DISTRIBUTION..........................................................................................134
LEGAL MATTERS...................................................................................................135
FINANCIAL INFORMATION...........................................................................................135
RATING..........................................................................................................135
GLOSSARY OF TERMS...............................................................................................137
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<PAGE>
Important notice about information in this prospectus and each accompanying
prospectus supplement
Information about each series of certificates is contained in two separate
documents:
. this prospectus, which provides general information, some of which
may not apply to a particular series; and
. the accompanying prospectus supplement for a particular series,
which describes the specific terms of the certificates of that
series.
The prospectus supplement will contain information about a particular
series that supplements the information contained in this prospectus, and you
should rely on that supplementary information in the prospectus supplement.
You should rely only on the information in this prospectus and the
accompanying prospectus supplement. We have not authorized anyone to provide you
with information that is different from that contained in this prospectus and
the accompanying prospectus.
------------------------
If you require additional information, the mailing address of our principal
executive offices is First Horizon Asset Securities Inc., 4000 Horizon Way,
Irving, Texas 75063 and the telephone number is (214) 441-4000. For other means
of acquiring additional information about us or a series of securities, see "The
Trust Fund -- Incorporation of Certain Documents by Reference" beginning on page
28.
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<PAGE>
RISK FACTORS
You should carefully consider the following information since it identifies
significant risks associated with an investment in the offered certificates.
Credit enhancement may not
be sufficient to protect you
from losses.................. With respect to each series of certificates,
credit enhancement may be provided in limited
amounts to cover losses on the underlying
mortgage loans. The types of losses to be
covered by credit enhancement may include
special hazard, bankruptcy and fraud losses and
will be described in the related prospectus
supplement.
Regardless of the form of credit enhancement
provided:
. the amount of coverage will be limited in
amount and in most cases will be subject to
periodic reduction in accordance with a
schedule or formula established or approved
by the rating agencies;
. all or a portion of the credit enhancement
for any series of certificates will generally
be permitted to be reduced, terminated or
substituted for if each applicable rating
agency indicates that the then-current
ratings will not be adversely affected.
If losses exceed the amount of coverage provided
by any credit enhancement or losses of a type
not covered by any credit enhancement occur,
losses will be borne by the holders of one or
more classes of certificates, as described in
the related prospectus supplement.
Neither the depositor, the seller, the master
servicer, the trustee nor any of their
affiliates will have any obligation to replace
or supplement any credit enhancement.
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<PAGE>
See "Credit Enhancement."
A reduction of the ratings on
your certificates may adversely
affect their value and
marketability........................ A rating agency may lower or withdraw
the rating of any class of certificates
following its initial issuance as a
result of the downgrading of the
obligations of any applicable credit
support provider or as a result of
losses on the related mortgage loans in
excess of the levels contemplated by the
rating agency at the time of its initial
rating analysis.
Neither the depositor, any seller, the
master servicer, the trustee nor any of
their affiliates will have any
obligation to maintain any rating of any
class of certificates. If a rating on
any class of certificates, including
your certificates, is lowered or
withdrawn, the value and marketability
of your certificates may decline.
See "Rating."
Limited assets are available
for payment of the certificates...... The applicable prospectus supplement may
provide that certificates will be
payable from other trust funds in
addition to their associated trust fund,
but if it does not, they will be payable
solely from their associated trust fund.
If the trust fund does not have
sufficient assets to distribute the full
amount due to you as a
certificateholder, your yield will be
impaired, and perhaps even the return of
your principal may be impaired, without
your having recourse to anyone else.
Furthermore, at the times specified in
the applicable prospectus supplement,
some assets of the trust fund may be
released and paid out to other persons,
such as the depositor, a servicer, a
credit enhancement provider, or any
other person entitled to payments from
the trust fund. Those assets will no
longer be available to make payments to
you. Those payments are generally made
after other specified payments that
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may be set forth in the applicable
prospectus supplement have been made.
You will not have any recourse against
the depositor or any servicer if you do
not receive a required distribution on
the certificates. You will only have
recourse against the assets of the trust
fund for another series of certificates
if the applicable prospectus supplement
so provides. The certificates will not
represent an interest in the depositor,
any servicer, any seller to the
depositor, or any one else except the
trust fund.
The obligations of the depositor,
the master servicer and a seller to
a trust fund are limited............. The only obligation of the depositor to
a trust fund comes from representations
and warranties made by it about assets
transferred to the trust fund. If one or
more of these representations and
warranties turn out to be untrue, the
depositor may be required to repurchase
some of the transferred assets. The
depositor does not have significant
assets and is unlikely to have
significant assets in the future. So if
the depositor were required to
repurchase a loan because of a breach of
a representation, its only sources of
funds for the repurchase would be: funds
obtained from enforcing a corresponding
obligation of a seller or originator of
the loan, or funds from a reserve fund
or similar credit enhancement
established to pay for loan repurchases.
The only obligation of the master
servicer to a trust fund, other than its
master servicing obligations, comes from
representations and warranties made by
it in connection with its loan servicing
activities. If one or more of these
representations and warranties turn out
to be untrue, the master servicer may be
required to repurchase some of the
loans. However, the master servicer may
not have the financial ability to make
the required repurchase.
The only obligations that a seller will
have to a trust fund come from
representations and warranties
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made by it in connection with its sale
of the loans to the depositor and its
obligation to deliver the related loan
documents to the depositor. If one or
more of these representations and
warranties turn out to be untrue, or the
seller fails to deliver required
documents, it may be required to
repurchase some of the loans. However,
the seller may not have the financial
ability to make the required repurchase.
You may have difficulty reselling your
certificates due to a lack of a
secondary market, fluctuating
market values or periods of
illiquidity.......................... No market for any of the certificates
will exist before they are issued. We
cannot assure you that a secondary
market will develop or, if it develops,
that it will continue. Consequently, you
may not be able to sell your
certificates readily or at prices that
will enable you to realize your desired
return or yield to maturity. The market
values of the certificates are likely to
fluctuate; these fluctuations may be
significant and could result in
significant losses to you. The secondary
markets for mortgage backed securities
have experienced periods of illiquidity
and can be expected to do so in the
future.
Illiquidity can have a severely adverse
effect on the prices of securities that
are especially sensitive to prepayment,
credit, or interest rate risk.
Illiquidity can also have an adverse
effect on the price of securities that
have been structured to support other
classes of certificates or that have
been structured to meet the investment
requirements of limited categories of
investors. For example, a particular
investor may require a security with a
specified maturity date, a call
protection feature, or a specific type
of amortization feature. The unique
nature of the security may inhibit its
marketability to other investors.
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Book-entry certificates may
experience decreased liquidity
and payment delays................... Because you can generally effect
transactions in book-entry certificates
only through DTC and its direct and
indirect participants:
. your ability to pledge book-entry
certificates to someone who does not
participate in the DTC system, or to
otherwise act with respect to the
book-entry certificates, may be
limited due to the lack of a physical
certificate;
. you may experience delays in your
receipt of payments on book-entry
certificates because distributions
will be made by the master servicer,
or a paying agent on behalf of the
master servicer, to the DTC; and
. the liquidity of book-entry
certificates in any secondary trading
market that may develop may be
limited because investors may be
unwilling to purchase securities for
which they cannot obtain delivery of
physical certificates.
See "Description of the Certificates--
Book-Entry Certificates."
The yield to maturity on your
certificates may be affected by
various factors...................... The yield to maturity on your
certificates will depend on a variety of
factors, including:
. the rate and timing of principal
payments on the mortgage loans,
including prepayments, defaults and
liquidations, and repurchases due to
breaches of representations or
warranties;
. the pass-through rate for that class;
. interest shortfalls due to mortgagor
prepayments; and
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<PAGE>
. the purchase price of that class.
In general, if you purchase a class of
certificates at a price higher than its
outstanding principal balance and
principal is distributed on the class
faster than you assumed at the time of
your purchase, the yield on your
certificates will be lower than
anticipated. Conversely, if you purchase
a class of certificates at a price lower
than its outstanding principal balance
and principal is distributed on the
class more slowly than you assumed at
the time of your purchase, the yield on
your certificates will be lower than
anticipated.
See "Yield and Prepayment
Considerations."
Geographic concentration of
mortgaged properties may affect
the yield on your certificates....... The yield to maturity on your
certificates may be affected by the
geographic concentration of the
mortgaged properties securing the
mortgage loans.
Various geographic regions of the United
States from time to time will experience
weaker regional economic conditions and
housing markets and, consequently, will
experience higher rates of loss and
delinquency on mortgage loans generally.
Any concentration of the mortgage loans
in such a region may present risk
considerations in addition to those
generally present for similar mortgage-
backed securities without such
concentration.
In addition, California, Florida, Texas
and several other regions have
experienced natural disasters, including
earthquakes, fires, floods and
hurricanes, which may adversely affect
property values.
Any deterioration in housing prices in
the states in which there is a
significant concentration of mortgaged
properties, as well as the other states
in which the mortgaged properties are
located, and any deterioration of
economic conditions in those states
which adversely affects the ability of
borrowers to
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make payments on the mortgage loans may
increase the likelihood of losses on the
mortgage loans. Losses, if they occur,
may have an adverse effect on the yield
to maturity of your certificates,
especially if they are subordinated
certificates. The states and geographic
areas where there are significant
concentrations of mortgaged properties
will be identified in the prospectus
supplement under "The Mortgage Pool."
Declines in property values may
adversely affect your certificates... The value of the properties underlying
the loans held in the trust fund may
decline over time. Among the factors
that could adversely affect the value of
the properties are:
. an overall decline in the residential
real estate market in the areas in
which they are located,
. a decline in their general condition
from the failure of borrowers to
maintain their property adequately,
and
. natural disasters that are not
covered by insurance, such as
earthquakes and floods.
If property values decline, the actual
rates of delinquencies, foreclosures,
and losses on all underlying loans could
be higher than those currently
experienced in the mortgage lending
industry in general. The holders of one
or more classes of certificates will
bear all or a portion of these losses if
they are not otherwise covered by a
credit enhancement.
Delays in liquidation of mortgaged
property and the effect of
anti-deficiency legislation may
adversely affect the distributions
on your certificates................. Even if the properties underlying the
loans held in the trust fund provide
adequate security for the loans,
substantial delays could occur before
defaulted loans are liquidated and their
proceeds are
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forwarded to investors. Property
foreclosure actions are regulated by
state statutes and rules and are subject
to many of the delays and expenses of
other lawsuits if defenses or
counterclaims are made, sometimes
requiring several years to complete.
Furthermore, in some states if the
proceeds of the foreclosure are
insufficient to repay the loan, the
borrower is not liable for the deficit.
Thus, if a borrower defaults, these
restrictions may impede our ability to
dispose of the property and obtain
sufficient proceeds to repay the loan in
full. In addition, the master servicer
will be entitled to deduct from
liquidation proceeds all expenses
reasonably incurred in attempting to
recover on the defaulted loan, including
legal fees and costs, real estate taxes,
and property maintenance and
preservation expenses.
See "Legal Aspects of the Mortgage
Loans - -Foreclosure/Repossession" and
"-- Anti-Deficiency Legislation and
Other Limitations on Lenders."
Losses on balloon payment
mortgages are borne by your
certificates......................... Some of the mortgage loans may not be
fully amortizing over their terms to
maturity and, thus, will require balloon
payments at their stated maturity.
Mortgage loans with balloon payments
involve a greater degree of risk than
fully amortizing loans because typically
the borrower must be able to refinance
the loan or sell the property to make
the balloon payment at maturity. The
ability of a borrower to do this will
depend on factors such as mortgage rates
at the time of sale or refinancing, the
borrower's equity in the property, the
condition of the property, the relative
strength of the local housing market,
the financial condition of the borrower,
and tax laws. The holders of one or more
classes of certificates will bear any
losses on these loans that are not
otherwise covered by a form of credit
enhancement.
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Violations of consumer protection laws
may adversely affect your
certificates......................... Violations of state or federal consumer
protection laws may limit the ability of
the master servicer to collect the
principal or interest on the loans held
in the trust, and in addition could
subject the trust to damages and
administrative enforcement. Losses on
loans from the application of those laws
that are not otherwise covered by a
credit enhancement will be borne by the
holders of one or more classes of
certificates.
See "Legal Aspects of the Mortgage
Loans".
Violations of environmental laws
may adversely affect your
certificates......................... The trust, as owner of mortgaged
property, may be subjected to fines and
penalties as a result of a failure to
comply with federal, state, and local
environmental laws and regulations.
In some states, a lien on the property
due to contamination has priority over
the lien of an existing mortgage. Also,
a mortgage lender may be held liable as
an owner or operator for costs
associated with the release of petroleum
from an underground storage tank under
some circumstances. If the trust were to
be considered the owner or operator of a
property by virtue of its ownership of
the related mortgage loan, it will
suffer losses as a result of any
liability imposed for environmental
hazards on the property.
The holders of one or more classes of
certificates will bear all or a portion
of any losses in respect of mortgage
loans that result from the application
of environmental laws, to the extent
those losses are not otherwise covered
by a credit enhancement.
See "Legal Aspects of the Mortgage
Loans --Environmental Risks".
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Bankruptcy of the depositor or a seller
may affect the timing and amount
of distributions on your certificates.. Neither the United States Bankruptcy
Code nor similar applicable state
insolvency laws prohibit the depositor
from filing a voluntary application
for relief. However, the transactions
contemplated by this prospectus and
the related prospectus supplement will
be structured so that the voluntary or
involuntary application for relief
under the United States Bankruptcy
Code or state insolvency laws by the
depositor is unlikely and any
bankruptcy filing by a seller which is
an affiliate of the depositor from
whom the depositor acquires the
mortgage loans should not result in
consolidation of the assets and
liabilities of the depositor with
those of the seller. These steps
include the creation of the depositor
as a separate, limited purpose finance
corporation, the certificate of
incorporation of which contains
limitations on the nature of the
depositor's business and restrictions
on the ability of the depositor to
commence voluntary or involuntary
cases or proceedings under the United
States Bankruptcy Code or state
insolvency laws without the prior
unanimous affirmative vote of all its
directors. However, there can be no
assurance that the activities of the
depositor would not result in a court
concluding that the assets and
liabilities of the depositor should be
consolidated with those of its parent,
FT Mortgage Companies.
Each seller will transfer its related
mortgage loans to the depositor and
the depositor will transfer the
mortgage loans to the related
bankruptcy remote trust. If a seller
were to become a debtor in a
bankruptcy case, a creditor, a trustee
or the debtor itself may take the
position that the contribution or
transfer of the mortgage loans by the
seller to the depositor should be
characterized as a pledge of the
mortgage loans to secure the debtor's
borrowing, with the result that the
depositor is deemed to be a creditor
of the seller, secured by a pledge of
the applicable mortgage loans. If such
an attempt were successful, delays in
payments of collections on the
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mortgage loans could occur or
reductions in the amount of payments
could result, or the trustee in
bankruptcy could elect to accelerate
payment of the obligation to the
depositor and liquidate the mortgage
loans.
If required by the rating agencies,
Andrews & Kurth L.L.P. will render a
reasoned opinion to the effect that,
in a bankruptcy or insolvency
proceeding involving the depositor, as
debtor, a bankruptcy court would treat
the sale of the mortgage assets from
the depositor to the trust as a true
sale and not a financing transaction
and thus the mortgage assets would not
be included in the depositor's
bankruptcy estate.
THE TRUST FUND
Whenever the terms mortgage pool and certificates are used in this
prospectus, those terms will be considered to apply, unless the context
indicates otherwise, to one specific mortgage pool and the certificates
representing certain undivided interests in a single trust fund. Similarly, the
term pass-through rate will refer to the pass- through rate borne by a class of
certificates of one specific series and the term trust fund will refer to one
specific trust fund. In addition, certain capitalized terms are used in this
prospectus to assist you in understanding the terms of the certificates. The
capitalized terms used in this prospectus are defined under "Glossary of Terms"
beginning on page 137.
This prospectus relates to mortgage pass-through certificates which may be
sold from time to time in one or more series by the depositor, First Horizon
Asset Securities Inc., on terms determined at the time of sale and described in
this prospectus and the related prospectus supplement. Each series will be
issued under a separate pooling and servicing agreement. The certificates of a
series will evidence beneficial ownership of a trust fund. The trust fund for a
series of certificates will consist of any one or more of the following types of
assets:
. the Mortgage Assets;
. amounts held from time to time in the Certificate Account or any
other account established for that series;
. mortgaged property related to the Mortgage Assets;
. any reserve fund for that series, if specified in the related
prospectus supplement;
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. the depositor's rights under the pooling and servicing agreement and
any subservicing agreements relating to mortgage loans in the trust;
. any primary mortgage insurance policies relating to mortgage loans
in the trust;
. any pool insurance policy, any special hazard insurance policy, any
bankruptcy bond or other credit support relating to the series;
. permitted investments held in the Certificate Account or any other
account established for that series, or any guaranteed investment
contract for the investment of those funds; and
. any other instrument or agreement relating to the trust and
described in the related prospectus supplement, which may include an
interest rate swap agreement or an interest rate cap agreement or
similar agreement issued by a bank, insurance company or savings and
loan association.
Some of the items listed above may be held outside of the trust. The value
of any guaranteed investment contract held by a trust will not exceed 10% of the
total assets of the trust.
Any Retained Interests which are received on a private mortgage-backed
security or mortgage loan comprising the Mortgage Assets for a series will not
be included in the trust for that series. Instead, that Retained Interest will
be retained by or payable to the originator, servicer or seller of that private
mortgage-backed security or loan, free and clear of the interest of
securityholders under the related agreement.
The Mortgage Assets will be acquired by the depositor, either directly or
indirectly, from one or more institutions, which may be affiliates of the
depositor, and conveyed by the depositor to the related trust fund. The trustee
for each series of certificates will be specified in the related prospectus
supplement. See "The Pooling and Servicing Agreement" for a description of the
trustee's rights and obligations.
The mortgage loans will be secured by first mortgage liens on one- to four-
family residential properties and, if so specified in the related prospectus
supplement, may include cooperative apartment loans secured by security
interests in shares issued by private, nonprofit, cooperative housing
corporations and in the related proprietary leases or occupancy agreements
granting exclusive rights to occupy specific dwelling units in the cooperatives'
buildings. In addition, the Mortgage Assets of the related trust fund may
include mortgage participation certificates evidencing interests in mortgage
loans. The mortgage loans may be conventional loans that are not insured or
guaranteed by any governmental agency. The mortgage loans may also be insured
by the FHA or partially guaranteed by the VA, as specified in the related
prospectus supplement. All or a portion of the mortgage loans in a mortgage pool
may be insured by FHA insurance and may be partially guaranteed by the VA.
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The certificates will be entitled to payment from the assets of the related
trust fund or from other assets pledged for the benefit of the
certificateholders but held outside of the related trust as specified in the
related prospectus supplement. The certificates will not be entitled to
payments in respect of the assets of any other trust fund established by the
depositor.
Mortgage loans acquired by the depositor will have been originated in
accordance with the underwriting criteria specified below under "Mortgage Loan
Program -- Underwriting Standards" or as otherwise described in a related
prospectus supplement.
The following is a brief description of the Mortgage Assets expected to be
included in the trust funds. If specific information about the Mortgage Assets
is not known at the time the related series of certificates initially is
offered, more general information of the nature described below will be provided
in the related prospectus supplement, and specific information will be set forth
in a report on Form 8-K to be filed with the SEC within fifteen days after the
initial issuance of the certificates. A maximum of 5% of the Mortgage Assets as
they will be constituted at the time that the applicable detailed description of
Mortgage Assets is filed will deviate in any material respect from the Mortgage
Asset pool characteristics described in the related prospectus supplement, other
than the aggregate number or amount of mortgage loans. A schedule of the
Mortgage Assets relating to the series will be attached to the pooling and
servicing agreement that is delivered to the trustee upon delivery of the
certificates.
The Mortgage Loans -- General
The real property that secures repayment of the mortgage loans is referred
to collectively as 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. Mortgage loans with loan-to-
value ratios greater than 80% may be covered wholly or partially by primary
mortgage guaranty insurance policies. The existence, extent and duration of
coverage will be described in the applicable prospectus supplement. The loan-
to-value ratio of a mortgage loan will generally not exceed 95%.
The applicable prospectus supplement may specify the day on which monthly
payments on the mortgage loans in a mortgage pool will be due, but if it does
not, all of the mortgage loans in a mortgage pool will have monthly payments due
on the first day of each month. The payment terms of the mortgage loans to be
included in a trust fund will be described in the related prospectus supplement
and may include any of the following features or combination thereof or other
features described in the related prospectus supplement:
. Interest may be payable at a fixed rate, a rate adjustable from time
to time in relation to an index which will be specified in the
related prospectus supplement, a rate that is fixed for a period of
time or under certain circumstances and is followed by an adjustable
rate, a rate that otherwise varies from time to time, or a rate that
is convertible from an adjustable rate to
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a fixed rate. Changes to an adjustable rate may be subject to
periodic limitations, maximum rates, minimum rates or a combination
of the limitations. Accrued interest may be deferred and added to
the principal of a loan for the periods and under the circumstances
as may be specified in the related prospectus supplement.
. Principal may be payable on a level debt service basis to fully
amortize the mortgage loan over its term, may be calculated on the
basis of an assumed amortization schedule that is significantly
longer than the original term to maturity or on an interest rate
that is different from the interest rate specified in its mortgage
note or may not be amortized during all or a portion of the original
term. Payment of all or a substantial portion of the principal may
be due on maturity, called balloon payments. Principal may include
interest that has been deferred and added to the principal balance
of the mortgage loan.
. Monthly payments of principal and interest may be fixed for the life
of the mortgage loan, may increase over a specified period of time
or may change from period to period. The terms of a mortgage loan
may include limits on periodic increases or decreases in the amount
of monthly payments and may include maximum or minimum amounts of
monthly payments.
. The mortgage loans generally may be prepaid at any time without the
payment of any prepayment fee. If so specified in the related
prospectus supplement, some prepayments of principal may be subject
to a prepayment fee, which may be fixed for the life of the mortgage
loan or may decline over time, and may be prohibited for the life of
the mortgage loan or for a specified period, which is called a
lockout period. Some mortgage loans may permit prepayments after
expiration of the applicable lockout period and may require the
payment of a prepayment fee in connection with any subsequent
prepayment. Other mortgage loans may permit prepayments without
payment of a fee unless the prepayment occurs during specified time
periods. The loans may include "due-on-sale" clauses that permit the
mortgagee to demand payment of the entire mortgage loan in
connection with the sale or a transfer of the related mortgaged
property. Other mortgage loans may be assumable by persons meeting
the then applicable underwriting standards of the seller.
A trust fund may contain buydown loans that include provisions whereby a
third party partially subsidizes the monthly payments of the obligors on the
mortgage loans during the early years of the mortgage loans, the difference to
be made up from a buydown fund contributed by the third party at the time of
origination of the mortgage loan. A buydown fund will be in an amount equal
either to the discounted value or full aggregate amount of future payment
subsidies. Thereafter, buydown funds are applied to the applicable mortgage loan
upon receipt by the master servicer of the mortgagor's portion of the monthly
payment on the mortgage loan. The
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master servicer administers the buydown fund to ensure that the monthly
allocation from the buydown fund combined with the monthly payment received from
the mortgagor equals the scheduled monthly payment on the applicable mortgage
loan. The underlying assumption of buydown plans is that the income of the
mortgagor will increase during the buydown period as a result of normal
increases in compensation and inflation, so that the mortgagor will be able to
meet the full mortgage payments at the end of the buydown period. To the extent
that this assumption as to increased income is not fulfilled, the possibility of
defaults on buydown loans is increased. The related prospectus supplement will
contain information with respect to any buydown loan concerning limitations on
the interest rate paid by the mortgagor initially, on annual increases in the
interest rate and on the length of the buydown period.
Each prospectus supplement will contain information, as of the date of the
prospectus supplement and to the extent then specifically known to the
depositor, with respect to the mortgage loans contained in the related mortgage
pool, including
. the aggregate outstanding principal balance and the average
outstanding principal balance of the mortgage loans as of the first
day of the month of issuance of the related series of certificates or
another date specified in the related prospectus supplement called a
cut-off date,
. the type of property securing the mortgage loans, including separate
residential properties, individual units in condominium apartment
buildings or in buildings owned by cooperatives, vacation and second
homes,
. the original terms to maturity of the mortgage loans,
. the largest principal balance and the smallest principal balance of
any of the mortgage loans,
. the earliest origination date and latest maturity date of any of the
mortgage loans,
. the aggregate principal balance of mortgage loans having loan-to-
value ratios at origination exceeding 80%,
. the maximum and minimum per annum mortgage rates, and
. the geographical distribution of the mortgage loans. If specific
information respecting the mortgage loans is not known to the
depositor at the time the related certificates are initially offered,
more general information of the nature described above will be
provided in the detailed description of Mortgage Assets.
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The loan-to-value ratio of a mortgage loan at any given time is the
fraction, expressed as a percentage, the numerator of which is the original
principal balance of the related mortgage loan and the denominator of which is
the collateral value of the related mortgaged property. The applicable
prospectus supplement may specify how the collateral value of a mortgaged
property will be calculated, but if it does not, the collateral value of a
mortgaged property is the lesser of the sales price for the property and the
appraised value determined in an appraisal obtained by the originator at
origination of the mortgage loan. The maximum loan-to-value ratio for the
mortgage loans included in a trust fund for a series of certificates will be
specified in the related prospectus supplement.
The depositor will cause the mortgage loans comprising each mortgage pool
to be assigned to the trustee named in the related prospectus supplement for the
benefit of the certificateholders of the related series. The master servicer
will service the mortgage loans, either directly or through sub-servicers,
pursuant to the pooling and servicing agreement, and will receive a fee for its
services. See "Mortgage Loan Program" and "The Pooling and Servicing Agreement."
With respect to mortgage loans serviced by the master servicer through a sub-
servicer, the master servicer will remain liable for its servicing obligations
under the related pooling and servicing agreement as if the master servicer
alone were servicing the mortgage loans.
The applicable prospectus supplement may provide for additional obligations
of the depositor, but if it does not, the only obligations of the depositor with
respect to a series of certificates will be to obtain representations and
warranties from the sellers and to assign the depositor's rights with respect to
the representations and warranties to the trustee for the series of
certificates. See "The Pooling and Servicing Agreement -- Assignment of Mortgage
Assets." The obligations of the master servicer with respect to the mortgage
loans will consist primarily of its contractual servicing obligations under the
related pooling and servicing agreement. Those obligations include the master
servicer's obligation to enforce the obligations of the sub-servicers or
sellers, or both, as more fully described under "Mortgage Loan Program --
Representations by Sellers; Repurchases" and its obligation to make cash
advances upon delinquencies in payments on or with respect to the mortgage loans
in the amounts described under "Description of the Certificates -- Advances."
The obligations of the master servicer to make advances may be subject to
limitations, to the extent provided in this prospectus and in the related
prospectus supplement. The master servicer may also be a seller in which case a
breach of its obligations in one capacity will not constitute a breach of its
obligations in the other capacity.
The mortgage loans may consist of deeds of trust or participations or other
beneficial interests in mortgage loans, deeds of trust or participations,
secured by first liens on one- to four-family residential properties. The
mortgaged properties relating to mortgage loans will consist of detached or
semi-detached one-family dwelling units, two- to four-family dwelling units,
townhouses, rowhouses, individual condominium units, individual units in planned
unit developments and other types of dwelling units that may be specified in the
related prospectus supplement. The mortgaged properties may include vacation and
second homes, investment
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properties and leasehold interests. In the case of leasehold interests, the
applicable prospectus supplement may specify that the term of the leasehold may
be less than five years beyond the scheduled maturity of the mortgage loan, but
if it does not, the term of the leasehold will exceed the scheduled maturity of
the mortgage loan by at least five years.
The Mortgage Assets of a trust fund may also include cooperative
apartment loans secured by security interests in shares issued by private, non-
profit, cooperative housing corporations and in the related proprietary leases
or occupancy agreements granting exclusive rights to occupy specific dwelling
units in the cooperatives' buildings.
The Mortgage Assets of a trust fund may include mortgage participation
certificates evidencing interests in mortgage loans. If those mortgage
participation certificates were issued by an issuer that is not affiliated with
the depositor, the depositor must have acquired them in a bona fide secondary
market transaction or they must either have been previously registered under the
Securities Act or have been held for at least the holding period required to be
eligible for sale under Rule 144(k) under the Securities Act.
Agency Securities
Agency securities are mortgage pass-through securities issued or guaranteed
by Ginnie Mae, Fannie Mae or Freddie Mac. All of the agency securities will be
registered in the name of the trustee or its nominee or, in the case of agency
securities issued only in book-entry form, a financial intermediary that is a
member of the Federal Reserve System or of a clearing corporation on the books
of which the security is held. The financial intermediary may be the same entity
as the trustee for a series of certificates. Each agency security will evidence
an interest in a pool of mortgage loans or cooperative loans and in principal
distributions and interest distributions on those loans.
The descriptions of Ginnie Mae, Freddie Mac and Fannie Mae Certificates
that are set forth below are descriptions of certificates representing
proportionate interests in a pool of mortgage loans and in the payments of
principal and interest thereon. Ginnie Mae, Freddie Mac or Fannie Mae may also
issue mortgage-backed securities representing a right to receive distributions
of interest only or principal only or disproportionate distributions of
principal or interest or to receive distributions of principal or interest prior
or subsequent to distributions on other certificates representing interests in
the same pool of mortgage loans.
In addition, any of such issuers may issue certificates representing
interests in mortgage loans having characteristics that are different from the
types of mortgage loans described below. The terms of any such certificates to
be included in a trust fund and of the underlying mortgage loans will be
described in the related prospectus supplement, and the descriptions that follow
are subject to modification as appropriate to reflect the terms of any such
certificates that are actually included in a trust fund.
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Ginnie Mae. Ginnie Mae is a wholly-owned corporate instrumentality of the
United States within HUD. Section 306(g) of the Housing Act authorizes Ginnie
Mae to guarantee the timely payment of the principal of and interest on
certificates representing interests in a pool of mortgages insured by the FHA,
under the Housing Act or under Title V of the Housing Act of 1949, or partially
guaranteed by the VA under the Servicemen's Readjustment Act of 1944, as
amended, or under Chapter 37 of Title 38, United States Code.
Section 306(g) of the Housing Act provides that "the full faith and credit
of the United States is pledged to the payment of all amounts which may be
required to be paid under any guarantee under this subsection." In order to meet
its obligations under any such guarantee, Ginnie Mae may, under Section 306(d)
of the Housing Act, borrow from the United States Treasury an amount that is at
any time sufficient to enable Ginnie Mae to perform its obligations under its
guarantee.
Ginnie Mae Certificates. Each Ginnie Mae Certificate relating to a series,
which may be a "Ginnie Mae I Certificate" or a "Ginnie Mae II Certificate" as
referred to by Ginnie Mae, will be a "fully modified pass-through" mortgage-
backed certificate issued and serviced by a mortgage banking company or other
financial concern approved by Ginnie Mae, except with respect to any stripped
mortgage-backed securities guaranteed by Ginnie Mae or any REMIC securities
issued by Ginnie Mae. The characteristics of any Ginnie Mae Certificates
included in the trust fund for a series of certificates will be set forth in the
related prospectus supplement.
Freddie Mac. Freddie Mac is a corporate instrumentality of the United
States created pursuant to 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. The principal activity of Freddie Mac currently
consists of purchasing first-lien, conventional, residential mortgage loans or
participation interests in such mortgage loans and reselling the mortgage loans
so purchased in the form of guaranteed mortgage securities, primarily Freddie
Mac Certificates. In 1981, Freddie Mac initiated its Home Mortgage Guaranty
Program under which it purchases mortgage loans from sellers with Freddie Mac
Certificates representing interests in the mortgage loans so purchased. All
mortgage loans purchased by Freddie Mac must meet certain standards set forth in
the Freddie Mac Act. Freddie Mac is confined to purchasing, so far as
practicable, mortgage loans that it deems to be of such quality and type as to
meet generally the purchase standards imposed by private institutional mortgage
investors. Neither the United States nor any agency thereof is obligated to
finance Freddie Mac's operations or to assist Freddie Mac in any other manner.
Freddie Mac Certificates. Each Freddie Mac Certificate relating to a
series will represent an undivided interest in a pool of mortgage loans that
typically consists of conventional loans, FHA Loans or VA Loans purchased by
Freddie Mac, except with respect to any stripped mortgage-backed securities
issued by Freddie Mac. Each such pool will consist of mortgage loans,
substantially all of which are secured by one- to four-family residential
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properties or, if specified in the related prospectus supplement, are secured by
five or more family residential properties. The characteristics of any Freddie
Mac Certificates included in the trust fund for a series of certificates will be
set forth in the related prospectus supplement.
Fannie Mae. Fannie Mae is a federally chartered and privately owned
corporation organized and existing under the Federal National Mortgage
Association Charter Act (12 U.S.C. (S)1716 et. seq.). It is the nation's largest
supplier of residential mortgage funds. Fannie Mae was originally established in
1938 as a United States government agency to provide supplemental liquidity to
the mortgage market and was transformed into a stockholder-owned and privately
managed corporation by legislation enacted in 1968. Fannie Mae provides funds to
the mortgage market primarily by purchasing home mortgage loans from local
lenders, thereby replenishing their funds for additional lending. Although the
Secretary of the Treasury of the United States has authority to lend Fannie Mae
up to $2.25 billion outstanding at any time, neither the United States nor any
agency thereof is obligated to finance Fannie Mae's operations or to assist
Fannie Mae in any other manner.
Fannie Mae Certificates. Each Fannie Mae Certificate relating to a series
will represent a fractional undivided interest in a pool of mortgage loans
formed by Fannie Mae, except with respect to any stripped mortgage-backed
securities issued by Fannie Mae. Mortgage loans underlying Fannie Mae
Certificates will consist of fixed, variable or adjustable rate conventional
mortgage loans or fixed-rate FHA Loans or VA Loans. Such mortgage loans may be
secured by either one- to four-family or multi-family residential properties.
The characteristics of any Fannie Mae Certificates included in the trust fund
for a series of certificates will be set forth in the related prospectus
supplement.
Private Mortgage-Backed Securities
Private mortgage-backed securities may consist of mortgage pass-through
certificates or participation certificates evidencing an undivided interest in a
pool of mortgage loans or collateralized mortgage obligations secured by
mortgage loans. Private mortgage-backed securities may include stripped
mortgage-backed securities representing an undivided interest in all or a part
of either the principal distributions (but not the interest distributions) or
the interest distributions (but not the principal distributions) or in some
specified portion of the principal and interest distributions (but not all the
distributions) on some mortgage loans. Private mortgage-backed securities will
have been issued pursuant to a pooling and servicing agreement, an indenture or
similar agreement. The applicable prospectus supplement may provide that the
seller/servicer of the underlying mortgage loans will not have entered into a
pooling and servicing agreement with a private trustee, but if it does not, the
seller/servicer of the underlying mortgage loans will have entered into the
pooling and servicing agreement with a private trustee. The private trustee or
its agent, or a custodian, will possess the mortgage loans underlying the
private mortgage-backed security. Mortgage loans underlying a private mortgage-
backed security will be serviced by a private servicer directly or by one or
more subservicers who may be subject to the supervision of the private servicer.
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The issuer of the private mortgage-backed securities will be a financial
institution or other entity engaged generally in the business of mortgage
lending, a public agency or instrumentality of a state, local or federal
government, or a limited purpose corporation organized for the purpose of
establishing trusts and acquiring and selling housing loans to the trusts and
selling beneficial interests in the trusts. If so specified in the related
prospectus supplement, the issuer of private mortgage-backed securities may be
an affiliate of the depositor. The obligations of the issuer of private
mortgage-backed securities will generally be limited to its representations and
warranties with respect to the assets conveyed by it to the related trust fund.
The issuer of private mortgage-backed securities will not have guaranteed any of
the assets conveyed to the related trust fund or any of the private mortgage-
backed securities issued under the pooling and servicing agreement.
Additionally, although the mortgage loans underlying the private mortgage-backed
securities may be guaranteed by an agency or instrumentality of the United
States, the private mortgage-backed securities themselves will not be so
guaranteed.
Distributions of principal and interest will be made on the private
mortgage-backed securities on the dates specified in the related prospectus
supplement. The private mortgage-backed securities may be entitled to receive
nominal or no principal distributions or nominal or no interest distributions.
Principal and interest distributions will be made on the private mortgage-backed
securities by the private trustee or the private servicer. The issuer of private
mortgage-backed securities or the private servicer may have the right to
repurchase assets underlying the private mortgage-backed securities after a
certain date or under other circumstances specified in the related prospectus
supplement.
The mortgage loans underlying the private mortgage-backed securities may
consist of fixed rate, level payment, fully amortizing loans or graduated
payment mortgage loans, buydown loans, adjustable rate mortgage loans or loans
having balloon or other special payment features. The mortgage loans may be
secured by single family property or multifamily property or by an assignment of
the proprietary lease or occupancy agreement relating to a specific dwelling
within a cooperative and the related shares issued by the cooperative.
The prospectus supplement for a series for which the trust fund includes
private mortgage-backed securities will specify the aggregate approximate
principal amount and type of the private mortgage-backed securities to be
included in the trust fund and certain characteristics of the mortgage loans
that comprise the underlying assets for the private mortgage-backed securities,
including:
. the payment features of the mortgage loans,
. the approximate aggregate principal balance, if known, of underlying
mortgage loans insured or guaranteed by a governmental entity,
. the servicing fee or range of servicing fees with respect to the
mortgage loans and
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. the minimum and maximum stated maturities of the underlying mortgage
loans at origination;
. the maximum original term-to-stated maturity of the private mortgage-
backed securities;
. the weighted average term-to stated maturity of the private mortgage-
backed securities;
. the pass-through or certificate rate of the private mortgage-backed
securities;
. the weighted average pass-through or certificate rate of the private
mortgage-backed securities;
. the issuer, the servicer and the trustee of the private mortgage-
backed securities;
. certain characteristics of credit support, if any, such as reserve
funds, insurance policies, surety bonds, letters of credit or
guaranties relating to the mortgage loans underlying the private
mortgage-backed securities or to the private mortgage-backed
securities themselves;
. the terms on which the underlying mortgage loans for the private
mortgage-backed securities may, or are required to, be purchased
before their stated maturity or the stated maturity of the private
mortgage-backed securities; and
. the terms on which mortgage loans may be substituted for those
originally underlying the private mortgage-backed securities.
Private mortgage-backed securities included in the trust fund for a series
of certificates that were issued by an issuer of private mortgage-backed
securities that is not affiliated with the depositor must be acquired in bona
fide secondary market transactions or either have been previously registered
under the Securities Act or have been held for at least the holding period
required to be eligible for sale under Rule 144(k) under the Securities Act.
Substitution of Mortgage Assets
Substitution of Mortgage Assets will be permitted upon breaches of
representations and warranties with respect to any original Mortgage Asset or if
the documentation with respect to any Mortgage Asset is determined by the
trustee to be incomplete. The period during which the substitution will be
permitted will be indicated in the related prospectus supplement. The related
prospectus supplement will describe any other conditions upon which Mortgage
Assets may be substituted for Mortgage Assets initially included in the trust
fund.
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Pre-Funding Arrangements
If specified in the prospectus supplement for a series, the related pooling
and servicing agreement will provide for a Pre-Funding Arrangement. With
respect to a series, the Pre-Funding Arrangement will require that any
Subsequent mortgage loans to be included in the related trust fund generally
conform to the underwriting requirements of the mortgage loans already included
in the trust fund and satisfy any additional requirements and conditions that
may be described in the applicable prospectus supplement. If a Pre-Funding
Arrangement is utilized in connection with the issuance of a series of
certificates, on the closing date the trustee will be required to deposit all or
a portion of the proceeds received by the trustee in connection with the sale of
one or more classes of certificates of the series into a Prefunding Account;
and, subsequently, the depositor will acquire Subsequent mortgage loans from the
seller in exchange for the release of money from the Pre-Funding Account for the
series. In addition, the Pre-Funding Arrangement will be limited to a specified
funding period, not to exceed 90 days from the closing date, during which time
any transfers of Subsequent mortgage loans must occur and to a maximum deposit
to the related Pre-Funding Account of no more than twenty-five percent (25%) of
the aggregate proceeds received from the sale of all classes of certificates of
the series.
If all of the funds originally deposited in the Pre-Funding Account are not
used by the end of the funding period, then any remaining amount will be applied
as a mandatory prepayment of a class or classes of certificates as specified in
the related prospectus supplement. Although it is intended that the principal
amount of Subsequent mortgage loans to be included in the related trust fund
after the closing date for the issuance of any particular series will require
application of substantially all of the funds in the Pre-Funding Account, and it
is not anticipated that there will be any material amount of principal
distributions from amounts remaining on deposit in the Pre-Funding Account in
reduction of the principal balances of any certificates, no assurance can be
given that a distribution with respect to the certificates will not occur on the
first distribution date after the end of the funding period. In any event, it
is unlikely that the depositor will be able to deliver Subsequent mortgage loans
with aggregate principal balances that exactly equal the amount on deposit in
the Pre-Funding Account, and the remaining amounts in the Pre-Funding Account at
the end of the related funding period, if any, will be distributed in reduction
of the principal balance of the certificates of the related series, as set forth
in related prospectus supplement.
As may be further specified in the related prospectus supplement, amounts
on deposit in the Pre-Funding Account will be invested in short term investments
that convert into cash or mature within a short period of time, have minimal or
no exposure to fluctuations in value as a result of market changes in prevailing
interest rates and are acceptable to each rating agency rating the applicable
series of certificates. To the extent that permitted investments consist of
debt obligations, they will be either registered or exempt from registration
under the Securities Act.
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The utilization of a Pre-Funding Arrangement is intended to improve the
efficiency of the issuance of a series of certificates and the sale and
assignment of the mortgage loans to the trust by allowing the depositor to
deliver to the trust some of the mortgage loans on the closing date and the
Subsequent mortgage loans from time to time during the related funding period.
These incremental deliveries allow for the issuance of a larger principal amount
of certificates for a series than would otherwise be the case without a Pre-
Funding Arrangement.
A Pre-Funding Arrangement can affect the application of the requirements
under ERISA. See "ERISA Considerations."
Available Information
The depositor has filed with the SEC a Registration Statement with respect
to the certificates under the Securities Act. This prospectus, which forms a
part of the Registration Statement, and the prospectus supplement relating to
each series of certificates contain summaries of the material terms of the
documents referred to in this prospectus and in the prospectus supplement, but
do not contain all of the information in the Registration Statement pursuant to
the rules and regulations of the SEC. For further information, reference is made
to the Registration Statement and its exhibits. The Registration Statement and
exhibits can be inspected and copied at prescribed rates at the public reference
facilities maintained by the SEC at its Public Reference Room at 450 Fifth
Street, N.W., Washington, D.C. 20549, and at its Regional Offices located as
follows: Chicago Regional Office, 500 West Madison Street, Chicago, Illinois
60661; and New York Regional Office, Seven World Trade Center, New York, New
York 10048. You may obtain information on the operation of the Public Reference
Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet Web
site that contains reports, information statements and other information
regarding the registrants that file electronically with the SEC, including the
depositor. The address of that Internet Web site is http://www.sec.gov.
This prospectus and any applicable prospectus supplement do not constitute
an offer to sell or a solicitation of an offer to buy any securities other than
the certificates offered by this prospectus and the prospectus supplement nor an
offer of the certificates to any person in any state or other jurisdiction in
which the offer would be unlawful.
Incorporation of Certain Documents by Reference
All documents filed for the trust fund referred to in the accompanying
prospectus supplement after the date of this prospectus and before the end of
the related offering with the SEC pursuant to Section 13(a), 13(c), 14 or 15(d)
of the Exchange Act are incorporated by reference in this prospectus and are a
part of this prospectus from the date of their filing. Any statement contained
in a document incorporated by reference in this prospectus is modified or
superseded for all purposes of this prospectus to the extent that a statement
contained in this prospectus or in the accompanying prospectus supplement or in
any other subsequently filed
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document that also is incorporated by reference differs from that statement. Any
statement so modified or superseded shall not, except as so modified or
superseded, 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 the person's 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. The trustee will not be required
to provide exhibits to the information that is incorporated by reference unless
the exhibits are specifically incorporated by reference into the information
that this prospectus incorporates. Document requests should be directed to the
corporate trust office of the trustee specified in the accompanying prospectus
supplement.
USE OF PROCEEDS
The depositor will use the net proceeds from the sale of the certificates
to purchase the Mortgage Assets or for general corporate purposes. The depositor
expects to sell certificates in series from time to time, but the timing and
amount of offerings of certificates will depend on a number of factors,
including the volume of Mortgage Assets acquired by the depositor, prevailing
interest rates, availability of funds and general market conditions.
THE DEPOSITOR
The depositor was incorporated on March 9, 1999 for the limited purpose of
acquiring, owning and transferring Mortgage Assets and selling interests in
Mortgage Assets or bonds secured by Mortgage Assets. The depositor is a wholly
owned subsidiary of FT Mortgage. The depositor maintains its principal office at
4000 Horizon Way, Irving, Texas 75063. Its telephone number is (214) 441-4000.
Neither the depositor nor any of the depositor's affiliates will ensure or
guarantee distributions on the certificates of any series.
THE MASTER SERVICER
FT Mortgage, an affiliate of the depositor, will be the master servicer of
the mortgage loans under the applicable pooling and servicing agreement. FT
Mortgage may have other business relationships with the depositor or the
depositor's affiliates. FT Mortgage is an indirect wholly owned subsidiary of
First Tennessee National Corporation, a Tennessee corporation incorporated in
1968 and registered as a bank holding company under the Bank Holding Company Act
of 1956, as amended. FT Mortgage is not a party to any legal proceedings that
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could have a material impact on its ability to service the mortgage loans under
the pooling and servicing agreement.
FT Mortgage maintains its principal office at 4000 Horizon Way, Dallas,
Texas 75063. Its telephone number is (214) 441-4000. For more specific
information regarding FT Mortgage, see "Servicing of Mortgage Loans -- The
Master Servicer" in the prospectus supplement.
MORTGAGE LOAN PROGRAM
The mortgage loans will have been purchased by the depositor, either
directly or through affiliates, from one or more sellers. The applicable
prospectus supplement may specify that the mortgage loans acquired by the
depositor will have been originated under different criteria than FT Mortgage's
underwriting criteria, but if it does not, the mortgage loans acquired by the
depositor will have been originated in accordance with the underwriting criteria
specified under "Underwriting Standards".
Underwriting Standards
General Standards. FT Mortgage's underwriting standards with respect to
certain mortgage loans will generally conform to those published in the Guide.
The underwriting standards as set forth in the Guide are continuously revised
based on opportunities and prevailing conditions in the residential mortgage
market and the market for the depositor's mortgage pass-through certificates.
The mortgage loans may be underwritten by FT Mortgage or by a designated third
party. See " -- Qualifications of Sellers." FT Mortgage may perform only
sample quality assurance reviews to determine whether the mortgage loans in any
mortgage pool were underwritten in accordance with applicable standards.
FT Mortgage's underwriting standards, as well as any other underwriting
standards that may be applicable to any mortgage loans, generally include a set
of specific criteria pursuant to which the underwriting evaluation is made.
However, the application of such underwriting standards does not imply that each
specific criterion was satisfied individually. Rather, a mortgage loan will be
considered to be originated in accordance with a given set of underwriting
standards if, based on an overall qualitative evaluation, the loan substantially
complies with the underwriting standards. For example, a mortgage loan may be
considered to comply with a set of underwriting standards, even if one or more
specific criteria included in the underwriting standards were not satisfied, if
other factors compensated for the criteria that were not satisfied or if the
mortgage loan is considered to be in substantial compliance with the
underwriting standards.
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The level of review by FT Mortgage, if any, of any mortgage loan for
conformity with the applicable underwriting standards will vary depending on any
one of a number of factors, including
. factors relating to the experience and status of the Seller,
. characteristics of the specific mortgage loan, including the
principal balance, the loan-to-value ratio, the loan type or loan
program, and
. the applicable credit score of the related mortgagor used in
connection with the origination of the mortgage loan, as determined
based on a credit scoring model acceptable to FT Mortgage).
Generally, credit scoring models provide a means for evaluating the
information about a prospective borrower that is available from a credit
reporting agency. The underwriting criteria applicable to any program under
which the Mortgage Loans may be originated and reviewed may provide that
qualification for the loan, or the availability of certain loan features, such
as maximum loan amount, maximum loan-to-value ratio, property type and use, and
documentation level, may depend on the borrower's credit score.
FT Mortgage's underwriting standards are generally intended to provide an
underwriter with information to evaluate the borrower's repayment ability and
the adequacy of the Mortgaged Property as collateral. Due to the variety of
underwriting standards and review procedures that may be applicable to the
mortgage loans included in any mortgage pool, the related prospectus supplement
generally will not distinguish among the various underwriting standards
applicable to the mortgage loans nor describe any review for compliance with
applicable underwriting standards performed by FT Mortgage. Moreover, there
can be no assurance that every mortgage loan was originated in conformity with
the applicable underwriting standards in all material respects, or that the
quality or performance of mortgage loans underwritten pursuant to varying
standards as described above will be equivalent under all circumstances.
Guide Standards. The following is a brief description of the
underwriting standards set forth in the Guide for FT Mortgage's alternative
documentation loan programs. Initially, a prospective borrower is required
to fill out a detailed application providing pertinent credit information. As
part of the application, the borrower is required to provide a current balance
sheet describing assets and liabilities and a statement of income and expenses,
as well as an authorization to apply for a credit report which summarizes the
borrower's credit history with merchants and lenders and any record of
bankruptcy. Salaried prospective borrowers generally are required to submit pay
stubs covering a consecutive 30-day period and their W-2 form for the most
recent year. In addition, FT Mortgage generally obtains a verbal verification
of employment from the prospective borrower's employer. If a prospective
borrower is self-employed, the borrower may be required to submit copies of
signed tax returns or provide bank statements. The borrower may also be required
to authorize verification of deposits at
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financial institutions where the borrower has accounts. In the case of a
mortgage loan secured by a property owned by a trust, the foregoing procedures
may be waived where the mortgage note is executed on behalf of the trust.
In determining the adequacy of the mortgaged property as collateral, an
appraisal is made of each property considered for financing. The appraiser is
required to verify that the property is in good condition and that construction,
if new, has been completed. The appraisal is based on various factors,
including the market value of comparable homes and the cost of replacing the
improvements.
Information with respect to the credit scores for the mortgage loans
underlying a series of certificates may be supplied in the related prospectus
supplement. Credit scores are obtained by many mortgage lenders in connection
with mortgage loan applications to help assess a borrower's credit-worthiness.
In addition, credit scores may be obtained by FT Mortgage after the origination
of a mortgage loan if the seller does not provide a credit score to FT Mortgage.
Credit scores are obtained from credit reports provided by various credit
reporting organizations, each of which may employ differing computer models
and methodologies.
The credit score is designed to assess a borrower's credit history at a
single point in time, using objective information currently on file for the
borrower at a particular credit reporting organization. Information utilized to
create a credit score may include, among other things, payment history,
delinquencies on accounts, levels of outstanding indebtedness, length of
credit history, types of credit, and bankruptcy experience. Credit scores
range from approximately 350 to approximately 840, with higher scores
indicating an individual with a more favorable credit history compared to an
individual with a lower score. However, a credit score purports only to be a
measurement of the relative degree of risk a borrower represents to a lender.
For example, a borrower with a higher credit score is statistically expected to
be less likely to default in payment than a borrower with a lower credit
score. In addition, it should be noted that credit scores were developed to
indicate a level of default probability over a two-year period, which does not
correspond to the life of a mortgage loan. Furthermore, credit scores were not
developed specifically for use in connection with mortgage loans, but for
consumer loans in general, and assess only the borrower's past credit history.
Therefore, a credit score does not take into consideration the differences
between mortgage loans and consumer loans generally, or the specific
characteristics of the related mortgage loan, such as the loan-to-value ratio,
the collateral for the mortgage loan, or the debt to income ratio. There can be
no assurance that the credit scores of the mortgagors will be an accurate
predictor of the likelihood of repayment of the related mortgage loans or that
any mortgagor's credit score would not be lower if obtained as of the date of
the related prospectus supplement.
Once all applicable employment, credit and property information is
received, a determination is made as to whether the prospective borrower has
sufficient monthly income available to meet its monthly obligations on the
proposed mortgage loan and other expenses related to the home, including
property taxes and hazard insurance, and its other financial
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obligations and monthly living expenses. FT Mortgage will generally underwrite
adjustable rate mortgage loans, buy-down mortgage loans, graduated payment
mortgage loans and certain other mortgage loans on the basis of the borrower's
ability to make monthly payments as determined by reference to the mortgage
rates in effect at origination or the reduced initial monthly payments, as the
case may be, and on the basis of an assumption that the borrowers will likely be
able to pay the higher monthly payments that may result from later increases in
the mortgage rates or from later increases in the monthly payments, as the case
may be, at the time of the increase, even though the borrowers may not be able
to make the higher payments at the time of origination. The mortgage rate in
effect from the origination date of an ARM Loan or certain other types of loans
to the first adjustment date generally will be lower, and may be significantly
lower, than the sum of the then applicable index and note margin. Similarly, the
amount of the monthly payment on buy-down mortgage loans and graduated payment
mortgage loans will increase periodically. If the borrowers' incomes do not
increase in an amount commensurate with the increases in monthly payments, the
likelihood of default will increase. In addition, in the case of either
adjustable rate mortgage loans or graduated payment mortgage loans that are
subject to negative amortization, due to the addition of deferred interest the
principal balances of the mortgage loans are more likely to equal or exceed the
value of the underlying mortgaged properties, thereby increasing the likelihood
of defaults and losses. With respect to balloon loans, payment of the balloon
amount will generally depend on the borrower's ability to obtain refinancing or
to sell the mortgaged property before the maturity of the balloon loan, and
there can be no assurance that the borrower will be able to refinance or sell
the mortgaged property before the balloon loan matures.
If so specified in the related prospectus supplement, a mortgage pool may
include mortgage loans that have been underwritten pursuant to a streamlined
documentation refinancing program, as set forth in the Guide. These programs
permit certain mortgage loans to be refinanced with only limited verification or
updating of the underwriting information that was obtained at the time that
the original mortgage loan was originated. For example, a new appraisal of the
mortgaged property may not be required if the refinanced mortgage loan was
originated up to approximately 24 months before the refinancing. In addition,
the mortgagor's income may not be verified, although continued employment is
required to be verified. In certain circumstances, the mortgagor may be
permitted to borrow up to 105% of the outstanding principal amount of the
original mortgage loan. Each mortgage loan underwritten pursuant to this program
will be treated as having been underwritten pursuant to the same underwriting
documentation program as the mortgage loan that it refinanced, including for
purposes of the disclosure in the related prospectus supplement.
The underwriting standards set forth in the Guide will be varied in
appropriate cases, including limited or reduced documentation programs. Certain
limited documentation programs, for example, do not require income, employment
or asset verifications. Generally, in order to be eligible for a limited
documentation program, the loan-to-value ratio must meet applicable guidelines,
the borrower must have a good credit history and the borrower's eligibility for
this type of program may be determined by use of a credit scoring model.
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To the extent the seller fails or is unable to repurchase any mortgage loan
due to a breach of a representation and warranty, neither the depositor, FT
Mortgage nor any other entity will be so obligated. Furthermore, to the extent
that the appraised value of a mortgaged property has declined, the actual loan-
to-value ratio with respect to the related mortgage loan will be higher than the
loan-to-value ratio referenced in the related prospectus supplement.
In its evaluation of mortgage loans which have more than twelve months of
payment experience, FT Mortgage generally places greater weight on payment
history and may take into account market and other economic trends while placing
less weight on underwriting factors generally applied to newly
originated mortgage loans. Mortgage loans seasoned for over twelve months
may be underwritten for purchase by FT Mortgage based on the borrower's credit
score and payment history, with no current income verification, and under an
alternative property valuation method.
The mortgaged properties may be located in states where, in general, a
lender providing credit on a single-family property may not seek a deficiency
judgment against the mortgagor but rather must look solely to the property for
repayment in the event of foreclosure. See "Certain Legal Aspects of the
Mortgage Loans -- Anti-Deficiency Legislation and Other Limitations on
Lenders." FT Mortgage's underwriting standards applicable to all states,
including anti-deficiency states, require that the value of the property being
financed, as indicated by the appraisal, currently supports and is anticipated
to support in the future the outstanding loan balance, although there can be no
assurance that the value of the property will continue to support the loan
balance in the future.
Qualifications of Sellers
Each seller must be an institution experienced in originating and servicing
mortgage loans of the type contained in the related mortgage pool and must
maintain satisfactory facilities to originate and service those mortgage loans.
Representations by Sellers; Repurchases
Each seller will have made representations and warranties in respect of the
mortgage loans sold by it and evidenced by a series of certificates. The
applicable prospectus supplement may specify additional representations and
warranties, but if it does not, the material representations and warranties made
by a seller will, at a minimum, consist of the following:
. that title insurance or, in the case of mortgaged properties located
in areas where title insurance policies are generally not available,
an attorney's certificate of title, and any required hazard insurance
policy and primary mortgage insurance policy were effective at the
origination of each mortgage loan other than cooperative loans, and
that each policy or certificate of title, as
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applicable, remained in effect on the date of purchase of the mortgage
loan from the seller by or on behalf of the depositor;
. that the seller had good title to each mortgage loan and the mortgage
loan was subject to no valid offsets, defenses, counterclaims or
rights of rescission except to the extent that any buydown agreement
described in this prospectus may forgive certain indebtedness of a
mortgagor;
. that each mortgage loan constituted a valid first lien on, or a first
perfected security interest with respect to, the mortgaged property,
subject only to permissible title insurance exceptions, if applicable,
and certain other exceptions described in the pooling and servicing
agreement;
. that there were no delinquent tax or assessment liens against the
mortgaged property; and
. that each mortgage loan was made in compliance with, and is
enforceable under, all applicable local, state and federal laws and
regulations in all material respects.
In addition, if any required payment on a mortgage loan was more than 31
days delinquent at any time during the twelve months before the cut-off date,
the related prospectus supplement shall so indicate.
As to any mortgage loan insured by the FHA or partially guaranteed by the
VA, the seller will represent that it has complied with underwriting policies of
the FHA or the VA, as the case may be.
As indicated in the related pooling and servicing agreement, the
representations and warranties of a seller in respect of a mortgage loan will be
made as of the date of initial issuance of the series of certificates, the
related cut-off date, the date on which the seller sold the mortgage loan to the
depositor or one of its affiliates, or the date of origination of the related
mortgage loan, as the case may be. If representations and warranties are made as
of a date other than the closing date or cut-off date, a substantial period of
time may have elapsed between the other date and the date of initial issuance of
the series of certificates evidencing an interest in the mortgage loan. Since
the representations and warranties of a seller do not address events that may
occur following the sale of a mortgage loan by the seller or following the
origination of the mortgage loan, as the case may be, its repurchase obligation
will not arise if the relevant event that would otherwise have given rise to a
repurchase obligation with respect to a mortgage loan occurs after the date of
sale of the mortgage loan by the seller to the depositor or its affiliates or
after the origination of the mortgage loan, as the case may be. In addition,
certain representations, including the condition of the related mortgaged
property, will be limited to the extent the seller has knowledge and the seller
will be under no obligation to investigate the substance of the
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representation. However, the depositor will not include any mortgage loan in the
trust fund for any series of certificates if anything has come to the
depositor's attention that would cause it to believe that the representations
and warranties of a seller will not be accurate and complete in all material
respects in respect of the mortgage loan as of the date of initial issuance of
the related series of certificates. If the master servicer is also a seller of
mortgage loans with respect to a particular series, the representations will be
in addition to the representations and warranties made by the master servicer in
its capacity as the master servicer.
The trustee, if the master servicer is the seller, or the master servicer
will promptly notify the relevant seller of any breach of any representation or
warranty made by it in respect of a mortgage loan that materially and adversely
affects the interests of the certificateholders in the mortgage loan. The
applicable prospectus supplement may specify that the seller has a different
repurchase obligation, but if it does not, then if the seller cannot cure the
breach within 90 days after notice from the master servicer or the trustee, as
the case may be, then the seller will be obligated to repurchase the mortgage
loan from the trust fund. The applicable prospectus supplement may specify a
different repurchase price, but if it does not, the repurchase price will be
equal to 100% of the outstanding principal balance of the mortgage as of the
date of the repurchase plus accrued interest on it to the first day of the month
in which the purchase price is to be distributed at the mortgage rate, less any
unreimbursed advances or amount payable as related servicing compensation if the
seller is the master servicer with respect to the mortgage loan. If an election
is to be made to treat a trust fund or designated portions of it as a "real
estate mortgage investment conduit" as defined in the Code, the master servicer
or a holder of the related residual certificate will be obligated to pay any
prohibited transaction tax that may arise in connection with the repurchase. The
applicable prospectus supplement may contain different reimbursement options,
but if it does not, the master servicer will be entitled to reimbursement for
payment of any prohibited transaction taxes from the assets of the related trust
fund or from any holder of the related residual certificate. See "Description of
the Certificates -- General" and in the related prospectus supplement. Except in
those cases in which the master servicer is the seller, the master servicer will
be required under the applicable pooling and servicing agreement to enforce this
obligation for the benefit of the trustee and the certificateholders, following
the practices it would employ in its good faith business judgment were it the
owner of the mortgage loan. This repurchase obligation will constitute the sole
remedy available to certificateholders or the trustee for a breach of
representation by a seller.
Neither the depositor nor the master servicer will be obligated to purchase
a mortgage loan if a seller defaults on its obligation to do so, and no
assurance can be given that sellers will carry out their respective repurchase
obligations with respect to mortgage loans. However, to the extent that a breach
of a representation and warranty of a seller may also constitute a breach of a
representation made by the master servicer, the master servicer may have a
repurchase obligation as described under "The Pooling and Servicing Agreement --
Assignment of Mortgage Assets."
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DESCRIPTION OF THE CERTIFICATES
The prospectus supplement relating to the certificates of each series to be
offered under this prospectus will, among other things, set forth for the
certificates, as appropriate:
. a description of the class or classes of certificates and the rate at
which interest will be passed through to holders of each class of
certificates entitled to interest or the method of determining the
amount of interest, if any, to be passed through to each class;
. the initial aggregate certificate balance of each class of
certificates included in the series, the dates on which distributions
on the certificates will be made and, if applicable, the initial and
final scheduled distribution dates for each class;
. information as to the assets comprising the trust fund, including the
general characteristics of the Mortgage Assets included in the trust
fund and, if applicable, the insurance, surety bonds, guaranties,
letters of credit or other instruments or agreements included in the
trust fund, and the amount and source of any reserve fund;
. the circumstances, if any, under which the trust fund may be subject
to early termination;
. the method used to calculate the amount of principal to be
distributed with respect to each class of certificates;
. the order of application of distributions to each of the classes
within the series, whether sequential, pro rata, or otherwise;
. the distribution dates with respect to the series;
. additional information with respect to the plan of distribution of
the certificates;
. whether one or more REMIC elections will be made and designation of
the regular interests and residual interests;
. the aggregate original percentage ownership interest in the trust
fund to be evidenced by each class of certificates;
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. information as to the nature and extent of subordination with respect
to any class of certificates that is subordinate in right of payment
to any other class; and
. information as to the seller, the master servicer and the trustee.
Each series of certificates will be issued pursuant to a pooling and
servicing agreement, dated as of the related cut-off date, among the depositor,
the master servicer and the trustee for the benefit of the holders of the
certificates of the series. The provisions of each pooling and servicing
agreement will vary depending upon the nature of the certificates and the
related trust fund. A form of pooling and servicing agreement is an exhibit to
the Registration Statement of which this prospectus is a part.
The prospectus supplement for a series of certificates will describe any
provision of the pooling and servicing agreement relating to the series that
materially differs from its description contained in this prospectus. The
depositor will provide a copy of the pooling and servicing agreement, without
exhibits, relating to any series without charge upon written request of a holder
of record of a certificate of the series addressed to First Horizon Asset
Securities Inc., 4000 Horizon Way, Irving, Texas 75063, Attention: Secretary.
The following summaries describe material provisions that may appear in the
pooling and servicing agreement.
General
The certificates of each series will be issued in either fully registered
or book-entry form in the authorized denominations specified in the related
prospectus supplement, will evidence specified beneficial ownership interests in
the related trust fund created pursuant to the related pooling and servicing
agreement and will not be entitled to payments in respect of the assets included
in any other trust fund established by the depositor. The applicable prospectus
supplement may provide for guarantees by a governmental entity or other person,
but if it does not, the Mortgage Assets will not be insured or guaranteed by any
governmental entity or other person. Each trust fund will consist of, to the
extent provided in the related pooling and servicing agreement,
. the Mortgage Assets that from time to time are subject to the related
pooling and servicing agreement, excluding any amounts specified in
the related prospectus supplement as a retained interest;
. the assets required to be deposited in the related Certificate
Account from time to time;
. property that secured a mortgage loan and that is acquired on behalf
of the certificateholders by foreclosure or deed in lieu of
foreclosure; and
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. any primary mortgage insurance policies, FHA insurance and VA
guaranties, and any other insurance policies or other forms of credit
enhancement required to be maintained pursuant to the related pooling
and servicing agreement.
If so specified in the related prospectus supplement, a trust fund may also
include one or more of the following: reinvestment income on payments received
on the Mortgage Assets, a reserve fund, a mortgage pool insurance policy, a
special hazard insurance policy, a bankruptcy bond, one or more letters of
credit, a surety bond, guaranties or similar instruments or other agreements.
Each series of certificates will be issued in one or more classes. Each
class of certificates of a series will evidence beneficial ownership of a
specified percentage or portion of future interest payments and a specified
percentage or portion of future principal payments on the Mortgage Assets in the
related trust fund. These specified percentages may be 0%. A series of
certificates may include one or more classes that are senior in right to payment
to one or more other classes of certificates of the series. Certain series or
classes of certificates may be covered by insurance policies, surety bonds or
other forms of credit enhancement, in each case as described in this prospectus
and in the related prospectus supplement. One or more classes of certificates of
a series may be entitled to receive distributions of principal, interest or any
combination of principal and interest. Distributions on one or more classes of a
series of certificates may be made before one or more other classes, after the
occurrence of specified events, in accordance with a schedule or formula, on the
basis of collections from designated portions of the Mortgage Assets in the
related trust fund, or on a different basis, in each case as specified in the
related prospectus supplement. The timing and amounts of the distributions may
vary among classes or over time as specified in the related prospectus
supplement.
Distributions of either or both of principal and interest on the related
certificates will be made by the trustee on each distribution date in proportion
to the percentages specified in the related prospectus supplement. Distributions
will be made monthly, quarterly, semi-annually or at other intervals and on the
dates specified in the prospectus supplement to the persons in whose names the
certificates are registered at the close of business on the dates specified in
the related prospectus supplement. Distributions will be made by check or money
order mailed to the persons entitled to them at the address appearing in the
certificates register maintained for holders of certificates or, if specified in
the related prospectus supplement, in the case of certificates that are of a
certain minimum denomination, upon written request by the certificateholder, by
wire transfer or by another means described in the prospectus supplement;
provided, however, that the final distribution in retirement of the certificates
will be made only upon presentation and surrender of the certificates at the
office or agency of the trustee or other person specified in the notice to
certificateholders of the final distribution.
The certificates will be freely transferable and exchangeable at the
corporate trust office of the trustee as set forth in the related prospectus
supplement. No service charge will be made
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for any registration of exchange or transfer of certificates of any series, but
the trustee may require payment of a sum sufficient to cover any related tax or
other governmental charge.
Under current law the purchase and holding by or on behalf of any employee
benefit plan or other retirement arrangement subject to provisions of ERISA or
the Code of certain classes of certificates may result in "prohibited
transactions" within the meaning of ERISA and the Code. See "ERlSA
Considerations." Retirement arrangements subject to these provisions include
individual retirement accounts and annuities, Keogh plans and collective
investment funds in which the plans, accounts or arrangements are invested. The
applicable prospectus supplement may specify other conditions under which
transfers of this type would be permitted, but if it does not, transfer of the
certificates will not be registered unless the transferee represents that it is
not, and is not purchasing on behalf of, a plan, account or other retirement
arrangement or provides an opinion of counsel satisfactory to the trustee and
the depositor that the purchase of the certificates by or on behalf of a plan,
account or other retirement arrangement is permissible under applicable law and
will not subject the trustee, the master servicer or the depositor to any
obligation or liability in addition to those undertaken in the pooling and
servicing agreement.
As to each series, an election may be made to treat the related trust fund
or designated portions of it as a REMIC. The related prospectus supplement will
specify whether a REMIC election is to be made. Alternatively, the pooling and
servicing agreement for a series may provide that a REMIC election may be made
at the discretion of the depositor or the master servicer and may be made only
if certain conditions are satisfied. The terms applicable to the making of a
REMIC election, as well as any material federal income tax consequences to
certificateholders not described in this prospectus, will be set forth in the
related prospectus supplement. If a REMIC an election is made with respect to a
series, one of the classes will be designated as evidencing the sole class of
"residual interests" in the related REMIC, as defined in the Code. All other
classes of certificates in the series will constitute "regular interests" in the
related REMIC, as defined in the Code. As to each series with respect to which a
REMIC election is to be made, the master servicer or a holder of the related
residual certificate will be obligated to take all actions required to comply
with applicable laws and regulations and will be obligated to pay any prohibited
transaction taxes. See "Material Federal Income Tax Consequences." The
applicable prospectus supplement may restrict the master servicer's
reimbursement rights, but if it does not, the master servicer will be entitled
to reimbursement for payment of any prohibited transaction taxes from the assets
of the trust fund or from any holder of the related residual certificate.
Distributions on Certificates
General. In general, the method of determining the amount of distributions
on a particular series of certificates will depend on the type of credit
support, if any, that is used with respect to the series. See "Credit
Enhancement" in this prospectus and in the related prospectus supplement.
Various methods that may be used to determine the amount of distributions on the
certificates of a particular series. The prospectus supplement for each series
of certificates will
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describe the method to be used in determining the amount of distributions on the
certificates of its series.
Distributions allocable to principal of and interest on the certificates
will be made by the trustee out of, and only to the extent of, funds in the
related Certificate Account, including any funds transferred from any reserve
fund. Distributions of principal and interest made in respect of a class of
certificates on any distribution date will be applied in the manner specified in
the related prospectus supplement. The applicable prospectus supplement may
provide for payment distinctions within classes, but if it does not,
distributions to any class of certificates will be made pro rata to all
certificateholders of that class.
Available Funds. All distributions on the certificates of each series on
each distribution date will be made from the Available Funds, in accordance with
the terms described in the related prospectus supplement and specified in the
pooling and servicing agreement. The applicable prospectus supplement may define
Available Funds with reference to different accounts or different amounts, but
if it does not, "Available Funds" for each distribution date will generally
equal the amount on deposit in the related Certificate Account on the
distribution date, net of related fees and expenses payable by the related trust
fund, other than amounts to be held in the Certificate Account for distribution
on future distribution dates.
Distributions of Interest. Interest will accrue on the class certificate
balance or in the case of certificates entitled only to distributions allocable
to interest, the aggregate notional amount, of each class of certificates
entitled to interest at the pass-through rate from the date and for the periods
specified in the prospectus supplement. The pass-through rate for a class of
certificates may be a fixed rate or an adjustable rate, as specified in the
related prospectus supplement. To the extent funds are available therefor,
interest accrued during each specified period on each class of certificates
entitled to interest, other than a class of accrual certificates that provide
for interest that accrues but is not currently payable, will be distributable on
the distribution dates specified in the related prospectus supplement until the
class certificate balance of the class has been distributed in full. In the case
of certificates entitled only to distributions allocable to interest, interest
accrued during each specified period will be distributable on the distribution
dates specified in the related prospectus supplement until the aggregate
notional amount of the certificates is reduced to zero or for the period of time
designated in the related prospectus supplement. The original certificate
balance of each certificate will equal the aggregate distributions allocable to
principal to which the certificate is entitled. The applicable prospectus
supplement may specify some other basis for these distributions, but if it does
not, distributions allocable to interest on each interest only certificate will
be calculated based on the notional amount of the certificate. The notional
amount of an interest only certificate will not evidence an interest in or
entitlement to distributions allocable to principal but will be used solely for
convenience in expressing the calculation of interest and for certain other
purposes.
With respect to any class of accrual certificates, any interest that has
accrued but is not paid on a given distribution date will be added to the class
certificate balance of that class on that
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distribution date. The applicable prospectus supplement may specify some other
basis for these distributions, but if it does not, distributions of interest on
each class of accrual certificates will commence only after the occurrence of
the events specified in the prospectus supplement and, before that time, the
beneficial ownership interest of that class in the trust fund, as reflected in
its class certificate balance, will increase on each distribution date by the
amount of interest that accrued on that class during the preceding interest
accrual period but that was not required to be distributed to that class on the
distribution date. The class of accrual certificates will thereafter accrue
interest on its outstanding class certificate balance as so adjusted.
Distributions of Principal. The related prospectus supplement will specify
the method by which the amount of principal to be distributed on the
certificates on each distribution date will be calculated and the manner in
which that amount will be allocated among the classes of certificates entitled
to distributions of principal. The class certificate balance of any class of
certificates entitled to distributions of principal will be the original class
certificate balance of that class as specified in the prospectus supplement,
reduced by all distributions reported to the holders of the certificates as
allocable to principal and in the case of accrual certificates, unless otherwise
specified in the related prospectus supplement, increased by all interest
accrued but not then distributable on the accrual certificates and in the case
of adjustable rate certificates, unless otherwise specified in the related
prospectus supplement, subject to the effect of negative amortization. The
related prospectus supplement will specify the method by which the amount of
principal to be distributed on the certificates on each distribution date will
be calculated and the manner in which that amount will be allocated among the
classes of certificates entitled to distributions of principal.
A series of certificates may include one or more classes of senior
certificates and one or more classes of subordinated certificates. If so
provided in the related prospectus supplement, one or more classes of senior
certificates will be entitled to receive all or a disproportionate percentage of
the payments of principal that are received from borrowers in advance of their
scheduled due dates and are not accompanied by amounts representing scheduled
interest due after the month of the payments in the percentages and under the
circumstances or for the periods specified in the prospectus supplement. Any
disproportionate allocation of these principal prepayments to senior
certificates will have the effect of accelerating the amortization of the senior
certificates while increasing the interests evidenced by the subordinated
certificates in the trust fund. Increasing the interests of the subordinated
certificates relative to that of the senior certificates is intended to preserve
the availability of the subordination provided by the subordinated certificates.
See "Credit Enhancement -- Subordination" in this prospectus and "Credit
Enhancement -- Subordination of the Subordinated Certificates" in the prospectus
supplement.
Unscheduled Distributions. If specified in the related prospectus
supplement, the certificates will be subject to receipt of distributions before
the next scheduled distribution date. If applicable, the trustee will be
required to make unscheduled distributions on the day and in the amount
specified in the related prospectus supplement if, due to substantial payments
of
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principal, including principal prepayments, on the Mortgage Assets, the trustee
or the master servicer determines that the funds available or anticipated to be
available from the Certificate Account and, if applicable, any reserve fund, may
be insufficient to make required distributions on the certificates on the
distribution date. The applicable prospectus supplement may specify some other
basis for these distributions, but if it does not, the amount of the unscheduled
distribution that is allocable to principal will not exceed the amount that
would otherwise have been required to be distributed as principal on the
certificates on the next distribution date. The applicable prospectus supplement
may provide that unscheduled distributions will not include interest or that
interest will be computed on a different basis, but if it does not, all
unscheduled distributions will include interest at the applicable pass-through
rate on the amount of the unscheduled distribution allocable to principal for
the period and to the date specified in the prospectus supplement.
Advances
To the extent provided in the related prospectus supplement, the master
servicer will be required to advance on or before each distribution date, an
amount equal to the aggregate of payments of principal and interest that were
delinquent on the related Determination Date, subject to the master servicer's
determination that the advances will be recoverable out of late payments by
obligors on the Mortgage Assets, liquidation proceeds, insurance proceeds not
used to restore the property or otherwise. The master servicer will make
advances from its own funds, or from funds advanced by sub-servicers or held in
the Certificate Account for future distributions to certificateholders. In the
case of cooperative loans, the master servicer also will be required to advance
any unpaid maintenance fees and other charges under the related proprietary
leases as specified in the related prospectus supplement.
In making advances, the master servicer will endeavor to maintain a regular
flow of scheduled interest and principal payments to certificateholders, rather
than to guarantee or insure against losses. If advances are made by the master
servicer from cash being held for future distribution to certificateholders, the
master servicer will replace the funds on or before any future distribution date
to the extent that funds in the applicable Certificate Account on the
distribution date would be less than the amount required to be available for
distributions to certificateholders on the distribution date. Any advances will
be reimbursable to the master servicer out of recoveries on the specific
Mortgage Assets with respect to which the advances were made. These recoveries
may include late payments made by the related obligors, any related insurance
proceeds, liquidation proceeds or proceeds of any mortgage loan repurchased by
the depositor, a sub-servicer or a seller pursuant to the related pooling and
servicing agreement. In addition, advances by the master servicer or sub-
servicer also will be reimbursable to the master servicer or a sub-servicer from
cash otherwise distributable to certificateholders to the extent that the master
servicer determines that the advances previously made are not ultimately
recoverable as described in the preceding sentence. The master servicer also
will be obligated to make advances, to the extent recoverable out of insurance
proceeds not used to restore the property, liquidation proceeds or otherwise,
for certain taxes and insurance premiums
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not paid by mortgagors on a timely basis. Funds so advanced are reimbursable to
the master servicer to the extent permitted by the pooling and servicing
agreement. If specified in the related prospectus supplement, the obligations of
the master servicer to make advances may be supported by a cash advance reserve
fund, a surety bond or other arrangement, in each case as described in the
prospectus supplement.
Reports to Certificateholders
The applicable prospectus supplement may specify different items to be
reported, but if it does not, before or concurrently with each distribution on a
distribution date the master servicer or the trustee will furnish to each
certificateholder of record of the related series a statement setting forth, to
the extent applicable to the series of certificates, among other things:
. the amount of the distribution allocable to principal;
. the amount of the distribution allocable to interest and the amount,
if any, of any shortfall in the amount of interest and principal;
. the amount of any advance;
. the aggregate amount withdrawn from the reserve fund, if any, that is
included in the amounts distributed to the certificateholders;
. the class certificate balance or notional amount of each class of the
related series after giving effect to the distribution of principal on the
distribution date;
. the aggregate unpaid principal balance of the mortgage loans after
giving effect to the distribution of principal on the distribution date;
. the number and aggregate principal balances of mortgage loans in the
related mortgage pool that are delinquent (a) one month, (b) two months and
(c) three months, and that are in foreclosure;
. the book value of any real estate acquired by the trust through
foreclosure or grant of a deed in lieu of foreclosure;
. if applicable, the amount remaining in the reserve fund at the close
of business on the distribution date;
. any amounts remaining under letters of credit, pool policies or other
forms of credit enhancement; and
. the servicing fee payable to the master servicer and any subservicer,
if applicable.
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Where applicable, any amount set forth above may be expressed as a dollar
amount per single certificate of the relevant class having the percentage
interest specified in the related prospectus supplement. The report to
certificateholders for any series of certificates may include additional or
other information of a similar nature to that specified above.
In addition, within a reasonable period of time after the end of each
calendar year, the master servicer or the trustee will mail to each
certificateholder of record at any time during the calendar year a report as to
the aggregate of amounts reported pursuant to the first two bulleted items for
the calendar year or, if the person was a certificateholder of record during a
portion of the calendar year, for the applicable portion of the year and other
customary information deemed appropriate for certificateholders to prepare their
tax returns.
Categories of Classes of Certificates
In general, classes of pass-through certificates fall into different
categories. The following chart identifies and generally defines the more
typical categories. The prospectus supplement for a series of certificates may
identify the classes which comprise the series by reference to the following
categories.
CATEGORIES OF CLASSES DEFINITION
--------------------- ----------
Principal Types
Accretion Directed............. A class that receives principal payments from
the accreted interest from specified accrual
classes. An accretion directed class also may
receive principal payments from principal paid
on the underlying Mortgage Assets or other
assets of the trust fund for the related series.
Component Certificates......... A class consisting of "components." The
components of a class of component certificates
may have different principal and interest
payment characteristics but together constitute
a single class. Each component of a class of
component certificates may be identified as
falling into one or more of the categories in
this chart.
Notional Amount Certificates... A class having no principal balance and bearing
interest on the related notional amount. The
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CATEGORIES OF CLASSES DEFINITION
--------------------- ----------
notional amount is used for purposes of the
determination of interest distributions.
Planned Principal Class or PACs.. A class that is designed to receive principal
payments using a predetermined principal
balance schedule derived by assuming two
constant prepayment rates for the underlying
Mortgage Assets. These two rates are the
endpoints for the structuring range for the
planned principal class. The planned principal
classes in any series of certificates may be
subdivided into primary planned principal
classes, secondary planned principal classes
and so forth, and may have different effective
structuring ranges and different principal
payment priorities. The structuring range for
the secondary planned principal class of a
series of certificates will be narrower than
that for the primary planned principal class
of the series.
Scheduled Principal Class........ A class that is designed to receive principal
payments using a predetermined principal
balance schedule but is not designated as a
planned principal class or targeted principal
class. In many cases, the schedule is derived
by assuming two constant prepayment rates for
the underlying Mortgage Assets. These two
rates are the endpoints for the structuring
range for the scheduled principal class.
Sequential Pay................... Classes that receive principal payments in a
prescribed sequence, that do not have
predetermined principal balance schedules and
that under all circumstances receive payments
of principal continuously from the first
distribution date on which they receive
principal until they are retired. A single
class that receives principal payments before
or after all other classes in the same series
of certificates may be identified as a
sequential pay class.
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CATEGORIES OF CLASSES DEFINITION
--------------------- ----------
Strip................................... A class that receives a constant
proportion, or strip, of the principal
payments on the underlying Mortgage
Assets or other assets of the trust
fund.
Support Class (also sometimes
referred to as companion classes)...... A class that receives principal
payments on any distribution date only
if scheduled payments have been made on
specified planned principal classes,
targeted principal classes or scheduled
principal classes.
Targeted Principal Class or TACs........ A class that is designed to receive
principal payments using a
predetermined principal balance
schedule derived by assuming a single
constant prepayment rate for the
underlying Mortgage Assets.
Interest Types
Fixed Rate.............................. A class with an interest rate that is
fixed throughout the life of the class.
Floating Rate........................... A class with an interest rate that
resets periodically based upon a
designated index and that varies
inversely with changes in the index.
Inverse Floating Rate................... A class with an interest rate that
resets periodically based upon a
designated index and that varies
directly with changes in the index.
Variable Rate........................... A class with an interest rate that
resets periodically and is calculated
by reference to the rate or rates of
interest applicable to specified assets
or instruments, including the mortgage
rates borne by the underlying mortgage
loans.
Interest Only........................... A class that receives some or all of
the interest payments made on the
underlying Mortgage Assets or other
assets of the trust fund and little or
no principal. Interest only classes
have either a nominal principal balance
or a notional amount. A
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CATEGORIES OF CLASSES DEFINITION
--------------------- ----------
nominal principal balance represents
actual principal that will be paid on
the class. It is referred to as nominal
since it is extremely small compared to
other classes. A notional amount is the
amount used as a reference to calculate
the amount of interest due on an
interest only class that is not
entitled to any distributions of
principal.
Principal Only.......................... A class that does not bear interest and
is entitled to receive only
distributions of principal.
Partial Accrual......................... A class that accretes a portion of the
amount of accrued interest on it, which
amount will be added to the principal
balance of the class on each applicable
distribution date, with the remainder
of the accrued interest to be
distributed currently as interest on
the class. The accretion may continue
until a specified event has occurred or
until the partial accrual class is
retired.
Accrual................................. A class that accretes the amount of
accrued interest otherwise
distributable on the class, which
amount will be added as principal to
the principal balance of the class on
each applicable distribution date. The
accretion may continue until some
specified event has occurred or until
the accrual class is retired.
Indices Applicable to Floating Rate and Inverse Floating Rate Classes
LIBOR. The applicable prospectus supplement may specify some other basis
for determining LIBOR, but if it does not, on the LIBOR determination date for
each class of certificates of a series for which the applicable interest rate is
determined by reference to LIBOR, the person designated in the related pooling
and servicing agreement as the calculation agent will determine LIBOR in
accordance with the LIBO Method or the BBA Method, each as described below,
which method will be specified in the related prospectus supplement:
LIBO Method. If using this method to calculate LIBOR, the calculation
agent will determine LIBOR by reference to the quotations, as set forth on
the Reuters Screen LIBO Page, offered by the principal London office of
each of the designated reference banks
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meeting the criteria set forth in this prospectus for making one-month
United States dollar deposits in leading banks in the London Interbank
market, as of 11:00 a.m. London time on the LIBOR determination date. In
lieu of relying on the quotations for those reference banks that appear at
the time on the Reuters Screen LIBO Page, the calculation agent will
request each of the reference banks to provide the offered quotations at
the time.
Under this method LIBOR will be established by the calculation agent
on each LIBOR determination date as follows:
. If on any LIBOR determination date two or more reference banks
provide offered quotations, LIBOR for the next interest accrual
period shall be the arithmetic mean of the offered quotations,
rounded upwards if necessary to the nearest whole multiple of
1/32%.
. If on any LIBOR determination date only one or none of the
reference banks provides offered quotations, LIBOR for the next
interest accrual period shall be whichever is the higher of LIBOR
as determined on the previous LIBOR determination date or the
reserve interest rate. The reserve interest rate shall be the
rate per annum which the calculation agent determines to be
either the arithmetic mean, rounded upwards if necessary to the
nearest whole multiple of 1/32%, of the one-month United States
dollar lending rates that New York City banks selected by the
calculation agent are quoting, on the relevant LIBOR
determination date, to the principal London offices of at least
two of the reference banks to which the quotations are, in the
opinion of the calculation agent being so made, or if the
calculation agent cannot determine the arithmetic mean, the
lowest one-month United States dollar lending rate which New York
City banks selected by the calculation agent are quoting on the
LIBOR determination date to leading European banks.
. If on any LIBOR determination date for a class specified in the
related prospectus supplement, the calculation agent is required
but is unable to determine the reserve interest rate in the
manner provided in the previous paragraph, LIBOR for the next
interest accrual period shall be LIBOR as determined on the
preceding LIBOR determination date, or, in the case of the first
LIBOR determination date, LIBOR shall be considered to be the per
annum rate specified in the related prospectus supplement.
Each reference bank shall be a leading bank engaged in transactions in
Eurodollar deposits in the international Eurocurrency market; shall not
control, be controlled by, or be under common control with the calculation
agent; and shall have an established place of business in London. If
reference bank should be unwilling or unable to so act, or if appointment
of a reference bank is terminated, another leading bank meeting the
criteria specified above will be appointed.
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BBA Method. If using this method of determining LIBOR, the
calculation agent will determine LIBOR on the basis of the British Bankers'
Association "Interest Settlement Rate" for one-month deposits in United
States dollars as found on Telerate page 3750 as of 11:00 a.m. London time
on each LIBOR determination date. Interest Settlement Rates currently are
based on rates quoted by eight British Bankers' Association designated
banks as being, in the view of the banks, the offered rate at which
deposits are being quoted to prime banks in the London interbank market.
The Interest Settlement Rates are calculated by eliminating the two highest
rates and the two lowest rates, averaging the four remaining rates,
carrying the result, expressed as a percentage, out to six decimal places,
and rounding to five decimal places.
If on any LIBOR determination date, the calculation agent is unable to
calculate LIBOR in accordance with the method set forth in the immediately
preceding paragraph, LIBOR for the next interest accrual period shall be
calculated in accordance with the LIBOR method described under "LIBO Method."
The establishment of LIBOR on each LIBOR determination date by the
calculation agent and its calculation of the rate of interest for the applicable
classes for the related interest accrual period shall, in the absence of
manifest error, be final and binding.
COFI. The Eleventh District Cost of Funds Index is designed to represent
the monthly weighted average cost of funds for savings institutions in Arizona,
California and Nevada that are member institutions of the Eleventh District. The
Eleventh District Cost of Funds Index for a particular month reflects the
interest costs paid on all types of funds held by Eleventh District member
institutions and is calculated by dividing the cost of funds by the average of
the total amount of those funds outstanding at the end of that month and of the
prior month and annualizing and adjusting the result to reflect the actual
number of days in the particular month. If necessary, before these calculations
are made, the component figures are adjusted by the FHLBSF to neutralize the
effect of events such as member institutions leaving the Eleventh District or
acquiring institutions outside the Eleventh District. The Eleventh District Cost
of Funds Index is weighted to reflect the relative amount of each type of funds
held at the end of the relevant month. The major components of funds of Eleventh
District member institutions are: savings deposits, time deposits, FHLBSF
advances, repurchase agreements and all other borrowings. Because the component
funds represent a variety of maturities whose costs may react in different ways
to changing conditions, the Eleventh District Cost of Funds Index does not
necessarily reflect current market rates.
A number of factors affect the performance of the Eleventh District Cost of
Funds Index, which may cause it to move in a manner different from indices tied
to specific interest rates, such as United States Treasury Bills or LIBOR.
Because the liabilities upon which the Eleventh District Cost of Funds Index is
based were issued at various times under various market conditions and with
various maturities, the Eleventh District Cost of Funds Index may not
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necessarily reflect the prevailing market interest rates on new liabilities of
similar maturities. Moreover, as stated above, the Eleventh District Cost of
Funds Index is designed to represent the average cost of funds for Eleventh
District savings institutions for the month before the month in which it is due
to be published. Additionally, the Eleventh District Cost of Funds Index may not
necessarily move in the same direction as market interest rates at all times,
since as longer term deposits or borrowings mature and are renewed at prevailing
market interest rates, the Eleventh District Cost of Funds Index is influenced
by the differential between the prior and the new rates on those deposits or
borrowings. In addition, movements of the Eleventh District Cost of Funds Index,
as compared to other indices tied to specific interest rates, may be affected by
changes instituted by the FHLBSF in the method used to calculate the Eleventh
District Cost of Funds Index.
The FHLBSF publishes the Eleventh District Cost of Funds Index in its
monthly Information Bulletin. Any individual may request regular receipt by mail
of Information Bulletins by writing the Federal Home Loan Bank of San Francisco,
P.O. Box 7948, 600 California Street, San Francisco, California 94120, or by
calling (415) 616-1000. The Eleventh District Cost of Funds Index may also be
obtained by calling the FHLBSF at (415) 616-2600.
The FHLBSF has stated in its Information Bulletin that the Eleventh
District Cost of Funds Index for a month will be announced on or near the last
working day of the following month and also has stated that it cannot guarantee
the announcement of the index on an exact date. So long as the index for a month
is announced on or before the tenth day of the second following month, the
interest rate for each class of certificates of a series for which the
applicable interest rate is determined by reference to an index denominated as
COFI for the interest accrual period commencing in the second following month
will be based on the Eleventh District Cost of Funds Index for the second
preceding month. If publication is delayed beyond the tenth day, the interest
rate will be based on the Eleventh District Cost of Funds Index for the third
preceding month.
The applicable prospectus supplement may specify some other basis for
determining COFI, but if it does not, then if on the tenth day of the month in
which any interest accrual period commences for a class of COFI certificates the
most recently published Eleventh District Cost of Funds Index relates to a month
before the third preceding month, the index for the current interest accrual
period and for each succeeding interest accrual period will, except as described
in the next to last sentence of this paragraph, be based on the National Cost of
Funds Index published by the OTS for the third preceding month, or the fourth
preceding month, if the National Cost of Funds Index for the third preceding
month has not been published on the tenth day of an interest accrual period.
Information on the National Cost of Funds Index may be obtained by writing the
OTS at 1700 G Street, N.W., Washington, D.C. 20552 or calling (202) 906-6677,
and the current National Cost of Funds Index may be obtained by calling (202)
906-6988. If on the tenth day of the month in which an interest accrual period
commences the most recently published National Cost of Funds Index relates to a
month before the fourth preceding month, the applicable index for the interest
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accrual period and each succeeding interest accrual period will be based on
LIBOR, as determined by the calculation agent in accordance with the pooling and
servicing agreement relating to the series of certificates. A change of index
from the Eleventh District Cost of Funds Index to an alternative index will
result in a change in the index level and could increase its volatility,
particularly if LIBOR is the alternative index.
The establishment of COFI by the calculation agent and its calculation of
the rates of interest for the applicable classes for the related interest
accrual period shall, in the absence of manifest error, be final and binding.
Treasury Index. The applicable prospectus supplement may specify some other
basis for determining and defining the Treasury index, but if it does not, on
the Treasury index determination date for each class of certificates of a series
for which the applicable interest rate is determined by reference to an index
denominated as a Treasury index, the calculation agent will ascertain the
Treasury index for Treasury securities of the maturity and for the period or, if
applicable, the date specified in the related prospectus supplement. The
Treasury index for any period means the average of the yield for each business
day during the specified period and for any date, the yield for the date,
expressed as a per annum percentage rate, on U.S. Treasury securities adjusted
to the "constant maturity" specified in the prospectus supplement or if no
"constant maturity" is so specified, U.S. Treasury securities trading on the
secondary market having the maturity specified in the prospectus supplement, in
each case as published by the Federal Reserve Board in its Statistical Release
No. H.15 (519). Statistical Release No. H.15 (519) is published on Monday or
Tuesday of each week and may be obtained by writing or calling the Publications
Department at the Board of Governors of the Federal Reserve System, 21st and C
Streets, Washington, D.C. 20551 (202) 452-3244. If the calculation agent has not
yet received Statistical Release No. H.15 (519) for a week, then it will use the
Statistical Release from the preceding week.
Yields on U.S. Treasury securities at "constant maturity" are derived from
the U.S. Treasury's daily yield curve. This curve, which relates the yield on a
security to its time to maturity, is based on the closing market bid yields on
actively traded Treasury securities in the over-the-counter market. These market
yields are calculated from composites of quotations reported by five leading
U.S. Government securities dealers to the Federal Reserve Bank of New York. This
method provides a yield for a given maturity even if no security with that exact
maturity is outstanding. If the Treasury index is no longer published, a new
index based upon comparable data and methodology will be designated in
accordance with the pooling and servicing agreement relating to the particular
series of certificates. The calculation agent's determination of the Treasury
index, and its calculation of the rates of interest for the applicable classes
for the related interest accrual period shall, in the absence of manifest error,
be final and binding.
Prime Rate. The applicable prospectus supplement may specify some other
basis for determining and defining the prime rate, but if it does not, on the
prime rate determination date for each class of certificates of a series for
which the applicable interest rate is determined by
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reference to an index denominated as the prime rate, the calculation agent will
ascertain the prime rate for the related interest accrual period. The prime rate
for an interest accrual period will be the "prime rate" as published in the
"Money Rates" section of The Wall Street Journal on the related prime rate
determination date, or if not so published, the "prime rate" as published in a
newspaper of general circulation selected by the calculation agent in its sole
discretion. If a prime rate range is given, then the average of the range will
be used. If the prime rate is no longer published, a new index based upon
comparable data and methodology will be designated in accordance with the
pooling and servicing agreement relating to the particular series of
certificates. The calculation agent's determination of the prime rate and its
calculation of the rates of interest for the related interest accrual period
shall, in the absence of manifest error, be final and binding.
Book-Entry Certificates
If so specified in the related prospectus supplement, one or more classes
of the certificates of any series may be initially issued through the book-entry
facilities of The Depository Trust Company. Each class of book-entry
certificates of a series will be issued in one or more certificates which equal
the aggregate initial class certificate balance of each class and which will be
held by a nominee of the depository. The applicable prospectus supplement may
specify other procedures for book-entry certificates, but if it does not, the
following generally describes the procedures that will be applicable to any
class of book-entry certificates.
Beneficial interests in the book-entry certificates of a series will be
held indirectly by investors through the book-entry facilities of the
depository, as described in this prospectus. Accordingly, the depository or its
nominee is expected to be the holder of record of the book-entry certificates.
Except as described below, no person acquiring a beneficial interest in a book-
entry certificate will be entitled to receive a physical certificate
representing the certificate.
The beneficial owner's ownership of a book-entry certificate will be
recorded on the records of the brokerage firm, bank, thrift institution or other
financial intermediary that maintains the beneficial owner's account for that
purpose. In turn, the financial intermediary's ownership of a book-entry
certificate will be recorded on the records of the depository or of a
participating firm that acts as agent for the financial intermediary whose
interest will be recorded on the records of the depository, if the beneficial
owner's financial intermediary is not a depository participant. Therefore, the
beneficial owner must rely on the foregoing procedures to evidence its
beneficial ownership of a book-entry certificate. Beneficial ownership of a
book-entry certificate may only be transferred by compliance with the procedures
of the financial intermediaries and depository participants.
In accordance with its normal procedures, the depository is expected to
record the positions held by each depository participant in the book-entry
certificates, whether held for its own account or as a nominee for another
person. In general, beneficial ownership of book-entry
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certificates will be subject to the rules, regulations and procedures governing
the depository and depository participants as in effect from time to time.
Distributions on the book-entry certificates will be made on each
distribution date by the trustee to the depository. The depository will be
responsible for crediting the amount of the payments to the accounts of the
applicable depository participants in accordance with the depository's normal
procedures. Each depository participant will be responsible for disbursing the
payments to the beneficial owners of the book-entry certificates that it
represents and to each financial intermediary for which it acts as agent. Each
financial intermediary will be responsible for disbursing funds to the
beneficial owners of the book-entry certificates that it represents.
Under a book-entry format, beneficial owners of the book-entry certificates
may experience some delay in their receipt of payments, since payments will be
forwarded by the trustee to the depository or its nominee, as the case may be,
as holder of record of the book-entry certificates. Because the depository can
act only on behalf of financial intermediaries, the ability of a beneficial
owner to pledge book-entry certificates to persons or entities that do not
participate in the depository system, or otherwise take actions in respect of
the book-entry certificates, may be limited due to the lack of physical
certificates for the book-entry certificates. In addition, issuance of the book-
entry certificates in book-entry form may reduce the liquidity of the
certificates in the secondary market since some potential investors may be
unwilling to purchase certificates for which they cannot obtain physical
certificates.
Until definitive certificates are issued, it is anticipated that the only
"certificateholder" of the book-entry certificates will be the depository or its
nominee. Beneficial owners of the book-entry certificates will not be
certificateholders, as that term will be used in the pooling and servicing
agreement relating to the series of certificates. Beneficial owners are only
permitted to exercise the rights of certificateholders indirectly through
financial intermediaries and the depository. Monthly and annual reports on the
related trust fund provided to the depository or its nominee, as the case may
be, as holder of record of the book-entry certificates, may be made available to
beneficial owners upon request, in accordance with the rules, regulations and
procedures creating and affecting the depository, and to the financial
intermediaries to whose depository accounts the book-entry certificates of the
beneficial owners are credited.
Until definitive certificates are issued, the depository will take any
action permitted to be taken by the holders of the book-entry certificates of a
particular series under the related pooling and servicing agreement only at the
direction of one or more financial intermediaries to whose depository accounts
the book-entry certificates are credited to the extent that the actions are
taken on behalf of financial intermediaries whose holdings include the book-
entry certificates.
The applicable prospectus supplement may when and for what reasons
definitive certificates may be issued, but if it does not, definitive
certificates will be issued to beneficial owners of book-entry certificates or
their nominees, rather than to the depository, only if
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. the depository or the depositor advises the trustee in writing that the
depository is no longer willing, qualified or able to discharge properly
its responsibilities as nominee and depository with respect to the book-
entry certificates and the depositor or the trustee is unable to locate
a qualified successor;
. the depositor, at its sole option, elects to terminate the book-entry
system through the depository; or
. after the occurrence of an event of default, beneficial owners of
certificates representing not less than 51% of the aggregate percentage
interests evidenced by each class of certificates of the related series
issued as book-entry certificates advise the trustee and the depository
through the financial intermediaries in writing that the continuation of
a book-entry system through the depository, or a successor to it, is no
longer in the best interests of the beneficial owners.
Upon the occurrence of any of these events, the trustee will be required to
notify all beneficial owners of the occurrence of the event and the availability
of definitive certificates. Upon surrender by the depository of the global
certificate or certificates representing the book-entry certificates and
instructions for re-registration, the trustee will issue the definitive
certificates, and thereafter the trustee will recognize the holders of the
definitive certificates as certificateholders under the pooling and servicing
agreement relating to the series of certificates.
CREDIT ENHANCEMENT
General
Credit enhancement may be provided for one or more classes of a series of
certificates or with respect to the Mortgage Assets in the related trust fund.
Credit enhancement may be in the form of one or any combination of the
following:
. subordination of other classses of certificates of the same series;
. a limited guarantee;
. a financial guaranty insurance policy;
. a surety bond;
. a letter of credit;
. a pool insurance policy;
. a special hazard insurance policy;
. a mortgagor bankruptcy bond;
. a reserve fund;
. cross support;
. overcollateralization; or
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. any other form of credit enhancement described in the related
prospectus supplement.
Credit enhancement may not provide protection against all risks of loss or
guarantee repayment of the entire principal balance of the certificates and
interest on them. If losses occur which exceed the amount covered by credit
enhancement or which are not covered by the credit enhancement,
certificateholders will bear their allocable share of any deficiencies.
Subordination
If so specified in the related prospectus supplement, the rights of holders
of one or more classes of subordinated certificates will be subordinate to the
rights of holders of one or more other classes of senior certificates of the
series to distributions of scheduled principal, principal prepayments, interest
or any combination of them that otherwise would have been payable to holders of
subordinated certificates under the circumstances and to the extent specified in
the related prospectus supplement. If specified in the related prospectus
supplement, delays in receipt of scheduled payments on the Mortgage Assets and
losses with respect to the Mortgage Assets will be borne first by the various
classes of subordinated certificates and thereafter by the various classes of
senior certificates, in each case under the circumstances and subject to the
limitations specified in the related prospectus supplement. The aggregate
distributions of delinquent payments on the Mortgage Assets over the lives of
the certificates or at any time, the aggregate losses on Mortgage Assets which
must be borne by the subordinated certificates by virtue of subordination and
the amount of the distributions otherwise distributable to the subordinated
certificateholders that will be distributable to senior certificateholders on
any distribution date may be limited as specified in the related prospectus
supplement. If aggregate distributions of delinquent payments on the Mortgage
Assets or aggregate losses on the Mortgage Assets were to exceed the amount
specified in the related prospectus supplement, senior certificateholders would
experience losses on the certificates.
If specified in the related prospectus supplement, various classes of
senior certificates and subordinated certificates may themselves be subordinate
in their right to receive certain distributions to other classes of senior and
subordinated certificates, respectively, through a cross support mechanism or
otherwise.
As between classes of senior certificates and as between classes of
subordinated certificates, distributions may be allocated among the classes in
the order of their scheduled final distribution dates, in accordance with a
schedule or formula, in relation to the occurrence of events, or otherwise, in
each case as specified in the related prospectus supplement. As between classes
of subordinated certificates, payments to senior certificateholders on account
of delinquencies or losses and payments to the reserve fund will be allocated as
specified in the related prospectus supplement.
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Mortgage Pool Insurance Policies
If specified in the related prospectus supplement relating to a mortgage
pool, a separate mortgage pool insurance policy will be obtained for the
mortgage pool and issued by the insurer named in the prospectus supplement. Each
mortgage pool insurance policy will, subject to policy limitations, cover loss
from default in payment on mortgage loans in the mortgage pool in an amount
equal to a percentage specified in the prospectus supplement of the aggregate
principal balance of the mortgage loans on the cut-off date that are not covered
as to their entire outstanding principal balances by primary mortgage insurance
policies. As more fully described below, the master servicer will present claims
under the insurance to the pool insurer on behalf of itself, the trustee and the
certificateholders. The mortgage pool insurance policies, however, are not
blanket policies against loss, since claims under them may be made only for
particular defaulted mortgage loans and only upon satisfaction of conditions
precedent in the policy. The applicable prospectus supplement may specify that
mortgage pool insurance will cover the failure to pay or the denial of a claim
under a primary mortgage insurance policy, but if it does not, the mortgage pool
insurance policies will not cover losses due to a failure to pay or denial of a
claim under a primary mortgage insurance policy.
In general, each mortgage pool insurance policy will provide that no claims
may be validly presented unless
. any required primary mortgage insurance policy is in effect for the
defaulted mortgage loan and a claim under it has been submitted and
settled;
. hazard insurance on the related mortgaged property has been kept in
force and real estate taxes and other protection and preservation
expenses have been paid;
. if there has been physical loss or damage to the mortgaged property, it
has been restored to its physical condition, with reasonable wear and
tear excepted, at the time of issuance of the policy; and
. the insured has acquired good and merchantable title to the mortgaged
property free and clear of liens except certain permitted encumbrances.
Upon satisfaction of these conditions, the pool insurer will have the
option to either
. purchase the mortgaged property at a price equal to the principal
balance of the related mortgage loan plus accrued and unpaid interest at
the mortgage rate to the date of the purchase and certain expenses
incurred by the master servicer on behalf of the trustee and
certificateholders, or
. pay the amount by which the sum of the principal balance of the
defaulted mortgage loan plus accrued and unpaid interest at the mortgage
rate to the date of payment of
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the claim and the master servicer's expenses exceeds the proceeds
received from an approved sale of the mortgaged property,
in either case net of certain amounts paid or assumed to have been paid under
the related primary mortgage insurance policy. If any mortgaged property is
damaged, and proceeds, if any, from the related hazard insurance policy or a
special hazard insurance policy or policies maintained for a series are
insufficient to restore the damaged property to a condition sufficient to permit
recovery under the mortgage pool insurance policy, the master servicer will not
be required to expend its own funds to restore the damaged property unless it
determines that the restoration will increase the proceeds to certificateholders
on liquidation of the mortgage loan after reimbursement of the master servicer
for its expenses and the expenses will be recoverable by it through proceeds of
the sale of the mortgaged property or proceeds of the related mortgage pool
insurance policy or any related primary mortgage insurance policy.
The applicable prospectus supplement may specify that mortgage pool
insurance will cover various origination and servicing defaults, but if it does
not, then no mortgage pool insurance policy will insure against loss sustained
from a default arising from, among other things, fraud or negligence in the
origination or servicing of a mortgage loan, including misrepresentation by the
mortgagor, the originator or persons involved in its origination, or failure to
construct a mortgaged property in accordance with plans and specifications. Many
primary mortgage insurance policies also do not insure against these types of
losses. A failure of coverage for one of these reasons might result in a breach
of the related seller's representations and, in that case, might result in an
obligation on the part of the seller to repurchase the defaulted mortgage loan
if the breach cannot be cured by the seller. In addition, no mortgage pool
insurance policy will cover, and many primary mortgage insurance policies do not
cover a claim with respect to a defaulted mortgage loan occurring when the
servicer of the mortgage loan, at the time of default or thereafter, was not
approved by the applicable insurer.
The original amount of coverage under each mortgage pool insurance policy
will be maintained to the extent provided in the related prospectus supplement
and may be reduced over the life of the related certificates by the aggregate
dollar amount of claims paid less the aggregate of the net amounts realized by
the pool insurer upon disposition of all foreclosed properties. The applicable
prospectus supplement may provide that the claims paid will be net of master
servicer expenses and accrued interest, but if it does not, then the amount of
claims paid will include certain expenses incurred by the master servicer as
well as accrued interest on delinquent mortgage loans to the date of payment of
the claim. Accordingly, if aggregate net claims paid under any mortgage pool
insurance policy reach the original policy limit, coverage under that mortgage
pool insurance policy will be exhausted and any further losses will be borne by
the certificateholders.
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Special Hazard Insurance Policies
If specified in the related prospectus supplement, a separate special
hazard insurance policy will be obtained for the mortgage pool and will be
issued by the insurer named in the prospectus supplement. Each special hazard
insurance policy will, subject to policy limitations, protect holders of the
related certificates from loss caused by the application of the coinsurance
clause contained in hazard insurance policies and loss from damage to mortgaged
properties caused by certain hazards not insured against under the standard form
of hazard insurance policy in the states where the mortgaged properties are
located or under a flood insurance policy if the mortgaged property is located
in a federally designated flood area. Some of the losses covered include
earthquakes and, to a limited extent, tidal waves and related water damage and
other losses that may be specified in the related prospectus supplement. See
"The Pooling and Servicing Agreement -- Hazard Insurance." No special hazard
insurance policy will cover losses from fraud or conversion by the trustee or
master servicer, war, insurrection, civil war, certain governmental action,
errors in design, faulty workmanship or materials (except under certain
circumstances), nuclear or chemical reaction, flood (if the mortgaged property
is located in a federally designated flood area), nuclear or chemical
contamination and certain other risks. The amount of coverage under any special
hazard insurance policy will be specified in the related prospectus supplement.
Each special hazard insurance policy will provide that no claim may be paid
unless hazard and, if applicable, flood insurance on the property securing the
mortgage loan have been kept in force and other protection and preservation
expenses have been paid.
The applicable prospectus supplement may provide for other payment
coverage, but if it does not, each special hazard policy will insure against
damage to mortgaged properties caused by special hazard losses in an amount
equal to the lesser of:
. the cost of repair to or replacement of the damaged property, or
. upon transfer of the property to the special hazard insurer, the unpaid
principal balance of the mortgage loan at the time of acquisition of the
property by foreclosure or deed in lieu of foreclosure, plus accrued
interest to the date of claim settlement and certain expenses incurred
by the master servicer with respect to the property.
If the unpaid principal balance of a mortgage loan, plus accrued interest and
expenses, is paid by the special hazard insurer, the amount of further coverage
under the related special hazard insurance policy will be reduced by that amount
less any net proceeds from the sale of the property. In adddition, any amount
paid to repair or replace the property will further reduce special hazard
coverage by that amount.
No special hazard policy will insure against damage that is covered by a
hazard insurance policy or flood insurance policy, if any, maintained by the
mortgagor or the master servicer.
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So long as a mortgage pool insurance policy remains in effect, the payment
by the special hazard insurer of the cost of repair or of the unpaid principal
balance of the related mortgage loan plus accrued interest and certain expenses
will not affect the total insurance proceeds paid to certificateholders, but
will affect the relative amounts of coverage remaining under the related special
hazard insurance policy and mortgage pool insurance policy.
To the extent specified in the prospectus supplement, the master servicer
may deposit cash, an irrevocable letter of credit, or any other instrument
acceptable to each rating agency rating the certificates of the related series
at the request of the depositor in a special trust account to provide protection
in lieu of or in addition to that provided by a special hazard insurance policy.
The amount of any special hazard insurance policy or of the deposit to the
special trust account relating to the certificates may be reduced so long as the
reduction will not result in a downgrading of the rating of the certificates by
a rating agency rating certificates at the request of the depositor.
Bankruptcy Bonds
If specified in the related prospectus supplement, a bankruptcy bond to
cover losses resulting from proceedings under the federal Bankruptcy Code with
respect to a mortgage loan will be issued by an insurer named in the prospectus
supplement. Each bankruptcy bond will cover, to the extent specified in the
related prospectus supplement, certain losses resulting from a reduction by a
bankruptcy court of scheduled payments of principal and interest on a mortgage
loan or a reduction by the court of the principal amount of a mortgage loan and
will cover certain unpaid interest on the amount of a principal reduction from
the date of the filing of a bankruptcy petition. The required amount of coverage
under each bankruptcy bond will be set forth in the related prospectus
supplement. Coverage under a bankruptcy bond may be canceled or reduced by the
master servicer if the cancellation or reduction would not adversely affect the
then current rating or ratings of the related certificates. See "Legal Aspects
of the Mortgage Loans -- Anti-Deficiency Legislation and Other Limitations on
Lenders."
To the extent specified in the prospectus supplement, the master servicer
may deposit cash, an irrevocable letter of credit or any other instrument
acceptable to each nationally recognized rating agency rating the certificates
of the related series at the request of the depositor in a special trust account
to provide protection in lieu of or in addition to that provided by a bankruptcy
bond. The amount of any bankruptcy bond or of the deposit to the special trust
account relating to the certificates may be reduced so long as the reduction
will not result in a downgrading of the rating of the certificates by a rating
agency rating certificates at the request of the depositor.
Reserve Fund
If so specified in the related prospectus supplement, credit support with
respect to a series of certificates may be provided by one or more reserve funds
held by the trustee, in trust, for the
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related series. The related prospectus supplement will specify whether or not a
reserve fund will be included in the trust fund for a series.
The reserve fund for a series will be funded by a deposit of cash, U.S.
Treasury securities or instruments evidencing ownership of principal or interest
payments on U.S. Treasury securities, letters of credit, demand notes,
certificates of deposit, or a combination of them in an aggregate amount
specified in the related prospectus supplement; by the deposit from time to time
of amounts specified in the related prospectus supplement to which the
subordinated certificateholders, if any, would otherwise be entitled; or in any
other manner specified in the related prospectus supplement.
Any amounts on deposit in the reserve fund and the proceeds of any other
instrument deposited in it upon maturity will be held in cash or will be
invested in permitted investments which will generally consist of short term
investments that convert into cash or mature within a short period of time, have
minimal or no exposure to fluctuations in value as a result of market changes in
prevailing interest rates and are acceptable to each rating agency rating the
applicable series of certificates. To the extent that permitted investments
consist of debt obligations, they will be either registered or exempt from
registration under the Securities Act. If a letter of credit is deposited with
the trustee, the letter of credit will be irrevocable. Generally, any deposited
instrument will name the trustee, in its capacity as trustee for the
certificateholders, as beneficiary and will be issued by an entity acceptable to
each rating agency that rates the certificates at the request of the depositor.
Additional information about the instruments deposited in the reserve funds will
be set forth in the related prospectus supplement.
Any amounts so deposited and payments on instruments so deposited will be
available for withdrawal from the reserve fund for distribution to the
certificateholders for the purposes, in the manner and at the times specified in
the related prospectus supplement.
Cross Support
If specified in the related prospectus supplement, the beneficial ownership
of separate groups of assets included in a trust fund may be evidenced by
separate classes of the related series of certificates. In that case, credit
support may be provided by a cross support feature that requires that
distributions be made on certificates evidencing a beneficial ownership interest
in other asset groups within the same trust fund. The related prospectus
supplement for a series that includes a cross support feature will describe the
material terms of any cross support feature, the impact of the cross support
feature on the interests of the certificateholders and all material applicable
risks.
If specified in the related prospectus supplement, the coverage provided by
one or more forms of credit support may apply concurrently to two or more
related trust funds. If applicable, the related prospectus supplement will
identify the trust funds to which the credit support relates
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and the manner of determining the amount of the coverage provided by it and of
the application of the coverage to the identified trust funds.
Insurance Policies, Surety Bonds and Guaranties
If so provided in the prospectus supplement for a series of certificates,
deficiencies in amounts otherwise payable on the certificates or certain of
their classes will be covered by insurance policies or surety bonds provided by
one or more insurance companies or sureties. These instruments may cover timely
distributions of interest or full distributions of principal or both on the
basis of a schedule of principal distributions set forth in or determined in the
manner specified in the related prospectus supplement. In addition, if specified
in the related prospectus supplement, a trust fund may also include other
insurance policies or guaranties for the purpose of maintaining timely payments
or providing additional protection against losses on the assets included in the
trust fund, paying administrative expenses, or establishing a minimum
reinvestment rate on the payments made on the assets or principal payment rate
on the assets. These arrangements may include agreements under which
certificateholders are entitled to receive amounts deposited in various accounts
held by the trustee on the terms specified in the prospectus supplement.
Over-Collateralization
If so provided in the prospectus supplement for a series of certificates, a
portion of the interest payment on each Mortgage Asset may be applied as an
additional distribution of principal to reduce the principal balance of a
particular class or classes of certificates and, thus, accelerate the rate of
payment of principal on the class or classes of certificates. Reducing the
principal balance of the certificates without a corresponding reduction in the
principal balance of the underlying Mortgage Assets will result in over-
collateralization.
YIELD AND PREPAYMENT CONSIDERATIONS
The yields to maturity and weighted average lives of the certificates will
be affected primarily by the amount and timing of principal payments received on
or in respect of the Mortgage Assets included in the related trust fund. The
original terms to maturity of the underlying mortgage loans of the Mortgage
Assets in a given mortgage pool will vary depending upon the type of mortgage
loans included in it, and each prospectus supplement will contain information
about the type and maturities of the mortgage loans. The applicable prospectus
supplement may indicate that some mortgage loans provide for prepayment
penalties, but if it does not, then the mortgage loans may be prepaid without
penalty in full or in part at any time. The prepayment experience on the
underlying mortgage loans of the Mortgage Assets will affect the life of the
related series of certificates.
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A number of factors may affect the prepayment experience of mortgage loans,
including homeowner mobility, economic conditions, the presence and
enforceability of due-on-sale clauses, mortgage market interest rates and the
availability of mortgage funds.
The applicable prospectus supplement may indicate that some conventional
mortgage loans do not have due-on-sale provisions, but if it does not, then all
conventional mortgage loans will contain due-on-sale provisions permitting the
mortgagee to accelerate the maturity of the loan upon sale or specified
transfers by the mortgagor of the underlying mortgaged property. Mortgage loans
insured by the FHA and mortgage loans partially guaranteed by the VA are
assumable with the consent of the FHA and the VA, respectively. Thus, the rate
of prepayments on those mortgage loans may be lower than that on conventional
mortgage loans bearing comparable interest rates. The master servicer generally
will enforce any due-on-sale or due-on-encumbrance clause, to the extent it has
knowledge of the conveyance or further encumbrance or the proposed conveyance or
proposed further encumbrance of the mortgaged property and reasonably believes
that it is entitled to do so under applicable law. However, the master servicer
will not take any enforcement action that would impair or threaten to impair any
recovery under any related insurance policy. See "The Pooling and Servicing
Agreement -- Collection Procedures" and "Legal Aspects of the Mortgage Loans"
for a description of certain provisions of each pooling and servicing agreement
and certain legal developments that may affect the prepayment experience on the
mortgage loans.
The rate of prepayments of conventional mortgage loans has fluctuated
significantly in recent years. In general, if prevailing rates fall
significantly below the mortgage rates borne by the mortgage loans, the mortgage
loans are likely to be subject to higher prepayment rates than if prevailing
interest rates remain at or above those mortgage rates. Conversely, if
prevailing interest rates rise appreciably above the mortgage rates borne by the
mortgage loans, the mortgage loans are likely to experience a lower prepayment
rate than if prevailing rates remain at or below those mortgage rates. However,
there can be no assurance that this will be the case.
When a full prepayment is made on a mortgage loan, the mortgagor is charged
interest on the principal amount of the mortgage loan prepaid only for the
number of days in the month actually elapsed up to the date of the prepayment
rather than for a full month. Thus, in most instances, the effect of prepayments
in full will be to reduce the amount of interest passed through in the following
month to certificateholders. Partial prepayments in a given month may be applied
to the outstanding principal balances of the mortgage loans so prepaid in the
month of receipt or the month following receipt. In the latter case, partial
prepayments will not reduce the amount of interest passed through in the month.
Interest payable on the certificates on any given distribution date will
include all interest accrued during their related interest accrual period. The
interest accrual period for the certificates of each series will be specified in
the applicable prospectus supplement. If the interest accrual period ends two or
more days before the related distribution date, your effective yield will be
less
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than it would be if the interest accrual period ended the day before the
distribution date, and your effective yield at par would be less than the
indicated coupon rate.
Under specified circumstances, the master servicer or the holders of the
residual interests in a REMIC may have the option to purchase the assets of a
trust fund thereby effecting earlier retirement of the related series of
certificates. See "The Pooling and Servicing Agreement -- Termination; Optional
Termination."
Factors other than those identified in this prospectus and in the related
prospectus supplement could significantly affect principal prepayments at any
time and over the lives of the certificates. The relative contribution of the
various factors affecting prepayment may also vary from time to time. There can
be no assurance as to the rate of payment of principal of the Mortgage Assets at
any time or over the lives of the certificates.
The prospectus supplement relating to a series of certificates will discuss
in greater detail the effect of the rate and timing of principal payments and
principal prepayments, delinquencies and losses on the yield, weighted average
lives and maturities of the certificates.
THE POOLING AND SERVICING AGREEMENT
The following is a summary of the material provisions of the pooling and
servicing agreement which are not described elsewhere in this prospectus. Where
particular provisions or terms used in the pooling and servicing agreement are
referred to, the provisions or terms are as specified in the related pooling and
servicing agreement.
Assignment of Mortgage Assets
Assignment of the Mortgage Loans. At the time of issuance of the
certificates of a series, the depositor will cause the mortgage loans comprising
the related trust fund to be assigned to the trustee, together with all
principal and interest received by or on behalf of the depositor on or with
respect to the mortgage loans after the cut-off date, other than principal and
interest due on or before the cut-off date and other than any retained interest
specified in the related prospectus supplement. The trustee will, concurrently
with the assignment, deliver the certificates to the depositor in exchange for
the mortgage loans. Each mortgage loan will be identified in a schedule
appearing as an exhibit to the related pooling and servicing agreement. The
schedule will include information as to the outstanding principal balance of
each mortgage loan after application of payments due on the cut-off date, as
well as information regarding the mortgage rate, the current scheduled monthly
payment of principal and interest, the maturity of the loan, the loan-to-value
ratio at origination and other specified information.
In addition, the depositor will deliver or cause to be delivered to the
trustee, or to the custodian, for each mortgage loan
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. the mortgage note endorsed without recourse in blank or to the order of
the trustee, except that the depositor may deliver or cause to be
delivered a lost note affidavit in lieu of any original mortgage note
that has been lost,
. the mortgage, deed of trust or similar instrument with evidence of
recording indicated on it, except for any mortgage not returned from the
public recording office, in which case the depositor will deliver or
cause to be delivered a copy of the mortgage together with a certificate
that the original of the mortgage was delivered to the recording office
or some other arrangement will be provided for,
. an assignment of the mortgage to the trustee in recordable form and
. any other security documents specified in the related prospectus
supplement or the related pooling and servicing agreement.
The applicable prospectus supplement may provide other arrangements for
assuring the priority of the assignments, but if it does not, then the depositor
will promptly cause the assignments of the related loans to be recorded in the
appropriate public office for real property records, except in states in which
in the opinion of counsel recording is not required to protect the trustee's
interest in the loans against the claim of any subsequent transferee or any
successor to or creditor of the depositor or the originator of the loans.
With respect to any mortgage loans that are cooperative loans, the
depositor will cause to be delivered to the trustee
. the related original cooperative note endorsed without recourse in blank
or to the order of the trustee, or to the extent the related pooling and
servicing agreement so provides, a lost note affidavit,
. the original security agreement,
. the proprietary lease or occupancy agreement,
. the recognition agreement,
. an executed financing agreement and
. the relevant stock certificate, related blank stock powers and any other
document specified in the related prospectus supplement.
The depositor will cause to be filed in the appropriate office an
assignment and a financing statement evidencing the trustee's security interest
in each cooperative loan.
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The trustee or the custodian will review the mortgage loan documents within
the time period specified in the related prospectus supplement after receipt of
them, and the trustee will hold the documents in trust for the benefit of the
certificateholders. Generally, if the document is found to be missing or
defective in any material respect, the trustee or the custodian will notify the
master servicer and the depositor, and the master servicer will notify the
related seller. If the seller cannot cure the omission or defect within the time
period specified in the related prospectus supplement after receipt of the
notice, the seller will be obligated to purchase the related mortgage loan from
the trustee at the purchase price or, if so specified in the related prospectus
supplement, replace the mortgage loan with another mortgage loan that meets
specified requirements. There can be no assurance that a seller will fulfill
this purchase obligation. Although the master servicer may be obligated to
enforce the obligation to the extent described under "Mortgage Loan Program --
Representations by Sellers; Repurchases," neither the master servicer nor the
depositor will be obligated to purchase the mortgage loan if the seller defaults
on its purchase obligation, unless the breach also constitutes a breach of the
representations or warranties of the master servicer or the depositor. The
applicable prospectus supplement may provide other remedies but if it does not,
then this purchase obligation constitutes the sole remedy available to the
certificateholders or the trustee for omission of, or a material defect in, a
constituent document.
The trustee will be authorized to appoint a custodian pursuant to a
custodial agreement to maintain possession of and, if applicable, to review the
documents relating to the mortgage loans as agent of the trustee.
Notwithstanding these provisions, unless the related prospectus supplement
otherwise provides, no mortgage loan will be purchased from a trust fund for
which a REMIC election is to be made if the purchase would result in a
prohibited transaction tax under the Code.
Assignment of Agency Securities. The depositor will cause the agency
securities to be registered in the name of the trustee or its nominee, and the
trustee concurrently will execute, countersign and deliver the certificates.
Each agency security will be identified in a schedule appearing as an exhibit to
the pooling and servicing agreement, which will specify as to each agency
security the original principal amount and outstanding principal balance as of
the cut-off date, the annual pass-through rate and the maturity date.
Assignment of Private Mortgage-Backed Securities. The depositor will cause
the private mortgage-backed securities to be registered in the name of the
trustee. The trustee or the custodian will have possession of any certificated
private mortgage-backed securities. Generally, the trustee will not be in
possession of or be assignee of record of any underlying assets for a private
mortgage-backed security. See "The Trust Fund -- Private Mortgage-Backed
Securities." Each private mortgage-backed security will be identified in a
schedule appearing as an exhibit to the related pooling and servicing agreement
which will specify the original principal amount, outstanding principal balance
as of the cut-off date, annual pass-through rate or interest rate and
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maturity date and other specified pertinent information for each private
mortgage-backed security conveyed to the trustee.
Conveyance of Subsequent Mortgage Loans. With respect to a series of
certificates for which a Pre-Funding Arrangement is provided, in connection with
any conveyance of Subsequent mortgage loans to the trust fund after the issuance
of the related certificates, the related pooling and servicing agreement will
require the seller and the depositor to satisfy the following conditions, among
others:
. each Subsequent mortgage loan purchased after the applicable closing
date must satisfy the representations and warranties contained in the
subsequent transfer agreement to be entered into by the depositor, the
seller and the trustee and in the related pooling and servicing
agreement;
. the seller will not select the Subsequent mortgage loans in a manner
that it believes is adverse to the interests of the certificateholders;
. as of the related cut-off date, all of the mortgage loans in the
mortgage pool at that time, including the Subsequent mortgage loans
purchased after the closing date, will satisfy the criteria set forth in
the related pooling and servicing agreement;
. the Subsequent mortgage loans will have been approved by any third party
provider of credit enhancement, if applicable; and
. before the purchase of each Subsequent mortgage loan the trustee will
perform an initial review of certain related loan file documentation for
the mortgage loan and issue an initial certification for which the
required documentation in the loan file has been received with respect
to each Subsequent mortgage loan.
The Subsequent mortgage loans, on an aggregate basis, will have
characteristics similar to the characteristics of the initial pool of mortgage
loans as described in the related prospectus supplement. Each acquisition of
any Subsequent mortgage loans will be subject to the review by any third party
provider of credit enhancement, if applicable, the rating agencies and the
seller's accountants of the aggregate statistical characteristics of the related
mortgage pool for compliance with the applicable statistical criteria set forth
in the related pooling and servicing agreement.
Payments on Mortgage Assets; Deposits to Certificate Account
The master servicer will establish and maintain or cause to be established
and maintained a Certificate Account for the related trust fund. The applicable
prospectus supplement may provide for other requirements for the Certificate
Account, but if it does not, then the Certificate Account must be either
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. maintained with a depository institution, the short-term unsecured debt
obligations of which are rated in the highest short-term rating category
by the nationally recognized statistical rating organizations that rated
one or more classes of the related series of certificates at the request
of the depositor, or in the case of a depository institution that is the
principal subsidiary of a holding company, the short-term debt
obligations of the holding company are so rated,
. an account or accounts, the deposits in which are insured by the FDIC or
SAIF to the limits established by the FDIC or the SAIF, and the
uninsured deposits in which are otherwise secured such that, as
evidenced by an opinion of counsel, the certificateholders have a claim
with respect to the funds in the Certificate Account or a perfected
first priority security interest against any collateral securing the
funds that is superior to the claims of any other depositors or general
creditors of the depository institution with which the Certificate
Account is maintained,
. a trust account or accounts maintained with the trust department of a
federal or a state chartered depository institution or trust company,
acting in a fiduciary capacity or
. an account or accounts otherwise acceptable to each rating agency that
rated one or more classes of the related series of certificates at the
request of the depositor.
The collateral eligible to secure amounts in the Certificate Account is
limited to permitted investments which will generally consist of short term
investments that convert into cash or mature within a short period of time, have
minimal or no exposure to fluctuations in value as a result of market changes in
prevailing interest rates and are acceptable to each rating agency rating the
applicable series of certificates. To the extent that permitted investments
consist of debt obligations, they will be either registered or exempt from
registration under the Securities Act. A Certificate Account may be maintained
as an interest bearing account or the funds held in it may be invested pending
each succeeding distribution date in permitted investments. To the extent
provided in the related prospectus supplement, the master servicer or its
designee will be entitled to receive the interest or other income earned on
funds in the Certificate Account as additional compensation and will be
obligated to deposit in the Certificate Account the amount of any loss
immediately as realized. The Certificate Account may be maintained with the
master servicer or with a depository institution that is an affiliate of the
master servicer, provided it meets the standards set forth above.
The master servicer will deposit or cause to be deposited in the
Certificate Account for each trust fund on a daily basis, to the extent
applicable and unless the related pooling and servicing agreement provides for a
different deposit arrangement, the following payments and collections received
or advances made by or on behalf of it after the cut-off date, other than
payments due on or before the cut-off date and exclusive of any amounts
representing any retained interest specified in the related prospectus
supplement:
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. all payments on account of principal, including principal prepayments
and, if specified in the related prospectus supplement, prepayment
penalties, on the mortgage loans;
. all payments on account of interest on the mortgage loans, net of
applicable servicing compensation;
. all proceeds (net of unreimbursed payments of property taxes, insurance
premiums and similar items incurred, and unreimbursed advances made, by
the master servicer) of the hazard insurance policies and any primary
mortgage insurance policies, to the extent the proceeds are not applied
to the restoration of the property or released to the mortgagor in
accordance with the master servicer's normal servicing procedures and
all other cash amounts, net of unreimbursed expenses incurred in
connection with liquidation or foreclosure and any unreimbursed
advances, received and retained in connection with the liquidation of
defaulted mortgage loans, by foreclosure or otherwise, together with any
net proceeds received on a monthly basis with respect to any properties
acquired on behalf of the certificateholders by foreclosure or deed in
lieu of foreclosure;
. all proceeds of any mortgage loan or property in respect thereof
purchased by the master servicer, the depositor or any seller as
described under "Mortgage Loan Program -- Representations by Sellers;
Repurchases" or "The Pooling and Servicing Agreement -- Assignment of
Mortgage Assets" above and all proceeds of any mortgage loan repurchased
as described under "The Pooling and Servicing Agreement --Termination;
Optional Termination";
. all payments required to be deposited in the Certificate Account with
respect to any deductible clause in any blanket insurance policy
described under " -- Hazard Insurance";
. any amount required to be deposited by the master servicer in connection
with losses realized on investments for the benefit of the master
servicer of funds held in the Certificate Account and, to the extent
specified in the related prospectus supplement, any payments required to
be made by the master servicer in connection with prepayment interest
shortfalls; and
. all other amounts required to be deposited in the Certificate Account
pursuant to the pooling and servicing agreement.
The master servicer or the depositor, as applicable, may from time to time
direct the institution that maintains the Certificate Account to withdraw funds
from the Certificate Account for the following purposes:
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. to pay to the master servicer the servicing fees described in the
related prospectus supplement, the master servicing fees and, as
additional servicing compensation, earnings on or investment income with
respect to funds in the amounts in the Certificate Account;
. to reimburse the master servicer for advances, the right of
reimbursement with respect to any mortgage loan being limited to amounts
received that represent late recoveries of payments of principal and
interest on the mortgage loan, or insurance proceeds or liquidation
proceeds from the mortgage loan, with respect to which the advance was
made;
. to reimburse the master servicer for any advances previously made that
the master servicer has determined to be nonrecoverable;
. to reimburse the master servicer from insurance proceeds not used to
restore the property for expenses incurred by the master servicer and
covered by the related insurance policies;
. to reimburse the master servicer for unpaid master servicing fees and
unreimbursed out-of-pocket costs and expenses incurred by the master
servicer in the performance of its servicing obligations, the right of
reimbursement being limited to amounts received representing late
recoveries of the payments for which the advances were made;
. to pay to the master servicer, with respect to each mortgage loan or
property acquired in respect thereof that has been purchased by the
master servicer pursuant to the pooling and servicing agreement, all
amounts received on them and not taken into account in determining the
principal balance of the repurchased mortgage loan;
. to reimburse the master servicer or the depositor for expenses incurred
and reimbursable pursuant to the pooling and servicing agreement;
. to withdraw any amount deposited in the Certificate Account that was not
required to be deposited in it; and
. to clear and terminate the Certificate Account upon termination of the
pooling and servicing agreement.
In addition, the pooling and servicing agreement will generally provide
that on or before the business day before each distribution date, the master
servicer shall withdraw from the Certificate Account the amount of Available
Funds, to the extent on deposit, for deposit in an account maintained by the
trustee for the related series of certificates.
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Collection Procedures
The master servicer, directly or through one or more sub-servicers, will
make reasonable efforts to collect all payments called for under the mortgage
loans and will, consistent with each pooling and servicing agreement and any
mortgage pool insurance policy, primary mortgage insurance policy, FHA
insurance, VA guaranty and bankruptcy bond or alternative arrangements, follow
the collection procedures it customarily follows for mortgage loans that are
comparable to the mortgage loans. Consistent with the above, the master servicer
may, in its discretion, waive any assumption fee, late payment or prepayment
charge or penalty fee in connection with a mortgage loan and arrange with a
mortgagor a schedule for the liquidation of delinquencies running for no more
than 180 days after the applicable due date for each payment to the extent not
inconsistent with the coverage of the mortgage loan by a mortgage pool insurance
policy, primary mortgage insurance policy, FHA insurance, VA guaranty or
bankruptcy bond or alternative arrangements, if applicable. To the extent the
master servicer is obligated to make or to cause to be made advances, this
obligation will continue during any period in which the arrangement is in
effect.
The applicable prospectus supplement may provide for other alternatives
regarding due-on-sale clauses, but if it does not, then in any case in which
property securing a conventional mortgage loan has been, or is about to be,
conveyed by the mortgagor, the master servicer will, to the extent it has
knowledge of the conveyance or proposed conveyance, exercise or cause to be
exercised its rights to accelerate the maturity of the mortgage loan under any
due-on-sale clause applicable to it, but only if permitted by applicable law and
the exercise will not impair or threaten to impair any recovery under any
related primary mortgage insurance policy. If these conditions are not met or if
the master servicer reasonably believes it is unable under applicable law to
enforce the due-on-sale clause or if the mortgage loan is insured by the FHA or
partially guaranteed by the VA, the master servicer will enter into or cause to
be entered into an assumption and modification agreement with the person to whom
the property has been or is about to be conveyed, pursuant to which that person
becomes liable for repayment of the mortgage loan and, to the extent permitted
by applicable law, the mortgagor also remains liable on it. Any fee collected by
or on behalf of the master servicer for entering into an assumption agreement
will be retained by or on behalf of the master servicer as additional servicing
compensation. See "Legal Aspects of the Mortgage Loans -- Due-on-Sale Clauses."
The terms of the related mortgage loan may not be changed in connection with an
assumption.
Any prospective purchaser of a cooperative apartment will generally have to
obtain the approval of the board of directors of the relevant cooperative before
purchasing the shares and acquiring rights under the related proprietary lease
or occupancy agreement. See "Legal Aspects of the Mortgage Loans." This approval
is usually based on the purchaser's income and net worth and numerous other
factors. Although the cooperative's approval is unlikely to be unreasonably
withheld or delayed, the necessity of acquiring the approval could limit the
number of potential purchasers for those shares and otherwise limit the trust
fund's ability to sell and realize the value of shares securing a cooperative
loan.
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In general, a "tenant-stockholder" (as defined in Code Section 216(b)(2))
of a corporation that qualifies as a "cooperative housing corporation" within
the meaning of Code Section 216(b)(1) is allowed a deduction for amounts paid or
accrued within his taxable year to the corporation representing his
proportionate share of certain interest expenses and certain real estate taxes
allowable as a deduction under Code Section 216(a) to the corporation under Code
Sections 163 and 164. In order for a corporation to qualify under Code Section
216(b)(1) for its taxable year in which the items are allowable as a deduction
to the corporation, the Section requires, among other things, that at least 80%
of the gross income of the corporation be derived from its tenant-stockholders
(as defined in Code Section 216(b)(2)). By virtue of this requirement, the
status of a corporation for purposes of Code Section 216(b)(1) must be
determined on a year-to-year basis. Consequently, there can be no assurance that
cooperatives relating to the cooperative loans will qualify under Section
216(b)(1) for any particular year. If a cooperative fails to qualify for one or
more years, the value of the collateral securing any related cooperative loans
could be significantly impaired because no deduction would be allowable to
tenant-stockholders under Code Section 216(a) with respect to those years. In
view of the significance of the tax benefits accorded tenant-stockholders of a
corporation that qualifies under Code Section 216(b)(1), the likelihood that a
failure to qualify would be permitted to continue over a period of years appears
remote.
Hazard Insurance
The master servicer will require the mortgagor on each mortgage loan to
maintain a hazard insurance policy providing for no less than the coverage of
the standard form of fire insurance policy with extended coverage customary for
the type of mortgaged property in the state in which the mortgaged property is
located. The coverage will be in an amount that is at least equal to the lesser
of
. the maximum insurable value of the improvements securing the mortgage
loan or the greater of
. the outstanding principal balance of the mortgage loan, and
. an amount that assures that the proceeds of the policy shall be
sufficient to prevent the mortgagor or the mortgagee from becoming a co-
insurer.
All amounts collected by the master servicer under any hazard policy,
except for amounts to be applied to the restoration or repair of the mortgaged
property or released to the mortgagor in accordance with the master servicer's
normal servicing procedures, will be deposited in the related Certificate
Account. If the master servicer maintains a blanket policy insuring against
hazard losses on all the mortgage loans comprising part of a trust fund, it will
have satisfied its obligation relating to the maintenance of hazard insurance.
The blanket policy may contain a deductible clause, in which case the master
servicer will be required to deposit from its own
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funds into the related Certificate Account the amounts that would have been
deposited in the Collction Account but for the deductible clause.
In general, the standard form of fire and extended coverage policy covers
physical damage to or destruction of the improvements securing a mortgage loan
by fire, lightning, explosion, smoke, windstorm and hail, riot, strike and civil
commotion, subject to the conditions and exclusions particularized in each
policy. Although the policies relating to the mortgage loans may have been
underwritten by different insurers under different state laws in accordance with
different applicable forms and therefore may not contain identical terms, their
basic terms are dictated by the respective state laws, and most 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 mud flows), nuclear reactions, wet or dry
rot, vermin, rodents, insects or domestic animals, theft and, in certain cases,
vandalism. This list is merely indicative of certain kinds of uninsured risks
and is not all inclusive. If the mortgaged property securing a mortgage loan is
located in a federally designated special flood area at the time of origination,
the master servicer will require the mortgagor to obtain and maintain flood
insurance.
The hazard insurance policies covering properties securing the mortgage
loans typically contain a clause that in effect requires the insured at all
times to carry insurance of generally 80% to 90% of the full replacement value
of the insured property in order to recover the full amount of any partial loss.
If the insured's coverage falls below this specified percentage, then the
insurer's liability upon partial loss will not exceed the larger of the actual
cash value of the improvements damaged or destroyed and the proportion of the
loss that the amount of insurance carried bears to the specified percentage of
the full replacement cost of the improvements. The hazard insurance policies
generally define the actual cash value of improvements as their replacement cost
at the time and place of loss, less physical depreciation. Since the amount of
hazard insurance the master servicer may cause to be maintained on the
improvements securing the mortgage loans declines as the principal balances
owing on them decrease, and since improved real estate generally has appreciated
in value over time in the past, the effect of this requirement upon partial loss
may be that hazard insurance proceeds will be insufficient to fully restore the
damaged property. If specified in the related prospectus supplement, a special
hazard insurance policy will be obtained to insure against certain of the
uninsured risks described above. See "Credit Enhancement -- Special Hazard
Insurance Policies" and "Credit Enhancements -- Insurance -- Special Hazard
Insurance Policy" in the related prospectus supplement.
The master servicer will not require that a standard hazard or flood
insurance policy be maintained on the cooperative dwelling relating to any
cooperative loan. Generally, the cooperative itself is responsible for
maintenance of hazard insurance for the property owned by the cooperative and
the tenant-stockholders of that cooperative do not maintain individual hazard
insurance policies. To the extent, however, that a cooperative and the related
borrower on a cooperative loan do not maintain insurance or do not maintain
adequate coverage or any insurance proceeds are not applied to the restoration
of damaged property, any damage to the
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borrower's cooperative dwelling or the cooperative's building could
significantly reduce the value of the collateral securing the cooperative loan.
Realization Upon Defaulted Mortgage Loans
Primary Mortgage Insurance Policies. The master servicer will maintain or
cause to be maintained, as the case may be, in effect, to the extent specified
in the related prospectus supplement, a primary mortgage insurance policy with
regard to each mortgage loan for which coverage is required. The master servicer
will not cancel or refuse to renew any primary mortgage insurance policy in
effect at the time of the initial issuance of a series of certificates that is
required to be kept in force under the applicable pooling and servicing
agreement unless the replacement primary mortgage insurance policy for the
canceled or nonrenewed policy is maintained with an insurer whose claims-paying
ability is sufficient to maintain the current rating of the classes of
certificates of the series that have been rated.
Although the terms of primary mortgage insurance vary, the amount of a
claim for benefits under a primary mortgage insurance policy covering a mortgage
loan will consist of the insured percentage of the unpaid principal amount of
the covered mortgage loan and accrued and unpaid interest on it and
reimbursement of certain expenses, less
. all rents or other payments collected or received by the insured, other
than the proceeds of hazard insurance, that are derived from or in any
way related to the mortgaged property,
. hazard insurance proceeds in excess of the amount required to restore
the mortgaged property and which have not been applied to the payment of
the mortgage loan,
. amounts expended but not approved by the issuer of the related primary
mortgage insurance policy,
. claim payments previously made by the primary insurer, and
. unpaid premiums.
Primary mortgage insurance policies reimburse certain losses sustained from
defaults in payments by borrowers. Primary mortgage insurance policies will not
insure against, and exclude from coverage, a loss sustained from a default
arising from or involving certain matters, including
. fraud or negligence in origination or servicing of the mortgage loans,
including misrepresentation by the originator, mortgagor or other
persons involved in the origination of the mortgage loan;
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. failure to construct the mortgaged property subject to the mortgage loan
in accordance with specified plans;
. physical damage to the mortgaged property; and
. the related sub-servicer not being approved as a servicer by the primary
insurer.
Recoveries Under A Primary Mortgage Insurance Policy. As conditions
precedent to the filing of or payment of a claim under a primary mortgage
insurance policy covering a mortgage loan, the insured will be required to
. advance or discharge
. all hazard insurance policy premiums, and
. as necessary and approved in advance by the primary insurer, real estate
property taxes, all expenses required to maintain the related mortgaged
property in at least as good a condition as existed at the effective
date of the primary mortgage insurance policy, ordinary wear and tear
excepted, mortgaged property sales expenses, any specified outstanding
liens on the mortgaged property and foreclosure costs, including court
costs and reasonable attorneys' fees;
. upon any physical loss or damage to the mortgaged property, have the
mortgaged property restored and repaired to at least as good a condition
as existed at the effective date of the primary mortgage insurance
policy, ordinary wear and tear excepted; and
. tender to the primary insurer good and merchantable title to and
possession of the mortgaged property.
The master servicer, on behalf of itself, the trustee and the
certificateholders, will present claims to the insurer under each primary
mortgage insurance policy, and will take any reasonable steps consistent with
its practices regarding comparable mortgage loans and necessary to receive
payment or to permit recovery under the policy with respect to defaulted
mortgage loans. As set forth above, all collections by or on behalf of the
master servicer under any primary mortgage insurance policy and, when the
mortgaged property has not been restored, the hazard insurance policy, are to be
deposited in the Certificate Account, subject to withdrawal as heretofore
described.
If the mortgaged property securing a defaulted mortgage loan is damaged and
proceeds, if any, from the related hazard insurance policy are insufficient to
restore the damaged mortgaged property to a condition sufficient to permit
recovery under the related primary mortgage insurance policy, if any, the master
servicer is not required to expend its own funds to restore the damaged
mortgaged property unless it determines that the restoration will increase the
proceeds
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to certificateholders on liquidation of the mortgage loan after reimbursement of
the master servicer for its expenses and that the expenses will be recoverable
by it from related insurance proceeds or liquidation proceeds.
If recovery on a defaulted mortgage loan under any related primary mortgage
insurance policy is not available for the reasons set forth in the preceding
paragraph, or if the defaulted mortgage loan is not covered by a primary
mortgage insurance policy, the master servicer will be obligated to follow or
cause to be followed the normal practices and procedures that it deems
appropriate to realize upon the defaulted mortgage loan. If the proceeds of any
liquidation of the mortgaged property securing the defaulted mortgage loan are
less than the principal balance of the mortgage loan plus interest accrued on it
that is payable to certificateholders, the trust fund will realize a loss in the
amount of the difference plus the aggregate of expenses incurred by the master
servicer in connection with the proceedings that are reimbursable under the
pooling and servicing agreement. In the unlikely event that the proceedings
result in a total recovery which is, after reimbursement to the master servicer
of its expenses, in excess of the principal balance of the mortgage loan plus
interest accrued on it that is payable to certificateholders, the master
servicer will be entitled to withdraw or retain from the Certificate Account
amounts representing its normal servicing compensation with respect to the
mortgage loan and, unless otherwise specified in the related prospectus
supplement, amounts representing the balance of the excess, exclusive of any
amount required by law to be forwarded to the related mortgagor, as additional
servicing compensation.
If the master servicer or its designee recovers insurance proceeds not used
to restore the property which, when added to any related liquidation proceeds
and after deduction of certain expenses reimbursable to the master servicer,
exceed the principal balance of a mortgage loan plus accrued interest that is
payable to certificateholders, the master servicer will be entitled to withdraw
or retain from the Certificate Account amounts representing its normal servicing
compensation with respect to the mortgage loan. If the master servicer has
expended its own funds to restore the damaged mortgaged property and the funds
have not been reimbursed under the related hazard insurance policy, it will be
entitled to withdraw from the Certificate Account out of related liquidation
proceeds or insurance proceeds an amount equal to the expenses incurred by it,
in which event the trust fund may realize a loss up to the amount so charged.
Since insurance proceeds cannot exceed deficiency claims and certain expenses
incurred by the master servicer, no insurance payment or recovery will result in
a recovery to the trust fund that exceeds the principal balance of the defaulted
mortgage loan together with accrued interest on it. See "Credit Enhancement" in
this prospectus and in the related prospectus supplement.
Unless the related pooling and servicing agreement provides for a different
application of liquidation proceeds, the proceeds from any liquidation of a
mortgage loan will be applied in the following order of priority:
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. first, to reimburse the master servicer for any unreimbursed expenses
incurred by it to restore the related mortgaged property and any
unreimbursed servicing compensation payable to the master servicer with
respect to the mortgage loan;
. second, to reimburse the master servicer for any unreimbursed advances
with respect to the mortgage loan;
. third, to accrued and unpaid interest on the outstanding principal
balance of the mortgage loan, to the extent no advance has been made for
that amount; and
. fourth, as a recovery of principal of the mortgage loan.
FHA Insurance; VA Guaranties. Mortgage loans designated in the related
prospectus supplement as insured by the FHA will be insured by the FHA as
authorized under the United States National Housing Act of 1934, as amended.
Those mortgage 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 and the FHA 245 graduated payment mortgage program. These programs
generally limit the principal amount and interest rates of the mortgage loans
insured. Mortgage loans insured by the FHA generally require a minimum down
payment of approximately 5% of the original principal amount of the loan. No
FHA-insured mortgage loans relating to a series may have an interest rate or
original principal amount exceeding the applicable FHA limits at the time of
origination of the loan.
The insurance premiums for mortgage loans insured by the FHA are collected
by lenders approved by the HUD or by the master servicer or any sub-servicers
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 HUD or upon assignment of the defaulted mortgage loan to HUD. With
respect to a defaulted FHA-insured mortgage loan, the master servicer or any
sub-servicer is limited in its ability to initiate foreclosure proceedings. When
it is determined, either by the master servicer or any sub-servicer or HUD, that
default was caused by circumstances beyond the mortgagor's control, the master
servicer or any sub-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 mortgagor. These plans may involve the reduction or suspension of
regular mortgage payments for a specified period, with the payments to be made
up on or before the maturity date of the mortgage, or the recasting of payments
due under the mortgage up to or beyond the maturity date. In addition, when a
default caused by circumstances beyond the mortgagor's control is accompanied by
certain other criteria, HUD may provide relief by making payments to the master
servicer or any sub-servicer in partial or full satisfaction of amounts due
under the mortgage loan, which payments are to be repaid by the mortgagor to
HUD, or by accepting assignment of the loan from the master servicer or any sub-
servicer. With certain exceptions, at least three full monthly installments must
be due and unpaid under the
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mortgage loan and HUD must have rejected any request for relief from the
mortgagor before the master servicer or any sub-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. The master servicer of any sub-servicer of each FHA-
insured mortgage loan will be obligated to purchase the debenture issued in
satisfaction of the mortgage loan upon default for an amount equal to the
principal amount of the debenture.
The amount of insurance benefits generally paid by the FHA is equal to the
entire unpaid principal amount of the defaulted mortgage loan adjusted to
reimburse the master servicer or sub-servicer for certain costs and expenses and
to deduct certain amounts received or retained by the master servicer or sub-
servicer after default. When entitlement to insurance benefits results from
foreclosure (or other acquisition of possession) and conveyance to HUD, the
master servicer or sub-servicer is compensated for no more than two-thirds of
its foreclosure costs, and is compensated for accrued and unpaid interest 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 mortgage 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-insured mortgage loan, bears interest from a
date 30 days after the mortgagor's first uncorrected failure to perform any
obligation to make any payment due under the mortgage loan 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.
Mortgage loans designated in the related prospectus supplement as
guaranteed by the VA will be partially guaranteed by the VA under the
Serviceman's Readjustment Act of 1944, as amended. The Serviceman's Readjustment
Act of 1944, as amended, permits a veteran (or in certain instances the spouse
of a veteran) to obtain a mortgage loan guaranty 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 purchaser and permits the guarantee of mortgage loans of
up to 30 years' duration. However, no mortgage loan guaranteed by the VA will
have an original principal amount greater than five times the partial VA
guaranty for the mortgage loan.
The maximum guaranty that may be issued by the VA under a VA guaranteed
mortgage loan depends upon the original principal amount of the mortgage loan,
as further described in 38 United States Code Section 3703(a), as amended. As of
February 1996, the maximum guaranty that may be issued by the VA under a VA
guaranteed mortgage loan of more than $144,000 is the lesser of 25% of the
original principal amount of the mortgage loan and $50,750. The liability on the
guaranty is reduced or increased pro rata with any reduction or increase in the
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amount of indebtedness, but in no event will the amount payable on the guaranty
exceed the amount of the original guaranty. The VA may, at its option and
without regard to the guaranty, make full payment to a mortgage holder of
unsatisfied indebtedness on a mortgage upon its assignment to the VA.
With respect to a defaulted VA guaranteed mortgage loan, the master
servicer or sub-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 guaranty is submitted after liquidation
of the mortgaged property.
The amount payable under the guaranty will be the percentage of the VA-
insured mortgage loan originally guaranteed applied to indebtedness outstanding
as of the applicable date of computation specified in the VA regulations.
Payments under the guaranty will be equal to the unpaid principal amount of the
loan, interest accrued on the unpaid balance of the loan to the appropriate date
of computation and limited expenses of the mortgagee, but in each case only to
the extent that the amounts have not been recovered through liquidation of the
mortgaged property. The amount payable under the guaranty may in no event exceed
the amount of the original guaranty.
Servicing and Other Compensation and Payment of Expenses
The principal servicing compensation to be paid to the master servicer in
respect of its master servicing activities for each series of certificates will
be equal to the percentage per annum described in the related prospectus
supplement of the outstanding principal balance of each mortgage loan, and the
compensation will be retained by it from collections of interest on the mortgage
loan in the related trust fund. As compensation for its servicing duties, a
sub-servicer or, if there is no sub-servicer, the master servicer will be
entitled to a monthly servicing fee as described in the related prospectus
supplement. In addition, generally the master servicer or a sub-servicer will
retain all prepayment charges, assumption fees and late payment charges, to the
extent collected from mortgagors, and investment income from funds in the
applicable Certificate Account.
The master servicer will, to the extent provided in the related pooling and
servicing agreement, pay or cause to be paid certain ongoing expenses associated
with each trust fund and incurred by it in connection with its responsibilities
under the related pooling and servicing agreement, including, without
limitation, payment of the fees and disbursements of the trustee, any custodian
appointed by the trustee, the certificate registrar and any paying agent, and
payment of expenses incurred in enforcing the obligations of sub-servicers and
sellers. The master servicer will be entitled to reimbursement of expenses
incurred in enforcing the obligations of sub-servicers and sellers under certain
limited circumstances. In addition, as indicated in the preceding section, the
master servicer will be entitled to reimbursement for certain expenses incurred
by it in connection with any defaulted mortgage loan as to which it has
determined that all recoverable liquidation proceeds and insurance proceeds have
been received,
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and in connection with the restoration of mortgaged properties, the right of
reimbursement being before the rights of certificateholders to receive any
related liquidation proceeds, including insurance proceeds.
Evidence as to Compliance
Each pooling and servicing agreement will provide that on or before a
specified date in each year, a firm of independent public accountants will
furnish a statement to the trustee to the effect that, on the basis of the
examination by the firm conducted substantially in compliance with the Uniform
Single Attestation Program for Mortgage Bankers or the Audit Program for
Mortgages serviced for Freddie Mac, the servicing by or on behalf of the master
servicer of mortgage loans, private mortgage-backed securities or agency
securities, under pooling and servicing agreements substantially similar to each
other (including the related pooling and servicing agreement) was conducted in
compliance with those agreements except for any significant exceptions or errors
in records that, in the opinion of the firm, the Audit Program for Mortgages
serviced for Freddie Mac or the Uniform Single Attestation Program for Mortgage
Bankers requires it to report. In rendering its statement the firm may rely, as
to matters relating to the direct servicing of mortgage loans, private mortgage-
backed securities or agency securities by sub-servicers, upon comparable
statements for examinations conducted substantially in compliance with the
Uniform Single Attestation Program for Mortgage Bankers or the Audit Program for
Mortgages serviced for Freddie Mac (rendered within one year of the statement)
of firms of independent public accountants with respect to the related sub-
servicer.
Each pooling and servicing agreement will also provide for delivery to the
trustee, on or before a specified date in each year, of an annual statement
signed by two officers of the master servicer to the effect that the master
servicer has fulfilled its obligations under the pooling and servicing agreement
throughout the preceding year.
Copies of the annual accountants' statement and the statement of officers
of the master servicer may be obtained by certificateholders of the related
series without charge upon written request to the master servicer at the address
set forth in the related prospectus supplement.
List of Certificateholders
Each pooling and servicing agreement will provide that three or more
holders of certificates of any series may, by written request to the trustee,
obtain access to the list of all certificateholders maintained by the trustee
for the purpose of communicating with other certificateholders with respect to
their rights under the pooling and servicing agreement and the certificates.
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Matters Regarding the Master Servicer and the Depositor
Each pooling and servicing agreement will provide that the master servicer
may not resign from its obligations and duties under the pooling and servicing
agreement except upon a determination that the performance by it of its duties
under the pooling and servicing agreement is no longer permissible under
applicable law. No resignation will become effective until the trustee or a
successor servicer has assumed the master servicer's obligations and duties
under the pooling and servicing agreement.
Each pooling and servicing agreement will further provide that neither the
master servicer, the depositor nor any director, officer, employee, or agent of
the master servicer or the depositor will be under any liability to the related
trust fund or certificateholders for any action taken or for refraining from the
taking of any action in good faith pursuant to the pooling and servicing
agreement, or for errors in judgment. However, neither the master servicer, the
depositor nor any director, officer, employee, or agent of the master servicer
or the depositor will be protected against any liability that would otherwise be
imposed for willful misfeasance, bad faith or negligence in the performance of
duties under the pooling and servicing agreement or for reckless disregard of
obligations and duties under the pooling and servicing agreement. Each pooling
and servicing agreement will further provide that the master servicer, the
depositor and any director, officer, employee or agent of the master servicer or
the depositor will be entitled to indemnification by the related trust fund and
will be held harmless against any loss, liability or expense incurred in
connection with any legal action relating to the pooling and servicing agreement
or the certificates, other than any loss, liability or expense related to any
specific Mortgage Asset or Mortgage Assets (except any loss, liability or
expense otherwise reimbursable pursuant to the pooling and servicing agreement)
and any loss, liability or expense incurred for willful misfeasance, bad faith
or negligence in the performance of duties under the pooling and servicing
agreement or for reckless disregard of obligations and duties under the pooling
and servicing agreement. In addition, each pooling and servicing agreement will
provide that neither the master servicer nor the depositor will be under any
obligation to appear in, prosecute or defend any legal action that is not
incidental to its respective responsibilities under the pooling and servicing
agreement and that in its opinion may involve it in any expense or liability.
The master servicer or the depositor may, however, in its discretion undertake
any action that it deems appropriate with respect to the pooling and servicing
agreement and the rights and duties of the parties to the pooling and servicing
agreement and the interests of the certificateholders under the pooling and
servicing agreement. In that event, the legal expenses and costs of the action
and any liability resulting from it will be expenses, costs and liabilities of
the trust fund, and the master servicer or the depositor, as the case may be,
will be entitled to be reimbursed for them out of funds otherwise distributable
to certificateholders.
Any person into which the master servicer may be merged or consolidated, or
any person resulting from any merger or consolidation to which the master
servicer is a party, or any person succeeding to the business of the master
servicer, will be the successor of the master servicer under each pooling and
servicing agreement, provided that the person is qualified to sell
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mortgage loans to, and service mortgage loans on behalf of, Fannie Mae or
Freddie Mac and further provided that the merger, consolidation or succession
does not adversely affect the then current rating or ratings of the class or
classes of certificates of any series that have been rated.
Events of Default
The applicable prospectus supplement may provide for other events of
default, but if it does not, then events of default under each pooling and
servicing agreement will consist of
. any failure by the master servicer to deposit in the Certificate Account
or remit to the trustee any payment which continues unremedied for five
days after the giving of written notice of the failure to the master
servicer by the trustee or the depositor, or to the master servicer and
the trustee by the holders of certificates having not less than 25% of
the voting rights evidenced by the certificates;
. any failure by the master servicer to observe or perform in any material
respect any of its other covenants or agreements in the pooling and
servicing agreement which failure materially affects the rights of
certificateholders that continues unremedied for sixty days after the
giving of written notice of the failure to the master servicer by the
trustee or the depositor, or to the master servicer and the trustee by
the holders of certificates of any class evidencing not less than 25% of
the voting rights evidenced by the certificate; and
. certain events of insolvency, readjustment of debt, marshaling of assets
and liabilities or similar proceeding and certain actions by or on
behalf of the master servicer indicating its insolvency, reorganization
or inability to pay its obligations.
If specified in the related prospectus supplement, the pooling and
servicing agreement will permit the trustee to sell the Mortgage Assets and the
other assets of the trust fund if payments on them are insufficient to make
payments required in the pooling and servicing agreement. The assets of the
trust fund will be sold only under the circumstances and in the manner specified
in the related prospectus supplement.
Rights Upon Event of Default
So long as an event of default under a pooling and servicing agreement
remains unremedied, the depositor or the trustee may, and at the direction of
holders of certificates having not less than 66 2/3% of the voting rights
evidenced by the certificates and under any other circumstances specified in the
pooling and servicing agreement, the trustee shall, terminate all of the rights
and obligations of the master servicer under the pooling and servicing agreement
relating to the trust fund and in the Mortgage Assets, whereupon the trustee
will succeed to all of the responsibilities, duties and liabilities of the
master servicer under the pooling and servicing agreement, including, if
specified in the related prospectus supplement, the obligation to make
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advances, and will be entitled to similar compensation arrangements. If the
trustee is unwilling or unable so to act, it may appoint, or petition a court of
competent jurisdiction for the appointment of, a mortgage loan servicing
institution with a net worth of at least $10,000,000 to act as successor to the
master servicer under the pooling and servicing agreement. Pending appointment,
the trustee is obligated to act as master servicer. The trustee and any
successor may agree upon the servicing compensation to be paid to the successor
servicer, which may not be greater than the compensation payable to the master
servicer under the pooling and servicing agreement.
No certificateholder, solely by virtue of its status as a
certificateholder, will have any right under any pooling and servicing agreement
to institute any proceeding with respect to the pooling and servicing agreement,
unless the holder previously has given to the trustee written notice of default
and unless the holders of any class of certificates of the series evidencing not
less than 25% of the voting rights evidenced by the certificates have requested
the trustee in writing to institute a proceeding in its own name as trustee and
have offered to the trustee reasonable indemnity, and the trustee for 60 days
has neglected or refused to institute the proceeding.
Amendment
The applicable prospectus supplement may specify other amendment
provisions, but if it does not, then each pooling and servicing agreement may be
amended by the depositor, the master servicer and the trustee, without the
consent of any of the certificateholders,
(a) to cure any ambiguity or mistake;
(b) to correct any defective provision in the pooling and servicing
agreement or to supplement any provision in the pooling and servicing
agreement that may be inconsistent with any other provision in it;
(c) to add to the duties of the depositor, the seller or the master
servicer;
(d) to add any other provisions with respect to matters or questions
arising under the pooling and servicing agreement; or
(e) to modify, alter, amend, add to or rescind any of the terms or
provisions contained in the pooling and servicing agreement.
However, no action pursuant to clauses (d) or (e) may, as evidenced by an
opinion of counsel, adversely affect in any material respect the interests of
any certificateholder. But no opinion of counsel will be required if the person
requesting the amendment obtains a letter from each rating agency requested to
rate the class or classes of certificates of the series stating that the
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amendment will not result in the downgrading or withdrawal of the respective
ratings then assigned to the certificates.
In addition, to the extent provided in the related pooling and servicing
agreement, a pooling and servicing agreement may be amended without the consent
of any of the certificateholders to change the manner in which the Certificate
Account is maintained, if the change does not adversely affect the then current
rating of the class or classes of certificates of the series that have been
rated at the request of the depositor. Moreover, the related pooling and
servicing agreement may be amended to modify, eliminate or add to any of its
provisions to the extent necessary to maintain the qualification of the related
trust fund as a REMIC or to avoid or minimize the risk of imposition of any tax
on the REMIC, if a REMIC election is made with respect to the trust fund, or to
comply with any other requirements of the Code, if the trustee has received an
opinion of counsel to the effect that the action is necessary or helpful to
maintain the qualification, avoid or minimize that risk or comply with those
requirements, as applicable.
The applicable prospectus supplement may specify other amendment
provisions, but if it does not, then each pooling and servicing agreement may
also be amended by the depositor, the master servicer and the trustee with the
consent of holders of certificates of the series evidencing a majority in
interest of each class affected thereby for the purpose of adding any provisions
to or changing in any manner or eliminating any of the provisions of the pooling
and servicing agreement or of modifying in any manner the rights of the holders
of the related certificates. However, no amendment may
(a) reduce in any manner the amount of, or delay the timing of, payments
received on Mortgage Assets that are required to be distributed on any
certificate without the consent of the holder of the certificate,
(b) adversely affect in any material respect the interests of the holders
of any class of certificates in a manner other than as described in (a),
without the consent of the holders of certificates of the class evidencing,
as to the class, percentage interests aggregating 66%, or
(c) reduce the aforesaid percentage of certificates of any class of
holders that is required to consent to the amendment without the consent of
the holders of all certificates of the class covered by the pooling and
servicing agreement then outstanding.
If a REMIC election is made with respect to a trust fund, the trustee will not
be entitled to consent to an amendment to the related pooling and servicing
agreement without having first received an opinion of counsel to the effect that
the amendment will not cause the trust fund to fail to qualify as a REMIC.
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Termination; Optional Termination
Generally, the obligations created by each pooling and servicing agreement
for each series of certificates will terminate upon the payment to the related
certificateholders of all amounts held in the Certificate Account or by the
master servicer and required to be paid to them pursuant to the pooling and
servicing agreement following the later of
. the final payment or other liquidation of the last of the Mortgage
Assets subject to it or the disposition of all property acquired upon
foreclosure of the Mortgage Assets remaining in the trust fund and
. the purchase by the master servicer or, if REMIC treatment has been
elected and if specified in the related prospectus supplement, by the
holder of the residual interest in the REMIC, from the related trust
fund of all of the remaining Mortgage Assets and all property acquired
in respect of the Mortgage Assets.
See "Material Federal Income Tax Consequences" in this prospectus and in the
related prospectus supplement.
Any purchase of Mortgage Assets and property acquired in respect of
Mortgage Assets evidenced by a series of certificates will be made at the option
of the master servicer or the party specified in the related prospectus
supplement, including the holder of the REMIC residual interest, at a price, and
in accordance with the procedures, specified in the related prospectus
supplement. The exercise of that right will effect early retirement of the
certificates of that series, but the right of the master servicer or the other
party or, if applicable, the holder of the REMIC residual interest, to so
purchase is subject to the principal balance of the related Mortgage Assets
being less than the percentage specified in the related prospectus supplement of
the aggregate principal balance of the Mortgage Assets at the cut-off date for
the series. The foregoing is subject to the provision that if a REMIC election
is made with respect to a trust fund, any repurchase pursuant to the second
bulleted item above will be made only in connection with a "qualified
liquidation" of the REMIC for federal tax purposes.
The Trustee
The trustee under each pooling and servicing agreement will be named in the
applicable prospectus supplement. The commercial bank or trust company serving
as trustee may have normal banking relationships with the depositor, the master
servicer and any of their respective affiliates.
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LEGAL ASPECTS OF THE MORTGAGE LOANS
The following discussion contains summaries, which are general in nature,
of certain legal matters relating to the mortgage loans. Because the legal
aspects are governed primarily by applicable state laws, which may differ
substantially from state to state, the summaries do not purport to be complete
or to reflect the laws of any particular state or to encompass the laws of all
states in which the security for the mortgage loans is situated.
General
The mortgage loans will be secured by deeds of trust, mortgages, security
deeds or deeds to secure debt, depending upon the prevailing practice in the
state in which the property subject to the loan is located. Deeds of trust are
used almost exclusively in California instead of mortgages. A mortgage creates a
lien upon the real property encumbered by the mortgage, which lien is generally
not before the lien for real estate taxes and assessments. Priority between
mortgages depends on their terms and generally on the order of recording with a
state or county office. There are two parties to a mortgage, the mortgagor, who
is the borrower and owner of the mortgaged property, and the mortgagee, who is
the lender. Under the mortgage instrument, the mortgagor delivers to the
mortgagee a note or bond and the mortgage. Although a deed of trust is similar
to a mortgage, a deed of trust formally has three parties, the borrower-property
owner called the trustor (similar to a mortgagor), a lender (similar to a
mortgagee) called the beneficiary, and a third-party grantee called the trustee.
Under a deed of trust, the borrower grants the property, irrevocably until the
debt is paid, in trust, generally with a power of sale, to the trustee to secure
payment of the obligation. A security deed and a deed to secure debt are special
types of deeds which indicate on their face that they are granted to secure an
underlying debt. By executing a security deed or deed to secure debt, the
grantor conveys title to, as opposed to merely creating a lien upon, the subject
property to the grantee until the underlying debt is repaid. The trustee's
authority under a deed of trust, the mortgagee's authority under a mortgage and
the grantee's authority under a security deed or deed to secure debt are
governed by law and, with respect to some deeds of trust, the directions of the
beneficiary.
Cooperatives. Certain of the mortgage loans may be cooperative loans. The
cooperative owns all the real property that comprises the project, including the
land, separate dwelling units and all common areas. The cooperative is directly
responsible for project management and, in most cases, payment of real estate
taxes and hazard and liability insurance. If there is a blanket mortgage on the
cooperative or underlying land or both, as is generally the case, the
cooperative, as project mortgagor, is also responsible for meeting these
mortgage obligations. A blanket mortgage is ordinarily incurred by the
cooperative in connection with the construction or purchase of the cooperative's
apartment building. The interest of the occupant under proprietary leases or
occupancy agreements to which that cooperative is a party are generally
subordinate to the interest of the holder of the blanket mortgage in that
building. If the cooperative is unable to meet the payment obligations arising
under its blanket mortgage, the mortgagee holding the blanket mortgage could
foreclose on that mortgage and terminate all subordinate proprietary leases and
occupancy agreements. In addition, the blanket mortgage on a cooperative may
provide financing in the form of a mortgage that does not fully amortize with a
significant
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portion of principal being due in one lump sum at final maturity. The inability
of the cooperative to refinance this mortgage and its consequent inability to
make the final payment could lead to foreclosure by the mortgagee providing the
financing. A foreclosure in either event by the holder of the blanket mortgage
could eliminate or significantly diminish the value of any collateral held by
the lender who financed the purchase by an individual tenant-stockholder of
cooperative shares or, in the case of a trust fund including cooperative loans,
the collateral securing the cooperative loans.
The cooperative is owned by tenant-stockholders who, through ownership of
stock, shares or membership certificates in the corporation, receive proprietary
leases or occupancy agreements which confer exclusive rights to occupy specific
units. Generally, a tenant-stockholder of a cooperative must make a monthly
payment to the cooperative representing the tenant-stockholder's pro rata share
of the cooperative's payments for its blanket mortgage, real property taxes,
maintenance expenses and other capital or ordinary expenses. An ownership
interest in a cooperative and accompanying rights is financed through a
cooperative share loan evidenced by a promissory note and secured by a security
interest in the occupancy agreement or proprietary lease and in the related
cooperative shares. The lender takes possession of the share certificate and a
counterpart of the proprietary lease or occupancy agreement, and a financing
statement covering the proprietary lease or occupancy agreement and the
cooperative shares 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.
Foreclosure/Repossession
Deed of Trust. Foreclosure of a deed of trust is generally accomplished by
a non-judicial sale under a specific provision in the deed of trust which
authorizes the trustee to sell the property at public auction upon any default
by the borrower under the terms of the note or deed of trust. In certain states,
foreclosure also may be accomplished by judicial action in the manner provided
for foreclosure of mortgages. In some states, such as California, the trustee
must record a notice of default and send a copy to the borrower-trustor and to
any person who has recorded a request for a copy of any notice of default and
notice of sale. In addition, the trustee must provide notice in some states to
any other individual having an interest of record in the real property,
including any junior lien holders. If the deed of trust is not reinstated within
any applicable cure period, a notice of sale must be posted in a public place
and, in most states, including California, published for a specified period of
time in one or more newspapers. In addition, these notice provisions require
that a copy of the notice of sale be posted on the property and sent to all
parties having an interest of record in the property. In California, the entire
process from recording a notice of default to a non-judicial sale usually takes
four to five months.
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In some states, including California, the borrower-trustor has the right to
reinstate the loan at any time following default until shortly before the
trustee's sale. In general, the borrower, or any other person having a junior
encumbrance on the real estate, may, during a reinstatement period, cure the
default by paying the entire amount in arrears plus the costs and expenses
incurred in enforcing the obligation. Certain state laws control the amount of
foreclosure expenses and costs, including attorney's fees, which may be
recoverable by a lender.
Mortgages. Foreclosure of a mortgage is generally accomplished by judicial
action. The action is initiated by the service of legal pleadings upon all
parties having an interest in the real property. Delays in completion of the
foreclosure may occasionally result from difficulties in locating necessary
parties. Judicial foreclosure proceedings are often not contested by any of the
parties. When the mortgagee's right to foreclosure is contested, the legal
proceedings necessary to resolve the issue can be time consuming. After the
completion of a judicial foreclosure proceeding, the court generally issues a
judgment of foreclosure and appoints a referee or other court officer to conduct
the sale of the property. In general, the borrower, or any other person having a
junior encumbrance on the real estate, may, during a statutorily prescribed
reinstatement period, cure a monetary default by paying the entire amount in
arrears plus other designated costs and expenses incurred in enforcing the
obligation. Generally, state law controls the amount of foreclosure expenses and
costs, including attorney's fees, which may be recovered by a lender. After the
reinstatement period has expired without the default having been cured, the
borrower or junior lienholder no longer has the right to reinstate the loan and
must pay the loan in full to prevent the scheduled foreclosure sale. If the deed
of trust is not reinstated, a notice of sale must be posted in a public place
and, in most states, published for a specific period of time in one or more
newspapers. In addition, some state laws require that a copy of the notice of
sale be posted on the property and sent to all parties having an interest in the
real property.
Although foreclosure sales are typically public sales, frequently no third
party purchaser bids in excess of the lender's lien because of the difficulty of
determining the exact status of title to the property, the possible
deterioration of the property during the foreclosure proceedings and a
requirement that the purchaser pay for the property in cash or by cashier's
check. Thus the foreclosing lender often purchases the property from the trustee
or referee for an amount equal to the principal amount outstanding under the
loan, accrued and unpaid interest and the expenses of foreclosure. Thereafter,
the lender will assume the burden of ownership, including obtaining hazard
insurance and making repairs at its own expense necessary to render the property
suitable for sale. The lender will commonly obtain the services of a real estate
broker and pay the broker's commission in connection with the sale of the
property. Depending upon market conditions, the ultimate proceeds of the sale of
the property may not equal the lender's investment in the property.
Courts have imposed general equitable principles upon foreclosure, which
are generally designed to mitigate the legal consequences to the borrower of the
borrower's defaults under the loan documents. Some courts have been faced with
the issue of whether federal or state constitutional provisions reflecting due
process concerns for fair notice require that borrowers
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under deeds of trust receive notice longer than that prescribed by statute. For
the most part, these cases have upheld the notice provisions as being reasonable
or have found that the sale by a trustee under a deed of trust does not involve
sufficient state action to afford constitutional protection to the borrower.
Cooperative Loans. The cooperative shares owned by the tenant-stockholder
and pledged to the lender are, in almost all cases, subject to restrictions on
transfer as set forth in the cooperative's certificate of incorporation and
bylaws, as well as the proprietary lease or occupancy agreement, and may be
canceled by the cooperative for failure by the tenant-stockholder to pay rent or
other obligations or charges owed by the tenant-stockholder, including
mechanics' liens against the cooperative apartment building incurred by the
tenant-stockholder. The proprietary lease or occupancy agreement generally
permits the cooperative to terminate the lease or agreement if an obligor fails
to make payments or defaults in the performance of covenants required under it.
Typically, the lender and the cooperative enter into a recognition agreement,
which establishes the rights and obligations of both parties upon a default by
the tenant-stockholder on its obligations under the proprietary lease or
occupancy agreement. A default by the tenant-stockholder under the proprietary
lease or occupancy agreement will usually constitute a default under the
security agreement between the lender and the tenant-stockholder.
The recognition agreement generally provides that, if the tenant-
stockholder has defaulted under the proprietary lease or occupancy agreement,
the cooperative will take no action to terminate the 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 the 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 on it.
Recognition agreements also provide that upon foreclosure of 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,
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place and terms of the foreclosure. Generally, a sale conducted according to the
usual practice of banks selling similar collateral will be considered reasonably
conducted.
Article 9 of the UCC provides that the proceeds of the sale will be applied
first to pay the costs and expenses of the sale and then to satisfy the
indebtedness secured by the lender's security interest. The recognition
agreement, however, generally provides that the lender's right to reimbursement
is subject to the right of the cooperative to receive sums due under the
proprietary lease or occupancy agreement. If there are proceeds remaining, the
lender must account to the tenant-stockholder for the surplus. Conversely, if a
portion of the indebtedness remains unpaid, the tenant-stockholder is generally
responsible for the deficiency. See "Anti-Deficiency Legislation and Other
Limitations on Lenders."
In the case of foreclosure on a building 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 the building but who did not purchase shares in the cooperative when
the building was so converted.
Rights of Redemption
In some states after a sale pursuant to a deed of trust or foreclosure of a
mortgage, the borrower and certain foreclosed junior lienors are given a
statutory period in which to redeem the property from the foreclosure sale. In
certain other states, including California, this right of redemption applies
only to sales following judicial foreclosure, and not to sales pursuant to a
non-judicial power of sale. In most states where the right of redemption is
available, statutory redemption may occur upon payment of the foreclosure
purchase price, accrued interest and taxes. In some states, the right to redeem
is an equitable right. The effect of a right of redemption is to diminish the
ability of the lender to sell the foreclosed property. The exercise of a right
of redemption would defeat the title of any purchaser at a foreclosure sale, or
of any purchaser from the lender after judicial foreclosure or sale under a deed
of trust. Consequently, the practical effect of the redemption right is to force
the lender to retain the property and pay the expenses of ownership until the
redemption period has run.
Anti-Deficiency Legislation and Other Limitations on Lenders
Certain states have imposed statutory restrictions that limit the remedies
of a beneficiary under a deed of trust or a mortgagee under a mortgage. In some
states, including California, statutes limit the right of the beneficiary or
mortgagee to obtain a deficiency judgment against the borrower following
foreclosure or a sale under a deed of trust. A deficiency judgment is a personal
judgment against the borrower equal in most cases to the difference between the
amount due to the lender and the current fair market value of the property at
the time of the foreclosure sale. As a result of these prohibitions, it is
anticipated that in most instances the master servicer
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will utilize the non-judicial foreclosure remedy and will not seek deficiency
judgments against defaulting mortgagors.
Some state statutes may require the beneficiary or mortgagee to exhaust the
security afforded under a deed of trust or mortgage by foreclosure in an attempt
to satisfy the full debt before bringing a personal action against the borrower.
In certain other states, the lender has the option of bringing a personal action
against the borrower on the debt without first exhausting that security.
However, in some of these states, following judgment on a personal action, the
lender may be considered to have elected a remedy and may be precluded from
exercising other remedies with respect to the security. Consequently, the
practical effect of the election requirement, when applicable, is that lenders
will usually proceed first against the security rather than bringing a personal
action against the borrower.
In some states, exceptions to the anti-deficiency statutes are provided for
in certain instances where the value of the lender's security has been impaired
by acts or omissions of the borrower, for example, upon waste of the property.
In addition to anti-deficiency and related legislation, numerous other
federal and state statutory provisions, including the federal bankruptcy laws,
the federal Soldiers' and Sailors' Civil Relief Act of 1940 and state laws
affording relief to debtors, may interfere with or affect the ability of the
secured mortgage lender to realize on its security. For example, in a proceeding
under the federal Bankruptcy Code, a lender may not foreclose on a mortgaged
property without the permission of the bankruptcy court. And in certain
instances a bankruptcy court may allow a borrower to reduce the monthly
payments, change the rate of interest, and alter the mortgage loan repayment
schedule for under collateralized mortgage loans. The effect of these types of
proceedings can be to cause delays in receiving payments on the loans underlying
certificates and even to reduce the aggregate amount of payments on the loans
underlying certificates.
The federal tax laws provide priority to certain tax liens over the lien of
a mortgage or secured party. Numerous federal and state consumer protection laws
impose substantive requirements upon mortgage lenders in connection with the
origination, servicing and enforcement of mortgage loans. These laws include the
federal Truth-in-Lending Act, Real Estate Settlement Procedures Act, Equal
Credit Opportunity Act, Fair Credit Billing Act, Fair Credit Reporting Act and
related statutes and regulations. These federal and state laws impose specific
statutory liabilities on lenders who fail to comply with the provisions of the
law. In some cases, this liability may affect assignees of the loans or
contracts.
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 was conducted in a
commercially reasonable manner. In the case of a cooperative loan, the
collateral would be the shares of the cooperative and the related proprietary
lease or occupancy agreement.
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Environmental Risks
Real property pledged as security to a lender may be subject to unforeseen
environmental risks. Under the laws of certain states, contamination of a
property may give rise to a lien on the property to assure the payment of the
costs of clean-up. In several states that lien has priority over the lien of an
existing mortgage on the property. In addition, under CERCLA, the EPA may impose
a lien on property where the EPA has incurred clean-up costs. However, a CERCLA
lien is subordinate to pre-existing, perfected security interests.
Under the laws of some states, and under CERCLA, it is conceivable that a
secured lender may be held liable as an "owner" or "operator" for the costs of
addressing releases or threatened releases of hazardous substances at a
mortgaged property, even though the environmental damage or threat was caused by
a prior or current owner or operator. CERCLA imposes liability for the costs on
any and all "responsible parties," including owners or operators. However,
CERCLA excludes from the definition of "owner or operator" a secured creditor
who holds indicia of ownership primarily to protect its security interest but
does not "participate in the management" of the property. Thus, if a lender's
activities begin to encroach on the actual management of a contaminated facility
or property, the lender may incur liability as an "owner or operator" under
CERCLA. Similarly, if a lender forecloses and takes title to a contaminated
facility or property, the lender may incur CERCLA liability in various
circumstances, including when it holds the facility or property as an
investment, including leasing the facility or property to a third party, or
fails to market the property in a timely fashion.
Whether actions taken by a lender would constitute participation in the
management of a property causing the lender to lose the protection of the
secured creditor exclusion has been a matter of judicial interpretation of the
statutory language, and court decisions have historically been inconsistent. In
United States v. Fleet Factors Corp. (1990), the United States Court of Appeals
for the Eleventh Circuit suggested that the mere capacity of the lender to
influence a borrower's decisions regarding disposal of hazardous substances was
sufficient participation in the management of the borrower's business to deny
the protection of the secured creditor exclusion to the lender, regardless of
whether the lender actually exercised influence. Other judicial decisions did
not interpret the secured creditor exclusion as narrowly as did the Eleventh
Circuit.
This ambiguity appears to have been resolved by the enactment of the Asset
Conservation Act, which took effect on September 30, 1996. The Asset
Conservation Act provides that to be deemed to have participated in the
management of a secured property, a lender must actually participate in the
operational affairs of the property or of the borrower. The Asset Conservation
Act also provides that participation in the management of the property does not
include "merely having the capacity to influence, or unexercised right to
control" operations. Rather, a lender will lose the protection of the secured
creditor exclusion only if it exercises decision-making control over the
borrower's environmental compliance and hazardous substance handling and
disposal
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practices, or assumes day-to-day management of all operational functions of the
secured property.
If a lender is or becomes liable, it can bring an action for contribution
against any other "responsible parties," including a previous owner or operator,
who created the environmental hazard, but those persons or entities may be
bankrupt or otherwise judgment proof. The costs associated with environmental
cleanup may be substantial. It is conceivable that the costs arising from the
circumstances set forth above would result in a loss to certificateholders.
CERCLA does not apply to petroleum products, and the secured creditor
exclusion does not govern liability for cleanup costs under federal laws other
than CERCLA, in particular Subtitle I of RCRA, which regulates underground
petroleum storage tanks, but not heating oil tanks. The EPA has adopted a lender
liability rule for underground storage tanks under Subtitle I of RCRA. Under
that rule, a holder of a security interest in an underground storage tank or
real property containing an underground storage tank is not considered an
operator of the underground storage tank as long as petroleum is not added to,
stored in or dispensed from the tank. Moreover, under the Asset Conservation
Act, the protections accorded to lenders under CERCLA are also accorded to
holders of security interests in underground petroleum storage tanks. It should
be noted, however, that liability for cleanup of petroleum contamination may be
governed by state law, which may not provide for any specific protection for
secured creditors.
Except as otherwise specified in the applicable prospectus supplement, at
the time the mortgage loans were originated, no environmental assessment or a
very limited environmental assessment of the Mortgage Properties was conducted.
Due-on-Sale Clauses
Generally, each conventional mortgage loan will contain a due-on-sale
clause which will generally provide that if the mortgagor or obligor sells,
transfers or conveys the mortgaged property, the loan may be accelerated by the
mortgagee. In recent years, court decisions and legislative actions have placed
substantial restriction on the right of lenders to enforce these clauses in many
states. For instance, the California Supreme Court in August 1978 held that due-
on-sale clauses were generally unenforceable. However, the Garn-St Germain Act,
subject to specified exceptions, preempts state constitutional, statutory and
case law prohibiting the enforcement of due-on-sale clauses. As to loans secured
by an owner-occupied residence, the Garn-St Germain Act sets forth nine specific
instances in which a mortgagee covered by the Garn-St Germain Act may not
exercise its rights under a due-on-sale clause, notwithstanding the fact that a
transfer of the property may have occurred. The inability to enforce a due-on-
sale clause may result in transfer of the related mortgaged property to an
uncreditworthy person, which could increase the likelihood of default or may
result in a mortgage bearing an interest rate below the current market rate
being assumed by a new home buyer, which may affect the average life of the
mortgage loans and the number of mortgage loans which may extend to maturity.
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Prepayment Charges
Under certain state laws, prepayment charges may not be imposed after a
certain period of time following the origination of mortgage loans with respect
to prepayments on loans secured by liens encumbering owner-occupied residential
properties. Since many of the mortgaged properties will be owner-occupied, it is
anticipated that prepayment charges may not be imposed on many of the mortgage
loans. The absence of this a restraint on prepayment, particularly with respect
to fixed rate mortgage loans having higher mortgage rates, may increase the
likelihood of refinancing or other early retirement of the loans or contracts.
Applicability of Usury Laws
Title V of DIDMCA provides that state usury limitations shall not apply to
certain types of residential first mortgage loans originated by certain lenders
after March 31, 1980. The OTS, as successor to the Federal Home Loan Bank Board,
is authorized to issue rules and regulations and to publish interpretations
governing implementation of Title V of DIDMCA. The statute authorized the states
to reimpose interest rate limits by adopting, before April 1, 1983, a law or
constitutional provision that expressly rejects an application of the federal
law. In addition, even where Title V of DIDMCA 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 of DIDMCA. Certain states have
taken action to reimpose interest rate limits or to limit discount points or
other charges, or both.
Soldiers' and Sailors' Civil Relief Act
Generally, under the terms of the Relief Act, a borrower who enters
military service after the origination of the borrower's mortgage loan, or a
borrower who is a member of the National Guard or is in reserve status at the
time of the origination of the mortgage loan and is later called to active duty,
may not be charged interest above an annual rate of 6% during the period of the
borrower's active duty status, unless a court orders otherwise upon application
of the lender. It is possible that this interest rate limitation could have an
effect, for an indeterminate period of time, on the ability of the master
servicer to collect full amounts of interest on some of the mortgage loans.
Unless the applicable prospectus supplement provides a special feature for a
particular trust fund, any shortfall in interest collections resulting from the
application of the Relief Act could result in losses to the holders of the
certificates. In addition, the Relief Act imposes limitations which would impair
the ability of the master servicer to foreclose on an affected mortgage loan
during the borrower's period of active duty status. Thus, if an affected
mortgage loan goes into default, there may be delays and losses occasioned by
the inability to realize upon the mortgaged property in a timely fashion.
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MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The following discussion is the opinion of Andrews & Kurth L.L.P., counsel
to the depositor, as to the material federal income tax consequences of the
purchase, ownership, and disposition of certificates. The opinion of Andrews &
Kurth L.L.P. is based on laws, regulations, administrative rulings, and judicial
decisions now in effect, all of which are subject to change either prospectively
or retroactively. The following discussion does not describe aspects of federal
tax law that are unique to insurance companies, securities dealers and investors
who hold certificates as part of a straddle within the meaning of Section 1092
of the Code. Prospective investors are encouraged to consult their tax advisors
regarding the federal, state, local, and any other tax consequences to them of
the purchase, ownership, and disposition of certificates.
General
The federal income tax consequences to certificateholders will vary
depending on whether an election is made to treat the trust fund relating to a
particular series of certificates as a REMIC under the Code referred to in this
section unless otherwise indicated). The prospectus supplement for each series
of certificates will specify whether a REMIC election will be made.
Non-REMIC Certificates
If a REMIC election is not made, the trust fund will not be classified as
an association taxable as a corporation and each trust fund will be classified
as a grantor trust under subpart E, Part I of subchapter J of chapter 1 of
subtitle A of the Code. In this case, owners of certificates will be treated for
federal income tax purposes as owners of a portion of the trust fund's assets as
described below. Andrews & Kurth L.L.P. will issue an opinion confirming the
above-stated conclusions for each trust fund for which no REMIC election is made
and will file the opinion, along with their consent to its use, with the SEC by
means of a Current Report on Form 8-K on or prior to the closing date.
a. Single Class of Certificates
Characterization. The trust fund may be created with one class of
certificates. In this case, each certificateholder will be treated as the owner
of a pro rata undivided interest in the interest and principal portions of the
trust fund represented by the certificates and will be considered the equitable
owner of a pro rata undivided interest in each of the mortgage loans in the
Pool. Any amounts received by a certificateholder in lieu of amounts due with
respect to any mortgage loans because of a default or delinquency in payment
will be treated for federal income tax purposes as having the same character as
the payments they replace.
Each certificateholder will be required to report on its federal income tax
return in accordance with its method of accounting its pro rata share of the
entire income from the
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mortgage loans in the trust fund represented by certificates, including
interest, OID, if any, prepayment fees, assumption fees, any gain recognized
upon an assumption and late payment charges received by the master servicer.
Under Code Sections 162 or 212 each certificateholder will be entitled to deduct
its pro rata share of servicing fees, prepayment fees, assumption fees, any loss
recognized upon an assumption and late payment charges retained by the master
servicer, provided that the amounts are reasonable compensation for services
rendered to the trust fund. Certificateholders that are individuals, estates or
trusts will be entitled to deduct their share of expenses only to the extent
expenses of the trust fund plus their other miscellaneous itemized deductions,
as defined in the Code, exceed two percent of their adjusted gross income. A
certificateholder using the cash method of accounting must take into account its
pro rata share of income and deductions as and when collected by or paid to the
master servicer. A certificateholder using an accrual method of accounting must
take into account its pro rata share of income as it accrues, or when received
if the income is received before it accrues, and must take into account its pro
rata share of deductions as they accrue. If the servicing fees paid to the
master servicer are deemed to exceed reasonable servicing compensation, the
amount of any excess could be considered as an ownership interest retained by
the master servicer, or any person to whom the master servicer assigned for
value all or a portion of the servicing fees, in a portion of the interest
payments on the mortgage loans. The mortgage loans would then be subject to the
"coupon stripping" rules of the Code discussed below.
Generally, as to each series of certificates:
. a certificate owned by a "domestic building and loan association" within
the meaning of Code Section 7701(a)(19) representing principal and
interest payments on mortgage loans will be considered to represent
"loans . . . secured by an interest in real property which is . . .
residential property" within the meaning of Code Section
7701(a)(19)(C)(v), to the extent that the mortgage loans represented by
that certificate are of a type described in that Code section;
. a certificate owned by a real estate investment trust representing an
interest in mortgage loans will be considered to represent "real estate
assets" within the meaning of Code Section 856(c)(4)(A), and interest
income on the mortgage loans will be considered "interest on obligations
secured by mortgages on real property" within the meaning of Code
Section 856(c)(3)(B), to the extent that the mortgage loans represented
by that certificate are of a type described in that Code section; and
. a certificate owned by a REMIC will represent an "obligation . . . which
is principally secured, directly or indirectly, by an interest in real
property" within the meaning of Code Section 860G(a)(3).
Buydown Loans. Certain trust funds may hold buydown loans. These loans can
be secured not only by a mortgage on real property but also by a pledged account
that is drawn upon to subsidize the mortgagor's monthly mortgage payments for a
limited period of time. So long as
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the loan value of the real property at least equals the amount of the loan, then
for purposes of the above-described requirements, the mortgage loan will be
treated as fully secured by real property. If the loan value of the real
property is less than the amount of the loan, then, a certificateholder could be
required to treat the loan as one secured by an interest in real property only
to the extent of the loan value of the real property. The related prospectus
supplement for any series of certificates will specify whether apportionment
would be required.
Premium. The price paid for a certificate by a holder will be allocated to
the holder's undivided interest in each mortgage loan based on each mortgage
loan's relative fair market value, so that the holder's undivided interest in
each mortgage loan will have its own tax basis. A certificateholder that
acquires an interest in mortgage loans at a premium may elect, under Code
Section 171, to amortize the premium under a constant interest method, provided
that the underlying mortgage loans with respect to the mortgage loans were
originated after September 27, 1985. Premium allocable to mortgage loans
originated on or before September 27, 1985 should be allocated among the
principal payments on the mortgage loans and allowed as an ordinary deduction as
principal payments are made. Amortizable bond premium will be treated as an
offset to interest income on the certificate. The basis for the certificate will
be reduced to the extent that amortizable premium is applied to offset interest
payments. It is not clear whether a reasonable prepayment assumption should be
used in computing amortization of premium allowable under Code Section 171.
However, recent changes to the Code require the use of a prepayment assumption
to accrue original issue discount on pools of receivables the yield on which may
be affected by prepayments for tax years beginning after August 5, 1997 and
prior legislative history indicated that if a prepayment assumption applied to
an instrument for purposes of the OID rules, that prepayment assumption should
be applied in amortizing bond premium.
If a premium is not subject to amortization using a reasonable prepayment
assumption, the holder of a certificate acquired at a premium should recognize a
loss if a mortgage loan, or an underlying mortgage loan, prepays in full, equal
to the difference between the portion of the prepaid principal amount of the
mortgage loan, or underlying mortgage loan, that is allocable to the certificate
and the portion of the adjusted basis of the certificate that is allocable to
the mortgage loan, or underlying mortgage loan. If a reasonable prepayment
assumption is used to amortize premium, it appears that any loss would be
available, if at all, only if prepayments have occurred at a rate faster than
the reasonable assumed prepayment rate. It is not clear whether any other
adjustments would be required to reflect differences between an assumed
prepayment rate and the actual rate of prepayments. In addition, under recent
legislation, amounts received on the redemption of an obligation issued by a
natural person are considered received in exchange for the obligation if the
debt obligation is purchased or issued after June 8, 1997 (i.e., treated the
same as obligations issued by corporations). This change could affect the
character of any loss. For example, this change could cause the loss to be
treated as capital if the assets are held as capital assets by the taxpayer.
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On December 30, 1997 the IRS issued the Amortizable Bond Premium
Regulations. These regulations specifically do not apply to prepayable debt
instruments subject to Code Section 1272(a)(6). Absent further guidance from the
IRS, the trustee intends to account for amortizable bond premium in the manner
described above. Prospective purchasers of the certificates are encouraged to
consult their tax advisors regarding the possible application of the Amortizable
Bond Premium Regulations.
OID. The IRS has stated in published rulings that, in circumstances
similar to those described in this prospectus, the special rules of the Code
relating to OID (currently Code Sections 1271 through 1273 and 1275) will be
applicable to a certificateholder's interest in those mortgage loans meeting the
conditions necessary for these sections to apply. OID generally must be reported
as ordinary gross income as it accrues under a constant interest method. See " -
- - Multiple Classes of Certificates -- Certificates Representing Interests in
Loans Other Than Adustable Rate Mortgage Loans."
Market Discount. A certificateholder that acquires an undivided interest
in mortgage loans may be subject to the market discount rules of the Code to the
extent an undivided interest in a mortgage loan is considered to have been
purchased at a "market discount." The amount of market discount is equal to the
excess of the portion of the principal amount of the mortgage loan allocable to
the holder's undivided interest in the mortgage loans over the holder's tax
basis in the undivided interest. Market discount with respect to a certificate
will be considered to be zero if the amount allocable to the certificate is less
than 0.25% of the certificate's stated redemption price at maturity multiplied
by the weighted average maturity remaining after the date of purchase. Treasury
regulations implementing the market discount rules have not yet been issued;
therefore, investors are encouraged to consult their own tax advisors regarding
the application of these rules and the advisability of making any of the
elections allowed under the market discount provisions.
The Code provides that any principal payment, whether a scheduled payment
or a prepayment, or any gain on disposition of a market discount bond acquired
by the taxpayer after October 22, 1986, shall be treated as ordinary income to
the extent that it does not exceed the accrued market discount at the time of
the payment. The amount of accrued market discount for purposes of determining
the tax treatment of subsequent principal payments or dispositions of the market
discount bond is to be reduced by the amount so treated as ordinary income.
The Code also grants the Treasury Department authority to issue regulations
providing for the computation of accrued market discount on debt instruments,
the principal of which is payable in more than one installment. Although the
Treasury Department has not yet issued regulations, rules described in the
relevant legislative history describe how market discount should be accrued on
instruments bearing market discount. According to the legislative history, the
holder of a market discount bond may elect to accrue market discount either on
the basis of a constant interest rate or according to one of the following
methods. If a certificate is issued with OID, the amount of market discount that
accrues during any accrual period would be equal to the
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product of the total remaining market discount and a fraction, the numerator of
which is the OID accruing during the period and the denominator of which is the
total remaining OID at the beginning of the accrual period. For certificates
issued without OID, the amount of market discount that accrues during a period
is equal to the product of the total remaining market discount and a fraction,
the numerator of which is the amount of stated interest paid during the accrual
period and the denominator of which is the total amount of stated interest
remaining to be paid at the beginning of the accrual period. For purposes of
calculating market discount under any of these methods in the case of
instruments that provide for payments that may be accelerated due to prepayments
of other obligations securing the instruments, the same prepayment assumption
applicable to calculating the accrual of OID will apply. Recent legislation
expands the required use of a prepayment assumption for purposes of calculating
OID for tax years beginning after August 5, 1997 to pools of receivables the
yield on which may be affected due to prepayments and previous legislative
history states Congress intends that if a prepayment assumption would be used to
calculate OID it should also be used to accrue market discount. Because the
regulations described above have not been issued, it is impossible to predict
what effect those regulations might have on the tax treatment of a certificate
purchased at a discount or premium in the secondary market.
A holder who acquired a certificate at a market discount also may be
required to defer, until the maturity date of the certificate or its earlier
disposition in a taxable transaction, the deduction of a portion of the amount
of interest that the holder paid or accrued during the taxable year on
indebtedness incurred or maintained to purchase or carry the certificate in
excess of the aggregate amount of interest, including OID, includible in the
holder's gross income for the taxable year with respect to the certificate. The
amount of the net interest expense deferred in a taxable year may not exceed the
amount of market discount accrued on the certificate for the days during the
taxable year on which the holder held the certificate and, in general, would be
deductible when the market discount is includible in income. The amount of any
remaining deferred deduction is to be taken into account in the taxable year in
which the certificate matures or is disposed of in a taxable transaction. In the
case of a disposition in which gain or loss is not recognized in whole or in
part, any remaining deferred deduction will be allowed to the extent of gain
recognized on the disposition. This deferral rule does not apply if the
certificateholder elects to include the market discount in income currently as
it accrues on all market discount obligations acquired by the certificateholder
in that taxable year or thereafter.
Election to Treat All Interest as OID. The OID Regulations permit a
certificateholder to elect to accrue all interest, discount (including de
minimis market or original issue discount) and premium in income as interest,
based on a constant yield method for certificates acquired on or after April 4,
1994. If an election to treat all interest as OID were to be made with respect
to a certificate with market discount, the certificateholder would be deemed to
have made an election to include in income currently market discount with
respect to all other debt instruments having market discount that the
certificateholder acquires during the year of the election or thereafter.
Similarly, a certificateholder that makes this election for a certificate that
is acquired at a premium will be deemed to have made an election to amortize
bond premium with respect to all
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debt instruments having amortizable bond premium that the certificateholder owns
or acquires. See " -- Single Class of Certificates -- Premium." The election to
accrue interest, discount and premium on a constant yield method with respect to
a certificate cannot be revoked without the consent of the IRS.
b. Multiple Classes of Certificates
1. Stripped Bonds and Stripped Coupons
The separation of ownership of the right to receive some or all of the
interest payments on an obligation from ownership of the right to receive some
or all of the principal payments results in the creation of "stripped bonds"
with respect to principal payments and "stripped coupons" with respect to
interest payments. For purposes of OID and market discount, the Code treats a
stripped bond or a stripped coupon as an obligation issued on the date that the
stripped interest is created. If a trust fund is created with two classes of
certificates, one class of certificates may consist of Stripped Bond
Certificates, while the second class of certificates may consist of Stripped
Coupon Certificates.
Servicing fees in excess of reasonable servicing fees will be treated under
the stripped bond rules. If the excess servicing fee is less than 100 basis
points or the certificates are initially sold with a de minimis discount, which
amount may be calculated without a prepayment assumption, any non-de minimis
discount arising from a subsequent transfer of the certificates should be
treated as market discount. The IRS appears to require that reasonable servicing
fees be calculated on a mortgage loan by mortgage loan basis, which could result
in some mortgage loans being treated as having more than 100 basis points of
interest stripped off.
Although current authority is not entirely clear, a Stripped Bond
Certificate should be treated as an interest in mortgage loans issued on the day
the certificate is purchased for purposes of calculating any OID. Generally, if
the discount on a mortgage loan is larger than a de minimis amount, as
calculated for purposes of the OID rules, a purchaser of the certificate will be
required to accrue the discount under the OID rules of the Code. See " -- Non-
REMIC Certificates" and " -- Single Class of Certificates -- Original Issue
Discount." However, a purchaser of a Stripped Bond Certificate will be required
to account for any discount on the mortgage loans as market discount rather than
OID if either the amount of OID with respect to the mortgage loan is treated as
zero under the OID de minimis rule when the certificate was stripped or no more
than 100 basis points (including any amount of servicing fees in excess of
reasonable servicing fees) is stripped off of the trust fund's mortgage loans.
The precise tax treatment of Stripped Coupon Certificates is substantially
uncertain. The Code could be read literally to require that OID computations be
made for each payment from each mortgage loan. However, based on the recent IRS
guidance, it appears that all payments from a mortgage loan underlying a
Stripped Coupon Certificate should be treated as a single installment obligation
subject to the OID rules of the Code, in which case, all payments from the
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mortgage loan would be included in the mortgage loan's stated redemption price
at maturity for purposes of calculating income on the Stripped Coupon
Certificate under the OID rules of the Code.
Based on current authority it is unclear under what circumstances, if any,
the prepayment of mortgage loans will give rise to a loss to the holder of a
Stripped Bond Certificate purchased at a premium or a Stripped Coupon
Certificate. If the certificate is treated as a single instrument, rather than
an interest in discrete mortgage loans, and the effect of prepayments is taken
into account in computing yield with respect to the certificate, it appears that
no loss will be available as a result of any particular prepayment unless
prepayments occur at a rate faster than the assumed prepayment rate. However, if
a certificate is treated as an interest in discrete mortgage loans, or if no
prepayment assumption is used, then when a mortgage loan is prepaid, any
certificate so treated should be able to recognize a loss equal to the portion
of the unrecovered premium of the certificate that is allocable to the mortgage
loan. In addition, amounts received in redemption for debt instruments issued by
natural persons purchased or issued after June 8, 1997 are treated as received
in exchange therefore (i.e., treated the same as obligations issued by
corporations). This change could affect the character of any loss.
Holders of Stripped Bond Certificates and Stripped Coupon Certificates are
encouraged to consult with their own tax advisors regarding the proper treatment
of these certificates for federal income tax purposes.
2. Certificates Representing Interests in Loans Other Than Adjustable
Rate Mortgage Loans
The original issue discount rules will be applicable to mortgages of
corporations originated after May 27, 1969, mortgages of noncorporate mortgagors
other than individuals originated after July 1, 1982, and mortgages of
individuals originated after March 2, 1984. Under the OID Regulations, original
issue discount could arise by the charging of points by the originator of the
mortgage 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 certain circumstances, by the presence of
"teaser" rates (i.e., the initial rates on the mortgage loans are lower than
subsequent rates on the mortgage loans) on the mortgage loans.
OID on each certificate must be included in the owner's ordinary income for
federal income tax purposes as it accrues, in accordance with a constant
interest method that takes into account the compounding of interest, in advance
of receipt of the cash attributable to the income. The amount of OID required to
be included in an owner's income in any taxable year with respect to a
certificate representing an interest in mortgage loans other than adjustable
rate mortgage loans likely will be computed as described under " -- Accrual of
Original Issue Discount." The following discussion is based in part on Treasury
regulations issued on January 27, 1994, and amended on June 11, 1996, under Code
Sections 1271 through 1273 and 1275 (the
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"OID Regulations") and in part on the provisions of the Tax Reform Act of 1986
(the "1986 Act"). However, the OID Regulations do not adequately address certain
issues relevant to prepayable securities.
Under the Code, the mortgage loans underlying the certificates will be
treated as having been issued on the date they were originated with an amount of
OID equal to the excess of the mortgage loan's stated redemption price at
maturity over its issue price. The issue price of a mortgage loan is generally
the amount lent to the mortgagee, which may be adjusted to take into account
certain loan origination fees. The stated redemption price at maturity of a
mortgage loan is the sum of all payments to be made on the mortgage loan other
than payments that are treated as qualified stated interest payments. The
accrual of this OID, as described under " -- Accrual of Original Issue
Discount," will, unless otherwise specified in the related prospectus
supplement, utilize the original yield to maturity of the certificates
calculated based on a reasonable assumed prepayment rate for the mortgage loans
underlying the certificates (the "Prepayment Assumption"), and will take into
account events that occur during the calculation period. The Prepayment
Assumption will be determined in the manner prescribed by regulations that have
not yet been issued. The legislative history of the 1986 Act (the "Legislative
History") provides, however, that the regulations will require that the
Prepayment Assumption be the prepayment assumption that is used in determining
the offering price of the certificate. No representation is made that any
certificate will prepay at the Prepayment Assumption or at any other rate. The
prepayment assumption contained in the Code literally only applies to debt
instruments collateralized by other debt instruments that are subject to
prepayment rather than direct ownership interests in debt instruments, and, in
tax years beginning after August 5, 1997, to pools of receivables the yield on
which may be affected by prepayments of receivables such as those the
certificates represent. However, no other legal authority provides guidance with
regard to the proper method for accruing OID on obligations that are subject to
prepayment, and, until further guidance is issued, the master servicer intends
to calculate and report OID under the method described in " -- Accrual of
Original Issue Discount."
Accrual of Original Issue Discount. Generally, the owner of a certificate
must include in gross income the sum of the "daily portions," as defined below,
of the OID on any certificate for each day on which it owns the certificate,
including the date of purchase but excluding the date of disposition. In the
case of an original owner, the daily portions of OID with respect to each
component generally will be determined as set forth under the OID Regulations. A
calculation will be made by the master servicer or other entity specified in the
related prospectus supplement of the portion of OID that accrues during each
successive monthly accrual period, or shorter period from the date of original
issue, that ends on the day in the calendar year corresponding to each of the
distribution dates on the certificates, or the day before each date. This will
be done, in the case of each full month accrual period, by adding the present
value at the end of the accrual period determined by using the original yield to
maturity of the respective component under the Prepayment Assumption as a
discount factor, of all remaining payments to be received under the Prepayment
Assumption on the respective component and any payments received during the same
accrual period, and subtracting from that total the "adjusted issue price" of
the respective
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component at the beginning of the same accrual period. The adjusted issue price
of a certificate at the beginning of the first accrual period is its issue
price; the adjusted issue price of a certificate at the beginning of a
subsequent accrual period is the adjusted issue price at the beginning of the
immediately preceding accrual period plus the amount of OID allocable to that
accrual period reduced by the amount of any payment made at the end of or during
that accrual period. The OID accruing during the accrual period will then be
divided by the number of days in the period to determine the daily portion of
OID for each day in the period. With respect to an initial accrual period
shorter than a full monthly accrual period, the daily portions of OID must be
determined according to an appropriate allocation under any reasonable method.
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 as it accrues rather than when received. However, the
amount of original issue discount includible in the income of a holder of an
obligation is reduced when the obligation is acquired 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 mortgage loans acquired by a certificateholder 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 (e.g., due to points) will be
includible by the holder. Other original issue discount on the mortgage loans
(e.g., that arising from a "teaser" rate) would still need to be accrued.
3. Certificates Representing Interests in Adustable Rate Mortgage Loans
The OID Regulations do not address the treatment of instruments, such as
the certificates, which represent interests in adjustable rate mortgage loans.
Additionally, the IRS has not issued guidance under the Code's coupon stripping
rules with respect to instruments that represent interests in adjustable rate
mortgage loans. In the absence of any authority, the master servicer will report
OID on certificates attributable to adjustable rate mortgage loans ("Stripped
ARM Obligations") to holders in a manner it believes is consistent with the
rules described under the heading " -- Certificates Representing Interests in
Loans Other Than Adustable Rate Mortgage Loans" and with the OID Regulations. As
such, for purposes of projecting the remaining payments and the projected yield,
the assumed rate payable on the adjustable rate mortgage loans will be the fixed
rate equivalent on the issue date. Application of these rules may require
inclusion of income on a Stripped ARM Obligation in advance of the receipt of
cash attributable to the income. Further, the addition of interest deferred due
to negative amortization ("Deferred Interest") to the principal balance of an
ARM Loan may require the inclusion of the interest deferred due to negative
amortization in the income of the certificateholder when it accrues.
Furthermore, the addition of Deferred Interest to the certificate's principal
balance will result in additional income, including possibly OID income, to the
certificateholder over the remaining life of the certificates.
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Because the treatment of Stripped ARM Obligations is uncertain, investors
are encouraged to consult their tax advisors regarding how income will be
includible with respect to the certificates.
c. Sale or Exchange of a Certificate
Sale or exchange of a certificate before its maturity will result in gain
or loss equal to the difference, if any, between the amount received and the
owner's adjusted basis in the certificate. The adjusted basis of a certificate
generally will equal the seller's purchase price for the certificate, increased
by the OID included in the seller's gross income with respect to the
certificate, and reduced by principal payments on the certificate previously
received by the seller. The gain or loss will be capital gain or loss to an
owner for which a certificate is a "capital asset" within the meaning of Code
Section 1221 and will be long-term or short-term depending on whether the
certificate has been owned for the long-term capital gain holding period, which
is currently more than one year.
The certificates will be "evidences of indebtedness" within the meaning of
Code Section 582(c)(1), so that gain or loss recognized from the sale of a
certificate by a bank or a thrift institution to which that section applies will
be ordinary income or loss.
d. Non-U.S. Persons
Generally, to the extent that a certificate evidences ownership in
underlying mortgage loans that were issued on or before July 18, 1984, interest
or OID paid by the person required to withhold tax under Code Section 1441 or
1442 to an owner that is not a U.S. Person or a certificateholder holding on
behalf of an owner that is not a U.S. Person will be subject to federal income
tax, collected by withholding, at a rate of 30% or any lower rate provided for
interest by an applicable tax treaty. Accrued OID recognized by the owner on the
sale or exchange of a certificate also will be subject to federal income tax at
the same rate. Generally, accrued OID payments would not be subject to
withholding to the extent that a certificate evidences ownership in mortgage
loans issued after July 18, 1984, by natural persons if the certificateholder
complies with certain identification requirements, including delivery of a
statement, signed by the certificateholder under penalties of perjury,
certifying that the certificateholder is not a U.S. Person and providing the
name and address of the certificateholder. Additional restrictions apply to
mortgage loans where the mortgagor is not a natural person in order to qualify
for the exemption from withholding. Any foreclosure property owned by the trust
could be treated as a U.S. real property interest owned by certificateholders.
Interest paid or accrued on the mortgage loans to a certificateholder who
is a non-U.S. Person will be considered "portfolio interest," and generally will
not be subject to United States federal income tax and withholding tax,
provided, that the interest is not effectively connected with the conduct of a
trade or business within the United States by the non-U.S. Person, and the non-
U.S. Person provides the trust or other person who is otherwise required to
withhold U.S. tax
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with respect to the mortgage loans with an appropriate statement on Form W-8 or
other similar form, signed under penalties of perjury, certifying that the
beneficial owner of the mortgage loan is a foreign person and providing that
non-U.S. person's name and address. If an interest in a mortgage loan is held
through a securities clearing organization or certain other financial
institutions, the organization or institution may provide the relevant signed
statement to the withholding agent. In that case, however, the signed statement
must be accompanied by a Form W-8 or substitute form provided by the non-U.S.
Person that owns that interest in the mortgage loan. If interest does not
constitute portfolio interest, then it will be subject to U.S. federal income
and withholding tax at a rate of 30%, unless reduced or eliminated pursuant to
an applicable tax treaty and the non-U.S. Person provides the trust, or an
organization or financial institution described above, with an appropriate
statement (e.g., a Form 1001), signed under penalties of perjury, to that
effect.
The New Withholding Regulations were published in the Federal Register on
October 14, 1997. In general, the New Withholding Regulations do not
significantly alter the substantive withholding and information reporting
requirements, but do unify current certification procedures and forms and
clarify reliance standards. The New Withholding Regulations generally will be
effective for payments made after December 31, 2000, subject to certain
transition rules. The discussion set forth above does not take the New
Withholding Regulations into account. Prospective Non-U.S. Persons who own
interests in mortgage loans are strongly encouraged to consult their own tax
advisor with respect to the New Withholding Regulations.
e. Information Reporting and Backup Withholding
The master servicer will furnish or make available, within a reasonable
time after the end of each calendar year, to each person who was a
certificateholder at any time during the year, the information deemed
appropriate to assist certificateholders in preparing their federal income tax
returns, or to enable holders to make any information available to beneficial
owners or financial intermediaries that hold certificates as nominees on behalf
of beneficial owners. If a holder, beneficial owner, financial intermediary or
other recipient of a payment on behalf of a beneficial owner fails to supply a
certified taxpayer identification number or if the Secretary of the Treasury
determines that the person has not reported all interest and dividend income
required to be shown on its federal income tax return, 31% backup withholding
may be required with respect to any payments. Any amounts deducted and withheld
from a distribution to a recipient would be allowed as a credit against a
recipient's federal income tax liability.
REMIC Certificates
The trust fund relating to a series of certificates may elect to be treated
as a REMIC. Qualification as a REMIC requires ongoing compliance with certain
conditions. Although a REMIC is not generally subject to federal income tax
(see, however " -- Residual Certificates" and " -- Prohibited Transactions and
Other Taxes"), if a trust fund with respect to which a REMIC election is made
fails to comply with one or more of the ongoing requirements of the
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Code for REMIC status during any taxable year, including the implementation of
restrictions on the purchase and transfer of the residual interests in a REMIC
as described under "Residual Certificates," the Code provides that a trust fund
will not be treated as a REMIC for that year and thereafter. In that event, the
entity may be taxable as a separate corporation, and the REMIC Certificates may
not be accorded the status or given the tax treatment described below. While the
Code authorizes the Treasury Department to issue regulations providing relief
upon an inadvertent termination of the status of a trust fund as a REMIC, no
regulations have been issued. Any relief, moreover, may be accompanied by
sanctions, such as the imposition of a corporate tax on all or a portion of the
REMIC's income for the period in which the requirements for REMIC status are not
satisfied. Assuming compliance with all provisions of the related pooling and
servicing agreement, each trust fund that elects REMIC status will qualify as a
REMIC, and the Regular Certificates will be considered to be regular interests
in the REMIC and the Residual Certificates will be considered to be residual
interests in the REMIC. The related prospectus supplement for each series of
certificates will indicate whether the trust fund will make a REMIC election and
whether a class of certificates will be treated as a regular or residual
interest in the REMIC. With respect to each trust fund for which a REMIC
election is to be made, Andrews & Kurth L.L.P. will issue an opinion confirming
the conclusions expressed above concerning the status of the trust fund as a
REMIC and the status of the certificates as representing regular or residual
interests in a REMIC and will file the opinion, along with their consent to its
use, with the SEC by means of a Current Report on Form 8-K on or prior to the
closing date.
In general, with respect to each series of certificates for which a REMIC
election is made, certificates held by a thrift institution taxed as a "domestic
building and loan association" will constitute assets described in Code Section
7701(a)(19)(C); certificates held by a real estate investment trust will
constitute "real estate assets" within the meaning of Code Section 856(c)(4)(A);
and interest on certificates held by a real estate investment trust will be
considered "interest on obligations secured by mortgages on real property"
within the meaning of Code Section 856(c)(3)(B). If less than 95% of the REMIC's
assets are assets qualifying under any of these Code sections, the certificates
will be qualifying assets only to the extent that the REMIC's assets are
qualifying assets. In addition, payments on mortgage loans held pending
distribution on the REMIC Certificates will be considered to be real estate
assets for purposes of Code Section 856(c).
In some instances the mortgage loans may not be treated entirely as assets
described in the foregoing sections. See, in this regard, the discussion of
buydown loans contained in " -- Non-REMIC Certificates -- Single Class of
Certificates." REMIC Certificates held by a real estate investment trust will
not constitute "Government Securities" within the meaning of Code Section
856(c)(4)(A), and REMIC Certificates held by a regulated investment company will
not constitute "Government Securities" within the meaning of Code Section
851(b)(4)(A)(ii). REMIC Certificates held by certain financial institutions will
constitute "evidences of indebtedness" within the meaning of Code Section
582(c)(1).
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A "qualified mortgage" for REMIC purposes is any obligation, including
certificates of participation in an obligation, that is principally secured by
an interest in real property and that is transferred to the REMIC within a
prescribed time period in exchange for regular or residual interests in the
REMIC. The REMIC Regulations provide that manufactured housing or mobile homes,
not including recreational vehicles, campers or similar vehicles, that are
"single family residences" under Code Section 25(e)(10) will qualify as real
property without regard to state law classifications. Under Code Section
25(e)(10), a single family residence includes any manufactured home that has a
minimum of 400 square feet of living space and a minimum width in excess of 102
inches and that is of a kind customarily used at a fixed location.
Tiered REMIC Structures. For some series of certificates, two or more
separate elections may be made to treat designated portions of the related trust
fund as REMICs (respectively, the "Subsidiary REMIC or REMICs" and the "Master
REMIC") for federal income tax purposes. Upon the issuance of such a series of
certificates, assuming compliance with all provisions of the related pooling and
servicing agreement, the Master REMIC as well as each Subsidiary REMIC will each
qualify as a REMIC, and the REMIC Certificates issued by the Master REMIC and
each Subsidiary REMIC, respectively, will be considered to evidence ownership of
Regular Certificates or Residual Certificates in the related REMIC within the
meaning of the REMIC provisions. With respect to each trust fund for which more
than one REMIC election is to be made, Andrews & Kurth L.L.P. will issue an
opinion confirming the conclusions expressed above concerning the status of the
Master REMIC and each Subsidiary REMIC as a REMIC and the status of the
certificates as regular or residual interests in a REMIC and will file the
opinion, along with their consent to its use, with the SEC by means of a Current
Report on Form 8-K on or prior to the closing date.
Only REMIC Certificates, other than the residual interest in any Subsidiary
REMIC, issued by the Master REMIC will be offered under this prospectus. All
Subsidiary REMICs and the Master REMIC will be treated as one REMIC solely for
purposes of determining whether the REMIC Certificates will be "real estate
assets" within the meaning of Section 856(c)(4)(A) of the Code; "loans secured
by an interest in real property" under Section 7701(a)(19)(C) of the Code; and
whether the income on the certificates is interest described in Section
856(c)(3)(B) of the Code.
a. Regular Certificates
General. Except as otherwise stated in this discussion, Regular
Certificates will be treated for federal income tax purposes as debt instruments
issued by the REMIC and not as ownership interests in the REMIC or its assets.
Moreover, holders of Regular Certificates that otherwise report income under a
cash method of accounting will be required to report income with respect to
Regular Certificates under an accrual method.
Original Issue Discount and Premium. The Regular Certificates may be issued
with OID. Generally, OID, if any, will equal the difference between the "stated
redemption price at
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maturity" of a Regular Certificate and its "issue price." Holders of any class
of certificates issued with OID will be required to include OID in gross income
for federal income tax purposes as it accrues, in accordance with a constant
interest method based on the compounding of interest as it accrues rather than
in accordance with receipt of the interest payments. The following discussion is
based in part on the OID Regulations and in part on the provisions of the 1986
Act. The OID Regulations generally are effective for debt instruments issued on
or after April 4, 1994. Regular Certificateholders should be aware, however,
that the OID Regulations do not adequately address certain issues relevant to
prepayable securities, such as the Regular Certificates.
The OID rules require that the amount and rate of accrual of OID be
calculated based on the Prepayment Assumption and the anticipated reinvestment
rate, if any, relating to the Regular Certificates and prescribe a method for
adjusting the amount and rate of accrual of the discount where the actual
prepayment rate differs from the Prepayment Assumption. Under the Code, the
Prepayment Assumption must be determined in the manner prescribed by
regulations, which regulations have not yet been issued. The Legislative History
provides, however, that Congress intended the regulations to require that the
Prepayment Assumption be the prepayment assumption that is used in determining
the initial offering price of the Regular Certificates. The prospectus
supplement for each series of Regular Certificates will specify the Prepayment
Assumption to be used for the purpose of determining the amount and rate of
accrual of OID. No representation is made that the Regular Certificates will
prepay at the Prepayment Assumption or at any other rate.
The IRS issued the Contingent Regulations in June 1996. The Contingent
Regulations specifically do not apply for purposes of calculating OID on debt
instruments subject to Code Section 1272(a)(6), such as the Regular
Certificates. Additionally, the OID Regulations do not contain provisions
specifically interpreting Code Section 1272(a)(6). The trustee intends to base
its computations on Code Section 1272(a)(6) and the OID Regulations as described
in this prospectus. However, because no regulatory guidance currently exists
under Code Section 1272(a)(6), there can be no assurance that this methodology
represents the correct manner of calculating OID.
In general, each Regular Certificate will be treated as a single
installment obligation issued with an amount of OID equal to the excess of its
"stated redemption price at maturity" over its issue price. The issue price of a
Regular Certificate is the first price at which a substantial amount of Regular
Certificates of that class are first sold to the public, excluding bond houses,
brokers, underwriters or wholesalers. The issue price of a Regular Certificate
also includes the amount paid by an initial certificateholder for accrued
interest that relates to a period before the issue date of the Regular
Certificate. The stated redemption price at maturity of a Regular Certificate
includes the original principal amount of the Regular Certificate, but generally
will not include distributions of interest that constitute "qualified stated
interest." Qualified stated interest generally means interest unconditionally
payable at intervals of one year or less at a single fixed rate or qualified
variable rate (as described below) during the entire term of the Regular
Certificate. Interest is payable at a single fixed rate only if the rate
appropriately
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takes into account the length of the interval between payments. Distributions of
interest on Regular Certificates with respect to which Deferred Interest will
accrue will not constitute qualified stated interest payments, and the stated
redemption price at maturity of the Regular Certificates includes all
distributions of interest and principal on the Regular Certificates.
Where the interval between the issue date and the first distribution date
on a Regular Certificate is longer than the interval between subsequent
distribution dates, the greater of any original issue discount disregarding the
rate in the first period and any interest foregone during the first period is
treated as the amount by which the stated redemption price of the certificate
exceeds its issue price for purposes of the de minimis rule described below. The
OID Regulations suggest that all or a portion of the interest on a long first
period Regular Certificate that is issued with non-de minimis OID will be
treated as OID. Where the interval between the issue date and the first
distribution date on a Regular Certificate is shorter than the interval between
subsequent distribution dates, interest due on the first distribution date in
excess of the amount that accrued during the first period would be added to the
certificates stated redemption price at maturity. Regular Certificateholders are
encouraged to consult their own tax advisors to determine the issue price and
stated redemption price at maturity of a Regular Certificate. Additionally, it
is possible that the IRS could assert that the stated pass-through rate of
interest on the Regular Certificates is not unconditionally payable because late
payments or nonpayments on the mortgage loans are not penalized nor are there
reasonable remedies in place to compel payment on the mortgage loans. That
position, if successful, would require all holders of Regular Certificates to
accrue income on the certificates under the OID Regulations.
Under the de minimis rule, OID on a Regular Certificate will be considered
to be zero if it is less than 0.25% of the stated redemption price at maturity
of the Regular Certificate multiplied by the weighted average maturity of the
Regular Certificate. For this purpose, the weighted average maturity of the
Regular Certificate 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 Certificate and the denominator of which is the stated redemption
price at maturity of the Regular Certificate. Although currently unclear, it
appears that the schedule of these distributions should be determined in
accordance with the Prepayment Assumption. The Prepayment Assumption with
respect to a series of Regular Certificates will be set forth in the related
prospectus supplement. Holders generally must report de minimis OID pro rata as
principal payments are received, and income will be capital gain if the Regular
Certificate is held as a capital asset. However, accrual method holders may
elect to accrue all de minimis OID as well as market discount under a constant
interest method.
The prospectus supplement with respect to a trust fund may provide for the
issuance of Super-Premium Certificates. The income tax treatment of Super-
Premium Certificates is not entirely certain. For information reporting
purposes, the trust fund intends to take the position that the stated redemption
price at maturity of Super-Premium Certificates is the sum of all
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payments to be made on these Regular Certificates determined under the
Prepayment Assumption, with the result that these Regular Certificates would be
issued with OID. The calculation of income in this manner could result in
negative original issue discount, which delays future accruals of OID rather
than being immediately deductible, when prepayments on the mortgage loans exceed
those estimated under the Prepayment Assumption. As discussed above, the
Contingent Regulations specifically do not apply to prepayable debt instruments
subject to Code Section 1272(a)(6), such as the Regular Certificates. However,
if the Super-Premium Certificates were treated as contingent payment
obligations, it is unclear how holders of those certificates would report income
or recover their basis. In the alternative, the IRS could assert that the stated
redemption price at maturity of Super-Premium Certificates should be limited to
their principal amount (subject to the discussion under " -- Accrued Interest
Certificates"), so that the Regular Certificates would be considered for federal
income tax purposes to be issued at a premium. If this position were to prevail,
the rules described under " -- Regular Certificates -- Premium" would apply. It
is unclear when a loss may be claimed for any unrecovered basis for a Super-
Premium Certificate. It is possible that a holder of a Super-Premium Certificate
may only claim a loss when its remaining basis exceeds the maximum amount of
future payments, assuming no further prepayments or when the final payment is
received with respect to the Super-Premium Certificate. Absent further guidance,
the trustee intends to treat the Super-Premium Certificates as described in this
prospectus.
Under the REMIC Regulations, if the issue price of a Regular Certificate,
other than those based on a notional amount, does not exceed 125% of its actual
principal amount, the interest rate is not considered disproportionately high.
Accordingly, the Regular Certificate generally should not be treated as a Super-
Premium Certificate and the rules described under " -- Regular Certificates --
Premium" should apply. However, it is possible that certificates issued at a
premium, even if the premium is less than 25% of the certificate's actual
principal balance, will be required to amortize the premium under an original
issue discount method or contingent interest method even though no election
under Code section 171 is made to amortize the premium.
Generally, a Regular Certificateholder must include in gross income the
"daily portions," determined as described above under "Non-REMIC Certificates --
Certificates Representing Interests in Loans Other Than Adjustable Rate Mortgage
Loans -- Accrual of Original Issue Discount".
Variable Rate Regular Certificates. Regular Certificates may provide for
interest based on a variable rate. Interest is treated as payable at a variable
rate and not as contingent interest if, generally, the issue price does not
exceed the original principal balance by more than a specified amount and the
interest compounds or is payable at least annually at current values of certain
objective rates matured by or based on lending rates for newly borrowed funds.
For a debt instrument issued after August 13, 1996, an objective rate is a 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. The
variable interest generally will be qualified stated interest to the
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extent it is unconditionally payable at least annually and, to the extent
successive variable rates are used, interest is not significantly accelerated or
deferred.
The amount of OID with respect to a Regular Certificate bearing a variable
rate of interest will accrue in the manner described under " -- Original Issue
Discount and Premium" by assuming generally that the index used for the variable
rate will remain fixed throughout the term of the certificate. Appropriate
adjustments are made for the actual variable rate.
Although unclear at present, the depositor intends to treat Regular
Certificates bearing an interest rate that is a weighted average of the net
interest rates on mortgage loans as variable rate certificates. In such case,
the weighted average rate used to compute the initial pass-through rate on the
Regular Certificates will be deemed to be the index in effect through the life
of the Regular Certificates. It is possible, however, that the IRS may treat
some or all of the interest on Regular Certificates with a weighted average rate
as taxable under the rules relating to obligations providing for contingent
payments. This treatment may effect the timing of income accruals on the Regular
Certificates. Additionally, if some or all of the mortgage loans are subject to
"teaser rates" (i.e., the initial rates on the mortgage loans are less than
subsequent rates on the mortgage loans) the interest paid on some or all of the
Regular Certificates may be subject to accrual using a constant yield method
notwithstanding the fact that these certificates may not have been issued with
"true" non-de minimis original issue discount.
Election to Treat All Interest as OID. The OID Regulations permit a
certificateholder to elect to accrue all interest, discount, including de
minimus market or original issue discount, and premium in income as interest,
based on a constant yield method for certificates acquired on or after April 4,
1994. If this type of an election were to be made with respect to a Regular
Certificate with market discount, a certificateholder would be deemed to have
made an election to include in income currently market discount with respect to
all other debt instruments having market discount that the certificateholder
acquires during the year of the election or thereafter. Similarly, a
certificateholder that makes this election for a certificate that is acquired at
a premium will be deemed to have made an election to amortize bond premium with
respect to all debt instruments having amortizable bond premium that the
certificateholder owns or acquires. See " -- Regular Certificates -- Premium."
The election to accrue interest, discount and premium on a constant yield method
with respect to a certificate cannot be revoked without the consent of the IRS.
Market Discount. A purchaser of a Regular Certificate may also be subject
to the market discount provisions of Code Sections 1276 through 1278. Under
these provisions and the OID Regulations, "market discount" equals the excess,
if any, of a Regular Certificate's stated principal amount or, in the case of a
Regular Certificate with OID, the adjusted issue price, which is determined for
this purpose as if the purchaser had purchased the Regular Certificate from an
original holder, over the price for the Regular Certificate paid by the
purchaser. A certificateholder that purchases a Regular Certificate at a market
discount will recognize income upon receipt of each distribution representing
stated redemption price. In particular, under
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Section 1276 of the Code a holder generally will be required to allocate each
principal distribution first to accrued market discount not previously included
in income, and to recognize ordinary income to that extent. A certificateholder
may elect to include market discount in income currently as it accrues rather
than including it on a deferred basis in accordance with the foregoing. If made,
the election will apply to all market discount bonds acquired by the electing
certificateholder on or after the first day of the first taxable year to which
the election applies. Market discount on Regular Certificates is accrued and
subject to the rules described above under "Non-REMIC Certificates -- Single
Class of Certificates --Market Discount".
Premium. A purchaser of a Regular Certificate that purchases the Regular
Certificate at a cost, not including accrued qualified stated interest, greater
than its remaining stated redemption price at maturity will be considered to
have purchased the Regular Certificate at a premium and may elect to amortize
the premium under a constant yield method. It is not clear whether the
Prepayment Assumption would be taken into account in determining the life of the
Regular Certificate for this purpose. The Amortizable Bond Premium Regulations
described above specifically do not apply to prepayable debt instruments subject
to Code Section 1272(a)(6) such as the Regular Certificates. Absent further
guidance from the IRS, the trustee intends to account for amortizable bond
premium in the manner described in this prospectus. However, the Legislative
History states that the same rules that apply to accrual of market discount,
which rules require use of a Prepayment Assumption in accruing market discount
with respect to Regular Certificates without regard to whether the certificates
have OID, will also apply in amortizing bond premium under Code Section 171. The
Code provides that amortizable bond premium will be allocated among the interest
payments on the Regular Certificates and will be applied as an offset against
the interest payment. Prospective purchasers of the Regular Certificates are
encouraged to consult their tax advisors regarding the possible application of
the Amortizable Bond Premium Regulations.
On December 30, 1997 the IRS issued final Amortizable Bond Premium
Regulations. These regulations specifically do not apply to prepayable debt
instruments subject to Code Section 1272(a)(6). Absent further guidance from the
IRS, the trustee intends to account for amortizable bond premium in the manner
described above. Prospective purchasers of the certificates are encouraged to
consult their tax advisors regarding the possible application of the Amortizable
Bond Premium Regulations.
Deferred Interest. Certain classes of Regular Certificates will provide
for the accrual of Deferred Interest with respect to one or more adjustable rate
mortgage loans. Any Deferred Interest that accrues with respect to a class of
Regular Certificates will constitute income to the holders of the certificates
before the time distributions of cash with respect to the Deferred Interest are
made. It is unclear, under the OID Regulations, whether any of the interest on
the certificates will constitute qualified stated interest or whether all or a
portion of the interest payable on the certificates must be included in the
stated redemption price at maturity of the certificates and accounted for as
OID, which could accelerate the inclusion. Interest on Regular Certificates must
in any event be accounted for under an accrual method by the holders of the
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certificates and, therefore, applying the latter analysis may result only in a
slight difference in the timing of the inclusion in income of interest on the
Regular Certificates.
Effects of Defaults and Delinquencies. Certain series of certificates may
contain one or more classes of subordinated certificates, and in the event there
are defaults or delinquencies on the mortgage loans, amounts that would
otherwise be distributed on the subordinated certificates may instead be
distributed on the certificates. Subordinated certificateholders nevertheless
will be required to report income with respect to their certificates under an
accrual method without giving effect to delays and reductions in distributions
on the subordinated certificates attributable to defaults and delinquencies on
the mortgage loans, except to the extent that it can be established that the
amounts are uncollectible. As a result, the amount of income reported by a
subordinated certificateholder in any period could significantly exceed the
amount of cash distributed to the holder in that period. The holder will
eventually be allowed a loss, or will be allowed to report a lesser amount of
income, to the extent that the aggregate amount of distributions on the
subordinated certificate is reduced as a result of defaults and delinquencies on
the mortgage loans. However, the timing and characterization of any losses or
reductions in income are uncertain, and, accordingly, subordinated
certificateholders are encouraged to consult their own tax advisors on this
point.
Sale, Exchange or Redemption. If a Regular Certificate is sold, exchanged,
redeemed or retired, the seller will recognize gain or loss equal to the
difference between the amount realized on the sale, exchange, redemption, or
retirement and the seller's adjusted basis in the Regular Certificate. The
adjusted basis generally will equal the cost of the Regular Certificate to the
seller, increased by any OID and market discount included in the seller's gross
income with respect to the Regular Certificate, and reduced (but not below zero)
by payments included in the stated redemption price at maturity previously
received by the seller and by any amortized premium. Similarly, a holder who
receives a payment that is part of the stated redemption price at maturity of a
Regular Certificate will recognize gain equal to the excess, if any, of the
amount of the payment over the holder's adjusted basis in the Regular
Certificate. A Regular Certificateholder who receives a final payment that is
less than the holder's adjusted basis in the Regular Certificate will generally
recognize a loss. Except as provided in the following paragraph and as provided
under "Market Discount," any gain or loss will be capital gain or loss, provided
that the Regular Certificate is held as a "capital asset" (generally, property
held for investment) within the meaning of Code Section 1221.
Gain from the sale or other disposition of a Regular Certificate that might
otherwise be capital gain will be treated as ordinary income to the extent that
the gain does not exceed the excess, if any, of the amount that would have been
includible in the holder's income with respect to the Regular Certificate had
income accrued on it at a rate equal to 110% of the AFR as defined in Code
Section 1274(d) determined as of the date of purchase of the Regular
Certificate, over the amount actually includible in the holder's income.
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The Regular Certificates will be "evidences of indebtedness" within the
meaning of Code Section 582(c)(1), so that gain or loss recognized from the sale
of a Regular Certificate by a bank or a thrift institution to which this section
applies will be ordinary income or loss.
The Regular Certificate information reports will include a statement of the
adjusted issue price of the Regular Certificate at the beginning of each accrual
period. In addition, the reports will include information necessary to compute
the accrual of any market discount that may arise upon secondary trading of
Regular Certificates. Because exact computation of the accrual of market
discount on a constant yield method would require information relating to the
holder's purchase price which the REMIC may not have, it appears that the
information reports will only require information pertaining to the appropriate
proportionate method of accruing market discount.
Accrued Interest Certificates. Certain of the Regular Certificates
("Payment Lag Certificates") may provide for payments of interest based on a
period that corresponds to the interval between distribution dates but that ends
before each distribution date. The period between the Closing Date for Payment
Lag Certificates and their first distribution date may or may not exceed that
interval. Purchasers of Payment Lag Certificates for which the period between
the Closing Date and the first distribution date does not exceed that interval
could pay upon purchase of the Regular Certificates accrued interest in excess
of the accrued interest that would be paid if the interest paid on the
distribution date were interest accrued from distribution date to distribution
date. If a portion of the initial purchase price of a Regular Certificate is
allocable to Pre-issuance Accrued Interest and the Regular Certificate provides
for a payment of stated interest on the first payment date (and the first
payment date is within one year of the issue date) that equals or exceeds the
amount of the Pre-issuance Accrued Interest, then the Regular Certificates issue
price may be computed by subtracting from the issue price the amount of Pre-
issuance Accrued Interest, rather than as an amount payable on the Regular
Certificate. However, it is unclear under this method how the OID Regulations
treat interest on Payment Lag Certificates. Therefore, in the case of a Payment
Lag Certificate, the trust fund intends to include accrued interest in the issue
price and report interest payments made on the first distribution date as
interest to the extent the payments represent interest for the number of days
that the certificateholder has held the Payment Lag Certificate during the first
accrual period.
Investors are encouraged to consult their own tax advisors concerning the
treatment for federal income tax purposes of Payment Lag Certificates.
Non-Interest Expenses of the REMIC. Under the temporary Treasury
regulations, if the REMIC is considered to be a "single-class REMIC," a portion
of the REMIC's servicing, administrative and other non-interest expenses will be
allocated as a separate item to those Regular Certificateholders that are "pass-
through interest holders." certificateholders that are pass-through interest
holders are encouraged to consult their own tax advisors about the impact of
these rules on an investment in the Regular Certificates. See "Residual
Certificates -- Pass-Through of Non-Interest Expenses of the REMIC."
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Treatment of Realized Losses. Although not entirely clear, it appears that
holders of Regular Certificates that are corporations should in general be
allowed to deduct as an ordinary loss any loss sustained during the taxable year
on account of the certificates becoming wholly or partially worthless, and that,
in general, holders of certificates that are not corporations should be allowed
to deduct as a short-term capital loss any loss sustained during the taxable
year on account of the certificates becoming wholly worthless. Although the
matter is unclear, non-corporate holders of certificates may be allowed a bad
debt deduction at the time that the principal balance of a certificate is
reduced to reflect realized losses resulting from any liquidated mortgage loans.
The IRS, however, could take the position that non-corporate holders will be
allowed a bad debt deduction to reflect realized losses only after all mortgage
loans remaining in the related trust fund have been liquidated or the
certificates of the related series have been otherwise retired. Potential
investors and Holders of the certificates are encouraged to consult their own
tax advisors regarding the appropriate timing, amount and character of any loss
sustained with respect to their certificates, including any loss resulting from
the failure to recover previously accrued interest or discount income.
Non-U.S. Persons. Generally, payments of interest, including any payment
with respect to accrued OID, on the Regular Certificates to a Regular
Certificateholder who is not a U.S. Person and is not engaged in a trade or
business within the United States will not be subject to federal withholding tax
if the Regular Certificateholder complies with certain identification
requirements, including delivery of a statement, signed by the Regular
Certificateholder under penalties of perjury, certifying that the Regular
Certificateholder is a foreign person and providing the name and address of the
Regular Certificateholder. If a Regular Certificateholder is not exempt from
withholding, distributions of interest, including distributions in respect of
accrued OID, the holder may be subject to a 30% withholding tax, subject to
reduction under any applicable tax treaty.
Further, it appears that a Regular Certificate would not be included in the
estate of a non-resident alien individual and would not be subject to United
States estate taxes. However, Certificateholders who are non-resident alien
individuals are encouraged to consult their tax advisors concerning this
question.
It is recommended that Regular Certificateholders who are not U.S. Persons
and persons related to them not acquire any Residual Certificates, and Residual
Certificateholders and persons related to Residual Certificateholders not
acquire any Regular Certificates without consulting their tax advisors as to the
possible adverse tax consequences of doing so.
As previously mentioned, the New Withholding Regulations were published in
the Federal Register on October 14, 1997 and generally will be effective for
payments made after December 31, 2000, subject to certain transition rules. The
discussion set forth above does not take the new withholding regulations into
account. Prospective Non-U.S. Persons who own Regular Certificates are strongly
encouraged to consult their own tax advisor with respect to the New Withholding
Regulations.
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Information Reporting and Backup Withholding. The master servicer will
furnish or make available, within a reasonable time after the end of each
calendar year, to each person who was a Regular Certificateholder at any time
during the year, any information deemed appropriate to assist Regular
Certificateholders in preparing their federal income tax returns, or to enable
holders to make the information available to beneficial owners or financial
intermediaries that hold the Regular Certificates on behalf of beneficial
owners. If a holder, beneficial owner, financial intermediary or other recipient
of a payment on behalf of a beneficial owner fails to supply a certified
taxpayer identification number or if the Secretary of the Treasury determines
that the person has not reported all interest and dividend income required to be
shown on its federal income tax return, 31% backup withholding may be required
with respect to any payments. Any amounts deducted and withheld from a
distribution to a recipient would be allowed as a credit against a recipient's
federal income tax liability. In addition, prospective investors are encouraged
to consult their tax advisors with respect to the New Withholding Regulations.
b. Residual Certificates
Allocation of the Income of the REMIC to the Residual Certificates. The
REMIC will not be subject to federal income tax except with respect to income
from prohibited transactions and certain other transactions. See " -- Prohibited
Transactions and Other Taxes." Instead, each original holder of a Residual
Certificate will report on its federal income tax return, as ordinary income,
its share of the taxable income of the REMIC for each day during the taxable
year on which it owns any Residual Certificates. The taxable income of the REMIC
for each day will be determined by allocating the taxable income of the REMIC
for each calendar quarter ratably to each day in the quarter. An original
holder's share of the taxable income of the REMIC for each day will be based on
the portion of the outstanding Residual Certificates that the holder owns on
that day. The taxable income of the REMIC will be determined under an accrual
method and will be taxable to the holders of Residual Certificates without
regard to the timing or amounts of cash distributions by the REMIC. Ordinary
income derived from Residual Certificates will be "portfolio income" for
purposes of the taxation of taxpayers subject to the limitations on the
deductibility of "passive losses." As residual interests, the Residual
Certificates will be subject to tax rules, described below, that differ from
those that would apply if the Residual Certificates were treated for federal
income tax purposes as direct ownership interests in the certificates or as debt
instruments issued by the REMIC.
A Residual Certificateholder may be required to include taxable income from
the Residual Certificate in excess of the cash distributed. For example, a
structure where principal distributions are made serially on regular interests
(that is, a fast-pay, slow-pay structure) may generate that sort of mismatching
of income and cash distributions (that is, "phantom income"). This mismatching
may be caused by the use of certain required tax accounting methods by the
REMIC, variations in the prepayment rate of the underlying mortgage loans and
certain other factors. Depending upon the structure of a particular transaction,
the aforementioned factors may
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significantly reduce the after-tax yield of a Residual Certificate to a Residual
Certificateholder. Investors are encouraged to consult their own tax advisors
concerning the federal income tax treatment of a Residual Certificate and the
impact of the tax treatment on the after-tax yield of a Residual Certificate.
A subsequent Residual Certificateholder also will report on its federal
income tax return amounts representing a daily share of the taxable income of
the REMIC for each day that the Residual Certificateholder owns the Residual
Certificate. Those daily amounts generally would equal the amounts that would
have been reported for the same days by an original Residual Certificateholder,
as described above. The Legislative History indicates that certain adjustments
may be appropriate to reduce or increase the income of a subsequent holder of a
Residual Certificate that purchased the Residual Certificate at a price greater
than or less than the adjusted basis the Residual Certificate would have in the
hands of an original Residual Certificateholder. See " -- Sale or Exchange of
Residual Certificates." It is not clear, however, whether these adjustments will
in fact be permitted or required and, if so, how they would be made. The REMIC
Regulations do not provide for these adjustments.
Taxable Income of the REMIC Attributable to Residual Interests. Taxable
Income of the REMIC Attributable to Residual Interests. The taxable income of
the REMIC will reflect a netting of the income from the mortgage loans and the
REMIC's other assets and the deductions allowed to the REMIC for interest and
OID on the Regular Certificates and, except as described under " -- Regular
Certificates -- Non-Interest Expenses of the REMIC," other expenses. 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 the
limitations on deductibility of investment interest expense and expenses for the
production of income do not apply, all bad loans will be deductible as business
bad debts, and the limitation on the deductibility of interest and expenses
related to tax-exempt income is more restrictive than with respect to
individual. The REMIC's gross income includes interest, original issue discount
income, and market discount income, if any, on the mortgage loans, as well as,
income earned from temporary investments on reverse assets, reduced by the
amortization of any premium on the mortgage loans. In addition, a Residual
Certificateholder will recognize additional income due to the allocation of
realized losses to the Regular Certificates due to defaults, delinquencies and
realized losses on the mortgage loans. The timing of the inclusion of the income
by Residual Certificateholders may differ from the time the actual loss is
allocated to the Regular Certificates. The REMIC's deductions include interest
and original issue discount expense on the Regular Certificates, servicing fees
on the mortgage loans, other administrative expenses of the REMIC and realized
losses on the mortgage loans. The requirement that Residual Certificateholders
report their pro rata share of taxable income or net loss of the REMIC will
continue until there are no certificates of any class of the related series
outstanding.
For purposes of determining its taxable income, the REMIC will have an
initial aggregate tax basis in its assets equal to the sum of the issue prices
of the Regular Certificates and the Residual Certificates, or, if a class of
certificates is not sold initially, its fair market value. The
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aggregate basis will be allocated among the mortgage loans and other assets of
the REMIC in proportion to their respective fair market value. A mortgage loan
will be deemed to have been acquired with discount or premium to the extent that
the REMIC's basis in the mortgage loan is less than or greater than its
principal balance, respectively. Any discount, whether market discount or OID,
will be includible in the income of the REMIC as it accrues, in advance of
receipt of the cash attributable to this income, under a method similar to the
method described above for accruing OID on the Regular Certificates. The REMIC
expects to elect under Code Section 171 to amortize any premium on the mortgage
loans. Premium on any mortgage loan to which the election applies would be
amortized under a constant yield method. It is not clear whether the yield of a
mortgage loan would be calculated for this purpose based on scheduled payments
or taking account of the Prepayment Assumption. Additionally, the election would
not apply to the yield with respect to any underlying mortgage loan originated
on or before September 27, 1985. Instead, premium with respect to that mortgage
loan would be allocated among the principal payments on the mortgage loan and
would be deductible by the REMIC as those payments become due.
The REMIC will be allowed a deduction for interest and OID on the Regular
Certificates. The amount and method of accrual of OID will be calculated for
this purpose in the same manner as described above with respect to Regular
Certificates except that the 0.25% per annum de minimis rule and adjustments for
subsequent holders will not apply.
A Residual Certificateholder will not be permitted to amortize the cost of
the Residual Certificate as an offset to its share of the REMIC's taxable
income. However, that taxable income will not include cash received by the REMIC
that represents a recovery of the REMIC's basis in its assets, and, as described
above, the issue price of the Residual Certificates will be added to the issue
price of the Regular Certificates in determining the REMIC's initial basis in
its assets. See " -- Sale or Exchange of Residual Certificates." For a
discussion of possible adjustments to income of a subsequent holder of a
Residual Certificate to reflect any difference between the actual cost of the
Residual Certificate to the holder and the adjusted basis the Residual
Certificate would have in the hands of an original Residual Certificateholder,
see " -- Allocation of the Income of the REMIC to the Residual Certificates."
Net Losses of the REMIC. The REMIC will have a net loss for any calendar
quarter in which its deductions exceed its gross income. The net loss would be
allocated among the Residual Certificateholders in the same manner as the
REMIC's taxable income. The net loss allocable to any Residual Certificate will
not be deductible by the holder to the extent that the net loss exceeds the
holder's adjusted basis in the Residual Certificate. Any net loss that is not
currently deductible due to this limitation may only be used by the Residual
Certificateholder to offset its share of the REMIC's taxable income in future
periods, but not otherwise. The ability of Residual Certificateholders that are
individuals or closely held corporations to deduct net losses may be subject to
additional limitations under the Code.
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Mark to Market Rules. A Residual Certificate acquired after January 3, 1995
cannot be marked-to-market.
Pass-Through of Non-Interest Expenses of the REMIC. As a general rule, all
of the fees and expenses of a REMIC will be taken into account by holders of the
Residual Certificates. In the case of a single class REMIC, however, the
expenses and a matching amount of additional income will be allocated, under
temporary Treasury regulations, among the Regular Certificateholders and the
Residual Certificateholders on a daily basis in proportion to the relative
amounts of income accruing to each certificateholder on that day. In general
terms, a single class REMIC is one that either would qualify, under existing
Treasury regulations, as a grantor trust if it were not a REMIC (treating all
interests as ownership interests, even if they would be classified as debt for
federal income tax purposes) or (ii) is similar to a grantor trust and is
structured with the principal purpose of avoiding the single class REMIC rules.
The applicable prospectus supplement may apportion expenses to the Regular
Certificates, but if it does not, then the expenses of the REMIC will be
allocated to holders of the related Residual Certificates in their entirety and
not to holders of the related Regular Certificates.
In the case of individuals, or trusts, estates or other persons that
compute their income in the same manner as individuals, who own an interest in a
Regular Certificate or a Residual Certificate directly or through a pass-through
interest holder that is required to pass miscellaneous itemized deductions
through to its owners or beneficiaries (e.g. a partnership, an S corporation or
a grantor trust), the trust expenses will be deductible under Code Section 67
only to the extent that those expenses, plus other "miscellaneous itemized
deductions" of the individual, exceed 2% of the individual's adjusted gross
income. In addition, Code Section 68 provides that the amount of itemized
deductions otherwise allowable for an individual whose adjusted gross income
exceeds a certain amount (the "Applicable Amount") will be reduced by the lesser
of 3% of the excess of the individual's adjusted gross income over the
Applicable Amount or 80% of the amount of itemized deductions otherwise
allowable for the taxable year. The amount of additional taxable income
recognized by Residual Certificateholders who are subject to the limitations of
either Code Section 67 or Code Section 68 may be substantial. Further, holders,
other than corporations, that are subject to the alternative minimum tax may not
deduct miscellaneous itemized deductions in determining their alternative
minimum taxable income. The REMIC is required to report to each pass-through
interest holder and to the IRS the holder's allocable share, if any, of the
REMIC's non-interest expenses. The term "pass-through interest holder" generally
refers to individuals, entities taxed as individuals and certain pass-through
entities, but does not include real estate investment trusts. Residual
Certificateholders that are pass-through interest holders are encouraged to
consult their own tax advisors about the impact of these rules on an investment
in the Residual Certificates.
Excess Inclusions. A portion of the income on a Residual Certificate
(referred to in the Code as an "excess inclusion") for any calendar quarter
generally will be subject to federal income tax in all events. Thus, for
example, an excess inclusion may not be offset by any unrelated losses,
deductions or loss carryovers of a Residual Certificateholder; will be treated
as
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"unrelated business taxable income" within the meaning of Code Section 512 if
the Residual Certificateholder is a pension fund or any other organization that
is subject to tax only on its unrelated business taxable income (see " -- Tax-
Exempt Investors"); and is not eligible for any reduction in the rate of
withholding tax in the case of a Residual Certificateholder that is a foreign
investor. See " -- Non-U.S. Persons." An exception to the excess inclusion rules
that applied to thrifts holding certain residuals was repealed by the Small
Business Tax Act of 1996.
Except as discussed in the following paragraph, with respect to any
Residual Certificateholder, the excess inclusions for any calendar quarter is
the excess, if any, of the income of the Residual Certificateholder for that
calendar quarter from its Residual Certificate over the sum of the "daily
accruals" for all days during the calendar quarter on which the Residual
Certificateholder holds the Residual Certificate. For this purpose, the daily
accruals with respect to a Residual Certificate are determined by allocating to
each day in the calendar quarter its ratable portion of the product of the
"adjusted issue price" of the Residual Certificate at the beginning of the
calendar quarter and 120 percent of the "Federal long-term rate" in effect at
the time the Residual Certificate is issued. For this purpose, the "adjusted
issue price" of a Residual Certificate at the beginning of any calendar quarter
equals the issue price of the Residual Certificate, increased by the amount of
daily accruals for all prior quarters, and decreased (but not below zero) by the
aggregate amount of payments made on the Residual Certificate before the
beginning of the same quarter. The "federal long-term rate" is an average of
current yields on Treasury securities with a remaining term of greater than nine
years, computed and published monthly by the IRS.
In the case of any Residual Certificates held by a real estate investment
trust, the aggregate excess inclusions with respect to the Residual
Certificates, reduced (but not below zero) by the real estate investment trust
taxable income (within the meaning of Code Section 857(b)(2), excluding any net
capital gain), will be allocated among the shareholders of the trust in
proportion to the dividends received by the shareholders from the trust, and any
amount so allocated will be treated as an excess inclusion with respect to a
Residual Certificate as if held directly by the shareholder. Regulated
investment companies, common trust funds and certain cooperatives are subject to
similar rules.
Payments. Any distribution made on a Residual Certificate to a Residual
Certificateholder will be treated as a non-taxable return of capital to the
extent it does not exceed the Residual Certificateholder's adjusted basis in the
Residual Certificate. To the extent a distribution exceeds the adjusted basis,
it will be treated as gain from the sale of the Residual Certificate.
Sale or Exchange of Residual Certificates. If a Residual Certificate is
sold or exchanged, the seller will generally recognize gain or loss equal to the
difference between the amount realized on the sale or exchange and its adjusted
basis in the Residual Certificate, except that the recognition of loss may be
limited under the "wash sale" rules. A holder's adjusted basis in a Residual
Certificate generally equals the cost of the Residual Certificate to the
Residual
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Certificateholder, increased by the taxable income of the REMIC that was
included in the income of the Residual Certificateholder with respect to the
Residual Certificate, and decreased (but not below zero) by the net losses that
have been allowed as deductions to the Residual Certificateholder with respect
to the Residual Certificate and by the distributions received by the Residual
Certificateholder. In general, the gain or loss will be capital gain or loss
provided the Residual Certificate is held as a capital asset. However, Residual
Certificates will be "evidences of indebtedness" within the meaning of Code
Section 582(c)(1), so that gain or loss recognized from sale of a Residual
Certificate by a bank or thrift institution to which that section applies would
be ordinary income or loss.
Except as provided in Treasury regulations yet to be issued, if the seller
of a Residual Certificate reacquires the Residual Certificate, or acquires any
other Residual Certificate, any residual interest in another REMIC or similar
interest in a "taxable mortgage pool" (as defined in Code Section 7701(i))
during the period beginning six months before, and ending six months after, the
date of the sale, the sale will be subject to the "wash sale" rules of Code
Section 1091. In that event, any loss realized by the Residual Certificateholder
on the sale will not be deductible, but, instead, will increase the Residual
Certificateholder's adjusted basis in the newly acquired asset.
Prohibited Transactions and Other Taxes
The Code imposes a Prohibited Transactions Tax on REMICs equal to 100
percent of the net income derived from "prohibited transactions" and prohibits
deducting any loss with respect to prohibited transactions. In general, subject
to certain specified exceptions, a prohibited transaction means the disposition
of a mortgage loan, the receipt of income from a source other than a mortgage
loan or certain other permitted investments, the receipt of compensation for
services, or gain from the disposition of an asset purchased with the payments
on the mortgage loans for temporary investment pending distribution on the
certificates. It is not anticipated that the trust fund for any series of
certificates will engage in any prohibited transactions in which it would
recognize a material amount of net income.
In addition, certain contributions to a trust fund as to which an election
has been made to treat the trust fund as a REMIC made after the day on which the
trust fund issues all of its interest could result in the imposition of a
Contributions Tax on the trust fund equal to 100% of the value of the
contributed property. No trust fund for any series of certificates will accept
contributions that would subject it to a Contributions Tax.
In addition, a trust fund as to which an election has been made to treat
the trust fund as a REMIC may also be subject to 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. "Net income
from foreclosure property" generally means income from foreclosure property
other than qualifying income for a real estate investment trust.
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Where any Prohibited Transactions Tax, Contributions Tax, tax on net income
from foreclosure property or state or local income or franchise tax that may be
imposed on a REMIC relating to any series of certificates results from
. a breach of the related master servicer's, trustee's or seller's
obligations under the related pooling and servicing agreement for the
series, the tax will be borne by the master servicer, trustee or
seller, as the case may be, out of its own funds or
. the seller's obligation to repurchase a mortgage loan, the tax will
be borne by the seller.
If the master servicer, trustee or seller, as the case may be, fails to pay or
is not required to pay the tax as provided above, the tax will be payable out of
the trust fund for the series and will result in a reduction in amounts
available to be distributed to the certificateholders of the series.
Liquidation and Termination
If the REMIC 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's final tax return a date on which the 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 will not be subject to any Prohibited Transactions Tax,
provided that the REMIC credits or distributes in liquidation all of the sale
proceeds plus its cash, other than the amounts retained to meet claims, to
holders of Regular and Residual Certificates within the 90-day period.
The REMIC will terminate shortly following the retirement of the Regular
Certificates. If a Residual Certificateholder's adjusted basis in the Residual
Certificate exceeds the amount of cash distributed to the Residual
Certificateholder in final liquidation of its interest, then it would appear
that the Residual Certificateholder would be entitled to a loss equal to the
amount of the excess. It is unclear whether the loss, if allowed, will be a
capital loss or an ordinary loss.
Administrative Matters
Solely for the purpose of the administrative provisions of the Code, the
REMIC generally will be treated as a partnership and the Residual
Certificateholders will be treated as the partners if there is more than one
holder of the Residual Certificate. Certain information will be furnished
quarterly to each Residual Certificateholder who held a Residual Certificate on
any day in the previous calendar quarter.
Each Residual Certificateholder is required to treat items on its return
consistently with their treatment on the REMIC's return, unless the Residual
Certificateholder either files a statement identifying the inconsistency or
establishes that the inconsistency resulted from incorrect information received
from the REMIC. The IRS may assert a deficiency resulting from
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a failure to comply with the consistency requirement without instituting an
administrative proceeding at the REMIC level. The REMIC does not intend to
register as a tax shelter pursuant to Code Section 6111 because it is not
anticipated that the REMIC will have a net loss for any of the first five
taxable years of its existence. Any person that holds a Residual Certificate as
a nominee for another person may be required to furnish the REMIC, in a manner
to be provided in Treasury regulations, with the name and address of the person
and other information.
Tax-Exempt Investors
Any Residual Certificateholder that is a pension fund or other entity that
is subject to federal income taxation only on its "unrelated business taxable
income" within the meaning of Code Section 512 will be subject to the tax on
that portion of the distributions received on a Residual Certificate that is
considered an excess inclusion. See " -- Residual Certificates -- Excess
Inclusions."
Non-U.S. Persons
Amounts paid to Residual Certificateholders who are not U.S. persons (see "
- -- Regular Certificates -- Non-U.S. Persons") are treated as interest for
purposes of the 30% (or lower treaty rate) United States withholding tax.
Amounts distributed to holders of Residual Certificates should qualify as
"portfolio interest," subject to the conditions described in " -- Regular
Certificates," but only to the extent that the underlying mortgage loans were
originated after July 18, 1984. Furthermore, the rate of withholding on any
income on a Residual Certificate that is excess inclusion income will not be
subject to reduction under any applicable tax treaties. See " -- Residual
Certificates -- Excess Inclusions." If the portfolio interest exemption is
unavailable, the amount will be subject to United States withholding tax when
paid or otherwise distributed, or when the Residual Certificate is disposed of,
under rules similar to those for withholding upon disposition of debt
instruments that have OID. The Code, however, grants the Treasury Department
authority to issue regulations requiring that those amounts be taken into
account earlier than otherwise provided where necessary to prevent avoidance of
tax, for example, where the Residual Certificates do not have significant value.
See " -- Residual Certificates -- Excess Inclusions." If the amounts paid to
Residual Certificateholders that are not U.S. persons are effectively connected
with their conduct of a trade or business within the United States, the 30% (or
lower treaty rate) withholding tax rate will not apply. Instead, the amounts
paid to the non-U.S. Person will be subject to U.S. federal income taxation at
regular graduated rates. For special restrictions on the transfer of Residual
Certificates, see " -- Tax-Related Restrictions on Transfers of Residual
Certificates."
Tax-Related Restrictions on Transfers of Residual Certificates
Disqualified Organizations. An entity may not qualify as a REMIC unless
there are reasonable arrangements designed to ensure that residual interests in
the entity are not held by "disqualified organizations." Further, a tax is
imposed on the transfer of a residual interest in a
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REMIC to a "disqualified organization." The amount of the tax equals the product
of an amount, as determined under the REMIC Regulations, equal to the present
value of the total anticipated "excess inclusions" with respect to the interest
for periods after the transfer and the highest marginal federal income tax rate
applicable to corporations. The tax is imposed on the transferor unless the
transfer is through an agent, including a broker or other middleman, for a
disqualified organization, in which event the tax is imposed on the agent. The
person otherwise liable for the tax shall be relieved of liability for the tax
if the transferee furnished to it an affidavit that the transferee is not a
disqualified organization and, at the time of the transfer, the person does not
have actual knowledge that the affidavit is false. A "disqualified organization"
means the United States, any State, possession or political subdivision of the
United States, any foreign government, any international organization or any
agency or instrumentality of any of the foregoing entities (provided that the
term does not include an instrumentality if all its activities are subject to
tax and, except for Freddie Mac, a majority of its board of directors is not
selected by a governmental agency), any organization (other than certain farmers
cooperatives) generally exempt from federal income taxes unless the organization
is subject to the tax on "unrelated business taxable income" and a rural
electric or telephone cooperative.
A tax is imposed on a "pass-through entity" holding a residual interest in
a REMIC if at any time during the taxable year of the pass-through entity a
disqualified organization is the record holder of an interest in the entity. The
amount of the tax is equal to the product of the amount of excess inclusions for
the taxable year allocable to the interest held by the disqualified organization
and the highest marginal federal income tax rate applicable to corporations. The
pass-through entity otherwise liable for the tax, for any period during which
the disqualified organization is the record holder of an interest in the entity,
will be relieved of liability for the tax if the record holder furnishes to the
entity an affidavit that the record holder is not a disqualified organization
and, for the applicable period, the pass-through entity does not have actual
knowledge that the affidavit is false. For this purpose, a "pass-through entity"
means a regulated investment company, real estate investment trust, or common
trust fund; a partnership, trust, or estate; and certain cooperatives. Except as
may be provided in Treasury regulations not yet issued, any person holding an
interest in a pass-through entity as a nominee for another will, with respect to
the interest, be treated as a pass-through entity. Large partnerships which
generally contain 250 or more partners are taxable on excess inclusion income as
if all partners were disqualified organizations.
To comply with these rules, the pooling and servicing agreement will
provide that no record or beneficial ownership interest in a Residual
Certificate may be purchased, transferred or sold, directly or indirectly,
without the express written consent of the master servicer. The master servicer
will grant consent to a proposed transfer only if it receives an affidavit from
the proposed transferee to the effect that it is not a disqualified organization
and is not acquiring the Residual Certificate as a nominee or agent for a
disqualified organization and a covenant by the proposed transferee to the
effect that the proposed transferee agrees to be bound by and to abide by the
transfer restrictions applicable to the Residual Certificate.
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Noneconomic Residual Certificates. The REMIC Regulations disregard, for
federal income tax purposes, any transfer of a Noneconomic Residual Certificate
to a "U.S. Person," as defined in the following sentence, unless no significant
purpose of the transfer is to enable the transferor to impede the assessment or
collection of tax. In general, the definition of a U.S. Person is the same as
provided under "Glossary of Terms," except that entities or individuals that
would otherwise be treated as Non-U.S. Persons, may be considered U.S. Persons
for this purpose if their income from the residual is subject to tax under Code
Section 871(b) or Code Section 882 (income effectively connected with a U.S.
trade or business). A Noneconomic Residual Certificate is any Residual
Certificate (including a Residual Certificate with a positive value at issuance)
unless, at the time of transfer, taking into account the Prepayment Assumption
and any required or permitted clean up calls or required liquidation provided
for in the REMIC's organizational documents, the present value of the expected
future distributions on the Residual Certificate 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 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. 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 transferor is presumed not to have that knowledge
if the transferor conducted a reasonable investigation of the transferee and the
transferee acknowledges to the transferor that the residual interest may
generate tax liabilities in excess of the cash flow and the transferee
represents that it intends to pay the taxes associated with the residual
interest as they become due. If a transfer of a Noneconomic Residual Certificate
is disregarded, the transferor would continue to be treated as the owner of the
Residual Certificate and would continue to be subject to tax on its allocable
portion of the net income of the REMIC.
Foreign Investors. The REMIC Regulations provide that the transfer of a
Residual Certificate that has a "tax avoidance potential" to a "foreign person"
will be disregarded for federal income tax purposes. This rule appears to apply
to a transferee who is not a U.S. Person unless the transferee's income in
respect of the Residual Certificate is effectively connected with the conduct of
a United States trade or business. A Residual Certificate is deemed to have a
tax avoidance potential unless, at the time of transfer, the transferor
reasonably expects that the REMIC will distribute to the transferee amounts that
will equal at least 30 percent of each excess inclusion, and that the amounts
will be distributed at or after the time the excess inclusion accrues and not
later than the end of the calendar year following the year of accrual. If the
non-U.S. Person transfers the Residual Certificate to a U.S. Person, the
transfer will be disregarded, and the foreign transferor will continue to be
treated as the owner, if the transfer has the effect of allowing the transferor
to avoid tax on accrued excess inclusions. The pooling and servicing agreement
will provide that no record or beneficial ownership interest in a Residual
Certificate may be transferred, directly or indirectly, to a non-U.S. Person
unless the person provides the trustee with a duly completed I.R.S. Form 4224
and the trustee consents to the transfer in writing.
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Any attempted transfer or pledge in violation of the transfer restrictions
shall be absolutely null and void and shall vest no rights in any purported
transferee. Investors in Residual Certificates are encouraged to consult their
own tax advisors with respect to transfers of the Residual Certificates and
pass-through entities are encouraged to consult their own tax advisors with
respect to any tax which may be imposed on a pass-through entity.
STATE TAX CONSIDERATIONS
In addition to the federal income tax consequences described in "Material
Federal Income Tax Considerations," potential investors are encouraged to
consider the state and local income tax consequences of the acquisition,
ownership, and disposition of the certificates. State and local income tax law
may differ substantially from the corresponding federal law, and this discussion
does not purport to describe any aspect of the income tax laws of any state or
locality. Therefore, potential investors are encouraged to consult their own tax
advisors with respect to the various tax consequences of investments in the
certificates.
ERISA CONSIDERATIONS
The following describes certain considerations under ERISA and the Code,
which apply only to certificates of a series that are not divided into
subclasses. If certificates are divided into subclasses, the related prospectus
supplement will contain information concerning considerations relating to ERISA
and the Code that are applicable to them.
ERISA imposes requirements on Plans and on Parties in Interest. Generally,
ERISA applies to investments made by Plans. Among other things, ERISA requires
that the assets of Plans be held in trust and that the trustee, or other duly
authorized fiduciary, have exclusive authority and discretion to manage and
control the assets of the Plans. ERISA also imposes certain duties on persons
who are fiduciaries of Plans. Under ERISA, any person who exercises any
authority or control respecting the management or disposition of the assets of a
Plan is considered to be a fiduciary of the Plan, subject to certain exceptions
not here relevant. Certain 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 ERISA Section 3(33)),
are not subject to ERISA requirements. Accordingly, assets of those plans may be
invested in certificates without regard to the described ERISA considerations,
subject to the provisions of applicable state law. However, any of those plans
that are qualified and exempt from taxation under Code Sections 401(a) and
501(a) are subject to the prohibited transaction rules set forth in Code Section
503.
On November 13, 1986, the DOL issued final regulations concerning the
definition of what constitutes the assets of a Plan. (Labor Reg. Section 2510.3-
101.) Under this regulation, the underlying assets and properties of
corporations, partnerships and certain other entities in which
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a Plan makes an "equity" investment could be deemed for purposes of ERISA to be
assets of the investing Plan in certain circumstances. However, the regulation
provides that, generally, the assets of a corporation or partnership in which a
Plan invests will not be deemed for purposes of ERISA to be assets of the Plan
if the equity interest acquired by the investing Plan is a publicly-offered
security. A publicly-offered security, as defined in Labor Reg. Section 2510.3-
101, is a security that is widely held, freely transferable and registered under
the Exchange Act.
In addition to the imposition of general fiduciary standards of investment
prudence and diversification, ERISA and the Code prohibit a broad range of
transactions involving Plan assets of a Plan and Parties in Interest with
respect to the Plan and impose additional prohibitions where Parties in Interest
are fiduciaries with respect to the Plan. Because the mortgage loans may be
deemed Plan assets of each Plan that purchases certificates, an investment in
the certificates by a Plan might be a prohibited transaction under ERISA
Sections 406 and 407 and subject to an excise tax under Code Section 4975 unless
a statutory, regulatory or administrative exemption applies.
PTE 83-1
In PTE 83-1, the DOL exempted from ERISA's prohibited transaction rules and
from the excise tax imposed under Code Section 4975 certain transactions
relating to the operation of residential mortgage pool investment trusts and the
purchase, sale and holding of "mortgage pool pass-through certificates" in the
initial issuance of the certificates. PTE 83-1 permits, subject to certain
conditions, transactions that might otherwise be prohibited between Plans and
Parties in Interest with respect to those Plans related to the origination,
maintenance and termination of mortgage pools consisting of mortgage loans
secured by first or second mortgages or deeds of trust on single-family
residential property, and the acquisition and holding of certain mortgage pool
pass-through certificates representing an interest in those mortgage pools by
Plans. If the general conditions of PTE 83-1 are satisfied, investments by a
Plan in Single Family Certificates will be exempt from the prohibitions of ERISA
Sections 406(a) and 407 (relating generally to transactions with Parties in
Interest who are not fiduciaries) if the Plan purchases the Single Family
Certificates at no more than fair market value and will be exempt from the
prohibitions of ERISA Sections 406(b)(1) and (2) (relating generally to
transactions with fiduciaries) if, in addition, the purchase is approved by an
independent fiduciary, no sales commission is paid to the pool sponsor, the Plan
does not purchase more than twenty-five percent (25%) of all Single Family
Certificates and at least fifty percent (50%) of all Single Family Certificates
are purchased by persons independent of the pool sponsor or pool trustee. PTE
83-1 does not provide an exemption for transactions involving subordinated
certificates. Accordingly, no transfer of a subordinated certificate generally
may be made to a Plan.
The discussion in this and the next paragraph applies only to Single Family
Certificates. The depositor believes that, for purposes of PTE 83-1, the term
"mortgage pass-through certificate" would include: (1) certificates issued in a
series consisting of only a single class of
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certificates; and (2) senior certificates issued in a series in which there is
only one class of senior certificates; provided that the certificates in the
case of clause (1), or the senior certificates in the case of clause (2),
evidence the beneficial ownership of both a specified percentage of future
interest payments greater than zero percent and a specified percentage greater
than zero percent of future principal payments on the mortgage loans. It is not
clear whether a class of certificates that evidences the beneficial ownership in
a trust fund divided into mortgage loan groups, beneficial ownership of a
specified percentage of interest payments only or principal payments only, or a
notional amount of either principal or interest payments, or a class of
certificates entitled to receive payments of interest and principal on the
mortgage loans only after payments to other classes or after the occurrence of
certain specified events would be a "mortgage pass-through certificate" for
purposes of PTE 83-1.
PTE 83-1 sets forth three general conditions that must be satisfied for any
transaction to be eligible for exemption:
. the maintenance of a system of insurance or other protection for the
pooled mortgage loans and property securing the loans and for
indemnifying certificateholders against reductions in pass-through
payments due to property damage or defaults in loan payments in an
amount not less than the greater of one percent of the aggregate
principal balance of all covered pooled mortgage loans or the
principal balance of the largest covered pooled mortgage loan;
. the existence of a pool trustee who is not an affiliate of the pool
sponsor; and
. a limitation on the amount of the payment retained by the pool
sponsor, together with other funds inuring to its benefit, to not more
than adequate consideration for selling the mortgage loans plus
reasonable compensation for services provided by the pool sponsor to
the mortgage pool.
The depositor believes that the first general condition referred to above
will be satisfied with respect to the certificates in a series issued without a
subordination feature, or the senior certificates only in a series issued with a
subordination feature, provided that the subordination and reserve fund,
subordination by shifting of interests, the pool insurance or other form of
credit enhancement described in this prospectus, that subordination, pool
insurance or other form of credit enhancement being the system of insurance or
other protection referred to above, with respect to a series of certificates is
maintained in an amount not less than the greater of one percent of the
aggregate principal balance of the mortgage loans or the principal balance of
the largest mortgage loan. See "Description of the Certificates." In the absence
of a ruling that the system of insurance or other protection with respect to a
series of certificates satisfies the first general condition referred to above,
there can be no assurance that these features will be so viewed by the DOL. The
trustee will not be affiliated with the depositor.
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Each Plan fiduciary who is responsible for making the investment decisions
whether to purchase or commit to purchase and to hold Single Family Certificates
must make its own determination as to whether the first and third general
conditions, and the specific conditions described briefly in the preceding
paragraph, of PTE 83-1 have been satisfied, or as to the availability of any
other PTEs. Each Plan fiduciary should also determine whether, under the general
fiduciary standards of investment prudence and diversification, an investment in
the certificates is appropriate for the Plan, taking into account the overall
investment policy of the Plan and the composition of the Plan's investment
portfolio.
Underwriter Exemptions
The DOL has granted Underwriter Exemptions to certain underwriters which
exempt certain transactions from certain of the prohibited transaction rules of
ERISA and the related excise tax provisions of Section 4975 of the Code with
respect to the initial purchase, the holding and the subsequent resale by Plans
of certificates in pass-through trusts that consist of certain receivables,
loans and other obligations that meet the conditions and requirements of the
Underwriter Exemptions.
While each Underwriter Exemption is an individual exemption separately
granted to a specific underwriter, the terms and conditions which generally
apply to the Underwriter Exemptions are substantially the following:
. the acquisition of the certificates by a Plan is on terms, including
the price for the certificates, that are at least as favorable to the
Plan as they would be in an arm's length transaction with an unrelated
party;
. the rights and interest evidenced by the certificates acquired by the
Plan are not subordinated to the rights and interests evidenced by
other certificates of the trust fund;
. the certificates acquired by the Plan have received a rating at the
time of acquisition that is one of the three highest generic rating
categories from Standard & Poor's Ratings Group, a division of McGraw-
Hill Companies, Inc., Moody's Investors Service, Inc., Duff & Phelps
Credit Rating Co. or Fitch IBCA, Inc.;
. the trustee is not an affiliate of any other member of the Restricted
Group;
. the sum of all payments made to and retained by the underwriters in
connection with the distribution of the certificates represents not
more than reasonable compensation for underwriting the certificates;
the sum of all payments made to and retained by the seller pursuant to
the assignment of the loans to the trust fund represents not more than
the fair market value of the loans; the sum of all payments made to
and retained by the master servicer and any other servicer represents
not more than reasonable
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compensation for its services under the agreement pursuant to which
the loans are pooled and reimbursements of its reasonable expenses;
and
. the Plan investing in the certificates is an "accredited investor" as
defined in Rule 501(a)(1) of Regulation D of the SEC under the
Securities Act.
In addition, for transactions that utilize prefunding, the following
conditions must be satisfied:
. The principal amount of Subsequent mortgage loans must not exceed 25%
of the principal balance of all certificates being offered as of the
closing date;
. All such Subsequent mortgage loans must meet the same terms and
conditions for eligibility as the initial mortgage loans, which terms
and conditions have been approved by one of the rating agencies,
except that such terms and conditions may be modified with the prior
approval of a rating agency or of a majority of the holders of the
certificates;
. The addition of Subsequent mortgage loans during the funding period
does not result in a ratings downgrade;
. The weighted average annual percentage rate of all mortgage loans in
the trust at the end of the funding period is not more than 100 basis
points lower than such weighted average as of the closing date;
. The characteristics of the Subsequent mortgage loans are monitored by
an insurer that is independent of the seller, or an independent
accountant delivers a letter, with copies to the relevant rating
agencies, underwriters and trustee, stating that the characteristics
of the Subsequent mortgage loans conform to the characteristics with
respect thereto specified in the related prospectus supplement;
. The funding period ends no later than 90 days after the closing date;
and
. Amounts on deposit in the related prefunding account and capitalized
interest account are invested only in investments permitted by the
rating agencies that are (i) direct obligations of or fully guaranteed
by the United States or any agency or instrumentality thereof or (ii)
rated, or issued by an issuer rated, in one of the three highest
generic rating categories by the rating agencies.
The trust fund must also meet the following requirements:
. the corpus of the trust fund must consist solely of assets of the
type that have been included in other investment pools;
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. certificates in other investment pools must have been rated in one of
the three highest rating categories of S&P, Moody's, Fitch or D&P for
at least one year before the Plan's acquisition of certificates; and
. certificates evidencing interests in the other investment pools must
have been purchased by investors other than Plans for at least one
year before any Plan's acquisition of certificates.
Moreover, the Underwriter Exemptions generally provide relief from certain
self-dealing and conflict of interest prohibited transactions that may occur
when the Plan fiduciary causes a Plan to acquire certificates in a trust holding
receivables as to which the fiduciary (or its affiliate) is an obligor provided
that, among other requirements:
. in the case of an acquisition in connection with the initial issuance
of certificates, at least fifty percent of each class of certificates
in which Plans have invested is acquired by persons independent of the
Restricted Group,
. the fiduciary (or its affiliate) is an obligor with respect to five
percent or less of the fair market value of the obligations contained
in the trust;
. the Plan's investment in certificates of any class does not exceed
twenty-five percent of all of the certificates of that class
outstanding at the time of the acquisition; and
. immediately after the acquisition, no more than twenty-five percent
of the assets of any Plan with respect to which the person is a
fiduciary is invested in certificates representing an interest in one
or more trusts containing assets sold or serviced by the same entity.
The Underwriter Exemptions do not apply to Plans sponsored by Restricted
Groups.
The prospectus supplement for each series of certificates will indicate the
classes of certificates, if any, offered thereby as to which it is expected that
an Underwriter Exemption will apply.
Any Plan fiduciary that proposes to cause a Plan to purchase certificates
is encouraged to consult with its counsel concerning the impact of ERISA and the
Code, the applicability of PTE 83-1, the availability and applicability of any
Underwriter Exemption or any other exemptions from the prohibited transaction
provisions of ERISA and the Code and the potential consequences in their
specific circumstances, before making the investment. Moreover, each Plan
fiduciary should determine whether under the general fiduciary standards of
investment prudence and diversification an investment in the certificates is
appropriate for the Plan, taking
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into account the overall investment policy of the Plan and the composition of
the Plan's investment portfolio.
Insurance Company General Accounts
Section III of PTE 95-60 exempts from the application of the prohibited
transaction provisions of Sections 406(a), 406(b) and 407(a) of ERISA and
Section 4975 of the Code transactions in connection with the servicing,
management and operation of a trust in which an insurance company general
account has an interest as a result of its acquisition of certificates issued by
the trust, provided that certain conditions are satisfied. If these conditions
are met, insurance company general accounts would be allowed to purchase certain
classes of certificates which do not meet the requirements of any of the
Underwriter Exemptions solely because they are subordinated to other classes of
certificates in a trust or have not received a rating at the time of the
acquisition in one of the three highest rating categories from S&P, Moody's DCR
or Fitch. All other conditions of one of the Underwriter Exemptions would have
to be satisfied in order for PTE 95-60 to be available. Before purchasing a
class of certificates, an insurance company general account seeking to rely on
Section III of PTE 95-60 should itself confirm that all applicable conditions
and other requirements have been satisfied.
Other Exemptions
One or more other PTEs issued by the DOL may be available to a Plan
investing in the certificates, depending in part upon the type of Plan fiduciary
making the decision to acquire certificates and the circumstances under which
the decision is made, including but not limited to PTE 84-14, regarding
investments effected by "qualified plan asset managers," PTE 90-1, regarding
investments by insurance company pooled separate accounts, PTE 91-38, regarding
investments by bank collective investment funds, and PTE 96-23, regarding
investments effected by "in-house asset managers." However, even if the
conditions specified in one or more of these other exemptions are met, the scope
of the relief provided might or might not cover all acts which might be
construed as prohibited transactions.
Consultation with Counsel
Any Plan fiduciary which proposes to cause a Plan to purchase certificates
is encouraged to consult with its counsel concerning the impact of ERISA and the
Code, the applicability of PTE 83-1, the availability and applicability of any
Underwriter Exemption or any other exemptions from the prohibited transaction
provisions of ERISA and the Code and the potential consequences in their
specific circumstances, before investing in the certificates. Moreover, each
Plan fiduciary should determine whether under the general fiduciary standards of
investment prudence and diversification an investment in the certificates is
appropriate for the Plan, taking into account the overall investment policy of
the Plan and the composition of the Plan's investment portfolio.
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LEGAL INVESTMENT
The prospectus supplement for each series of certificates will specify
which, if any, of the classes of certificates offered by it will constitute
"mortgage related securities" for purposes of SMMEA. Classes of certificates
that qualify as "mortgage related securities" will be legal investments for
those investors whose authorized investments are subject to state regulation, to
the same extent as, under applicable law, obligations issued by or guaranteed as
to principal and interest by the United States constitute legal investments for
them. Those investors are persons, trusts, corporations, partnerships,
associations, business trusts and business entities, including depository
institutions, life insurance companies and pension funds, created pursuant to or
existing under the laws of the United States or of any state, including the
District of Columbia and Puerto Rico. Under SMMEA, if a state enacts legislation
before October 4, 1991 specifically limiting the legal investment authority of
those entities with respect to "mortgage related securities," the certificates
will constitute legal investments for entities subject to the legislation only
to the extent provided in it. Approximately twenty-one states adopted limiting
legislation before the October 4, 1991 deadline.
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 certificates
without limitations as to the percentage of their assets represented by them,
federal credit unions may invest in mortgage related securities, and national
banks may purchase certificates for their own account without regard to the
limitations generally applicable to investment securities set forth in 12 U.S.C.
24 (Seventh), subject in each case to regulations that the applicable federal
authority may prescribe. In this connection, federal credit unions should review
the National Credit Union Administration Letter to Credit Unions No. 96, as
modified by Letter to Credit Unions No. 108, which includes guidelines to assist
federal credit unions in making investment decisions for mortgage related
securities, and the regulation "Investment and Deposit Activities" (12 C.F.R.
Part 703), whether or not the class of certificates under consideration for
purchase constitutes a "mortgage related security".
All depository institutions considering an investment in the certificates,
whether or not the class of certificates under consideration for purchase
constitutes a "mortgage related security", should review the Federal Financial
Institutions Examination Council's Supervisory Policy Statement on Securities
Activities (to the extent adopted by their respective regulators), setting
forth, in relevant part, certain securities trading and sales practices deemed
unsuitable for an institution's investment portfolio, and guidelines for (and
restrictions on) investing in mortgage derivative products, including "mortgage
related securities" that are "high-risk mortgage securities" as defined in the
policy statement. According to the policy statement, "high-risk mortgage
securities" include securities such as certificates not entitled to
distributions allocated to principal or interest, or subordinated certificates.
Under the policy statement, each depository institution must determine, before
purchase (and at stated intervals thereafter), whether a particular mortgage
derivative product is a "high-risk mortgage security," and whether the purchase
or retention of such a product would be consistent with the policy statement.
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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 "prudent
investor" provisions, percentage-of-assets limits and provisions that may
restrict or prohibit investment in securities that are not "interest bearing" or
"income paying."
There may be other restrictions on the ability of certain investors,
including depository institutions, either to purchase certificates or to
purchase certificates representing more than a specified percentage of the
investor's assets. Investors are encouraged to consult their own legal advisors
in determining whether and to what extent the certificates constitute legal
investments for them.
METHOD OF DISTRIBUTION
Certificates are being offered by the prospectus and the accompanying
prospectus supplement in series from time to time, with each series evidencing a
separate trust fund, through any of the following methods:
. by negotiated firm commitment underwriting and public reoffering by
underwriters;
. by agency placements through one or more placement agents primarily
with institutional investors and dealers; and
. by placement directly by the depositor with institutional investors.
A prospectus supplement will be prepared for each series which will
describe the method of offering being used for that series and will set forth
the identity of any of its underwriters and either the price at which the series
is being offered, the nature and amount of any underwriting discounts or
additional compensation to the underwriters and the proceeds of the offering to
the depositor, or the method by which the price at which the underwriters will
sell the certificates will be determined. Each prospectus supplement for an
underwritten offering will also contain information regarding the nature of the
underwriters obligations, any material relationship between the depositor and
any underwriter and, where appropriate, information regarding any discounts or
concessions to be allowed or reallowed to dealers or others and any arrangements
to stabilize the market for the certificates so offered. In firm commitment
underwritten offerings, the underwriters will be obligated to purchase all of
the certificates of the series if any certificates are purchased. Certificates
may be acquired by the underwriters for their own accounts and may be resold
from time to time in one or more transactions, including negotiated
transactions, at a fixed public offering price or at varying prices determined
at the time of sale.
This prospectus, together with the related prospectus supplement, may be
used by First Tennessee Capital Markets, an affiliate of the depositor, in
connection with offers and sales related to market making transactions in the
certificates in which First
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<PAGE>
Tennessee Capital Markets acts as principal. First Tennessee Capital Markets may
also act as agent in those transactions. Sales in those transactions will be
made at prices related to prevailing prices at the time of sale.
Underwriters and agents may be entitled under agreements entered into with
the depositor to indemnification by the depositor against certain civil
liabilities, including liabilities under the Securities Act, or to contribution
with respect to payments which the underwriters or agents may be required to
make in respect thereof.
If a series is offered other than through underwriters, the prospectus
supplement relating to it will contain information regarding the nature of the
offering and any agreements to be entered into between the depositor and
purchasers of certificates of the series.
LEGAL MATTERS
The validity of the certificates, including certain federal income tax
consequences with respect to the certificates, will be passed upon for the
depositor by Andrews & Kurth L.L.P., Dallas, Texas. Certain of the legal
aspects of the certificates will be passed upon for the Underwriters by Brown &
Wood LLP, Washington, D.C.
FINANCIAL INFORMATION
A new trust fund will be formed for each series of certificates and no
trust fund will engage in any business activities or have any assets or
obligations before the issuance of the related series of certificates.
Accordingly, no financial statements for any trust fund will be included in this
prospectus or in the related prospectus supplement.
RATING
It is a condition to the issuance of the certificates of each series
offered by this prospectus and by the prospectus supplement that they shall have
been rated in one of the four highest rating categories by the nationally
recognized statistical rating agency or agencies specified in the related
prospectus supplement.
A rating is based on the adequacy of the value of the trust assets and any
credit enhancement for that class, and reflects the rating agency's assessment
of how likely it is that holders of the class of certificates will receive the
payments to which they are entitled. A rating does not constitute an assessment
of how likely it is that principal prepayments on the underlying loans will be
made, the degree to which the rate of prepayments might differ from that
originally anticipated, or the likelihood that the certificates will be redeemed
early. As a result,
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<PAGE>
certificateholders might suffer a lower than anticipated yield, and, in
addition, holders of stripped pass-through certificates in extreme cases might
fail to recoup their underlying investments.
A rating is not a recommendation to purchase, hold, or sell certificates
because it does not address the market price of the certificates or the
suitability of the certificates for any particular investor. A rating may not
remain in effect for any given period of time and the rating agency could lower
or withdraw the rating entirely in the future.
For example, the rating agency could lower or withdraw its rating due to:
. a decrease in the adequacy of the value of the trust assets or any
related credit enhancement,
. an adverse change in the financial or other condition of a credit
enhancement provider, or
. a change in the rating of the credit enhancement provider's long-term
debt.
The amount, type, and nature of credit enhancement established for a class
of certificates will be determined on the basis of criteria established by each
rating agency rating classes of the certificates. These criteria are sometimes
based upon an actuarial analysis of the behavior of similar loans in a larger
group. That analysis is often the basis upon which each rating agency determines
the amount of credit enhancement required for a class. The historical data
supporting any actuarial analysis may not accurately reflect future experience,
and the data derived from a large pool of similar loans may not accurately
predict the delinquency, foreclosure, or loss experience of any particular pool
of mortgage loans.
Each security rating should be evaluated independently of any other
security rating.
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<PAGE>
GLOSSARY OF TERMS
1986 Act -- The Tax Reform Act of 1986.
Amortizable Bond Premium Regulations -- Final regulations issued by the IRS
on December 30, 1997 which deal with amortizable bond premium.
Asset Conservation Act -- The Asset Conservation, Lender Liability and
Deposit Insurance Protection Act of 1996, which took effect on September 30,
1996.
Available Funds -- The amount on deposit in the related Certificate Account
on the distribution date, net of related fees and expenses payable by the
related trust fund, other than amounts to be held in the Certificate Account for
distribution on future distribution dates.
CERCLA-- The Comprehensive Environmental Response, Compensation and
Liability Act of 1980, under which the Environmental Protection Agency may
impose a lien on property where the Environmental Protection Agency has incurred
clean-up costs.
Certificate Account -- An account established and maintained by the master
servicer in the name of the trustee for the benefit of the holders of each
series of certificates, for the disbursement of payments on the mortgage loans
evidenced by each series of certificates.
Code -- The Internal Revenue Code of 1986, as amended.
Contingent Regulations -- Final regulations issued by the IRS in June 1996
governing the calculation of OID on instruments having contingent interest
payments.
Contributions Tax -- A tax on a trust fund equal to 100% of the value of
the contributed property.
Deferred Interest -- Interest deferred due to negative amortization.
DIDMCA -- The Depository Institutions Deregulation and Monetary Control Act
of 1980.
DOL -- The U.S. Department of Labor.
Eleventh District -- The Eleventh Federal Home Loan Bank District.
ERISA -- The Employee Retirement Income Security Act of 1974, as amended.
Exchange Act -- The Securities Exchange Act of 1934, as amended.
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FHLBSF -- The Federal Home Loan Bank of San Francisco.
Freddie Mac Act -- Title III of the Emergency Home Finance Act of 1970, as
amended.
Garn-St Germain Act -- The Garn-St Germain Depository Institutions Act of
1982.
Guide -- FT Mortgage Companies' Seller Guide and Servicer Guide,
collectively.
Housing Act -- The National Housing Act of 1934, as amended.
Legislative History -- The legislative history of the 1986 Act.
Mortgage Assets -- The mortgage-related assets of a trust fund for a series
of certificates, including:
. a pool of first lien mortgage loans or participation interests
in first lien mortgage loans, in each case secured by one- to
four-family residential properties,
. agency securities, or
. private mortgage-backed securities.
National Cost of Funds Index -- The National Monthly Median Cost of Funds
Ratio to SAIF-Insured Institutions published by the OTS for the third preceding
month, or the fourth preceding month, if the National Cost of Funds Index for
the third preceding month has not been published on the tenth day of an interest
accrual period.
New Withholding Regulations -- Final regulations dealing with backup
withholding and information reporting on income paid to foreign persons and
related matters which were published in the Federal Register on October 14,
1997.
Non-U.S. Person -- A person other than a U.S. Person.
OID Regulations -- The Treasury regulations issued under Code Sections 1271
through 1273 and 1275.
OID -- Original issue discount.
OTS -- The Office of Thrift Supervision.
Parties in Interest -- Persons who bear specified relationships to Plans or
who are fiduciaries with respect to Plans.
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Payment Lag Certificates -- Regular Certificates which provide for payments
of interest based on a period that corresponds to the interval between
distribution dates but that ends before each distribution date.
Plans -- Employee benefit plans subject to ERISA and certain retirement
plans and arrangements, including individual retirement accounts and annuities,
Keogh plans and collective investment funds and separate accounts in which the
plans, accounts or arrangements are invested.
Pre-Funding Account -- When a Pre-Funding Arrangement is utilized in
connection with the issuance of a series of certificates, a segregated account
into which a trustee will be required to deposit all or a portion of the
proceeds received by such trustee in connection with the sale of one or more
classes of certificates of the series.
Pre-Funding Arrangement -- An arrangement in which the depositor commits to
purchase Subsequent mortgage loans for deposit into the trust fund after the
date on which the related certificates are issued.
Pre-issuance Accrued Interest -- Interest that has accrued on a certificate
before the issue date.
PTE -- A prohibited tranaction exemption issued by the DOL.
Prohibited Transactions Tax -- A tax on REMICs equal to 100% of the net
income derived from prohibited transactions.
RCRA -- The Resource Conservation and Recovery Act.
Regular Certificateholders -- Holders of Regular Certificates.
Regular Certificates -- The regular interests of a trust fund that elects
REMIC status.
Relief Act -- The Soldiers' and Sailors' Civil Relief Act of 1940, as
amended.
REMIC -- A real estate mortgage investment conduit, as defined in the Code.
REMIC Certificates -- The certificates of a trust fund that elects REMIC
status.
REMIC Regulations -- The regulations governing REMICs under the Code.
Residual Certificateholder -- A holder of a Residual Certificate.
Residual Certificates --The residual interests in a trust fund that elects
REMIC status.
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<PAGE>
Restricted Group -- Any one or more of the seller, the underwriter, the
trustee, the master servicer, any servicer, any insurer with respect to the
mortgage loans, any obligor with respect to mortgage loans included in the trust
fund constituting more than five percent of the aggregate unamortized principal
balance of the assets in the trust fund, or any affiliate of those parties.
Retained Interest -- For a Mortgage Asset, the amount or percentage
specified in the related prospectus supplement which is not sold by the
depositor or seller of the Mortgage Asset and, therefore, is not included in the
trust for the related series.
Securities Act -- The Securities Act of 1933, as amended.
Single Family Certificates -- Certificates that represent interests in a
mortgage pool consisting of mortgage loans representing loans for single family
homes.
SMMEA -- The Secondary Mortgage Market Enhancement Act of 1984.
Stripped Arm Obligations -- OID on certificates attributable to adjustable
rate mortgage loans.
Stripped Bond Certificates -- A class of certificates that represents the
right to principal and interest, or principal only, on all or a portion of the
mortgage loans.
Stripped Coupon Certificates -- A class of certificates that represents the
right to some or all of the interest on all or a portion of the mortgage loans,
including mortgage loans underlying a Stripped Bond Certificate.
Subsequent mortgage loans -- Additional mortgage loans purchased by the
depositor after the date on which the related certificates are issued.
Super-Premium Certificates -- Regular Certificates issued at prices
significantly exceeding their principal amounts or notional principal balances.
U.S. Person -- a person who is;
. a citizen or resident of the United States,
. a corporation or a partnership, including an entity treated as a
corporation or partnership for U.S. federal income tax purposes,
which is organized in or created under the laws of the United States
or any State thereof or the District of Columbia, unless in the case
of a partnership, Treasury Regulations provide otherwise,
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<PAGE>
. an estate the income of which, from sources outside the United
States, is includible in gross income for federal income tax
purposes regardless of its connection with the conduct of a trade or
business within the United States,
. a trust if a court within the United States is able to exercise
primary supervision over the administration of the trust and one or
more United States persons have authority to control all substantial
decisions of the trust, or
. a trust that can elect to be treated as a U.S. Person.
Underwriter Exemptions -- Administrative exemptions, granted by the DOL to
certain underwriters, from certain of the prohibited transaction rules of ERISA
and the related excise tax provisions of Section 4975 of the Code with respect
to the initial purchase, the holding and the subsequent resale by Plans of
certificates in pass-through trusts that consist of certain receivables, loans
and other obligations that meet the conditions and requirements of such
exemptions.
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The information in this prospectus supplement 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
supplement is not an offer to sell these securities and we are not soliciting
offers to buy these securities in any state where the offer or sale is not
permitted.
Subject to Completion, dated December 20, 1999
PROSPECTUS SUPPLEMENT
(To Prospectus dated December 20, 1999)
$----------------------
(Approximate)
First Horizon Asset Securities, Inc.
Depositor
First Tennessee Bank National Association FT Mortgage Companies
Seller Master
Servicer
First Horizon Mortgage Pass-Through Trust 1999-__
Issuer
Mortgage Pass-Through Certificates, Series 1999-_
Distributions payable monthly commencing in ______, 1999
- --------------------------------------------------------------------------------
You should carefully consider the risk factors beginning on page S-9 of this
prospectus supplement and on page 6 of the accompanying prospectus.
- --------------------------------------------------------------------------------
The trust will issue:
o ______ classes of senior certificates;
o ______ classes of junior certificates;
o ______ class(es) of residual certificates
For a description of the classes of certificates offered by this
prospectus, see "Summary -- Offered Certificates" on page S-4. Credit
enhancement for the certificates will be provided by subordination.
The assets of the trust will include a pool of conventional, fixed
rate, first lien, fully amortizing, one- to four-family residential mortgage
loans. The stated maturities of the mortgage loans will range from ___ to ___
years.
The SEC and state securities regulators have not approved or
disapproved of these securities or determined if this prospectus supplement or
the prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The underwriters will purchase the certificates and will sell them to
investors at varying prices to be determined at the time of sale. The proceeds
to the depositor from the sale of the certificates will be approximately ___% of
the total principal balance of those certificates, plus accrued interest, before
deducting expenses. The underwriter's commission will be the difference between
the price it pays for the certificates and the amount it receives from their
sale to the public. The certificates will be available for delivery to investors
on or about ____________.
[This prospectus supplement and the accompanying prospectus are to be
used by First Tennessee Capital Markets, an affiliate of the depositor, the
seller and the master servicer, in connection with offers and sales related to
market making transactions in the offered certificates in which First Tennessee
Capital Markets acts as principal. First Tennessee Capital Markets may also act
as agent in these transactions. Sales will be made at prices related to
prevailing prices at the time of sale.]
[NAME OF UNDERWRITER] [NAME OF UNDERWRITER]
____________, 1999
S-1
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
PAGE
----
<S> <C>
SUMMARY...........................................................................................................4
The Issuer...............................................................................................4
The Mortgage Loans.......................................................................................5
Cut-off Date.............................................................................................6
Closing Date.............................................................................................6
Depositor................................................................................................6
Seller.................................................................................................. 6
Master Servicer..........................................................................................6
Trustee ................................................................................................6
Distribution Dates.......................................................................................6
Interest Payments........................................................................................6
Principal Payments.......................................................................................6
Optional Termination.....................................................................................6
Collection Account; Priority of Distributions............................................................7
Advances ................................................................................................7
Credit Enhancement.......................................................................................7
Subordination............................................................................................7
Tax Status...............................................................................................8
ERISA Considerations.....................................................................................8
Legal Investment.........................................................................................8
Ratings ................................................................................................8
RISK FACTORS......................................................................................................9
Certificates may not be
appropriate investments
for some investors............................................................................9
Prepayments are unpredictable
and will affect the yield on
your certificates.............................................................................9
Subordination may not be
sufficent to protect senior
certificates from losses.....................................................................11
Concentration of [California]
mortgage loans may increase
risk of losses................................................................................12
Residual Certificates have
adverse tax consequences.....................................................................13
Year 2000 computer problems
could disrupt distributions on
your certificates........................................................................... 13
FORWARD LOOKING STATEMENTS...................................................................................... 16
THE MORTGAGE POOL............................................................................................... 16
General .............................................................................................. 16
</TABLE>
S-2
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Assignment of the Mortgage Loans........................................................................25
SERVICING OF MORTGAGE LOANS......................................................................................27
General ...............................................................................................27
The Master Servicer.....................................................................................27
Foreclosure, Delinquency and Loss Experience........................................................... 27
Servicing Compensation and Payment of Expenses......................................................... 31
Adjustment to Master Servicing Fee in Connection with Prepaid Mortgage Loans........................... 31
Advances .............................................................................................. 32
DESCRIPTION OF THE CERTIFICATES................................................................................. 32
General .............................................................................................. 32
Book-Entry Certificates................................................................................ 33
Payments on Mortgage Loans; Accounts................................................................... 34
Distributions.......................................................................................... 34
Priority of Distributions Among Certificates........................................................... 34
Interest .............................................................................................. 35
Principal.............................................................................................. 35
Allocation of Losses................................................................................... 37
Structuring Assumptions................................................................................ 38
Optional Purchase of Defaulted Loans................................................................... 39
Optional Termination....................................................................................40
The Trustee............................................................................................ 40
Restrictions on Transfer of the Class A-R Certificates................................................. 40
YIELD, PREPAYMENT AND MATURITY CONSIDERATIONS .................................................................. 40
General .............................................................................................. 40
Prepayment Considerations and Risks.................................................................... 41
Sensitivity of the Class X Certificates................................................................ 42
Sensitivity of the Principal Only Certificates..........................................................44
Additional Information................................................................................. 44
Weighted Average Lives of the Offered Certificates......................................................45
Decrement Tables....................................................................................... 45
Last Scheduled Distribution Date....................................................................... 47
The Subordinated Certificates.......................................................................... 47
CREDIT ENHANCEMENT.............................................................................................. 48
Subordination of Certain Classes....................................................................... 48
USE OF PROCEEDS................................................................................................. 49
MATERIAL FEDERAL INCOME TAX CONSEQUENCES ....................................................................... 49
ERISA CONSIDERATIONS............................................................................................ 51
METHOD OF DISTRIBUTION.......................................................................................... 52
LEGAL MATTERS................................................................................................... 53
RATINGS ....................................................................................................... 53
</TABLE>
S-3
<PAGE>
SUMMARY
This summary highlights selected information from this document and
does not contain all of the information that you need to consider in making your
investment decision. To understand all of the terms of an offering of the
certificates, you should read carefully this entire document and the
accompanying prospectus.
For the definitions of certain capitalized terms used in this
prospectus supplement, see "Glossary of Terms" on page S-56.
The Issuer
The Issuer of the certificates will be First Horizon Mortgage
Pass-Through Trust 1999-__. The trust was created for the sole purpose of
issuing the certificates.
Offered Certificates
On the closing date, the trust will issue twelve classes of
certificates, nine of which are being offered by this prospectus supplement and
the accompanying prospectus. The assets of the trust that will support both the
offered certificates and other classes of certificates will consist of a pool of
mortgage loans with a principal balance of approximately $_______ as of
_________, 1999.
The following table shows the approximate initial principal balance,
annual pass-through rate and type of each class of offered certificates:
- --------------------------------------------------------------------------------
Class Certificate Pass-Through
Class Principal Balance Rate Type
----- ----------------- ---- ----
Class A-1 $_____________ ___% senior
Class A-2 $_____________ ___% senior
Class A-3 $_____________ ___% senior
Class PO $_____________ senior/principal only
Class X ___% senior/interest only
Class A-R $_____________ ___% senior/residual
Class M $_____________ ___% subordinate
Class B-1 $_____________ ___% subordinate
Class B-2 $_____________ ___% subordinate
- --------------------------------------------------------------------------------
Depending on the final composition of the pool of mortgage loans sold
to the trust, the principal balance of each class of certificates may increase
or decrease from the amount listed above. The total original principal balance
of the certificates will not be less than $______ nor greater than $______.
S-4
<PAGE>
All classes of the offered certificates, other than the Class PO, Class
X and Class A-R Certificates, will be book-entry certificates.
The trust will issue the certificates in the following minimum
denominations:
- ----------------------------------------------------------
Class Minimum Denomination
----- --------------------
- ----------------------------------------------------------
Class A-1
- ----------------------------------------------------------
Class A-2
- ----------------------------------------------------------
Class A-3
- ----------------------------------------------------------
Class PO
- ----------------------------------------------------------
Class X
- ----------------------------------------------------------
Class A-R
- ----------------------------------------------------------
Class M
- ----------------------------------------------------------
Class B-1
- ----------------------------------------------------------
Class B-2
- ----------------------------------------------------------
Certificates with principal balances in excess of these amounts will be
issued in multiples of $1,000 above the minimum denomination.
See "Description of the Certificates -- General," "Book-Entry
Certificates" and "The Mortgage Pool" in this prospectus supplement and "The
Trust Fund -- The Mortgage Loans -- General" in the prospectus.
The Mortgage Loans
[FT Mortgage Companies] originated or acquired all of the mortgage
loans. The mortgage loans expected to be sold to the trust have the following
characteristics as of:
o Total original principal balance (1): $________________
o Original terms to maturity: _____ to _____ years
o Weighted average maturity: between ___ and ___ months
o Weighted average annual interest rate: between ____% and ____%
o Largest geographic concentration: ___% of the mortgage loans are
secured by property located in [California]
- -----------
(1) Approximate, after deducting payments of principal due on or before _____,
and subject to the variance described in this prospectus supplement.
See "The Mortgage Pool -- General".
S-5
<PAGE>
Cut-off Date
_______________, 1999, the date as of which the aggregate principal
balance of the mortgage loans is determined for purposes of this prospectus
supplement, unless a different date is specified.
Closing Date
On or about __________, 1999
Depositor
First Horizon Asset Securities Inc.
Seller
[First Tennessee Bank National Association]
Master Servicer
FT Mortgage Companies
Trustee
[Bank of New York]
Distribution Dates
We will make distributions on the certificates on the ___th day of each
month. If the ___th day of each month is not a business day, then the
distributions will be made to you on the next business day. The first
distribution is scheduled for ________, 1999.
Interest Payments
Interest will accrue at the pass-through rate on each interest bearing
class of certificates on the basis of a 360-day year divided into twelve 30-day
months. The interest accrual period for the interest bearing classes of
certificates for any distribution date will be the calendar month before the
distribution date.
See "Description of the Certificates -- Interest".
Principal Payments
Principal will be paid on the certificates on the ___ day of each month
as described in this prospectus supplement beginning at page S-37.
See "Description of the Certificates -- Principal".
S-6
<PAGE>
Optional Termination
The master servicer may purchase all of the remaining assets of the
trust after the principal balance of the mortgage loans and real estate owned by
the trust declines below 10% of the principal balance of the mortgage loans on
______________, 1999.
See "Description of the Certificates -- Optional Termination".
Collection Account; Priority of Distributions
On each distribution date amounts available in the trust to make
distributions on the certificates will be applied in the following order of
priority:
(1) to interest on the interest bearing classes of senior certificates;
(2) to principal on the classes of senior certificates in the manner,
order and priority described under "Description of the Certificates
-- Principal";
(3) to any deferred amounts payable on the Class PO Certificates, as
described under "Description of the Certificates -- Principal"; and
(4) to interest on and then principal of each class of subordinate
certificates, in order of their numerical class designations,
beginning with the Class M Certificates, as described under
"Description of the Certificates -- Principal".
Advances
The master servicer will make cash advances with respect to delinquent
payments of principal and interest on the mortgage loans to the extent the
master servicer reasonably believes that the cash advances can be repaid from
future payments on the mortgage loans. These cash advances are only intended to
maintain a regular flow of scheduled interest and principal payments on the
certificates and are not intended to guarantee or insure against losses.
See "Servicing of Mortgage Loans -- Advances".
Credit Enhancement
The issuance of senior certificates and subordinate certificates by the
trust is designed to increase the likelihood that senior certificateholders will
receive regular payments of interest and principal.
Subordination
The senior certificates will have a payment priority over the
subordinate certificates. Within the classes of subordinate certificates, the
Class M Certificates will have payment priority over the Class B-1 and Class B-2
Certificates, and the Class B-1 Certificates will have a payment priority over
the Class B-2 Certificates. The Class B-3, Class B-4 and Class B-5 Certificates,
which are not being offered to the public, are also subordinated, in that order,
with the Class B-5 Certificates having the lowest payment priority.
Subordination is designed to provide the holders of certificates with a
higher payment priority with protection against most losses realized when the
remaining unpaid principal balance on a mortgage loan exceeds the amount of
proceeds recovered upon the liquidation of that
S-7
<PAGE>
mortgage loan. This loss protection is accomplished by allocating realized
losses among the subordinate certificates, beginning with the subordinate
certificates with the lowest payment priority, before realized losses are
allocated to the senior certificates. However, special hazard losses, bankruptcy
losses, and fraud losses in excess of the amounts set forth in this prospectus
supplement, are allocated pro rata to each class of certificates instead of
first being allocated to the subordinate certificates.
See "Description of the Certificates -- Allocation of Losses" and
"Credit Enhancement -- Subordination of Certain Classes".
Tax Status
The trust will elect to be treated, for federal income tax purposes as
a REMIC. The classes of certificates that are designated as the regular
certificates will constitute regular interests in the REMIC. The Class A-R
Certificates will represent the sole class of residual interests in the REMIC.
See "Material Federal Income Tax Consequences" in this prospectus
supplement and in the prospectus.
ERISA Considerations
A pension or other employee benefit plan subject to the Employee
Retirement Income Security Act of 1974 or Section 4975 of the Internal Revenue
Code of 1986 may purchase the Class A Certificates, other than the Class A-R
Certificates, so long as the conditions described under "ERISA Considerations"
are met.
See "ERISA Considerations" in this prospectus supplement and in the
prospectus.
Legal Investment
The senior certificates [and the Class M Certificates] will be mortgage
related securities for purposes of the Secondary Mortgage Market Enhancement Act
of 1984 as long as they are rated in one of the two highest rating categories by
at least one nationally recognized statistical rating organization. The [Class
B-1 and Class B-2] Certificates will not be mortgage related securities for
purposes of that act.
See "Legal Investment" in the prospectus.
Ratings
The classes of certificates listed below will not be offered unless
they are assigned the following ratings by ___ and ___.
- -----------------------------------------------------
Class Rating Rating
----- ------ ------
- -----------------------------------------------------
Class A-1
- -----------------------------------------------------
Class A-2
- -----------------------------------------------------
Class A-3
- -----------------------------------------------------
Class PO
- -----------------------------------------------------
Class X
- -----------------------------------------------------
Class A-R
- -----------------------------------------------------
Class M
- -----------------------------------------------------
S-8
<PAGE>
- -----------------------------------------------------
Class B-1
- -----------------------------------------------------
Class B-2
- -----------------------------------------------------
A rating is not a recommendation to buy, sell or hold securities. These
ratings may be lowered or withdrawn at any time by either of the rating
agencies.
See "Ratings".
RISK FACTORS
The following information, which you should carefully consider,
identifies certain significant sources of risk associated with an investment in
the certificates. You should also carefully consider the information set forth
under "Risk Factors" on page 6 of the prospectus.
Certificates may not be
appropriate investments
for some investors...................... The certificates may not be an
appropriate investment for you if
you do not have sufficient
resources or expertise to
evaluate the particular
characteristics of the applicable
class of certificates. This may
be the case because, among other
things:
o if you purchase your
certificates at a price
other than par, your yield
to maturity will be
sensitive to the uncertain
rate and timing of
principal prepayments on
the mortgage loans;
o the certificates may be
inappropriate investments
for you if you require a
distribution of a
particular amount of
principal on a specific
date or an otherwise
predictable stream of
distributions because the
rate of principal
distributions on, and the
weighted average life of,
the certificates will be
sensitive to the uncertain
rate and timing of
principal prepayments on
the mortgage loans and the
priority of principal
distributions among the
classes of certificates;
o you may not be able to
reinvest the principal
amounts distributed on your
certificates, which in
general are expected to be
greater during periods of
relatively low interest
rates, at a rate that is as
high as the applicable
pass-through rate or your
expected yield;
o unless a secondary market
for the certificates
develops, the certificates
may be illiquid
investments; and
o you must report interest as
well as original issue
discount, if any, on the
accrual method of
S-9
<PAGE>
accounting, even if you are
otherwise using the cash
method of accounting.
You should also carefully
consider the further risks
discussed below and under the
heading "Yield,
Prepayment and Maturity
Considerations" in this
prospectus supplement and under
the heading "Risk Factors" in the
prospectus.
Prepayments are unpredictable
and will affect the yield on
your certificates........................ Borrowers may prepay their
mortgage loans in whole or in
part at any time. We cannot
predict the rate at which
borrowers will repay their
mortgage loans. A prepayment of a
mortgage loan, however, will
usually result in a prepayment on
the certificates and will affect
the yield to maturity on your
certificates. In addition, you
will be subject to any
reinvestment risks resulting from
faster or slower prepayments of
mortgage loans.
The rate of principal payments on
the mortgage loans will be
affected by, among other things:
o the amortization schedules
of the mortgage loans;
o the rate of principal
prepayments, including
partial prepayments and
those resulting from
refinancing, by mortgagors;
o liquidations of defaulted
mortgage loans;
o repurchases of mortgage
loans by the seller as a
result of defective
documentation or breaches
of representations and
warranties;
o optional purchase by the
seller of defaulted
mortgage loans; and
o the optional purchase by
the seller of all of the
mortgage loans in
connection with the
termination of the trust.
The rate of payments, including
prepayments, on the mortgage
loans may be influenced by a
variety of economic, geographic,
social and other factors,
including the following:
o If prevailing rates for
similar mortgage loans fall
below the mortgage rates on
the mortgage loans owned by
the trust, we would expect
the rate of prepayment to
increase. Increased
prepayments could result in
a faster return of
principal to you at a time
when you may not be able to
reinvest the
S-10
<PAGE>
principal at an interest
rate as high as the pass-
through rate on your
certificates.
o If interest rates on
similar mortgage loans rise
above the mortgage rates on
the mortgage loans owned by
the trust, we would expect
the rate of prepayment to
decrease. Reduced
prepayments could result in
a slower return of
principal to you at a time
when you may be able to
reinvest the principal at a
higher rate of interest
than the pass-through rate
on your certificates.
o Refinancing programs, which
may involve soliciting all
or some of the mortgagors
to refinance their mortgage
loans, may increase the
rate of prepayments on the
mortgage loans. The master
servicer or its affiliates
may offer these refinancing
programs from time to time,
including streamlined
documentation programs as
well as programs under
which a mortgage loan is
modified to reduce the
interest rate.
See "Yield, Prepayment and
Maturity Considerations" and
"Description of the Certificates
-- Optional Termination" in this
prospectus supplement and "The
Pooling and Servicing Agreement
-- Assignment of Mortgage
Assets," and "-- Termination;
Optional Termination" in the
prospectus.
The effect of prepayments on
principal only and interest only
certificates may be severe.............. The rate of payments, including
prepayments, on the mortgage
loans owned by the trust can
adversely affect the yield you
receive on principal only and
interest only certificates. For
example:
o If you purchase principal
only certificates or if you
purchase your certificates
at a discount and principal
is repaid slower than you
anticipate, then your yield
may be lower than you
anticipate.
o If you purchase interest
only certificates or you
purchase your certificates
at a premium and principal
is repaid faster than you
anticipate, then your yield
may be lower than you
anticipate.
o If you purchase interest
only certificates and
principal is repaid faster
than you anticipate, you
may lose your initial
investment.
See "Yield, Prepayment and
Maturity Considerations".
S-11
<PAGE>
Subordination may not be
sufficient to protect senior
certificates from losses................ Credit enhancement will be
provided for the certificates,
first, by the right of the
holders of certificates to
receive payments of principal
before the classes subordinated
to them and, second, by the
allocation of realized losses to
subordinated classes in the
inverse order of their
subordination. This form of
credit enhancement is provided by
using collections on the mortgage
loans otherwise payable to
holders of subordinated classes
to pay amounts due on more senior
classes. Collections otherwise
payable to subordinated classes
comprise the sole source of funds
from which this type of credit
enhancement is provided. Realized
losses are allocated to the
subordinate certificates,
beginning with the subordinate
certificates with the lowest
payment priority, until the
principal amount of that class
has been reduced to zero.
Subsequent realized losses will
be allocated to the next most
junior classes of subordinate
certificates sequentially, until
the class certificate balances of
each succeeding class has been
reduced to zero.
Accordingly, if the class
certificate balance of each
subordinated class were to be
reduced to zero, delinquencies
and defaults on the mortgage
loans would reduce the amount of
funds available for monthly
distributions to holders of the
senior certificates. Furthermore,
the subordinated classes will
provide only limited protection
against some categories of losses
such as special hazard losses,
bankruptcy losses and fraud
losses in excess of the amounts
specified in this prospectus
supplement. Any losses in excess
of those amounts will be
allocated pro rata to each class,
even if the class certificate
balance of each subordinated
class has not been reduced to
zero. Among the subordinate
certificates the Class M
Certificates are the least
subordinated, that is, they have
the highest payment priority.
Then come the Class B-1, Class
B-2, Class B-3, Class B-4 and
Class B-5 Certificates, in that
order.
See "Credit Enhancement --
Subordination of Certain
Classes".
Concentration of [California]
mortgage loans may increase
risk of losses on your
certificates ........................ Approximately ___% of the
mortgage loans expected to be in
the trust on the cut-off date are
secured by property in
[California]. Accordingly, you
should consider the following
risks associated with property
located in [California]:
S-12
<PAGE>
o Property in [California]
may be more susceptible
than homes located in other
parts of the country to
certain types of
uninsurable hazards, such
as [earthquakes, floods,
mudslides] and other
natural disasters.
o Economic conditions in
[California], which may or
may not affect real
property values, may affect
the ability of borrowers to
repay their loans on time.
o [California's] economic
condition and housing
market may be adversely
affected by a variety of
events, including natural
disasters such as
earthquakes, hurricanes,
floods and eruptions,
mudslides, brushfires and
civil disturbances such as
riots. If these occur, the
rates of delinquency,
foreclosure, bankruptcy and
loss on the mortgage loans
may increase.
o Declines in the
[California] residential
real estate market may
reduce the values of
properties located in
[California], which would
result in an increase in
the loan-to-value ratios.
o Any increase in the market
value of properties located
in [California] would
reduce the loan-to-value
ratios and could,
therefore, make alternative
sources of financing
available to the borrowers
at lower interest rates,
which could result in an
increased rate of
prepayment of the mortgage
loans.
[Any additional geographic
concentrations material to an
individual offering will also be
disclosed.]
Residual Certificates have
adverse tax consequences................ The Class A-R Certificates will
be the sole "residual interests"
in the REMIC for federal income
tax purposes.
Holders of Class A-R Certificates
must report as ordinary income or
loss their pro rata share of the
net income or the net loss of the
respective REMIC whether or not
any cash distributions are made
to them. This allocation of
income or loss may result in a
zero or negative after-tax
return. No cash distributions are
expected to be made with respect
to the Class A-R Certificates.
Due to their tax consequences,
the Class A-R Certificates will
be subject to restrictions on
transfer that may affect their
liquidity. In addition, the Class
A-R Certificates may not be
acquired by employee benefit
plans subject to ERISA.
S-13
<PAGE>
See "Description of the
Certificates -- Restrictions on
Transfer of the Class A-R
Certificates," "ERISA
Considerations" and "Material
Federal Income Tax Consequences"
in this prospectus supplement.
Year 2000 computer problems
could disrupt distributions on
your certificates....................... The following is a Year 2000
readiness disclosure within the
meaning of the Year 2000
Information and Readiness
Disclosure Act.
In the event that computer
problems arise out of a failure
of the efforts described below to
be completed on time, or in the
event that the systems of the
master servicer, the trustee or
DTC are not fully year 2000
compliant, any resulting
disruptions in the collection and
distribution of receipts on or in
respect of the mortgage loans
could materially adversely affect
your certificates.
The forward-looking statements
contained in this Year 2000
readiness disclosure should be
read in conjunction with the
section entitled "Forward Looking
Statements" on page S-16 of this
prospectus supplement.
The Master Servicer. The master
servicer and its ultimate
corporate parent, First Tennessee
National Corporation, like all
financial institutions, are faced
with the challenge of correctly
stating and processing data
containing dates from the Year
2000 and beyond, i.e. becoming
Year 2000 ready. Computers
programmed with a two-digit field
for identifying the year
interpret "98" as "1998," but may
interpret "00" as "1900" rather
than "2000." If not remedied,
this problem could create system
errors and failures resulting in
the disruption of normal business
operations.
First Tennessee National
Corporation has established
project teams to address these
Year 2000 issues. For additional
information on First Tennessee
National Corporation's Year 2000
remediation efforts, readers of
this prospectus supplement are
referred to the "Year 2000"
subsection of Item 2. of Part I
of First Tennessee National
Corporation's Quarterly Report on
Form 10-Q for the period ended
September 30, 1999, which is
incorporated by reference in this
prospectus supplement, and the
relevant portions of any
subsequent reports filed by First
Tennessee National Corporation
under the Securities Exchange Act
of 1934, as amended for the
purpose of updating this
information.
The master servicer and its major
vendors of mortgage servicing
software are preparing
contingency plans which will be
implemented, if required, to
minimize
S-14
<PAGE>
interruptions to mortgage
servicing operations. However,
due to the size and complexity of
some systems, some of which are
provided by outside vendors, and
the necessity for these systems
to interface correctly, both
within and outside the master
servicer, there is the
possibility that some systems may
not handle date-related data
correctly after January 1, 2000.
Nevertheless, based on their
efforts and those of their major
vendors and the information
available to date, and assuming
the continued availability to the
master servicer and to its
significant vendors of staff and
other technical resources and no
unexpected difficulty in
implementing system enhancements,
the master servicer believes that
it will not incur significant
operational disruptions to
mortgage servicing operations as
a result of the Year 2000
problem.
The master servicer expects that
its mission critical systems and
those provided by its significant
vendors will be Year 2000 ready
before January 1, 2000. However,
the master servicer is heavily
dependent on its outside vendors
and the systems of third parties.
There can be no assurance that
the systems of the master
servicer or third parties with
which the master servicer deals
will be timely converted.
Likewise, the master servicer
does not have the same ability to
monitor and control its outside
vendors as it has for its own
internal systems.
If either the master servicer or
any of its vendors or third party
service providers is not Year
2000 ready, the master servicer
most likely will not be able to
process payments on the mortgage
loans on a timely basis or
accurately. These problems could
lead to the occurrence of an
event of default under the
pooling agreement. For the
remedies available upon the
occurrence of an event of
default, see "The Pooling and
Servicing Agreement -- Rights
Upon Event of Default" in the
prospectus.
Replacement of the master
servicer could lead to payment
delays on the certificates during
any transition period.
The Trustee. The trustee has
informed the depositor and the
master servicer that it will use
commercially reasonable efforts
to (1) make the computer hardware
and software owned by the trustee
and used to provide its services
under the pooling agreement Year
2000 ready before December 31,
1999, (2) test software that the
trustee licenses from third
parties to provide services under
the pooling and servicing
agreement and subject to certain
conditions, if any of this
software is not Year 2000 ready
by September 30, 1999, obtain
replacement software that is
warranted by its vendor as Year
2000
S-15
<PAGE>
ready and (3) contact third party
service providers that the
trustee may use to provide
services under the pooling
agreement to obtain assurances
from them that the computer
hardware and software used to
provide services under the
pooling agreement are Year 2000
ready. However, there can be no
assurance that the systems of the
trustee or third parties with
which the trustee deals will be
Year 2000 ready.
If the trustee or any of its
vendors or third party service
providers is not Year 2000 ready,
the trustee may not be able to
make timely or accurate payments
to certificateholders. The
pooling agreement provides that
the holders of certificates
evidencing at least 50% of the
voting rights have the right to
remove the trustee by providing
written notice to the master
servicer and the trustee.
Replacement of the trustee could
lead to payment delays on the
Certificates during any
transition period.
The DTC. DTC has informed its
participants and other members of
the financial community that it
has developed and is implementing
a program so that its systems, as
the same relate to the timely
payment of distributions, which
include principal and income
payments, to securityholders,
book-entry deliveries, and
settlement of trades within DTC,
continue to function
appropriately. This program
includes a technical assessment
and a remediation plan, each of
which is complete. Additionally,
DTC's plan includes a testing
phase, which is expected to be
completed within appropriate time
frames.
However, DTC's ability to perform
properly its services is also
dependent upon other parties,
including but not limited to
issuers and their agents, as well
as third party vendors from whom
DTC licenses software and
hardware, and third party vendors
on whom DTC relies for
information or the provision of
services, including
telecommunication and electrical
utility service providers, among
others. DTC is contacting, and
will continue to contact, third
party vendors from whom DTC
acquires services to: (1) impress
upon them the importance of their
services being year 2000
compliant; and (3) determine the
extent of their efforts for year
2000 remediation, and as
appropriate, testing, of their
services. In addition, DTC is in
the process of developing
contingency plans as it deems
appropriate.
The DTC has provided the
information in the preceding two
paragraphs for informational
purposes only and the DTC does
not intend for this information
to serve as a
S-16
<PAGE>
representation,
warranty, or contract
modification of any kind.
FORWARD LOOKING STATEMENTS
We caution you that certain statements contained in or incorporated by
reference in this prospectus supplement and the accompanying prospectus consist
of forward-looking statements relating to future economic performance or
projections and other financial items. These statements can be identified by the
use of forward-looking words such as "may," "will," "should," "expects,"
"believes," "anticipates," "estimates," or other comparable words.
Forward-looking statements are subject to a variety of risks and uncertainties
that could cause actual results to differ from the projected results. Those
risks and uncertainties include, among others, general economic and business
conditions, regulatory initiatives and compliance with governmental regulations,
customer preferences, effects of prepayments, changes in interest rates and
various other matters, many of which are beyond our control. Because we cannot
predict the future, what actually happens may be very different from what we
predict in our forward-looking statements.
THE MORTGAGE POOL
General
The depositor will purchase mortgage loans in the mortgage pool from
First Tennessee Bank National Association pursuant to a pooling and servicing
agreement among First Tennesee Bank National Association, as seller, FT
Mortgage, as master servicer, the depositor and [Bank of New York], as trustee.
The depositor will cause the mortgage loans to be assigned to the trustee for
the benefit of the certificateholders.
Under the pooling and servicing agreement, the seller will make certain
representations, warranties and covenants to the depositor relating to, among
other things, the due execution and enforceability of the pooling and servicing
agreement and certain characteristics of the mortgage loans and, subject to the
limitations described under "-- Assignment of the Mortgage Loans," will be
obligated to repurchase or substitute a similar mortgage loan for any mortgage
loan as to which there exists deficient documentation or as to which there has
been an uncured breach of any representation or warranty relating to the
characteristics of the mortgage loans that materially and adversely affect the
interests of the certificateholders in the mortgage loan. The seller will
represent and warrant to the depositor in the pooling and servicing agreement
that the mortgage loans were selected from among the outstanding one- to
four-family mortgage loans in the seller's portfolio as to which the
representations and warranties set forth in the pooling and servicing agreement
can be made and that the selection was not made in a manner intended to
adversely affect the interests of the certificateholders. See "Mortgage Loan
Program -- Representations by Sellers; Repurchases" in the prospectus. Under the
pooling and servicing agreement, the depositor will assign all its interest in
the representations, warranties and covenants, including the seller's repurchase
obligation, to the trustee for the benefit of the certificateholders. The
depositor will make no representations or warranties with respect to the
mortgage loans and will have no obligation to repurchase or substitute mortgage
loans with deficient documentation or which are otherwise defective. First
Tennessee Bank National Association is selling the mortgage loans to the
depositor without recourse and will have no obligation with respect to the
certificates in its capacity as seller other than the repurchase obligation
described above. The obligations of FT Mortgage, as master servicer, with
S-17
<PAGE>
respect to the certificates are limited to the master servicer's contractual
servicing obligations under the pooling and servicing agreement.
Information with respect to the mortgage loans expected to be included
in the mortgage pool is set forth under this heading. Before the closing date,
mortgage loans may be removed from the mortgage pool and other mortgage loans
may be substituted for them. The depositor believes that the information set
forth in this prospectus supplement with respect to the mortgage pool as
presently constituted is representative of the characteristics of the mortgage
pool as it will be constituted at the closing date, but some characteristics of
the mortgage loans in the mortgage pool may vary. Unless otherwise indicated,
information presented in this prospectus supplement expressed as a percentage,
other than rates of interest, are approximate percentages based on the aggregate
Stated Principal Balances of the mortgage loans as of the cut-off date. No more
than 5% of the mortgage loans relative to the cut-off date pool principal
balance will deviate from the mortgage loan characteristics described under this
heading.
As of the cut-off date, the aggregate of the Stated Principal Balances
of the mortgage loans is expected to be approximately $_______________, which is
referred to as the cut-off date pool principal balance. The mortgage loans
provide for the amortization of the amount financed over a series of
substantially equal monthly payments. The due date for each mortgage loan is the
first day of each calendar month. At origination, substantially all of the
mortgage loans had stated terms to maturity of 30 years. Scheduled monthly
payments made by the mortgagors on the mortgage loans either earlier or later
than their scheduled due dates will not affect the amortization schedule or the
relative application of the payments to principal and interest. The mortgagors
may prepay their mortgage loans at any time without penalty.
Approximately ____% mortgage loans, by cut-off date pool principal
balance, are jumbo mortgage loans that have principal balances at origination
that exceed the then applicable limitations for purchase by Fannie Mae and
Freddie Mac.
Each mortgage loan was originated after ___________________.
The latest stated maturity date of any mortgage loan is ____________.
The earliest stated maturity date of any mortgage loan is ____________.
As of the cut-off date, no mortgage loan was delinquent more than 30
days.
[No] mortgage loan will be subject to buydown agreements. [No] mortgage
loan provides for deferred interest or negative amortization.
As of the cut-off date, ___ mortgage loans, representing approximately
___% of the cut-off date pool principal balance, were each originated as an
adjustable rate mortgage loan but converted to a fixed rate mortgage loan before
its inclusion in the mortgage pool.
No mortgage loan has a loan-to-value ratio at origination of more than
95%. Generally, each mortgage loan with a loan-to-value ratio at origination of
greater than 80% is covered by a primary mortgage guaranty insurance policy
issued by a mortgage insurance company acceptable to Fannie Mae or Freddie Mac.
The primary mortgage guaranty insurance policy provides coverage in an amount
equal to a specified percentage times the sum of the Stated Principal Balance of
the related mortgage loan, the accrued interest on the related mortgage loan and
the related foreclosure expenses. The specified percentage is either 12% for
loan-to-value ratios between 80.01% and 85.00%, 25% for loan-to-value ratios
between 85.01% and 90.00% and 30% for loan-to-value ratios between 90.01% and
95.00%.
S-18
<PAGE>
Except with respect to the Lender PMI Mortgage Loans, no primary
mortgage guaranty insurance policy will be required with respect to any mortgage
loan
o after the date on which the related loan-to-value ratio is 80%
or less or, based on a new appraisal, the Stated Principal
Balance of the mortgage loan represents 80% or less of the new
appraised value or
o if maintaining the primary mortgage guaranty insurance policy
is prohibited by applicable law.
With respect to the Lender PMI Mortgage Loans, the primary mortgage
guaranty insurance policy will be maintained for the life of those mortgage
loans.
The loan-to-value ratio of a mortgage loan at any given time is a
fraction, expressed as a percentage, the numerator of which is the Stated
Principal Balance of the related mortgage loan at the date of determination and
the denominator of which is
o in the case of a purchase, the lesser of the selling price of
the mortgaged property or its appraised value at the time of
sale, or
o in the case of a refinancing, the appraised value of the
mortgaged property at the time of refinancing, except in the
case of a mortgage loan underwritten pursuant to FT Mortgage's
Streamlined Documentation Program as described in the
prospectus under "The Mortgage Loan Program -- Underwriting
Standards."
For mortgage loans originated pursuant to FT Mortgage's Streamlined
Documentation Program,
o if the loan-to-value ratio at the time of the origination of
the mortgage loan being refinanced was 90% or less, the
loan-to-value ratio will be the ratio of the principal amount
of the mortgage loan outstanding at the date of determination
divided by the appraised value of the related mortgaged
property at the time of the origination of the mortgage loan
being refinanced or
o if the loan-to-value ratio at the time of the origination of
the mortgage loan being refinanced was greater than 90%, then
the loan-to-value ratio will be the ratio of the principal
amount of the mortgage loan outstanding at the date of
determination divided by the appraised value as determined by
a limited appraisal report at the time of the origination of
the mortgage loan.
See "The Mortgage Loan Program -- Underwriting Standards" in the
prospectus.
No assurance can be given that the value of any mortgaged property has
remained or will remain at the level that existed on the appraisal or sales
date. If residential real estate values generally or in a particular geographic
area decline, the loan-to-value ratios might not be a reliable indicator of the
rates of delinquencies, foreclosures and losses that could occur with respect to
the affected mortgage loans.
The following information sets forth in tabular format certain
information, as of the cut-off date, as to the mortgage loans. Other than with
respect to rates of interest, percentages (approximate) are reported by
aggregate Stated Principal Balance of the mortgage loans as of the cut-off date
and have been rounded in order to total 100%.
S-19
<PAGE>
[Remainder of Page Intentionally Left Blank]
S-20
<PAGE>
MORTGAGE RATES
--------------
<TABLE>
<CAPTION>
Aggregate
Number of Principal Balance Percentage of
Mortgage Rates (%) Mortgage Loans Outstanding Mortgage Pool
------------------ -------------- ----------- -------------
<S> <C>
6.375....................................
6.500....................................
6.625....................................
6.750....................................
6.875....................................
7.000....................................
7.125....................................
7.250....................................
7.375....................................
7.500....................................
7.625....................................
7.750....................................
7.875....................................
8.000....................................
8.125....................................
8.250....................................
8.375....................................
8.500....................................
8.625....................................
8.750....................................
TOTAL
</TABLE>
In the above table, the Lender PMI Mortgage Loans are shown at the
mortgage rates net of the interest premium charged by the related lenders. As of
the cut-off date, the weighted average mortgage rate of the mortgage loans, as
so adjusted, is expected to be approximately ____%. Without this adjustment, the
weighted average mortgage rate of the mortgage loans is expected to be
approximately ____% per annum.
[Remainder of Page Intentionally Left Blank]
S-21
<PAGE>
CURRENT MORTGAGE LOAN PRINCIPAL BALANCES
<TABLE>
<CAPTION>
Aggregate
Number of Principal
Mortgage Balance Percentage of
Current Mortgage Loan Amounts Loans Outstanding Mortgage Pool
----------------------------- ----- ----------- -------------
<S> <C> <C>
$ 0 - $ 50,000.................
$ 50,001 - $ 100,000.................
$ 100,001 - $ 150,000.................
$ 150,001 - $ 200,000.................
$ 200,001 - $ 250,000.................
$ 250,001 - $ 300,000.................
$ 300,001 - $ 350,000.................
$ 350,001 - $ 400,000.................
$ 400,001 - $ 450,000.................
$ 450,001 - $ 500,000.................
$ 500,001 - $ 550,000.................
$ 550,001 - $ 600,000.................
$ 600,001 - $ 650,000.................
$ 650,001 - $ 700,000.................
$ 700,001 - $ 750,000.................
$ 750,001 - $ 800,000.................
$ 800,001 - $ 850,000.................
$ 850,001 - $ 900,000.................
$ 900,001 - $ 950,000.................
$ 950,001 - $ 1,000,000.................
TOTALS:........................
</TABLE>
As of the cut-off date, the weighted average principal balance of the mortgage
loans is expected to be approximately $___________ .
S-22
<PAGE>
DOCUMENTATION PROGRAMS FOR MORTGAGE LOANS
<TABLE>
<CAPTION>
Aggregate
Number of Principal
Mortgage Balance Percent of
Type of Program Loans Outstanding Mortgage Pool
--------------- ----- ----------- -------------
<S> <C> <C>
Full..............................................
Alternative.......................................
Reduced...........................................
No Income/No Asset................................
Streamlined.......................................
TOTALS:..................................
</TABLE>
ORIGINAL LOAN-TO-VALUE RATIOS
<TABLE>
<CAPTION>
Aggregate
Original Number of Principal
Loan-to-Value Mortgage Balance Percent of
Ratios (%) Loans Outstanding Mortgage Pool
---------- ----- ----------- -------------
<S> <C> <C>
50.00 and below......................
50.01 to 55.00.................
55.01 to 60.00.................
60.01 to 65.00.................
65.01 to 70.00.................
70.01 to 75.00.................
75.01 to 80.00.................
80.01 to 85.00.................
85.01 to 90.00.................
90.01 to 95.00.................
TOTALS:........................
</TABLE>
The weighted average original loan-to-value ratio of the mortgage loans
is expected to be approximately ___%.
S-23
<PAGE>
STATE DISTRIBUTION
OF MORTGAGE PROPERTIES (1)
<TABLE>
<CAPTION>
Aggregate
Number of Principal Balance Percent of
State Mortgage Loans Outstanding Mortgage Pool
----- -------------- ----------- -------------
<S> <C>
Alabama................................
Arkansas...............................
Arizona................................
California.............................
Colorado...............................
Connecticut............................
District of Columbia...................
Delaware...............................
Florida................................
Georgia................................
Hawaii.................................
Idaho..................................
Illinois...............................
Indiana................................
Iowa...................................
Kansas.................................
Kentucky...............................
Louisiana..............................
Massachusetts..........................
Maryland...............................
Michigan...............................
Minnesota..............................
Missouri...............................
Mississippi............................
Montana................................
North Carolina.........................
North Dakota...........................
Nebraska...............................
New Hampshire..........................
New Jersey.............................
New Mexico.............................
Nevada.................................
New York...............................
Ohio...................................
Oklahoma...............................
Oregon.................................
Pennsylvania...........................
Rhode Island...........................
South Carolina.........................
Tennessee..............................
Texas..................................
Utah...................................
Virginia...............................
Washington.............................
Wisconsin..............................
</TABLE>
S-24
<PAGE>
<TABLE>
<CAPTION>
Aggregate
Number of Principal
Mortgage Balance Percent of
Loan Purpose Loans Outstanding Mortgage Pool
------------ ----- ----------- -------------
<S> <C>
Wyoming................................
Other..................................
TOTALS:......................
</TABLE>
The designation "Other" in the above table includes other states and
the District of Columbia with under [2]% concentrations individually. No more
than approximately ____% of the mortgage loans are secured by mortgaged
properties located in any one postal zip code area.
PURPOSE OF MORTGAGE LOANS
<TABLE>
<CAPTION>
Aggregate
Number of Principal
Mortgage Balance Percent of
Loan Purpose Loans Outstanding Mortgage Pool
------------ ----- ----------- -------------
<S> <C>
Purchase..........................................
Refinance (rate/term).............................
Refinance (cash out)..............................
TOTALS:..................................
</TABLE>
TYPES OF MORTGAGED PROPERTIES
<TABLE>
<CAPTION>
Aggregate
Number of Principal
Mortgage Balance Percent of
Property Type Loans Outstanding Mortgage Pool
------------- ----- ----------- -------------
<S> <C>
Single Family.....................................
Condominium.......................................
High Rise Condo...................................
2-4 Family........................................
Planned Unit......................................
TOTALS:..................................
</TABLE>
[Remainder of Page Intentionally Left Blank]
S-25
<PAGE>
OCCUPANCY TYPES
<TABLE>
<CAPTION>
Aggregate
Number of Principal
Mortgage Balance Percent of
Occupancy Type Loans Outstanding Mortgage Pool
-------------- ----- ----------- -------------
<S> <C>
Primary Residence.................................
Investor Property.................................
Second Residence..................................
TOTALS:..................................
</TABLE>
The information shown in the above table is based upon representations
of the mortgagor at the time of origination of the mortgage loans.
REMAINING TERMS TO MATURITY
<TABLE>
<CAPTION>
Aggregate
Number of Principal
Remaining Term to Mortgage Balance Percent of
Maturity (Months) Loans Outstanding Mortgage Pool
------------------ ----- ----------- -------------
<S> <C>
360.............................
359.............................
358.............................
357.............................
356.............................
355.............................
354.............................
353.............................
352.............................
351.............................
TOTALS:......................
</TABLE>
As of the cut-off date, the weighted average remaining term to maturity
of the mortgage loans is expected to be approximately ___ months.
Assignment of the Mortgage Loans
Pursuant to the pooling and servicing agreement and on the closing
date, the depositor will sell, without recourse, all of its interest in the
mortgage loans and the other assets included in the trust fund, including all
principal and interest received on the mortgage loans after the cut-off date, to
the trustee in trust for the benefit of the certificateholders .
In connection with the sale, the depositor will deliver or cause to be
delivered to the trustee, or a custodian for the trustee, the mortgage file for
each mortgage loan, which contains, among other things,
S-26
<PAGE>
o the original mortgage note, including any modifications or
amendments, endorsed in blank without recourse, except that
the depositor may deliver or cause to be delivered a lost note
affidavit in lieu of any original mortgage note that has been
lost,
o the original mortgage creating a first lien on the related
mortgaged property with evidence of recording,
o an assignment in recordable form of the mortgage,
o the title policy with respect to the related mortgaged
property, and
o if applicable, all recorded intervening assignments of the
mortgage and any riders or modifications to the mortgage note
and mortgage, except for any documents not returned from the
public recording office, which will be delivered to the
trustee as soon as the same is available to the depositor.
With respect to up to 50% of the mortgage loans, the depositor may
deliver all or a portion of each related mortgage file to the trustee not later
than thirty days after the closing date. Assignments of the mortgage loans to
the trustee or its nominee will be recorded in the appropriate public office for
real property records, except in states such as California where, in the opinion
of counsel, no recording is required to protect the trustee's interests in the
mortgage loan against the claim of any subsequent transferee or any successor to
or creditor of the depositor or the seller.
The trustee will review each mortgage file within 90 days of the
closing date, or promptly after the trustee's receipt of any document permitted
to be delivered after the closing date, and if any document in a mortgage file
is found to be missing or materially defective and the seller does not cure the
defect within 90 days after receiving notice of the defect from the trustee, or
within such longer period not to exceed 720 days after the closing date as
provided in the pooling and servicing agreement in the case of missing documents
not returned from the public recording office, the seller will be obligated to
repurchase the affected mortgage loan from the trust fund. Rather than
repurchase the mortgage loan as provided above, the seller may, at its option,
remove the affected mortgage loan (referred to as a deleted mortgage loan) from
the trust fund and substitute in its place another mortgage loan (referred to as
a replacement mortgage loan); however, a substitution will only be permitted
within two years of the closing date and may not be made unless an opinion of
counsel is provided to the Trustee to the effect that the substitution will not
disqualify the REMIC or result in a prohibited transaction tax under the Code.
On the date of substitution, any replacement mortgage loan will
o have a principal balance, after deduction of all scheduled
payments due in the month of substitution, not in excess of, and
not more than 10% less than, the principal balance of the deleted
mortgage loan, provided that the seller may deposit a Substitution
Adjustment Amount into the Certificate Account for distribution to
the certificateholders on the related distribution date,
o have a mortgage rate not lower than, and not more than one
percentage point per annum higher than, that of the deleted
mortgage loan,
o have a loan-to-value ratio not higher than that of the deleted
mortgage loan,
S-27
<PAGE>
o have a remaining term to maturity not greater than, and not more
than one year less than, the remaining term to maturity of the
deleted mortgage loan, and
o comply with all of the representations and warranties set forth in
the pooling and servicing agreement as of the date of
substitution.
This cure, repurchase or substitution obligation constitutes the sole remedy
available to certificateholders or the trustee for omission of, or a material
defect in, a mortgage loan document.
SERVICING OF MORTGAGE LOANS
General
The master servicer will service the mortgage loans in accordance with
the terms set forth in the pooling and servicing agreement. See "The Pooling and
Servicing Agreement" in the prospectus. The master servicer may perform any of
its obligations under the pooling and servicing agreement through one or more
subservicers. Notwithstanding any subservicing arrangement, the master servicer
will remain liable for its servicing duties and obligations under the pooling
and servicing agreement as if the master servicer alone were servicing the
mortgage loans.
The Master Servicer
FT Mortgage, a Kansas corporation and an indirect wholly owned
subsidiary of First Tennessee National Corporation, a Tennessee corporation,
will act as master servicer for the mortgage loans pursuant to the pooling and
servicing agreement. FT Mortgage is engaged primarily in the mortgage banking
business, and as such, originates, purchases, sells and services mortgage loans.
FT Mortgage originates mortgage loans through a retail branch system and through
mortgage loan brokers and correspondents nationwide. FT Mortgage's mortgage
loans are principally first-lien, fixed or adjustable rate mortgage loans
secured by single-family residences.
At September 30, 1999, FT Mortgage provided servicing for approximately
$48.5 billion aggregate principal amount of mortgage loans, substantially all of
which are being serviced for unaffiliated persons.
The principal executive offices of FT Mortgage are located at 4000
Horizon Way, Irving, Texas 75063.
FT Mortgage initially services substantially all of the mortgage loans
it originates or acquires. In addition, FT Mortgage has purchased in bulk the
rights to service mortgage loans originated by other lenders. Servicing includes
collecting and remitting loan payments, accounting for principal and interest,
holding escrow (impound) funds for payment of taxes and insurance, making
inspections as required of the mortgaged premises, contacting delinquent
mortgagors, supervising foreclosures in the event of unremedied defaults and
generally administering the loans, for which FT Mortgage receives servicing
fees. FT Mortgage has in the past and may in the future sell to other mortgage
bankers a portion of its portfolio of loan servicing rights. In addition, see
"The Pooling and Servicing Agreement -- Evidence as to Compliance" in the
prospectus for a description of the annual servicing report and the report of
the independent public accountants required to be provided by FT Mortgage in its
capacity as master servicer under the pooling and servicing agreement.
S-28
<PAGE>
Foreclosure, Delinquency and Loss Experience
Historically, a variety of factors, including the appreciation of real
estate values, have limited the master servicer's loss and delinquency
experience on its portfolio of serviced mortgage loans. There can be no
assurance that factors beyond the master servicer's control, such as national or
local economic conditions or downturns in the real estate markets of its lending
areas, will not result in increased rates of delinquencies and foreclosure
losses in the future.
A general deterioration of the real estate market in regions where the
Mortgaged Properties are located may result in increases in delinquencies of
loans secured by real estate, slower absorption rates of real estate into the
market and lower sales prices for real estate. A general weakening of the
economy may result in decreases in the financial strength of borrowers and
decreases in the value of collateral serving as security for loans. If the real
estate market and economy were to decline, the master servicer may experience an
increase in delinquencies on the loans it services and higher net losses on
liquidated loans.
The master servicer generally follows the guidelines established by
Fannie Mae with respect to foreclosure and liquidation of mortgage loans. These
guidelines provide for the commencement of foreclosure proceedings when a
scheduled monthly payment has become 90 days past due.
The following table summarizes the delinquency, foreclosure and loss
experience, respectively, on the dates indicated, of all jumbo first lien
mortgage loans serviced or master serviced by the master servicer. The
delinquency, foreclosure and loss percentages may be affected by the size and
relative lack of seasoning of the master servicer's jumbo loan servicing
portfolio which increased from approximately $1.237 billion at December 31,
1997, to approximately $3.060 billion at December 31, 1998, and to approximately
$4.713 billion at September 30, 1999. Accordingly, the information should not be
considered as a basis for assessing the likelihood, amount or severity of
delinquency or losses on the mortgage loans and no assurances can be given that
the foreclosure, delinquency and loss experience presented in the table below
will be indicative of the experience on the mortgage loans underlying the
certificates:
[Remainder of Page Intentionally Left Blank]
S-29
<PAGE>
Delinquency and Foreclosure Experience in FT Mortgage's Portfolio
of One-to-Four Family, Jumbo Residential Mortgage Loans
<TABLE>
<CAPTION>
As of December 31,
------------------
1997 1998
---- ----
No. of % of Principal % of No. of % of Principal % of
Loans Loans Balance($) Balance Loans Loans Balance($) Balance
----- ----- ---------- ------- ----- ----- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
JUMBO LOANS
Total Portfolio 3,844 1,237,996 9,473 3,060,034
Period of Delinquency
30-59 Days 74 1.93 23,683 1.91 96 1.01 32,508 1.06
60-89 Days 17 0.44 9,843 0.80 13 0.14 6,922 0.23
90 Days or more 17 0.44 6,430 0.52 19 0.20 6,766 0.22
Total Delinquencies 108 2.81 39,956 3.23 128 1.35 46,195 1.51
Foreclosures Pending 13 0.34 3,685 0.30 9 0.10 2,493 0.08
Total Delinquencies 121 3.15 43,641 3.53 137 1.45 48,688 1.59
Liquidated loans 0 0 2 540
Net Gains (Losses) on
liquidated loans 0 0 13
=
<CAPTION>
As of September 30, 1999
------------------------
No. of % of Principal % of
Loans Loans Balance($) Balance
----- ----- ---------- -------
<S> <C> <C> <C> <C>
JUMBO LOANS
Total Portfolio 4,713,107
14,575
Period of Delinquency
30-59 Days 138 45,687 0.97
===
60-89 Days 16 0.95 4,748 0.10
== ====
90 Days or more 7 0.11 2,258 0.05
= ====
0.05
Total Delinquencies 164 1.13 53,350 1.13
===
Foreclosures Pending 3 0.02 657 0.01
====
Total Delinquencies 167 1.15 54,007 1.14
===
Liquidated loans 0 0
Net Gains (Losses) on
liquidated loans 0 0
=
</TABLE>
S-30
<PAGE>
The above table shows mortgage loans which were delinquent or for which
foreclosure proceedings had been instituted as of the date indicated. All dollar
amounts are reported in thousands. As used in this table, the term "Net Gains
(Losses)" refers to actual gains or losses incurred on liquidated properties
which are calculated as net liquidation proceeds, less book value, excluding
loan purchase premium or discount.
The following table summarizes the delinquency and foreclosure
experience, respectively, on the dates indicated, of all mortgage loans serviced
or master serviced by the master servicer. These mortgage loans have a variety
of underwriting, payment and other characteristics, many of which differ from
those of the mortgage loans, and no assurances can be given that the delinquency
and foreclosure experience presented in the table below will be indicative of
the experience of the mortgage loans underlying the certificates. The
delinquency and foreclosure percentages may be affected by the size and relative
lack of seasoning of the master servicer's entire loan servicing portfolio which
increased from approximately $22.490 billion at December 31, 1996, to
approximately $27.511 billion at December 31, 1997, to approximately $39.726
billion at December 31, 1998, and to approximately $48.509 billion at September
30, 1999.
S-31
<PAGE>
Delinquency and Foreclosure Experience in FT Mortgage's Total Portfolio
of One-to-Four Family, Residential Mortgage Loans
<TABLE>
<CAPTION>
As of December 31,
------------------
1996 1997
---- ----
No. of % of Principal % of No. of % of Principal % of
Loans Loans Balance($) Balance Loans Loans Balance($) Balance
----- ----- ---------- ------- ----- ----- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
TOTAL SERVICING
PORTFOLIO
Total Portfolio 278,280 22,490,102 320,878 27,511,674
Period of Delinquency
30-59 Days 10,281 3.69 713,933 3.17 11,493 3.58 863,381 3.14
60-89 Days 3,170 1.14 216,509 0.96 3,120 0.97 230,324 0.84
90 Days or more 4,713 1.69 310,147 1.38 5,465 1.70 386,039 1.40
Total Delinquencies 18,164 6.53 1,240,589 5.52 20,078 6.26 1,479,745 5.38
Foreclosures Pending 1,730 0.62 128,131 0.57 2,203 0.69 174,860 0.64
Total Delinquencies 19,894 7.15 1,368,720 6.09 22,281 6.94 1,654,605 6.01
<CAPTION>
As of December 31,
1998
----
No. of % of Principal % of
Loans Loans Balance Balance
----- ----- ------- -------
<S> <C> <C> <C> <C>
TOTAL SERVICING
PORTFOLIO
Total Portfolio 410,075 39,726,760
Period of Delinquency
30-59 Days 13,310 3.25 1,077,341 2.71
60-89 Days 2,902 0.71 226,591 0.57
90 Days or more 5,386 1.31 406,314 1.02
Total Delinquencies 21,598 5.27 1,710,247 4.31
Foreclosures Pending 2,202 0.54 186,945 0.47
Total Delinquencies 23,800 5.80 1,897,193 4.78
</TABLE>
<TABLE>
<CAPTION>
As of September 30, 1999
------------------------
No. of % of Principal % of
Loans Loans Balance($) Balance
<S> <C> <C> <C> <C>
TOTAL SERVICING
PORTFOLIO
Total Portfolio 48,509,500
474,789
Period of Delinquency
30-59 Days 15,736 3.31 2.84
======
60-89 Days 3,910 0.82 1,379,588 0.65
===== =========
90 Days or more 5,197 1.09 314,294 0.86
===== =======
417,040
</TABLE>
S-32
<PAGE>
<TABLE>
<S> <C> <C> <C>
Total Delinquencies 26,786 5.64 2,272,600 4.68
======
Foreclosures Pending 0.41 161,678 0.33
1,943
Total Delinquencies 28,729 6.05 2,444,278 5.01
======
</TABLE>
The above table shows mortgage loans which were delinquent or for which
foreclosure proceedings had been instituted as of the date indicated. All dollar
amounts are reported in thousands.
S-33
<PAGE>
The delinquency levels have declined over the years shown in the above
tables. This decline is attributable primarily to the growth and relative lack
of seasoning in the master servicer's servicing portfolio and to generally
favorable and improving economic conditions over this time period. There can be
no assurance that the experience shown in the above tables will be indicative of
future loss and delinquency experience of the master servicer's jumbo loan
servicing portfolio or total loan servicing portfolio, or of the mortgage loans
in the trust.
There can be no assurance that factors beyond the master servicer's
control, such as weakening national or local economic conditions, higher
interest rates, higher unemployment rates, a decline in the availability of
refinancing, or downturns in real estate markets, will not result in increased
rates of delinquencies and foreclosure losses in the future.
Servicing Compensation and Payment of Expenses
The expense fees with respect to the mortgage pool are payable out of
the interest payments on each mortgage loan. The expense fees will be ____% per
annum of the Stated Principal Balance of each mortgage loan. The expense fees
consist of the master servicing fee and the trustee fee. The master servicing
fee will be ___% per annum of the Stated Principal Balance of each mortgage
loan. The master servicer is obligated to pay some, but not all ongoing expenses
associated with the trust fund and incurred by the master servicer in connection
with its responsibilities under the pooling and servicing agreement and those
amounts will be paid by the master servicer out of its fee. The amount of the
master servicing fee is subject to adjustment with respect to prepaid mortgage
loans, as described under "--Adjustment to Master Servicing Fee in Connection
with Certain Prepaid Mortgage Loans." The master servicer is also entitled to
receive, as additional servicing compensation, all late payment fees, assumption
fees and other similar charges and all reinvestment income earned on amounts on
deposit in the Certificate Account and Distribution Account. The net mortgage
rate of a mortgage loan is the mortgage rate thereof, which is the net of the
interest premium charged by the related lenders with respect to the Lender PMI
Mortgage Loans, less the expense fees with respect to the mortgage loan,
expressed as a per annum percentage of its Stated Principal Balance.
Adjustment to Master Servicing Fee in Connection with Prepaid Mortgage Loans
When a borrower prepays a mortgage loan between due dates, the borrower
is required to pay interest on the amount prepaid only to the date of prepayment
and not thereafter. [Except for the month of the cut-off date, principal
prepayments by borrowers received by the master servicer from the first day
through the fifteenth day of a calendar month will be distributed to
certificateholders on the distribution date in the same month in which the
prepayments are received and, accordingly, no shortfall in the amount of
interest to be distributed to certificateholders with respect to the prepaid
mortgage loans results. Conversely, principal prepayments by borrowers received
by the master servicer from the sixteenth day or, in the case of the first
distribution date, from the cut-off date through the last day of a calendar
month will be distributed to certificateholders on the distribution date in the
month after the month of receipt and, accordingly, a shortfall in the amount of
interest to be distributed to certificateholders with respect to the prepaid
mortgage loans would result.] [Pursuant to the pooling and servicing agreement,
the master servicing fee for any month will be reduced, but not by more than
one-half of the master servicing fee, by an amount sufficient to pass through to
certificateholders the full amount of interest to which they would be entitled
in respect of each such prepaid mortgage loan on the related distribution date.
If shortfalls in interest as a result of prepayments in any Prepayment Period
exceed an amount equal to one-half of the master servicing fee otherwise payable
on the related distribution date, the amount of interest available to be
distributed to
S-34
<PAGE>
certificateholders will be reduced by the amount of the excess. See "Description
of the Certificates -- Interest".] Notwithstanding the foregoing, the master
servicer will not be required to pass-through interest to the certificateholders
in respect of partial principal prepayments or curtailments.
Advances
Subject to the following limitations, the master servicer will be
required to advance before each distribution date, from its own funds or funds
in the Certificate Account that do not constitute Available Funds for the
distribution date, an amount equal to the aggregate of payments of principal and
interest on the mortgage loans (net of the master servicing fee with respect to
the related mortgage loans) which were due on the related due date and which
were delinquent on the related determination date, together with an amount
equivalent to interest on each mortgage loan as to which the related mortgaged
property has been acquired by the trust fund through foreclosure or deed-in-lieu
of foreclosure. The determination date is the ___ day of each month. If the ___
day is not a business day, then the determination date will be the previous
business day; provided that the determination date in each month will always be
at least two business days before the related distribution date.
Advances are intended to maintain a regular flow of scheduled interest
and principal payments on the certificates rather than to guarantee or insure
against losses. The master servicer is obligated to make advances with respect
to delinquent payments of principal of or interest on each mortgage loan to the
extent that advances are, in its reasonable judgment, recoverable from future
payments and collections or insurance payments or proceeds of liquidation of the
related mortgage loan. If the master servicer determines on any determination
date to make an advance, the advance will be included with the distribution to
certificateholders on the related distribution date. Any failure by the master
servicer to make a deposit in the Certificate Account as required under the
pooling and servicing agreement, including any failure to make an advance, will
constitute an Event of Default under the pooling and servicing agreement if the
failure remains unremedied for five days after written notice thereof. If the
master servicer is terminated as a result of the occurrence of an Event of
Default, the trustee or the successor master servicer will be obligated to make
advances in accordance with the terms of the pooling and servicing agreement.
DESCRIPTION OF THE CERTIFICATES
General
The certificates will be issued pursuant to the pooling and servicing
agreement. The following summaries of the material terms pursuant to which the
certificates will be issued do not purport to be complete and are subject to,
and are qualified in their entirety by reference to, the provisions of the
pooling and servicing agreement. When particular provisions or terms used in the
pooling and servicing agreement are referred to, the actual provisions,
including definitions of terms, are incorporated by reference.
The certificates will have the respective initial class certificate
balances or initial notional amounts, subject to a variance of +/-5%, and
pass-through rates set forth on page S-4.
The class certificate balance of any class of certificates as of any
distribution date is the initial class certificate balance of the class, reduced
by the sum of
S-35
<PAGE>
o all amounts previously distributed to certificateholders of the class
as payments of principal,
o the amount of Realized Losses, including Excess Losses, allocated to
the class, and
o in the case of any class of subordinate certificates, any amounts
allocated to the class in reduction of its class certificate balance
in respect of payments of Class PO Deferred Amounts, as described
under "--Allocation of Losses."
In addition, the class certificate balance of the class of subordinate
certificates then outstanding with the highest numerical class designation will
be reduced if and to the extent that the aggregate of the class certificate
balances of all classes of certificates, following all distributions and the
allocation of Realized Losses on a distribution date, exceeds the Pool Principal
Balance as of the due date occurring in the month of the distribution date. The
notional amount certificates do not have principal balances and are not entitled
to any distributions in respect of principal of the mortgage loans.
The notional amount of the Class X Certificates for any distribution
date will be equal to the aggregate of the Stated Principal Balances of the
Non-Discount mortgage loans with respect to the distribution date. The initial
notional amount of the Class X Certificates will be equal to the aggregate of
the Stated Principal Balances of the Non-Discount mortgage loans as of the
cut-off date.
The senior certificates will have an initial aggregate class
certificate balance of approximately $___________ and will evidence in the
aggregate an initial beneficial ownership interest of approximately ____% in the
trust fund. The Class M, Class B-1, Class B-2, Class B-3, Class B-4 and Class
B-5 Certificates will each evidence in the aggregate an initial beneficial
ownership interest of approximately ___%, ___%, ___%, ___%, ___% and ___%,
respectively, in the trust fund.
Class PO, Class X and Class A-R Certificates will be issued in fully
registered certificated form. All of the other classes will be represented by
book-entry certificates. The book-entry certificates will be issuable in
book-entry form only. The Class A-R Certificates will be issued as a single
certificate in a denomination of $100.
Book-Entry Certificates
Each class of book-entry certificates will be issued in one or more
certificates which equal the aggregate initial class certificate balance of the
class of certificates and which will be held by a depository, initially a
nominee of The Depository Trust Company. Beneficial interests in the book-entry
certificates will be held indirectly by investors through the book-entry
facilities of the depository, as described in this prospectus supplement.
Investors may hold beneficial interests in the book-entry certificates in
minimum denominations representing an original principal amount of $25,000 and
integral multiples of $1,000 in excess thereof. One investor of each class of
book-entry certificates may hold a beneficial interest in a book entry
certificate that is not an integral multiple of $1,000. The depositor has been
informed by the depository that its nominee will be CEDE & Co.. Accordingly,
CEDE & Co. is expected to be the holder of record of the book-entry
certificates. Except as described in the prospectus under "Description of the
Certificates -- Book-Entry Certificates," no beneficial owner of a book-entry
certificate will be entitled to receive a physical certificate.
S-36
<PAGE>
Unless and until definitive certificates are issued, it is anticipated that
the only certificateholder of the book-entry certificates will be CEDE & Co., as
nominee of the depository. Beneficial owners of the book-entry certificates will
not be certificateholders, as that term is used in the pooling and servicing
agreement. Beneficial owners are only permitted to exercise the rights of
certificateholders indirectly through financial intermediaries and the
depository. Monthly and annual reports on the trust fund provided to CEDE & Co.,
as nominee of the depository, may be made available to beneficial owners upon
request, in accordance with the rules, regulations and procedures creating and
affecting the depository, and to the financial intermediaries to whose
depository accounts the book-entry certificates of the beneficial owners are
credited.
For a description of the procedures generally applicable to the
book-entry certificates, see "Description of the Certificates -- Book-Entry
Certificates" in the prospectus.
Payments on Mortgage Loans; Accounts
On or before the closing date, the master servicer will establish a
Certificate Account, which will be maintained in trust for the benefit of the
certificateholders. Funds credited to the Certificate Account may be invested
for the benefit and at the risk of the master servicer in Permitted Investments,
as defined in the pooling and servicing agreement, that are scheduled to mature
on or before the business day preceding the next distribution date. On or before
the business day before each distribution date, the master servicer will
withdraw from the Certificate Account the amount of Available Funds and will
deposit the Available Funds in an a Distribution Account.
Distributions
Distributions on the certificates will be made by the trustee on the
monthly distribution date to the persons in whose names the certificates are
registered at the close of business on the last business day of the month before
the distribution date.
Distributions on each distribution date will be made by check mailed to
the address of the person entitled to it as the address appears on the
applicable certificate register or, in the case of a certificateholder who holds
100% of a class of certificates or who holds certificates with an aggregate
initial certificate balance of $1,000,000 or more or who holds an interest only
certificate and who has so notified the trustee in writing in accordance with
the pooling and servicing agreement, by wire transfer in immediately available
funds to the account of the certificateholder at a bank or other depository
institution having appropriate wire transfer facilities; provided, however, that
the final distribution in retirement of the certificates will be made only upon
presentment and surrender of the certificates at the Corporate Trust Office of
the trustee.
Priority of Distributions Among Certificates
Distributions will be made on each distribution date from Available
Funds in the following order of priority:
o to interest on each interest bearing class of senior
certificates;
o to principal on the classes of senior certificates then
entitled to receive distributions of principal, in the order
and subject to the priorities set forth under "Description of
the Certificates -- Principal", in each case in an aggregate
amount
S-37
<PAGE>
up to the maximum amount of principal to be distributed
on the senior classes on such distribution date;
o to any Class PO Deferred Amounts with respect to the Class PO
Certificates, but only from amounts that would otherwise be
distributed on such distribution date as principal of the
subordinate certificates; and
o to interest on and then principal of each class of subordinate
certificates, in the order of their numerical class
designations, beginning with the Class M Certificates, in each
case subject to the limitations set forth under "Description
of the Certificates -- Principal".
Interest
The classes of offered certificates will have the respective
pass-through rates set forth or described on page S-4.
The pass-through rate for the Class X Certificates for any distribution
date will be equal to the excess of the average of the net mortgage rates of the
Non-Discount mortgage loans, weighted on the basis of their Stated Principal
Balances, over ____% per annum. The pass-through rate for the Class X
Certificates for the first distribution date is expected to be approximately
___% per annum. The net mortgage rate for each mortgage loan is its mortgage
rate (net of the interest premium charged by the related lenders for the Lender
PMI Mortgage Loans) less the expense fee for the mortgage loan, expressed as a
percentage of its Stated Principal Balance.
On each distribution date, to the extent of funds available therefor,
each interest bearing class of certificates will be entitled to receive an
amount allocable to interest for the related interest accrual period. This
interest distribution amount for any interest bearing class will be equal to the
sum of (a) interest at the applicable pass-through rate on the related class
certificate balance or notional amount, as the case may be, and (b) the sum of
the amounts, if any, by which the amount described in clause (a) above on each
prior distribution date exceeded the amount actually distributed as interest on
the prior distribution dates and not subsequently distributed (which are called
unpaid interest amounts). The Class PO Certificates are principal only
certificates and will not bear interest.
With respect to each distribution date, the interest accrual period for
each interest bearing class of certificates will be the calendar month before
the distribution date.
The interest entitlement described above for each class of certificates
for any distribution date will be reduced by the amount of Net Interest
Shortfalls for the distribution date. Each class' pro rata share of the Net
Interest Shortfalls will be based on the amount of interest the class otherwise
would have been entitled to receive on the distribution date.
Interest will be calculated and payable on the basis of a 360-day year
divided into twelve 30-day months.
If on a particular distribution date, Available Funds in the
Certificate Account applied in the order described above under "-- Priority of
Distributions Among Certificates" are not sufficient to make a full distribution
of the interest entitlement on the certificates, interest will be distributed on
each class of certificates of equal priority based on the amount of interest it
would otherwise have been entitled to receive in the absence of the shortfall.
Any unpaid interest amount will be carried forward and added to the amount
holders of each class of certificates will
S-38
<PAGE>
be entitled to receive on the next distribution date. A shortfall could occur,
for example, if losses realized on the mortgage loans were exceptionally high or
were concentrated in a particular month. Any unpaid interest amount so carried
forward will not bear interest.
Principal
General. All payments and other amounts received in respect of
principal of the mortgage loans will be allocated between the Class PO
Certificates, on the one hand, and the senior certificates (other than the
interest only certificates and the principal only certificates) and the
subordinate certificates, on the other hand, in each case based on the
applicable Non-PO Percentage and the applicable PO Percentage, respectively, of
those amounts.
Non-PO Formula Principal Amount. On each distribution date, the Non-PO
Formula Principal Amount will be distributed as principal of the senior
certificates (other than the interest only certificates and the principal only
certificates) in an amount up to the Senior Principal Distribution Amount and as
principal of the subordinate certificates, in an amount up to the Subordinated
Principal Distribution Amount.
Senior Principal Distribution Amount. On each distribution date before
the Senior Credit Support Depletion Date, the Non-PO Formula Principal Amount,
up to the amount of the Senior Principal Distribution Amount for the
distribution date, will be distributed as principal of the following classes of
senior certificates, in the following order of priority:
o to the Class A-R Certificates, until their class certificate
balance is reduced to zero;
o concurrently, to the Class A-1 , Class A-2, Class A-3 and
Class PO Certificates, pro rata, based on their then
outstanding class certificate balances, until their class
certificate balances are reduced to zero;
o sequentially, to the Class M-1, Class B-1 and Class B-2
Certificates, in that order, until their class certificate
balances are reduced to zero;
o sequentially, to the Class B-3, Class B-4 and Class B-5
Certificates, in that order, until their class certificate
balances are reduced to zero.
Notwithstanding the foregoing, on each distribution date on and after
the Senior Credit Support Depletion Date, the Non-PO Formula Principal Amount
will be distributed, concurrently as principal of the classes of senior
certificates (other than the interest only certificates and the principal only
certificates), pro rata, in accordance with their respective class certificate
balances immediately before the distribution date.
Subordinated Principal Distribution Amount. On each distribution date,
to the extent of Available Funds therefor, the Non-PO Formula Principal Amount,
up to the amount of the Subordinated Principal Distribution Amount for the
distribution date, will be distributed as principal of the subordinate
certificates. Except as provided in the next paragraph, each class of
subordinate certificates will be entitled to receive its pro rata share of the
Subordinated Principal Distribution Amount (based on its respective class
certificate balance), in each case to the extent of the amount available from
Available Funds for distribution of principal. Distributions of principal of the
subordinate certificates will be made sequentially to the classes of subordinate
certificates in the order of their numerical class designations, beginning with
the Class M Certificates, until their respective class certificate balances are
reduced to zero.
S-39
<PAGE>
With respect to each class of subordinate certificates, if on any
distribution date the Applicable Credit Support Percentage is less than the
Original Applicable Credit Support Percentage, no distribution of partial
principal prepayments and principal prepayments in full will be made to the
Restricted Classes and the amount of partial principal prepayments and principal
prepayments in full otherwise distributable to the Restricted Classes will be
allocated among the remaining classes of subordinate certificates, pro rata,
based upon their respective class certificate balances, and distributed in the
sequential order described above.
The approximate Original Applicable Credit Support Percentages for the
subordinate certificates on the date of issuance of the certificates are
expected to be as follows:
Class M............................ %
Class B-1.......................... %
Class B-2.......................... %
Class B-3.......................... %
Class B-4.......................... %
Class B-5.......................... %
For purposes of calculating the Applicable Credit Support Percentages
of the subordinate certificates, the Class M Certificates will be considered to
have a lower numerical class designation than each other class of subordinate
certificates.
Residual Certificates. The Class A-R Certificates will remain
outstanding for so long as the trust fund shall exist, whether or not they are
receiving current distributions of principal or interest. In addition to
distributions of interest and principal as described above, on each distribution
date, the holders of the Class A-R Certificates will be entitled to receive any
Available Funds remaining after payment of interest and principal on the senior
certificates and Class PO Deferred Amounts on the Class PO Certificates and
interest and principal on the subordinate certificates, as described above. It
is not anticipated that there will be any significant amounts remaining for that
distribution.
Class PO Principal Distribution Amount. On each distribution date,
distributions of principal of the Class PO Certificates will be made in an
amount equal to the lesser of
o the PO Formula Principal Amount for the distribution date, and
o the product of (x) Available Funds remaining after
distribution of interest on the senior certificates and (y) a
fraction, the numerator of which is the PO Formula Principal
Amount and the denominator of which is the sum of the PO
Formula Principal Amount and the Senior Principal Distribution
Amount.
If the Class PO Principal Distribution Amount on a distribution date is
calculated as provided in the second bulleted point above, principal
distributions to holders of the senior certificates (other than the principal
only certificates) will be in an amount equal to the product of Available Funds
remaining after distribution of interest on the senior certificates and a
fraction, the numerator of which is the Senior Principal Distribution Amount and
the denominator of which is the sum of the Senior Principal Distribution Amount
and the PO Formula Principal Amount.
S-40
<PAGE>
Allocation of Losses
On each distribution date, the applicable PO Percentage of any Realized
Loss, including any Excess Loss, on a Discount mortgage loan will be allocated
to the Class PO Certificates until their class certificate balance is reduced to
zero. The amount of any Realized Loss, other than an Excess Loss, allocated on
or before the Senior Credit Support Depletion Date will be treated as a Class PO
Deferred Amount. To the extent funds are available on the distribution date or
on any future distribution date from amounts that would otherwise be allocable
to the Subordinated Principal Distribution Amount, Class PO Deferred Amounts
will be paid on the Class PO Certificates before distributions of principal on
the subordinate certificates. Any distribution of Available Funds in respect of
unpaid Class PO Deferred Amounts will not further reduce the class certificate
balance of the Class PO Certificates. The Class PO Deferred Amounts will not
bear interest. The class certificate balance of the class of subordinate
certificates then outstanding with the highest numerical class designation will
be reduced by the amount of any payments in respect of Class PO Deferred
Amounts. After the Senior Credit Support Depletion Date, no new Class PO
Deferred Amounts will be created.
For purposes of allocating losses to the subordinate certificates, the
Class M Certificates will be considered to have a lower numerical class
designation than each other class of subordinate certificates.
On each distribution date, the applicable Non-PO Percentage of any
Realized Loss, other than any Excess Loss, will be allocated first to the
subordinate certificates, in the reverse order of their numerical class
designations (beginning with the class of subordinate certificates then
outstanding with the highest numerical class designation), in each case until
the class certificate balance of the respective class of certificates has been
reduced to zero, and then to the senior certificates (other than the interest
only certificates and the principal only certificates) pro rata, based upon
their respective class certificate balances.
On each distribution date, the applicable Non-PO Percentage of Excess
Losses will be allocated pro rata among the classes of senior certificates
(other than the interest only certificates and the principal only certificates)
and the subordinate certificates based upon their respective class certificate
balances.
Because principal distributions are paid to some classes of
certificates (other than the principal only certificates) before other classes
of certificates, holders of the certificates that are entitled to receive
principal later bear a greater risk of being allocated Realized Losses on the
mortgage loans than holders of classes that are entitled to receive principal
earlier.
Structuring Assumptions
Unless otherwise specified, the information in the tables in this
prospectus supplement has been prepared on the basis of the following
Structuring Assumptions:
o the mortgage pool consists of two mortgage loans with the following
characteristics:
<TABLE>
<CAPTION>
Original Term Remaining Term
Principal Net to Maturity to Maturity
Balance Mortgage Rate Mortgage Rate (in Months) (in Months)
<S> <C>
</TABLE>
S-41
<PAGE>
$
$
$
o the mortgage loans prepay at the specified constant
percentages of SPA,
o no defaults in the payment by mortgagors of principal of and
interest on the mortgage loans are experienced,
o scheduled payments on the mortgage loans are received on the
first day of each month commencing in the calendar month
following the closing date and are computed before giving
effect to prepayments received on the last day of the prior
month,
o prepayments are allocated without giving effect to loss and
delinquency tests,
o there are no Net Interest Shortfalls and prepayments represent
prepayments in full of individual mortgage loans and are
received on the last day of each month, commencing in the
calendar month of the closing date,
o the scheduled monthly payment for each mortgage loan has been
calculated so that each mortgage loan will amortize in amounts
sufficient to repay the current balance of the mortgage loan
by its respective remaining term to maturity,
o the initial class certificate balance or notional amount, as
applicable, of each class of certificates is as set forth on
page S-4,
o interest accrues on each interest bearing class of
certificates during each interest accrual period at the
applicable interest rate set forth on page S-4,
o distributions in respect of the certificates are received in
cash on the ____ day of each month commencing in the calendar
month following the closing date,
o the closing date of the sale of the certificates is
___________, 1999,
o the seller is not required to repurchase or substitute for any
mortgage loan,
o the master servicer does not exercise the option to repurchase
the mortgage loans described under "-- Optional Purchase of
Defaulted Loans" and "-- Optional Termination," and
o no class of certificates becomes a Restricted Class.
While it is assumed that each of the mortgage loans prepays at the
specified constant percentages of SPA, this is not likely to be the case.
Moreover, discrepancies may exist between the characteristics of the actual
mortgage loans which will be delivered to the trustee and characteristics of the
mortgage loans used in preparing the tables in this prospectus supplement.
S-42
<PAGE>
Prepayments of mortgage loans commonly are measured relative to a
prepayment standard or model. The model used in this prospectus supplement is
SPA, which represents an assumed rate of prepayment each month of the then
outstanding principal balance of a pool of new mortgage loans. SPA does not
purport to be either a historical description of the prepayment experience of
any pool of mortgage loans or a prediction of the anticipated rate of prepayment
of any pool of mortgage loans, including the mortgage loans. 100% SPA assumes
prepayment rates of 0.2% per annum of the then unpaid principal balance of the
pool of mortgage loans in the first month of the life of the mortgage loans and
an additional 0.2% per annum in each month thereafter (e.g., 0.4% per annum in
the second month) until the 30th month. Beginning in the 30th month and in each
month thereafter during the life of the mortgage loans, 100% SPA assumes a
constant prepayment rate of 6% per annum. Multiples may be calculated from this
prepayment rate sequence. For example, ___% SPA assumes prepayment rates will be
___% per annum in month one, ___ % per annum in month two, and increasing by
___% in each succeeding month until reaching a rate of ___% per annum in month
30 and remaining constant at ___ % per annum thereafter. 0% SPA assumes no
prepayments. There is no assurance that prepayments will occur at any SPA rate
or at any other constant rate.
Optional Purchase of Defaulted Loans
The master servicer may, at its option, purchase from the trust fund
any mortgage loan which is delinquent in payment by 91 days or more. Any
purchase shall be at a price equal to 100% of the Stated Principal Balance of
the mortgage loan plus accrued interest at the applicable mortgage rate from the
date through which interest was last paid by the related mortgagor or advanced,
and not reimbursed, to the first day of the month in which the amount is to be
distributed.
Optional Termination
The master servicer will have the right to repurchase all remaining
mortgage loans and foreclosed or otherwise repossessed properties in the
mortgage pool and thereby effect early retirement of the certificates, subject
to the Pool Principal Balance of the mortgage loans and foreclosed or otherwise
repossessed properties at the time of repurchase being less than 10% of the
cut-off date pool principal balance. In the event the master servicer exercises
its repurchase option, the purchase price distributed with respect to each class
of certificates will be 100% of its then outstanding class certificate balance
plus any Class PO Deferred Amounts in the case of the Class PO Certificates and,
in the case of an interest bearing certificate, any unpaid accrued interest at
the applicable pass-through rate, in each case subject to reduction as provided
in the pooling and servicing agreement if the purchase price is based in part on
the appraised value of any foreclosed or otherwise repossessed properties and
the appraised value is less than the Stated Principal Balance of the related
mortgage loans. Distributions on the certificates in respect of any optional
termination will first be paid to the senior certificates and then to the
subordinate certificates. The proceeds from any distribution may not be
sufficient to distribute the full amount to which each class of certificates is
entitled if the purchase price is based in part on the appraised value of any
foreclosed or otherwise repossessed property and the appraised value is less
than the Stated Principal Balance of the related mortgage loan.
The Trustee
[The Bank of New York] will be the trustee under the pooling and
servicing agreement. The depositor and the master servicer may maintain other
banking relationships in the ordinary course of business with [The Bank of New
York]. Offered certificates may be surrendered at the Corporate Trust Office of
the trustee located at [101 Barclay Street, 12E, New York, New York 10286
Attention: Corporate Trust Administration] or at any other address the trustee
designates.
S-43
<PAGE>
Restrictions on Transfer of the Class A-R Certificates
The Class A-R Certificates will be subject to the restrictions on
transfer described in the prospectus under "Material Federal Income Tax
Consequences -- REMIC Certificates -- Tax-Related Restrictions on Transfers of
Residual Certificates -- Disqualified Organizations," "--Noneconomic Residual
Interests" and "--Foreign Investors." The pooling and servicing agreement
provides that the Class A-R Certificates, in addition to certain other ERISA
restricted classes of certificates, may not be acquired by an ERISA Plan. See
"ERISA Considerations". Each Class A-R Certificate will contain a legend
describing these restrictions.
YIELD, PREPAYMENT AND MATURITY CONSIDERATIONS
General
The effective yield to the holders of each interest bearing class of
certificates will be lower than the yield otherwise produced by the applicable
pass-through rate and the purchase price of the certificates because monthly
distributions will not be payable to the holders until the ___ day (or, if that
day is not a business day, the following business day) of the month after the
applicable interest accrual period without any additional distribution of
interest or earnings to compensate for the delay
Delinquencies on the mortgage loans which are not advanced by or on
behalf of the master servicer because such amounts, if advanced, would not be
recoverable, will adversely affect the yield on the certificates. Because of the
priority of distributions, shortfalls resulting from delinquencies not so
advanced will be borne first by the subordinate certificates, in the reverse
order of their numerical class designations, and then by the senior
certificates. If, as a result of shortfalls, the aggregate of the class
certificate balances of all classes of certificates exceeds the Pool Principal
Balance, the class certificate balance of the class of subordinate certificates
then outstanding with the highest numerical class designation will be reduced by
the amount of the excess.
Net Interest Shortfalls will adversely affect the yields on the classes
of offered certificates. In addition, although all losses initially will be
borne by the subordinate certificates, in the reverse order of their numerical
class designations, either directly or through distributions of Class PO
Deferred Amounts on the Class PO Certificates), Excess Losses will be borne by
all classes of certificates, other than the interest only certificates, on a pro
rata basis. Moreover, since the Subordinated Principal Distribution Amount for
each distribution date will be reduced by the amount of any distributions on the
distribution date in respect of Class PO Deferred Amounts, the amount
distributable as principal on each distribution date to each class of
subordinate certificates then entitled to a distribution of principal will be
less than it otherwise would be in the absence of the Class PO Deferred Amounts.
As a result, the yields on the offered certificates will depend on the rate and
timing of Realized Losses, including Excess Losses. Excess Losses could occur at
a time when one or more classes of subordinate certificates are still
outstanding and otherwise available to absorb other types of Realized Losses.
For purposes of allocating losses and shortfalls resulting from
delinquencies to the subordinate certificates, the Class M Certificates will be
considered to have a lower numerical class designation than each other class of
subordinate certificates.
S-44
<PAGE>
Prepayment Considerations and Risks
The rate of principal payments on the offered certificates, the aggregate
amount of distributions on the offered certificates and the yield to maturity of
the offered certificates will be related to the rate and timing of payments of
principal on the mortgage loans. The rate of principal payments on the mortgage
loans will in turn be affected by the amortization schedules of the mortgage
loans and by the rate of principal prepayments, including for this purpose,
prepayments resulting from refinancing, liquidations of the mortgage loans due
to defaults, casualties, condemnations and repurchases by the seller or master
servicer. The mortgage loans may be prepaid by the mortgagors at any time
without a prepayment penalty. The mortgage loans may also be subject to
"due-on-sale" provisions. See "The Mortgage Pool".
Prepayments, liquidations and purchases of the mortgage loans will result
in distributions on the offered certificates of principal amounts which would
otherwise be distributed over the remaining terms of the mortgage loans. Since
the rate of payment of principal of the mortgage loans will depend on future
events and a variety of factors, no assurance can be given as to the rate of
payment of principal on the mortgage loans or the rate of principal prepayments.
The extent to which the yield to maturity of a class of offered certificates may
vary from the anticipated yield will depend upon the degree to which the class
of offered certificates is purchased at a discount or premium, and the degree to
which the timing of payments on the offered certificates is sensitive to
prepayments, liquidations and purchases of the mortgage loans. Further, an
investor should consider the risk that, in the case of the principal only
certificates and any other offered certificate purchased at a discount, a slower
than anticipated rate of principal payments (including prepayments) on the
mortgage loans could result in an actual yield to the investor that is lower
than the anticipated yield and, in the case of the interest only certificates
and any other offered certificate purchased at a premium, a faster than
anticipated rate of principal payments could result in an actual yield to the
investor that is lower than the anticipated yield. Investors in the interest
only certificates should carefully consider the risk that they may not be able
to recover their initial investment if there is a rapid rate of principal
payments on the mortgage loans.
The rate of principal payments, including prepayments, on pools of
mortgage loans may vary significantly over time and may be influenced by a
variety of economic, geographic, social and other factors, including changes in
mortgagors' housing needs, job transfers, unemployment, mortgagors' net equity
in the mortgaged properties, servicing decisions, as well as the characteristics
of the mortgage loans included in the mortgage pool as described under "The
Mortgage Pool -- General". In addition, FT Mortgage's Streamlined Documentation
Program may affect the rate of prepayments on the mortgage loans. In general, if
prevailing interest rates were to fall significantly below the mortgage rates on
the mortgage loans, the mortgage loans could be subject to higher prepayment
rates than if prevailing interest rates were to remain at or above the mortgage
rates on the mortgage loans. Conversely, if prevailing interest rates were to
rise significantly, the rate of prepayments on the mortgage loans would
generally be expected to decrease. No assurances can be given as to the rate of
prepayments on the mortgage loans in stable or changing interest rate
environments. Furthermore, with respect to up to 50% of the mortgage loans, the
depositor may deliver all or a portion of each related mortgage file to the
trustee not later than thirty days after the closing date, a delayed delivery.
If the seller fails to deliver all or a portion of any mortgage file to the
depositor or other designee of the depositor or, at the depositor's direction,
to the trustee within the 30-day period, the seller will be required to use its
best efforts to deliver a Substitute mortgage loan for the related delayed
delivery mortgage loan or repurchase the related delayed delivery mortgage loan.
Any repurchases pursuant to this provision would also have the effect of
accelerating the rate of prepayments on the mortgage loans.
S-45
<PAGE>
As described under "Description of the Certificates -- Principal," the
Senior Prepayment Percentage of the applicable Non-PO Percentage of all
principal prepayments will be initially distributed to the classes of senior
certificates, other than the Class PO Certificates, then entitled to receive
principal prepayment distributions. This may result in all, or a
disproportionate percentage, of the principal prepayments being distributed to
holders of the classes of senior certificates and none, or less than their pro
rata share, of the principal prepayments being distributed to holders of the
subordinate certificates during the periods of time described in the definition
of "Senior Prepayment Percentage."
The timing of changes in the rate of prepayments on the mortgage loans
may significantly affect an investor's actual yield to maturity, even if the
average rate of principal payments is consistent with an investor's expectation.
In general, the earlier a prepayment of principal on the mortgage loans, the
greater the effect on an investor's yield to maturity. The effect on an
investor's yield as a result of principal payments occurring at a rate higher or
lower than the rate anticipated by the investor during the period immediately
following the issuance of the offered certificates may not be offset by a
subsequent like decrease or increase in the rate of principal payments.
The tables below indicate the sensitivity of the pre-tax corporate bond
equivalent yields to maturity of certain classes of certificates to various
constant percentages of SPA. The yields set forth in the tables were calculated
by determining the monthly discount rates that, when applied to the assumed
streams of cash flows to be paid on the applicable classes of certificates,
would cause the discounted present value of the assumed streams of cash flows to
equal the assumed aggregate purchase prices of the classes and converting the
monthly rates to corporate bond equivalent rates. These calculations do not take
into account variations that may occur in the interest rates at which investors
may be able to reinvest funds received by them as distributions on the
certificates and consequently do not purport to reflect the return on any
investment in any class of certificate when the reinvestment rates are
considered.
Sensitivity of the Class X Certificates
As indicated in the table below, the yield to investors in the Class X
Certificates will be sensitive to the rate of principal payments, including
prepayments, of the Non-Discount mortgage loans (particularly those with high
net mortgage rates), which generally can be prepaid at any time. Based on the
assumptions described below, the yield to maturity on the Class X Certificates
would be approximately 0% if prepayments were to occur at a constant rate of
approximately ____% SPA. If the actual prepayment rate of the Non-Discount
mortgage loans were to exceed the foregoing level for as little as one month
while equaling this level for the remaining months, the investors in the Class X
Certificates would not fully recoup their initial investments.
As described under "Description of the Certificates -- General," the
pass-through rate of the Class X Certificates in effect from time to time is
calculated by reference to the net mortgage rates of the Non-Discount mortgage
loans. The Non-Discount mortgage loans will have higher net mortgage rates, and
higher mortgage rates, than the other mortgage loans. In general, mortgage loans
with higher mortgage rates tend to prepay at higher rates than mortgage loans
with relatively lower mortgage rates in response to a given change in market
interest rates. As a result, the Non-Discount mortgage loans may prepay at
higher rates, thereby reducing the pass-through rate and notional amount of the
Class X Certificates.
The information set forth in the following table has been prepared on
the basis of the Structuring Assumptions and on the assumption that the purchase
price of the Class X Certificates (expressed as a percentage of initial notional
amount) is as follows:
S-46
<PAGE>
CLASS PRICE
- ----- -----
Class X...............................
The price in the above table does not include accrued interest. Accrued
interest has been added to the price in calculating the yields set forth in the
table below.
SENSITIVITY OF THE CLASS X CERTIFICATES TO PREPAYMENTS
(PRE-TAX YIELDS TO MATURITY)
<TABLE>
<CAPTION>
PERCENTAGE OF SPA
----------------------------------------------------------------
<S> <C>
CLASS 0% % % % %
- ----------------------------------------------
Class X......................................
</TABLE>
It is unlikely that the Non-Discount mortgage loans will have the
precise characteristics described in this prospectus supplement or that the
Non-Discount mortgage loans will all prepay at the same rate until maturity or
that all of the Non-Discount mortgage loans will prepay at the same rate or
time. As a result of these factors, the pre-tax yields on the Class X
Certificates are likely to differ from those shown in the table above, even if
all of the Non-Discount mortgage loans prepay at the indicated percentages of
SPA. No representation is made as to the actual rate of principal payments on
the Non-Discount mortgage loans for any period or over the life of the Class X
Certificates or as to the yield on the Class X Certificates. Investors must make
their own decisions as to the appropriate prepayment assumptions to be used in
deciding whether to purchase the Class X Certificates.
Sensitivity of the Principal Only Certificates
The Class PO Certificates will be principal only certificates and will
not bear interest. As indicated in the table below, a lower than anticipated
rate of principal payments, including prepayments, on the Discount mortgage
loans will have a negative effect on the yield to investors in the Class PO
Certificates.
As described under "Description of the Certificates -- Principal," the
Class PO Principal Distribution Amount is calculated by reference to the
principal payments, including prepayments, on the Discount mortgage loans. The
Discount mortgage loans will have lower net mortgage rates, and lower mortgage
rates, than the other mortgage loans. In general, mortgage loans with higher
mortgage rates tend to prepay at higher rates than mortgage loans with
relatively lower mortgage rates in response to a given change in market interest
rates. As a result, the Discount mortgage loans may prepay at lower rates,
thereby reducing the rate of payment of principal and the resulting yield of the
Class PO Certificates.
The information set forth in the following table has been prepared on
the basis of the Structuring Assumptions and on the assumption that the
aggregate purchase price of the Class PO Certificates, expressed as a percentage
of its initial class certificate balance, is as follows:
S-47
<PAGE>
CLASS PRICE
- ----- -----
Class PO...............................
SENSITIVITY OF THE CLASS PO CERTIFICATES TO PREPAYMENTS
(PRE-TAX YIELDS TO MATURITY)
<TABLE>
<CAPTION>
PERCENTAGE OF SPA
----------------------------------------------------------------
<S> <C>
CLASS 0% % % % %
- ----------------------------------------------
Class PO.....................................
</TABLE>
It is unlikely that the Discount mortgage loans will have the precise
characteristics described in this prospectus supplement or that the Discount
mortgage loans will all prepay at the same rate until maturity or that all of
the Discount mortgage loans will prepay at the same rate or time. As a result of
these factors, the pre-tax yield on the Class PO Certificates is likely to
differ from those shown in the table above, even if all of the Discount mortgage
loans prepay at the indicated percentages of SPA. No representation is made as
to the actual rate of principal payments on the Discount mortgage loans for any
period or over the life of the Class PO Certificates or as to the yield on the
Class PO Certificates. Investors must make their own decisions as to the
appropriate prepayment assumptions to be used in deciding whether to purchase
the Class PO Certificates.
Additional Information
The depositor intends to file certain additional yield tables and other
computational materials with respect to one or more classes of offered
certificates with the SEC in a report on Form 8-K. The tables and materials were
prepared by the Underwriter at the request of one or more prospective investors,
based on assumptions provided by, and satisfying the special requirements of,
the prospective investors. The tables and assumptions may be based on
assumptions that differ from the Structuring Assumptions. Accordingly, the
tables and other materials may not be relevant to or appropriate for investors
other than those specifically requesting them.
Weighted Average Lives of the Offered Certificates
The weighted average life of an offered certificate is determined by
(a) multiplying the amount of the net reduction, if any, of the class
certificate balance of the certificate on each distribution date by the number
of years from the date of issuance to the distribution date, (b) summing the
results and (c) dividing the sum by the aggregate amount of the net reductions
in class certificate balance of the certificate referred to in clause (a).
For a discussion of the factors which may influence the rate of
payments, including prepayments, of the mortgage loans, see "--Prepayment
Considerations and Risks" in this prospectus supplement and "Yield and
Prepayment Considerations" in the prospectus.
In general, the weighted average lives of the offered certificates will
be shortened if the level of prepayments of principal of the mortgage loans
increases. However, the weighted
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<PAGE>
average lives of the offered certificates will depend upon a variety of other
factors, including the timing of changes in the rate of principal payments, the
priority sequence of distributions of principal of the classes of certificates.
See "Description of the Certificates -- Principal".
The interaction of the foregoing factors may have different effects on
various classes of offered certificates and the effects on any class may vary at
different times during the life of the class. Accordingly, no assurance can be
given as to the weighted average life of any class of offered certificates.
Further, to the extent the prices of the offered certificates represent
discounts or premiums to their respective original class certificate balances,
variability in the weighted average lives of the classes of offered certificates
will result in variability in the related yields to maturity. For an example of
how the weighted average lives of the classes of offered certificates may be
affected at various constant percentages of SPA, see the Decrement Tables below.
Decrement Tables
The following tables indicate the percentages of the initial class
certificate balances of the classes of offered certificates (other than the
Class X Certificates) that would be outstanding after each of the dates shown at
various constant percentages of SPA and the corresponding weighted average lives
of the classes. The tables have been prepared on the basis of the Structuring
Assumptions. It is not likely that the mortgage loans will have the precise
characteristics described in the Structuring Assumptions or that all of the
mortgage loans will prepay at the constant percentages of SPA specified in the
tables below or at any other constant rate. Moreover, the diverse remaining
terms to maturity of the mortgage loans could produce slower or faster principal
distributions than indicated in the tables, which have been prepared using the
specified constant percentages of SPA, even if the remaining term to maturity of
the mortgage loans is consistent with the remaining terms to maturity of the
mortgage loans specified in the Structuring Assumptions.
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PERCENT OF INITIAL CLASS PRINCIPAL BALANCE OUTSTANDING
<TABLE>
<CAPTION>
Class P Bonds
Distribution Date 0% 100% 275% 450% 600%
- ----------------- -- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Initial.............................................. 100 100 100 100 100
1999................................................
2000................................................
2001................................................
2002................................................
2003................................................
2004................................................
2005................................................
2006................................................
2007................................................
2008................................................
2009................................................
2010................................................
2011................................................
2012................................................
2013................................................
2014................................................
2015................................................
2016................................................
2017................................................
2018................................................
2019................................................
2020................................................
2021................................................
2022................................................
2023................................................
2024................................................
2025................................................
2026................................................
2027................................................
2028.................................................
Weighted Average Life (in years)**...................
</TABLE>
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<PAGE>
For purposes of the above table, the percent of initial class
certificate balance outstanding has been rounded to the nearest whole percentage
and the weighted average life (in years) has been determined as specified under
"-- Weighted Average Lives of the Offered Certificates".
Last Scheduled Distribution Date
The last scheduled distribution date for each class of offered
certificates is the distribution date in ____________ 20___, which is the
distribution date in the month following the month of the latest scheduled
maturity date for any of the mortgage loans. Since the rate of distributions in
reduction of the class certificate balance or notional amount of each class of
offered certificates will depend on the rate of payment, including prepayments,
of the mortgage loans, the class certificate balance or notional amount of any
class could be reduced to zero significantly earlier or later than the last
scheduled distribution date. The rate of payments on the mortgage loans will
depend on their particular characteristics, as well as on prevailing interest
rates from time to time and other economic factors, and no assurance can be
given as to the actual payment experience of the mortgage loans. See "--
Prepayment Considerations and Risks" and "-- Weighted Average Lives of the
Offered Certificates" in this prospectus supplement and "Yield and Prepayment
Considerations" in the prospectus.
The Subordinated Certificates
The weighted average life of, and the yield to maturity on, the
subordinate certificates, in increasing order of their numerical class
designation, will be progressively more sensitive to the rate and timing of
mortgagor defaults and the severity of resulting losses on the mortgage loans.
In particular, the rate and timing of mortgagor defaults and the severity of
resulting losses on the mortgage loans may be affected by the characteristics of
the mortgage loans included in the mortgage pool as described under "The
Mortgage Pool -- General" in this prospectus supplement and "Mortgage Loan
Program -- Underwriting Standards" in the prospectus. If the actual rate and
severity of losses on the mortgage loans is higher than those assumed by a
holder of a subordinate certificate, the actual yield to maturity of the
certificate may be lower than the yield expected by the holder based on the
holder's assumptions. The timing of losses on mortgage loans will also affect an
investor's actual yield to maturity, even if the rate of defaults and severity
of losses over the life of the mortgage pool are consistent with an investor's
expectations. In general, the earlier a loss occurs, the greater the effect on
an investor's yield to maturity. Realized Losses on the mortgage loans will
reduce the class certificate balances of the applicable class of subordinate
certificates to the extent of any allocated losses (as described under
"Description of the Certificates -- Allocation of Losses"), without the receipt
of cash attributable to the reduction. In addition, shortfalls in cash available
for distributions on the subordinate certificates will result in a reduction in
the class certificate balance of the class of subordinate certificates then
outstanding with the highest numerical class designation if and to the extent
that the aggregate of the class certificate balances of all classes of
certificates, following all distributions and the allocation of Realized Losses
on a distribution date, exceeds the Pool Principal Balance as of the due date
occurring in the month of the related distribution date. As a result of the
reductions, less interest will accrue on the class of subordinate certificates
than otherwise would be the case. The yield to maturity of the subordinate
certificates will also be affected by the disproportionate allocation of
principal prepayments to the senior certificates, Net Interest Shortfalls, other
cash shortfalls in Available Funds and distribution of Class PO Deferred Amounts
to Class PO Certificateholders. See "Description of the Certificates --
Allocation of Losses".
If on any distribution date, the Applicable Credit Support Percentage
for any class of subordinate certificates is less than its Original Applicable
Credit Support Percentage, all partial principal prepayments and principal
prepayments in full available for distribution on the
S-51
<PAGE>
subordinate certificates will be allocated solely to that class and all other
classes of subordinate certificates with lower numerical class designations,
thereby accelerating the amortization thereof relative to that of the Restricted
Classes and reducing the weighted average lives of those classes of subordinate
certificates receiving distributions. Accelerating the amortization of the
classes of subordinate certificates with lower numerical class designations
relative to the other classes of subordinate certificates is intended to
preserve the availability of the subordination provided by the other classes.
For purposes of allocating losses and prepayments to the subordinate
certificates, the Class M Certificates will be deemed to have a lower numerical
class designation than each other class of subordinate certificates.
CREDIT ENHANCEMENT
Subordination of Certain Classes
The rights of the holders of the subordinate certificates to receive
distributions with respect to the mortgage loans will be subordinated to the
rights of the holders of the senior certificates. The rights of the holders of
each class of subordinate certificates, other than the Class M Certificates, to
receive distributions will be further subordinated to the rights of the class or
classes of subordinate certificates with lower numerical class designations.
This subordination feature is intended to increase the likelihood that the
senior certificateholders and the holders of subordinate certificates with lower
numerical class designations will receive the maximum amount to which they are
entitled on any distribution date and to provide these holders with protection
against Realized Losses, other than Excess Losses. In addition, the subordinate
certificates will provide limited protection against Special Hazard Losses,
Bankruptcy Losses and Fraud Losses up to the Special Hazard Loss Coverage
Amount, Bankruptcy Loss Coverage Amount and Fraud Loss Coverage Amount,
respectively, as described in the second paragraph below. The applicable Non-PO
Percentage of Realized Losses, other than Excess Losses, will be allocated to
the class of subordinate certificates then outstanding with the highest
numerical class designation. In addition, the class certificate balance of the
class of subordinate certificates then outstanding with the highest numerical
class designation will be reduced by the amount of distributions on the Class PO
Certificates in reimbursement for Class PO Deferred Amounts.
For purposes of allocating losses to the subordinate certificates, the
Class M Certificates will be considered to have a lower numerical class
designation than each other class of subordinate certificates.
The subordinate certificates will provide limited protection to the
classes of certificates of higher relative priority against
o a Special Hazard Loss Coverage Amount of approximately $___________,
o a Bankruptcy Loss Coverage Amount approximately $_____________, and
o a Fraud Loss Coverage Amount approximately $_______________.
The Special Hazard Loss Coverage Amount will be reduced, from time to
time, to be an amount equal on any distribution date to the lesser of
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<PAGE>
o the Special Hazard Loss Coverage Amount as of the closing date
less the amount, if any, of losses attributable to Special
Hazard Losses incurred since the closing date, or the greatest
of
o 1% of the aggregate of the principal balances of the mortgage
loans,
o twice the principal balance of the largest mortgage loan, and
o the aggregate principal balances of the mortgage loans secured
by Mortgaged Properties located in the single California
postal zip code area having the highest aggregate principal
balance of any California postal zip code area.
All principal balances for the purpose of this definition will be
calculated as of the first day of the calendar month before the distribution
date after giving effect to scheduled installments of principal and interest on
the mortgage loans then due, whether or not paid.
The Fraud Loss Coverage Amount will be reduced, from time to time, by
the amount of Fraud Losses allocated to the certificates. In addition, on the
first, second, third and fourth anniversaries of the cut-off date, the Fraud
Loss Coverage Amount will be reduced to an amount equal to the lesser of
o 1% of the then current Pool Principal Balance, and
o the excess of the Fraud Loss Coverage Amount as of the
preceding anniversary of the cut-off date over the cumulative
amount of Fraud Losses allocated to the certificates since the
preceding anniversary.
On the fifth anniversary of the cut-off date, the Fraud Loss Coverage
Amount will be reduced to zero.
The Bankruptcy Loss Coverage Amount will be reduced, from time to time,
by the amount of Bankruptcy Losses allocated to the certificates.
The amount of coverage provided by the subordinate certificates for
Special Hazard Losses, Bankruptcy Losses and Fraud Losses may be canceled or
reduced from time to time for each of the risks covered, provided that the then
current ratings of the certificates assigned by the rating agencies are not
adversely affected as a result. In addition, a reserve fund or other form of
credit enhancement may be substituted for the protection provided by the
subordinate certificates for Special Hazard Losses, Bankruptcy Losses and Fraud
Losses.
USE OF PROCEEDS
The depositor will apply the net proceeds of the sale of the
certificates against the purchase price of the mortgage loans.
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<PAGE>
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
For federal income tax purposes, an election will be made to treat the
trust fund as a REMIC. The Class A-R Certificates will constitute the sole class
of residual interests in the REMIC.
The Regular Certificates will be treated as debt instruments issued by
the REMIC for federal income tax purposes. Income on the Regular Certificates
must be reported under an accrual method of accounting. Under the accrual method
of accounting, interest income may be required to be included in a holder's
gross income in advance of the holder's actual receipt of that interest income.
The principal only certificates will be treated for federal income tax
purposes as having been issued with an amount of OID equal to the difference
between their principal balance and their issue price. Although the tax
treatment is not entirely certain, notional amount certificates will be treated
as having been issued with OID for federal income tax purposes equal to the
excess of all expected payments of interest on the certificates over their issue
price. Although unclear, a holder of a notional amount certificate may be
entitled to deduct a loss to the extent that its remaining basis exceeds the
maximum amount of future payments to which the certificateholder would be
entitled if there were no further prepayments of the mortgage loans. The
remaining classes of Regular Certificates, depending on their respective issue
prices (as described in the prospectus under "Material Federal Income Tax
Consequences"), may be treated as having been issued with OID for federal income
tax purposes. For purposes of determining the amount and rate of accrual of OID
and market discount, the Trust Fund intends to assume that there will be
prepayments on the mortgage loans at a rate equal to ____% SPA. No
representation is made as to whether the mortgage loans will prepay at the
foregoing rate or any other rate. See "Yield, Prepayment and Maturity
Considerations" in this prospectus supplement and "Material Federal Income Tax
Consequences" in the prospectus. Computing accruals of OID in the manner
described in the prospectus may, depending on the actual rate of prepayments
during the accrual period, result in the accrual of negative amounts of OID on
the certificates issued with OID in an accrual period. Holders will be entitled
to offset negative accruals of OID only against future OID accrual on their
certificates.
If the holders of any Regular Certificates are treated as holding their
certificates at a premium, they are encouraged to consult their tax advisors
regarding the election to amortize bond premium and the method to be employed.
See "Material Federal Income Tax Consequences -- REMIC Certificates -- Regular
Certificates" in the prospectus.
As is described more fully under "Material Federal Income Tax
Consequences" in the prospectus, the offered certificates will represent
qualifying assets under Sections 856(c)(4)(A) and 7701(a)(19)(C) of the Code,
and net interest income attributable to the offered certificates will be
"interest on obligations secured by mortgages on real property" within the
meaning of Section 856(c)(3)(B) of the Code, to the extent the assets of the
trust fund are assets described in those sections.
The Regular Certificates will represent qualifying assets under Section
860G(a)(3) if acquired by a REMIC within the prescribed time periods of the
Code.
The holders of the Class A-R Certificates must include the taxable
income of the REMIC in their federal taxable income. The resulting tax liability
of the holders may exceed cash distributions to them during certain periods. All
or a portion of the taxable income from a
S-54
<PAGE>
Residual Certificate recognized by a holder may be treated as "excess inclusion"
income, which with limited exceptions, is subject to U.S. federal income tax.
In computing alternative minimum taxable income, the special rule
providing that taxable income cannot be less than the sum of the taxpayer's
excess inclusions for the year does not apply. However, a taxpayer's alternative
minimum taxable income cannot be less than the sum of the taxpayer's excess
inclusions for the year. In addition, the amount of any alternative minimum tax
net operating loss is determined without regard to any excess inclusions.
Purchasers of a Class A-R Certificate are encouraged to consider
carefully the tax consequences of an investment in residual certificates
discussed in the prospectus and consult their own tax advisors with respect to
those consequences. See "Material Federal Income Tax Consequences -- REMIC
Certificates -- Residual Certificates" in the prospectus. Specifically,
prospective holders of Class A-R Certificates should consult their tax advisors
regarding whether, at the time of acquisition, a Class A-R Certificate will be
treated as a "noneconomic" residual interest, a "non-significant value" residual
interest and a "tax avoidance potential" residual interest. See "Material
Federal Income Tax Consequences -- Tax-Related Restrictions on Transfer of
Residual Certificates -- Noneconomic Residual Certificates," "Material Federal
Income Tax Consequences -- Residual Certificates -- Mark to Market Rules,"
"--Excess Inclusions" and "Material Federal Income Tax Consequences -- Tax
Related Restrictions on Transfers of Residual Certificates -- Foreign Investors"
in the prospectus. Additionally, for information regarding Prohibited
Transactions and Treatment of Realized Losses, see "Material Federal Income Tax
Consequences -- Prohibited Transactions and Other Taxes" and "-- REMIC
Certificates -- Regular Certificates -- Treatment of Realized Losses" in the
prospectus.
ERISA CONSIDERATIONS
Any fiduciary of a Plan that proposes to cause the Plan to acquire any
of the offered certificates is encouraged to consult with its counsel with
respect to the potential consequences of the Plan's acquisition and ownership of
the certificates under ERISA and Section 4975 of the Code. See "ERISA
Considerations" in the prospectus. Section 406 of ERISA prohibits "parties in
interest" with respect to an employee benefit plan subject to ERISA from
engaging in various different types of transactions involving the plan and its
assets unless a statutory, regulatory or administrative exemption applies to the
transaction. Section 4975 of the Code imposes excise taxes on prohibited
transactions involving "disqualified persons" and Plans described under that
Section. ERISA authorizes the imposition of civil penalties for prohibited
transactions involving Plans not subject to the requirements of Section 4975 of
the Code.
Some employee benefit plans, including governmental plans and some
church plans, are not subject to ERISA's requirements. Accordingly, assets of
those plans may be invested in the offered certificates without regard to the
ERISA considerations described in this prospectus supplement and in the
prospectus, subject to the provisions of other applicable federal and state law.
Any of those plans that are qualified and exempt from taxation under Sections
401(a) and 501(a) of the Code may nonetheless be subject to the prohibited
transaction rules set forth in Section 503 of the Code.
Except as noted above, investments by Plans are subject to ERISA's
general fiduciary requirements, including the requirement of investment prudence
and diversification and the requirement that a Plan's investments be made in
accordance with the documents governing the Plan. A fiduciary that decides to
invest the assets of a Plan in the offered certificates should consider, among
other factors, the extreme sensitivity of the investment to the rate of
principal payments, including prepayments, on the mortgage loans.
S-55
<PAGE>
The U.S. Department of Labor has granted an exemption to _____________
(PTE _____, Exemption Application No. D-_____ Fed. Reg. (________)) from some of
the prohibited transaction rules of ERISA and the related excise tax provisions
of Section 4975 of the Code with respect to the initial purchase, the holding
and the subsequent resale by Plans of certificates in pass-through trusts that
consist of specified receivables, loans and other obligations that meet the
conditions and requirements of the exemption. PTE ___ applies to mortgage loans
such as the mortgage loans in the trust fund.
For a general description of PTE ___ and the conditions that must be
satisfied for it to apply, see "ERISA Considerations" in the prospectus.
It is expected that PTE ___ will apply to the acquisition and holding
by Plans of the Class A Certificates, excluding the Class A-R Certificates, and
that all conditions of PTE ____ other than those within the control of the
investors will be met. In addition, as of the date hereof, no single mortgagor
is the obligor on five percent (5%) of the mortgage loans included in the trust
fund by aggregate unamortized principal balance of the assets of the trust fund.
Because the Class PO and Class X Certificates are not being purchased
by any Underwriter to whom an exemption similar to PTE ____ has been granted,
those classes of certificates do not currently meet the requirements of the
exemption or any comparable individual administrative exemption granted to any
underwriter. Consequently, the Class PO and Class X Certificates may be
transferred only if the conditions in the first or third bullet point in the
next paragraph are met.
Because the characteristics of the Class M, Class B-1, Class B-2 and
Class A-R Certificates may not meet the requirements of PTE _____ or any other
issued exemption under ERISA, a Plan or an individual retirement account or
other plan subject to Section 4975 of the Code may engage in a prohibited
transaction or incur excise taxes or civil penalties if it purchases and holds
the Class M, Class B-1, Class B-2 and Class A-R Certificates. Consequently,
transfers of the Class M, Class B-1, Class B-2 and Class A-R Certificates will
not be registered by the trustee unless the trustee receives:
o a representation from the transferee of the certificate,
acceptable to and in form and substance satisfactory to the
trustee, that the transferee is not an employee benefit plan
subject to Section 406 of ERISA or a plan or arrangement
subject to Section 4975 of the Code, nor a person acting on
behalf of any plan or arrangement or using the assets of any
plan or arrangement to effect the transfer,
o if the purchaser is an insurance company, a representation
that the purchaser is an insurance company which is purchasing
the certificates with funds contained in an "insurance company
general account" (as defined in Section V(e) of PTE 95-60) and
that the purchase and holding of the certificates are covered
under Sections I and III of PTE 95-60, or
o an opinion of counsel satisfactory to the trustee that the
purchase or holding of the certificate by a plan, or any
person acting on behalf of a plan or using the plan's assets,
will not result in the assets of the trust fund being
considered to be "plan assets" and subject to the prohibited
transaction requirements of ERISA and the Code and will not
subject the trustee to any obligation in addition to those
undertaken in the agreement.
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The representations described in the first and second bullet points
above shall be considered to have been made to the trustee by the transferee's
acceptance of a Class M, Class B-1 or Class B-2 Certificate. In the event that a
representation is violated, or any attempt to transfer a Class M, Class B-1 or
Class B-2 Certificate to a plan or person acting on behalf of a plan or using
the plan's assets is initiated without the required opinion of counsel, the
attempted transfer or acquisition shall be void.
Prospective Plan investors are encouraged to consult with their legal
advisors concerning the impact of ERISA and the Code, the applicability of the
exemption and PTE 83-1 described in the prospectus, and the potential
consequences in their specific circumstances, before making an investment in any
of the offered certificates. Moreover, each Plan fiduciary is encouraged to
determine whether under the general fiduciary standards of investment prudence
and diversification, an investment in any of the offered certificates is
appropriate for the Plan, taking into account the overall investment policy of
the Plan and the composition of the Plan's investment portfolio.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in the Underwriting
Agreement among the depositor, ______________________ and
________________________, the depositor has agreed to sell the certificates to
the underwriters, _____________ has agreed to purchase from the depositor the
senior certificates, other than the Class PO and Class X Certificates (the
"_____________ Underwritten Certificates") and has agreed to purchase from the
depositor the Class M, Class B-1 and Class B-2 Certificates (the "____________
Underwritten Certificates" and, together with the ___________ Underwritten
Certificates, the "Underwritten Certificates"). Distribution of the
________________ Underwritten Certificates will be made by ________________ and
distribution of the ________________ Underwritten Certificates will be made by
__________________ , in each case from time to time in negotiated transactions
or otherwise at varying prices to be determined at the time of sale. In
connection with the sale of the Underwritten Certificates, the Underwriters may
be deemed to have received compensation from the depositor in the form of
underwriting discounts. ____________________ is an affiliate of the depositor.
_____________________ intends to make a secondary market in the
______________ Underwritten Certificates and _____________________ intends to
make a secondary market in the_______________ Underwritten Certificates, but
neither Underwriter has any obligation to do so. There can be no assurance that
a secondary market for the offered certificates will develop or, if it does
develop, that it will continue or that it will provide certificateholders with a
sufficient level of liquidity of investment.
The depositor has agreed to indemnify the Underwriters against, or make
contributions to the Underwriters with respect to, liabilities customarily
indemnified against, including liabilities under the Securities Act of 1933, as
amended.
The Class PO and Class X Certificates may be offered by the seller or
the depositor from time to time directly or through underwriters or agents
(either of which may include First Tennessee Capital Markets, an underwriter
affiliate of the depositor, the seller and the master servicer) in one or more
negotiated transactions, or otherwise, at varying prices to be determined at the
time of sale, in one or more separate transactions at prices to be negotiated at
the time of each sale. Any underwriters or agents that participate in the
distribution of the Class PO and Class X Certificates may be deemed to be
"underwriters" within the meaning of the Securities Act of 1933 and any profit
on the sale of those certificates by them and
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any discounts, commissions, concessions or other compensation received by any of
them may be deemed to be underwriting discounts and commissions under the Act.
LEGAL MATTERS
The validity of the certificates, including their material federal
income tax consequences, will be passed upon for the depositor by Andrews &
Kurth L.L.P., Dallas, Texas. Brown & Wood LLP, Washington, DC, will pass upon
certain legal matters on behalf of the Underwriters.
RATINGS
It is a condition to the issuance of the senior certificates that they
be rated ____ by _________________ and ___ by ______________. It is a condition
to the issuance of the Class ___ , Class PO and Class X Certificates that they
be rated ____ by ____. It is a condition to the issuance of the Class M, Class
B-1 and Class B-2 Certificates that they be rated at least ____, ____ and ____,
respectively, by ______.
The ratings assigned by _______ to mortgage pass-through certificates
address the likelihood of the receipt of all distributions on the mortgage loans
by the related certificateholders under the agreements pursuant to which the
certificates are issued. ________ ratings take into consideration the credit
quality of the related mortgage pool, including any credit support providers,
structural and legal aspects associated with the certificates, and the extent to
which the payment stream on the mortgage pool is adequate to make the payments
required by the certificates.
________ ratings on the certificates do not, however, constitute a
statement regarding frequency of prepayments of the mortgage loans. The "___"
symbol is appended to the rating by ________ of those certificates that _______
believes may experience high volatility or high variability in expected returns
due to non-credit risks. The absence of an "____ " symbol in the ratings of the
other offered certificates should not be taken as an indication that the
certificates will exhibit no volatility or variability in total return.
The ratings assigned by ____________ to mortgage pass-through
certificates address the likelihood of the receipt by certificateholders of all
distributions to which they are entitled under the transaction structure.
________'s ratings reflect its analysis of the riskiness of the mortgage loans
and its analysis of the structure of the transaction as set forth in the
operative documents. ___________'s ratings do not address the effect on the
certificates' yield attributable to prepayments or recoveries on the underlying
mortgage loans. Further the rating on the Class X Certificates does not address
whether investors will recoup their initial investment. The rating assigned by
______ to the Class PO Certificates only addresses the return of its stated
Principal Balance. The rating assigned by ______ to the Class A-R Certificates
only addresses the return of its class certificate balance and accrued interest
at its stated pass-through rate.
The ratings of the rating agencies do not address the possibility that,
as a result of principal prepayments, certificateholders may receive a lower
than anticipated yield.
The security ratings assigned to the offered certificates should be
evaluated independently from similar ratings on other types of securities. A
security rating is not a recommendation to buy, sell or hold securities and may
be subject to revision or withdrawal at any time by the rating agencies.
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The depositor has not requested a rating of the offered certificates by
any rating agency other than the rating agencies specified in this prospectus
supplement; there can be no assurance, however, as to whether any other rating
agency will rate the offered certificates or, if it does, what rating would be
assigned by the other rating agency. The rating assigned by the other rating
agency to the offered certificates could be lower than the respective ratings
assigned by the rating agencies.
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GLOSSARY OF TERMS
Applicable Credit Support Percentage -- The sum of the related class
subordination percentages of a class of certificates and all classes of
subordinate certificates which have higher numerical class designations than the
class of certificates.
Available Funds -- With respect to any distribution date, an amount
equal to the sum of:
o all scheduled installments of interest, net of the related expense
fees, and principal due on the due date in the month in which the
distribution date occurs and received before the related
determination date, together with any advances in respect thereof;
o all Insurance Proceeds and all Liquidation Proceeds during the
calendar month before the distribution date, which in each case is
the net of unreimbursed expenses incurred in connection with a
liquidation or foreclosure and unreimbursed advances, if any;
o all partial or full prepayments received during the related
Prepayment Period; and
o any Substitution Adjustment Amount or the purchase price for any
deleted mortgage loan or a mortgage loan repurchased by the seller
or the master servicer as of such distribution date, reduced by
amounts in reimbursement for advances previously made and other
amounts that the master servicer is entitled to be reimbursed for
out of the Certificate Account pursuant to the pooling and
servicing agreement.
Bankruptcy Loss Coverage Amount -- The aggregate amount of Realized
Losses which may be allocated in connection with Bankruptcy Losses.
Bankruptcy Losses -- Realized Losses attributable to various actions
which may be taken by a bankruptcy court in connection with a mortgage loan,
including a reduction by the bankruptcy court of the principal balance of or the
mortgage rate on a mortgage loan or an extension of its maturity.
Certificate Account -- An account established and maintained by the
master servicer, in the name of the trustee for the benefit of the holders of
each series of certificates, for the disbursement of payments on the mortgage
loans evidenced by each series of certificates.
Class Subordination Percentage -- With respect to any distribution date
and each class of subordinate certificates, the fraction expressed as a
percentage, the numerator of which is the class certificate balance of the class
of subordinate certificates immediately before the distribution date and the
denominator of which is the aggregate of the class certificate balances of all
classes of certificates immediately before the distribution date.
Code -- The Internal Revenue Code of 1986, as amended.
Compensating Interest -- As to any mortgage loan that prepaid in full
during the related prepayment period an additional payment made by the master
servicer, to the extent funds are available from the servicing fee, equal to the
amount of interest at the mortgage rate, less the servicing fee, for that
mortgage loan from the date of the prepayment to the related due date.
Discount mortgage loan -- Any mortgage loan with a net mortgage rate
less than ___%.
S-60
<PAGE>
Distribution Account -- An account established and maintained with the
trustee on behalf of the certificateholders, into which the master servicer will
deposit the Available Funds withdrawn from the Certificate Account.
Excess Losses -- Special Hazard Losses in excess of the applicable
Special Hazard Loss Coverage Amount; Bankruptcy Losses in excess of the
applicable Bankruptcy Loss Coverage Amount; and Fraud Losses in excess of the
applicable Fraud Loss Coverage Amount.
Fraud Loss Coverage Amount -- The aggregate amount of Realized Losses
which may be allocated in connection with Fraud Losses.
Fraud Losses -- Realized Losses incurred on defaulted mortgage loans as
to which there was fraud, dishonesty or misrepresentation in the origination of
the mortgage loans.
FT Mortgage-- FT Mortgage Companies, a Kansas corporation.
Insurance Proceeds -- All proceeds of any primary mortgage guaranty
insurance policies and any other insurance policies with respect to the mortgage
loans, to the extent the proceeds are not applied to the restoration of the
related mortgaged property or released to the mortgagor in accordance with the
master servicer's normal servicing procedures.
Lender PMI Mortgage Loans -- Mortgage loans with which the lender,
rather than the borrower, acquired the primary mortgage guaranty insurance and
charged the related borrower an interest premium.
Liquidated mortgage loan -- A defaulted mortgage loan as to which the
master servicer has determined that all recoverable liquidation and insurance
proceeds have been received.
Liquidation Proceeds -- All cash amounts, other than Insurance
Proceeds, received and retained in connection with the liquidation of defaulted
mortgage loans, by foreclosure or otherwise during the calendar month before the
distribution date.
Net Interest Shortfall -- For any distribution date, the sum of:
o the amount of interest which would otherwise have been received
for any mortgage loan that was the subject of (x) a Relief Act
Reduction or (y) a Special Hazard Loss, Fraud Loss, or Bankruptcy
Loss, after the exhaustion of the respective amounts of coverage
provided by the Subordinate Certificates for those types of
losses; and
o any Net Prepayment Interest Shortfalls.
Net Interest Shortfalls on any distribution date will be allocated pro
rata among all classes of certificates entitled to receive distributions of
interest on that distribution date, based on the amount of interest each of
those classes of certificates would otherwise be entitled to receive on that
distribution date before taking into account any reduction in that amounts
resulting from that Net Interest Shortfalls. The amount the Subordinate
Certificates would otherwise be entitled to receive from the mortgage loans
before taking into account any of those reductions will be based on the amount
of interest accruing at the applicable pass-through rate on that class's
proportionate share, based on the class principal balance, of the aggregate
Stated Principal Balance of the mortgage loans.
S-61
<PAGE>
Net Prepayment Interest Shortfall -- For any distribution date, the
amount by which the aggregate of Prepayment Interest Shortfalls during the
applicable prepayment period applicable to that distribution date exceeds the
available Compensating Interest, if any, for that period.
Non-Discount mortgage loan -- Any mortgage loan with a net mortgage
rate equal to or greater than ____%.
Non-PO Formula Principal Amount -- For any distribution date, an amount
equal to the sum of the applicable Non-PO Percentage of
(a) all monthly payments of principal due on each mortgage loan on the
related due date,
(b) the principal portion of the purchase price of each mortgage loan
that was repurchased by the seller or another person pursuant to
the pooling and servicing agreement as of the distribution date,
(c) the Substitution Adjustment Amount in connection with any deleted
mortgage loan received with respect to the distribution date,
(d) any insurance proceeds or liquidation proceeds allocable to
recoveries of principal of mortgage loans that are not yet
Liquidated mortgage loans received during the calendar month
before the distribution date,
(e) with respect to each mortgage loan that became a Liquidated
mortgage loan during the calendar month before the distribution
date, the amount of the liquidation proceeds allocable to
principal received with respect to the mortgage loan, and
(f) all partial and full principal prepayments by borrowers received
during the related Prepayment Period.
Non-PO Percentage -- With respect to a Discount mortgage loan, the
percentage obtained by dividing the net mortgage rate by ____%, and with respect
to any Non-Discount mortgage loan, 100%.
OID -- Original issue discount.
Original Applicable Credit Support Percentage -- The Applicable Credit
Support Percentage for a class of certificates on the date of issuance of the
certificates.
Plan -- An employee benefit plan or arrangement (such as an individual
retirement plan or Keogh plan) that is subject to ERISA or Section 4975 of the
Code.
PO Formula Principal Amount -- For any distribution date, an amount
equal to the sum of the applicable PO Percentage of
o all monthly payments of principal due on each mortgage loan on
the related due date,
o the principal portion of the purchase price of each mortgage loan
that was repurchased by the seller or another person pursuant to
the pooling and servicing agreement as of the distribution date,
o the Substitution Adjustment Amount in connection with any deleted
mortgage loan received for the distribution date,
S-62
<PAGE>
o any insurance proceeds or liquidation proceeds allocable to
recoveries of principal of mortgage loans that are not yet
Liquidated mortgage loans received during the calendar month
before the distribution date,
o for each mortgage loan that became a Liquidated mortgage loan
during the calendar month before the distribution date, the amount
of liquidation proceeds allocable to principal received on the
mortgage loan and
o all partial and full principal prepayments by borrowers received
during the related Prepayment Period;
provided, however, that if a Bankruptcy Loss that is an Excess Loss is sustained
on a Discount mortgage loan that is not a Liquidated mortgage loan, the PO
Formula Principal Amount will be reduced on the related distribution date by the
applicable PO Percentage of the principal portion of the Bankruptcy Loss.
Pool Principal Balance -- With respect to any distribution date, the
aggregate of the Stated Principal Balances of the mortgage loans outstanding on
the due date in the month before the distribution date.
PO Percentage -- With respect to any Discount mortgage loan, the
percentage obtained by dividing (___% minus the net mortgage rate) by ___%, and
with respect to any Non-Discount mortgage loan, 0%.
Prepayment Interest Shortfall -- The amount by which interest paid by a
borrower in connection with a prepayment of principal on a mortgage loan is less
than one month's interest at the related mortgage rate, net of the related
servicing fee, on the Stated Principal Balance of that mortgage loan.
Prepayment Period -- The period from the sixteenth day of a calendar
month or in the case of the first distribution date, from the cut-off date
through the fifteenth day of the succeeding calendar month.
PTE -- A prohibited transaction exemption issued by the U.S. Department
of Labor.
Realized Loss -- For a Liquidated mortgage loan, the amount by which
the Stated Principal Balance of the mortgage loan exceeds the amount of
Liquidation Proceeds applied to reduce the principal balance of the related
mortgage loan.
Regular Certificates -- All classes of certificates, other than the
Class A-R Certificates.
Relief Act Reduction -- A reduction in the amount of monthly interest
payment on a mortgage loan pursuant to the Soldiers' and Sailors' Civil Relief
Act of 1940.
Restricted Classes -- Classes of certificates to which no distribution
of partial principal prepayments and principal prepayments in full will be made
if on any distribution date the Applicable Credit Support Percentage is less
than the Original Applicable Credit Support Percentage.
Senior Credit Support Depletion Date -- The date on which the class
certificate balance of each class of subordinate certificates has been reduced
to zero.
S-63
<PAGE>
Senior Percentage -- For any distribution date, the percentage
equivalent of a fraction the numerator of which is the aggregate of the class
certificate balances of each class of senior certificates (other than the
principal only certificates) immediately before the distribution date and the
denominator of which is the aggregate of the class certificate balances of all
classes of certificates, other than the principal only certificates, immediately
before the distribution date.
Senior Principal Distribution Amount -- For any distribution date, an
amount equal to the sum of
o the Senior Percentage of the applicable Non-PO Percentage of all
amounts described in clauses (a) through (d) of the definition of
"Non-PO Formula Principal Amount" for the distribution date,
o for each mortgage loan that became a Liquidated mortgage loan
during the calendar month before the distribution date, the lesser
of the Senior Percentage of the applicable Non-PO Percentage of
the Stated Principal Balance of the mortgage loan and either
o the Senior Prepayment Percentage or
o if an Excess Loss was sustained on the Liquidated mortgage
loan during the preceding calendar month, the Senior
Percentage of the applicable Non-PO Percentage of the amount
of the liquidation proceeds allocable to principal received on
the mortgage loan, and
o the Senior Prepayment Percentage of the applicable Non-PO
Percentage of amounts described in clause (f) of the definition of
"Non-PO Formula Principal Amount" for the distribution date;
provided, however, that if a Bankruptcy Loss that is an Excess Loss is sustained
on a mortgage loan that is not a Liquidated mortgage loan, the Senior Principal
Distribution Amount will be reduced on the related distribution date by the
Senior Percentage of the applicable Non-PO Percentage of the principal portion
of the Bankruptcy Loss.
Senior Prepayment Percentage -- For any distribution date occurring
during the five years beginning on the first distribution date, 100%.
Thereafter, the Senior Prepayment Percentage will, except as described below, be
subject to gradual reduction as described in the following paragraph. This
disproportionate allocation of various unscheduled payments in respect of
principal will have the effect of accelerating the amortization of the Senior
Certificates while, in the absence of Realized Losses, increasing the interest
in the aggregate Stated Principal Balance evidenced by the Subordinate
Certificates. Increasing the respective interest of the Subordinate Certificates
relative to that of the Senior Certificates is intended to preserve the
availability of the subordination provided by the Subordinate Certificates.
The Senior Prepayment Percentage for any distribution date occurring on
or after the fifth anniversary of the first distribution date will be as
follows:
o for any distribution date in the first year thereafter, the Senior
Percentage plus 70% of the Subordinated Percentage for the
distribution date;
o for any distribution date in the second year thereafter, the
Senior Percentage plus 60% of the Subordinated Percentage for the
distribution date;
S-64
<PAGE>
o for any distribution date in the third year thereafter, the Senior
Percentage plus 40% of the Subordinated Percentage for the
distribution date;
o for any distribution date in the fourth year thereafter, the
Senior Percentage plus 20% of the Subordinated Percentage for the
distribution date; and
o for any distribution date thereafter, the Senior Percentage for
the distribution date, unless on any distribution date the Senior
Percentage exceeds the initial Senior Percentage, in which case
the Senior Prepayment Percentage for the distribution date will
once again equal 100%.
Notwithstanding the foregoing, no decrease in the Senior Prepayment
Percentage will occur unless both of the step down conditions are satisfied:
o the Stated Principal Balance of all mortgage loans delinquent 60
days or more (averaged over the preceding six month period), as a
percentage of the aggregate class certificate balance of the
subordinate certificates on the distribution date, does not equal
or exceed 50%, and
o cumulative Realized Losses on the mortgage loans do not exceed
o for the distribution date on the fifth anniversary of the
first distribution date, 30% of the aggregate of the class
certificate balances of the subordinate certificates as of the
cut-off date,
o for the distribution date on the sixth anniversary of the
first distribution date, 35% of the aggregate of the class
certificate balances of the subordinate certificates as of the
cut-off date,
o for the distribution date on the seventh anniversary of the
first distribution date, 40% of the aggregate of the class
certificate balances of the subordinate certificates as of the
cut-off date,
o for the distribution date on the eighth anniversary of the
first distribution date, 45% of the aggregate of the class
certificate balances of the subordinate certificates as of the
cut-off date, and
o for the distribution date on the ninth anniversary of the
first distribution date, 50% of the aggregate of the class
certificate balances of the subordinate certificates as of the
cut-off date.
If on any distribution date the allocation to the class or classes of
senior certificates (other than the principal only certificates) then entitled
to distributions of principal of full and partial principal prepayments and
other amounts in the percentage required above would reduce the outstanding
class certificate balance of the class or classes below zero, the distribution
to the class or classes of certificates of the Senior Prepayment Percentage of
those amounts for the distribution date will be limited to the percentage
necessary to reduce the related class certificate balance(s) to zero.
SPA -- The Standard Prepayment assumption, a prepayment standard or
model which represents an assumed rate of prepayment each month of the then
outstanding principal balance of a pool of new mortgage loans.
S-65
<PAGE>
Special Hazard Loss Coverage Amount -- The aggregate amount of Realized
Losses which may be allocated in connection with Special Hazard Losses.
Special Hazard Losses -- A Realized Loss incurred, to the extent that
the loss was attributable to direct physical damage to a mortgaged property
other than any loss of a type covered by a hazard insurance policy or a flood
insurance policy, if applicable; and any shortfall in insurance proceeds for
partial damage due to the application of the co-insurance clauses contained in
hazard insurance policies. The amount of the Special Hazard Loss is limited to
the lesser of the cost of repair or replacement of the mortgaged property; any
loss above that amount would be a Defaulted Mortgage Loss or other applicable
type of loss. [Special Hazard Losses does not include losses occasioned by war,
civil insurrection, various governmental actions, errors in design, faulty
workmanship or materials, except under some circumstances, nuclear reaction,
chemical contamination or waste by the mortgagor.]
Stated Principal Balance -- For any mortgage loan and due date, the
unpaid principal balance of the mortgage loan as of the due date, as specified
in its amortization schedule at the time, before any adjustment to the
amortization schedule for any moratorium or similar waiver or grace period,
after giving effect to any previous partial prepayments and liquidation proceeds
received and to the payment of principal due on the due date and irrespective of
any delinquency in payment by the related mortgagor.
Structuring Assumptions -- The assumed characteristics of the mortgage
loans used for purposes of estimating the weighted average lives of the
certificates, as listed on page S-___.
Subordinated Percentage -- The difference between 100% and the Senior
Percentage for the distribution date.
Subordinated Prepayment Percentage -- As of any distribution date, the
difference between 100% and the Senior Prepayment Percentage.
Subordinated Principal Distribution Amount -- For any distribution
date, an amount equal to the sum of
o the Subordinated Percentage of the applicable Non-PO Percentage of
all amounts described in clauses (a) through (d) of the definition
of "Non-PO Formula Principal Amount" for the distribution date,
for each mortgage loan that became a Liquidated mortgage loan
during the calendar month before the distribution date, the
applicable Non-PO Percentage of the liquidation proceeds allocable
to principal received on the mortgage loan, after application of
the amounts pursuant to the second bulleted item of the definition
of Senior Principal Distribution Amount up to the Subordinated
Percentage of the applicable Non-PO Percentage of the Stated
Principal Balance of the mortgage loan, and
o the Subordinated Prepayment Percentage of the applicable Non-PO
Percentage of the amounts described in clause (f) of the
definition of 'Non-PO Formula Principal Amount' for the
distribution date,
reduced by the amount of any payments in respect of Class PO Deferred Amounts on
the related distribution date.
Substitution Adjustment Amount -- The amount by which the principal
balance of a substituted mortgage loan exceeds the principal balance of a
replacement mortgage loan.
S-66
<PAGE>
FIRST HORIZON MORTGAGE PASS-THROUGH TRUST 1999-__
ISSUER
FIRST HORIZON ASSET SECURITIES INC.
DEPOSITOR
FT MORTGAGE COMPANIES
SELLER AND MASTER SERVICER
$---------------------------
(APPROXIMATE)
MORTGAGE PASS-THROUGH CERTIFICATES, SERIES 1999-
------------------------------
PROSPECTUS SUPPLEMENT
------------------------------
[NAME OF UNDERWRITER]
[NAME OF UNDERWRITER]
You should rely only on the information contained or incorporated by
reference in this prospectus supplement and the accompanying prospectus. We have
not authorized anyone to provide you with different information.
We are not offering the Series 1999-__ Mortgage Pass-Through
Certificates in any state where the offer is not permitted.
Dealers will deliver a prospectus supplement and prospectus when acting
as underwriters of the Series 1999-__ Mortgage Pass-Through Certificates and
with respect to their unsold allotments or subscriptions. In addition, all
dealers selling the Series 1999- Mortgage Pass-Through Certificates will be
required to deliver a prospectus supplement and prospectus until __________,
1999.
_________________, 1999
<PAGE>
PART II
INFORMATION REQUIRED IN THE REGISTRATION STATEMENT
Item 14. Other Expenses of Issuance and Distribution
Set forth below is an estimate of the amount of fees and expenses to be
incurred in connection with the issuance and distribution of the securities
offered hereby, other than underwriting discounts and commissions.
SEC Registration Fee............................ $
278.00
Printing and Engraving Expenses................. *
Accounting Fees and Expenses.................... *
Legal Fees and Expenses......................... *
Trustee Fees and Expenses....................... *
Blue Sky Fees and Expenses...................... *
Rating Agency Fees.............................. *
Miscellaneous................................... *
Total.................................$ *
===================
* To be calculated at a later date.
Item 15. Indemnification of Directors and Officers.
Section 145 of the Delaware General Corporation Law, as amended, provides
that a corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action or
proceeding, whether civil, criminal, administrative or investigative, by reason
of the fact that he is or was a director, officer, employee or agent of the
corporation or is or was serving at its request in such capacity in another
corporation or business association, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful.
As permitted by Section 102(b)(7) of the Delaware General Corporation Law,
as amended, the Registrant's Certificate of Incorporation provides that a
director of the Registrant shall not be personally liable to the Registrant or
its stockholders for monetary damages for breach of fiduciary duty as a
director, except for liability (i) for any breach of the director's duty of
loyalty to the corporation or its stockholders, (ii) for acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation of
law, (iii) under Section 174 of the Delaware General Corporation Law, or ( iv)
for any transaction from which the director derived an improper personal
benefit.
The Registrant's Certificate of Incorporation and Bylaws provide that the
Registrant will indemnify each person who is or was a director or officer of the
Registrant to the maximum extent permitted from time to time by law.
First Tennessee National Corporation, the indirect parent of First Horizon
Asset Securities Inc., provides insurance from commercial carriers against
certain liabilities incurred by its officers and directors and by the officers
and directors of certain of its subsidiaries and other affiliated corporations.
See Item 17(c) below.
II-1
<PAGE>
Item 16. Exhibits.
Exhibit No.
-----------
1.1 Form of Underwriting Agreement****
3.1 Certificate of Incorporation*
3.2 Bylaws*
4.1 Form of Pooling and Servicing Agreement**
5.1 Opinion of Andrews & Kurth L.L.P. regarding legality of the
Certificates**
8.1 Opinion of Andrews & Kurth L.L.P., regarding certain tax
matters***
23.1 Consents of Andrews & Kurth L.L.P. (contained in their
opinions filed as Exhibits 5.1 and 8.1 to this Registration
Statement)
24.1 Powers of Attorney (included on Page II-4)*
- --------------
* Previously filed with the Commission on March 16, 1999 as an Exhibit to the
Registrant's Registration Statement on Form S-3 (No. 333-74467)
** Previously filed with the Commission on May 20, 1999 as an Exhibit to
Amendment No. 1 to the Registrant's Registration Statement on Form S-3 (No. 333-
74467)
*** Previously filed with the Commission on July 16, 1999 as an Exhibit to
Amendment No. 2 to the Registrant's Registration Statement on Form S-3 (No. 333-
74467)
**** Filed herewith.
Item 17. Undertakings
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are
being made of the securities registered hereby, a post-effective
amendment to this registration statement:
(i) to include any prospectus required by Section
10(a)(3) of the Securities Act of 1933;
(ii) to reflect in the prospectus any facts or events
arising after the effective date of this registration
statement (or the most recent post-effective amendment hereof)
which, individually or in the aggregate, represent a
fundamental change in the information set forth in this
registration statement; and
(iii) to include any material information with
respect to the plan of distribution not previously disclosed
in this registration statement or any material change to such
information in this registration statement.
Provided, however, that the undertakings set forth in clauses (i) and
(ii) above do not apply if the information required to be included in a
post-effective amendment by those clauses is contained in periodic
reports filed with or furnished to the Commission by the registrant
pursuant to Section 13 or Section 15(d) of the Securities Exchange Act
of 1934 that are incorporated by reference in this registration
statement.
(2) That, for the purpose of determining any liability under
the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
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.
II-2
<PAGE>
(b) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 that is incorporated by reference in this
registration statement shall be deemed to be a new registration statement
relating to the securities offered herein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(c) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the provisions described under Item 15
above, or otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act of 1933 and will be governed by the final adjudication of such
issue.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that (i) it has reasonable grounds to believe that it meets
all of the requirements for filing on Form S-3 and (ii) it reasonably believes
that the security rating requirement of Transaction Requirement B.5 of Form S-3
will be met by the time of sale of each series of certificates to which this
Amendment No. 3 to the Registration Statement relates and has duly caused this
Amendment No. 3 to Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Dallas, State of Texas,
on the 20th day of December, 1999.
FIRST HORIZON ASSET SECURITIES INC.
By: /s/ James B. Witherow
-------------------------------------------
James B. Witherow, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 3 to Registration Statement has been signed by the following
persons in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
President
/s/ James B. Witherow Chief Executive Officer and Director December 20, 1999
- --------------------------------------------
James B. Witherow (Principal Executive Officer)
Gary B. Klinger* Chief Financial Officer and December 20, 1999
- ----------------------------------------------
Gary B. Klinger Treasurer
(Principal Financial Officer and
Principal Accounting Officer)
J. Kenneth Glass* Director December 20, 1999
- ----------------------------------------------
J. Kenneth Glass
Thomas J. Wageman* Director December 20, 1999
- ----------------------------------------------
Thomas J. Wageman
</TABLE>
*By: /s/ James B. Witherow
- ----------------------------------------------
James B. Witherow
Attorney-in-fact
II-4
<PAGE>
INDEX TO EXHIBITS
Exhibit No.
-----------
1.1 Form of Underwriting Agreement****
3.1 Certificate of Incorporation*
3.2 Bylaws*
4.1 Form of Pooling and Servicing Agreement**
5.1 Opinion of Andrews & Kurth L.L.P. regarding legality of the
Certificates**
8.1 Opinion of Andrews & Kurth L.L.P., regarding certain tax
matters***
23.1 Consents of Andrews & Kurth L.L.P. (contained in their
opinions filed as Exhibits 5.1 and 8.1 to this Registration
Statement)
24.1 Powers of Attorney (included on Page II-4)*
- --------------
* Previously filed with the Commission on March 16, 1999 as an Exhibit to the
Registrant's Registration Statement on Form S-3 (No. 333-74467)
** Previously filed with the Commission on May 20, 1999 as an Exhibit to
Amendment No. 1 to the Registrant's Registration Statement on Form S-3 (No. 333-
74467)
*** Previously filed with the Commission on July 16, 1999 as an Exhibit to
Amendment No. 2 to the Registrant's Registration Statement on Form S-3 (No. 333-
74467)
**** Filed herewith.
<PAGE>
Exhibit 1.1
-----------
FIRST HORIZON ASSET SECURITIES INC.
MORTGAGE PASS-THROUGH CERTIFICATES
(Issuable in Series)
UNDERWRITING AGREEMENT
----------------------
[[UNDERWRITER] New York, New York
[[ADDRESS] [[DATE], 1999
[[ADDRESS]
Ladies and Gentlemen:
First Horizon Asset Securities Inc., a corporation organized and existing
under the laws of the State of Delaware (the "Company"), may offer for sale to
you (the "Underwriter") from time to time its Mortgage Pass-Through Certificates
evidencing interests in pools of mortgage loans (the "Certificates"). The
Certificates may be issued in various series, and within each series, in one or
more classes, in one or more offerings on terms determined at the time of sale
(each such series, a "Series" and each such class, a "Class"). Each Series of
the Certificates will be issued under a separate Pooling and Servicing Agreement
(each, a "Pooling and Servicing Agreement") to be dated as of the respective
cut-off date (each, a "Cut-off Date") between the Company, as depositor, First
Tennessee Bank National Association, as seller, FT Mortgage Companies, as master
servicer, and [ ], as trustee (the "Trustee").
Capitalized terms used but not defined herein shall have the meanings given to
them in the related Pooling and Servicing Agreement.
The Certificates issued under each Pooling and Servicing Agreement will
represent the entire beneficial ownership interest in a trust fund (the "Trust
Fund") established by such Pooling and Servicing Agreement. The assets of each
Trust Fund will consist primarily of (i) one or more pools of conventional,
fixed rate, first lien, fully amortizing, one- to four-family residential
mortgage loans (the "Mortgage Loans") having the original terms to maturity
specified in the related Terms Agreement referred to hereinbelow, (ii) mortgage
pass-through securities issued or guaranteed by Ginnie Mae, Fannie Mae or
Freddie Mac, or (iii) private mortgage-backed securities backed by first lien
mortgage loans secured by one- to four-family residential properties or
participations therein. If so specified in the related Terms Agreement, one or
more elections may be made to treat the assets of each Trust Fund as a real
estate mortgage investment conduit (each, a "REMIC") for federal income tax
purposes.
Whenever the Company determines to make an offering of Certificates (each,
a "Certificate Offering") pursuant to this Agreement through you, it will enter
into an agreement
<PAGE>
with you (the "Terms Agreement") providing for the sale of specified Classes of
Offered Certificates (as defined below) to, and the purchase and public offering
thereof by, you. Each such Certificate Offering which the Company elects to make
pursuant to this Agreement shall be governed by this Agreement, as supplemented
by the related Terms Agreement. Each Terms Agreement, which shall be
substantially in the form of Exhibit A hereto, shall specify, among other
things, the Classes of Certificates to be purchased by the Underwriter (the
"Offered Certificates"), the principal balance or balances of the Offered
Certificates, each subject to any stated variance, and the price or prices at
which such Offered Certificates are to be purchased by the Underwriter from the
Company.
1. Representations and Warranties. The Company represents and warrants
------------------------------
to and agrees with the Underwriter, as of the date of the related Terms
Agreement, that:
(a) The registration statement specified in the related Terms
Agreement, on Form S-3, including a prospectus, has been filed with
the Securities and Exchange Commission (the "Commission") for the
registration under the Securities Act of 1933, as amended (the "Act"),
of mortgage pass-through certificates issuable in series, which
registration statement has been declared effective by the Commission.
Such registration statement, as amended to the date of the related
Terms Agreement, including any documents incorporated by reference
therein pursuant to Item 12 of Form S-3 under the Act which were filed
under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), on or before the effective date of the Registration Statement,
is hereinafter called the "Registration Statement", and such
prospectus, as such prospectus is supplemented by a prospectus
supplement relating to the Offered Certificates of the related Series,
each in the form first filed after the date of the related Terms
Agreement pursuant to Rule 424(b) under the Act, including any
documents incorporated by reference therein pursuant to Item 12 of
Form S-3 under the Act which were filed under the Exchange Act on or
before the date of such prospectus supplement (other than any such
incorporated documents that relate to Collateral Term Sheets (as
defined herein))(such prospectus supplement, including such
incorporated documents (other than those that relate to Collateral
Term Sheets), in the form first filed after the date of the related
Terms Agreement pursuant to Rule 424(b) is hereinafter called the
"Prospectus Supplement"), is hereinafter called the "Prospectus". Any
reference herein to the terms "amend", "amendment" or "supplement"
with respect to the Registration Statement, the Prospectus or the
Prospectus Supplement shall be deemed to refer to and include the
filing of any document under the Exchange Act after the effective date
of the Registration Statement or the issue date of the Prospectus or
Prospectus Supplement, as the case may be, deemed to be incorporated
therein by reference pursuant to Item 12 of Form S-3 under the Act.
(b) The related Registration Statement, at the time it became
effective, and the Prospectus contained therein, and any amendments
thereof and supplements thereto filed prior to the date of the related
Terms Agreement, conformed in all material respects to the
requirements of the Act and the rules and
<PAGE>
regulations of the Commission thereunder; on the date of the related
Terms Agreement and on each Closing Date (as defined in Section 3
below), the related Registration Statement and the related Prospectus,
and any amendments thereof and supplements thereto, will conform in
all material respects to the requirements of the Act and the rules and
regulations of the Commission thereunder; such Registration Statement,
at the time it became effective, did not contain any untrue statement
of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein not
misleading; such Prospectus, on the date of any filing pursuant to
Rule 424(b) and on each Closing Date, will not include any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements therein, in the light of the
circumstances under which they are made, not misleading; and the
detailed description (each, a "Detailed Description") filed in
connection with any Pre-Funding Arrangement referred to in such
Prospectus, on each closing date relating to the purchase of the
related Subsequent mortgage loans and the date of any filing thereof
under cover of Form 8-K, will not include any untrue statement of a
material fact or omit to state any information which such Prospectus
states will be included in such Detailed Description; provided,
however, that the Company makes no representations or warranties as to
the information contained in or omitted from (A) such Registration
Statement or such Prospectus (or any supplement thereto) in reliance
upon and in conformity with written information furnished to the
Company by or on behalf of the Underwriter specifically for use in the
preparation thereof or (B) any Current Report (as defined in Section
5(b) below), or in any amendment thereof or supplement thereto,
incorporated by reference in such Registration Statement or such
Prospectus (or any amendment thereof or supplement thereto).
(c) The Certificates of the related Series will conform to the
description thereof contained in the related Prospectus; will each, if
rated at the time of issuance in one of the two highest rating
categories by a nationally recognized statistical rating organization,
be when issued a "mortgage related security" as such term is defined
in Section 3(a)(41) of the Exchange Act, and will each on the related
Closing Date be duly and validly authorized, and, when validly
executed, countersigned, issued and delivered in accordance with the
related Pooling and Servicing Agreement and sold to you as provided
herein and in the related Terms Agreement, will each be validly issued
and outstanding and entitled to the benefits of the related Pooling
and Servicing Agreement.
(d) Neither the issuance nor sale of the Certificates of the
related Series nor the consummation of any other of the transactions
herein contemplated, nor the fulfillment of the terms hereof or of the
related Terms Agreement, will conflict with any statute, order or
regulation applicable to the Company of any court, regulatory body,
administrative agency or governmental body having jurisdiction over
the Company or with any organizational document of the Company or any
instrument or any agreement under which the Company is bound or to
which it is a party.
<PAGE>
(e) This Agreement and the related Terms Agreement have been
duly authorized, executed and delivered by the Company.
(f) At or prior to the related Closing Date, the Company will
have entered into the related Pooling and Servicing Agreement and,
assuming the due authorization, execution and delivery thereof by the
other parties thereto, such Pooling and Servicing Agreement (on such
Closing Date) will constitute the valid and binding agreement of the
Company enforceable in accordance with its terms, subject as to
enforceability, to bankruptcy, insolvency, reorganization or other
similar laws affecting creditors' rights and to general principles of
equity (regardless of whether the enforceability of such Pooling and
Servicing Agreement is considered in a proceeding in equity or at
law).
2. Purchase and Sale. Subject to the execution of the Terms Agreement
-----------------
for a particular Certificate Offering and subject to the terms and conditions
and in reliance upon the representations and warranties set forth in this
Agreement and such Terms Agreement, the Company agrees to sell to the
Underwriter, and the Underwriter agrees to purchase from the Company, all, but
not less than all, of the related Offered Certificates at the purchase price
therefor set forth in such Terms Agreement (the "Purchase Price").
The parties hereto agree that settlement for all securities sold pursuant
to this Agreement and the applicable Terms Agreement shall take place on the
settlement date agreed upon at the time of the related transaction and set forth
as the "Closing Date" in such Terms Agreement and not as set forth in Rule 15c6-
1(a) of the Exchange Act.
3. Delivery and Payment. Delivery of and payment for the Offered
--------------------
Certificates of a Series shall be made at the offices of Andrews & Kurth,
Dallas, Texas, at 10:00 A.M., Dallas time, on the Closing Date specified in the
related Terms Agreement, which date and time may be postponed by agreement
between the Underwriter and the Company (such date and time being herein called
the "Closing Date"). Delivery of such Offered Certificates shall be made to the
Underwriter against payment by the Underwriter of the Purchase Price thereof to
or upon the order of the Company by wire transfer in federal or other
immediately available funds or by check payable in federal funds, as the Company
shall specify no later than five full business days prior to such Closing Date.
Unless delivery is made through the facilities of The Depository Trust Company,
the Offered Certificates shall be registered in such names and in such
authorized denominations as the Underwriter may request not less than two full
business days in advance of each Closing Date.
The Company agrees to notify the Underwriter at least two business days
before each Closing Date of the exact principal balance evidenced by the Offered
Certificates and to have such Offered Certificates available for inspection,
checking and packaging in Dallas, Texas, no later than 12:00 noon on the
business day prior to such Closing Date.
4. Offering by the Underwriter. It is understood that the Underwriter
---------------------------
proposes to offer the Offered Certificates of the related Series for sale to the
public as set forth in the related Prospectus.
<PAGE>
5. Agreements. The Company agrees with the Underwriter that:
----------
(a) The Company will cause the Prospectus as supplemented by a
Prospectus Supplement relating to the Offered Certificates to be filed
pursuant to Rule 424 under the Act and will promptly advise the Underwriter
when such Prospectus as so supplemented has been so filed, and prior to the
termination of the Certificate Offering to which such Prospectus relates
also will promptly advise the Underwriter (i) when any amendment to the
related Registration Statement specifically relating to such Offered
Certificates shall have become effective or any further supplement to such
Prospectus has been filed, (ii) of any request by the Commission for any
amendment of such Registration Statement or Prospectus or for any
additional information, (iii) of the issuance by the Commission of any stop
order suspending the effectiveness of such Registration Statement or the
institution or threatening of any proceeding for that purpose and (iv) of
the receipt by the Company of any written notification with respect to the
suspension of the qualification of such Offered Certificates for sale in
any jurisdiction or the initiation or threatening of any proceeding for
such purpose. The Company will not file any amendment of the related
Registration Statement or supplement to the related Prospectus (other than
any amendment or supplement specifically relating to one or more Series of
mortgage pass-through certificates other than the Series that includes the
related Offered Certificates or any Exchange Act filings other than Current
Reports) unless the Company has furnished the Underwriter with a copy for
its review prior to filing and such Underwriter has consented to such
filing. The Company will use its best efforts to prevent the issuance of
any such stop order and, if issued, to obtain as soon as possible the
withdrawal thereof.
(b) The Company will cause any Computational Materials and any
Structural Term Sheets (each as defined in Section 8 below) with respect to
the Offered Certificates of a Series that are delivered by the Underwriter
to the Company pursuant to Section 8 to be filed with the Commission on a
Current Report on Form 8-K (each such filing of such materials, a "Current
Report") pursuant to Rule 13a-11 under the Exchange Act on the business day
immediately following the later of (i) the day on which such Computational
Materials and Structural Term Sheets are delivered to counsel for the
Company by the Underwriter, and (ii) the date on which this Agreement is
executed and delivered. The Company will cause any Collateral Term Sheet
(as defined in Section 9 below) with respect to the Offered Certificates of
a Series that is delivered by the Underwriter to the Company in accordance
with the provisions of Section 9 to be filed with the Commission on a
Current Report pursuant to Rule 13a-11 under the Exchange Act on the
business day immediately following the day on which such Collateral Term
Sheet is delivered to counsel for the Company by the Underwriter. Each such
Current Report shall be incorporated by reference in the related Prospectus
and the related Registration Statement.
(c) If, at any time when a prospectus relating to the Offered
Certificates of a Series is required to be delivered under the Act, any
event occurs as a result of which the related Prospectus as then amended or
supplemented would include any untrue statement of a material fact or omit
to state any material fact necessary to make the statements therein in
light of the circumstances under which they were made not misleading, or if
it
<PAGE>
shall be necessary at any time to amend or supplement the related
Prospectus to comply with the Act or the rules thereunder, the Company
promptly shall prepare and file with the Commission, subject to the
penultimate sentence of paragraph (a) of this Section 5, an amendment or
supplement which will correct such statement or omission or an amendment
which will effect such compliance.
(d) The Company will furnish to the Underwriter and counsel for the
Underwriter, without charge, as many signed copies of the related
Registration Statement (including exhibits thereto) and, so long as
delivery of a prospectus by the Underwriter or dealer may be required by
the Act, as many copies of the related Prospectus and any supplements
thereto as the Underwriter may reasonably request.
(e) The Company will furnish such information, execute such
instruments and take such actions as may be reasonably requested by the
Underwriter to qualify the Offered Certificates of a Series for sale under
the laws of such jurisdictions as the Underwriter may designate, to
maintain such qualifications in effect so long as required for the
distribution of such Offered Certificates and to determine the legality of
such Offered Certificates for purchase by institutional investors;
provided, however, that the Company shall not be required to qualify to do
business in any jurisdiction where it is not qualified on the date of the
related Terms Agreement or to take any action which would subject it to
general or unlimited service of process in any jurisdiction in which it is
not, on the date of the related Terms Agreement, subject to such service of
process.
(f) So long as the Offered Certificates of a Series are outstanding,
the Company will furnish to the Underwriter, upon request, copies of the
annual independent public accountants' servicing report furnished to the
Trustee pursuant to the related Pooling and Servicing Agreement.
(g) Unless otherwise specified in the related Terms Agreement, the
Company will pay, and FT Mortgage Companies will cause the Company to pay,
all expenses incident to the performance of the Company's obligations under
this Agreement and the applicable Terms Agreement (other than the expenses
of Deloitte & Touche L.L.P. under Sections 8(c) and 9(c) hereof, the
Underwriters' due diligence expenses, the Underwriters' counsel fees and
the Underwriters' own expenses, which will be paid by the Underwriter),
including and without limitation those related to: (i) the filing of the
Registration Statement with respect to the Certificates and all amendments
thereto, (ii) the printing or photocopying and delivery to the
Underwriters, in such quantities as you may reasonably request, of copies
of this Agreement and the Terms Agreement, (iii) the preparation,
registration, issuance and delivery to the Underwriters of the Certificates
underwritten pursuant to this Agreement, (iv) the fees and disbursements of
the Company's counsel and accountants, and of any counsel rendering a
closing opinion with respect to matters of local law, (v) the qualification
of the Certificates underwritten pursuant to this Agreement under
securities and Blue Sky laws and the determination of the eligibility of
the Certificates for investment, including filing fees in connection
therewith, (vi) the printing and delivery to the Underwriters, in such
quantities as they may reasonably request, of copies of the Registration
Statement with respect to the
<PAGE>
Certificates underwritten pursuant to this Agreement and all amendments
thereto, of any preliminary prospectus and preliminary prospectus
supplement and of the Final Prospectus and all amendments and supplements
thereto and all documents incorporated therein (other than exhibits to any
Current Report), and of any Blue Sky Survey and Legal Investment Survey,
(vii) the printing or photocopying and delivery to the Underwriters, in
such quantities as you may reasonably request, of copies of the applicable
Pooling Agreement, (viii) the fees charged by investment rating agencies
requested by the Company to rate the Certificates underwritten pursuant to
this Agreement, (ix) the fees and expenses, if any, incurred in connection
with the listing of the Certificates underwritten pursuant to this
Agreement on any national securities exchange; and (x) the fees and
expenses of the Trustee and its counsel.
6. Conditions to the Obligations of the Underwriter. The obligations of
------------------------------------------------
the Underwriter to purchase the Offered Certificates of any Series shall be
subject to the accuracy in all material respects of the representations and
warranties on the part of the Company contained in this Agreement, as
supplemented by the related Terms Agreement, as of the respective dates thereof
and the related Closing Date, to the accuracy of the statements of the Company
made in any applicable officers' certificates pursuant to the provisions hereof,
to the performance by the Company of its obligations under this Agreement and
such Terms Agreement and to the following additional conditions applicable to
the related Certificate Offering:
(a) No stop order suspending the effectiveness of the related
Registration Statement shall have been issued and no proceedings for that
purpose shall have been instituted or threatened.
(b) Andrews & Kurth L.L.P, counsel for the Company, shall have
furnished to the Underwriter an opinion, dated the related Closing Date, to
the effect that:
(i) this Agreement and the related Terms Agreement have been
duly executed and delivered by the Company under the law of the State
of New York;
(ii) the related Pooling and Servicing Agreement has been duly
executed and delivered by the Company under the law of the State of
New York and is a legal, valid and binding agreement of the Company
enforceable against the Company in accordance with its terms;
(iii) the Offered Certificates, when duly executed and
countersigned by the Trustee in accordance with the related Pooling
and Servicing Agreement, will be validly issued and outstanding and
entitled to the benefits of such Pooling and Servicing Agreement;
(iv) the related Pooling and Servicing Agreement is not
required to be qualified under the Trust Indenture Act of 1939, as
amended, and the trust created thereunder is not required to be
registered under the Investment Company Act of 1940, as amended;
<PAGE>
(v) such counsel confirms that the related Registration
Statement is effective under the Act and, to the best of such
counsel's knowledge, no stop order with respect thereto has been
issued, and no proceeding for that purpose has been instituted or
threatened by the Commission; such Registration Statement (except the
financial statements and schedules and other financial and statistical
data included therein and the documents incorporated by reference
therein, as to which such counsel need express no view), at the time
it became effective and the related Prospectus (except the financial
statements and schedules, the other financial and statistical data
included therein and the documents incorporated by reference therein),
as of the date of the Prospectus Supplement conformed in all material
respects to the requirements of the Act and the rules and regulations
thereunder; and no information has come to the attention of such
counsel that causes it to believe that (A) such Registration Statement
(except the financial statements and schedules and the other financial
and statistical data included therein and the documents incorporated
by reference therein, as to which such counsel need express no view)
at the time it became effective, contained an untrue statement of a
material fact or omitted to state a material fact required to be
stated therein or necessary to make the statements therein not
misleading or (B) such Prospectus or any amendment or supplement
thereto (except the financial statements and schedules and the other
financial and statistical data included therein), as of the date of
the Prospectus Supplement, or at the related Closing Date, contained
or contains an untrue statement of a material fact or omitted or omits
to state a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made,
not misleading;
(vi) the statements set forth under the heading "Description of
the Certificates" in the related Prospectus, insofar as such
statements purport to summarize certain provisions of the related
Pooling and Servicing Agreement and the related Offered Certificates,
provide a fair summary of such provisions;
(vii) the statements set forth in the related Prospectus under
the headings "Certain Legal Aspects of the Mortgage Loans", "Material
Federal Income Tax Consequences" (insofar as they relate specifically
to the purchase, ownership and disposition of the related Offered
Certificates) and "ERISA Considerations" (insofar as they relate
specifically to the purchase, ownership and disposition of such
Offered Certificates), to the extent that they constitute matters of
law or legal conclusions, provide a fair summary of such law or
conclusions;
(viii) assuming compliance with all provisions of the related
Pooling and Servicing Agreement, for federal income tax purposes, (A)
if any election is made to treat the assets of the Trust Fund as a
REMIC: the related Trust Fund (and any specified subgrouping therein)
will qualify as a REMIC pursuant to Section 860D of the Internal
Revenue Code of 1986, as amended (the "Code"), each Class of
Certificates of the related Series, other than the related Residual
Class or Classes, will constitute a class of "regular interests" in
the related REMIC within the meaning of the Code, and each Class of
such Certificates specified in the related
<PAGE>
Prospectus as a Class of Residual Certificates will constitute the
"residual interest" in the related REMIC within the meaning of the
Code; (B) if no such REMIC election is made: the Trust Fund will be
treated as a "grantor trust"; and
(ix) assuming that some or all of the Offered Certificates of
the related Series shall be rated at the time of issuance in one of
the two highest rating categories by a nationally recognized
statistical rating organization, each Offered Certificate so rated
will be at the time of issuance, a "mortgage related security" as such
term is defined in Section 3(a)(41) of the Exchange Act.
Such opinion may express its reliance as to factual matters on the
representations and warranties made by, and on certificates or other
documents furnished by, officers of the parties to this Agreement, the
related Terms Agreement or the related Pooling and Servicing Agreement.
Such opinion may assume the due authorization, execution and delivery of
the instruments and documents referred to therein by the parties thereto
other than the Company. Such opinion may be qualified, insofar as it
concerns the enforceability of the documents referred to therein, to the
extent that such enforceability may be limited by bankruptcy, insolvency,
reorganization or other similar laws affecting the enforcement of
creditors' rights in general and by general equity principles (regardless
of whether such enforcement is considered in a proceeding in equity or at
law). Such opinion may be further qualified as expressing no opinion as to
(x) the statements in the related Prospectus under the heading "Certain
Legal Aspects of the Mortgage Loans" except insofar as such statements
relate to the laws of the State of New York and the laws of the United
States, and (y) the statements in such Prospectus under the headings "ERISA
Considerations" and "Material Federal Income Tax Consequences" except
insofar as such statements relate to the laws of the United States. In
addition, such opinion may be qualified as an opinion only on the law of
the State of New York and the federal law of the United States of America.
(c) Andrews & Kurth, L.L.P., counsel for the Company, shall have
furnished to the Underwriter an opinion, dated the related Closing Date, to
the effect that:
(i) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State
of Delaware, with corporate power to own its properties, to conduct
its business as described in the related Prospectus and to enter into
and perform its obligations under this Agreement, the related Terms
Agreement, the related Pooling and Servicing Agreement and the
Certificates of the related Series;
(ii) The Company has full power and authority to sell the
related Mortgage Loans as contemplated herein and in the related
Pooling and Servicing Agreement;
(iii) This Agreement, the related Terms Agreement and the
related Pooling and Servicing Agreement have been duly authorized,
executed and delivered by the Company under the law of the State of
Delaware;
<PAGE>
(iv) The issuance and sale of the Offered Certificates have
been duly authorized by the Company;
(v) No consent, approval, authorization or order of any court
or governmental agency or body is required for the consummation by the
Company of the transactions contemplated herein or in the related
Pooling and Servicing Agreement, except such as may be required under
the blue sky laws of any jurisdiction and such other approvals as have
been obtained;
(vi) Neither the issuance of the Certificates of the related
Series nor delivery of the related Offered Certificates, nor the
consummation of any other of the transactions contemplated in this
Agreement, the related Terms Agreement or the related Pooling and
Servicing Agreement, nor the fulfillment of the terms of the related
Certificates, the related Pooling and Servicing Agreement, this
Agreement or the related Terms Agreement will conflict with or violate
any term or provision of the articles of incorporation or by-laws of
the Company or any statute, order or regulation applicable to the
Company of any court, regulatory body, administrative agency or
governmental body having jurisdiction over the Company and will not
conflict with, result in a breach or violation or the acceleration of
or constitute a default under the terms of any indenture or other
agreement or instrument known to such counsel to which the Company is
a party or by which it is bound; and
(vii) There are no actions, proceedings or investigations
pending or, to the best knowledge of such counsel, threatened before
any court, administrative agency or other tribunal (i) asserting the
invalidity of this Agreement, the related Terms Agreement, the related
Pooling and Servicing Agreement or the related Certificates, (ii)
seeking to prevent the issuance of the Certificates of the related
Series or the consummation by the Company of any of the transactions
contemplated by this Agreement, such Terms Agreement or such Pooling
and Servicing Agreement, or (iii) which might materially and adversely
affect the performance by the Company of its obligations under, or the
validity or enforceability of, this Agreement, such Terms Agreement,
such Pooling and Servicing Agreement or the related Certificates.
In rendering his or her opinion such counsel may rely as to matters of
fact, to the extent deemed proper and as stated therein, on certificates of
responsible officers of the Company or public officials. In addition, such
opinion may be qualified as an opinion only on the general corporation laws
of the State of Delaware.
(d) In-house counsel for FT Mortgage Companies (or its ultimate
parent) shall have furnished to the Underwriter an opinion, dated the
related Closing Date, to the effect that:
(i) FT Mortgage Companies has been duly incorporated and is
validly existing as a corporation in good standing under the laws of
the State of Kansas, with corporate power to own its properties, to
conduct its business as described in
<PAGE>
the related Prospectus and to enter into and perform its obligations
under this Agreement, the related Terms Agreement, the related Pooling
and Servicing Agreement and the Certificates of the related Series;
(ii) FT Mortgage Companies has full power and authority to sell
and master service the related Mortgage Loans as contemplated herein
and in the related Pooling and Servicing Agreement;
(iii) This Agreement, the related Terms Agreement and the
related Pooling and Servicing Agreement have been duly authorized,
executed and delivered by FT Mortgage Companies under the law of the
State of Kansas;
(iv) The issuance and sale of the Offered Certificates have
been duly authorized by FT Mortgage Companies;
(v) No consent, approval, authorization or order of any court
or governmental agency or body is required for the consummation by FT
Mortgage Companies of the transactions contemplated herein or in the
related Pooling and Servicing Agreement, except such as may be
required under the blue sky laws of any jurisdiction and such other
approvals as have been obtained;
(vi) Neither the issuance of the Certificates of the related
Series nor delivery of the related Offered Certificates, nor the
consummation of any other of the transactions contemplated in this
Agreement, the related Terms Agreement or the related Pooling and
Servicing Agreement, nor the fulfillment of the terms of the related
Certificates, the related Pooling and Servicing Agreement, this
Agreement or the related Terms Agreement will conflict with or violate
any term or provision of the articles of incorporation or by-laws of
FT Mortgage Companies or any statute, order or regulation applicable
to FT Mortgage Companies of any court, regulatory body, administrative
agency or governmental body having jurisdiction over FT Mortgage
Companies and will not conflict with, result in a breach or violation
or the acceleration of or constitute a default under the terms of any
indenture or other agreement or instrument known to such counsel to
which FT Mortgage Companies is a party or by which it is bound, other
than such conflicts, breaches and violations or defaults which,
individually or on a cumulative basis, would not have a material
adverse effect on FT Mortgage Companies and its subsidiaries, taken as
a whole, or on the issuance and sale of the Certificates or the
consummation of the transactions contemplated hereby; and; and
(vii) There are no actions, proceedings or investigations
pending or, to the best knowledge of such counsel, threatened before
any court, administrative agency or other tribunal (i) asserting the
invalidity of this Agreement, the related Terms Agreement, the related
Pooling and Servicing Agreement or the related Certificates, (ii)
seeking to prevent the issuance of the Certificates of the related
Series or the consummation by FT Mortgage Companies of any of the
transactions contemplated by this Agreement, such Terms Agreement or
such
<PAGE>
Pooling and Servicing Agreement, or (iii) which might materially
and adversely affect the performance by FT Mortgage Companies of its
obligations under, or the validity or enforceability of, this
Agreement, such Terms Agreement, such Pooling and Servicing Agreement
or the related Certificates.
In rendering his or her opinion such counsel may rely as to matters of
fact, to the extent deemed proper and as stated therein, on certificates of
responsible officers of FT Mortgage Companies or public officials. In
addition, such opinion may be qualified as an opinion only on the laws of
the State of Kansas and may assume that the applicable laws of Kansas are
identical to those of Tennessee.
(e) The General Counsel for First Tennessee Bank National Association
(the "Bank") (or its ultimate parent) shall have furnished to the
Underwriter an opinion, dated the related Closing Date, to the effect that:
(i) The Bank is a national banking association duly chartered
and validly existing under the laws of the United States, with the
requisite power to own its properties, to conduct its business as
described in the related Prospectus and to enter into and perform its
obligations under the Pooling and Servicing Agreement of the related
Series;
(ii) The Bank has full power and authority to sell the related
Mortgage Loans as contemplated in the related Pooling and Servicing
Agreement;
(iii) The related Pooling and Servicing Agreement has been duly
authorized, executed and delivered by the Bank under the laws of the
United States;
(iv) No consent, approval, authorization or order of any court
or governmental agency or body is required for the consummation by the
Bank of the transactions contemplated in the related Pooling and
Servicing Agreement, except such approvals as have been obtained;
(vi) Neither the consummation of any of the transactions
contemplated in the related Pooling and Servicing Agreement, nor the
fulfillment of the terms of the related Pooling and Servicing
Agreement will conflict with or violate any term or provision of the
articles of association or by-laws of the Bank or any statute, order
or regulation applicable to the Bank of any court, regulatory body,
administrative agency or governmental body having jurisdiction over
the Bank and will not conflict with, result in a breach or violation
or the acceleration of or constitute a default under the terms of any
indenture or other agreement or instrument known to such counsel to
which the Bank is a party or by which it is bound, other than such
conflicts, breaches and violations or defaults which, individually or
on a cumulative basis, would not have a material adverse effect on the
Bank and its subsidiaries, taken as a whole, or on the issuance and
sale of the Certificates or the consummation of the transactions
contemplated hereby; and
<PAGE>
(vii) There are no actions, proceedings or investigations pending
or, to the best knowledge of such counsel, threatened before any
court, administrative agency or other tribunal (i) asserting the
invalidity of the related Pooling and Servicing Agreement, (ii)
seeking to prevent the consummation by the Bank of any of the
transactions contemplated by the Pooling and Servicing Agreement, or
(iii) which might materially and adversely affect the performance by
the Bank of its obligations under, or the validity or enforceability
of, the related Pooling and Servicing Agreement.
In rendering his or her opinion such counsel may rely as to matters of
fact, to the extent deemed proper and as stated therein, on certificates of
responsible officers of the Bank or public officials. In addition, such
opinion may be qualified as an opinion only on the laws of the United
States.
(f) The Underwriter shall have received from Brown & Wood LLP,
counsel for the Underwriter, such opinion or opinions, dated the related
Closing Date, with respect to the issuance and sale of the Certificates of
the related Series, the related Registration Statement, the related
Prospectus and such other related matters as the Underwriter may reasonably
require, and the Company shall have furnished to such counsel such
documents as the Underwriter may reasonably request for the purpose of
enabling them to pass upon such matters.
(g) The Company shall have furnished to the Underwriter a certificate
of the Company, signed by the President or any Vice President or the
principal financial or accounting officer of the Company, dated the related
Closing Date, to the effect that the signers of such certificate have
carefully examined the related Registration Statement (excluding any
Current Reports and any other documents incorporated by reference therein),
the related Prospectus, any Detailed Description (excluding any related
Current Report), this Agreement and the related Terms Agreement and that:
(i) the representations and warranties of the Company in this
Agreement are true and correct in all material respects on and as of
the related Closing Date with the same effect as if made on such
Closing Date, and the Company has complied with all the agreements and
satisfied all the conditions on its part to be performed or satisfied
at or prior to such Closing Date;
(ii) no stop order suspending the effectiveness of such
Registration Statement has been issued and no proceedings for that
purpose have been instituted or, to their knowledge, threatened; and
(iii) nothing has come to their attention that would lead them to
believe that such Registration Statement (excluding any Current
Report) contains any untrue statement of a material fact or omits to
state any material fact required to be stated therein or necessary to
make the statements therein not misleading, or that the related
Prospectus (excluding any related Current Report) contains any untrue
statement of a material fact or omits to state a material fact
required to be stated therein or necessary to make the statements
therein, in the light of the
<PAGE>
circumstances under which they were made, not misleading, or that any
Detailed Description includes any untrue statement of a material fact
or omits to state any information which the Prospectus (or the related
Prospectus Supplement) states will be included in such Detailed
Description.
(h) [ ], counsel for the Trustee, shall have furnished
to the Underwriter an opinion, dated the related Closing Date, to the
effect that:
(i) the Trustee has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State
of [ ] with corporate power to own its properties and conduct its
business as presently conducted by it, to conduct business as a
trustee and to enter into and perform its obligations under the
related Pooling and Servicing Agreement;
(ii) the related Pooling and Servicing Agreement has been duly
authorized, executed and delivered by the Trustee and constitutes the
legal, valid and binding agreement of the Trustee enforceable against
the Trustee in accordance with its terms, subject to bankruptcy,
insolvency, fraudulent conveyance, reorganization or other similar
laws affecting the enforcement of creditors' rights generally and to
judicial discretion, and general principles of equity (regardless of
whether enforcement is sought in a proceeding in equity or at law);
(iii) the Trustee has duly accepted its appointment as trustee
under the related Pooling and Servicing Agreement;
(iv) no consent, approval, authorization or order of any [ ] or
federal court or government agency or body is required on the part of
the Trustee for the consummation of the transactions contemplated in
the related Pooling and Servicing Agreement, except such as may be
required under any federal or state securities law; and
(v) the performance on the part of the Trustee of any of the
transactions contemplated in the related Pooling and Servicing
Agreement does not conflict with or result in a breach or violation of
any term or provision of, or constitute a default under, the Articles
of Organization, as amended, or By-Laws of the Trustee, or any [
] or federal statute or regulation applicable to the Trustee, or to
such counsel's knowledge, any indenture or other agreement or
instrument to which the Trustee is a party or by which it is bound,
or, to such counsel's knowledge, any order of any state or federal
court, regulatory body, administrative agency or governmental body
having jurisdiction over the Trustee.
In addition, such counsel shall furnish to the Underwriter such
opinions as to the treatment of the Trust Fund for purposes of [ ]
tax law as are reasonably satisfactory to the Underwriter.
<PAGE>
(i) Deloitte & Touche LLP shall have furnished to the Underwriter a
letter, dated as of the date of the related Terms Agreement, in form and
substance satisfactory to the Underwriter, stating in effect that they have
performed certain specified procedures as a result of which they have
determined that such information as the Underwriter may reasonably request
of an accounting, financial or statistical nature (which is limited to
accounting, financial or statistical information derived from the general
accounting records of FT Mortgage Companies) set forth in the related
Prospectus Supplement under the caption "Servicing of Mortgage Loans --
Foreclosure, Delinquency and Loss Experience" agrees with the accounting
records of FT Mortgage Companies, excluding any questions of legal
interpretation.
(j) Deloitte & Touche LLP shall have furnished to the Underwriter a
letter, dated as of the related Closing Date, in form and substance
satisfactory to the Underwriter, stating in effect that they have performed
certain specified procedures as a result of which they have determined that
such information as the Underwriter may reasonably request of an
accounting, financial or statistical nature (which is limited to
accounting, financial or statistical information derived from the general
accounting records of the Company and which is obtained from an analysis of
a sample of the Mortgage Loans included in the related pool) set forth in
the related Prospectus Supplement under the caption "The Mortgage Pool" and
in any Detailed Description relating to such Prospectus Supplement is
mutually consistent and agrees with the accounting records of the Company
and, where applicable, the related Mortgage Loan files of the Company,
excluding any questions of legal interpretation. In addition, if
applicable, such accountants shall have furnished to the Underwriter a
letter, dated as of the related Closing Date, which shall include a
statement or statements to the effect that based upon the assumptions and
methodology agreed to by the Company (and which is consistent with the
manner in which any final PAC Balances, TAC Balances, Scheduled Balances,
Maximum and Minimum Scheduled Balances or any other scheduled balances are
to be calculated as set forth in the related Prospectus), all of which
shall be described by reference in such letter, such accountants shall have
verified the mathematical accuracy of any final PAC Balances Table, TAC
Balances Table, Scheduled Balances Table, Maximum or Minimum Scheduled
Balances Table or other scheduled balances table attached as an exhibit to
the related Pooling and Servicing Agreement.
(k) Deloitte & Touche LLP shall have furnished to the Underwriter and
the Company a letter or letters, dated as of the date of the related Terms
Agreement, in form and substance satisfactory to the Underwriter and the
Company, including, without limitation, statements, if applicable, to the
effect that:
(i) based upon the assumptions and methodology set forth in the
related Prospectus, all of which shall be described by reference in
such letter, they recomputed the percentages of initial principal
balance outstanding as of each of the Distribution Dates (as defined
in such Prospectus) indicated and the weighted average lives of each
Class of Offered Certificates at each of the indicated percentages of
the applicable Prepayment Assumption, and they compared the recomputed
percentages and weighted average lives to the corresponding
<PAGE>
percentages and weighted average lives set forth in the related tables
and found them to be in agreement;
(ii) based upon the assumptions and methodology set forth in
such Prospectus, all of which shall be described by reference in such
letter, they have verified the mathematical accuracy of any Scheduled
Final Distribution Dates for the Offered Certificates, PAC Balances,
TAC Balances, Scheduled Balances, Maximum and Minimum Scheduled
Balances or any other scheduled balances set forth in such Prospectus
for each indicated Distribution Date, and have verified the
mathematical accuracy of any initial Effective Ranges of any PAC
Certificates, Scheduled Certificates or other scheduled Certificates
set forth in such Prospectus; and
(iii) based upon the assumptions and methodology set forth in
such Prospectus, all of which shall be described by reference in such
letter, they have verified the mathematical accuracy of the pre-tax
yields to maturity and, if applicable, aggregate cash flows of any
Class of Certificates for which such pre-tax yields and, if
applicable, aggregate cash flows are set forth in such Prospectus at
the indicated percentages of the Prepayment Assumption and, if
applicable, at the indicated values of COFI, LIBOR or any other index,
as applicable.
(l) The Offered Certificates of the related Series shall have
received the ratings specified in the related Terms Agreement (the
"Required Ratings").
(m) Prior to the related Closing Date, the Company shall have
furnished to the Underwriter such further information, certificates and
documents as the Underwriter may reasonably request.
(n) If any Certificates of the related Series are to be sold to any
other underwriter and/or offered in reliance upon an exemption from the
registration requirements of the Act, the sale at or prior to the related
Closing Date of such Certificates to the purchaser thereof shall have
occurred.
(o) Subsequent to the date of the related Terms Agreement, there
shall not have been any change, or any development involving a prospective
change, in or affecting the business or properties of the Company which the
Underwriter concludes in its reasonable judgment, after consultation with
the Company, materially impairs the investment quality of the Offered
Certificates of the related Series so as to make it impractical or
inadvisable to proceed with the public offering or the delivery of such
Offered Certificates as contemplated by the related Prospectus.
If any of the conditions specified in this Section 6 shall not have been
fulfilled in all material respects with respect to the particular Offered
Certificates of a Series when and as provided in this Agreement and the related
Terms Agreement, or if any of the opinions and certificates mentioned above or
elsewhere in this Agreement and the related Terms Agreement shall not be in all
material respects reasonably satisfactory in form and substance to the
Underwriter and its counsel, this Agreement (with respect to the related Offered
Certificates) and
<PAGE>
the related Terms Agreement and all obligations of the Underwriter hereunder
(with respect to the related Offered Certificates) and thereunder may be
canceled at, or at any time prior to, the related Closing Date by the
Underwriter. Notice of such cancellation shall be given to the Company in
writing, or by telephone or telegraph confirmed in writing.
7. Indemnification and Contribution.
--------------------------------
(a) The Company and FT Mortgage Companies jointly and severally agree
to indemnify and hold harmless the Underwriter and each person who controls
the Underwriter within the meaning of the Act or the Exchange Act against
any and all losses, claims, damages or liabilities, joint or several, to
which they or any of them may become subject under the Act, the Exchange
Act, or other Federal or state statutory law or regulation, at common law
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 a material fact contained in the
Registration Statement relating to the Offered Certificates of the
applicable Series as it became effective or in any amendment or supplement
thereof, or in such Registration Statement or the related Prospectus, or in
any amendment thereof, or in any Detailed Description referred to in such
Prospectus (or the related prospectus Supplement) or arise out of or are
based upon the omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make the statements
therein not misleading, and agree to reimburse each such indemnified party
for any legal or other expenses reasonably incurred by them in connection
with investigating or defending any such loss, claim, damage, liability or
action; provided, however, that neither the Company nor FT Mortgage
Companies will be liable in any such case to the extent that any such loss,
claim, damage or liability arises out of or is based upon any such untrue
statement or alleged untrue statement or omission or alleged omission made
therein (A) in reliance upon and in conformity with written information
furnished to the Company or FT Mortgage Companies, as the case may be, as
herein stated by or on behalf of the Underwriter specifically for use in
connection with the preparation thereof or (B) in any Current Report or any
amendment or supplement thereof, except to the extent that any untrue
statement or alleged untrue statement therein or omission therefrom results
(or is alleged to have resulted) directly from an error (a "Mortgage Pool
Error") in the information concerning the characteristics of the Mortgage
Loans furnished by the Company or FT Mortgage Companies, as the case may
be, to the Underwriter in writing or by electronic transmission that was
used in the preparation of either (x) any Computational Materials or ABS
Term Sheets (or amendments or supplements thereof) included in such Current
Report (or amendment or supplement thereof) or (y) any written or
electronic materials furnished to prospective investors on which the
Computational Materials or ABS Term Sheets (or amendments or supplements)
were based. This indemnity agreement will be in addition to any liability
which the Company and FT Mortgage Companies may otherwise have.
<PAGE>
(b) The Underwriter agrees to indemnify and hold harmless the
Company, each of its directors, each of its officers, and each person or
entity (including each of its directors and officers) who controls the
Company within the meaning of the Act or the Exchange Act, to the same
extent as the foregoing indemnities from the Company and FT Mortgage
Companies to the Underwriter, but only with reference to (A) written
information furnished to the Company by or on behalf of the Underwriter
specifically for use in the preparation of the documents referred to in the
foregoing indemnity with respect to the related Series, or (B) any
Computational Materials or ABS Term Sheets (or amendments or supplements
thereof) furnished to the Company by the Underwriter pursuant to Section 8
or Section 9 and incorporated by reference in such Registration Statement
or the related Prospectus or any amendment or supplement thereof (except
that no such indemnity shall be available for any losses, claims, damages
or liabilities, or actions in respect thereof, resulting from any Mortgage
Pool Error). This indemnity agreement will be in addition to any liability
which the Underwriter may otherwise have. The Company acknowledges, unless
otherwise specified in writing by the Underwriter, that the statements set
forth in the first sentence of the penultimate paragraph, and in the last
paragraph appearing on the cover page of the related Prospectus Supplement
as such statements relate to such Offered Certificates and the second
sentence of the first paragraph under the heading "Method of Distribution"
in such Prospectus Supplement as such statements relate to such Offered
Certificates constitute the only information furnished in writing by or on
behalf of the Underwriter for inclusion in the related Prospectus (other
than any Computational Materials or ABS Term Sheets (or amendments or
supplements thereof) furnished to the Company by the Underwriter), and the
Underwriter confirms that such statements are correct.
(c) Promptly after receipt by an indemnified party under Section 7 of
notice of the commencement of any action, such indemnified party will, if a
claim in respect thereof is to be made against the indemnifying party under
this Section 7, notify the indemnifying party in writing of the
commencement thereof; but the omission so to notify the indemnifying party
will not relieve it from any liability which it may have to any indemnified
party otherwise than under this Section 7, except to the extent that the
omission to so notify the indemnifying party causes or exacerbates a loss.
In case any such action is brought against any indemnified party, and it
notifies the indemnifying party of the commencement thereof, the
indemnifying party will be entitled to participate therein, and to the
extent that it may elect by written notice delivered to the indemnified
party promptly after receiving the aforesaid notice from such indemnified
party, to assume the defense thereof, with counsel satisfactory to such
indemnified party; provided, however, that if the defendants in any such
action include both the indemnified party and the indemnifying party and
the indemnified party shall have reasonably concluded that there may be
legal defenses available to it and/or other indemnified parties which are
different from or additional to those available to the indemnifying party,
the indemnified party or parties shall have the right to select separate
counsel to assert such legal defenses and to otherwise participate in the
defense of such action on behalf of such indemnified party or parties. Upon
receipt of notice from the indemnifying party to such indemnified party of
its election so to assume the defense of such action and approval by the
indemnified party of counsel, the indemnifying party will not be liable to
such
<PAGE>
indemnified party under this Section 7 for any legal or other expenses
subsequently incurred by such indemnified party in connection with the
defense thereof unless (i) the indemnified party shall have employed
separate counsel in connection with the assertion of legal defenses in
accordance with the proviso to the next preceding sentence (it being
understood, however, that the indemnifying party shall not be liable for
the expenses of more than one separate counsel approved by the indemnified
party in the case of subparagraph (a) or (b), representing the indemnified
parties under subparagraph (a) or (b), who are parties to such action),
(ii) the indemnifying party shall not have employed counsel satisfactory to
the indemnified party to represent the indemnified party within a
reasonable time after notice of commencement of the action or (iii) the
indemnifying party has authorized the employment of counsel for the
indemnified party at the expense of the indemnifying party; and except
that, if clause (i) or (iii) is applicable, such liability shall be only in
respect of the counsel referred to in such clause (i) or (iii).
(d) If the indemnification provided for in paragraph (a) or (b) of
this Section 7 is due in accordance with its terms but is for any reason
held by a court to be unavailable from the Company, FT Mortgage Companies
or the Underwriter, on grounds of policy or otherwise, or if the
indemnified party failed to give notice under paragraph (c) of this Section
7 in respect of a claim otherwise subject to indemnification in accordance
with paragraph (a) or (b) of this Section 7, the Company, FT Mortgage
Companies and the Underwriter shall contribute to the aggregate losses,
claims, damages and liabilities (including legal and other expenses
reasonably incurred in connection with investigating or defending same) to
which the Company, FT Mortgage Companies and the Underwriter may be
subject, as follows:
(i) in the case of any losses, claims, damages and liabilities
(or actions in respect thereof) which do not arise out of or are not
based upon any untrue statement or omission of a material fact in any
Computational Materials or ABS Term Sheets (or any amendments or
supplements thereof) or in any written or electronic materials
distributed to prospective investors on which the Computational
Materials are based, in such proportion so that the Underwriter is
responsible for that portion represented by the difference between the
proceeds to the Company in respect of the Offered Certificates
appearing on the cover page of the Prospectus Supplement for the
related Series and the total proceeds received by the Underwriter from
the sale of such Offered Certificates (the "Underwriting Discount"),
and the Company and FT Mortgage Companies are jointly and severally
responsible for the balance; provided, however, that in no case shall
the Underwriter be responsible under this subparagraph (i) for any
amount in excess of such Underwriting Discount applicable to the
Offered Certificates purchased by the Underwriter pursuant to this
Agreement and the related Terms Agreement; and
(ii) in the case of any losses, claims, damages and liabilities
(or actions in respect thereof) which arise out of or are based upon
any untrue statement or omission of a material fact in any
Computational Materials or ABS Term Sheets (or any amendments or
supplements thereof) or in any written or electronic
<PAGE>
materials distributed to prospective investors on which the
Computational Materials are based, in such proportion as is
appropriate to reflect the relative fault of the Company or FT
Mortgage Companies, as the case may be, on the one hand and the
Underwriter on the other in connection with the statements or
omissions which resulted in such losses, claims, damages or
liabilities (or actions in respect thereof) as well as any other
relevant equitable considerations; provided, however, that in no case
shall the Underwriter be responsible under this subparagraph (ii) for
any amount in excess of the Underwriting Discount applicable to the
Offered Certificates. The relative fault shall be determined by
reference to, among other things, whether the untrue or alleged untrue
statement of a material fact or the omission or alleged omission to
state a material fact in such Computational Materials or ABS Term
Sheets (or any amendments or supplements thereof or such written or
electronic materials) results from information prepared by the Company
or FT Mortgage Companies, as the case may be, on the one hand or the
Underwriter on the other and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such
statement or omission.
Notwithstanding anything to the contrary in this Section 7(d), no person
guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of
the Act) shall be entitled to contribution from any person who was not guilty of
such fraudulent misrepresentation. For purposes of this Section 7, each person
who controls the Underwriter within the meaning of either the Act or the
Exchange Act shall have the same rights to contribution as the Underwriter, and
each person who controls the Company or FT Mortgage Companies, as the case may
be, within the meaning of either the Act or the Exchange Act, each officer of
the Company who shall have signed the Registration Statement and each director
of the Company or FT Mortgage Companies, as the case may be, shall have the same
rights to contribution as the Company or FT Mortgage Companies, as the case may
be, subject in each case to the immediately preceding sentence of this paragraph
(d).
8. Computational Materials and Structural Term Sheets.
--------------------------------------------------
(a) On the business day before the date on which the Current Report
relating to the Offered Certificates of a Series is required to be filed by
the Company with the Commission pursuant to Section 5(b) hereof, the
Underwriter shall deliver to the Company five complete copies of all
materials provided by the Underwriter to prospective investors in such
Offered Certificates that constitute (i) "Computational Materials" within
the meaning of the no-action letter dated May 20, 1994 issued by the
Division of Corporation Finance of the Commission to Kidder, Peabody
Acceptance Corporation I, Kidder, Peabody & Co. Incorporated, and Kidder
Structured Asset Corporation and the no-action letter dated May 27, 1994
issued by the Division of Corporation Finance of the Commission to the
Public Securities Association (together, the "Kidder Letters"), the filing
of which material is a condition of the relief granted in such letter (such
materials being the "Computational Materials"), and (ii) "Structural Term
Sheets" within the meaning of the no-action letter dated February 17, 1995
issued by the Division of Corporation Finance of the Commission to the
Public Securities Association (the "PSA Letter"), the filing of which
material is a condition of the relief
<PAGE>
granted in such letter (such materials being the "Structural Term Sheets").
Each delivery of Computational Materials and Structural Term Sheets to the
Company pursuant to this paragraph (a) shall be effected by delivering four
copies of such materials to counsel for the Company on behalf of the
Company at the address specified in Section 3 hereof and one copy of such
materials to the Company.
(b) If, at any time when a prospectus relating to the Offered
Certificates of a Series is required to be delivered under the Act, it
shall be necessary to amend or supplement the related Prospectus as a
result of an untrue statement of a material fact contained in any
Computational Materials or Structural Term Sheets provided by the
Underwriter pursuant to this Section 8 or the omission to state therein a
material fact required, when considered in conjunction with the related
Prospectus and Prospectus Supplement, to be stated therein or necessary to
make the statements therein, when read in conjunction with the related
Prospectus and Prospectus Supplement, not misleading, or if it shall be
necessary to amend or supplement any Current Report relating to any
Computational Materials or Structural Term Sheets to comply with the Act or
the rules thereunder, the Underwriter will prepare and furnish to the
Company for filing with the Commission an amendment or supplement which
will correct such statement or omission or an amendment or supplement which
will effect such compliance.
(c) The Underwriter shall cause Deloitte & Touche L.L.P. to furnish
to the Company a letter, dated as of the date on which you deliver any
Computational Materials or Structural Term Sheets to the Company pursuant
to Section 8(a), in form and substance satisfactory to the Company, stating
in effect that they have verified the mathematical accuracy of any
calculations performed by the Underwriter and set forth in such
Computational Materials or Structural Term Sheets, as applicable.
9. Collateral Term Sheets.
----------------------
(a) On the business day immediately following the date on which any
Collateral Term Sheet (as defined in the PSA Letter) was first delivered to
a prospective investor in such Offered Certificates, the Underwriter shall
deliver to the Company five complete copies of all materials provided by
the Underwriter to prospective investors in the Offered Certificates that
constitute "Collateral Term Sheets." Each delivery of a Collateral Term
Sheet to the Company pursuant to this paragraph (a) shall be effected by
delivering four copies of such materials to counsel for the Company on
behalf of the Company at the address specified in Section 3 hereof and one
copy of such materials to the Company. (Collateral Term Sheets and
Structural Term Sheets are, together, referred to herein as "ABS Term
Sheets.")
(b) If, at any time when a prospectus relating to the Offered
Certificates of a Series is required to be delivered under the Act, it
shall be necessary to amend or supplement the related Prospectus as a
result of an untrue statement of a material fact contained in any
Collateral Term Sheets provided by the Underwriter pursuant to this Section
9 or the omission to state therein a material fact required, when
considered in conjunction with the related Prospectus and Prospectus
Supplement, to be stated therein
<PAGE>
or necessary to make the statements therein, when read in conjunction with
the related Prospectus and Prospectus Supplement, not misleading, or if it
shall be necessary to amend or supplement any Current Report relating to
any Collateral Term Sheets to comply with the Act or the rules thereunder,
the Underwriter will prepare and furnish to the Company for filing with the
Commission an amendment or supplement which will correct such statement or
omission or an amendment or supplement which will effect such compliance.
(c) The Underwriter shall cause Deloitte & Touche L.L.P. to furnish
to the Company a letter, dated as of the date on which you deliver any
Collateral Term Sheets to the Company pursuant to Section 9(a), in form and
substance satisfactory to the Company, stating in effect that they have
verified the mathematical accuracy of any calculations performed by the
Underwriter and set forth in such Collateral Term Sheets, as applicable.
10. Termination. This Agreement (with respect to a particular Certificate
-----------
Offering) and the related Terms Agreement shall be subject to termination in the
absolute discretion of the Underwriter, by notice given to the Company prior to
delivery of and payment for the related Offered Certificates, if prior to the
related Closing Date (i) trading in securities generally on the New York Stock
Exchange shall have been suspended or materially limited, (ii) a general
moratorium on commercial banking activities in New York shall have been declared
by either federal or New York State authorities, or (iii) there shall have
occurred any outbreak or escalation of hostilities or other calamity, event or
crisis the effect of which on the financial markets of the United States is such
as to make it, in the reasonable judgment of the Underwriter, impracticable to
market such Offered Certificates.
11. Representations and Indemnities to Survive Delivery. The agreements,
---------------------------------------------------
representations, warranties, indemnities and other statements of the Company (or
FT Mortgage Companies, as the case may be) or its officers and of the
Underwriter set forth in or made pursuant to this Agreement and the related
Terms Agreement will remain in full force and effect, regardless of any
investigation made by or on behalf of the Underwriter or the Company (or FT
Mortgage Companies, as the case may be) or any of the officers, directors or
controlling persons referred to in Section 7 hereof, and will survive delivery
of and payment for the related Offered Certificates. The provisions of Section
7 hereof shall survive the termination or cancellation of this Agreement and the
related Terms Agreement.
12. Successors. This Agreement and the related Terms Agreement will inure
----------
to the benefit of and be binding upon the parties hereto and thereto and their
respective successors and the officers, directors and controlling persons
referred to in Section 7 hereof, and their successors and assigns, and no other
person will have any right or obligation hereunder or thereunder. No purchaser
of any Offered Certificate from the Underwriter shall be deemed a successor or
assign by reason of such purchase.
13. APPLICABLE LAW. THIS AGREEMENT AND THE RELATED TERMS AGREEMENT WILL
--------------
BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH,
<PAGE>
THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO AGREEMENTS MADE AND TO BE
PERFORMED THEREIN.
14. Miscellaneous. This Agreement, as supplemented by the related Terms
-------------
Agreement, supersedes all prior and contemporaneous agreements and
understandings relating to the subject matter hereof. This Agreement and the
related Terms Agreement or any term of each may not be changed, waived,
discharged or terminated except by an affirmative written agreement made by the
party against whom enforcement of the change, waiver, discharge or termination
is sought. The headings in this Agreement and the related Terms Agreement are
for purposes of reference only and shall not limit or otherwise affect the
meaning hereof or thereof.
15. Notices. All communications hereunder will be in writing and
-------
effective only on receipt, and, if sent to the Underwriter, will be delivered to
it at the address first above written; or if sent to the Company, will be
delivered to First Horizon Asset Securities Inc., 4000 Horizon Way, Irving,
Texas 75063, Attention: Wade Walker, with a copy to First Tennessee National
Corporation, 165 Madison Avenue, Memphis, Tennessee 38103, Attention: Clyde A.
Billings, Jr., Esq.
<PAGE>
If the foregoing is in accordance with your understanding of our agreement,
please sign and return to the undersigned a counterpart hereof, whereupon this
letter and your acceptance shall represent a binding agreement between the
Company and the Underwriter.
Very truly yours,
FIRST HORIZON ASSET SECURITIES INC.
By:____________________________________
Name:_______________________________
Title:______________________________
The foregoing Agreement is
hereby confirmed and accepted
as of the date first above written.
[UNDERWRITER]
By:________________________________
Name:___________________________
Title:__________________________
FT MORTGAGE COMPANIES
By:________________________________
Name:___________________________
Title:__________________________
<PAGE>
EXHIBIT A
FIRST HORIZON ASSET SECURITIES INC.
REMIC MULTI-CLASS MORTGAGE PASS-THROUGH CERTIFICATES
SERIES ____-__
TERMS AGREEMENT
---------------
(to Underwriting Agreement,
dated [ ], 1999
between the Company and the Underwriter)
First Horizon Asset Securities Inc. New York, New York
4000 Horizon Way [Date]
Irving, Texas 75063
[ ] (the "Underwriter") agrees, subject to the terms and
provisions herein and of the captioned Underwriting Agreement (the "Underwriting
Agreement"), to purchase such Classes of Series ____-__ Certificates specified
in Section 2(a) hereof (the "Offered Certificates"). This letter supplements and
modifies the Underwriting Agreement solely as it relates to the purchase and
sale of the Offered Certificates described below. The Series ____-__
Certificates are registered with the Securities and Exchange Commission by means
of an effective Registration Statement (No. 333-___). Capitalized terms used and
not defined herein have the meanings given them in the Underwriting Agreement.
Section 1. The Mortgage Pool: The Series ____-__ Certificates shall
-----------------
evidence the entire beneficial ownership interest in a mortgage pool (the
"Mortgage Pool") of conventional, fixed rate, fully amortizing one- to four-
family residential mortgage loans (the "Mortgage Loans") having the following
characteristics as of ________ __, ____ (the "Cut-off Date"):
(a) Aggregate Principal Amount of the Mortgage Pool: $[ ]
-----------------------------------------------
aggregate principal balance as of the Cut-off Date, subject to [an upward
or downward variance of up to [ ]%, the precise aggregate principal
balance to be determined by the Company][a permitted variance such that the
aggregate Scheduled Principal Balance thereof will be not less than $[ ]
or greater than $[ ].
(b) Original Terms to Maturity: The original term to maturity of
--------------------------
each Mortgage Loan included in the Mortgage Pool shall be between ___ and
___ years.
Section 2. The Certificates: The Offered Certificates shall be issued as
----------------
follows:
(a) Classes: The Offered Certificates shall be issued with the
-------
following Class designations, interest rates and principal balances,
subject in the aggregate to the variance referred to in Section 1(a)[and,
as to any particular Class, to an upward or downward variance of up to
[ ]%]:
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<PAGE>
Principal Interest Class Purchase
Class Balance Rate Price Percentage
- ----- ------- ---- ----------------
(b) The Offered Certificates shall have such other characteristics
as described in the related Prospectus.
Section 3. Purchase Price: The Purchase Price for each Class of the
--------------
Offered Certificates shall be the Class Purchase Price Percentage therefor (as
set forth in Section 2(a) above) of the initial Class Certificates Principal
Balance thereof plus accrued interest at the rate of [ ]% per annum from and
including the Cut-off Date up to, but not including, _________ __, ____ (the
"Closing Date").
Section 4. Required Ratings: The Offered Certificates shall have received
----------------
Required Ratings of at least [ ] from [ ].
Section 5. Tax Treatment: [One or more elections will be made to treat
-------------
the assets of the Trust Fund as a REMIC.] [The Trust Fund will be treated as a
"grantor trust" for federal income tax purposes.]
[Section 6. Additional Expenses:]/*/
______________
/*/ to be inserted if applicable.
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<PAGE>
If the foregoing is in accordance with your understanding of our agreement,
please sign and return to the undersigned a counterpart hereof, whereupon this
letter and your acceptance shall represent a binding agreement between the
Underwriter and the Company.
Very truly yours,
[UNDERWRITER]
By:__________________________
Name:_____________________
Title:____________________
The foregoing Agreement is
hereby confirmed and accepted
as of the date first above written.
FIRST HORIZON ASSET SECURITIES INC.
By:__________________________________
Name:_____________________________
Title:____________________________
FT MORTGAGE COMPANIES
By:__________________________________
Name:_____________________________
Title:____________________________
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